<PAGE>
As filed with the Securities and Exchange Commission on September 20, 2000
Registration No. 333-43656
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
Under
The Securities Act of 1933
--------------
SMURFIT-STONE CONTAINER CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 2653 43-1531401
(State or Other (Primary Standard (I.R.S. Employer
Jurisdiction of Industrial Classification Identification No.)
Incorporation or Code Number)
Organization)
150 North Michigan Avenue
Chicago, Illinois 60601
(312) 346-6600
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
--------------
Craig A. Hunt
Vice President, General Counsel and Secretary
150 North Michigan Avenue
Chicago, Illinois 60601
(312) 346-6600
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
--------------
Copies to:
Joseph A. Walsh, Jr.
Steven J. Gavin
Winston & Strawn
35 West Wacker Drive
Chicago, Illinois 60601
(312) 558-5600
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Approximate date of commencement of the proposed sale of the securities to
the public: As soon as practicable after the effective date of this
Registration Statement and the effective time of the merger described in this
Registration Statement.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
The Registrant hereby amends this Registration Statement on such date as may
be necessary to delay its effective date until the Registrant shall file a
further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act or until this Registration Statement shall become effective on
such date as the Commission, acting pursuant to said Section 8(a), may
determine.
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++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The board of directors of Stone Container has authorized the solicitation of +
+proxies. Any stockholder submitting a proxy may revoke such proxy at any time +
+prior to its exercise by notifying the secretary of Stone Container in +
+writing at 150 N. Michigan Avenue, Chicago, Illinois 60601-7568, before the +
+special meeting, and if you attend the special meeting you may revoke your +
+proxy if previously submitted and vote in person by notifying the secretary +
+of Stone Container at the special meeting. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to Completion, dated September 20, 2000
PROXY STATEMENT PROSPECTUS
Dear Stone Container Stockholder:
You are cordially invited to attend a special meeting of the stockholders of
Stone Container Corporation to be held on , , 2000 at the offices of
Stone Container, 150 North Michigan Avenue, Chicago, Illinois at 10:00 a.m.
(C.S.T.). At this special meeting, you will be asked to consider and vote upon
an Agreement and Plan of Merger, dated as of August 8, 2000, among Smurfit-
Stone Container Corporation, SCC Merger Co. and Stone Container. If the merger
is completed, you will receive for each share of Stone Container $1.75 Series E
Cumulative Convertible Exchangeable Preferred Stock you own one share of
Smurfit-Stone 7% Series A Cumulative Exchangeable Redeemable Convertible
Preferred Stock, plus an amount in cash equal to the accrued and unpaid
dividends on each outstanding share of Stone Container Series E Preferred
Stock, less $0.12.
The merger cannot be completed unless Stone Container's stockholders adopt
the merger agreement. We have scheduled a special meeting of Stone Container
stockholders to vote on the merger agreement. If you were a stockholder of
record on September 20, 2000, you may vote at the meeting. Whether or not you
plan to attend, please take the time to vote by completing and mailing the
enclosed proxy card to us.
This proxy statement/prospectus provides you with detailed information about
the merger. This document is also the prospectus of Smurfit-Stone for any
Smurfit-Stone Series A Preferred Stock that will be issued to you in the
merger. We encourage you to read this entire document carefully.
The board of directors of Stone Container has approved the merger. Neither
Stone Container nor the board of directors makes any recommendation to you as
to whether you should approve the merger. You must make your own decision as to
whether to approve the merger.
Sincerely yours,
Raymond M. Curran
President and Chief Executive Officer
Stone Container Corporation
Please see the section entitled "Risk Factors" on page 13 for a discussion of
potential risks involved in the merger.
Neither the Securities and Exchange Commission nor
any state securities commission has approved or
disapproved the merger or the Smurfit-Stone Series A
Preferred Stock to be issued in the merger. Neither
the Securities and Exchange Commission nor any state
securities commission has passed upon the fairness or
merits of the merger nor determined that the
information contained in this proxy
statement/prospectus is accurate or adequate. Any
representation to the contrary is a criminal offense.
Proxy statement/prospectus dated , 2000, and first mailed to
shareholders on or about , 2000.
<PAGE>
STONE CONTAINER CORPORATION
150 North Michigan Avenue
Chicago, Illinois 60601
Notice of Special Meeting of Stockholders
to be Held on , 2000
To the Holders of $1.75 Series E Cumulative
Convertible Exchangeable Preferred
Stock of Stone Container Corporation:
You are cordially invited to attend a special meeting of stockholders of
Stone Container Corporation to be held on , , 2000, at the
offices of Stone Container, 150 North Michigan Avenue, Chicago, Illinois, at
10:00 a.m. (C.S.T.) for the purpose of considering and voting upon a proposal
to approve and adopt the Agreement and Plan of Merger, dated as of August 8,
2000, among Smurfit-Stone Container Corporation, SCC Merger Co. and Stone
Container, and the merger, as described in the attached proxy
statement/prospectus.
All stockholders of record at the close of business on September 20, 2000,
are entitled to notice of, and to vote at, the special meeting, or any
adjournment or postponement thereof.
The board of directors of Stone Container has authorized the solicitation of
proxies. Any stockholder submitting a proxy may revoke such proxy at any time
prior to its exercise by notifying the secretary of Stone Container in writing
at 150 N. Michigan Avenue, Chicago, Illinois 60601-7568, before the special
meeting, and if you attend the special meeting you may revoke your proxy if
previously submitted and vote in person by notifying the secretary of Stone
Container at the special meeting.
By the Order of the Board of
Directors,
Craig A. Hunt
Secretary
Chicago, Illinois
, 2000
Your vote is important. Whether or not you plan to attend the stockholder
meeting, please complete, date and return your proxy card in the enclosed
envelope promptly. If you do not vote by proxy or in person at the special
meeting, your shares will count as votes against the proposed merger.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
QUESTIONS AND ANSWERS ABOUT THE MERGER.................................... 1
WHO CAN HELP ANSWER YOUR QUESTIONS........................................ 3
SUMMARY................................................................... 4
Market Prices and Dividends............................................. 8
Summary Historical Financial Data of Smurfit-Stone...................... 9
Summary Historical Financial Data of Stone Container.................... 10
Summary Unaudited Pro Forma Financial Information....................... 12
RISK FACTORS.............................................................. 13
Risks Relating to Smurfit-Stone......................................... 13
Risks Relating to the Smurfit-Stone Series A Preferred Stock............ 16
FORWARD-LOOKING STATEMENTS................................................ 18
SPECIAL FACTORS........................................................... 19
Effects of the Merger................................................... 19
Background of the Merger................................................ 19
Approval by the Stone Container Board of Directors; Reasons for the
Merger................................................................. 20
Position of Smurfit-Stone Regarding Fairness of the Merger.............. 22
Opinion of Financial Advisor to Stone Container......................... 22
Plans for Stone Container after the Merger.............................. 22
Appraisal Rights........................................................ 23
Federal Securities Laws Consequences.................................... 23
Material Federal Income Tax Considerations.............................. 23
MATERIAL PROVISIONS OF THE MERGER AGREEMENT............................... 29
Structure of the Merger................................................. 29
The Merger Consideration................................................ 29
Closing; Effective Time................................................. 29
Directors and Officers of Stone Container after the Merger.............. 29
Representations and Warranties.......................................... 29
Covenants............................................................... 30
Conditions to the Merger................................................ 30
Termination, Expenses, Amendment and Waiver............................. 31
THE SPECIAL MEETING....................................................... 33
Time and Place of the Special Meeting................................... 33
Purpose of the Special Meeting.......................................... 33
Record Date; Stock Entitled to Vote; Quorum............................. 33
Required Vote........................................................... 33
Proxies; Voting and Revocation.......................................... 34
Solicitation of Proxies................................................. 34
COMPARISON OF STOCKHOLDER RIGHTS.......................................... 35
Capitalization.......................................................... 35
Voting Rights........................................................... 35
Number, Election, Vacancy and Removal of Directors...................... 36
Amendments to Certificates of Incorporation............................. 36
Amendments to Bylaws.................................................... 37
Stockholder Action in Lieu of Meeting................................... 37
Notice of Stockholders Actions.......................................... 37
Special Stockholders Meetings........................................... 38
</TABLE>
i
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<TABLE>
<CAPTION>
Page
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<S> <C>
Limitation of Personal Liability of Directors........................... 38
Dividends............................................................... 39
Conversion.............................................................. 39
INFORMATION ABOUT SMURFIT-STONE........................................... 40
Business................................................................ 40
Management's Discussion and Analysis of Financial Condition and Results
of Operations.......................................................... 50
INFORMATION ABOUT STONE CONTAINER......................................... 65
Business................................................................ 65
Management's Discussion and Analysis of Financial Condition and Results
of Operations.......................................................... 72
THE ST. LAURENT ACQUISITION............................................... 86
Business Segments....................................................... 86
Sales and Marketing..................................................... 90
Competition............................................................. 91
Research and Development................................................ 91
Environmental Compliance................................................ 91
OPINION OF FINANCIAL ADVISOR.............................................. 93
INTERESTS OF CERTAIN PERSONS IN THE MERGER................................ 102
Ownership of Stone Container Common Stock............................... 102
Management's Ownership of Stone Container Series E Preferred Stock...... 102
Directors and Officers of Smurfit-Stone and Stone Container............. 102
Voting Agreement........................................................ 102
Purchases of Stone Container Series E Preferred Stock by Affiliates..... 102
PRINCIPAL STOCKHOLDERS.................................................... 103
Smurfit-Stone........................................................... 103
Stone Container......................................................... 104
MANAGEMENT OF SMURFIT-STONE............................................... 105
Directors and Executive Officers........................................ 105
Executive Compensation.................................................. 108
Option Grants In 1999................................................... 109
Aggregated Option Exercised In Last Fiscal Year and Year-End Option
Value.................................................................. 109
CERTAIN TRANSACTIONS OF SMURFIT-STONE..................................... 112
Transaction with JS Group............................................... 112
Board Membership........................................................ 112
Standstill Agreement.................................................... 112
Subscription Agreement.................................................. 113
Registration Rights Agreement........................................... 113
Voting Agreement........................................................ 114
Fee and Expense Reimbursement Letter.................................... 114
Release Letter and Executive Bonus Program.............................. 114
MacMillan Bathurst...................................................... 114
MANAGEMENT OF STONE CONTAINER............................................. 115
Directors and Executive Officers........................................ 115
Executive Compensation.................................................. 117
Option Grants In 1999................................................... 118
Aggregated Option Exercises In Last Fiscal Year and Year-End Option
Value.................................................................. 119
CERTAIN TRANSACTIONS OF STONE CONTAINER................................... 122
Transactions with JS Group.............................................. 122
Transactions with Jefferson Smurfit..................................... 122
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Voting Agreement......................................................... 122
Other Transactions....................................................... 122
DESCRIPTION OF SMURFIT-STONE CAPITAL STOCK................................. 124
Series A Preferred Stock................................................. 124
Debentures............................................................... 130
Common Stock............................................................. 132
Subscription Agreement................................................... 133
WHERE YOU CAN FIND MORE INFORMATION........................................ 134
EXPERTS.................................................................... 134
LEGAL MATTERS.............................................................. 135
INDEX TO FINANCIAL STATEMENTS.............................................. F-1
</TABLE>
LIST OF ANNEXES
Annex AAgreement and Plan of Merger
Annex BSmurfit-Stone Certificate of Incorporation
Annex CSmurfit-Stone Bylaws
Annex DForm of Smurfit-Stone Series A Preferred Stock Certificate of
Designation
Annex EOpinion of Financial Advisor to Stone Container
Annex FVoting Agreement
This document incorporates important business and financial information
about Smurfit-Stone and Stone Container that is not included in or delivered
with this document. Smurfit-Stone will provide you with copies of this
information relating to Smurfit-Stone, without charge, upon written or oral
request to:
Smurfit-Stone Container Corporation
150 North Michigan Avenue
Chicago, Illinois 60601
Attention: Office of Corporate Secretary
Telephone number: (312) 346-6600
Stone Container will provide you with copies of this information relating to
Stone Container, without charge, upon written or oral request to:
Stone Container Corporation
150 North Michigan Avenue
Chicago, Illinois 60601
Attention: Office of Corporate Secretary
Telephone number: (312) 346-6600
In order to receive timely delivery of the documents in advance of the
special meeting, you should make your request no later than , 2000.
iii
<PAGE>
QUESTIONS AND ANSWERS ABOUT THE MERGER
Q1: Why is Stone Container proposing to merge with SCC Merger Co.?
A1: At present, dividends on the Stone Container Series E Preferred Stock are
more than 13 quarters in arrears and Stone Container's note indentures and
credit agreements prohibit the payment of any dividends on such stock. The
merger will enable holders of Series E Preferred Stock to receive from
Smurfit-Stone a cash payment in the amount of such dividend arrearage (less
$0.12 per share) and shares of Smurfit-Stone Series A Preferred Stock on
which quarterly dividends will be payable in cash or additional shares of
Series A Preferred Stock. The payment of such dividends will not be subject
to the prohibitions contained in Stone Container's existing note indentures
and credit agreements.
Q2: What is the recommendation of the Stone Container board of directors?
A2: The Stone Container board of directors is not making any recommendation to
any stockholders with respect to the merger. Each stockholder must make his
or her own decision as to whether to approve the merger.
Q3: What Stockholder vote is required to approve the merger?
A3: The affirmative vote of:
. at least two-thirds of the outstanding shares of Stone Container common
stock and Series E Preferred Stock, voting together as a single class,
and
. at least two-thirds of the outstanding shares of Stone Container Series
E Preferred Stock, voting as a separate class, is required to approve
the merger agreement and the merger.
Q4: What will happen to my Stone Container Series E Preferred Stock in the
merger?
A4: For each share of Stone Container Series E Preferred Stock you own, you
will receive
. one share of Smurfit-Stone's Series A Preferred Stock, plus
. an amount in cash equal to the accrued and unpaid dividends on each
share of Series E Preferred Stock on the date the merger closes, less
$0.12.
An amount equal to $0.12 per share is being reduced from the cash
consideration payable in connection with the merger in order to reimburse
Smurfit-Stone for a portion of the fees and expenses related to the merger.
Q5: When will the merger take effect?
A5: Smurfit-Stone and Stone Container are working toward completing the merger
as quickly as possible. Smurfit-Stone and Stone Container hope to complete
the merger promptly after the Stone Container special meeting of
stockholders.
Q6: How will my rights as a stockholder differ after the merger?
A6: If you are a holder of Stone Container Series E Preferred Stock, after the
merger your rights as a holder of Smurfit-Stone Series A Preferred Stock
will be governed by Smurfit-Stone's certificate of incorporation, bylaws
and certificate of designation attached to this document as Annexes B, C
and D, rather than Stone Container's current certificate of incorporation
and bylaws.
The principal differences between Smurfit-Stone Series A Preferred Stock
and Stone Container Series E Preferred Stock are:
. the Series A Preferred Stock will be issued by Smurfit-Stone, rather
than Stone Container;
. under specific circumstances, Smurfit-Stone's board of directors will be
allowed to declare and pay dividends through the issuance of additional
shares of Series A Preferred Stock rather than cash;
. holders of Series A Preferred Stock will not be entitled to appoint
directors to Smurfit-Stone's board of directors in the event of any
dividend arrearage;
. the Series A Preferred Stock will be entitled to vote in limited
circumstances, whereas the Series E Preferred Stock is entitled to
1
<PAGE>
one vote per share on all matters submitted to Stone Container's
stockholders;
. the Series A Preferred Stock will be subject to mandatory redemption for
cash or Smurfit-Stone common stock on February 15, 2012;
. the Series A Preferred Stock may be exchanged for convertible
subordinated debentures issued by Smurfit-Stone rather than Stone
Container; and
. the Series A Preferred Stock will be accepted for quotation on the
Nasdaq National Market whereas the Series E Preferred Stock is listed on
the New York Stock Exchange.
Q7: What should I do now in order to vote on the merger?
A7: You should mail your completed and signed proxy card to Stone Container in
the enclosed postage-paid envelope as soon as possible so that your shares
will be represented at the special meeting.
Q8: Can I change my vote after I have mailed in a signed proxy card?
A8: Yes. You can change your vote in one of the following ways at any time
before your proxy is voted at the special meeting. First, you can revoke
your proxy by written notice. Second, you can submit a new, later dated
proxy card. Third, you can attend the special meeting and vote in person.
Finally, you may alter the instructions as to how your proxy is to be voted
by giving notice of the alteration to the corporate secretary of Stone
Container.
Q9: If my shares are held in "street name" by my broker, will my broker vote my
shares for me?
A9: Your broker will vote your shares only if you provide instructions on how
to vote. You should follow the directions provided by your broker regarding
how to instruct your broker to vote your shares. If you do not return our
proxy or if your broker does not properly vote your shares, your shares
will not be voted on the proposed merger, which will have the same effect
as voting against the proposed merger.
Q10: Should I send in my share certificates now?
A10: No. After the merger is completed, you will be sent written instructions
for exchanging your Stone Container share certificates. Please do not send
in your stock certificates with your proxy.
Q11: Do I have appraisal rights?
A11: No, you do not have appraisal rights under Delaware law because the Stone
Container Series E Preferred Stock is listed on the New York Stock
Exchange and the Smurfit-Stone Series A Preferred Stock will be quoted on
the Nasdaq National Market.
Q12: What are the tax consequences of the merger?
A12: Upon the exchange of Stone Container Series E Preferred Stock for Smurfit-
Stone Series A Preferred Stock, you will recognize gain or loss equal to
the difference between
. the sum of
. the fair market value of the Smurfit-Stone Series A Preferred Stock you
receive in the merger,
. any cash you receive as partial consideration for your Stone Container
Series E Preferred Stock, and
. any transaction costs paid on your behalf by Smurfit-Stone, and
. your tax basis in your Stone Container Series E Preferred Stock.
Your gain or loss should be long-term capital gain or loss assuming you
have held your Stone Container Series E Preferred Stock for more than one
year and assuming you hold such stock as a capital asset, and if you are
an individual, should be subject to a maximum tax rate of 20%. Holders of
the Stone Container Series E Preferred Stock are strongly urged to consult
their own tax advisors as to the specific tax consequences to them of the
merger and of holding the Smurfit-Stone Series A Preferred Stock,
including the applicability and effect of federal, state, local and
foreign income and other tax laws on their particular circumstances.
2
<PAGE>
WHO CAN HELP ANSWER YOUR QUESTIONS
If you would like additional copies of this proxy statement/prospectus, or
if you have questions about where to send your proxy, you should contact:
ChaseMellon Shareholder Services, L.L.C.
85 Challenger Road
Ridgefield Park, New Jersey 07660
Phone Number: (888) 213-0965
If you have additional questions about the merger you should contact:
Stone Container Corporation
150 North Michigan Avenue
Chicago, Illinois 60601
Attention: Office of General Counsel
Phone Number: (312) 346-6600
3
<PAGE>
SUMMARY
This summary highlights selected information from this proxy
statement/prospectus and does not contain all of the information that is
important to you. To understand the merger fully and for a more complete
description of the legal terms of the merger, you should read carefully this
entire document and the documents to which we have referred you. See "Where You
Can Find More Information" (page 131). We have included page references
parenthetically to direct you to a more complete description of each topic
presented in this Summary.
The Companies (pages 40 and 65)
Smurfit-Stone Container Corporation
150 North Michigan Avenue
Chicago, Illinois 60601
(312) 346-6600
Smurfit-Stone Container Corporation, a Delaware corporation, is an integrated
producer of containerboard, corrugated containers and other packaging products.
Smurfit-Stone is the industry's leading manufacturer of paper and paper-based
packaging, including
. containerboard,
. corrugated containers,
. industrial bags and
. clay-coated recycled boxboard.
Smurfit-Stone also is the world's largest paper recycler. In addition, Smurfit-
Stone is a leading producer of solid bleached sulfate, folding cartons, paper
tubes and cores, and labels. For the year ended December 31, 1999, Smurfit-
Stone had net sales of $7,151 million and net income of $157 million.
Stone Container Corporation
150 North Michigan Avenue
Chicago, Illinois 60601
(312) 346-6600
Stone Container Corporation, a Delaware corporation, is an integrated producer
of containerboard, corrugated containers and other packaging products. Stone
Container has operations throughout the United States, Canada, Europe and Latin
America. For the year ended December 31, 1999, Stone Container had net sales of
$4,341 million and a net loss of $77 million. Smurfit-Stone owns all of the
outstanding common stock of Stone Container.
What You Will Receive in the Merger (page 29)
As a result of the merger, subject to the provisions of the merger agreement
described in this proxy statement/prospectus, each outstanding share of Stone
Container Series E Preferred Stock will convert into the right to receive
. one share of Smurfit-Stone Series A Preferred Stock, plus
. an amount in cash equal to the accrued and unpaid dividends on each
outstanding share of Stone Container Series E Preferred Stock, less
$0.12.
An amount equal to $0.12 per share (or approximately $550,000 in the aggregate)
is being reduced from the cash consideration payable in connection with the
merger in order to reimburse Smurfit-Stone for a portion of the fees and
expenses related to the merger. As of June 30, 2000, the amount of the accrued
and unpaid dividends on each outstanding share of outstanding Series E
Preferred Stock was $5.6875. Until the completion of the merger, this amount
will continue to increase at a rate of $0.4375 per quarter. Smurfit-Stone
expects to pay the dividend arrearage out of its available working capital.
Approval by the Board (page 20)
The Stone Container board of directors has approved the merger. Neither Stone
Container nor its board of directors makes any recommendation to any
stockholder as to whether such stockholder should approve the merger. You must
make your own decision as to whether to approve the merger.
Opinion of Financial Advisor (page 93)
Deutsche Bank Securities Inc., as financial advisor to the Stone Container
board of directors, has delivered its written opinion to the Stone Container
board of directors that, as of August 8, 2000 and based upon and subject to the
various qualifications and assumptions described therein, the consideration to
be received by holders of Stone Container Series E Preferred Stock in the
merger is fair from a financial point of view to such stockholders. The full
text of the opinion of Deutsche Bank is attached as
4
<PAGE>
Annex E. We encourage you to read the opinion carefully in its entirety.
Deutsche Bank's opinion is directed to the Stone Container board of directors
and does not constitute a recommendation to any stockholder as to how to vote
in connection with the merger.
Our Reasons for the Merger (page 20)
Stone Container has not made any dividend payments on its Series E Preferred
Stock since February 15, 1997. The payment of such dividends has been, and
continues to be, prohibited under the terms of Stone Container's credit
agreements and note indentures. However, these limitations do not prohibit
Smurfit-Stone from engaging in a transaction with the holders of Stone
Container's Series E Preferred Stock. The merger is intended to give holders of
the Series E Preferred Stock the opportunity to exchange such shares for an
amount in cash equal to such dividend arrearage (less $0.12 per share) and
shares of preferred stock of Smurfit-Stone on which quarterly dividends may be
paid in cash or additional shares of preferred stock without violating the
terms of any existing credit agreements or indentures.
The Special Meeting (page 33)
The special meeting will be held at the offices of Stone Container, 150 North
Michigan Avenue, Chicago, Illinois, on , 2000, at 10:00 a.m., local time.
At the special meeting stockholders will be asked to adopt the merger
agreement.
Voting Rights; Votes Required for Approval (page 33)
You are entitled to vote at the special meeting if you owned shares of Stone
Container Series E Preferred Stock as of the close of business on the record
date of September 20, 2000. On the record date, there were 135,335,381 shares
of Stone Container common stock and 4,599,300 shares of Stone Container Series
E Preferred Stock entitled to vote at the special meeting. Stockholders will
have one vote at the special meeting for each share of Stone Container common
stock or Series E Preferred Stock they owned on the record date.
The affirmative vote of:
. at least two-thirds of the outstanding shares of Stone Container common
stock and Series E Preferred Stock, voting together as a single class,
and
. at least two-thirds of the outstanding shares of Stone Container Series E
Preferred Stock, voting as a separate class,
is required to approve the merger agreement and the merger.
Smurfit-Stone intends to vote all 135,335,381 outstanding shares of Stone
Container common stock in favor of approving the merger agreement and the
merger. In addition, holders of 680,200, or 14.8%, of the outstanding shares of
Stone Container Series E Preferred Stock have agreed to vote their shares in
favor of the merger pursuant to a voting agreement, a copy of which is attached
as Annex F.
Share Ownership of Smurfit-Stone and Management (page 102)
As of March 31, 2000, Smurfit-Stone owned and was entitled to vote 135,335,381
(100%) outstanding shares of Stone Container common stock. As of March 31,
2000, Stone Container's directors and executive officers as a group
beneficially owned and were entitled to vote 680,200 (less than 15%)
outstanding shares of Stone Container Series E Preferred Stock. These directors
and officers have expressed an intention to vote in favor of the merger
agreement. Two of these directors, appointed by the holders of the Series E
Preferred Stock, and their affiliates are obligated to vote their 680,200
shares in favor of the merger pursuant to the voting agreement.
Appraisal Rights (page 23)
Stone Container is organized under Delaware law. Under Delaware law, holders of
Stone Container Series E Preferred Stock who do not vote in favor of the
approval of the merger agreement will not be entitled to dissent and receive
from Stone Container the fair cash value of his or her shares of Stone
Container Series E Preferred Stock because such stock is listed on the New York
Stock Exchange and the Smurfit-Stone Series A Preferred Stock to be received in
the merger will be quoted on the Nasdaq National Market.
5
<PAGE>
Federal Income Tax Considerations (page 23)
Upon the exchange of Stone Container Series E Preferred Stock for Smurfit-Stone
Series A Preferred Stock, you will recognize gain or loss equal to the
difference between
. the sum of
. the fair market value of the Smurfit-Stone Series A Preferred Stock you
receive in the merger,
. any cash you receive as partial consideration for your Stone Container
Series E Preferred Stock, and
. any transaction costs paid on your behalf by Smurfit-Stone, and
. your tax basis in your Stone Container Series E Preferred Stock.
Your gain or loss should be long-term capital gain or loss assuming you have
held your Stone Container Series E Preferred Stock for more than one year and
assuming you hold such stock as a capital asset, and if you are an individual,
should be subject to a maximum tax rate of 20%. Holders of the Stone Container
Series E Preferred Stock are strongly urged to consult their own tax advisors
as to the specific tax consequences to them of the merger and of holding the
Smurfit-Stone Series A Preferred Stock, including the applicability and effect
of federal, state, local and foreign income and other tax laws on their
particular circumstances.
Comparison of Stockholder Rights (page 35)
When the merger is completed, you will become a stockholder of Smurfit-Stone.
Like Stone Container, Smurfit-Stone is a Delaware corporation. However, the
certificate of incorporation and bylaws of Smurfit-Stone differ from those of
Stone Container. As a result, you will have different rights as a Smurfit-Stone
stockholder than you currently have as a Stone Container stockholder.
Conditions to the Completion of the Merger (page 30)
The merger will be completed if a number of conditions are met (or, where
permitted, waived), including the following (which are more completely set
forth in the merger agreement):
. the stockholders of Stone Container adopt the merger agreement;
. all necessary governmental approvals are obtained;
. no law, injunction or order prohibits the merger;
. the Smurfit-Stone Series A Preferred Stock to be issued in the merger is
accepted for quotation on the Nasdaq National Market;
. the Form S-4 registration statement of Smurfit-Stone, of which this proxy
statement/prospectus is a part, becomes effective and is not the subject
of any stop order or proceedings seeking a stop order; and
. no material adverse change occurs in the business, prospects or financial
condition of Smurfit-Stone or Stone Container.
Termination of the Merger (page 31)
Smurfit-Stone and Stone Container may agree to terminate the merger agreement
at any time with the consent of certain holders of Stone Container Series E
Preferred Stock. In addition, either party may terminate the merger agreement
if:
. Stone Container stockholders do not adopt the merger agreement;
. a law or regulation makes the transaction illegal or any order or
injunction permanently prohibits the transaction; or
. the other party breaches its representations, warranties or obligations
under the merger agreement in any material respect and does not or cannot
cure the breach.
In addition,
. Smurfit-Stone may terminate the merger agreement if specific conditions
in the merger agreement are not satisfied on or before December 31, 2000;
and
. Stone Container may terminate the merger agreement if specific conditions
in the merger agreement are not satisfied on or before December 31, 2000.
Expenses (page 31)
Pursuant to a voting agreement to be entered into concurrently with the merger
agreement, Smurfit-
6
<PAGE>
Stone will pay the legal fees incurred by Smurfit-Stone, Stone Container and
the two directors appointed by the holders of Stone Container Series E
Preferred Stock in connection with the merger agreement and the merger. The
merger agreement provides that the cash consideration payable to the holders of
Series E Preferred Stock in connection with the merger will be reduced by an
amount equal to $0.12 per share. As a result, the holders of Series E Preferred
Stock, as a group, will bear approximately $550,000 of the fees and expenses
incurred in connection with the merger agreement and the merger. Smurfit-Stone
estimates that such fees and expenses will be approximately $1,200,000, and
will include financial and legal advisory fees, accountants' fees, and
printing, filing and other miscellaneous costs.
Management Following the Merger (page 29)
Upon the closing of the merger, the two directors appointed to the Stone
Container board of directors by the holders of Stone Container Series E
Preferred Stock will resign. No other change to the boards of directors or
management of Stone Container or Smurfit-Stone will result from the merger.
Listing of Smurfit-Stone Series A Preferred Stock (page 130)
The new Smurfit-Stone Series A Preferred Stock to be issued in the merger will
be quoted on the Nasdaq National Market under the symbol "SSCCA."
7
<PAGE>
Market Prices and Dividends
The Stone Container Series E Preferred Stock is currently listed on the New
York Stock Exchange under the symbol STO E. As of August 10, 2000, there were
approximately 207 holders of record of the Series E Preferred Stock. The
following table presents the high and low sales prices for the Stone Container
Series E Preferred Stock as reported by the New York Stock Exchange Composite
Tape and the dividends per share for each quarter during Stone Container's 1998
and 1999 fiscal years and the first quarter of Stone Container's 2000 fiscal
year.
<TABLE>
<CAPTION>
Series E Preferred Stock
-------------------------
Dividends
High Low per Share(1)
------------ ------------ ------------
<S> <C> <C> <C>
1998
First Quarter......................... $ 18.563 $ 15.313 $ 0
Second Quarter........................ 22.000 17.813
Third Quarter......................... 21.188 16.063
Fourth Quarter........................ 19.250 14.125
1999
First Quarter......................... $ 19.250 $ 17.250 $ 0
Second Quarter........................ 23.125 17.625
Third Quarter......................... 23.375 21.250
Fourth Quarter........................ 23.500 19.250
2000
First Quarter......................... $ 23.000 $ 17.000 $ 0
Second Quarter........................ $ 18.375 $ 15.875 $ 0
Third Quarter (through August 8,
2000)................................ $ 16.625 $ 15.125 $ 0
</TABLE>
--------
(1) Dividends are payable on each share of the Stone Container Series E
Preferred Stock at a rate of $1.75 per annum. Stone Container's credit
agreements and note indentures have not permitted the payment of any
dividends on its Series E Preferred Stock since February 15, 1997. As of
June 30, 2000, the amount of the accrued and unpaid dividends on the Series
E Preferred Stock was $5.6875 per share.
The last reported sale price of Stone Container Series E Preferred Stock as
reported by the New York Stock Exchange Composite Tape on August 8, 2000, the
last full trading day immediately prior to the public announcement of the
signing of the merger agreement, was $15.438 per share. The last reported sale
price of Stone Container Series E Preferred Stock as reported by the New York
Stock Exchange Composite Tape on , 2000, the last practicable trading day
for which information was available prior to the date of this proxy
statement/prospectus, was $ per share.
The market prices of shares of Stone Container Series E Preferred Stock
fluctuate from day to day. As a result, you should obtain current market
quotations. No assurance can be given as to what the market price of Smurfit-
Stone's Series A Preferred Stock will be if and when the merger is consummated.
8
<PAGE>
Summary Historical Financial Data of Smurfit-Stone
(in millions, except per share amounts)
The following table shows Smurfit-Stone's selected consolidated financial
data as of and for each of the periods indicated and should be read in
conjunction with the financial statements and the notes thereto included
elsewhere in this proxy statement/prospectus. The consolidated financial data
for each of the years in the five-year period ended December 31, 1999 was
derived from Smurfit-Stone's audited consolidated financial statements. The
unaudited consolidated financial data for the six-month periods ended June 30,
2000 and 1999 was derived from Smurfit-Stone's unaudited consolidated financial
statements. The unaudited consolidated financial data reflect, in the opinion
of Smurfit-Stone's management, all normal recurring adjustments considered
necessary by Smurfit-Stone for a fair presentation of these results. Smurfit-
Stone's results of operations for the six-month period ended June 30, 2000 are
not necessarily indicative of the results which may be expected for the full
fiscal year 2000.
<TABLE>
<CAPTION>
Six months
ended
June 30, Year ended December 31,
--------------- -----------------------------------------
2000 1999 1999(a) 1998(b)(c) 1997 1996 1995
------- ------- ------- ---------- ------ ------ ------
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Income Statement Data:
Net sales............... $ 4,057 $ 3,435 $7,151 $ 3,485 $2,957 $3,109 $3,704
Income (loss) from
continuing operations
before extraordinary
item and cumulative
effect of accounting
change................. 71 (115) 163 (211) (19) 80 227
Basic income (loss) per
common share from
continuing operations
before extraordinary
item and cumulative
effect of accounting
change................. .32 (.53) .75 (1.70) (.17) .72 2.05
Diluted income (loss)
per common share from
continuing operations
before extraordinary
item and cumulative
effect of accounting
change................. .32 (.53) .74 (1.70) (.17) .71 2.03
Weighted average common
shares outstanding--
Basic.................. 222 216 217 124 111 111 111
Weighted average common
shares outstanding--
Diluted................ 224 216 220 124 111 112 112
Other Data: (unaudited)
Ratio of earnings to
combined fixed charges
and preferred stock
dividends(d)........... 1.49 (e) 1.53 (e) (e) 1.61 2.48
Balance Sheet Data:
Total assets............ $11,440 $10,896 $9,859 $11,631 $2,771 $2,688 $2,783
Long-term debt.......... 5,715 6,044 4,793 6,633 2,040 1,944 2,192
Stockholders' equity
(deficit).............. 2,327 1,558 1,847 1,634 (374) (375) (487)
</TABLE>
--------
(a) Smurfit-Stone recorded $446 million of pre-tax gains on asset sales in
1999, resulting from the sales of a majority of its timberlands and its
interest in Abitibi Consolidated, Inc.
(b) On November 18, 1998, Stone Container merged with a wholly-owned subsidiary
of Smurfit-Stone. Results for 1998 include Stone Container after November
18, 1998. Smurfit-Stone issued approximately 104 million shares of its
common stock in the Stone Container merger, resulting in a total purchase
price (including the fair value of stock options and related fees) of
approximately $2,245 million.
(c) Smurfit-Stone recorded pre-tax charges of $310 million ($187 million after
tax) in the fourth quarter of 1998, including $257 million of restructuring
charges in connection with the Stone Container merger, $30 million for
settlement of its Cladwood(R) litigation and $23 million of Stone Container
merger-related costs.
(d) For purposes of calculating the ratio of earnings to combined fixed charges
and preferred stock dividends, earnings include income (loss) from
continuing operations before income taxes, minority interests,
extraordinary items and the cumulative effects of changes in accounting
principles, plus fixed charges. Fixed charges consist of interest on
indebtedness, preferred stock dividend requirements of majority owned
subsidiaries, amortization of deferred debt issuance costs and that portion
of lease rental expense considered to be representative of the interest
factors therein.
(e) Earnings were inadequate to cover combined fixed charges and preferred
stock dividends for the period ended June 30, 1999 and the years ended
December 31, 1998 and 1997 by $150 million, $340 million and $27 million,
respectively.
9
<PAGE>
Summary Historical Financial Data of Stone Container
(in millions, except per share amounts)
The following table shows Stone Container's selected consolidated financial
data as of and for each of the periods indicated and should be read in
conjunction with the financial statements and the notes thereto included
elsewhere in this proxy statement/prospectus. The consolidated financial data
for each of the years in the five-year period ended December 31, 1999 was
derived from Stone Container's audited consolidated financial statements. The
unaudited consolidated financial data for the six-month periods ended June 30,
2000 and 1999 was derived from Stone Container's unaudited consolidated
financial statements. The unaudited consolidated financial data reflect, in
the opinion of Stone Container's management, all normal recurring adjustments
considered necessary by Stone Container for a fair presentation of these
results. Stone Container's results of operations for the six-month period
ended June 30, 2000 are not necessarily indicative of the results which may be
expected for the full fiscal year 2000.
<TABLE>
<CAPTION>
Predecessor
----------------------------------------
Six months
ended June Year ended
30, December 31,
------------- ---------------------------
Period from Period from
Year ended November 19 to January 1 to
December 31, December 31, November 18,
2000 1999 1999 1998 (a) 1998 1997 1996 1995(b)
------ ------ ------------ -------------- ------------ ------ ------ -------
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Income Statement Data:
Net sales............... $2,537 $2,106 $4,341 $ 465 $4,254 $4,696 $4,989 $7,198
Income (loss) before
extraordinary item..... 26 (77) (75) (36) (749) (405) (122) 445
Basic income (loss) per
common share before
extraordinary item (c). (7.43) (4.16) (1.32) 4.64
Diluted income (loss)
per common share before
extraordinary item (c). (7.43) (4.16) (1.32) 3.89
Weighted average common
shares outstanding--
Basic.................. 102 99 99 94
Weighted average common
shares outstanding--
Diluted................ 102 99 99 115
Other Data: (unaudited)
Ratio of earnings to
combined fixed charges
and preferred stock
dividends (d).......... 1.35 (e) (e) (e) (e) (e) (e) 2.48
Balance Sheet Data:
Total assets............ $9,093 $8,135 $7,565 $8,793 $5,824 $6,354 $6,399
Long-term debt.......... 4,029 3,466 3,157 4,063 4,351 4,160 3,942
Preferred Stock......... 78 78 78 78 115 115 115
Stockholders' equity.... 2,930 2,503 2,506 2,590 277 795 1,005
</TABLE>
-------
(a) On November 18, 1998, Stone Container completed a merger with a wholly-
owned subsidiary of Smurfit-Stone. The merger was accounted for as a
purchase business combination, and accordingly, purchase accounting
adjustments, including goodwill, have been pushed down and are reflected
in Stone Container's financial statements subsequent to November 18, 1998.
The financial statements for periods before November 18, 1998 were
prepared using Stone Container's historical basis of accounting and are
designated as "Predecessor." The comparability of operating results for
the Predecessor periods and the periods subsequent to November 18, 1998
are affected by the purchase accounting adjustments.
(b) On November 1, 1995, Stone-Consolidated Corporation ("Stone-
Consolidated"), a Canadian subsidiary of Stone Container, amalgamated its
operations with Rainy River Forest Products, Inc. a Toronto-based Canadian
pulp and paper company. As a result of the amalgamation, Stone Container's
equity ownership in Stone-Consolidated was reduced from 75% to 47% and
accordingly, effective November 1, 1995,
Stone Container began reporting Stone-Consolidated as a non-consolidated
affiliate in accordance with the
10
<PAGE>
equity method of accounting. Furthermore, on May 30, 1997, Stone-
Consolidated merged with Abitibi-Price Inc. to form Abitibi Consolidated,
Inc. ("Abitibi") and, as of December 31, 1998, Stone Container was the owner
of approximately 25% of the common stock of Abitibi. On January 21, 1999
Stone Container sold 16% (approximately 7.8 million shares) of its interest
in Abitibi for approximately $80 million. On April 23, 1999, Stone Container
sold its remaining interest (approximately 41 million shares) for net
proceeds of $414 million. As a result, Stone Container recorded a $39
million gain during 1999. The proceeds of the sales have been applied to
debt reduction.
(c) Subsequent to the merger, earnings per share information is no longer
presented because Stone Container is a wholly-owned subsidiary of Smurfit-
Stone.
(d) For purposes of calculating the ratio of earnings to combined fixed charges
and preferred stock dividends, earnings include income (loss) before income
taxes and extraordinary items, plus fixed charges. Fixed charges consist of
interest on indebtedness, preferred stock dividend requirements of majority
owned subsidiaries, amortization of deferred debt issuance costs and that
portion of lease rental expense considered to be representative of the
interest factors therein.
(e) Earnings were inadequate to cover combined fixed charges and preferred
stock dividends for the period ended June 30, 1999 and the years ended
December 31, 1999, 1997 and 1996 and for the periods from January 1 to
November 18, 1998 and from November 19 to December 31, 1998 by $91 million,
$64 million, $516 million, $257 million, $727 million and $53 million,
respectively.
11
<PAGE>
Summary Unaudited Pro Forma Financial Information
The following table shows Smurfit-Stone's and Stone Container's unaudited
pro forma financial information as of and for each of the periods indicated,
after giving effect to both the St. Laurent acquisition and the merger proposed
in this proxy statement/prospectus, and should be read in conjunction with the
unaudited pro forma financial statements and the notes thereto included
elsewhere in this proxy statement/prospectus.
<TABLE>
<CAPTION>
Smurfit-Stone Pro Stone Container Pro
Forma Forma
-------------------- ---------------------
Six
months Six
ended months
June Year ended ended Year ended
30, December 31, June 30, December 31,
2000 1999 2000 1999
------- ------------ -------- ------------
<S> <C> <C> <C> <C>
Income Statement Data:
Net sales........................... $ 4,512 $8,014 $2,992 $5,204
Income (loss) from continuing
operations before extraordinary
item............................... 66 151 17 (95)
Basic income (loss) per common share
from continuing operations before
extraordinary item................. .27 .62
Diluted income (loss) per common
share from continuing operations
before extraordinary item.......... .27 .61
Weighted average common shares
outstanding--Basic................. 243 243
Weighted average common shares
outstanding--Diluted............... 246 246
Other Data:
Ratio of earnings to combined fixed
charges and preferred stock
dividends (a)...................... 1.40 1.42 1.24 (b)
Balance Sheet Data:
Total assets........................ $11,414 $9,093
Long-term debt...................... 5,715 4,029
Stockholders' equity ............... 2,393 2,930
</TABLE>
--------
(a) For purposes of calculating the ratio of earnings to combined fixed charges
and preferred stock dividends, earnings include income (loss) from
continuing operations before income taxes, minority interests,
extraordinary items and the cumulative effects of changes in accounting
principles, plus fixed charges. Fixed charges consist of interest on
indebtedness, preferred stock dividend equivalents of majority-owned
subsidiaries, amortization of deferred debt issuance costs and that portion
of lease rental expense considered to be representative of the interest
factors therein.
(b) Pro Forma earnings for Stone Container were inadequate to cover fixed
charges for the year ended December 31, 1999 by $96 million.
12
<PAGE>
RISK FACTORS
Risks Relating to Smurfit-Stone
Smurfit-Stone's substantial leverage may require it to seek
additional sources of capital to satisfy its capital needs
Smurfit-Stone has a highly leveraged capital structure. As of March 31,
2000, Smurfit-Stone and its subsidiaries had approximately $4.9 billion of
outstanding indebtedness. In addition, on May 31, 2000, Smurfit-Stone and its
subsidiaries incurred additional indebtedness of $1.05 billion to finance the
acquisition of St. Laurent Paperboard Inc. and to repay St. Laurent's
indebtedness.
The level of Smurfit-Stone's indebtedness could have significant
consequences for Smurfit-Stone and its stockholders, including the following:
. Smurfit-Stone may be required to seek additional sources of capital,
including additional borrowings under its existing credit facilities,
other private or public debt or equity financings to service or refinance
its indebtedness, which borrowings may not be available on favorable
terms,
. a substantial portion of Smurfit-Stone's cash flow from operations will
be necessary to meet the payment of principal and interest on its
indebtedness and other obligations and will not be available for Smurfit-
Stone's working capital, capital expenditures and other general corporate
purposes,
. Smurfit-Stone's level of indebtedness could make it more vulnerable to
economic downturns, and reduce its operational and business flexibility
in responding to changing business and economic conditions and
opportunities; and
. Smurfit-Stone will be more highly leveraged than some of its competitors,
which may place it at a competitive disadvantage.
In addition, borrowings under Smurfit-Stone's and its subsidiaries' credit
agreements are at variable rates of interest, which expose Smurfit-Stone to the
risk of increased interest rates.
Factors beyond Smurfit-Stone's control could hinder its ability to
service its debt and meet its operating requirements
Smurfit-Stone has scheduled principal payments on its indebtedness of
approximately $55 million, $70 million and $1.4 billion in 2000, 2001 and 2002,
respectively.
The ability of Smurfit-Stone and its subsidiaries to meet their obligations
and to comply with the financial covenants contained in their respective debt
instruments will largely depend on the future performance of Smurfit-Stone and
its subsidiaries. Their performance will be subject to financial, business and
other factors affecting them. Many of these factors will be beyond Smurfit-
Stone's control, such as
. the state of the economy,
. the financial markets,
. demand for and selling prices of its products,
. costs of its raw materials and
. legislation and other factors relating to the paperboard and packaging
products industries generally or to specific competitors.
In the event that net proceeds from borrowings or other financing sources
and from operating cash flows and any divestitures do not provide sufficient
liquidity for Smurfit-Stone to meet its operating and debt service
requirements, Smurfit-Stone will be required to pursue other alternatives to
repay indebtedness and improve liquidity. Such alternatives may include
. sales of other assets,
13
<PAGE>
. cost reductions,
. deferral of certain discretionary capital expenditures and
. seeking amendments or waivers to their debt instruments.
Smurfit-Stone can give no assurance that such measures could be successfully
completed or would generate the liquidity required by Smurfit-Stone to operate
its business and service its obligations. If Smurfit-Stone
. is not able to generate sufficient cash flow or otherwise obtain funds
necessary to make required debt payments, or
. fails to comply with the various covenants in its various debt
instruments,
it would be in default under the terms of its various debt instruments, which
would permit Smurfit-Stone's debtholders to accelerate the maturity of such
indebtedness and would cause defaults under other indebtedness of Smurfit-
Stone.
The cyclicality of Smurfit-Stone's industry could negatively impact Smurfit-
Stone's
ability to respond to competition or take advantage of business opportunities
Smurfit-Stone's operating results reflect the industry's general cyclical
pattern. The vast majority of Smurfit-Stone's products are commodities,
resulting in extreme price competition. The industry in which Smurfit-Stone
competes has had substantial over-capacity for several years. In addition, the
industry is capital intensive, which leads to high fixed costs and generally
results in continued production as long as prices are sufficient to cover
marginal costs. These conditions have contributed to substantial price
competition and volatility in the industry. In the event of a recession, demand
and prices are likely to drop substantially.
Smurfit-Stone's sales and profitability have historically been more
sensitive to price changes than changes in volume. Future decreases in prices
for Smurfit-Stone's products would adversely affect its operating results.
These factors, coupled with Smurfit-Stone's highly leveraged financial
position, may adversely impact Smurfit-Stone's ability to respond to
competition and to other market conditions or to otherwise take advantage of
business opportunities.
Restrictive covenants in Smurfit-Stone's indebtedness could limit its
corporate activity
Smurfit-Stone's ability to incur additional indebtedness, and in certain
cases refinance outstanding indebtedness, is significantly limited or
restricted under the agreements relating to the existing indebtedness of
Smurfit-Stone and its subsidiaries. The agreements contain covenants that
restrict, among other things, the ability of Smurfit-Stone and its subsidiaries
to
. incur indebtedness,
. pay dividends,
. repurchase or redeem capital stock,
. engage in transactions with stockholders and affiliates,
. issue capital stock,
. create liens,
. sell assets,
. engage in mergers and consolidations and
. make investments in unrestricted subsidiaries.
In addition, Smurfit-Stone is limited in its ability to move capital freely
within Smurfit-Stone and its subsidiaries. The limitations contained in such
agreements, together with the highly leveraged capital structure
14
<PAGE>
of Smurfit-Stone and its subsidiaries, could limit the ability of Smurfit-Stone
and its subsidiaries to effect future debt or equity financings. These
limitations also may otherwise restrict their corporate activities, including
their ability to avoid defaults, provide for capital expenditures, take
advantage of business opportunities or respond to advantageous market
conditions.
The interests of Smurfit-Stone's significant stockholder may be
in opposition to the interests of other stockholders
Smurfit International B.V., a significant stockholder of Smurfit-Stone, has
by reason of its direct and indirect ownership of shares of Smurfit-Stone
common stock, a significant effect on the outcome of the vote on all matters
submitted to a vote of holders of Smurfit-Stone common stock. Smurfit
International's presence as a significant stockholder may deter a potential
acquirer from making a tender offer or otherwise attempting to obtain control
of Smurfit-Stone, even if such events might be favorable to Smurfit-Stone or
its stockholders.
Smurfit-Stone's industry is highly competitive and price
fluctuations could diminish Smurfit-Stone's sales volume
The paperboard and packaging products industries are highly competitive, and
no single company is dominant. Smurfit-Stone's competitors include large,
vertically integrated paperboard and packaging products companies and numerous
smaller companies. Because these products are globally traded commodities, the
industries in which Smurfit-Stone competes are particularly sensitive to price
fluctuations as well as other factors including innovation, design, quality and
service, with varying emphasis on these factors depending on the product line.
To the extent that one or more of Smurfit-Stone's competitors become more
successful with respect to any key competitive factor, Smurfit-Stone's business
could be materially adversely affected.
The markets for folding cartons and market pulp are also highly competitive.
Many of Smurfit-Stone's competitors are less leveraged and have financial and
other resources greater than those of Smurfit-Stone and are able to better
withstand the adverse nature of the business cycle.
Smurfit-Stone can give no assurance that it will be able to maintain all or
a substantial majority of the sales volume to its customers, due in part to the
tendency of certain customers to diversify their suppliers.
Price fluctuations in raw materials could adversely affect Smurfit-Stone's
ability to obtain the materials needed to manufacture its products
Wood fiber and recycled fiber, the principal raw materials used in the
manufacture of Smurfit-Stone's products, are purchased in highly competitive,
price sensitive markets. These raw materials have historically exhibited price
and demand cyclicality. In particular, the supply and price of wood fiber
depends on a variety of factors over which Smurfit-Stone has no control,
including environmental and conservation regulations, natural disasters and
weather. A decrease in the supply of wood fiber has caused, and likely will
continue to cause, higher wood fiber costs in some of the regions in which
Smurfit-Stone procures wood. In addition, the increase in demand of products
manufactured, in whole or in part, from recycled fiber has caused an occasional
tightness in the supply of recycled fiber. It may also cause a significant
increase in the cost of such fiber used in the manufacture of recycled
containerboard and related products. Such costs are likely to continue to
fluctuate based upon demand/supply characteristics. While Smurfit-Stone has not
experienced any significant difficulty in obtaining wood fiber and recycled
fiber in economic proximity to its mills, it can give no assurance that this
will continue to be the case for any or all of its mills.
Smurfit-Stone is subject to environmental regulations and
liabilities that could weaken its operating results
Federal, state, provincial, foreign and local environmental requirements,
particularly those relating to air and water quality, are a significant factor
in Smurfit-Stone's business. Smurfit-Stone in the past has had, and in the
future may face, environmental liability for the costs of remediating soil or
groundwater that is or was contaminated by Smurfit-Stone or by a third party at
various sites which are now or were previously owned or operated by Smurfit-
Stone. There also may be similar liability at sites with respect to which
either Smurfit-
15
<PAGE>
Stone has received, or in the future may receive, notice that it may be a
potentially responsible party, or "PRP", and which are the subject of cleanup
activity under the Comprehensive Environmental Response, Compensation and
Liability Act ("CERCLA"), analogous state laws and other laws concerning
hazardous substance contamination.
Smurfit-Stone has incurred in the past, and may incur in the future, civil
and criminal fines and penalties relating to environmental matters and costs
relating to the damage of natural resources, lost property values and toxic
tort claims. Smurfit-Stone in the past has made significant expenditures to
comply with environmental regulations and expects to make significant
expenditures in the future. Smurfit-Stone has reserves based on current
information to address environmental liabilities. However, additional
significant expenditures could be required due to changes in law or the
discovery of new information, and those expenditures could have a material
adverse effect on Smurfit-Stone's financial condition. In addition, Smurfit-
Stone is required to make significant environmental capital expenditures on an
annual basis. Smurfit-Stone expects those expenditures to increase
significantly in the next several years.
The United States Environmental Protection Agency has finalized parts of a
comprehensive rule governing the pulp, paper and paperboard industry, known as
the "Cluster Rule". In order to comply with those parts of the Cluster Rule
that have been finalized, Smurfit-Stone estimates that it may require the
incurrence of approximately $310 million in capital expenditures, the majority
of which will be spent over the next three to five years. Smurfit-Stone cannot
predict the ultimate cost of complying with the parts of the regulations that
have been finalized, or with regulations that have not yet been finalized,
until it completes further engineering studies, and non-final regulations are
finalized. Smurfit-Stone can give no assurance that the foregoing costs and
liabilities, either individually or in the aggregate, will not have a material
adverse effect on Smurfit-Stone's financial condition in the future.
Foreign currency risks and exchange rate fluctuations could hinder the results
of Smurfit-Stone's international operations
Smurfit-Stone has operations throughout the United States, Canada, Europe
and Latin America. For Smurfit-Stone, the functional currency for the majority
of its operations is the applicable local currency, other than for operations
in highly inflationary economies, where the functional currency is the U.S.
dollar. Smurfit-Stone enters into foreign currency exchange agreements, the
amount of which during 1999 was not material to the consolidated financial
position of Smurfit-Stone at December 31, 1999. These factors substantially
mitigate any potential foreign currency exchange risk. Nonetheless, Smurfit-
Stone's stockholders' equity is directly affected by exchange rates by
. translations into U.S. dollars for financial reporting purposes of the
assets and liabilities of its foreign operations conducted in local
currencies and
. gains or losses from foreign operations conducted in U.S. dollars.
In addition, Smurfit-Stone competes with foreign producers, particularly in
Northern Europe. Any revaluation of the U.S. dollar relative to Northern
European currencies or the European common currency could cause Smurfit-Stone's
products to be less cost competitive.
Risks Relating to the Smurfit-Stone Series A Preferred Stock
The terms of the merger agreement and the merger were not determined by
arm's length negotiations
The terms of the merger among Smurfit-Stone, Stone Container and SCC Merger
Co. were not determined by arm's length negotiations. Stone Container is a
wholly-owned subsidiary of Smurfit-Stone. Although Stone Container's board of
directors received an opinion from its financial advisor as to the fairness,
from a financial point of view, of the consideration to be received in the
merger by the holders of its Series E Preferred Stock,
16
<PAGE>
Stone Container cannot assure holders of its Series E Preferred Stock that the
terms of the merger are as favorable as those that would have been obtained in
an unaffiliated third-party transaction.
Smurfit-Stone's holding company structure limits its ability to pay cash
dividends on the Series A Preferred Stock
Smurfit-Stone is a holding company and its assets consist solely of
investments in its subsidiaries. Smurfit-Stone's ability to pay cash dividends
on the Series A Preferred Stock will depend on the earnings of its subsidiaries
and the distribution or other payment of such earnings to Smurfit-Stone in the
form of dividends, loans or advances, and repayment of loans or advances, and
repayment of loans and advances from Smurfit-Stone. The subsidiaries are
separate and distinct legal entities and have no obligation, contingent or
otherwise, to pay any amounts due in respect of the Series A Preferred Stock or
to make any funds available to pay such obligations, whether by dividends,
loans or other payments. In addition, the subsidiaries' credit facilities and
note indentures may limit their ability to make distributions to Smurfit-Stone.
Under such circumstances, Smurfit-Stone may be unable to pay cash dividends on
its Series A Preferred Stock.
Dividends paid in kind on the Series A Preferred Stock may cause holders of
Series A Preferred Stock to suffer tax liability without receiving any cash
Holders of Series A Preferred Stock may incur income tax liability without
receiving any cash to pay that liability. Dividends on the Series A Preferred
Stock may be paid, under specific circumstances, in additional shares of Series
A Preferred Stock. Dividends paid in additional shares of Series A Preferred
Stock are said to be paid "in kind." Dividends paid in kind may be taxable
income to holders of Series A Preferred Stock even though those dividends
provide no cash to those holders with which to pay the resulting income tax
liability.
Smurfit-Stone may be unable to pay cash dividends on its Series A Preferred
Stock
Smurfit-Stone may not be obligated to pay cash dividends on its Series A
Preferred Stock under specific circumstances. These circumstances include,
among other things,
. the aggregate amount of such dividends exceeding 10% of Smurfit-Stone's
"net income" (as described on page 122 of this proxy
statement/prospectus) for the most recent four full fiscal quarter
period;
. payment of such cash dividends which would conflict with, violate or
result in a breach of, any of the credit agreements, indentures or debt
instruments of Smurfit-Stone or any of the subsidiaries; or
. Smurfit-Stone's board of directors making a good faith determination that
Smurfit-Stone does not have legally available funds to pay a cash
dividend.
For the four quarter period ended June 30, 2000, Smurfit-Stone had "net
income" (as described on page of this proxy statement/prospectus) of
approximately $115.4 million.
Smurfit-Stone can redeem the Series A Preferred Stock
Smurfit-Stone has the option, on thirty days' notice, to redeem all or some
of the shares of Series A Preferred Stock at any time, whether or not the
holders of Series A Preferred Stock wish Smurfit-Stone to do so. In addition,
Smurfit-Stone must redeem all shares of Series A Preferred Stock on February
15, 2012. Before such mandatory redemption, holders of redeemed Series A
Preferred Stock will receive payment of the redemption price in cash. At the
mandatory redemption date, Smurfit-Stone will have the option of paying the
redemption price in cash or shares of Smurfit-Stone common stock.
Smurfit-Stone can exchange the Series A Preferred Stock for Debentures
Smurfit-Stone has the right, on any dividend payment date, to exchange all
of the Series A Preferred Stock for Debentures.
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Corporate holders of Series A Preferred Stock risk loss of a tax deduction if
Smurfit-Stone exchanges the Series A Preferred Stock
If Smurfit-Stone exchanges the Series A Preferred Stock for Debentures,
corporate holders of Series A Preferred Stock may suffer adverse tax
consequences. Except for the maturity date, the Debentures will have
substantially the same economic terms, voting rights and conversion features as
the Series A Preferred Stock, but instead of receiving dividend payments,
holders of Debentures would receive interest payments. Corporate holders of
Series A Preferred Stock therefore risk the loss of the "dividends received"
deduction in the event of Smurfit-Stone's exchange of the shares of Series A
Preferred Stock for Debentures.
Holders of Smurfit-Stone Series A Preferred Stock will not be entitled to
vote on any matters, except in limited circumstances
Holders of Smurfit-Stone Series A Preferred Stock generally have no voting
rights, except as required by law or in connection with the modification of the
certificate of designation establishing the terms of the Series A Preferred
stock or the indenture governing the Debentures. Holders of Smurfit-Stone
Series A Preferred Stock are not entitled to vote to appoint, remove or replace
the members of Smurfit-Stone's board of directors.
A liquid trading market for the Smurfit-Stone Series A
Preferred Stock may not develop or continue
Unlike the Stone Container Series E Preferred Stock, there has been no
previous public market for Smurfit-Stone's Series A Preferred Stock. Although
Smurfit-Stone is obligated to use its commercially reasonable efforts to
maintain the listing of the Series A Preferred Stock on the Nasdaq National
Market or a national securities exchange for as long as any shares of Series A
Preferred Stock are outstanding, Smurfit-Stone cannot predict the extent to
which investor interest will lead to the development of an active and liquid
trading market for its Series A Preferred Stock.
FORWARD-LOOKING STATEMENTS
This prospectus/proxy statement contains forward-looking statements with
respect to the financial condition, results of operations, plans, objectives,
future performance and business of Smurfit-Stone and Stone Container, as well
as information relating to the proposed merger. When used in this
prospectus/proxy statement, the words "anticipates," "believes," "expects,"
"intends" and similar expressions identify such forward-looking statements.
Although Smurfit-Stone and Stone Container believe that such statements are
based on reasonable assumptions, these forward-looking statements are subject
to numerous factors, risks and uncertainties that could cause actual outcomes
and results to be materially different from those projected. These factors,
risks and uncertainties include, among others, the following:
. the impact of general economic conditions where Smurfit-Stone and Stone
Container do business, including interest rates;
. general industry conditions, including competition and product and raw
material prices;
. fluctuations in exchange rates and currency values;
. capital expenditure requirements;
. legislative or regulatory requirements;
. access to capital markets; and
. other factors described in this proxy statement/prospectus.
Smurfit-Stone's and Stone Container's actual results, performance or
achievement could differ materially from those expressed in, or implied by, the
forward-looking statements. No assurances can be given that any of the events
anticipated by the forward-looking statements will occur or, if any of them do,
what impact they will have on Smurfit-Stone's and Stone Container's results of
operations and financial condition.
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SPECIAL FACTORS
Effects of the Merger
Smurfit-Stone, Stone Container and SCC Merger Co. have entered into a merger
agreement to effect a recapitalization of Stone Container that will result in
the elimination and consequent delisting of Stone Container's outstanding
Series E Preferred Stock. Upon completion of the merger, each share of Series E
Preferred Stock issued and outstanding immediately prior to the effective time
of the merger will be canceled and converted into the right to receive one
share of Smurfit-Stone's newly authorized Series A Preferred Stock, plus an
amount in cash equal to the accrued and unpaid dividends on each share of
Series E Preferred Stock on the date the merger closes, less $0.12. As a result
of the merger, Smurfit-Stone will become Stone Container's sole stockholder and
holders of Stone Container's Series E Preferred Stock will become holders of
Smurfit-Stone's Series A Preferred Stock.
Following the consummation of the merger, the Series E Preferred Stock will
no longer be listed on the New York Stock Exchange. In addition, the
registration of the Series E Preferred Stock under the Securities Exchange Act
will be terminated. Consequently, following the merger there will be no
publicly traded Stone Container Series E Preferred Stock outstanding.
Background of the Merger
Stone Container has not made any dividend payments on the Series E Preferred
Stock since February 15, 1997. The payment of such dividends has been, and
continues to be, prohibited under the terms of Stone Container's credit
agreements and note indentures. In general, these agreements provide that Stone
Container may only fund payments in respect of its capital stock (including
dividends on the Series E Preferred Stock) from a "restricted payment basket"
that equals (1) 100% of its net income, plus (2) amounts contributed to its
capital less (3) 100% of its net losses. As of June 30, 2000, this restricted
payment basket was a negative $1,018 million.
The terms of the Stone Container Series E Preferred Stock provide that for
so long as the dividends on the stock are more than six quarters in arrears,
the holders of such stock will be entitled to appoint two persons to serve on
the Stone Container board of directors. In March 1999, Mr. David Gale and Mr.
Mark Weissman were appointed to serve on the board of directors of Stone
Container as the representatives of the holders of the Series E Preferred
Stock. Messrs. Gale and Weissman were re-elected as directors of Stone
Container by the holders of Series E Preferred Stock at the Annual Meetings of
Stockholders of Stone Container held in May 1999 and May 2000.
Since joining the board of directors of Stone Container, Messrs. Weissman
and Gale, in addition to performing their duties as directors, have encouraged
the company to explore possible means of satisfying the arrearage on the Series
E Preferred Stock. In the course of these discussions, the parties acknowledged
that the limitations contained in Stone Container's credit agreements and
indentures prohibit a transaction that involves any payment by Stone Container,
but that such limitations would not prevent Smurfit-Stone from entering into a
transaction directly with the holders of the Series E Preferred Stock. In
February 2000, Mr. Ray Curran, in his capacity as the Chief Executive Officer
of Smurfit-Stone, advised Messrs. Gale and Weissman that Smurfit-Stone would be
willing to consider a transaction that addressed the arrearage provided that
the transaction was consistent with the best interests of Smurfit-Stone and its
stockholders.
On May 2, 2000, Stone Container entered into a confidentiality agreement
with Mariner Investment Group, Inc., Delta Dividend Group, Inc. and Messrs.
Gale and Weissman. Mariner Investment Group and Delta Dividend Group are
entities affiliated with Messrs. Gale and Weissman and are substantial holders
of Series E Preferred Stock. Under the terms of the confidentiality agreement,
the parties agreed to maintain the confidentiality of information furnished in
connection with a possible transaction including the Series E Preferred Stock.
In addition, such parties agreed not to acquire any securities issued by Stone
Container for a
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three-month period ending August 2, 2000. The parties subsequently amended the
confidentiality agreement to extend this period through August 15, 2000.
On May 15, 2000, Messrs. Gale and Weissman, together with their legal
counsel, met with Mr. Curran and other representatives of Smurfit-Stone
management, together with their legal counsel, in Chicago, Illinois. At this
meeting, the representatives of Smurfit-Stone outlined a possible transaction
in which shares of Series E Preferred Stock would be exchanged for cash and
preferred stock in Smurfit-Stone through a merger transaction. At this meeting,
no agreement on the specific terms of the merger was reached, but the parties
committed to continue discussions.
On May 18, 2000, Mr. Curran and other representatives of Smurfit-Stone
management apprised the board of directors of Smurfit-Stone of the ongoing
discussions concerning the Stone Container Series E Preferred Stock. The board
of directors of Smurfit-Stone authorized Mr. Curran to pursue the merger
transaction subject to certain conditions, including the negotiation of
mutually acceptable terms and receipt of any required bank or third party
consents.
Throughout June and July 2000, Messrs. Gale and Weissman, and their legal
counsel, and representatives of Smurfit-Stone, and its legal counsel, engaged
in discussions concerning the proposed transaction, including the terms of the
Series A Preferred Stock to be issued in the merger.
On July 20, 2000, the board of directors of Stone Container approved the
engagement of Deutsche Bank Securities Inc. to serve as a financial advisor in
connection with the proposed merger and to render an opinion as to the
fairness, from a financial point of view, of the consideration to be received
by the holders of the Series E Preferred Stock.
On August 8, 2000, the Stone Container board of directors held a special
meeting at which members of management, representatives of Deutsche Bank and
legal counsel were present. At the meeting, legal counsel reviewed the terms
and conditions of the merger agreement. Representatives of Deutsche Bank also
made a presentation regarding the proposed merger.
Following these presentations, and after discussion, the Stone Container
board of directors approved the merger agreement and the related agreements
contemplated thereby, and authorized Stone Container management to enter into
such agreements. Mr. Curran was not present at this meeting. Deutsche Bank
rendered its opinion to the effect that, as of the date and subject to the
assumptions made, procedures followed, matters considered and limits of its
review, the consideration to be paid to the holders of the Series E Preferred
Stock in connection with the merger agreement and the transactions contemplated
thereby was fair, from a financial point of view, to such holders and Stone
Container. Deutsche Bank's written opinion confirming its oral opinion was
delivered on August 8, 2000.
On August 8, 2000, the merger agreement and voting agreement were each
executed and a press release announcing such execution was made on August 9,
2000, prior to the opening of trading on the Nasdaq National Market.
Approval by the Stone Container Board of Directors; Reasons for the Merger
The Stone Container board of directors has approved the merger. Neither
Stone Container nor its board of directors makes any recommendation to any
stockholder as to whether such stockholder should approve the merger. Each
stockholder must make his or her own decision as to whether to approve the
merger.
On August 8, 2000, the Stone Container board of directors, including the two
members appointed by the holders of Series E Preferred Stock, determined that
the terms of the merger were fair to and in the best interest of the holders of
Stone Container's Series E Preferred Stock. The Stone Container board of
directors consequently approved and adopted the merger agreement, the merger
and the transactions contemplated by the
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merger agreement. In connection with such approval, the Stone Container board
of directors received from Deutsche Bank an oral opinion (which was later
confirmed in writing) to the effect that, as of such date, the consideration to
be received by the holders of Series E Preferred Stock in the merger was fair,
from a financial point of view, to such stockholders. In addition to
considering its financial advisor's determination of the fairness, from a
financial point of view, of the consideration to be received by such
stockholders, the Stone Container board of directors considered the procedural
fairness of the proposed merger. The Stone Container board of directors
considered, among other things, the fact that its independent members, who were
elected by the holders of the Series E Preferred Stock voting separately as a
class, had approved the merger and that the final approval of the merger
requires the affirmative vote of holders of two-thirds of the outstanding
shares of Series E Preferred Stock. Accordingly, the Stone Container board of
directors determined that the approval of the proposed merger was procedurally
fair to the holders of Series E Preferred Stock.
In approving the merger and the merger agreement, Stone Container's board of
directors consulted with its legal counsel and financial advisor and considered
a number of additional factors in making its decision, including:
. since February 15, 1997, Stone Container's credit agreements and note
indentures have prohibited Stone Container from declaring and paying
dividends when due on the Series E Preferred Stock;
. as of June 30, 2000, the resulting arrearage in the payment of dividends
on the Series E Preferred Stock of approximately $5.6875 per share, or
$26.2 million in the aggregate;
. Stone Container's projections indicating that the limitations imposed by
its various debt instruments prevent it from paying dividends on the
Series E Preferred Stock until May 2003;
. the fact that the merger transaction structure permitted the elimination
of the entire dividend arrearage without violating the terms of Stone
Container's credit agreements or note indentures;
. the terms of the Series A Preferred Stock, including the requirement that
Smurfit-Stone pay dividends on such stock in additional shares of Series
A Preferred Stock in the event cash dividends are not paid and the
obligation that Smurfit-Stone redeem such shares for cash or shares of
Smurfit-Stone common stock on February 12, 2012;
. the fact that the Series A Preferred Stock, unlike the Series E Preferred
Stock, carried no voting rights;
. the fact that the Series A Preferred Stock would be quoted on the Nasdaq
National Market and not listed on the New York Stock Exchange; and
. the presentation of Deutsche Bank at the meeting of the board of
directors of Stone Container held on August 8, 2000 and the opinion of
Deutsche Bank dated August 8, 2000, that, as of such date, the merger
consideration to be received by the holders of the Series E Preferred
Stock was fair, from a financial point of view, to such stockholders. In
its review of the analyses performed by Deutsche Bank, including the
historical performance analysis of the Series E Preferred Stock, the
equity derivative valuations, and the dividend discount models, the board
of directors did not separately weigh each analysis prepared by Deutsche
Bank, but rather considered all of them taken as a whole.
The foregoing discussion of the information and factors considered by the
Stone Container board of directors includes the material factors considered by
the board of directors in reaching its conclusions and approval of the merger
and merger agreement but is not meant to be exhaustive. In view of the variety
of factors considered in reaching its determination, including the various
advantages and disadvantages of the proposed transaction, the board of
directors did not find it practicable to, and did not, quantify or otherwise
assign relative weights to the specific factors considered in reaching its
conclusions and approval. In addition, individual members of the board of
directors may have given different weights to different factors. Stone
Container's board of directors believes that these factors support its fairness
determination.
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Position of Smurfit-Stone Regarding Fairness of the Merger
Smurfit-Stone believes that the consideration to be received by the holders
of Stone Container's Series E Preferred Stock pursuant to the merger is fair to
and in the best interests of such stockholders. Smurfit-Stone also believes
that approval of the proposed merger is procedurally fair to the holders of
Series E Preferred Stock. Smurfit-Stone bases these beliefs on the following
considerations:
. Smurfit-Stone, Stone Container and representatives of the holders of the
Series E Preferred Stock successfully negotiated the terms of the merger
agreement;
. holders of Series E Preferred Stock will, in the form of the Series A
Preferred Stock, receive preferred stock with identical conversion and
dividend rights, a definitive mandatory redemption date, but less voting
rights than the Series E Preferred Stock;
. holders of Series E Preferred Stock will receive, upon completion of the
merger, payment of the accrued and unpaid dividends on their Series E
Preferred Stock, which dividends have been in arrears for more than 13
fiscal quarters;
. payment of dividends on the Series A Preferred Stock will not be subject
to the limitations and restrictions contained in Stone Container's note
indentures and credit agreements;
. the terms of the merger agreement and the merger were approved by Stone
Container's board of directors, including the two members appointed by
the holders of Series E Preferred Stock;
. approval of the proposed merger requires the affirmative vote of the
holders of two-thirds of the outstanding shares of Series E Preferred
Stock; and
. notwithstanding that the opinion of the Stone Container board of
director's financial advisor was solely provided for the information and
assistance of the Stone Container board of directors and that Smurfit-
Stone is not entitled to rely on this opinion, the Smurfit-Stone board of
directors took note of such opinion from Deutsche Bank to the effect that
the consideration to be received by the holders of the Series E Preferred
Stock in the merger is fair, from a financial point of view, to such
stockholders.
Opinion of Financial Advisor to Stone Container
Stone Container retained Deutsche Bank as its financial advisor in
connection with the proposed merger of SCC Merger Co. and Stone Container. At
the August 8, 2000 meeting of the Stone Container board of directors, Deutsche
Bank delivered its oral opinion, subsequently confirmed in writing as of the
same date, to the Stone Container board of directors to the effect that, as of
the date of such opinion, based upon and subject to the assumptions made,
matters considered and limits of the review undertaken by Deutsche Bank, the
consideration to be received by the holders of Series E Preferred Stock under
the merger agreement was fair, from a financial point of view, to the holders
of Series E Preferred Stock.
The full text of Deutsche Bank's written opinion, dated August 8, 2000,
which sets forth among other things, the assumptions made, matters considered
and limits on the review undertaken by Deutsche Bank in connection with its
opinion, is attached as Annex E to this proxy statement/prospectus and is
incorporated herein by reference. You are urged to read Deutsche Bank's opinion
in its entirety. The summary of Deutsche Bank's opinion set forth in this proxy
statement/prospectus is qualified in its entirety by reference to the full text
of Deutsche Bank's opinion. For a further discussion of the review undertaken
by Deutsche Bank in connection with its opinion, we refer you to the section
captioned "Opinion of Financial Advisor," appearing later in this proxy
statement/prospectus.
Plans for Stone Container after the Merger
Pursuant to the merger agreement, upon approval of the merger and merger
agreement by the holders of the Series E Preferred Stock, Smurfit-Stone intends
to effect the merger in accordance with the merger agreement. We more fully
describe the merger agreement under the caption "MATERIAL PROVISIONS OF THE
MERGER AGREEMENT."
Except as described in this proxy statement/prospectus, Smurfit-Stone has no
current plans or proposals that relate to or would result in:
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. other than the merger, an extraordinary corporate transaction, such as a
reorganization or liquidation involving Stone Container;
. a sale or transfer of a material amount of Stone Container's assets;
. any change in Stone Container's management; or
. any other material change in Stone Container's corporate structure or
business.
Smurfit-Stone owns 100% of Stone Container's common stock. As of June 30,
2000, the holders of Series E Preferred Stock held, in the aggregate, $115
million of preferred stock (at face value) and had a claim for the accrued and
unpaid dividends on such preferred stock. The Series E Preferred Stock is
recorded at $78 million on Stone Container's balance sheet, which represented
the fair market value of the Series E Preferred Stock on November 18, 1998,
when Smurfit-Stone acquired Stone Container. Upon completion of the merger, the
preferred stock will be eliminated from Stone Container's balance sheet and
Smurfit-Stone's approximate $26 million payment of the dividend arrearage on
the Series E Preferred Stock will be recorded as a reduction to Smurfit-Stone's
stockholders' equity. Following consummation of the merger, Smurfit-Stone's
direct interest in Stone Container's net book value and net earnings will be
100%.
Appraisal Rights
Holders of Stone Container Series E Preferred Stock are not entitled to
appraisal rights under Delaware law in connection with the merger because the
Stone Container Series E Preferred Stock is listed on the New York Stock
Exchange and the shares of Smurfit-Stone Series A Preferred Stock that they
will be entitled to receive in the merger will be quoted on the Nasdaq National
Market upon completion of the merger.
Federal Securities Laws Consequences
This proxy statement/prospectus does not cover any resales of the Smurfit-
Stone Series A Preferred Stock to be received by Stone Container stockholders
in the merger, and no person is authorized to make any use of this proxy
statement/prospectus in connection with any such resale.
All shares of Smurfit-Stone Series A Preferred Stock received by Stone
Container stockholders in the merger will be freely transferable, except those
shares of Smurfit-Stone Series A Preferred Stock received by persons who are
deemed to be "affiliates" of Stone Container under the Securities Act of 1933
at the time of Stone Container's special meeting. The shares received by
"affiliates" of Stone Container may be resold only in transactions permitted by
Rule 145 under the Securities Act of 1933 or as otherwise permitted under the
Securities Act of 1933. Persons who may be affiliates of Stone Container for
those purposes generally include individuals or entities that control, are
controlled by, or are under common control with, Stone Container, and would not
include stockholders who are not officers, directors or principal stockholders
of Stone Container.
Material Federal Income Tax Considerations
In the opinion of Winston & Strawn, counsel to Smurfit-Stone and Stone
Container, the following is a summary of the material United States federal
income tax considerations of
. the merger to Stone Container stockholders who exchange their Stone
Container Series E Preferred Stock for Smurfit-Stone Series A Preferred
Stock and cash pursuant to the merger and
. holding the Smurfit-Stone Series A Preferred Stock as a capital asset.
An opinion of counsel is not binding on the Internal Revenue Service or a
court. As a result, neither Smurfit-Stone nor Stone Container can assure you
that the tax considerations contained in this discussion will not be challenged
by the Internal Revenue Service or sustained by a court if challenged by the
Internal Revenue Service.
This discussion addresses only stockholders who hold their Stone Container
Series E Preferred Stock as a capital asset and does not consider the tax
treatment of stockholders who hold Stone Container Series E Preferred Stock
through a partnership or other pass-through entity. Furthermore, this
discussion does not
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address all of the United States federal income tax consequences that may be
relevant to particular stockholders in light of their individual circumstances
(including any tax consequences from entering the voting agreement) or to
stockholders who are subject to special rules (including, without limitation,
financial institutions, tax-exempt organizations, insurance companies, dealers
in securities or foreign currencies, foreign holders, persons who hold their
Stone Container Series E Preferred Stock as a hedge against currency risk, a
constructive sale, or conversion transaction, or holders who acquired their
shares pursuant to the exercise of an employee stock option or otherwise as
compensation), nor does it address any aspect of state, local or foreign
taxation.
The following discussion is not intended to be a complete analysis or
description of all potential United States federal income tax consequences or
any other tax consequences of the merger. In addition, the discussion does not
address tax consequences which may vary with, or are contingent on, your
individual circumstances. Holders of the Stone Container Series E Preferred
Stock are strongly urged to consult their own tax advisors as to the specific
tax consequences to them of the merger and of holding the Series A Preferred
Stock, including the applicability and effect of federal, state, local and
foreign income and other tax laws on their particular circumstances.
Exchange of Stone Container Series E Preferred Stock for Smurfit-Stone Series
A Preferred Stock
The exchange of Stone Container Series E Preferred Stock for Smurfit-Stone
Series A Preferred Stock and cash pursuant to the merger will be a taxable
event for United States federal income tax purposes. Consequently, if you are a
holder of Stone Container Series E Preferred Stock, you will recognize a gain
or loss equal to the difference between
. the sum of
. the fair market value on the date of the merger of the Smurfit-Stone
Series A Preferred Stock you receive in the merger, and
. any cash you receive as partial consideration for your Stone Container
Series E Preferred Stock, and
. any transaction costs paid on your behalf by Smurfit-Stone, and
. your tax basis in your Stone Container Series E Preferred Stock.
Your tax basis in your Stone Container Series E Stock will depend on a number
of factors, including the original cost of such stock, the amount and nature of
distributions subsequently received with respect to such stock, and any
transaction costs incurred in connection with the acquisition or disposition of
such stock.
Your gain or loss on the exchange of Stone Container Series E Preferred
Stock should be long-term capital gain or loss if you held your Stone Container
Series E Preferred Stock for more than one year at the time of the exchange and
you held such stock as a capital asset. If you are an individual stockholder,
your long-term capital gain is subject to a maximum tax rate of 20%. The
deductibility of capital losses is subject to limitations for both individuals
and corporations. Your tax basis in the Smurfit-Stone Series A Preferred Stock
received by you in the merger will be equal to the fair market value of such
stock on the date of the exchange. Your holding period for such stock will
begin on the day after the date of the exchange.
A noncorporate holder of Stone Container Series E Preferred Stock may be
subject to backup withholding at a rate of 31% on the value of the
consideration received in the merger. Backup withholding will not apply,
however, to a stockholder who
. furnishes a correct taxpayer identification number and certifies that it
is not subject to backup withholding on the substitute W-9 or successor
form included in the letter of transmittal to be delivered to the former
holders of Stone Container Series E Preferred Stock following completion
of the merger,
. provides a certification of foreign status on Form W-8BEN or successor
form, or
. is otherwise exempt from backup withholding.
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Smurfit-Stone Series A Preferred Stock
Generally.
Because the Series A Preferred Stock is subject to mandatory redemption and,
subject to certain limitations, is exchangeable for Smurfit-Stone's 7%
Convertible Subordinated Debentures at Smurfit-Stone's option, there is a risk
that the Series A Preferred Stock could be treated as indebtedness for federal
income tax purposes. Smurfit-Stone intends to take the position (which counsel
believes is reasonable) that the Series A Preferred Stock constitutes stock for
federal income tax purposes, and, therefore, the material tax consequences to
holders of the Series A Preferred Stock should be as described herein. If,
however, it is determined that the Series A Preferred Stock is debt, corporate
holders would not be entitled to the benefit of the dividends received
deduction discussed below and the yield to the holders of the Series A
Preferred Stock would be taxable as original issue discount (i.e., interest
income), whether or not actual cash payments are received and whether or not
Smurfit-Stone has accumulated earnings and profits. The remainder of the
discussion assumes that the Series A Preferred Stock will be classified as
stock for federal income tax purposes.
Redemption Premium.
Because the Series A Preferred Stock is subject to mandatory redemption, a
holder of Series A Preferred Stock will be required to accrue the redemption
premium (other than a redemption premium that is treated as de minimus under
applicable Treasury Regulations), if any, of such stock as ordinary dividend
income arising from a series of constructive distributions of additional stock
over the period ending on the mandatory redemption date, using principles
similar to those that govern the accrual of original issue discount under
section 1272(a) of the Code. The redemption premium, if any, will equal the
amount by which the Liquidation Preference exceeds the issue price of the
Series A Preferred Stock. A holder of Series A Preferred Stock should consult
its own tax advisor to determine whether accrual of a redemption premium is
required with respect to the Series A Preferred Stock and the potential tax
consequences of increases to the Liquidation Preference in the event dividends
are not paid.
Dividends on Smurfit-Stone Series A Preferred Stock.
If Smurfit-Stone distributes money or other property to the holders of the
Series A Preferred Stock, the distribution will be treated under Code Section
301 as a dividend to the extent of Smurfit-Stone's current and accumulated
earnings and profits and will be taxed at ordinary income tax rates. The
portion of the distribution in excess of Smurfit-Stone's current and
accumulated earnings and profits will be treated as a nontaxable return of
basis to the extent thereof. Any remaining amount of the distribution will be
treated as gain from the sale of the Series A Preferred Stock. Such gain should
be treated as capital gain, and assuming such holder has held its stock for
more than one year, should be treated as long-term capital gain. For
individuals, long-term capital gain is subject to a maximum tax rate of 20%.
The basis of any property received in a distribution with respect to the Series
A Preferred Stock will equal the fair market value of such property.
For purposes of the foregoing paragraph, the amount of a distribution will
be the sum of
. amount of money received and
. the fair market value of any other property received
reduced (but not below zero) by
. the amount of any liability of the corporation assumed by the holder of
the Series A Preferred Stock and
. the amount of any liability to which the property received by such holder
is subject immediately before and immediately after the distribution.
A distribution by Smurfit-Stone of additional shares of Series A Preferred
Stock to the holders of the Series A Preferred Stock will be treated as a
distribution of property under Code Section 301 in an amount equal to the fair
market value of the distributed Series A Preferred Stock. Such a distribution
will be subject to
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the dividend rules described above, unless the distribution is made to take
into account a stock dividend, stock split, or any similar event which would
otherwise result in the dilution of the conversion rights of the Series A
Preferred Stock, and further, may be subject to the redemption premium rules
described above if the fair market value of the distributed shares is less than
the Liquidation Preference thereof by more than a de minimus amount. A holder's
tax basis in Series A Preferred Stock that is treated as a distribution of
property under Code Section 301 will equal the fair market value of the
distributed stock on the date of the distribution. If at any time Smurfit-Stone
makes a distribution to its stockholders and, pursuant to the anti-dilution
provisions of the Series A Preferred Stock, the conversion rate of such stock
is increased, such increase may be deemed to be a distribution of property
under Code Section 301 to the holders of the Series A Preferred Stock if the
proportionate interests of the holders of the Series A Preferred Stock are
consequently increased. In the event such a distribution of property is deemed
to occur, the holders' basis in their Series A Preferred Stock would be
proportionately increased by the amount of the deemed distribution. Smurfit
Stone does not believe that accretions to the Liquidation Preference upon
nonpayment of dividends will cause a deemed distribution. However, the Internal
Revenue Service may take a contrary position. Accordingly, holders of the
Series A Preferred Stock should consult their own tax advisors regarding this
issue.
Taxable dividends on the Series A Preferred Stock should qualify for the
dividends received deduction in the hands of qualifying corporate holders,
subject to the minimum holding period requirements and other applicable
requirements (including the disallowance of the dividends received deduction to
the extent a corporate stockholder incurs interest expense on debt directly
attributable to the Series A Preferred Stock). A corporate stockholder's
liability for alternative minimum tax may be affected by the portion of the
dividends received (or deemed to be received) that are deducted in computing
taxable income.
Section 1059 of the Code reduces the benefit of the dividends received
deduction with respect to "extraordinary dividends" by requiring a corporate
stockholder to reduce its basis in the preferred stock (but not below zero) by
the nontaxed portion (as a result of the dividends received deduction) of any
"extraordinary dividend" if the holder has not held the preferred stock for
more than two years before the earliest of the dates on which the corporation
declares, announces, or agrees to, the amount or payment of such dividend. In
addition, an amount treated as a dividend in the case of a redemption that is
either non-pro rata as to all stockholders, in partial liquidation, or which
would not have been treated as a dividend if any options had not been taken
into account under Section 318(a)(14) of the Code or if Section 304(a) of the
Code had not applied, would also constitute an extraordinary dividend even if
the Series A Preferred Stock were held for more than two years before the date
of announcement or agreement with respect to the redemption. If the nontaxed
portion of all extraordinary dividends exceeds the corporate holder's basis,
the excess is treated as taxable gain. The dividends on the Series A Preferred
Stock may constitute extraordinary dividends for this purpose. An
"extraordinary dividend" on the Series A Preferred Stock would generally be a
dividend (including a deemed dividend) that equals or exceeds 5% of the
holder's basis in such stock, treating all dividends having ex-dividend dates
within an 85-day period as one dividend, or exceeds 20% of the holders basis in
such stock, treating all dividends having ex-dividends dated within a 365-day
period as one dividend. However, if the market value can be established by the
holder to the satisfaction of the Secretary of the Treasury, fair market value
may be substituted for stock basis in making the foregoing determination.
If stock pays fixed dividends at least annually, has no dividends in arrears
at the time it is acquired by a corporate holder, and does not have an actual
rate of return exceeding 15%, then a fixed dividend paid with respect to such
stock will be a "qualified preferred dividend" that may qualify for special
relief under Section 1059 of the Code. Under this relief provision,
. a qualified preferred dividend is not treated as "extraordinary" if the
taxpayer holds such stock for more than five years or
. if the taxpayer disposes of such stock before it has been held for more
than five years, then the amount of the basis reduction under Section
1059 of the Code with respect to such dividends will not be greater than
the excess (if any) of
. the qualified preferred dividends paid with respect to such stock
during the period the taxpayer held the stock over
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. the qualified preferred dividends that would have been paid during such
period on the basis of the stated rate of return.
For purposes of determining the actual rate of return or the stated rate of
return, the average amount of actual dividends received (or deemed received
under Section 305 of the Code), or the stated dividends, as the case may be are
compared with the lesser of the holder's adjusted tax basis in the stock or the
liquidation preference (excluding dividend arrearages) of the stock.
Conversion of Smurfit-Stone Series A Preferred Stock to Smurfit-Stone Common
Stock.
If the Series A Preferred Stock is converted to Smurfit-Stone Common Stock,
neither the holder of the Series A Preferred Stock nor Smurfit-Stone should
recognize gain or loss for federal income tax purposes, except to the extent
that cash is received in lieu of fractional shares of Common Stock. Income will
generally be recognized, however, to the extent that Common Stock is received
in payment of dividends in arrears. A holder's tax basis in the Common Stock
received in such a conversion (including Common Stock received in payment of
dividend arrearages) will equal such holder's tax basis in its Series A
Preferred Stock, increased by the fair market value of the Common Stock that is
received in payment of dividends in arrears.
Redemption of Series A Preferred Stock for Cash.
A redemption of the Series A Preferred Stock will be a taxable event that
will be treated as a sale or exchange (on which capital gain or loss may be
realized) if the redemption
. results in a "complete termination" of the stockholder's stock interest
in Smurfit-Stone under Section 302(b)(3) of the Code,
. is "substantially disproportionate" with respect to the stockholder under
Section 302(b)(2) of the Code, or
. ""is not essentially equivalent to a dividend" with respect to the
stockholder under Section 302(b)(1) of the Code.
In determining whether any of these tests have been met, shares considered to
be owned by the stockholder by reason of certain constructive ownership rules
set forth in Section 318 of the Code, as well as shares actually owned must be
taken into account. The gain or loss recognized will be an amount equal to the
difference between (1) the sum of the amount of cash and the fair market value
of any property received (less any cash received in payment of accumulated and
declared but unpaid dividends, which will be taxable as ordinary income if not
previously included in a holder's income) and (2) the stockholder's adjusted
tax basis in the Series A Preferred Stock. A stockholder's gain, if any, will
generally be considered capital gain and will be long-term capital gain if the
holder has held the Series A Preferred Stock for more than one year. Capital
gains realized by corporations are generally taxed at the same rates applicable
to ordinary income, although noncorporate taxpayers who realize long-term
capital gains may be subject to a maximum tax rate of 20% on such gains.
Because satisfaction of these tests will depend on the particular facts and
circumstances of each holder of Series A Preferred Stock at the time of the
redemption, each holder is urged to consult it own tax adviser as to whether it
would be entitled to sale or exchange treatment in connection with such a
redemption.
If a redemption of the Series A Preferred Stock does not meet any of the
redemption tests under Section 302 of the Code, it will be treated as a
distribution that is taxable as a dividend under Section 301 of the Code to the
extent of Smurfit-Stone's current or accumulated earnings and profits. The
distribution amount should be the amount of cash received by the stockholder.
If a corporate stockholder has dividend treatment on a redemption of the Series
A Preferred Stock, the dividend will be an extraordinary dividend under Section
1059 of the Code irrespective of the holder's holding period.
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Exchange of Series A Preferred Stock for 7% Convertible Subordinated
Debentures.
Smurfit-Stone may, under certain circumstances, exchange all of the Series A
Preferred Stock for 7% Convertible Subordinated Debentures of Smurfit-Stone. If
this occurs, the treatment to the holders of the Series A Preferred Stock will
generally be as described under the caption "Redemption of Series A Preferred
Stock for Cash" above. If gain or loss is recognized for federal income tax
purposes, an amount equal to the difference between the issue price of the 7%
Convertible Subordinated Debentures (less any amount attributable to
accumulated and declared but unpaid dividends, which will be taxable as
ordinary income if not previously included in a holder's income) and the
holder's adjusted tax basis in the Series A Preferred Stock will be taken into
account. If issuance of the 7% Convertible Subordinated Debentures is treated
as a dividend, the amount of the distribution should be the issue price of the
7% Convertible Subordinated Debentures. If the 7% Convertible Subordinated
Debentures have original issue discount upon their issuance, a holder will be
required to include in income an amount equal to the sum of the "daily
portions" of such original issue discount, even if the holder does not receive
cash payments of interest.
Backup Withholding.
Under Section 3406 of the Code and under applicable Treasury regulations, a
noncorporate holder of Series A Preferred Stock, 7% Convertible Subordinated
Debentures, or common stock may be subject to back-up withholding at a rate of
31% with respect to dividends or interest paid on, original issue discount
accrued with respect to, or the proceeds of a sale, exchange or redemption of
Series A Preferred Stock, 7% Convertible Subordinated Debentures, or common
stock, as the case may be. The payor will be required to deduct and withhold
the prescribed amounts if
. the payee fails to furnish a taxpayer identification number (TIN) to the
payor,
. the IRS notifies the payor that the TIN furnished by the payee is
incorrect,
. there has been a "notified payee under-reporting" described in Section
3406(c) of the Code, or
. there has been a failure of the payee to certify under penalty of perjury
that the payee is not subject to withholding under Section 3406(a)(1)(C)
of the Code.
If any one of the events listed above occurs, Smurfit-Stone will be required
to withhold an amount equal to 31% from any dividend payment made with respect
to Series A Preferred Stock or Common Stock, any payment of interest or
principal pursuant to the terms of the 7% Convertible Subordinated Debentures,
or any payment of proceeds of a redemption of such instruments, to a
noncorporate holder. Amounts paid as back-up withholding do not constitute an
additional tax and will be credited against the holder's federal income tax
liabilities.
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MATERIAL PROVISIONS OF THE MERGER AGREEMENT
The following is a brief summary of the material provisions of the merger
agreement. A copy of the merger agreement is attached as Annex A to this
document and incorporated in this document by reference. This summary is
qualified in its entirety by reference to the full text of the merger
agreement. Stone Container stockholders are urged to read the merger agreement
carefully and in its entirety.
Structure of the Merger
Under the merger agreement, SCC Merger Co. will merge with and into Stone
Container, with Stone Container continuing as the surviving corporation.
The Merger Consideration
Each share of Stone Container Series E Preferred Stock that is issued and
outstanding immediately before the effective time of the merger shall become
and be converted into the right to receive
. one share of Smurfit-Stone Series A Preferred Stock, which share shall be
issued at the closing of the merger, and
. an amount in cash equal to the accrued and unpaid dividends in respect of
such share, less $0.12.
An amount equal to $0.12 per share is being reduced from the cash
consideration payable in connection with the merger in order to reimburse
Smurfit-Stone for a portion of the fees and expenses related to the merger.
Smurfit-Stone estimates that such fees and expenses will be approximately
$1,200,000, and will include financial and legal advisory fees, accountants'
fees, and printing, filing and other miscellaneous costs. Smurfit-Stone expects
to pay the dividend arrearage out of its available working capital.
Closing; Effective Time
Unless it is earlier terminated in accordance with the merger agreement, the
closing of the merger will take place no later than three business days after
the satisfaction or, if permissible, waiver of the conditions set forth in the
agreement, at the offices of Winston & Strawn, 35 West Wacker Drive, Chicago,
Illinois 60601, at 10:00 a.m. (Chicago time). On the closing date, the parties
to the merger agreement will cause the merger to be consummated by filing a
certificate of merger in the form required by the Delaware General Corporation
Law with the Secretary of State of Delaware, in accordance with the relevant
provisions of the Delaware General Corporation Law (the time of acceptance by
the Secretary of State of Delaware of such filing being the "effective time" of
the merger). From and after the effective time of the merger, the Series E
Preferred Stock will no longer be outstanding and will automatically be
cancelled, retired and cease to exist. Holders of certificates representing
shares of Series E Preferred Stock will cease to have any rights with respect
to such shares, except for the right to receive the merger consideration
described above.
Directors and Officers of Stone Container after the Merger
Upon the closing of the merger, the two directors appointed to the Stone
Container board of directors by the holders of Stone Container Series E
Preferred Stock will resign. No other change to the board of directors or
management of Stone Container will result from the merger.
Representations and Warranties
Organization
Each party to the merger agreement represents and warrants to the other that
it is a corporation duly organized, validly existing and in good standing under
the laws of the state of Delaware.
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Corporate Authority
Each party to the merger agreement represents and warrants to the other that
it has full corporate power and authority to enter into the merger agreement
and the merger agreement constitutes the valid and legally binding obligation
of such party, enforceable in accordance with its terms and conditions.
Opinion of Financial Advisor
Stone Container represents and warrants that it has received the opinion of
Deutsche Bank, its financial advisor, dated as of the date of the merger
agreement, to the effect that, as of the date of the merger agreement, the
consideration to be received in the merger by the holders of the Series E
Preferred Stock is fair to such holders from a financial point of view. A
complete and correct signed copy of such opinion was delivered to Smurfit-Stone
on August 8, 2000, and such opinion has not been withdrawn or modified.
Noncontravention
Each party to the merger agreement represents and warrants that neither the
execution and the delivery of the merger agreement, nor the consummation of the
transactions contemplated thereby, will:
. violate any constitution, statute, regulation, rule, injunction,
judgment, order, decree, ruling, charge, or other restriction of any
government, governmental agency, or court to which such party is subject
or any provision of its charter or bylaws; or
. conflict with, result in a breach of, constitute a default under, result
in the acceleration of, create in any party the right to accelerate,
terminate, modify, or cancel, or require any notice under any agreement,
contract, lease, license, instrument, or other arrangement to which such
party is a party or by which it is bound or to which any of its assets is
subject,
which (in either case), would have a material adverse effect on the business,
financial condition, operations, or results of operations of such party.
Covenants
General
Each of the parties to the merger agreement will use its commercially
reasonable efforts to take all action and to do all things necessary, proper,
or advisable in order to consummate and make effective the transactions
contemplated by the merger agreement (including satisfaction, but not waiver,
of the closing conditions set forth in the merger agreement).
Notices and Consents
Each of the parties will give any notices to third parties, and will use
commercially reasonable efforts to obtain any third party consents that are
necessary to vest in the surviving corporation all rights, title and interest
of SCC Merger Co. and Stone Container or that any of the parties may reasonably
request in connection with the matters referred to therein. Each of the parties
will give any notices to, make any filings with, and use commercially
reasonable efforts to obtain any authorizations, consents, and approvals of
governments and governmental agencies necessary or desirable in connection with
the matters referred to in the merger agreement.
Conditions to the Merger
The merger is subject to the following conditions:
. the representations and warranties of each party set forth in the merger
agreement shall be true and correct in all material respects at and as of
the closing date;
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. holders of Series E Preferred Stock shall have approved the merger
agreement and the merger and the transactions contemplated thereby in
accordance with the terms of the Delaware General Corporation Law and
Stone Container's certificate of incorporation and bylaws;
. any and all notices, filings, authorizations, consents and approvals of
any federal, state, local or foreign governmental entity necessary to
consummate the transactions contemplated by the merger agreement shall
have been given, made or obtained by the parties to the merger agreement;
. the Smurfit-Stone certificate of designation setting forth the rights and
preferences of the holders of the Series A Preferred Stock will have been
filed with the Secretary of State of Delaware in substantially the form
attached to this proxy statement/prospectus as Annex D;
. the Series A Preferred Stock will have been accepted for quotation on the
Nasdaq National Market, subject to official notice of issuance;
. the registration statement on Form S-4 of which this proxy
statement/prospectus is a part will have been declared effective by the
Securities and Exchange Commission. No stop order suspending the
effectiveness of the registration statement on Form S-4 shall have been
issued by the Securities and Exchange Commission and no proceedings for
that purpose shall have been initiated or threatened by the Securities
and Exchange Commission;
. no material adverse effect on the business, financial condition,
operations, prospects or results of operations of any of the parties
(other than a material adverse effect of Smurfit-Stone resulting solely
from a material adverse effect of Stone Container, which is a condition
waivable by Smurfit-Stone) shall be or shall have been existing; and
. none of the parties to the merger agreement shall be subject to any
outstanding injunction, judgment, order, decree, ruling or charge or a
party to or, to its knowledge, threatened to be made a party to any
action, suit, proceeding, hearing, investigation, charge, complaint,
claim or demand of, in or before any court or quasi judicial or
administrative agency of any federal, state, local or foreign
jurisdiction or before any arbitrator which would prevent or forbid the
consummation of the transactions contemplated by the merger agreement.
Termination, Expenses, Amendment and Waiver
The parties may terminate the merger agreement by mutual written consent at
any time before the Closing with the consent of certain holders of Stone
Container Series E Preferred Stock. The parties also may terminate the merger
agreement if:
. the holders of the Series E Preferred Stock do not adopt the merger
agreement;
. a law or regulation makes the transaction illegal or any order or
injunction permanently prohibits the transaction; or
. the other party breaches its representations, warranties or other
obligations under the merger agreement in any material respect and does
not or cannot cure the breach.
In addition,
. Smurfit-Stone may terminate the merger agreement if specific conditions
in the merger agreement are not satisfied on or before December 31, 2000;
and
. Stone Container may terminate the merger agreement if specific conditions
in the merger agreement are not satisfied on or before December 31, 2000;
provided that Smurfit-Stone or Stone Container, as the case may be, cannot
terminate the merger agreement if Smurfit-Stone or Stone Container, as the case
may be, is responsible for the failure to satisfy the specified conditions in
the merger agreement.
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Pursuant to a voting agreement entered into concurrently with the merger
agreement, Smurfit-Stone will pay the legal fees incurred by Smurfit-Stone,
Stone Container and the two directors appointed by the holders of Stone
Container Series E Preferred Stock in connection with the merger agreement and
the merger. The merger agreement provides that the cash consideration payable
to the holders of Series E Preferred Stock in connection with the merger will
be reduced by an amount equal to $0.12 per share. As a result, the holders of
Series E Preferred Stock, as a group, will bear approximately $550,000 of the
fees and expenses incurred in connection with the merger agreement and the
merger.
No amendment of any provision of the merger agreement will be valid unless
it is in writing and signed by Smurfit-Stone, SCC Merger Co. and Stone
Container. No waiver by any party of any default, misrepresentation, or breach
of warranty or covenant under the merger agreement, whether intentional or not,
will be deemed to extend to any prior or subsequent default, misrepresentation,
or breach of warranty or covenant under the merger agreement or affect in any
way any rights arising by virtue of any prior or subsequent such occurrence. In
addition, the voting agreement prohibits Smurfit-Stone and Stone Container from
amending, modifying or waiving any provision of the merger agreement in a
manner adverse to the rights of holders of the Series E Preferred Stock without
the written consent of the other parties to the voting agreement. The voting
agreement also requires Smurfit-Stone's board of directors to authorize
additional shares of Series A Preferred Stock as is necessary to pay dividend
obligations on the Series A Preferred Stock, to the extent such obligations are
not paid in cash. Furthermore, the voting agreement requires Smurfit-Stone to
use its commercially reasonable efforts to maintain the listing of the Series A
Preferred Stock on the Nasdaq National Market or a national securities exchange
for as long as any shares of Series A Preferred Stock are outstanding.
Any party whose obligation is subject to a condition contained in the merger
agreement may, in its sole discretion, waive such condition.
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THE SPECIAL MEETING
Time and Place of the Special Meeting
We are sending this proxy statement/prospectus to you as part of the
solicitation of proxies by the Stone Container board of directors for use at
the special meeting to be held at , on , 2000 at the offices
of Stone Container, 150 North Michigan Avenue at 10:00 a.m., local time. We are
first mailing this proxy statement/prospectus, the attached notice of special
meeting of stockholders and the enclosed proxy card to you on or about
, 2000.
Purpose of the Special Meeting
At the special meeting, Stone Container stockholders will consider and vote
upon a proposal to adopt the Agreement and Plan of Merger, dated as of August
8, 2000, among Smurfit-Stone, SCC Merger Co. and Stone Container. This
agreement provides for the merger of SCC Merger Co. into Stone Container, with
Stone Container as the surviving corporation.
We know of no matter to be brought before the special meeting other than the
merger. If any matter incident to the conduct of the special meeting should be
brought before the meeting, the persons named in the proxy card will vote in
their discretion.
The Stone Container board of directors has approved the merger agreement.
Neither Stone Container nor its board of directors makes any recommendation to
any stockholder as to whether you should approve the merger agreement. You must
make your own decision as to whether to approve the merger agreement.
Record Date; Stock Entitled to Vote; Quorum
The Stone Container board of directors has fixed the close of business on
September 20, 2000 as the record date for the special meeting. Only holders of
Stone Container common stock and Series E Preferred Stock on the record date
will be entitled to vote at the special meeting and any adjournments or
postponements thereof. At the record date, 135,335,381 shares of Stone
Container common stock and 4,599,300 shares of Stone Container Series E
Preferred Stock were outstanding and entitled to vote. The presence, in person
or by proxy, of a majority of the shares of Stone Container common stock and
Series E Preferred Stock is necessary to constitute a quorum at the special
meeting. Abstentions and broker non-votes will be included in the determination
of shares present at the special meeting for purposes of determining a quorum.
Under New York Stock Exchange rules, brokers who hold shares in street name for
customers have the authority to vote on certain "routine" proposals when they
have not received instructions from beneficial owners. Under New York Stock
Exchange rules, such brokers are precluded from exercising their voting
discretion with respect to the approval and adoption of non-routine matters
such as the merger, and thus, absent specific instructions from the beneficial
owner of such shares, brokers are not empowered to vote such shares with
respect to the adoption of the merger, resulting in what is known as a "broker
non-vote."
Required Vote
All properly executed proxies delivered and not properly revoked will be
voted at the special meeting as specified in such proxies. If you do not
specify a choice, your shares represented by a signed proxy will be voted "FOR"
the adoption of the merger agreement.
The affirmative vote of at least two-thirds of the outstanding shares of
Stone Container common stock and Series E Preferred Stock, voting together as a
single class, and the affirmative vote of at least two-thirds of the
outstanding shares of Stone Container Series E Preferred Stock, voting as a
separate class, is required to adopt the merger agreement. The failure to
submit a proxy card or to vote in person at the special meeting, the
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abstention from voting by a stockholder and broker non-votes will have the same
effect as a vote "AGAINST" the adoption of the merger agreement.
If sufficient votes in favor of the merger agreement proposal are not
received by the time scheduled for the special meeting, the special meeting may
be adjourned for a period or periods of not more than 30 days in the aggregate
to permit further solicitation of proxies. Any such adjournment will require
the affirmative vote of a majority of the votes cast or if a quorum is not
present, a majority of the votes represented in person or by proxy at the
session of the special meeting to be adjourned. The cost of any such additional
solicitation and of any adjourned session will be borne by Stone Container.
Smurfit-Stone and Stone Container each is a party to a voting agreement with
Mariner Investment Group Inc., Delta Dividend Group, Inc., Mark Weissman and
David Gale. Messrs. Weissman and Gale are directors of Stone Container
appointed by the holders of Stone Container Series E Preferred Stock, and
Mariner and Delta are their respective affiliates. Mariner, Delta and Messrs.
Weissman and Gale beneficially own, in the aggregate, 680,200 shares of Stone
Container's Series E Preferred Stock. Pursuant to this voting agreement,
Mariner, Delta, and Messrs. Weissman and Gale each agreed to vote in favor of
approving the merger agreement and the merger. In addition, Smurfit-Stone,
which holds 100% of the outstanding Stone Container common stock, intends to
vote all 135,335,381 of its shares in favor of the merger agreement and the
merger.
Proxies; Voting and Revocation
Each share of Stone Container common stock is entitled to one vote and each
share of Stone Container Series E Preferred Stock is entitled to one vote.
Votes will be tabulated at the special meeting by inspectors of election
appointed by Stone Container.
You may revoke or change your proxy at any time prior to its being voted by
filing a written instrument of revocation or change with the corporate
secretary of Stone Container. You may also revoke your proxy by filing a duly
executed proxy bearing a later date or by appearing at the special meeting in
person, notifying the corporate secretary and voting by ballot at the special
meeting. If you attend the meeting, you may vote in person whether or not you
have previously given a proxy, but your presence, without notifying the
corporate secretary of Stone Container, at the meeting will not revoke a
previously given proxy. In addition, if you beneficially hold shares of Stone
Container common stock or Series E Preferred Stock that are not registered in
your own name, you will need additional documentation from the record holder of
such shares to attend and vote the shares personally at the meeting.
Solicitation of Proxies
Proxies will be solicited through the mail and directly by officers,
directors and employees of Stone Container not specifically employed for such
purpose, without additional compensation. Stone Container will reimburse banks,
brokerage houses and other custodians, nominees and fiduciaries for their
reasonable expenses in forwarding these proxy materials to the principals.
Stone Container has engaged ChaseMellon Shareholder Services, L.L.C. to
represent it in connection with the solicitations of proxies at a cost of
approximately $11,000 plus expenses.
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COMPARISON OF STOCKHOLDER RIGHTS
The rights of Stone Container stockholders currently are governed by the
Delaware General Corporation Law, Stone Container's certificate of
incorporation and Stone Container's bylaws. The rights of Smurfit-Stone
stockholders currently are governed by the Delaware General Corporation Law,
Smurfit-Stone's certificate of incorporation and Smurfit-Stone's bylaws. Upon
completion of the merger, the rights of holders of Stone Container's Series E
Preferred Stock will be governed by the Delaware General Corporation Law,
Smurfit-Stone's certificate of incorporation, Smurfit-Stone's bylaws and
Smurfit-Stone's certificate of designations relating to Smurfit-Stone's Series
A Preferred Stock.
The following designation summarizes the material differences which may
affect the rights of stockholders of Stone Container and Smurfit-Stone. The
following designation is not a complete statement of all such differences or a
complete description of the specific provisions referred to in this summary.
The identification of specific differences is not intended to indicate that
other equally or more significant differences do not exist. Stockholders should
carefully read the relevant provisions of the Delaware General Corporation law,
each of Stone Container's and Smurfit-Stone's certificate of incorporation and
bylaws, and the certificate of designations relating to the Series A Preferred
Stock.
Capitalization
Stone Container
Stone Container's authorized capital consists of 200,000,000 shares of
common stock and 10,000,000 shares of preferred stock, each having $.01 par
value per share.
Smurfit-Stone
Smurfit-Stone's authorized capital consists of 400,000,000 shares of common
stock and 25,000,000 shares of preferred stock, each having a $.01 par value
per share, 5,600,000 of which are designated as Series A Preferred Stock.
Voting Rights
Stone Container
Each holder of Stone Container common stock is entitled to one vote for each
share held of record and may cumulate votes for the election of directors. Each
holder of Stone Container Series E Preferred Stock is entitled to one vote for
each share held of record on all matters submitted to Stone Container's
stockholders. In addition, holders of Stone Container Series E Preferred Stock,
voting as a separate class, are entitled to elect two of Stone Container's
directors until Stone Container declares and pays, or sets apart for payment,
the accumulated dividends on its shares of Series E Preferred Stock.
Smurfit-Stone
Each holder of Smurfit-Stone common stock is entitled to one vote for each
share held of record. Each holder of Smurfit-Stone Series A Preferred Stock
generally will not be entitled to vote on any matter, except as may be required
by law or in connection with the modification of the certificate of designation
establishing the terms of the Series A Preferred Stock or the indenture
governing the Debentures.
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Number, Election, Vacancy and Removal of Directors
Stone Container
The Stone Container bylaws require the number of directors to consist of not
fewer than three nor more than ten, with the exact number to be determined by
the Stone Container board of directors. The Stone Container board of directors
currently consists of five members.
The Stone Container certificate of incorporation provides that each holder
of Stone Container common stock entitled to vote in the election of directors
may cumulate their votes. This means that each stockholder will be entitled to
that number of votes which equals the number of votes which the stockholder
would be entitled to cast for the election of directors, multiplied by the
number of directors. A stockholder may cast all votes for a single director or
distribute them among the number to be voted for or for any two or more
nominees, in each case at the stockholder's discretion.
Vacancies and newly created directorships resulting from an increase in the
size of the board of directors may be filled by a majority of the directors
then in office. Any director may be removed, with or without cause, at any time
by the affirmative vote of the holders of a majority of the outstanding Stone
Container capital stock entitled to vote.
Smurfit-Stone
The Smurfit-Stone certificate of incorporation and bylaws require the number
of directors to consist of not less than three nor more than fifteen, with the
exact number to be determined by the Smurfit-Stone board of directors. The
Smurfit-Stone board of directors currently consists of 11 members. The Smurfit-
Stone certificate of incorporation provides for the election of Smurfit-Stone's
directors at each annual meeting of stockholders for a one-year term.
The Smurfit-Stone bylaws further provide that any vacancies on the Smurfit-
Stone board of directors can only be filled by the affirmative vote of a
majority of the directors then in office. Any director may be removed, with or
without cause, at anytime by the affirmative vote of the holders of a majority
of the outstanding Smurfit-Stone capital stock entitled to vote.
Amendments to Certificates of Incorporation
Stone Container
The amendment of Stone Container's certificate of incorporation requires the
affirmative vote of a majority of the outstanding shares of capital stock
entitled to vote, voting as a single class. Nonetheless, the affirmative vote
of at least two-thirds of the outstanding shares of capital stock entitled to
vote, voting as a single class, is required to amend Article V of the
certificate of incorporation. Article V relates to the amendment of Stone
Container's bylaws. In addition, the affirmative vote of at least two-thirds of
the outstanding shares of Series E Preferred Stock, voting as a separate class,
is required to change the preferences, rights or powers of the Series E
Preferred Stock.
Smurfit-Stone
The amendment of Smurfit-Stone's certificate of incorporation requires the
affirmative vote of a majority of the outstanding shares of capital stock
entitled to vote, voting as a single class. Nonetheless, the affirmative vote
of at least 75% of the outstanding shares of capital stock entitled to vote,
voting as a single class, is required to amend specific provisions of Articles
VI and X of Smurfit-Stone's certificate of incorporation. Article VI relates to
the compensation of members of various committees of Smurfit-Stone's board of
directors. Article X relates to provisions of Smurfit-Stone's bylaws that
relate to committee representation by representatives of Morgan Stanley
Leveraged Equity Fund II, Inc.
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Amendments to Bylaws
Stone Container
Stone Container's certificate of incorporation provides that Stone
Container's bylaws may be altered, amended or repealed by the affirmative vote
of
. a majority of a quorum of Stone Container's board of directors, or
. at least two-thirds of the outstanding common stock and Series E
Preferred Stock, voting together as a single class.
Smurfit-Stone
Smurfit-Stone's bylaws may be altered, amended or repealed and new bylaws
may be adopted by the directors at any regular or special meeting or by the
stockholders at any regular or special meeting if notice of such alteration,
amendment, repeal or adoption is given in the notice of such special meeting of
the stockholders. Notwithstanding the foregoing, Smurfit-Stone's certificate of
incorporation requires the affirmative vote of at least 75% of the outstanding
capital stock entitled to vote in order to amend Article X of the bylaws, which
ensures committee representation for one of Smurfit-Stone's significant
stockholders.
Stockholder Action in Lieu of Meeting
Stone Container
Any action required or permitted to be taken at any annual or special
meeting of Stone Container stockholders may be taken without a meeting, without
prior notice and without a vote, if a consent or consents in writing, setting
forth the action so taken, is signed by the holders of outstanding Stone
Container capital stock having not less than the minimum number of votes that
would be necessary to authorize or take such action at a meeting at which all
shares entitled to vote in such action were present and voted.
Smurfit-Stone
Smurfit-Stone's certificate of incorporation provides that stockholders may
not take any action by written consent in lieu of a meeting.
Notice of Stockholders Actions
Stone Container
Stone Container's bylaws provide that stockholders holding a majority of the
outstanding shares of Stone Container's capital stock entitled to vote may
request that Stone Container's secretary call a special meeting of
stockholders. The stockholders' request must state the purpose of the proposed
meeting.
Smurfit-Stone
Smurfit-Stone's certificate of incorporation and bylaws provide that
stockholders holding at least 25% of the outstanding shares of Smurfit-Stone's
capital stock entitled to vote must give timely written notice of nominations
for directors and of any other proposed business to be brought before an annual
meeting of stockholders.
For a nomination to be made by a stockholder at an annual meeting, the
stockholder must give timely written notice of the nomination in proper written
form to the secretary of Smurfit-Stone. To be timely, a stockholder's notice
must be delivered to or mailed and received at the principal executive offices
of Smurfit-Stone not less than 60 days nor more than 90 days before the
anniversary date of the immediately preceding annual meeting of stockholders.
If the annual meeting is called for a date that is not within 30 days before or
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after such anniversary date, notice by the stockholder must be received not
later than the close of business on the tenth day following the day on which
notice of the date of the annual meeting was mailed or public disclosure of the
date of the annual meeting was first made, whichever first occurs.
For business to be properly brought before an annual meeting by a
stockholder, the stockholder must give timely notice of the business in proper
written form to the secretary of Smurfit-Stone. To be timely, a stockholder's
notice to the secretary must be delivered to or mailed and received at Smurfit-
Stone's principal executive offices not less than 60 days nor more than 90 days
before the anniversary date of the immediately preceding annual meeting of
stockholders. If the annual meeting is called for a date that is not within 30
days before or after such anniversary date, notice by the stockholder must be
received not later than the close of business on the tenth day following
disclosure of the date of the annual meeting was mailed or public disclosure of
the date of the annual meeting was first made, whichever first occurs.
Special Stockholders Meetings
Stone Container
Stone Container's bylaws provide that special meetings of Stone Container's
stockholders may be called by the board of directors, its chairman or the
secretary at the written request of the holders of a majority of the
outstanding capital stock entitled to vote. Business transacted at any special
meeting of stockholders shall be limited to matters relating to the purpose or
purposes stated in the notice of meeting.
Smurfit-Stone
Smurfit-Stone's certificate of incorporation and bylaws provide that special
meetings of Smurfit-Stone's stockholders may be called by the chairman of the
board of directors, the chief executive officer, any vice president or the
secretary, at the written request of a majority of the board of directors or
holders of at least 25% of the outstanding capital stock entitled to vote.
Business transacted at any special meeting of stockholders shall be limited to
matters relating to the purpose or purposes stated in the notice of meeting.
Limitation of Personal Liability of Directors
The Delaware General Corporation Law provides that a corporation's
certificate of incorporation may include a provision limiting the personal
liability of a director to the corporation or its stockholders for monetary
damages for breach of fiduciary duty as a director. However, no such provision
can eliminate or limit the liability of a director for the following:
. any breach of the director's duty of loyalty to the corporation or its
stockholders;
. acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of the law;
. violation of Section 174 of the Delaware General Corporation Law
regarding unlawful payment of dividends or unlawful stock purchases or
redemptions;
. any transactions from which the director derived an improper personal
benefit; and
. any act or omission prior to the adoption of such a provision in the
certificate of incorporation
Stone Container
Stone Container's certificate of incorporation provides that no director
will be personally liable to Stone Container or its stockholders for monetary
damages for breach of fiduciary duty as a director, except for liability
. for any breach of the director's duty of loyalty to Stone Container and
its stockholders;
. for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of the law;
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. under Section 174 of the Delaware General Corporation Law; or
. for any transaction from which the director derived an improper personal
benefit.
Smurfit-Stone
Smurfit-Stone's certificate of incorporation provides that no director will
be personally liable to Smurfit-Stone or its stockholders for monetary damages
for breach of fiduciary duty as a director, except for liability
. for any breach of the director's duty of loyalty to Smurfit-Stone and its
stockholders;
. for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of the law;
. under Section 174 of the Delaware General Corporation Law; or
. for any transaction from which the director derived an improper personal
benefit.
Dividends
Stone Container
Stone Container's certificate of incorporation provides that, subject to the
preferential rights of Stone Container's preferred stock, the holders of Stone
Container common stock are entitled to receive, to the extent permitted by law,
such dividends as may be declared from time to time by Stone Container's board
of directors. Holders of shares of Series E Preferred Stock are entitled to
receive, when, as and if declared by Stone Container's board of directors out
of legally available funds, cumulative cash dividends on the shares of Series E
Preferred Stock at the rate of $1.75 per annum per share, payable in equal
quarterly installments. Stone Container's credit agreements and note indentures
have not permitted the payment of any dividends on the Series E Preferred Stock
since February 15, 1997.
Smurfit-Stone
Smurfit-Stone's bylaws provide that the board of directors may declare
dividends on Smurfit-Stone's capital stock at any regular or special meeting.
Such dividends may be paid in cash, in property, or in shares of capital stock.
Before payment of any dividend, there may be set aside out of any legally
available funds, such sums as the board of directors, in its absolute
discretion, deems proper as a reserve to meet contingencies, or for equalizing
dividends, or for repairing or maintaining any property of Smurfit-Stone, or
for any proper purpose, and the board of directors may modify or abolish any
such reserve. Dividends on Smurfit-Stone's Series A Preferred Stock are
described in this proxy statement/prospectus under the caption "Description of
Smurfit-Stone Capital Stock--Series A Preferred Stock."
Conversion
Stone Container
Holders of Stone Container common stock have no rights to convert their
shares into any other securities. Unless called for redemption, holders of
Stone Container's Series E Preferred Stock have the right at any time to
convert all or some of their shares of Series E Preferred Stock into shares of
Smurfit-Stone common stock at the per share conversion price of $34.28, subject
to adjustment.
Smurfit-Stone
Holders of Smurfit-Stone common stock have no rights to convert their shares
into any other securities. Holders of Smurfit-Stone Series A Preferred Stock
will have the conversion rights described in this proxy statement/prospectus
under the caption "Description of Smurfit-Stone Capital Stock--Series A
Preferred Stock."
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INFORMATION ABOUT SMURFIT-STONE
On May 31, 2000, Smurfit-Stone completed its acquisition of St. Laurent
Paperboard Inc. For a more complete description of St. Laurent's business, we
refer you to the section entitled "The St. Laurent Acquisition," appearing
later in this proxy statement/prospectus. The following presentation of
"Information about Smurfit-Stone" does not reflect the completion of the St.
Laurent acquisition.
Business
General
Smurfit-Stone Container Corporation, a Delaware corporation, is an
integrated producer of containerboard, corrugated containers and other
packaging products. Smurfit-Stone is the industry's leading manufacturer of
paper and paper-based packaging, including
. containerboard,
. corrugated containers,
. industrial bags and
. clay-coated recycled boxboard.
Smurfit-Stone also is the world's largest paper recycler. In addition,
Smurfit-Stone is a leading producer of solid bleached sulfate, folding cartons,
paper tubes and cores, and labels. For the year ended December 31, 1999,
Smurfit-Stone had net sales of $7,151 million and net income of $157 million.
Smurfit-Stone is a holding company with no business operations of its own.
Smurfit-Stone conducts its business operations through two wholly-owned
subsidiaries: JSCE, Inc., a Delaware corporation, and Stone Container. JSCE
conducts all of its business operations through its wholly-owned subsidiary
Jefferson Smurfit Corporation (U.S.). Smurfit-Stone acquired Stone Container
through a November 18, 1998 merger of a wholly-owned subsidiary with and into
Stone Container. Smurfit-Stone's results presented in this proxy
statement/prospectus reflect Stone Container's operations after the date of the
Stone Container merger. Jefferson Smurfit and Stone Container collectively have
operations throughout the United States, Canada, Europe and Latin America.
On May 31, 2000, Smurfit-Stone completed its acquisition of St. Laurent
pursuant to an amended and restated pre-merger agreement dated as of April 13,
2000 among Smurfit-Stone, Stone Container, 371174 Canada Inc., 3038727 Nova
Scotia Company and St. Laurent.
Pursuant to the merger agreement, each outstanding common share and
restricted share unit of St. Laurent was exchanged for $12.50 in cash and 0.5
shares of Smurfit-Stone common stock. The total net consideration paid by
Smurfit-Stone in connection with the acquisition of St. Laurent was
approximately $1.4 billion, consisting of
. approximately $631 million in cash;
. 25,335,381 shares of Smurfit-Stone common stock; and
. the assumption of $376 million of St. Laurent's debt.
Smurfit-Stone financed the cash portion of the purchase price through
borrowings under certain of its credit facilities, including a new credit
facility entered into by Stone Container and its subsidiaries.
Products
Containerboard and Corrugated Containers Segment
The primary products of Smurfit-Stone's Containerboard and Corrugated
Containers segment include:
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.corrugated containers;
. containerboard;
. kraft paper;
. solid bleached sulfate; and
. pulp.
As of December 31, 1999, this segment includes 15 paper mills and 129
container plants located in the United States and three paper mills located in
Canada. Sales for Smurfit-Stone's Containerboard and Corrugated Containers
segment in 1999 were $4,829 million, including $193 million of intersegment
sales.
Production for Smurfit-Stone's paper mills and sales volume for its
corrugated container facilities for the last three years, including Stone
Container's operations after the date of the Stone Container merger, are
included in the table below.
<TABLE>
<CAPTION>
1999 1998 1997
----- ----- -----
<S> <C> <C> <C>
Tons produced (in thousands)
Containerboard........................................... 5,973 2,479 2,024
Kraft paper.............................................. 437 63
Solid bleached sulfate................................... 189 185 190
Market Pulp.............................................. 572 71
Corrugated containers sold (in billion sq. ft.).......... 79.2 35.2 31.7
</TABLE>
Smurfit-Stone's containerboard mills produce a full line of containerboard,
which for 1999 included
. 3,858,000 tons of unbleached kraft linerboard,
. 324,000 tons of mottled white linerboard and
. 1,791,000 tons of recycled medium.
Smurfit-Stone's containerboard mills and corrugated container operations are
highly integrated, with the majority of containerboard produced by Smurfit-
Stone used internally by its corrugated container operations. In 1999, Smurfit-
Stone's corrugated container plants consumed 5,755,000 tons of containerboard,
representing an integration level of approximately 84%. A significant portion
of the kraft paper production is consumed by Smurfit-Stone's industrial bag
operations.
Corrugated containers are sold to a broad range of manufacturers of
consumable goods. Corrugated containers are used to ship such diverse products
as home appliances, electric motors, small machinery, grocery products,
produce, books, tobacco and furniture and for many other applications,
including point of purchase displays. Smurfit-Stone provides innovative
packaging solutions, stressing the value-added aspects of its corrugated
containers, including labeling and multicolor graphics to differentiate its
products and respond to customer requirements. Smurfit-Stone's corrugated
container plants are located nationwide, serving local customers and large
national accounts.
Sales volumes shown above include Smurfit-Stone's proportionate share of the
operations of Smurfit-MBI (formerly MacMillan Bathurst, Inc.), a Canadian
producer of corrugated containers, and other affiliates reported on an equity
ownership basis. Smurfit-Stone and Jefferson Smurfit Group plc, a principal
indirect shareholder of Smurfit-Stone, each own a 50% interest in Smurfit-MBI.
Smurfit-Stone also produces solid bleached sulfate, some of which is
consumed internally by Smurfit-Stone's folding carton plants. In addition,
Smurfit-Stone produces bleached northern and southern hardwood pulp, which is
sold to manufacturers of paper products, including photographic and other
specialty papers, as well as the printing and writing sectors.
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Folding Cartons and Boxboard Segment
The primary products of Smurfit-Stone's Folding Cartons and Boxboard segment
include:
. coated recycled boxboard and
. folding cartons.
Sales for Smurfit-Stone's Folding Cartons and Boxboard segment in 1999 were
$836 million.
Production of coated recycled boxboard in 1999, 1998 and 1997 by Smurfit-
Stone's boxboard mills was 581,000, 582,000 and 585,000 tons, respectively.
Smurfit-Stone's boxboard and folding carton operations are integrated, with the
majority of tons produced by Smurfit-Stone's boxboard mills used internally by
its folding carton operations. In 1999, Smurfit-Stone's folding carton plants
consumed 637,000 tons of recycled boxboard, solid bleached sulfate and coated
natural kraft, representing an integration level of approximately 78%.
Folding cartons are sold to manufacturers of consumable goods, especially
food, beverage, detergents, paper products and other consumer products.
Smurfit-Stone's folding carton plants offer extensive converting capabilities,
including
. web and sheet lithographic, rotogravure and flexographic printing,
. laminating,
. a full line of structural and graphic design services tailored to
specific technical requirements, and
. photography for packaging, sales promotion concepts, and point of
purchase displays.
Folding cartons are used primarily to provide point of purchase advertising
while protecting customers' products. Smurfit-Stone makes folding cartons for a
wide variety of applications, including food and fast foods, detergents, paper
products, beverages, health and beauty aids and other consumer products.
Customers range from small local accounts to large national accounts. Smurfit-
Stone's folding carton plants are located nationwide. Folding carton sales
volumes for 1999, 1998 and 1997 were 583,000, 536,000 and 488,000 tons,
respectively.
Smurfit-Stone has focused its capital expenditures and its marketing
activities in this segment to support a strategy of enhancing product quality
as it relates to
. packaging graphics,
. increasing flexibility while reducing customer lead time, and
. assisting customers in innovative package designs.
Other Products
Industrial Bags
Smurfit-Stone produces a wide variety of industrial bags, including:
. multiwall bags,
. consumer bags and
. intermediate bulk containers.
These products are designed to safely and effectively ship a wide range of
industrial and consumer products, including fertilizers, chemicals, concrete,
flour, sugar, feed, seed, pet foods, popcorn, charcoal and salt. Smurfit-
Stone's bag plants are located nationwide. Smurfit-Stone believes that it is
the largest producer of industrial bags in the United States. In 1999, Smurfit-
Stone's bag plants consumed approximately 45% of the kraft paper produced by
Smurfit-Stone's kraft paper mills. Bag shipments for 1999 and for the period in
1998 subsequent to the date of the Stone Container merger were 316,000 and
34,000 tons, respectively. Smurfit-Stone's sales of industrial bags in 1999
were $513 million.
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Specialty Packaging
Smurfit-Stone produces a wide variety of specialty packaging products,
including:
. uncoated recycled boxboard,
. paper tubes and cores,
. solid fiber partitions and
. consumer packaging.
Paper tubes and cores are used primarily for paper, film and foil, yarn
carriers and other textile products and furniture components. Flexible
packaging, paper and metallized paper labels and heat transfer labels are used
in a wide range of consumer product applications. In addition, a contract
packaging plant provides custom contract packaging services, including
cartoning, bagging, liquid-filling or powder-filling and high-speed
overwrapping. Smurfit-Stone produces high-quality rotogravure cylinders and has
a full-service organization experienced in the production of color separations
and lithographic film for the commercial printing, advertising and packaging
industries. In 1999, Smurfit-Stone's sales of specialty packaging products were
$288 million, including $24 million of intersegment sales.
Reclamation Operations
Smurfit-Stone's reclamation operations procure fiber resources for its paper
mills as well as other producers. Smurfit-Stone operates reclamation facilities
throughout the United States that collect, sort, grade and bale recovered
paper. Smurfit-Stone also collects aluminum and glass. In addition, Smurfit-
Stone operates a nationwide brokerage system through which it purchases and
resells recovered paper to its recycled paper mills and other producers on a
regional and national contract basis. Brokerage contracts provide bulk
purchasing, resulting in lower prices and cleaner recovered paper. Many of the
reclamation facilities are located close to Smurfit-Stone's recycled paper
mills, ensuring availability of supply with minimal shipping costs. Domestic
tons of recovered paper collected for 1999, 1998 and 1997 were 6,560,000,
5,155,000 and 4,832,000, respectively. Smurfit-Stone's sales of recycled
materials in 1999 were $563 million, including $263 million of intersegment
sales.
International Operations
Smurfit-Stone produces containerboard, boxboard and corrugated containers in
Europe and Latin America. Its European operations include
. three paper mills located in Hoya and Viersen, Germany and Cordoba,
Spain,
. 21 corrugated container plants (eleven located in Germany, three in
Spain, three in Belgium, two in France and two in the Netherlands) and
. six reclamation plants (five located in Germany and one in Spain).
In addition, Smurfit-Stone operates four container plants and several small
affiliate operations in Mexico that also produce corrugated containers.
Production for its international mills and sales volume for its foreign
corrugated container facilities for 1999 and for the period after the date of
the Stone Container merger were:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Tons produced (in thousands)
Containerboard................................................ 380 40
Recycled boxboard............................................. 79 8
Corrugated containers sold (in billion sq. ft.)................. 12.5 1.3
</TABLE>
In 1999, Smurfit-Stone's foreign corrugated container plants consumed
761,000 tons of containerboard. Its sales for its foreign operations were $581
million.
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Cladwood(R)
Cladwood(R) is a wood composite panel used by the housing industry.
Cladwood(R) is manufactured from sawmill shavings and other wood residuals and
overlaid with recycled newsprint. Smurfit Newsprint Corporation, a wholly-owned
subsidiary of Jefferson Smurfit Corporation (U.S.), has two Cladwood(R) plants
located in Oregon. Sales for Cladwood(R) in 1999 were $21 million.
Newsprint
Smurfit-Stone divested the newsprint mills owned by Smurfit Newsprint.
Accordingly, its newsprint operations located in Newberg and Oregon City,
Oregon have been accounted for as a discontinued operation. The Newberg mill
was sold in November 1999 and the ownership of the Oregon City mill was
transferred to a third party in May 2000.
In 1999, Smurfit Newsprint produced approximately 510,000 metric tons and
sold $235 million of newsprint. For the past three years, an average of
approximately 42% of Smurfit Newsprint's newsprint production was sold to The
Times Mirror Company pursuant to a long-term newsprint agreement, which has
been terminated.
Fiber Resources
Wood fiber and recycled fiber are the principal raw materials used in the
manufacture of Smurfit-Stone's paper products. Smurfit-Stone satisfies
virtually all of its need for wood fiber through purchases on the open market
or under supply agreements. Smurfit-Stone satisfies essentially all of its need
for recycled fiber through the operation of its reclamation facilities and
nationwide brokerage system.
Wood fiber and recycled fiber are purchased in highly competitive, price-
sensitive markets, which have historically exhibited price and demand
cyclicality. Conservation regulations have caused, and will likely continue to
cause, a decrease in the supply of wood fiber and higher wood fiber costs in
some of the regions in which Smurfit-Stone procures wood fiber. Fluctuations in
supply and demand for recycled fiber can cause tight supplies of recycled
fiber, and at those times Smurfit-Stone has experienced an increase in the cost
of such fiber. While Smurfit-Stone has not experienced any significant
difficulty in satisfying its needs for wood fiber and recycled fiber, it can
give no assurances that this will continue to be the case for any or all of its
mills.
In October 1999, Smurfit-Stone sold 820,000 acres of owned timberland and
assigned its rights to 160,000 acres of leased timberland located in the
southeastern United States. As part of the sales agreement, Jefferson Smurfit
entered into a two-year supply contract with the buyer to purchase 1.4 million
tons of timber each year during 2000 and 2001 at prevailing market prices. As
of December 31, 1999, Smurfit-Stone owned approximately 132,000 acres of
timberland in Canada, where it operates wood harvesting facilities.
Marketing
Smurfit-Stone's marketing strategy is to sell a broad range of paper-based
packaging products to marketers of industrial and consumer products. In
managing the marketing activities of its paperboard mills, Smurfit-Stone seeks
to meet the quality and service needs of the customers of its package
converting plants at the most efficient cost, while balancing those needs
against the demands of its open market customers. Smurfit-Stone's converting
plants focus on supplying both specialized packaging with high value graphics
that enhance a product's market appeal and high-volume sales of commodity
products.
Smurfit-Stone seeks to serve a broad customer base for each of its segments
and as a result serves thousands of accounts. Each plant has its own sales
force, and many have product design engineers and other service professionals
who are in close contact with customers to respond to their specific needs.
Smurfit-Stone complements the local plants' marketing and service capabilities
with regional and national design and service
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capabilities. Smurfit-Stone also maintains national sales offices for customers
who purchase through a centralized purchasing office. National account business
may be allocated to more than one plant because of production capacity and
equipment requirements.
Smurfit-Stone's business does not depend on a single customer or on a small
number of major customers. Smurfit-Stone does not believe that the loss of any
one customer would materially and adversely affect it.
Competition
The markets in which Smurfit-Stone sells its principal products are highly
competitive and comprised of many participants. Although no single company
dominates, Smurfit-Stone does face significant competitors in each of its
businesses. Smurfit-Stone's competitors include large vertically integrated
companies as well as numerous smaller companies. The industries in which
Smurfit-Stone competes have historically been sensitive to price fluctuations
brought about by shifts in industry capacity and other cyclical industry
conditions. Other competitive factors include design, quality and service, with
varying emphasis depending on product line.
Backlog
Demand for Smurfit-Stone's major product lines is relatively constant
throughout the year and seasonal fluctuations in marketing, production,
shipments and inventories are not significant. Backlogs are not a significant
factor in the industry. Smurfit-Stone does not have a significant backlog of
orders, as most orders are placed for delivery within 30 days.
Research and Development
Smurfit-Stone's research and development center is located in Carol Stream,
Illinois. The center uses state-of-the-art technology to assist all levels of
the manufacturing and sales processes, from raw materials supply through
finished packaging performance. Research programs have provided improvements in
coatings and barriers, stiffeners, inks and printing. The center's technical
staff conducts basic, applied and diagnostic research. It also develops
processes and products and provides a wide range of other technical services.
Smurfit-Stone actively pursues applications for patents on new inventions
and designs and attempts to protect its patents against infringement.
Nevertheless, Smurfit-Stone believes that its success and growth depend more on
the quality of its products and its relationships with its customers than on
the extent of its patent protection.
Smurfit-Stone holds or is licensed to use certain patents, licenses,
trademarks and trade names on products. However, Smurfit-Stone does not
consider that the successful continuation of any material aspect of its
business depends on such intellectual property. The cost of Smurfit-Stone's
research and development activities for 1999, 1998 and 1997 was approximately
$7 million, $4 million and $3 million, respectively.
Employees
Smurfit-Stone had approximately 36,300 employees at December 31, 1999. Of
these employees, approximately 30,800 were employees of U.S. operations and the
remainder were employees of foreign operations. Of the domestic employees,
approximately 20,500 (67%) are represented by collective bargaining units. The
expiration dates of union contracts for Smurfit-Stone's major paper mill
facilities are as follows:
. the Missoula, Montana mill, expiring in May 2001;
. the Jacksonville, Florida (Seminole) mill, expiring in June 2001;
. the Hopewell, Virginia mill, expiring in July 2002;
. the Brewton, Alabama mill, expiring in October 2002;
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. the Panama City, Florida mill, expiring in March 2003;
. the Fernandina Beach, Florida mill, expiring in June 2003;
. the Florence, South Carolina mill, expiring in August 2003; and
. the Hodge, Louisiana mill, expiring in June 2006.
Smurfit-Stone believes that its employee relations are generally good.
Smurfit-Stone is currently in the process of bargaining with unions
representing production employees at a number of its operations. While the
terms of these agreements may vary, Smurfit-Stone believes that the material
terms of its collective bargaining agreements are customary for the industry
and the type of facility, the classification of the employees and the
geographic location covered by such agreements.
Properties
Smurfit-Stone maintains manufacturing facilities and sales offices
throughout North America, Europe and Latin America. Its facilities are properly
maintained and equipped with machinery suitable for their use. Smurfit-Stone's
manufacturing facilities, excluding the discontinued newsprint operations, as
of December 31, 1999 are summarized below.
<TABLE>
<CAPTION>
Number of
Facilities
------------------ State
Total Owned Leased Locations
----- ----- ------ --------- ---
<S> <C> <C> <C> <C> <C>
United States
Paper mills.................................. 23 23 0 16
Corrugated container plants.................. 129 82 47 34
Folding carton plants........................ 20 16 4 10
Bag packaging plants......................... 15 8 7 13
Specialty packaging plants................... 29 10 19 16
Reclamation plants........................... 26 17 9 15
Cladwood(R) plants........................... 2 2 0 1
Wood products plants......................... 2 2 0 2
--- --- ---
Subtotal................................... 246 160 86 39
Canada
Paper mills.................................. 3 3 0 N/A
Wood products plants......................... 1 1 0 N/A
Europe and Other
Paper mills.................................. 3 3 0 N/A
Corrugated container plants.................. 26 23 3 N/A
Reclamation plants........................... 6 3 3 N/A
--- --- ---
Total...................................... 285 193 92 N/A
</TABLE>
Smurfit-Stone's paper mills represent approximately 71% of its investment in
property, plant and equipment. In addition to its manufacturing facilities,
Smurfit-Stone owns approximately 132,000 acres of timberland in Canada and also
operates wood harvesting facilities.
46
<PAGE>
The approximate annual tons of productive capacity of Smurfit-Stone's paper
mills, including the proportionate share of its affiliates' productive capacity
at December 31, 1999 were:
<TABLE>
<CAPTION>
Annual Capacity
---------------
(000 U.S. tons)
<S> <C>
United States
Containerboard.......................................... 5,620
Kraft paper............................................. 437
Solid bleached sulfate.................................. 192
Recycled boxboard....................................... 779
Market pulp............................................. 341
-----
Sub-total............................................. 7,369
Canada
Containerboard.......................................... 477
Market pulp............................................. 240
Europe and Other
Containerboard.......................................... 418
Recycled boxboard....................................... 79
-----
Total................................................. 8,583
</TABLE>
Litigation
Subsequent to an understanding reached in December 1998, Smurfit-Stone and
Smurfit Newsprint entered into a settlement agreement in January 1999. The
settlement agreement implemented a nationwide class action settlement of claims
involving Cladwood(R), a composite wood siding product manufactured by Smurfit
Newsprint that has been used primarily in the construction of manufactured or
mobile homes. The class action claimants alleged that Cladwood(R) siding on
their homes prematurely failed. The settlement was reached in connection with a
class action pending in King County, Washington and also resolved all other
pending class actions. Pursuant to the settlement, Smurfit Newsprint paid $20
million into a settlement fund, plus up to approximately $6.5 million of
administrative costs, plaintiffs' attorneys' fees, and class representative
payments. Smurfit-Stone has established reserves that it believes will be
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 Smurfit-Stone to re-evaluate whether the liabilities in connection with
the Cladwood(R) cases could exceed established reserves.
In 1998, seven putative class action complaints were filed against Stone
Container in the United States District Court for the Northern District of
Illinois and the United States District Court for the Eastern District of
Pennsylvania. These complaints alleged that Stone Container reached agreements
in restraint of trade that affected the manufacture, sale and pricing of
corrugated products in violation of antitrust laws. The complaints have been
amended to name several other defendants, including Jefferson Smurfit and
Smurfit-Stone. The suits seek an unspecified amount of damages arising out of
the sale of corrugated products for the period from October 1, 1993 through
March 31, 1995. Under the provisions of the applicable statutes, any award of
actual damages could be trebled. The Federal Multidistrict Litigation Panel has
ordered all of the complaints to be transferred to and consolidated in the
United States District Court for the Eastern District of Pennsylvania. Stone
Container, Jefferson Smurfit and Smurfit-Stone believe they have meritorious
defenses and intend to vigorously defend these cases.
Smurfit-Stone also is a defendant in a number of lawsuits and claims arising
out of the conduct of its business, including those related to environmental
matters. In addition, St. Laurent is a defendant in lawsuits and claims arising
out of the conduct of its business, which are more fully described in the
section on "The St. Laurent Acquisition." While Smurfit-Stone cannot predict
with certainty the ultimate results of such suits or other proceedings, its
management believes that the resolution of these matters will not have a
material adverse effect on the company's consolidated financial condition or
results of operations.
47
<PAGE>
Environmental Compliance
Smurfit-Stone's operations are subject to extensive environmental regulation
by federal, state, and local authorities. In the past, Smurfit-Stone has made
significant capital expenditures to comply with water, air, solid and hazardous
waste and other environmental laws and regulations. Smurfit-Stone expects to
make significant expenditures in the future for environmental compliance.
Because various environmental standards are subject to change, it is difficult
to predict with certainty the amount of capital expenditures that will
ultimately be required to comply with future standards.
In particular, the United States Environmental Protection Agency has
finalized significant parts of its comprehensive rule governing the pulp, paper
and paperboard industry, known as the "Cluster Rule." This rule will require
substantial expenditures to achieve compliance. Smurfit-Stone estimates, based
on engineering studies done to date, that compliance with these portions of the
Cluster Rule could require up to $310 million in capital expenditures, the
majority of which will be spent over the next several years. Smurfit-Stone
cannot predict with certainty the ultimate cost of complying with the
regulations until it completes further engineering studies and additional
regulations are finalized.
In addition to Cluster Rule compliance, Smurfit-Stone also anticipates
additional capital expenditures related to environmental compliance. For the
past three years, Smurfit-Stone has spent an average of approximately $35
million annually on capital expenditures for environmental purposes. The
anticipated spending for such capital projects for fiscal 2000 is approximately
$200 million. A significant amount of the increased expenditures in 2000 will
be due to compliance with the Cluster Rule and is included in the estimate of
up to $310 million set forth above. Since Smurfit-Stone's principal competitors
are, or will be, subject to comparable environmental standards, including the
Cluster Rule, management is of the opinion, based on current information, that
compliance with environmental standards will not adversely affect Smurfit-
Stone's competitive position.
Environmental Matters
In March 1999, management of Smurfit Newsprint's former Oregon City, Oregon
newsprint mill became aware of possible alterations by one of its employees of
data utilized in determining compliance with the mill's National Pollutant
Discharge Elimination System permit. Smurfit Newsprint conducted a thorough
internal investigation of this matter. Based on this investigation, it
concluded that such alterations did occur and, as a result, the mill may have
violated its permit limits on suspended solids on several occasions. Smurfit
Newsprint provided both the EPA and the Oregon Department of Environmental
Quality (the "Oregon DEQ") with a detailed report of its investigation, and the
agencies conducted additional investigations based on this report. Smurfit
Newsprint fully cooperated with these investigations. In July 2000, Smurfit
Newsprint paid a civil penalty of less than $100,000 to the Oregon DEQ to
settle the Notice of Assessment of Civil Penalty issued by the Oregon DEQ in
connection with this matter. The U.S. Attorney's Office has advised Smurfit
Newsprint that it does not intend to commence a criminal prosecution against
Smurfit Newsprint. Accordingly, Smurfit Newsprint now considers this matter
fully resolved.
In September 1997, Smurfit-Stone received a Notice of Violation and a
Compliance Order from the EPA alleging noncompliance with air emissions
limitations for the smelt dissolving tank at Smurfit-Stone's Hopewell, Virginia
mill and for failure to comply with New Source Performance Standards applicable
to certain other equipment at the mill. In cooperation with the EPA, Smurfit-
Stone responded to information requests, conducted tests and took measures to
ensure continued compliance with applicable emission limits. In December 1997
and November 1998, Smurfit-Stone received additional requests from the EPA for
information about past capital projects at the mill. In April 1999, the EPA
issued a Notice of Violation alleging that Smurfit-Stone "modified" the
recovery boiler and increased nitrogen oxide emissions without obtaining a
required construction permit. Smurfit-Stone responded to this Notice of
Violation and indicated that the EPA's allegations were without merit.
48
<PAGE>
In February 2000, Smurfit-Stone, the EPA and the Department of Justice
entered into a tolling agreement for the purpose of allowing continued
discussion regarding settlement of the matter before the initiation of a civil
action by the EPA. Pursuant to the tolling agreement's terms, the parties have
stipulated and agreed that the period of time from the date of the agreement
through and including December 31, 2000 will not be included in computing the
deadline under any statute of limitations applicable to the commencement of an
action against Smurfit-Stone with respect to the Notices of Violations.
In August 1999, Smurfit-Stone received a Notice of Infraction from the
Ministry of Environment of the Province of Quebec alleging noncompliance with
specified environmental standards at Smurfit-Stone's New Richmond, Quebec mill.
The majority of the citations alleged that Smurfit-Stone had discharged total
suspended solids in the mill's treated effluent which exceeded the regulatory
limitations for the rolling 30-day average. The remainder of the citations were
for monitoring, reporting and administrative deficiencies uncovered during an
inspection performed by the Ministry earlier in the year. The total fine
demanded by the Ministry for all of the alleged violations is $6.5 million
(Canadian). Smurfit-Stone entered a plea of "not guilty" as to all of the
citations and intends to vigorously defend itself against these alleged
violations.
In April 1999, the EPA and the Virginia Department of Environmental Quality
(the "Virginia DEQ") each issued a notice of violation under the Clean Air Act
to St. Laurent's mill located in West Point, Virginia, which was acquired from
Chesapeake Corporation in May, 1997. In general, the notices of violations
allege that, from 1984 to the present, the West Point mill installed certain
equipment and modified certain production processes without obtaining the
required permits. In the purchase agreement between St. Laurent and Chesapeake
Corporation, Chesapeake Corporation agreed to indemnify St. Laurent for
remediation work resulting from violations of applicable laws, including the
Clean Air Act, that existed at the mill before and on the date of the purchase
agreement, as to which Chesapeake Corporation had "knowledge" (as defined in
the purchase agreement), up to a maximum of $50 million. While such costs
cannot be estimated with certainty at this time, based on presently available
information, Smurfit-Stone believes that the cost of remediation work, which
represents capital expenditures comprising engineering, procurement and
construction work of mill modifications (including the installation of air
emission controls, etc.) associated with the notices of violations may
approximate $25 million. In addition, civil or criminal penalties may be
pursued by the EPA and Virginia DEQ; however, based upon discussions with the
EPA and Virginia DEQ to date, Smurfit-Stone believes that the total cost of
remediation work associated with the notices of violations and fines and
penalties that may be imposed by the EPA and Virginia DEQ will not exceed the
maximum amount of Chesapeake Corporation's indemnification obligation. St.
Laurent and Chesapeake Corporation appointed a third party arbitrator to decide
the scope and timing of future remediation work that is the subject of the
indemnification in the purchase agreement. The arbitrator has ruled that any
fines and penalties that may result from any breach of Chesapeake Corporation's
representations and warranties arising out of the notices of violations, either
by adjudication or settlement, are part of the costs and expenses that are
subject to reimbursement by Chesapeake Corporation to St. Laurent under the
purchase agreement. By agreement of the parties, the 30-month period for
reimbursement by Chesapeake Corporation of costs and expenses incurred by St.
Laurent under the provisions of the purchase agreement has been extended
indefinitely. Smurfit-Stone is cooperating with Chesapeake Corporation to
analyze, respond to, and defend against the matters alleged in the notices of
violations and to develop and implement a remediation plan as required by the
notices of violations.
Federal, state and local environmental requirements are a significant factor
in Smurfit-Stone's business. Smurfit-Stone employs processes in the manufacture
of pulp, paperboard and other products which result in various discharges,
emissions, and wastes. These processes are subject to numerous federal, state
and local environmental laws and regulations, including reporting and
disclosure obligations. Smurfit-Stone operates and expects to operate under
permits and similar authorizations from various governmental authorities that
regulate such discharges, emissions, and wastes.
Smurfit-Stone also faces potential liability as a result of releases, or
threatened releases, of hazardous substances into the environment from various
sites owned and operated by third parties at which company-
49
<PAGE>
generated wastes have allegedly been deposited. Generators of hazardous
substances sent to off-site disposal locations at which environmental problems
exist, as well as the owners of those sites and certain other classes of
persons (generally referred to as "potentially responsible parties" or "PRPs"),
are, in most instances, subject to joint and several liability for response
costs for the investigation and remediation of such sites under the
Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA")
and analogous state laws, regardless of fault or the lawfulness of the original
disposal. Smurfit-Stone has received notice that it is or may be a PRP at a
number of federal and/or state sites where response action may be required and
as a result may have joint and several liability for cleanup costs at such
sites. However, liability for CERCLA sites is typically shared with other PRPs
and costs are commonly allocated according to relative amounts of waste
deposited. Smurfit-Stone's relative percentage of waste deposited at a majority
of these sites is quite small. In addition to participating in remediation of
sites owned by third parties, Smurfit-Stone has entered into consent orders for
investigation and/or remediation of certain company-owned properties.
Based on current information, Smurfit-Stone believes that the probable costs
of the potential environmental enforcement matters discussed above, response
costs under CERCLA and similar state laws, and remediation of owned property
will not have a material adverse effect on its financial condition or results
of operations. Smurfit-Stone believes that its liability for these matters was
adequately reserved at December 31, 1999.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
General
Market conditions and demand for containerboard and corrugated containers,
Smurfit-Stone's primary products, have historically been subject to cyclical
changes in the economy and changes in industry capacity, both of which can
significantly impact selling prices and Smurfit-Stone's profitability.
Market conditions were generally weak from 1996 to 1998 due primarily to
excess capacity within the industry. Linerboard prices, which peaked in 1995 at
approximately $535 per ton, declined dramatically thereafter, reaching a low of
$310 per ton in April 1997. Corrugated container prices followed this same
pricing trend during the period with somewhat less fluctuation. Prices remained
at reduced levels through the end of 1998.
During the second half of 1998, the containerboard industry took extensive
economic downtime, resulting in a significant reduction in inventory levels. In
addition, several paper companies, including Smurfit-Stone, permanently shut
down paper mill operations, approximating 6% of industry capacity. The balance
between supply and demand for containerboard has improved as a result of the
shutdowns, and inventories remained low throughout 1999. Corrugated container
shipments for the industry were strong in 1999, increasing approximately 2%
compared to 1998. Based on these developments, Smurfit-Stone was able to
implement two price increases during 1999, totaling $90 per ton for linerboard,
bringing the price at the end of 1999 to $430 per ton. In addition, Smurfit-
Stone implemented a $50 per ton price increase in February 2000 for linerboard.
Market pulp is also subject to the cyclical changes in the economy and
changes in industry capacity. The price of market pulp declined from 1996 to
1998 as a result of excess capacity worldwide. Mill closures, market related
downtime and the recovery of the Asian markets resulted in tighter supplies and
a recovery in prices in 1999. As a result, Smurfit-Stone was able to implement
price increases totaling approximately $160 per metric ton for market pulp
during 1999. In addition, Smurfit-Stone implemented a $30 per metric ton price
increase in January 2000 for market pulp.
Market conditions in the folding carton and boxboard mill industry, which
were weak in 1998, began to strengthen in the second half of 1999. Demand for
recycled boxboard and solid bleached sulfate improved gradually and Smurfit-
Stone was able to implement price increases in the fourth quarter of 1999. On
average, prices were lower in 1999 as compared to 1998. Shipments of folding
cartons for the industry increased 2% compared to 1998 and mill operating rates
were higher.
50
<PAGE>
Wood fiber and recycled fiber are the principal raw materials used in the
manufacture of Smurfit-Stone's products. Fiber supplies can vary widely at
times and are highly dependent upon the demand of paper mills. Wood fiber and
reclaimed fiber prices declined in 1998 due primarily to the lower demand
brought about by extensive economic downtime taken by the containerboard
industry in 1998. The price of old corrugated containers, the principal grade
used in recycled containerboard mills, declined in 1998 to its lowest level in
five years. Smurfit-Stone's average wood fiber cost in 1999 declined
approximately 6% compared to 1998 due primarily to the number of permanent mill
closures in those areas where Smurfit-Stone competes for wood. Recycled fiber
prices increased approximately 11% compared to 1998, primarily as a result of
stronger export demand.
Restructuring and the 1998 Stone Container Merger
As previously discussed, a wholly-owned subsidiary of Smurfit-Stone merged
with Stone Container on November 18, 1998. Smurfit-Stone restructured its
operations in connection with the merger. Smurfit-Stone recorded a pretax
charge of $257 million in the fourth quarter of 1998 for restructuring costs
related to the permanent closure of certain Jefferson Smurfit mill operations
and related facilities on December 1, 1998. In addition, the allocation of the
cost to acquire Stone Container included an adjustment to fair value of
property, plant and equipment associated with the permanent closure of certain
containerboard and pulp mill facilities owned by Stone Container on December 1,
1998 and five Stone Container converting facilities during the allocation
period in 1999.
As part of Smurfit-Stone's continuing evaluation of all areas of its
business in connection with its merger integration, Smurfit-Stone recorded a
$10 million restructuring charge in the year ended December 31, 1999 related to
the permanent shutdown of eight additional Jefferson Smurfit facilities and a
$46 million restructuring charge in the first half of 2000 related to the
permanent shutdown of a Stone Container containerboard mill and five Stone
Container converting facilities. The containerboard mill shutdown in 2000 had
an annual capacity of 130,000 tons of corrugating medium.
The restructuring charges and the allocation of costs to acquire Stone
Container included adjustments to liabilities for the termination of certain
employees of Smurfit-Stone, the liabilities for long-term commitments and
resolution of litigation related to Stone Container's investment in Florida
Coast. Since the Stone Container merger, through June 30, 2000, approximately
$221 million, or 75%, of the cash expenditures were incurred, approximately 56%
of which related to the Florida Coast settlement. The remaining exit
liabilities for Jefferson Smurfit and Stone Container as of June 30, 2000 of
approximately $75 million will be funded through operations as originally
planned.
Results of Operations for the Six Months ended June 30, 2000 and June 30, 1999
Segment Data
<TABLE>
<CAPTION>
Six months ended June 30,
-----------------------------
2000 1999
-------------- --------------
Net Profit/ Net Profit/
Sales (Loss) Sales (Loss)
------ ------- ------ -------
<S> <C> <C> <C> <C>
Containerboard and corrugated containers......... $2,624 $ 440 $2,230 $ 152
Folding cartons and boxboard..................... 439 37 405 33
Other operations................................. 994 64 800 55
------ ----- ------ -----
Total operations................................. $4,057 541 $3,435 240
====== ======
Restructuring charge............................. (46) (9)
Interest expense, net............................ (250) (296)
Other, net....................................... (91) (90)
----- -----
Income (loss) from continuing operations before
income taxes, minority interest and
extraordinary item.............................. $ 154 $(155)
===== =====
</TABLE>
51
<PAGE>
Improvements in containerboard and other markets in 2000 resulted in strong
increases in Smurfit-Stone's net sales and profits. Smurfit-Stone's net sales
for the six month period ended June 30, 2000, increased 13% compared to the
same period last year. The increase in net sales was due primarily to higher
average sales prices for containerboard, corrugated containers and market pulp
and the acquisition of St. Laurent. Net sales and income before income taxes
for St. Laurent of $96 million and $6 million, respectively, are included in
Smurfit-Stone's results of operations after May 31, 2000, the date of the
acquisition. Smurfit-Stone's operating profits for the six month period ended
June 30, 2000 increased 125% compared to last year due primarily to the sales
price increases. Operating profits in the second quarter of 2000 were reduced
by the economic downtime taken at Smurfit-Stone's containerboard mills in order
to reduce inventories. Other, net for 1999 included a $39 million gain on asset
sales and an expense of $26 million related to the cashless exercise of
Smurfit-Stone stock options under the Jefferson Smurfit Corporation stock
option plan. The increases (decreases) in net sales for each of Smurfit-Stone's
segments are shown in the chart below.
<TABLE>
<CAPTION>
Six months ended June 30, 2000
compared to 1999
-----------------------------------------
Containerboard
& Folding
Corrugated Cartons & Other
Containers Boxboard Operations Total
-------------- --------- ---------- -----
(In millions)
<S> <C> <C> <C> <C>
Increase (decrease) in net sales
due to:
--------------------------------
Sales price and product mix...... $446 $24 $138 $ 608
Sales volume..................... (67) 10 26 (31)
Acquisition and other............ 108 47 155
Closed or sold facilities........ (93) (17) (110)
---- --- ---- -----
Total increase................. $394 $34 $194 $ 622
==== === ==== =====
</TABLE>
Containerboard and Corrugated Containers Segment
Market conditions in the containerboard industry continued to improve in the
first half of 2000, and Smurfit-Stone implemented price increases of $50 per
ton and $60 per ton on February 1, 2000 for linerboard and medium,
respectively. On average, linerboard prices for the second quarter of 2000 were
higher than last year by 22% and the average price of corrugated containers was
higher by 21%. Strong demand for market pulp continued to drive prices higher
in the first half of 2000. Pulp prices were increased $30 per metric ton on
January 1, 2000 and $40 per metric ton on April 1, 2000. Pulp prices were
increased again on July 1, 2000 by $30 per metric ton. The average price of
market pulp for the second quarter of 2000 increased 35% compared to last year.
Solid bleached sulfate prices increased 10% compared to last year.
Production of containerboard and kraft paper for the second quarter of 2000,
exclusive of St. Laurent's containerboard production of 110,000 tons, declined
10% compared to last year due to higher levels of maintenance downtime, as well
as economic downtime taken in order to reduce inventories. Shipments of
corrugated containers decreased 3% compared to last year due to plant closures
and customer rationalization. Smurfit-Stone had lower third-party sales of
containerboard and kraft, market pulp and other products in the six month
period ended June 30, 2000. Sales volume for market pulp and solid bleached
sulfate for the second quarter declined 5% and 4%, respectively, compared to
last year.
For the six months ended June 30, 2000, net sales of $2,624 million
increased 18% compared to last year and profits increased by $288 million to
$440 million. On average, linerboard prices were higher than last year by 22%
and the average price of corrugated containers was higher by 20%. Production of
containerboard and kraft paper for the six months ended June 30, 2000,
exclusive of St. Laurent's containerboard production of 110,000 tons, decreased
2% due primarily to the downtime. Shipments of corrugated containers declined
1% compared to last year. The average sales price of market pulp increased 37%
compared to last year while sales volume declined 11%. The average price of
solid bleached sulfate increased by 7% compared to last year while
52
<PAGE>
sales volume was lower by 1%. Profits increased due primarily to the higher
average sales prices, although the additional mill downtime and the higher
reclaimed fiber cost partially offset the sales price improvements. Cost of
goods sold as a percent of net sales decreased to 75% for the six months ended
June 30, 2000 compared to 84% for the same period last year due primarily to
the higher average sales prices.
Folding Cartons and Boxboard Segment
For the six months ended June 30, 2000, net sales of $439 million increased
by 8% compared to last year. On average, boxboard sales prices were 9% higher
and folding carton sales prices were 5% higher than last year. Folding carton
shipments increased 1% and boxboard shipments increased 14% compared to last
year. The higher cost of materials and higher converting costs partially offset
the improvements in sales price and product mix, resulting in a profit
improvement of $3 million compared to last year. Cost of goods sold as a
percent of net sales of 84% for the six months ended June 30, 2000 was
comparable to the same period last year.
Other Operations
Net sales of $994 million for the six months ended June 30, 2000 increased
by 24% compared to last year, and profits increased by $9 million to $64
million due primarily to the reclamation operations and St. Laurent's
converting operations. Demand for reclaimed fiber has been strong in 2000
causing the cost and sales price of reclaimed fiber to escalate rapidly.
Compared to last year, the average prices of old corrugated containers and old
newsprint were higher by $50 per ton and $40 per ton, respectively. The amount
of mill downtime taken by the paper industry and a decline in export shipments
in the second quarter of 2000, however, have reduced demand, thereby bringing
cost and sales prices down in June and July. Total tons of fiber reclaimed and
brokered increased 3% compared to last year. Results for Smurfit-Stone's
industrial bag, international and specialty packaging operations were
comparable to last year.
Costs and Expenses
Costs and expenses for the six month period ended June 30, 2000 include
expenses for St. Laurent after May 31, 2000. Exclusive of St. Laurent, Smurfit-
Stone's cost of goods sold compared to last year was lower because of third
party sales of containerboard and kraft, market pulp and other products.
Smurfit-Stone's overall cost of goods sold as a percent of net sales for the
six months ended June 30 decreased from 87% in 1999 to 80% in 2000, due
primarily to the higher average sales prices.
Selling and administrative expenses decreased compared to last year due to
expense in 1999 of $26 million related to the cashless exercise of Smurfit-
Stone stock options under the Jefferson Smurfit Corporation stock option plan.
Exclusive of the effect of the 1999 charge for stock option exercises, selling
and administrative expenses as a percent of net sales for the six month period
ended June 30 declined from 10% in 1999 to 9% in 2000, as a result of higher
sales prices in 2000.
Other income and expense, net for the six months ended June 30, 2000 include
a $39 million gain on the sale of Smurfit-Stone's equity interest in Abitibi-
Consolidated Inc. In addition, foreign exchange gains were more favorable in
1999 as compared to 2000.
Interest expense, net for the six months ended June 30, 2000 was lower than
last year by $46 million due to lower average outstanding debt levels. The
decrease was partially offset by higher average interest rates and new
borrowings used to fund the St. Laurent acquisition. Smurfit-Stone's overall
average effective interest rate in the 2000 period was higher than last year
for the six month period ended June 30, by 0.5%.
Provision for income taxes for the six month period ended June 30, 2000
differed from the federal statutory tax rate due to several factors, the most
significant of which were state income taxes and the effect of permanent
differences from applying purchase accounting.
53
<PAGE>
Statistical Data
<TABLE>
<CAPTION>
Six months ended
June 30,
-----------------------
2000 1999
----------- -----------
(In thousands of tons,
except as noted)
<S> <C> <C>
Mill production:
Containerboard.................................. 3,234 3,120
Kraft paper..................................... 145 225
Market pulp..................................... 307 292
Solid bleached sulfate.......................... 106 91
Recycled boxboard............................... 425 415
Corrugated shipments (billion sq. ft.)............ 45.2 45.7
Folding carton shipments.......................... 291 288
Industrial bag shipments.......................... 154 157
Fiber reclaimed and brokered...................... 3,331 3,221
</TABLE>
Discontinued Operations
In February 1999, Smurfit-Stone adopted a formal plan to sell the newsprint
mills of its subsidiary, Smurfit Newsprint. Accordingly, the newsprint
operations of Smurfit Newsprint are accounted for as discontinued operations.
Smurfit-Stone transferred ownership of the Oregon City, Oregon newsprint mill
on May 9, 2000 to a third party, thereby completing Smurfit-Stone's exit from
the newsprint business. Smurfit-Stone received no proceeds from the transfer.
During the second quarter of 2000, Smurfit-Stone recorded a $6 million after-
tax gain to reflect adjustments to the previous estimates on disposition of
discontinued operations.
Results of Operations for 1999, 1998 and 1997
Smurfit-Stone's results include the results of Stone Container for 1999 and
for the period after November 18, 1998.
Segment Data
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------------------
1999 1998 1997
-------------- -------------- --------------
Net Profit/ Net Profit/ Net Profit/
Sales (Loss) Sales (Loss) Sales (Loss)
------ ------- ------ ------- ------ -------
(In millions)
<S> <C> <C> <C> <C> <C> <C>
Containerboard and corrugated
containers....................... $4,636 $ 478 $2,014 $ 117 $1,607 $ 56
Folding cartons and boxboard...... 836 62 785 67 752 68
Other operations.................. 1,679 101 686 40 598 39
------ ----- ------ ----- ------ -----
Total operations.................. $7,151 641 $3,485 224 $2,957 163
====== ====== ======
Restructuring charge.............. (10) (257)
Interest expense, net............. (563) (247) (196)
Other, net........................ 271 (56) 11
----- ----- -----
Income (loss) from continuing
operations before income taxes,
minority interest, extraordinary
item and cumulative effect of
accounting change................ $ 339 $(336) $ (22)
===== ===== =====
</TABLE>
--------
Other, net includes, among other things, corporate expenses and gains or losses
on asset sales.
54
<PAGE>
1999 Compared to 1998
Net sales of $7,151 million and operating profits of $641 million were
significantly higher in 1999 compared to 1998 due primarily to the Stone
Container merger and improvements in sales prices. Other, net improved $327
million compared to 1998 due primarily to gains recorded on sales of assets in
1999. Income from continuing operations before income taxes, minority interest,
extraordinary item and cumulative effect of accounting change was $339 million
in 1999, as compared to a loss of $336 million in 1998. The increases
(decreases) in net sales for each of Smurfit-Stone's segments are shown in the
chart below.
<TABLE>
<CAPTION>
1999 Compared to 1998
-----------------------------------------
Folding
Containerboard Cartons
& Corrugated & Other
Containers Boxboard Operations Total
-------------- -------- ---------- ------
(In millions)
<S> <C> <C> <C> <C>
Increase (decrease) due to:
Sales prices and product
mix........................ $ 78 $(9) $ 37 $ 106
Sales volume................ 61 3 64
Stone Container merger...... 2,624 971 3,595
1998 acquisition............ 26 26
Sold or closed facilities... (106) (1) (18) (125)
------ --- ---- ------
Net increase.................. $2,622 $51 $993 $3,666
====== === ==== ======
</TABLE>
Containerboard and Corrugated Containers Segment
Net sales of $4,636 million and profits of $478 million for 1999 increased
significantly compared to 1998 due primarily to the Stone Container merger and
improved sales prices for containerboard and corrugated containers. Net sales
and profits for the Stone Container operations for 1999 were $2,902 million and
$301 million, respectively, as compared to $318 million and $10 million,
respectively, for the period from the date of the Stone Container merger to
December 31, 1998. Smurfit-Stone was able to implement two price increases for
containerboard in 1999, totaling $90 per ton for linerboard and $130 per ton
for medium. On average, linerboard and corrugated container prices increased 8%
and 9%, respectively, compared to 1998. The increase in corrugated container
prices reflects the price increases implemented and Smurfit-Stone's strategy to
rationalize customer mix. Solid bleached sulfate prices were lower than 1998 by
3%.
As a result of the Stone Container merger, containerboard, kraft paper and
market pulp production increased significantly in 1999. Production was also
favorably impacted by the acquisition of a containerboard machine from JS Group
in November 1998. Solid bleached sulfate shipments were higher than 1998 by 2%.
Corrugated container sales volume also increased compared to 1998 due primarily
to the Stone Container merger. Corrugated container shipments were negatively
impacted by the closure of four Jefferson Smurfit plants and the
rationalization of customer mix. Cost of goods sold as a percent of net sales
decreased to 80% for 1999 compared to 86% for 1998 due to higher sales prices,
plant shutdowns and cost saving initiatives undertaken in connection with the
merger.
Folding Cartons and Boxboard Segment
Net sales for 1999 increased by 7% compared to 1998 while profits decreased
by $5 million to $62 million. The sales increase was due primarily to higher
sales volume of folding cartons, which increased by 9% compared to 1998.
Boxboard shipments increased by 1% compared to last year. On average, boxboard
prices were lower than 1998 by 9% and folding carton prices were comparable to
1998. Cost of goods sold as a percent of net sales increased from 83% in 1998
to 84% in 1999 due primarily to the effect of lower sales prices and higher
reclaimed fiber costs.
55
<PAGE>
Other Operations
Net sales of $1,679 million for Smurfit-Stone's other operations for 1999
increased $993 million compared to 1998 and profits increased by $61 million to
$101 million due primarily to the industrial bag and international operations
acquired in the Stone Container merger. Other operations also include Smurfit-
Stone's reclamation and specialty packaging operations. Reclamation benefited
from higher sales prices in 1999 as a result of increased demand. Compared to
1998, the average price of old corrugated containers increased approximately
11% and the total tons of fiber reclaimed and brokered increased 27% due to the
additional fiber requirements resulting from the Stone Container merger.
Costs and Expenses
Cost of goods sold for 1999 in Smurfit-Stone's Consolidated Statements of
Operations increased compared to 1998 due primarily to the Stone Container
merger. The increase was partially offset by elimination of cost for certain
containerboard mill operations which were permanently shut down in December
1998. Smurfit-Stone's overall cost of goods sold as a percent of net sales
decreased from 85% in 1998 to 84% in 1999 due primarily to the effects of the
Stone Container merger and higher sales prices.
Selling and administrative expenses for 1999 increased compared to 1998 due
primarily to the Stone Container merger. Staff reductions and certain other
merger synergies achieved in 1999 had a favorable impact on Smurfit-Stone's
administrative expenses. Smurfit-Stone expensed $26 million related to the
cashless exercise of stock options under the Smurfit-Stone stock option plan in
1999. In 1998, Smurfit-Stone expensed $30 million for settlement of certain
litigation and $23 million of other merger-related cost. Smurfit-Stone's
overall selling and administrative expense as a percent of net sales declined
from 11% in 1998 to 10% in 1999 due primarily to the effects of the Stone
Container merger and higher sales prices.
Interest expense, net for 1999 was higher than 1998 due primarily to the
higher levels of debt outstanding as a result of the Stone Container merger.
Average effective interest rates for 1999 were comparable to last year.
Other, net in Smurfit-Stone's Consolidated Statements of Operations for 1999
included gains on the sale of Smurfit-Stone's timberlands of $407 million and
$39 million on the sale of shares of Abitibi.
Smurfit-Stone recorded income tax expense of $168 million in 1999. The
effective rate for the period differed from the federal statutory tax rate due
to several factors, the most significant of which were state income taxes and
the effect of permanent differences from applying purchase accounting. At
December 31, 1999, Smurfit-Stone had approximately $1,420 million of net
operating loss carryforwards for U.S. federal income tax purposes that expire
from 2009 through 2019, with a tax value of $497 million. A valuation allowance
of $152 million has been established for a portion of these deferred tax
assets. Further, Smurfit-Stone had net operating loss carryforwards for state
income tax purposes with a tax value of $111 million, which expire from 2000 to
2019. A valuation allowance of $56 million has been established for a portion
of these deferred assets. For information concerning income taxes as well as
information regarding differences between effective tax rates and statutory
rates, see Note 8 of the Notes to Consolidated Financial Statements.
Discontinued Operations
In February 1999, Smurfit-Stone adopted a formal plan to sell the operating
assets of its subsidiary, Smurfit Newsprint. Smurfit-Stone subsequently decided
to continue to operate its Cladwood(R) business. Accordingly, Smurfit
Newsprint's newsprint results are accounted for as a discontinued operation for
all periods presented in Smurfit-Stone's Consolidated Statements of Operations.
In November 1999, Smurfit-Stone sold its Newberg, Oregon newsprint mill for
approximately $211 million. The ownership of the Oregon City mill was
transferred to a third party in May 2000. Transfer of the Oregon City mill
completed Smurfit-Stone's disposition of its newsprint business.
56
<PAGE>
The 1999 results of the discontinued operations included the realized gain
on the sale of the Newberg mill, an expected loss on the transfer of the Oregon
City mill, the actual results from the measurement date through December 31,
1999 and the estimated losses on the Oregon City mill through the disposition
date.
1998 Compared to 1997
Net sales of $3,485 million and operating profits of $224 million were
higher than 1997 by 18% and 37%, respectively, due primarily to the Stone
Container merger and higher sales prices for containerboard and corrugated
containers. The increases (decreases) in net sales for each of Smurfit-Stone's
segments are shown in the chart below.
<TABLE>
<CAPTION>
1998 Compared to 1997
----------------------------------------
Folding
Containerboard Cartons
& Corrugated & Other
Containers Boxboard Operations Total
-------------- -------- ---------- -----
(In millions)
<S> <C> <C> <C> <C>
Increase (decrease) due to:
Sales prices and product mix.. $146 $(13) $(53) $ 80
Sales volume.................. (63) 45 22 4
Stone Container merger........ 318 1 128 447
Acquisition................... 9 9
Sold or closed facilities..... (3) (9) (12)
---- ---- ---- ----
Net increase.................... $407 $ 33 $ 88 $528
==== ==== ==== ====
</TABLE>
Containerboard and Corrugated Containers Segment
Net sales of the Containerboard and Corrugated Containers segment increased
25% compared to 1997 to $2,014 million and segment profits increased $61
million over 1997 to $117 million. The increase in net sales was due primarily
to the Stone Container merger and improved sales prices. The profit increase
was due primarily to the improvements in sales price. Net sales and profits for
the Stone Container operations included in this segment for the period after
November 18, 1998 were $318 million and $10 million, respectively.
Containerboard and corrugated container prices were higher in 1998 by 16%
and 11%, respectively, compared to 1997. Solid bleached sulfate prices declined
2% during the period. Containerboard sales volume for Smurfit-Stone's mills in
1998 declined 2% compared to 1997 due to the closure of three Jefferson Smurfit
containerboard mills, effective December 1, 1998, and higher levels of economic
downtime. Smurfit-Stone also had 28 days of downtime in 1997 at its Brewton,
Alabama mill associated with a rebuild and upgrade of its mottled white paper
machine. Sales volume for Smurfit-Stone's corrugated container facilities
declined 5% compared to 1997 due in part to Smurfit-Stone's strategy to
rationalize customer mix. Cost of goods sold as a percent of net sales
decreased from 88% in 1997 to 86% in 1998 due primarily to the higher sales
prices in 1998.
Folding Cartons and Boxboard Segment
Net sales of the Folding Cartons and Boxboard segment increased 4% compared
to 1997 to $785 million and segment profits declined $1 million compared to
1997 to $67 million. The increase in net sales was due primarily to increased
sales volume of folding cartons. Folding carton sales volume increased 10%
compared to 1997, reflecting growth in new business acquired near the end of
1997. Sales volume for the boxboard mills declined 1% compared to 1997.
Boxboard prices were higher in 1998 on average, increasing 3% compared to 1997.
Folding carton prices declined 3%, reflecting the change in product mix related
to the new business acquired. Cost of goods sold as a percent of net sales for
1998 was comparable to 1997.
57
<PAGE>
Costs and Expenses
The increases in cost of goods sold and selling and administrative expenses
in 1998 compared to 1997 were due primarily to the Stone Container merger.
Smurfit-Stone's overall cost of goods sold as a percent of net sales decreased
from 86% in 1997 to 85% in 1998. Selling and administrative expenses in 1998
also included a $30 million pretax charge for the settlement of certain
litigation (described below) and $23 million of merger-related costs. Selling
and administrative expenses as a percent of net sales increased from 8% in 1997
to 11% in 1998.
Subsequent to an understanding reached in December 1998, Smurfit-Stone and
Smurfit Newsprint entered into a settlement agreement in January 1999 to
implement a nationwide class action settlement of claims involving Cladwood(R).
Smurfit-Stone recorded a $30 million pretax charge in 1998 for amounts Smurfit
Newsprint agreed to pay into a settlement fund for administrative costs,
plaintiffs' attorneys' fees, class representative payments and other costs.
Smurfit-Stone 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 Smurfit-Stone to re-evaluate whether
the liabilities in connection with the Cladwood(R) cases could exceed
established reserves.
Interest expense, net for 1998 was $247 million, an increase of $51 million
compared to 1997. The increase was due to higher levels of debt as a result of
the merger.
Smurfit-Stone recorded an income tax benefit of $126 million in 1998. The
effective rate for the period differed from the federal statutory tax rate due
to several factors, the most significant of which were state income taxes and
the effect of permanent differences from applying purchase accounting.
Discontinued Operations
As explained above, Smurfit Newsprint's newsprint results are reflected as
discontinued operations for all periods presented in Smurfit-Stone's
Consolidated Statements of Operations. Smurfit-Stone had income from
discontinued operations, net of tax, in 1998 of $27 million compared to $20
million in 1997. Net sales for discontinued operations amounted to $303 million
and $281 million for 1998 and 1997, respectively.
Liquidity and Capital Resources
General
Net cash provided by operating activities for the six months ended June 30,
2000 of $177 million, borrowings under bank credit facilities of $1,525
million, proceeds from the sale of assets of $67 million and proceeds from
exercise of stock options of $6 million were used to fund the $631 million cash
component of the St. Laurent acquisition, $983 million of net debt repayments,
$17 million of financing fees and property additions of $115 million. Debt
repayments for the first half of 2000 include the $559 million redemption of
Stone Container's outstanding 9.875% senior notes due February 1, 2001,
repayment of approximately $376 million of existing indebtedness of St.
Laurent, prepayments on Smurfit-Stone's bank term loans and scheduled debt
repayments.
For 1999, proceeds from the sale of assets of $1,643 million, net cash
provided by operating activities of $183 million, proceeds from the exercise of
stock options of $17 million and available cash of $131 million were used to
fund property additions of $156 million and net debt payments of $1,822
million.
On May 31, 2000, Smurfit-Stone, through its Stone Container subsidiary,
acquired St. Laurent. Under the terms of the merger agreement, each common
share and restricted share unit of St. Laurent was exchanged for 0.5 shares of
Smurfit-Stone common stock and $12.50 in cash. A total of 25.3 million shares
of Smurfit-Stone common stock were issued. The total purchase price, including
cash paid of $631 million and debt assumed of $376 million, was approximately
$1.4 billion.
58
<PAGE>
On May 31, 2000, Stone Container and certain of its subsidiaries closed on
new credit facilities with a group of financial institutions consisting of (1)
$950 million in the form of Tranche G and Tranche H term loans maturing on
December 31, 2006, and (2) a $100 million revolving credit facility maturing on
December 31, 2005. The proceeds of the new credit facilities were used to fund
the cash component of the St. Laurent acquisition, refinance certain existing
indebtedness of St. Laurent and pay fees and expenses related to the
acquisition. The new revolving credit will be used for general corporate
purposes. The new credit facilities are secured by a security interest in
substantially all of the assets acquired in the St. Laurent acquisition.
In May 2000, Stone Container sold the market pulp mill at its closed Port
Wentworth, Georgia mill site to a third party. Net proceeds of approximately
$58 million were used for debt reduction.
In November 1999, Smurfit-Stone sold its Newberg, Oregon newsprint mill.
Proceeds of approximately $211 million were used to pay down borrowings under
the Jefferson Smurfit credit agreement. In May 2000, Smurfit-Stone transferred
its Oregon City, Oregon newsprint mill.
In October 1999, Smurfit-Stone sold 820,000 acres of owned timberland and
assigned its rights to 160,000 acres of leased timberland to a third party for
$710 million, comprised of $225 million of cash and $485 million of installment
notes. The installment notes were monetized in a financing transaction
completed in November 1999, resulting in proceeds of $430 million. The proceeds
from the sale were used to pay down borrowings under the Jefferson Smurfit
credit agreement. A bankruptcy remote special purpose entity holds the
installment notes. The monetization transaction was accounted for under
Statement of Financial Accounting Standards ("SFAS") No. 125 "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities." Accordingly, the financial assets transferred to this qualifying
special purpose entity and the liabilities of that entity are not included in
the consolidated financial statements of Smurfit-Stone (see Note 4 of the Notes
to Consolidated Financial Statements).
In January 1999, Smurfit-Stone sold 7.8 million shares of its interest in
Abitibi for approximately $80 million and in April 1999, Smurfit-Stone sold its
remaining interest in Abitibi for approximately $414 million. Proceeds were
sufficient to prepay the entire outstanding balance of Stone Container's
Tranche B term loan and, in accordance with the Stone Container credit
agreement, the revolving credit maturity date was extended from April 30, 2000
to December 31, 2000.
Financing Activities
On March 31, 2000, Stone Container amended and restated its existing credit
agreement pursuant to which a group of financial institutions provided an
additional $575 million to Stone Container in the form of a Tranche F term loan
maturing on December 31, 2005 and extended the maturity date of the revolving
credit agreement to December 31, 2005. On April 28, 2000, Stone Container used
the proceeds of the Tranche F term loan to redeem the 9.875% senior notes due
February 1, 2001.
In October 1999, Jefferson Smurfit amended the Jefferson Smurfit credit
agreement to,
. permit the sale of the timberland operations and the Newberg mill,
. permit the cash proceeds from these asset sales to be applied as
prepayments against the Jefferson Smurfit credit agreement,
. ease certain quarterly financial covenants for 1999 and 2000 and
. permit certain prepayments of other indebtedness.
In October 1999, Stone Container entered into a new accounts receivable
securitization program. The Stone Container securitization program provides for
certain trade accounts receivables to be sold without recourse to Stone
Receivables Corporation, a wholly-owned non-consolidated bankruptcy remote
qualified
59
<PAGE>
special purpose entity. The proceeds from the transaction were used to prepay
the borrowings under the prior Stone Container accounts receivable
securitization program.
In August 1999, Stone Container repaid its $120 million 11.0% senior
subordinated debentures at maturity with borrowings under its revolving credit
facility.
In January 1999, Stone Container obtained a waiver from its bank group for
relief from certain financial covenant requirements under the Stone Container
credit agreement as of December 31, 1998. Subsequently, on March 23, 1999,
Stone Container and its bank group amended the Stone Container credit agreement
to further ease certain quarterly financial covenant requirements for 1999.
The credit facilities of Jefferson Smurfit and Stone Container contain
various business and financial covenants including, among other things,
. limitations on dividends, redemptions and repurchases of capital stock,
. limitations on the incurrence of indebtedness,
. limitations on capital expenditures and
. maintenance of certain financial covenants.
These credit agreements also require prepayments if Jefferson Smurfit or
Stone Container have excess cash flows, as defined, or receive proceeds from
certain asset sales, insurance, issuance of certain equity securities or
incurrence of certain indebtedness. The obligations under the Jefferson Smurfit
credit agreement are unconditionally guaranteed by Smurfit-Stone and certain of
its subsidiaries. The obligations under the Jefferson Smurfit credit agreement
are secured by a security interest in substantially all of the assets of
Jefferson Smurfit. The obligations under the Stone Container credit agreement
are secured by a security interest in substantially all of the assets of Stone
Container and 65% of the stock of its Canadian subsidiary. The security
interest excludes cash, cash equivalents, certain trade receivables, four paper
mills and the land and buildings of the corrugated container facilities. Such
restrictions, together with the highly leveraged position of Smurfit-Stone,
could restrict corporate activities, including Smurfit-Stone's ability to
respond to market conditions, to provide for unanticipated capital expenditures
or to take advantage of business opportunities.
The declaration of dividends by the Board of Directors of Stone Container is
subject to, among other things, certain restrictive provisions contained in the
Stone Container credit agreement and certain note indentures. At June 30, 2000,
Stone Container had accumulated dividend arrearages of approximately $26
million related to its Series E Preferred Stock.
Stone Container's senior notes, aggregating $1,698 million are redeemable in
whole or in part at Stone Container's option at various dates beginning in
February 1999, at par plus a weighted average premium of 2.57%. The Stone
Container senior subordinated debentures, aggregating $481 million, are
redeemable as of December 31, 1999, in whole or in part, at Stone Container's
option at par plus a weighted average premium of .16%. The indentures governing
Stone Container's senior notes and senior subordinated debentures generally
provide that in the event of a "change of control" (as defined in the
indenture), Stone Container must, subject to certain exemptions, offer to
repurchase its senior notes and senior subordinated debentures. The Stone
Container merger constituted such a change in control. As a result, Stone
Container is required to offer to repurchase its senior notes and senior
subordinated debentures at a price equal to 101% of the principal amount,
together with accrued interest. However, because the Stone Container credit
agreement prohibits Stone Container from making an offer to repurchase the
senior notes and senior subordinated debentures, Stone Container could not make
the offer. Although the terms of its senior notes refer to an obligation to
repay the bank debt or obtain the consent of the bank lenders to such
repurchase, the terms do not specify a deadline, if any, following the merger
for repayment of bank debt or obtaining such consent. Smurfit-Stone intends to
actively seek commercially acceptable sources of financing to repay the
outstanding indebtedness under the Stone Container credit agreement or
alternative financing arrangements which would cause the bank lenders to
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<PAGE>
consent to the repurchase. There can be no assurance that Smurfit-Stone will be
successful in obtaining such financing or consents or as to the terms of such
financing or consents.
Based upon covenants in the Stone Container indentures, Stone Container 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 Stone Container 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 Container'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 Stone Container indentures returned to the original
interest rates on April 1, 1999 due to Stone Container's equity levels
exceeding the minimum on December 31, 1998. Stone Container's equity level
exceeded the minimum on December 31, 1999.
Smurfit-Stone 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,
expenditures under the Cluster Rule and other capital expenditures. Smurfit-
Stone expects to use any excess cash flows provided by operations to make
further debt reductions. As of June 30, 2000, Jefferson Smurfit had $432
million of unused borrowing capacity under its credit agreement and Stone
Container had $605 million of unused borrowing capacity under the Stone
Container credit agreement and additional credit agreement.
Environmental Matters
Smurfit-Stone's operations are subject to extensive environmental regulation
by federal, state and local authorities in the United States and regulatory
authorities with jurisdiction over its foreign operations. Smurfit-Stone has
made, and expects to continue to make, significant capital expenditures to
comply with water, air and solid and hazardous waste and other environmental
laws and regulations. Capital expenditures for environmental control equipment
and facilities were approximately $18 million in 1998 and approximately $29
million in 1999. Smurfit-Stone anticipates that environmental capital
expenditures will approximate $200 million in 2000. The majority of the
expenditures after 1999 relate to amounts that Smurfit-Stone currently
anticipates will be required to comply with the Cluster Rule. In November 1997,
the EPA issued the Cluster Rule, which made existing requirements for discharge
of wastewater under the Clean Water Act more stringent and imposed new
requirements on air emissions under the Clean Air Act for the pulp and paper
industry. Though the final rule is still not fully promulgated, Smurfit-Stone
currently believes it may be required to make additional capital expenditures
of up to $290 million during the next several years in order to meet the
requirements of the new regulations. Also, additional operating expenses will
be incurred as capital installations required by the Cluster Rule are put into
service.
In addition, Smurfit-Stone is from time to time subject to litigation and
governmental proceedings regarding environmental matters in which compliance
action and injunctive and/or monetary relief are sought. Smurfit-Stone has been
named as a PRP at a number of sites that are the subject of remedial activity
under CERCLA or comparable state laws. Although Smurfit-Stone is subject to
joint and several liability imposed under CERCLA, at most of the multi-PRP
sites there are organized groups of PRPs and costs are being shared among PRPs.
Payments related to cleanup at existing and former operating sites and CERCLA
sites were not material to Smurfit-Stone's liquidity during 1999. Future
environmental regulations may have an unpredictable adverse effect on Smurfit-
Stone's operations and earnings, but they are not expected to adversely affect
Smurfit-Stone's competitive position.
Although capital expenditures for environmental control equipment and
facilities and compliance costs in future years will depend on engineering
studies and legislative and technological developments which cannot be
predicted at this time, such costs could increase as environmental regulations
become more stringent. Environmental expenditures include projects that, in
addition to meeting environmental concerns, may yield certain benefits to
Smurfit-Stone in the form of increased capacity and production cost savings. In
addition to capital expenditures for environmental control equipment and
facilities, other expenditures incurred to maintain
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<PAGE>
environmental regulatory compliance (including any remediation costs) represent
ongoing costs to Smurfit-Stone.
Effects of Inflation
Although inflation has slowed in recent years, it is still a factor in the
economy and Smurfit-Stone continues to seek ways to mitigate its impact to the
extent permitted by competition. Inflationary increases in operating costs have
been moderate since 1996, and have not had a material impact on Smurfit-Stone's
financial position or operating results during the past three years. Smurfit-
Stone uses the last-in, first-out method of accounting for approximately 69% of
its inventories. Under this method, the cost of products sold reported in the
financial statements approximates current costs and thus provides a closer
matching of revenue and expenses in periods of increasing costs. As a result of
the Stone Container merger, approximately 70% of consolidated property, plant
and equipment is valued at fair value. For the remainder of Smurfit-Stone's
property, plant and equipment, depreciation charges represent the allocation of
historical costs incurred over past years and are significantly less than if
they were based on the current cost of productive capacity being consumed.
Prospective Accounting Standards
In 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
requires that all derivative instruments be recorded on the balance sheet at
fair value. SFAS No. 133 is effective for all quarters of fiscal years
beginning after June 15, 2000. Smurfit-Stone is currently assessing what the
impact of SFAS No. 133 will be on Smurfit-Stone's future earnings and financial
position.
Quantitative and Qualitative Disclosures About Market Risk
Foreign Currency Risk
Smurfit-Stone is exposed to foreign currency rate risk. Smurfit-Stone's
foreign exchange exposures are the Canadian dollar and the German mark. In
general, a weakening of these currencies relative to the U.S. dollar has a
negative translation effect. Conversely, a strengthening of these currencies
would have the opposite effect.
Smurfit-Stone 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. Smurfit-Stone recognized foreign currency transaction gains of $2
million for the six months ended June 30, 2000 compared to a gain of $6 million
for the same period last year. During the six months ended June 30, 2000 the
exchange rates for the Canadian dollar and the German mark strengthened
(weakened) against the U.S. dollar as follows:
<TABLE>
<S> <C>
Rate at June 30, 2000 vs. December 31, 1999
Canadian dollar................................................. (2.5)%
German mark..................................................... (5.5)%
Average Rate for the six months ended June 30, 2000 vs. 1999
Canadian dollar................................................. 1.7%
German mark..................................................... (13.2)%
</TABLE>
The average exchange rates for the Canadian dollar and the German mark
weakened against the U.S. dollar in 1999 by 0.2% and 4.4%, respectively.
Smurfit-Stone incurred foreign currency transaction gains of $7 million in 1999
that have been recorded in Other, net on Smurfit-Stone's Consolidated
Statements of Operations. During 1998, the transaction gains and losses on this
obligation were immaterial to Smurfit-Stone.
Assets and liabilities outside the United States are primarily located in
Canada and Germany. Smurfit-Stone's investments in foreign subsidiaries with a
functional currency other than the U.S. dollar are not hedged.
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<PAGE>
The net assets in foreign subsidiaries translated into U.S. dollars using the
year-end exchange rates were approximately $640 million at December 31, 1999.
The potential loss in fair value resulting from a hypothetical 10% adverse
change in foreign currency exchange rates would be approximately $64 million at
December 31, 1999. Any loss in fair value would be reflected as a cumulative
translation adjustment in Accumulated Other Comprehensive Income and would not
impact the net income of Smurfit-Stone.
Smurfit-Stone also enters into foreign currency exchange agreements, the
amount of which during 1999 was not material to the consolidated financial
position of Smurfit-Stone at December 31, 1999.
Interest Rate Risk
Smurfit-Stone's earnings and cash flows are significantly affected by the
amount of interest on its indebtedness. Smurfit-Stone's financing arrangements
include both fixed and variable rate debt in which changes in interest rates
will impact the fixed and variable debt differently. A change in the interest
rate of fixed rate debt will impact the fair value of the debt, whereas a
change in the interest rate on the variable rate debt will impact interest
expense and cash flows. Management's objective is to protect Smurfit-Stone from
interest rate volatility and reduce or cap interest expense within acceptable
levels of market risk. Smurfit-Stone periodically enters into interest rate
swaps, caps or options to hedge interest rate exposure and manage risk within
company policy. Smurfit-Stone does not utilize derivatives for speculative or
trading purposes. Any derivative would be specific to the debt instrument,
contract or transaction, which would determine the specifics of the hedge. No
significant change has occurred in Smurfit-Stone's exposure to such risk for
the six months ended June 30, 2000. The amount of interest rate swaps entered
into by Smurfit-Stone was not material to the consolidated financial position
of Smurfit-Stone at December 31, 1999.
The table below presents principal amounts by year of anticipated maturity
for Smurfit-Stone's debt obligations and related average interest rates based
on the weighted average interest rates at the end of the period. Variable
interest rates disclosed do not attempt to project future interest rates. This
information should be read in conjunction with Note 6 to the Notes to
Consolidated Financial Statements.
Short and Long-Term Debt
<TABLE>
<CAPTION>
Short and Long-Term Debt
Outstanding as of December 31, 1999
(U.S. $, in millions)
-----------------------------------------------------
Fair
2000 2001 2002 2003 2004 Thereafter Total Value
---- ---- ------ ------ ---- ---------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Bank term loans and
revolver
9.4% average interest
rate (variable)......... $136 $ 7 $ 58 $ 582 $ 76 $262 $1,121 $1,123
U.S. accounts receivable
securitization
5.9% average interest
rate (variable)......... 224 224 224
U.S. senior and senior
subordinated notes
10.7% average interest
rate (fixed)............ 10 566 1,054 503 503 444 3,080 3,145
U.S. industrial revenue
bonds
8.5% average interest
rate (fixed)............ 4 13 13 17 13 206 266 266
Other U.S................ 11 11 12 6 3 7 50 50
German mark bank term
loans
5.2% average interest
rate (variable)......... 11 12 15 1 1 40 40
Other foreign............ 2 3 2 2 2 1 12 12
---- ---- ------ ------ ---- ---- ------ ------
Total debt............... $174 $612 $1,378 $1,111 $598 $920 $4,793 $4,860
==== ==== ====== ====== ==== ==== ====== ======
</TABLE>
Year 2000
The year 2000 problem concerned the inability of computer systems and
devices to properly recognize and process date-sensitive information when the
year changed to 2000. Smurfit-Stone depends upon its information
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<PAGE>
technology ("IT") and non-IT (used to run manufacturing equipment that contain
embedded hardware and software that must handle dates) to conduct and manage
its business.
Smurfit-Stone utilized both internal and external resources to evaluate the
potential impact of the year 2000 problem and established a year 2000 Program
Management Office to guide and coordinate the efforts of its operating units in
developing and executing its plan. The year 2000 Program Management Office
instituted a seven-phase approach, which enabled Smurfit-Stone to identify all
systems and devices that were determined to be susceptible to the year 2000
problem. Corrective actions were initiated and affected systems or devices were
replaced, repaired or upgraded. Through December 31, 1999, Smurfit-Stone spent
approximately $54 million to correct the year 2000 problem. Smurfit-Stone does
not expect to spend any significant amounts in the future on year 2000 related
problems.
Subsequent to midnight on December 31, 1999 (the "Rollover Date"), Smurfit-
Stone's financial and administrative systems, communication links and process
control systems, which control and monitor production, power, emissions and
safety, were verified for operational capability. Only minor issues relating to
these systems were noted. Smurfit-Stone has conducted and managed normal
business operations as planned since the Rollover Date and has not experienced
any loss of production at any mill or converting facility as a result of the
year 2000 problem. Minor issues, which surfaced at mills and converting
facilities, were addressed and resolved typically within one day. Smurfit-Stone
was able to provide customers, upon request, verification of operational
capability on January 1, 2000. Furthermore, Smurfit-Stone was not adversely
impacted by any disruptions of raw materials, supplies or services provided by
key vendors or suppliers.
Smurfit-Stone's year 2000 Program Management Office continues to check for
year 2000 issues. However, given the amount of system activity since the
Rollover Date, Smurfit-Stone does not expect any major problems related to the
year 2000 problem.
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<PAGE>
INFORMATION ABOUT STONE CONTAINER
On May 31, 2000, Smurfit-Stone, Stone Container's parent company, completed
its acquisition of St. Laurent Paperboard Inc. For a more complete description
of St. Laurent's business, we refer you to the section entitled "The St.
Laurent Acquisition," appearing later in this proxy statement/prospectus. The
following presentation of "Information about Stone Container" does not reflect
the completion of the St. Laurent acquisition.
Business
General
Stone Container Corporation, a Delaware corporation, is an integrated
producer of containerboard, corrugated containers and other packaging
products. Stone Container has operations throughout the United States, Canada,
Europe and Latin America. For the year ended December 31, 1999, Stone
Container had net sales of $4,341 million and a net loss of $77 million.
Stone Container is a wholly-owned subsidiary of Smurfit-Stone. Smurfit-
Stone is a holding company with no business operations of its own. Smurfit-
Stone conducts its business operations through two wholly-owned subsidiaries:
Stone Container and JSCE, Inc. Smurfit-Stone acquired Stone Container through
a November 18, 1998 merger of a wholly-owned subsidiary with and into Stone
Container.
On May 31, 2000, Smurfit-Stone completed its acquisition of St. Laurent
Paperboard Inc. pursuant to an amended and restated pre-merger agreement dated
as of April 13, 2000 among Smurfit-Stone, Stone Container, 371174 Canada Inc.,
3038727 Nova Scotia Company and St. Laurent.
Pursuant to the merger agreement, each outstanding common share and
restricted share unit of St. Laurent was exchanged for $12.50 in cash and 0.5
shares of Smurfit-Stone common stock. The total net consideration paid by
Smurfit-Stone in connection with the acquisition of St. Laurent was
approximately $1.4 billion, consisting of
. approximately $631 million in cash;
. 25,335,381 shares of Smurfit-Stone common stock; and
. the assumption of $376 million of St. Laurent's debt.
Smurfit-Stone financed the cash portion of the purchase price through
borrowings under certain of its credit facilities, including a new credit
facility entered into by Stone Container and its subsidiaries.
Products
Containerboard and Corrugated Containers Segment
The primary products of Stone Container's Containerboard and Corrugated
Containers segment include
. corrugated containers,
. containerboard,
. kraft paper and
. market pulp.
As of December 31, 1999, this segment includes 11 paper mills and 81
container plants located in the United States and three paper mills located in
Canada. Total sales for Stone Container's Containerboard and Corrugated
Containers segment in 1999 were $3,398 million, including $153 million of
inter-segment sales.
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<PAGE>
Production for Stone Container's paper mills and sales volume for its
corrugated container facilities for the last three years were:
<TABLE>
<CAPTION>
1999 1998 1997
----- ----- -----
<S> <C> <C> <C>
Tons produced (in thousands)
Containerboard........................................ 4,381 4,432 4,554
Kraft paper........................................... 437 457 436
Market pulp........................................... 572 639 780
Corrugated containers sold (in billion sq. ft.)......... 50.1 50.1 47.6
</TABLE>
Stone Container's containerboard mills produce a full line of
containerboard, which for 1999 included 2,873,000 and 1,508,000 tons of
unbleached kraft linerboard and corrugating medium, respectively. Stone
Container's containerboard mills and corrugated container operations are highly
integrated, with the majority of containerboard produced by Stone Container
used internally by its corrugated container operations. In 1999, Stone
Container's corrugated container plants consumed 3,360,000 tons of
containerboard, representing an integration level of approximately 77%. A
significant portion of the kraft paper production is consumed internally by
Stone Container's industrial bag segment.
Corrugated containers are sold to a broad range of manufacturers of
consumable goods. Corrugated containers are used to ship such diverse products
as home appliances, electric motors, small machinery, grocery products,
produce, books, tobacco and furniture and for many other applications,
including point of purchase displays. Stone Container provides innovative
packaging solutions, stressing the value-added aspects of its corrugated
containers, including labeling and multicolor graphics to differentiate its
products and respond to customer requirements. Stone Container's corrugated
container plants are located nationwide, serving local customers and large
national accounts.
Sales volumes shown above include Stone Container's proportionate share of
the operations of Smurfit-MBI (formerly MacMillan Bathurst, Inc.), a Canadian
producer of corrugated containers, and other affiliates reported on an equity
ownership basis. Stone Container and Jefferson Smurfit Group plc, a principal
indirect shareholder of Smurfit-Stone, each own a 50% interest in Smurfit-MBI.
Stone Container also produces bleached northern and southern hardwood pulp.
Market pulp is sold to manufacturers of paper products, including photographic
and other specialty papers, as well as the printing and writing sectors.
Industrial Bags Segment
Stone Container produces a wide variety of industrial bags, including:
. multiwall bags,
. consumer bags and
. intermediate bulk containers.
These products are designed to safely and effectively ship a wide range of
industrial and consumer products, including fertilizers, chemicals, concrete,
flour, sugar, feed, seed, pet foods, popcorn, charcoal and salt. Stone
Container's bag plants are located nationwide. Stone Container believes it is
the largest producer of industrial bags in the United States. In 1999, Stone
Container's bag plants consumed approximately 45% of the kraft paper produced
by Stone Container's kraft paper mills. Shipments for 1999, 1998 and 1997 were
316,000, 302,000 and 297,000 tons, respectively, excluding the proportionate
share of non-consolidated affiliates. Stone Container's sales of industrial
bags in 1999 were $513 million.
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<PAGE>
International Segment
Stone Container produces containerboard, boxboard and corrugated containers
in Europe and Latin America. Stone Container's European operations include:
. three paper mills located in Hoya and Viersen, Germany and Cordoba,
Spain,
. 21 corrugated container plants (eleven located in Germany, three in
Spain, three in Belgium, two in France, and two in the Netherlands) and
. six reclamation plants (five located in Germany and one in Spain).
In addition, Stone Container operates four container plants and several
small affiliate operations in Mexico, which also produce corrugated containers.
Production for Stone Container's international mills and sales volume for its
international corrugated container facilities for the last three years were:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Tons produced (in thousands)
Containerboard........................................... 380 380 381
Recycled boxboard........................................ 79 75 78
Corrugated containers sold (in billion sq. ft.)............ 12.5 12.3 11.4
</TABLE>
In 1999, Stone Container's international corrugated container plants
consumed 761,000 tons of containerboard. Total International segment sales were
$581 million in 1999.
Fiber Resources
Wood fiber and recycled fiber are the principal raw materials used in the
manufacture of Stone Container's paper products. Stone Container satisfies
virtually all of its need for wood fiber through purchases on the open market
or under supply agreements. Stone Container satisfies essentially all of its
need for recycled fiber through Smurfit-Stone's reclamation operations.
Wood fiber and recycled fiber are purchased in highly competitive, price-
sensitive markets, which have historically exhibited price and demand
cyclicality. Conservation regulations have caused, and will likely continue to
cause, a decrease in the supply of wood fiber and higher wood fiber costs in
some of the regions in which Stone Container procures wood fiber. Fluctuations
in supply and demand for recycled fiber have occasionally caused tight supplies
of recycled fiber, and at those times Stone Container has experienced an
increase in the cost of such fiber. While Stone Container has not experienced
any significant difficulty in satisfying its need for wood fiber and recycled
fiber, it can give no assurances that this will continue to be the case for any
or all of its mills.
Marketing
Stone Container's marketing strategy is to sell a broad range of paper-based
packaging products to marketers of industrial and consumer products. In
managing the marketing activities of its paperboard mills, Stone Container
seeks to meet the quality and service needs of the customers of its package
converting plants at the most efficient cost, while balancing those needs
against the demands of its open market customers. Stone Container's converting
plants focus on supplying both specialized packaging with high value graphics
that enhance a product's market appeal and high-volume sales of commodity
products.
Stone Container seeks to serve a broad customer base for each of its
segments and as a result serves thousands of accounts. Each plant has its own
sales force, and many have product design engineers and other service
professionals who are in close contact with customers to respond to their
specific needs. Stone Container complements the local plants' marketing and
service capabilities with regional and national design and service
capabilities. Stone Container also maintains national sales offices for
customers who purchase through a centralized purchasing office. National
account business may be allocated to more than one plant because of production
capacity and equipment requirements.
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<PAGE>
Stone Container's business is not dependent upon a single customer or upon a
small number of major customers. Stone Container does not believe that the loss
of any one customer would materially and adversely affect it.
Competition
The markets in which Stone Container sells its principal products are highly
competitive and comprised of many participants. Although no single company
dominates, Stone Container does face significant competitors in each of its
businesses. Stone Container's competitors include large vertically integrated
companies as well as numerous smaller companies. The industries in which Stone
Container competes are particularly sensitive to price fluctuations brought
about by shifts in industry capacity and other cyclical industry conditions.
Other competitive factors include design, quality and service, with varying
emphasis depending on product line.
Backlog
Demand for Stone Container's major product lines is relatively constant
throughout the year and seasonal fluctuations in marketing, production,
shipments and inventories are not significant. Backlogs are not a significant
factor in the industry. Stone Container does not have a significant backlog of
orders, as most orders are placed for delivery within 30 days.
Research and Development
Stone Container's research and development center uses state-of-the-art
technology to assist all levels of the manufacturing and sales processes, from
raw materials supply through finished packaging performance. Research programs
have provided improvements in coatings and barriers, stiffeners, inks and
printing. The technical staff conducts basic, applied and diagnostic research,
develops processes and products and provides a wide range of other technical
services.
Stone Container actively pursues applications for patents on new inventions
and designs and attempts to protect its patents against infringement.
Nevertheless, Stone Container believes that its success and growth are more
dependent on the quality of its products and its relationships with its
customers, than on the extent of its patent protection.
Stone Container holds or is licensed to use certain patents, licenses,
trademarks and trade names on products. However, Stone Container does not
consider that the successful continuation of any material aspect of its
business depends on such intellectual property.
Employees
Stone Container had approximately 21,900 employees at December 31, 1999. Of
these employees, approximately 16,600 were employees of U.S. operations and the
remainder were employees of foreign operations. Of the domestic employees,
approximately 11,600 employees (70%) are represented by collective bargaining
units. The expiration dates of union contracts for Stone Container's major
paper mill facilities are as follows:
. the Missoula, Montana mill, expiring May 2001;
. the Jacksonville, Florida (Seminole) mill, expiring June 2001;
. the Hopewell, Virginia mill, expiring July 2002;
. the Panama City, Florida mill, expiring March 2003
. the Florence, South Carolina mill, expiring August 2003; and
. the Hodge, Louisiana mill, expiring June 2006.
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<PAGE>
Stone Container believes that its employee relations are generally good.
Stone Container is currently in the process of bargaining with unions
representing production employees at a number of its operations. While the
terms of these agreements may vary, Stone Container believes that the material
terms of its collective bargaining agreements are customary for the industry
and the type of facility, the classification of the employees and the
geographic location covered by such agreements.
Properties
Stone Container maintains manufacturing facilities and sales offices
throughout North America, Europe and Latin America. Stone Container's
facilities are properly maintained and equipped with machinery suitable for
their use. Stone Container's manufacturing facilities as of December 31, 1999
are summarized below:
<TABLE>
<CAPTION>
Number of
Facilities
------------------
State
Total Owned Leased Locations
----- ----- ------ ---------
<S> <C> <C> <C> <C>
United States
Paper mills...................................... 11 11 10
Corrugated container plants...................... 81 46 35 32
Bag packaging plants............................. 15 8 7 13
Wood products plants............................. 1 1 1
--- --- ---
Subtotal....................................... 108 66 42 36
Canada
Paper mills...................................... 3 3 N/A
Other............................................ 1 1 N/A
Europe and Other
Paper mills...................................... 3 3 N/A
Reclamation plants............................... 6 3 3 N/A
Corrugated container plants...................... 26 23 3 N/A
--- --- ---
Total.......................................... 147 99 48 N/A
=== === ===
</TABLE>
Stone Container's paper mills represent approximately 76% of its investment
in property, plant and equipment. In addition to its manufacturing facilities,
Stone Container owns approximately 132,000 acres of timberland in Canada and
operates wood harvesting facilities.
The approximate annual tons of productive capacity, in thousands of short
tons, of Stone Container's paper mills at December 31, 1999 were:
<TABLE>
<CAPTION>
Annual
Capacity
--------
<S> <C>
United States
Containerboard................................................. 4,008
Kraft paper.................................................... 437
Market pulp.................................................... 341
-----
Subtotal..................................................... 4,786
Canada
Containerboard................................................. 477
Market pulp.................................................... 240
Europe and Other
Containerboard................................................. 418
Recycled boxboard.............................................. 79
-----
Total........................................................ 6,000
=====
</TABLE>
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<PAGE>
Litigation
In 1998, seven putative class action complaints were filed against Stone
Container in the United States District Court for the Northern District of
Illinois and the United States District Court for the Eastern District of
Pennsylvania. These complaints alleged that Stone Container reached agreements
in restraint of trade that affected the manufacture, sale and pricing of
corrugated products in violation of antitrust laws. The complaints have been
amended to name several other defendants, including Jefferson Smurfit and
Smurfit-Stone. The suits seek an unspecified amount of damages arising out of
the sale of corrugated products for the period from October 1, 1993 through
March 31, 1995. Under the provisions of the applicable statutes, any award of
actual damages could be trebled. The Federal Multidistrict Litigation Panel has
ordered all of the complaints to be transferred to and consolidated in the
United States District Court for the Eastern District of Pennsylvania. Stone
Container, Jefferson Smurfit and Smurfit-Stone believe they have meritorious
defenses and intend to vigorously defend these cases.
Stone Container also is a defendant in a number of lawsuits and claims
arising out of the conduct of its business, including those related to
environmental matters. In addition, St. Laurent is a defendant in lawsuits and
claims arising out of the conduct of its business, which are more fully
described in the section on "The St. Laurent Acquisition." While Stone
Container cannot predict with certainty the ultimate results of such suits or
other proceedings, its management believes that the resolution of these matters
will not have a material adverse effect on the company's consolidated financial
condition or results of operations.
Environmental Compliance
Stone Container's operations are subject to extensive environmental
regulation by federal, state, and local authorities. In the past, Stone
Container has made significant capital expenditures to comply with water, air,
solid and hazardous waste, and other environmental laws and regulations. Stone
Container expects to make significant expenditures in the future for
environmental compliance. Because various environmental standards are subject
to change, it is difficult to predict with certainty the amount of capital
expenditures that will ultimately be required to comply with future standards.
In particular, the United States Environmental Protection Agency has
finalized significant parts of its comprehensive rule governing the pulp, paper
and paperboard industry, known as the "Cluster Rule". This rule will require
substantial expenditures to achieve compliance. Stone Container estimates,
based on engineering studies done to date, that compliance with these portions
of the Cluster Rule could require up to $180 million in capital expenditures,
the majority of which will be spent over the next several years. Stone
Container cannot predict with certainty the ultimate cost of complying with the
regulations until it completes further engineering studies and additional
regulations are finalized.
In addition to Cluster Rule compliance, Stone Container also anticipates
additional capital expenditures related to environmental compliance. For the
past three years, Stone Container has spent an average of approximately $18
million annually on capital expenditures for environmental purposes. The
anticipated spending for such capital projects for fiscal 2000 is approximately
$130 million. A significant amount of the increased expenditures in 2000 will
be due to compliance with the Cluster Rule and is included in the estimate of
up to $180 million set forth above. Since Stone Container's principal
competitors are, or will be, subject to comparable environmental standards,
including the Cluster Rule, management is of the opinion, based on current
information, that compliance with environmental standards will not adversely
affect Stone Container's competitive position.
Environmental Matters
In September 1997, Stone Container received a Notice of Violation and a
Compliance Order from the EPA alleging noncompliance with air emissions
limitations for the smelt dissolving tank at Stone Container's Hopewell,
Virginia mill and for failure to comply with New Source Performance Standards
applicable to
70
<PAGE>
certain other equipment at the mill. In cooperation with the EPA, Stone
Container responded to information requests, conducted tests and took measures
to ensure continued compliance with applicable emission limits. In December
1997 and November 1998, Stone Container received additional requests from the
EPA for information about past capital projects at the mill. In April 1999, the
EPA issued a notice of violation alleging that Stone Container "modified" the
recovery boiler and increased nitrogen oxide emissions without obtaining a
required construction permit. Stone Container responded to this notice and
indicated that the EPA's allegations were without merit.
In February 2000, Smurfit-Stone, the EPA and the Department of Justice
entered into a tolling agreement for the purpose of allowing continued
discussion regarding settlement of the matter before the initiation of a civil
action by the EPA. Pursuant to the tolling agreement's terms, the parties have
stipulated and agreed that the period of time from the date of the agreement
through and including December 31, 2000 will not be included in computing the
deadline under any statute of limitations applicable to the commencement of an
action against Smurfit-Stone with respect to the Notices of Violations.
In August 1999, Stone Container received a Notice of Infraction from the
Ministry of Environment of the Province of Quebec alleging noncompliance with
specified environmental standards at Stone Container's New Richmond, Quebec
mill. The majority of the citations alleged that Stone Container had discharged
total suspended solids in the mill's treated effluent which exceeded the
regulatory limitations for the rolling 30-day average. The remainder of the
citations were for monitoring, reporting and administrative deficiencies
uncovered during an inspection performed by the Ministry earlier in the year.
The total fine demanded by the Ministry for all of the alleged violations is
$6.5 million (Canadian). Stone Container entered a plea of "not guilty" as to
all of the citations and intends to vigorously defend itself against these
alleged violations.
In April 1999, the EPA and the Virginia Department of Environmental Quality
(the "Virginia DEQ") each issued a notice of violation under the Clean Air Act
to St. Laurent's mill located in West Point, Virginia, which was acquired from
Chesapeake Corporation in May, 1997. In general, the notices of violations
allege that, from 1984 to the present, the West Point mill installed certain
equipment and modified certain production processes without obtaining the
required permits. In the purchase agreement between St. Laurent and Chesapeake
Corporation, Chesapeake Corporation agreed to indemnify St. Laurent for
remediation work resulting from violations of applicable laws, including the
Clean Air Act, that existed at the mill before and on the date of the purchase
agreement, as to which Chesapeake Corporation had "knowledge" (as defined in
the purchase agreement), up to a maximum of $50 million. While such costs
cannot be estimated with certainty at this time, based on presently available
information, Smurfit-Stone believes that the cost of remediation work, which
represents capital expenditures comprising engineering, procurement and
construction work of mill modifications (including the installation of air
emission controls, etc.) associated with the notices of violations may
approximate $25 million. In addition, civil or criminal penalties may be
pursued by the EPA and Virginia DEQ; however, based upon discussions with the
EPA and Virginia DEQ to date, Smurfit-Stone believes that the total cost of
remediation work associated with the notices of violations and fines and
penalties that may be imposed by the EPA and Virginia DEQ will not exceed the
maximum amount of Chesapeake Corporation's indemnification obligation. St.
Laurent and Chesapeake Corporation appointed a third party arbitrator to decide
the scope and timing of future remediation work that is the subject of the
indemnification in the purchase agreement. The arbitrator has ruled that any
fines and penalties that may result from any breach of Chesapeake Corporation's
representations and warranties arising out of the notices of violations, either
by adjudication or settlement, are part of the costs and expenses that are
subject to reimbursement by Chesapeake Corporation to St. Laurent under the
purchase agreement. By agreement of the parties, the 30-month period for
reimbursement by Chesapeake Corporation of costs and expenses incurred by St.
Laurent under the provisions of the purchase agreement has been extended
indefinitely. Smurfit-Stone is cooperating with Chesapeake Corporation to
analyze, respond to, and defend against the matters alleged in the notices of
violations and to develop and implement a remediation plan as required by the
notices of violations.
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<PAGE>
Federal, state and local environmental requirements are a significant factor
in Stone Container's business. Stone Container employs processes in the
manufacture of pulp, paperboard and other products which result in various
discharges, emissions, and wastes. These processes are subject to numerous
federal, state and local environmental laws and regulations, including
reporting and disclosure obligations. Stone Container operates and expects to
operate under permits and similar authorizations from various governmental
authorities that regulate such discharges, emissions, and wastes.
Stone Container also faces potential liability as a result of releases, or
threatened releases, of hazardous substances into the environment from various
sites owned and operated by third parties at which company-generated wastes
have allegedly been deposited. Generators of hazardous substances sent to off-
site disposal locations at which environmental problems exist, as well as the
owners of those sites and certain other classes of persons (generally referred
to as "potentially responsible parties" or "PRPs"), are, in most instances,
subject to joint and several liability for response costs for the investigation
and remediation of such sites under the Comprehensive Environmental Response,
Compensation and Liability Act of 1980 ("CERCLA") and analogous state laws,
regardless of fault or the lawfulness of the original disposal. Stone Container
has received notice that it is or may be a PRP at a number of federal and/or
state sites where response action may be required, and as a result may have
joint and several liability for cleanup costs at such sites. However, liability
for CERCLA sites is typically shared with other PRPs and costs are commonly
allocated according to relative amounts of waste deposited. Stone Container's
relative percentage of waste deposited at a majority of these sites is quite
small. In addition to participating in remediation of sites owned by third
parties, Stone Container has entered into consent orders for investigation
and/or remediation of certain company-owned properties.
Based on current information, Stone Container believes that the probable
costs of the potential environmental enforcement matters discussed above,
response costs under CERCLA and similar state laws, and remediation of owned
property, will not have a material adverse effect on Stone Container's
financial condition or results of operations. Stone Container believes that its
liability for these matters was adequately reserved at December 31, 1999.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
General
Market conditions and demand for containerboard and corrugated containers,
Stone Container's primary products, have historically been subject to cyclical
changes in the economy and changes in industry capacity, both of which can
significantly impact selling prices and Stone Container's profitability.
Market conditions were generally weak from 1996 to 1998 due primarily to
excess capacity within the industry. Linerboard prices, which peaked in 1995 at
approximately $535 per ton, declined dramatically thereafter, reaching a low of
$310 per ton in April 1997. Corrugated container prices followed this same
pricing trend during the period with somewhat less fluctuation. Prices remained
at reduced levels through the end of 1998.
During the second half of 1998, the containerboard industry took extensive
economic downtime, resulting in a significant reduction in inventory levels. In
addition, several paper companies, including Stone Container, permanently shut
down paper mill operations, approximating 6% of industry capacity. The balance
between supply and demand for containerboard improved as a result of the
shutdowns, and inventories remained low throughout 1999. Corrugated container
shipments for the industry were strong in 1999, increasing approximately 2%
compared to 1998. Based on these developments, Stone Container was able to
implement two price increases during 1999, totaling $90 per ton for linerboard,
bringing the price at the end of 1999 to $430 per ton. In addition, Stone
Container implemented a $50 per ton price increase in February 2000 for
linerboard.
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<PAGE>
Market pulp is also subject to the cyclical changes in the economy and
changes in industry capacity. The price of market pulp declined from 1996 to
1998 as a result of excess capacity worldwide. Mill closures, market related
downtime and the recovery of the Asian markets in 1998 resulted in tighter
supplies and a recovery in prices in 1999. As a result, Stone Container was
able to implement price increases totaling approximately $160 per metric ton
for market pulp during 1999. In addition, Stone Container implemented a $30 per
metric ton price increase in January 2000 for market pulp.
Wood fiber and recycled fiber are the principal raw materials used in the
manufacture of Stone Container's products. Fiber supplies can vary widely at
times and are highly dependent upon the demand of paper mills. Wood fiber and
reclaimed fiber prices declined in 1998 due primarily to the lower demand
brought about by extensive economic downtime taken by the containerboard
industry in 1998. The price of old corrugated containers, the principal grade
used in recycled containerboard mills, declined in 1998 to its lowest level in
five years. Stone Container's average wood fiber cost in 1999 declined
approximately 6% compared to 1998 due primarily to the number of permanent mill
closures in those areas where Stone Container competes for wood. Recycled fiber
prices increased approximately 11% compared to 1998, primarily as a result of
stronger export demand.
Restructuring and the 1998 Stone Container Merger
As previously discussed, Stone Container merged with a wholly-owned
subsidiary of Smurfit-Stone and became Smurfit-Stone's wholly-owned subsidiary
on November 18, 1998. The merger was accounted for as a purchase business
combination and, accordingly, purchase accounting adjustments including
goodwill were pushed down and reflected in Stone Container's financial
statements after November 18, 1998. In connection with the merger, Smurfit-
Stone restructured its operations.
The restructuring included the permanent shutdown of certain of Stone
Container's containerboard mill and pulp mill facilities on December 1, 1998
and five of Stone Container's converting facilities during the allocation
period in 1999. The adjustment to fair value of property, plant and equipment
associated with the permanent shutdown of Stone Container's facilities,
liabilities for the termination of certain employees of Stone Container and the
liabilities for long-term commitments, as well as resolution of litigation
related to Stone Container's investment in Florida Coast, were included in the
allocation of Smurfit-Stone's cost to acquire Stone Container. As part of Stone
Container's continuing evaluation of all areas of its business in connection
with the merger integration, Stone Container recorded a pre-tax restructuring
charge of $46 million in 2000 related to the permanent shutdown of one
containerboard mill facility and five converting facilities. The containerboard
mill shutdown in 2000 had an annual capacity of 130,000 tons of corrugating
medium.
Since the merger, through June 30, 2000, approximately $176 million (78%) of
the cash expenditures were incurred, the majority of which related to the
Florida Coast settlement. The remaining exit liabilities for Stone Container as
of June 30, 2000 of approximately $49 million will be funded through operations
as originally planned.
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<PAGE>
Results of Operations for the Six Months ended June 30, 2000 and June 30, 1999
Segment Data
<TABLE>
<CAPTION>
Six months ended June 30,
-----------------------------
2000 1999
-------------- --------------
Net Profit/ Net Profit/
Sales (Loss) Sales (Loss)
------ ------- ------ -------
<S> <C> <C> <C> <C>
Containerboard and corrugated containers.......... $1,927 $322 $1,552 $ 81
Industrial bags................................... 253 15 257 19
International..................................... 310 15 295 15
Other operations.................................. 47 2 2 (1)
------ ---- ------ -----
Total operations.............................. $2,537 354 $2,106 114
====== ======
Restructuring charge.............................. (46)
Interest expense, net............................. (170) (179)
Other, net........................................ (68) (36)
---- -----
Loss before income taxes and extraordinary item... $ 70 $(101)
==== =====
</TABLE>
Improvements in containerboard and other markets in 2000 resulted in strong
increases in Stone Container's net sales and profits. Stone Container's net
sales for the six month period ended June 30, 2000 increased 13% compared to
the same period last year. The increase in net sales was due primarily to
higher average sales prices for containerboard, corrugated containers and
market pulp and the acquisition of St. Laurent. Net sales and income before
income taxes for St. Laurent of $96 million and $6 million, respectively, are
included in Stone Container's results of operations after May 31, 2000, the
date of the acquisition. Stone Container's operating profits for the six month
period ended June 30, 2000 increased 211% compared to last year due primarily
to the sales price increases. Operating profits in the second quarter of 2000
were reduced by the economic downtime taken at Stone Container's containerboard
mills in order to reduce inventories. Other, net for 1999 included a $39
million gain on asset sales. The increases (decreases) in net sales for each of
Stone Container's segments are shown in the chart below.
<TABLE>
<CAPTION>
Six months ended June 30,
2000 compared to 1999
-----------------------------------------------
Container-
board &
Corrugated Industrial Inter- Other
Containers Bags national Operations Total
---------- ---------- -------- ---------- -----
(In millions)
<S> <C> <C> <C> <C> <C>
Increase (decrease) in net
sales due to:
Sales price and product mix. $328 $ 4 $11 $ $343
Sales volume................ 2 (6) 11 7
Acquisition and other....... 100 47 147
Closed or sold facilities... (55) (2) (7) (2) (66)
---- --- --- --- ----
Total increase (decrease). $375 $(4) $15 $45 $431
==== === === === ====
</TABLE>
Containerboard and Corrugated Containers Segment
Market conditions in the containerboard industry continued to improve in the
first half of 2000, and Stone Container implemented price increases of $50 per
ton and $60 per ton on February 1, 2000 for linerboard and medium,
respectively. On average, linerboard prices for the second quarter of 2000 were
higher than last year by 22% and the average price of corrugated containers was
higher by 19%. Strong demand for market pulp continued to drive prices higher
in the first half of 2000. Pulp prices were increased $30 per metric ton on
January 1, 2000 and $40 per metric ton on April 1, 2000. Pulp prices were
increased again on July 1, 2000 by $30 per metric ton. The average price of
market pulp for the second quarter of 2000 increased 35% compared to last year.
74
<PAGE>
Production of containerboard and kraft paper for the second quarter of 2000,
exclusive of St. Laurent's containerboard production of 110,000 tons, declined
10% compared to last year due to higher levels of maintenance downtime, as well
as economic downtime taken in order to reduce inventories. Shipments of
corrugated containers decreased 4% compared to last year due to plant closures
and customer rationalization. Stone Container had higher third party sales of
containerboard, but lower third party sales of kraft, market pulp and other
products in the six month period ended June 30, 2000. Sales volume for market
pulp for the second quarter declined 5% compared to last year.
For the six months ended June 30, 2000, net sales of $1,927 increased 24%
compared to last year and profits increased by $241 million to $322 million. On
average, linerboard prices were higher than last year by 22% and the average
price of corrugated containers was higher by 18%. Production of containerboard
and kraft paper for the six months ended June 30, 2000, exclusive of St.
Laurent's containerboard production of 110,000 tons, decreased 2% due primarily
to the downtime. Shipments of corrugated containers declined 2% compared to
last year. The average sales price of market pulp increased 37% compared to
last year while sales volume declined 11%. Sales volume for kraft paper for the
first half of 2000 declined 59% compared to last year. Profits increased due
primarily to the higher average sales prices, although the additional mill
downtime and the higher reclaimed fiber cost partially offset the sales price
improvements. Cost of goods sold as a percent of net sales decreased to 76% for
the six months ended June 30, 2000 compared to 85% for the same period last
year due primarily to the higher average sales prices.
Industrial Bags Segment
Net sales for the six months ended June 30, 2000 were $254 million, a
decrease of 2%, compared to last year and profit decreased $4 million to $15
million. The decrease in net sales was due to a labor strike at one of the
operating facilities and lower sales volume. Cost of goods sold as a percent of
net sales increased to 83% for the six months ended June 30, 2000 compared to
81% for the same period last year, due primarily to the labor strike and lower
sales volume.
International Segment
Net sales for the six months ended June 30, 2000 were $310 million, an
increase of 5%, compared to last year, and profit remained unchanged at $15
million. The increase in net sales was due to higher sales prices, particularly
in Europe for containerboard, boxboard, and corrugated containers, and higher
sales volume. Sales were negatively impacted by the sale of a corrugated
container operation in 1999 located in Australia. Cost of goods sold as a
percent of net sales increased to 87% for the six months ended June 30, 2000
compared to 85% for the same period last year due to higher costs for
containerboard and reclaimed fiber.
Other Operations
Other operations include St. Laurent's converting facilities after May 31,
2000, the date of the acquisition. Net sales and profit were $47 million and $2
million, respectively.
Costs and Expenses
Costs and expenses for the six month period ended June 30, 2000 include
expenses for St. Laurent after May 31, 2000. Exclusive of St. Laurent, Stone
Container's cost of goods sold decreased compared to last year due to lower
third party sales of kraft, market pulp and other products. The decreases in
Stone Container's overall cost of goods sold as a percent of net sales for the
six months ended June 30, from 89% in 1999 to 81% in 2000, were due primarily
to higher average sales prices.
Selling and administrative expenses as a percent of net sales for the six
month period ended June 30, decreased from 10% in 1999 to 8% in 2000 due
primarily to higher average sales prices.
Other income and expense, net for the six month period ended June 30, 1999
include a $39 million gain on the sale of Stone Container's equity interest in
Abitibi-Consolidated Inc. In addition, foreign exchange gains were more
favorable in 1999 as compared to 2000.
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<PAGE>
Interest expense for the six months ended June 30, 2000 was lower than last
year by $9 million due to lower average debt levels outstanding. Stone
Container's overall average effective interest rate was higher than last year
for the six month period ended June 30, 2000 by 0.4%. The decrease in interest
expense was partially offset by the increase in the average interest rate and
new borrowings to fund the St. Laurent acquisition.
Provision for income taxes for the six months ended June 30, 2000 differed
from the federal statutory tax rate due to several factors, the most
significant of which were state income taxes and the effect of permanent
differences from applying purchase accounting.
Statistical Data
<TABLE>
<CAPTION>
Six months ended
June 30,
-----------------
2000 1999
-------- --------
(In thousands of
tons, except as
noted)
<S> <C> <C>
Mill production:
Containerboard........................................ 2,482 2,337
Kraft paper........................................... 145 225
Market pulp........................................... 307 292
Solid bleached sulfate................................ 11
Corrugated shipments (billions sq. ft.)................. 30.6 31.1
Industrial bag shipments................................ 154 157
</TABLE>
Results of Operations for 1999, 1998 and 1997
Segment Data
For purposes of the following discussion of results of operations, the 1998
financial information for the period before November 18, 1998 (the "Predecessor
Period") has been combined with the financial information for the period from
November 19 to December 31, 1998. The financial statements for the Predecessor
Period were prepared using Stone Container's historical basis of accounting.
The comparability of operating results for the Predecessor Periods and the
period encompassing push down accounting are affected by the purchase
accounting adjustments.
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------------------
1999 1998 1997
-------------- -------------- --------------
Net Profit/ Net Profit/ Net Profit/
Sales (Loss) Sales (Loss) Sales (Loss)
------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Containerboard and corrugated
containers....................... $3,245 $301 $3,609 $ 6 $3,640 $ (35)
Industrial bags................... 513 31 513 35 491 31
International..................... 581 28 586 30 556 27
Other operations.................. 2 (1) 11 1 9 4
------ ---- ------ ----- ------ -----
Total operations.............. $4,341 359 $4,719 72 $4,696 27
====== ====== ======
Interest expense.................. (340) (452) (441)
Other, net........................ (94) (509) (191)
---- ----- -----
Loss before income taxes and
extraordinary item............... $(75) $(889) $(605)
==== ===== =====
</TABLE>
--------
Other, net includes, among other things, corporate expenses, gain on asset
sales and, for 1998, write-down of investments and certain merger-related costs
as discussed below.
1999 compared to 1998
Net sales of $4,341 million for 1999 decreased $378 million, or 8%, compared
to 1998 due primarily to lower sales volume and the closure of operating
facilities in the Containerboard and Corrugated Containers
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<PAGE>
segment. Higher sales prices partially offset the decline in volume. Operating
profits of $359 million increased $287 million compared to 1998 due primarily
to the performance of Stone Container's Containerboard and Corrugated
Containers segment. Other, net in 1999 improved $415 million compared to 1998
due primarily to the write-down of certain investments in 1998, improvements in
operating results of affiliates and reductions in administrative expenses. Loss
before income taxes and extraordinary item was $75 million in 1999 as compared
to $889 million in 1998. The increases or (decreases) in net sales for each of
Stone Container's segments are shown in the chart below.
<TABLE>
<CAPTION>
1999 compared to 1998
-----------------------------------------------
Container-
board &
Corrugated Industrial Inter- Other
Containers Bags national Operations Total
---------- ---------- -------- ---------- -----
(In millions)
<S> <C> <C> <C> <C> <C>
Increase (decrease) due to:
Sales price and product mix. $ 124 $11 $(20) $(2) $ 113
Sales volume................ (202) 5 39 (158)
Closed or sold facilities... (286) (16) (24) (7) (333)
----- --- ---- --- -----
Net decrease.............. $(364) $ 0 $ (5) $(9) $(378)
===== === ==== === =====
</TABLE>
Containerboard and Corrugated Containers Segment
Net sales of $3,245 million for 1999 decreased by 10% compared to 1998. The
benefit from the improvement in sales prices was offset by a reduction in
containerboard sales volume, plant closures resulting from the merger and the
sale of Stone Container's newsprint operation located in Snowflake, Arizona in
October 1998. Stone Container was able to implement two price increases for
containerboard in 1999, totaling $90 per ton for linerboard and $130 per ton
for medium. On average, linerboard and corrugated container prices increased 8%
and 2%, respectively, compared to 1998. The average prices of kraft paper and
pulp in 1999 increased 4% and 15%, respectively, compared to 1998. Profits
improved by $295 million compared to 1998 to $301 million due to higher sales
prices, plant shutdowns, reduced mill downtime and cost saving initiatives
undertaken in connection with the merger. Cost of goods sold as a percent of
net sales decreased to 83% for 1999 compared to 92% for 1998.
Containerboard production of 4,381 tons in 1999 decreased by 1% and pulp
production declined 10% compared to 1998 due primarily to the mill closures.
Production of kraft paper declined 4%. Corrugated container shipments were
unchanged from 1998.
Industrial Bags Segment
Net sales of $513 million for 1999 were unchanged from last year and profits
decreased $4 million to $31 million. Cost of goods sold as a percent of net
sales decreased to 83% for 1999 compared to 88% for 1998 due primarily to the
higher average sales prices. The decline in profits was due primarily to higher
administrative cost.
International Segment
Net sales of $581 million decreased by 1% compared to 1998 and profits
decreased by $2 million to $28 million. The decrease in net sales was due to
lower average sales prices in Europe and the sale of Stone Container's
corrugated container operations located in Australia. Exclusive of the
Australia operations, shipments of corrugated containers increased 8% compared
to 1998. Cost of goods sold as a percent of net sales decreased from 86% in
1998 to 85% in 1999.
Costs and Expenses
Cost of goods sold for 1999 in Stone Container's Consolidated Statements of
Operations decreased compared to 1998 due primarily to the effects of the
merger and the sale of the Snowflake mill. Such decreases
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<PAGE>
were partially offset by higher LIFO expense, higher depreciation expense
related to the fair value adjustments made to the historical basis of property,
plant and equipment in the purchase price allocation adjustment and increased
goodwill amortization charges. Stone Container's overall cost of goods sold as
a percent of net sales decreased from 92% in 1998 to 87% in 1999 due primarily
to the effects of the merger and higher average sales prices.
Selling and administrative expenses for 1999 decreased compared to 1998 due
primarily to staff reductions, certain other merger synergies achieved and a
reduction in bad debt expense. Selling and administrative expenses as a percent
of net sales decreased from 12% in 1998 to 9% in 1999.
Interest expense, net decreased $112 million compared to 1998 primarily as a
result of lower average outstanding borrowings during 1999.
Equity income of non-consolidated affiliates was $12 million in 1999, as
compared to a loss in 1998 of $88 million. The improvement was due primarily to
elimination of losses related to Stone Container's non-consolidated affiliates
that were divested during 1998 and 1999.
Other, net in Stone Container's Consolidated Statements of Operations
improved in 1999 due primarily to non-cash charges in 1998 of $174 million for
the write-down of certain investments and assets. In addition, Stone Container
recorded foreign exchange gains in 1999 as compared to foreign exchange losses
in 1998. Other, net included a gain of $39 million on the sale of shares of
Abitibi in 1999 and a gain of $37 million on the sale of the Snowflake mill in
1998. In connection with the merger, Stone Container recorded charges of $32
million in the 1998 Predecessor Period related to certain merger transactions
cost and change in control payments.
The effective income tax rate for 1999 differed from the federal statutory
tax rate due to several factors, the most significant of which was the effect
of permanent differences from applying purchase accounting. At December 31,
1999, Stone Container had approximately $1,337 million of net operating loss
carryforwards for U.S. federal income tax purposes that expire from 2009
through 2019, with a tax value of $468 million. A valuation allowance of $152
million has been established for a portion of these deferred tax assets.
Further, Stone Container had net operating loss carryforwards for state income
tax purposes with a tax value of $68 million, which expire from 2000 through
2019. A valuation allowance of $46 million has been established for a portion
of these deferred taxes. For information concerning the benefit from income
taxes as well as information regarding differences between effective tax rates
and statutory rates, see Note 8 of the Notes to the Consolidated Financial
Statements.
1998 compared to 1997
Net sales of $4,719 million for 1998 increased $23 million, or 1%, compared
to 1997. Operating profits of $72 million increased $45 million compared to
1997 due primarily to the Containerboard and Corrugated Containers segment.
Containerboard and Corrugated Containers Segment
Net sales of $3,609 million for 1998 decreased 1% compared to 1997 and
profits improved by $41 million to $6 million. The decrease in net sales was
due to a number of factors, including the de-consolidation of Stone Container's
SVCPI affiliate effective June 1997, lower average prices for market pulp,
lower volume for containerboard and the sale of the Snowflake mill. The
decreases were partially offset by increased sales of corrugated containers.
The improvement in profit was due primarily to higher prices for containerboard
and corrugated container products. Losses for Stone Container's market pulp
operations increased in 1998 compared to 1997 by $75 million due primarily to
lower prices, partially offsetting the increase in containerboard and
corrugated container profits.
Corrugated container prices and sales volume increased compared to 1997 by
4% and 5%, respectively. Containerboard prices were higher in 1998 by 8%
compared to 1997. Containerboard sales volume in 1998
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<PAGE>
declined 12% compared to 1997 due primarily to the higher level of economic
downtime and the closures of a containerboard mill and other pulp mill
facilities, effective December 1, 1998. Kraft paper prices and sales volume
declined compared to 1997 by 5% and 14%, respectively. Cost of goods sold as a
percent of net sales decreased from 93% in 1997 to 92% in 1998 due primarily to
the higher sales prices in 1998.
In October 1998, Stone Container sold the Snowflake mill to Abitibi. As a
result of the sale, Stone Container no longer operates in the newsprint
business. Stone Container retained ownership of a corrugating medium machine
located at the Snowflake mill. The gain on the sale of the Snowflake mill, of
$37 million, is included in other, net in the Segment Data table.
Industrial Bags Segment
Net sales of $513 million increased 4% compared to 1997 and profits improved
$4 million to $35 million. The increase in net sales and profit were due
primarily to Interstate Packaging, which became a consolidated subsidiary of
Stone Container in May 1998. Sales volume, excluding Interstate Packaging,
increased by 2% in 1998 and prices were comparable to 1997. Cost of goods sold
as a percent of net sales for 1998 was comparable to 1997.
International Segment
Net sales $586 million increased by 5% compared to 1997 and profit improved
$3 million to $30 million. The increases were due primarily to improved sales
volume for corrugated containers, which improved 4% compared to 1997.
Corrugated container selling prices were comparable to 1997. A 2% increase in
containerboard sales price was offset by a decrease in sales volume and the
impact of strengthening of the U.S. dollar relative to local currencies. Cost
of goods sold as a percent of net sales for 1998 was comparable to 1997.
Costs and Expenses
Stone Container's overall cost of goods sold as a percent of net sales in
1998 of 92% was comparable to 1997. Selling and administrative expenses for
1998 increased compared to 1997 due to merger-related costs and higher bad debt
expense. Selling and administrative expense as a percent of net sales increased
from 10% in 1997 to 12% in 1998.
Interest expense, net increased $11 million over 1997 primarily as a result
of higher average outstanding borrowings during the year.
Equity loss of non-consolidated affiliates was $88 million for 1998, as
compared to $71 million in 1997 due primarily to significant increases in
foreign exchange transaction losses recorded by Abitibi on foreign currency
forward contracts.
Other, net expense for 1998 in Stone Container's Consolidated Statements of
Operations increased compared to 1997 due to non-cash charges of $174 million
related to the write-down of certain investments and assets, and a charge of
$32 million related to certain merger transaction costs and change in control
payments recorded in the 1998 Predecessor Period. The write-downs included
. $67 million related to Stone Container's investment in Stone Venepal
(Celgar) Pulp, Inc., which filed for bankruptcy in July, 1998;
. $56 million related to its 50% ownership interest in Financiere Carton
Papier, a privately held folding carton converting operation based in
France;
. $32 million related to its 20% ownership interest in Venepal S.A.C.A., a
publicly traded, Venezuelan based, manufacturer of paperboard and paper
packaging products; and
. $19 million related to wood products operations.
The income tax benefit recorded in 1998 was $104 million. The benefit was
reduced by a valuation allowance established in the third quarter against
deferred tax assets on net operating loss carryforwards, which,
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<PAGE>
due to continuing losses, may not be realizable. For information concerning the
benefit from income taxes as well as information regarding differences between
effective tax rates and statutory rates, see Note 8 of the Notes to the
Consolidated Financial Statements.
Liquidity and Capital Resources
General
Net cash provided by operating activities for the six months ended June 30,
2000 of $192 million, borrowings under bank credit facilities of $1,525 million
and proceeds from the sale of assets of $61 million were used to fund the $631
million cash component of the St. Laurent acquisition, $1,031 million of net
debt repayments, $17 million of financing fees and property additions of $66
million. Debt repayments for the first half of 2000 include the $559 million
redemption of Stone Container's outstanding 9.875% senior notes due February 1,
2001, repayment of approximately $376 million of existing indebtedness of St.
Laurent, prepayments on Stone Container's bank term loans and scheduled debt
repayments.
For 1999, proceeds from the sale of assets of $770 million, net cash
provided by operating activities of $72 million and available cash of $124
million were used primarily to fund capital investments of $87 million and net
debt payments of $883 million.
On May 31, 2000, Smurfit-Stone, through its Stone Container subsidiary,
acquired St. Laurent. Under the terms of the merger agreement, each common
share and restricted share unit of St. Laurent was exchanged for 0.5 shares of
Smurfit-Stone common stock and $12.50 in cash. A total of 25.3 million shares
of Smurfit-Stone common stock were issued. The total purchase price, including
cash paid of $631 million and debt assumed of $376 million, was approximately
$1.4 billion.
On May 31, 2000, Stone Container and certain of its subsidiaries closed on
new credit facilities with a group of financial institutions consisting of (1)
$950 million in the form of Tranche G and Tranche H term loans maturing on
December 31, 2006, and (2) a $100 million revolving credit facility maturing on
December 31, 2005. The proceeds of the new credit facilities were used to fund
the cash component of the St. Laurent acquisition, refinance certain existing
indebtedness of St. Laurent and pay fees and expenses related to the
acquisition. The new revolving credit facility will be used for general
corporate purposes. The new credit facilities are secured by a security
interest in substantially all of the assets acquired in the St. Laurent
acquisition.
In May 2000, Stone Container sold the market pulp mill at its closed Port
Wentworth, Georgia mill site to a third party. Net proceeds of approximately
$58 million were used for debt reduction.
In January 1999, Stone Container sold 7.8 million shares of its interest in
Abitibi for approximately $80 million, and in April 1999, Stone Container sold
its remaining interest in Abitibi for approximately $414 million. Proceeds were
sufficient to prepay the entire outstanding balance of Stone Container's
Tranche B term loan and, in accordance with Stone Container's credit agreement,
the revolving credit maturity date was extended from April 30, 2000 to December
31, 2000.
Financing Activities
On March 31, 2000, Stone Container amended and restated its existing credit
agreement pursuant to which a group of financial institutions provided an
additional $575 million to Stone Container in the form of a Tranche F term loan
maturing on December 31, 2005 and extended the maturity date of the revolving
credit agreement to December 31, 2005. On April 28, 2000, Stone Container used
the proceeds of the Tranche F term loan to redeem the 9.875% senior notes due
February 1, 2001.
In October 1999, Stone Container entered into a new accounts receivable
securitization program. The securitization program provides for certain trade
accounts receivables to be sold to Stone Receivables
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<PAGE>
Corporation, a wholly-owned non-consolidated bankruptcy remote qualified
special purpose entity. The proceeds from the transaction were used to prepay
the borrowings under the prior accounts receivable securitization program.
In August 1999, Stone Container repaid its $120 million 11.0% senior
subordinated debentures at maturity with borrowings under its revolving credit
facility.
In January 1999, Stone Container obtained a waiver from its bank group for
relief from certain financial covenant requirements under Stone Container's
bank credit agreement as of December 31, 1998. Subsequently, on March 23, 1999,
Stone Container and its bank group amended the credit agreement to further ease
certain quarterly financial covenant requirements for 1999.
Stone Container's bank credit agreements contain various business and
financial covenants including, among other things,
. limitations on dividends, redemptions and repurchases of capital stock,
. limitations on the incurrence of indebtedness,
. limitations on capital expenditures and
. maintenance of certain financial covenants.
The credit agreements also require prepayments if Stone Container has excess
cash flows (as defined), or receives proceeds from certain asset sales,
insurance, issuance of equity securities or incurrence of certain indebtedness.
The obligations under the credit agreements are secured by a security interest
in substantially all of Stone Container's assets and 65% of the stock of its
Canadian subsidiary. The security interest excludes cash, cash equivalents,
certain trade receivables, four paper mills and the land and buildings of the
corrugated container facilities. Such restrictions, together with Stone
Container's highly leveraged position, could restrict corporate activities,
including Stone Container's ability to respond to market conditions, to provide
for unanticipated capital expenditures or to take advantage of business
opportunities.
The declaration of dividends by Stone Container's board of directors is
subject to, among other things, certain restrictive provisions contained in the
credit agreement and certain note indentures. As of June 30, 2000, Stone
Container had accumulated dividend arrearages of approximately $26 million
related to its Series E Preferred Stock.
Stone Container's senior notes, aggregating $1,698 million are redeemable in
whole or in part at Stone Container's option at various dates beginning in
February 1999, at par plus a weighted average premium of 2.57%. Stone
Container's senior subordinated debentures, aggregating $481 million, are
redeemable as of December 31, 1999, in whole or in part, at Stone Container's
option at par plus a weighted average premium of .16%. The indentures governing
the senior notes and the senior subordinated debentures generally provide that
in the event of a "change of control" (as defined in the indentures), Stone
Container must, subject to certain exemptions, offer to repurchase the senior
notes and the senior subordinated debentures. The Stone Container merger
constituted such a change in control. As a result, Stone Container is required
to offer to repurchase its senior notes and senior subordinated debentures at a
price equal to 101% of the principal amount, together with accrued interest.
However, because Stone Container's credit agreement prohibits Stone Container
from making an offer to repurchase the senior notes and the senior subordinated
debentures, Stone Container could not make the offer. Although the terms of the
senior notes refer to an obligation to repay the bank debt or obtain the
consent of the bank lenders to such repurchase, the terms do not specify a
deadline, if any, following the merger for repayment of bank debt or obtaining
such consent. Stone Container intends to actively seek commercially acceptable
sources of financing to repay the outstanding indebtedness under the credit
agreement or alternative financing arrangements which would cause the bank
lenders to consent to the repurchase. There can be no assurance that Stone
Container will be successful in obtaining such financing or consents or as to
the terms of such financing or consents.
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<PAGE>
Based upon covenants in the indentures, Stone Container 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 Container'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 Container's equity levels exceeding the minimum on December 31, 1998.
Stone Container's equity level exceeded the minimum on December 31, 1999.
Stone Container 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,
expenditures under the Cluster Rule and other capital expenditures. Stone
Container expects to use any excess cash flows provided by operations to make
further debt reductions. As of June 30, 2000, Stone Container had $605 million
of unused borrowing capacity under the credit agreement and the additional
credit agreement.
Environmental Matters
Stone Container's operations are subject to extensive environmental
regulation by federal, state, and local authorities in the United States and
regulatory authorities with jurisdiction over its foreign operations. Stone
Container has made, and expects to continue to make, significant capital
expenditures to comply with water, air and solid and hazardous waste and other
environmental laws and regulations. Capital expenditures for environmental
control equipment and facilities were approximately $14 million in 1999 and
approximately $8 million in 1998. Stone Container anticipates that
environmental capital expenditures will approximate $130 million in 2000. The
majority of the expenditures after 1999 relate to amounts that Stone Container
currently anticipates will be required to comply with the Cluster Rule. In
November 1997, the EPA issued the Cluster Rule, which made existing
requirements for discharge of wastewater under the Clean Water Act more
stringent and impose new requirements on air emissions under the Clean Air Act
for the pulp and paper industry. Though the final rule is still not fully
promulgated, Stone Container currently believes it may be required to make
capital expenditures of up to $170 million during the next several years in
order to meet the requirements of the new regulations. Also, additional
operating expenses will be incurred as capital installations required by the
Cluster Rule are put into service.
Although capital expenditures for environmental control equipment and
facilities and compliance costs in future years will depend on legislative and
technological developments which cannot be predicted at this time, such costs
could increase as environmental regulations become more stringent.
Environmental control expenditures include projects which, in addition to
meeting environmental concerns, may yield certain benefits to Stone Container
in the form of increased capacity and production cost savings. In addition to
capital expenditures for environmental control equipment and facilities, other
expenditures incurred to maintain environmental regulatory compliance
(including any remediation) represent ongoing costs to Stone Container.
In addition, Stone Container is from time to time subject to litigation and
governmental proceedings regarding environmental matters in which compliance
action and injunctive and/or monetary relief are sought. Stone Container has
been named as a PRP at a number of sites which are the subject of remedial
activity under CERCLA or comparable state laws. Although Stone Container is
subject to joint and several liability imposed under CERCLA, at most of the
multi-PRP sites there are organized groups of PRPs and costs are being shared
among PRPs. Payments related to clean-up at existing and former operating sites
and CERCLA sites were not material to Stone Container's liquidity during 1999.
Future environmental regulations may have an unpredictable adverse effect on
Stone Container's operations and earnings, but they are not expected to
adversely affect Stone Container's competitive position.
Although capital expenditures for environmental control equipment and
facilities and compliance costs in future years will depend on engineering
studies and legislative and technological developments which cannot
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<PAGE>
be predicted at this time, such costs could increase as environmental
regulations become more stringent. Environmental expenditures include projects
that, in addition to meeting environmental concerns, may yield certain benefits
to Stone Container in the form of increased capacity and production cost
savings. In addition to capital expenditures for environmental control
equipment and facilities, other expenditures incurred to maintain environmental
regulatory compliance (including any remediation costs) represent ongoing costs
to Stone Container.
Effects of Inflation
Although inflation has slowed in recent years, it is still a factor in the
economy, and Stone Container continues to seek ways to mitigate its impact to
the extent permitted by competition. Inflationary increases in operating costs
have been moderate since 1996 and have not had a material impact on Stone
Container's financial position or operating results during the past three
years. Stone Container uses the last-in, first-out method of accounting for
approximately 63% of its inventories. Under this method, the cost of products
sold reported in the financial statements approximates current costs and thus
provides a closer matching of revenue and expenses in periods of increasing
costs. Because of the merger, Stone Container's asset values were adjusted to
fair market value in the allocation of the purchase price. As a result,
depreciation expense in future years will approximate current cost of
productive capacity being consumed.
Prospective Accounting Standards
In 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
requires that all derivative instruments be recorded on the balance sheet at
fair value. SFAS No. 133 is effective for all quarters of fiscal years
beginning after June 15, 2000. Stone Container is currently assessing what the
impact of SFAS No. 133 will be on its future earnings and financial position.
Quantitative and Qualitative Disclosure About Market Risk
Foreign Currency Risk
A portion of Stone Container's operations are located outside of the United
States. Accordingly, movements in exchange rates and translation effects may
have an impact on the financial condition and results of operations of Stone
Container's foreign subsidiaries and affiliates. Stone Container's significant
foreign exchange exposures are the Canadian dollar and the German mark. In
general, a weakening of these currencies relative to the U.S. dollar has a
negative translation effect on Stone Container's financial condition and
results of operations. Conversely, a strengthening of these currencies would
have the opposite effect.
Stone Container 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. Stone Container recognized foreign currency transaction gains of $2
million for the six months ended June 30, 2000 compared to a gain of $6 million
for the same period last year. During the six months ended June 30, 2000 the
exchange rates for the Canadian dollar and the German mark strengthened
(weakened) against the U.S. dollar as follows:
<TABLE>
<S> <C>
Rate at June 30, 2000 vs. December 31, 1999
Canadian dollar................................................. (2.5)%
German mark..................................................... (5.5)%
Average Rate for the six months ended June 30, 2000 vs. 1999
Canadian dollar................................................. 1.7%
German mark..................................................... (13.2)%
</TABLE>
Assets and liabilities outside the United States are primarily located in
Canada and Germany. Stone Container's investments in foreign subsidiaries with
a functional currency other than the U.S. are not hedged.
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<PAGE>
The net assets in foreign subsidiaries translated into U.S. dollars using the
year-end exchange rates were approximately $640 million at December 31, 1999.
The potential loss in fair value resulting from a hypothetical 10% adverse
change in foreign currency exchange rates would be approximately $64 million at
December 31, 1999. Any loss in fair value would be reflected as a cumulative
translation adjustment in Accumulated Other Comprehensive Income and would not
impact Stone Container's net income.
In 1999, 1998 and 1997, the average exchange rates for the Canadian dollar
and the German mark strengthened (weakened) against the U.S. dollar as follows:
<TABLE>
<CAPTION>
Year ended
December 31,
-------------------
1999 1998 1997
---- ---- -----
<S> <C> <C> <C>
Canadian dollar..................................... (0.2)% (7.1)% (1.5)%
German mark......................................... (4.4) (1.4) (15.3)
</TABLE>
Stone Container incurred foreign currency transaction gains of $7 million in
1999 that have been recorded in Other, net. Stone Container's non-consolidated
Canadian affiliate, Abitibi, was sold in April 1999, thereby eliminating a
portion of Stone Container's foreign currency risk.
Stone Container enters into foreign currency exchange agreements, the amount
of which during 1999 was not material to the consolidated financial position at
December 31, 1999.
Interest Rate Risk
Stone Container's earnings and cash flow are significantly affected by the
amount of interest on its indebtedness. Management's objective is to protect
Stone Container from interest rate volatility and reduce or cap interest
expense within acceptable levels of market risk. Stone Container periodically
enters into interest rate swaps, caps or options to hedge interest rate
exposure and manage risk within company policy. Stone Container does not
utilize derivatives for speculative or trading purposes. Any derivative would
be specific to the debt instrument, contract or transaction, which would
determine the specifics of the hedge. No significant change has occurred in
Stone Container's exposure to such risk for the six months ended June 30, 2000.
The amount of interest rate swaps entered into by Stone Container was not
material to its consolidated financial position at December 31, 1999.
The table below presents principal amounts by year of anticipated maturity
for Stone Container's debt obligations and related average interest rates based
on the weighted average interest rates at the end of the period. Variable
interest rates disclosed do not attempt to project future interest rates. This
information should be read in conjunction with Note 6 to the Notes to
Consolidated Financial Statements.
Short and Long-Term Debt
<TABLE>
<CAPTION>
Short and Long-Term Debt
Outstanding as of December 31, 1999
(U.S. $, in millions)
---------------------------------------------
There- Fair
2000 2001 2002 2003 2004 After Total Value
---- ---- ---- ---- ---- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. bank term loans and
revolver--9.7% average interest
rate (variable)................ $136 $ 7 $ 7 $531 $ $ $ 681 $ 682
U.S. senior and senior
subordinated notes--10.8%
average interest rate (fixed).. 10 566 954 3 203 444 2,180 2,218
U.S. industrial revenue bonds--
8.6% average interest rate
(fixed)........................ 1 13 13 13 13 182 235 235
German mark bank term loans--
5.2% average interest rate
(variable)..................... 11 12 15 1 1 40 40
Other--U.S...................... 2 2 1 1 1 2 9 9
Other--foreign.................. 2 3 2 2 2 1 12 12
---- ---- ---- ---- ---- ---- ------ ------
Total debt...................... $162 $603 $992 $551 $220 $629 $3,157 $3,196
==== ==== ==== ==== ==== ==== ====== ======
</TABLE>
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Year 2000
The year 2000 problem concerned the inability of computer systems and
devices to properly recognize and process date-sensitive information when the
year changed to 2000. Stone Container depends upon its information technology
("IT") and non-IT (used to run manufacturing equipment that contain embedded
hardware or software that must handle dates) to conduct and manage its
business.
Stone Container utilized both internal and external resources to evaluate
the potential impact of the year 2000 problem and established a year 2000
Program Management Office to guide and coordinate the efforts of its operating
units in developing and executing its plan. The year 2000 Program Management
Office instituted a seven-phase approach, which enabled Stone Container to
identify all systems and devices that were determined to be susceptible to the
year 2000 problem. Corrective actions were initiated and affected systems or
devices were replaced, repaired or upgraded. Through December 31, 1999, Stone
Container spent approximately $15 million to correct the year 2000 problem.
Stone Container does not expect to spend any significant amounts in the future
on year 2000 related problems.
Subsequent to midnight on December 31, 1999 (the "Rollover Date"), Stone
Container's financial and administrative systems, communication links, and
process control systems, which control and monitor production, power, emissions
and safety, were verified for operational capability. Only minor issues,
relating to these systems were noted. Stone Container has conducted and managed
normal business operations as planned, since the Rollover Date and has not
experienced any loss of production at any mill or converting facility as a
result of the year 2000 problem. Minor issues, which surfaced at mills and
converting facilities, were addressed and resolved typically within one day.
Stone Container was able to provide customers, upon request, verification of
operational capability on January 1, 2000. Furthermore, Stone Container was not
adversely impacted by any disruption of raw materials, supplies or services
provided by key vendors or suppliers.
Stone Container's year 2000 Program Management Office continues to check for
year 2000 issues. However, given the amount of system activity since the
Rollover Date, Stone Container does not expect any major problems related to
the year 2000 problem.
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THE ST. LAURENT ACQUISITION
On May 31, 2000, Smurfit-Stone completed its acquisition of St. Laurent
Paperboard Inc. pursuant to an amended and restated pre-merger agreement, dated
as of April 13, 2000, among Smurfit-Stone, Stone Container, 371174 Canada Inc.,
3038727 Nova Scotia Company and St. Laurent. This section provides information
on St. Laurent as it was organized and operated until May 31, 2000, before its
acquisition by Smurfit-Stone.
St. Laurent is a leading North American manufacturer, supplier and converter
of high quality, value-added paperboard products. St. Laurent serves a diverse
customer base in North America and selected international markets. St. Laurent
has two primary business segments: (1) Paperboard and (2) Paperboard Converting
and Packaging.
Business Segments
Paperboard Segment
The primary products of St. Laurent's Paperboard segment include:
. white top linerboard,
. corrugating medium,
. unbleached kraft linerboard and
. solid bleached paperboard (foodboard and linerboard).
These products are produced at four primary mills located in Canada and the
United States. Approximately 54% of St. Laurent's primary mill capacity is
dedicated to the production of high-quality, value-added grades of paperboard.
St. Laurent is the leading North American producer of white top linerboard and
has an estimated 32% North American market share. Sales for St. Laurent's
Paperboard segment in 1999 were $614 million, including $90 million of
intersegment sales.
In 1999, paperboard comprised approximately 57% of St. Laurent's total net
sales to third parties. In 1999, the St. Laurent paperboard mills produced in
the aggregate approximately 1,533,000 tons of paperboard comprised of
. 683,300 tons of white top linerboard,
. 443,300 tons of corrugating medium,
. 295,000 tons of unbleached linerboard and
. 110,800 tons of solid bleached paperboard (foodboard and linerboard).
Shipments of paperboard from St. Laurent's primary mills to third parties
increased by 46,000 tons, or 3.6%, despite the permanent shutdown of the West
Point, Virginia mill's pulp machine during the fourth quarter of 1998.
The West Point, Virginia mill is St. Laurent's largest facility. It produces
white top linerboard, corrugating medium and unbleached kraft linerboard. The
West Point mill's annual production capacity is approximately 800,000 tons. Of
this tonnage, approximately 340,000 tons are dedicated to the production of
white top
linerboard. In 1999, a key initiative for the mill was its successful switch
from an acid to an alkaline papermaking process. This switch enabled the mill
to improve the appearance of its white top linerboard without adding any
additional cost to its production process.
The La Tuque, Quebec mill is St. Laurent's second largest facility. It
mainly produces white top linerboard, solid bleached foodboard and solid
bleached linerboard. Its annual production capacity is approximately 463,000
tons. Of this tonnage, approximately 352,000 tons are dedicated to white top
linerboard.
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The mill produced a record 457,000 tons of paperboard in 1999, an increase of
6% over 1998 production figures.
In May 1999, St. Laurent announced an investment of approximately $25
million to reinforce the La Tuque mill's position as the leading manufacturing
facility of value-added paperboard grades. The investment will allow the mill
to convert part of its existing white top linerboard production capacity into
lightly coated white top linerboard. Lightly coated white top linerboard offers
enhanced quality and printing characteristics. According to St. Laurent's
research, the consumption of this grade of white top linerboard has increased
at a compounded annual growth rate of more than 40% since 1995. As a result of
this investment, St. Laurent will become one of the first North American
paperboard manufacturers to produce a coated white top linerboard.
Commercial production of lightly coated white top linerboard is scheduled to
begin during the second quarter of 2000, ramping-up capacity over a period of
two to three years to 50,000 tons annually. Another key initiative for the La
Tuque mill in 1999 was its successful switch from an acid to an alkaline
papermaking process. This switch enabled the mill to cut its fiber usage and
fiber costs by approximately $3.6 million.
St. Laurent's Matane, Quebec corrugating medium mill has an annual
production capacity of approximately 152,000 tons. In 1999, total production
output was 146,400 tons, a 2.3% increase over 1998 production figures.
St. Laurent's fourth primary mill is located in Thunder Bay, Ontario. The
Thunder Bay mill produces lightweight and featherweight corrugating medium in
basis weights as low as 14 lbs. In 1999, production of featherweight
corrugating medium increased by 8% to approximately 25,000 tons, representing
22% of the mill's total production output. The Thunder Bay mill has an annual
production capacity of approximately 140,000 tons. Despite its increased
production of featherweight corrugating medium, the Thunder Bay mill's overall
productivity climbed to 138,554 tons, a 10.3% increase compared to 1998.
Paperboard Converting and Packaging Segment
The primary products of St. Laurent's Converting and Packaging segment
include:
. corrugated containers and sheets,
. litho-labeled and direct-printed retail packaging,
. point-of-purchase displays,
. post-print,
. specialty and protective packaging products,
. cupstock and
. baconboard.
Sales for St. Laurent's Paperboard Converting and Packaging segment in 1999
were $363 million.
St. Laurent currently owns and operates 17 converting plants located in the
provinces of Ontario and Quebec, and eight states located primarily in the
eastern United States. Each plant serves a broad range of customers with highly
specialized products. Each plant is equipped with design capabilities and
production equipment to provide superior packaging products and solutions to
its customers. These converting plants consume the equivalent of approximately
37% of St. Laurent's primary mill paperboard production. In 1999, approximately
40% of St. Laurent's total net sales to third parties were of converted
paperboard and packaging products manufactured by its converting plants.
During 1999, St. Laurent continued to grow its paperboard converting and
packaging operations with significant acquisitions and investments in new and
existing facilities. During the fourth quarter of 1998, St. Laurent began an
expansion program of its Latta, South Carolina specialty packaging and display
plant. St.
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<PAGE>
Laurent completed this program during the second quarter of 1999 at a cost of
approximately $9.8 million. This investment has enabled the plant to offer one-
stop shopping for high-end services and products to meet the packaging needs of
those of St. Laurent's customers who are active in, and require, specialty
consumer packaging. Such specialty packaging includes
. multi-color printing,
. point-of-purchase displays,
. litho-laminating and labeling,
. expert structural and graphic design,
. digital imaging capabilities and
. fulfillment services.
On February 1, 1999, St. Laurent's 49% owned affiliate completed the
acquisition of all of the assets of Eastern Container Corporation, a privately
held corporation headquartered in Springfield, Massachusetts, for a purchase
price of $46.8 million. Eastern Container's assets consist of, among other
things, three packaging converting facilities serving the New England states
and greater New York markets. These facilities produce
. high quality specialty and protective packaging (triple wall/wood/foam
packaging),
. corrugated sheets and containers,
. industrial and consumer packaging and
. point of purchase displays and packaging for the retail and high tech
industries.
Combined, the Eastern Container facilities employ approximately 560 people and
produce approximately 830 million square feet of industrial and consumer
packaging.
St. Laurent and an independent institutional investor respectively invested
$9.6 million and $10.0 million and financed the balance of the purchase price
with the 49% owned affiliate's debt. As part of the consideration to finance
the acquisition, St. Laurent agreed to issue a maximum of 705,000 warrants to
the independent institutional investor. These warrants, when vested over a
three year period, give the investor the right to acquire shares of St. Laurent
common stock. At the closing of the St. Laurent acquisition, 380,000 warrants
were issued to the independent institutional investor. St. Laurent also
negotiated various rights to acquire the remaining 51% interest in its 49%
owned affiliate. At closing, St. Laurent's 49% owned affiliate changed its name
to Eastern Container Corporation. Finally, on December 3, 1999, St. Laurent
acquired the remaining 51% interest in its affiliate and, as a result, all
unissued warrants were cancelled. On February 23, 2000, the independent
institutional investor exercised its rights to convert the 380,000 warrants
into 380,000 shares of St. Laurent common stock.
On May 28, 1999, St. Laurent completed the acquisition of the assets of
Castle Rock Container Company, a division of Consolidated Papers, Inc. This
acquisition also fit with St. Laurent's strategic objectives of focusing on
value-added niche products, and maximizing shareholder value by increasing its
vertical integration through growth in value-added converting capacity. Castle
Rock Container is a leading custom manufacturer of high-quality corrugated
packaging, point of purchase displays and communication kits. Castle Rock
Container operates a 350,000 square foot facility located in Adams, Wisconsin.
The facility employs approximately 240 people.
During the fourth quarter of 1999, St. Laurent began production at Grafx
Packaging Corp., its new sheet plant located in Columbus, Ohio. This sheet
plant is the first of its kind in North America. It currently produces
microfluted corrugated packaging for both the folding carton and corrugated
segment of the packaging industry. It also provides innovative packaging
solutions to St. Laurent's customers from corrugated, microfluted sheets
manufactured at Innovative Packaging Corp., St. Laurent's state-of-the-art
sheet feeding facility located in Milwaukee, Wisconsin.
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<PAGE>
On December 22, 1999, St. Laurent completed the acquisition of the assets of
The Kimball Companies through its wholly-owned subsidiary, Eastern Container
Corporation. The Kimball Companies is a leading manufacturer of protective
packaging, including triple wall, wood, foam and corrugated packaging. The
Kimball Companies serves the Northeast United States market. As a result of the
acquisition, St. Laurent, through Eastern Container Corporation, has become the
leading supplier of protective packaging in this market.
During the first quarter of 1999, St. Laurent sold its Markham, Ontario
building and real estate. In January 2000, St. Laurent opened a new packaging
facility located in Pickering, Ontario. The new facility's production is
focused on high-end, value-added packaging products and solutions including
. point-of-purchase displays,
. graphics packaging,
. litho laminating and
. labeling.
St. Laurent's newest subsidiary and initiative is NextPak.com, Corp., which
began operating in December 1999. NextPak.com is tailored to focus on internet
retailers, a segment of electronic commerce that has seen rapid growth. Now
fully operational, NextPak.com offers a full range of packaging products and
services, providing e-tailers with integrated packaging solutions that enable
them to market and fulfil their products more cost-efficiently.
Finally, to increase its bulk packaging production capacity, St. Laurent
invested $1.1 million to acquire a new bulk box laminator for its Baltimore,
Maryland bulk packaging plant. This custom-built machine is scheduled to be
operational by the third quarter, 2000. Once operational, it will give the
Baltimore plant additional production capacity and flexibility in this
packaging segment. This investment will effectively double the plant's
production capacity of laminated bulk boxes. Through this initiative, St.
Laurent will enhance its leadership position in the production of bulk
packaging solutions.
In January 2000, St. Laurent completed the sale to Elopak Canada of its
liquid packaging plant located in St. Leonard, Quebec. The plant annually
produces approximately 400 million gable top cartons that are supplied to dairy
and juice producers. This divestiture corresponds with St. Laurent's strategic
objective of focusing on its core, value-added quality niche packaging and
paperboard products.
Other Operations
In July 1999, in order to reduce the West Point mill's fiber costs and
enhance its competitiveness, St. Laurent acquired the building products assets
and business of Chesapeake Corporation. The acquired assets include
. two pine sawmills located in West Point, Virginia and Princess Anne,
Maryland;
. a hardwood lumber re-processing facility located in Milford, Virginia and
. a chip mill located in Pocomoke City, Maryland.
The two sawmills have a combined annual capacity of 60 million board feet, and
the chip mill has an annual capacity of 300,000 short tons. As a result of this
acquisition, St. Laurent owns and manages three sawmills with a total capacity
of 70 million board feet. St. Laurent also owns and manages approximately
920,000 acres of private timberlands in the Province of Quebec north of its La
Tuque, Quebec mill. These timberlands are used to secure fiber for the mill by
granting cutting rights to third parties in return for long term wood chips and
sawdust fiber supply agreements. St. Laurent also operates a recycled fiber
procurement division that ensures the old corrugated container supply
requirements of its mills in Matane, Quebec, Thunder Bay, Ontario and West
Point, Virginia.
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<PAGE>
Sales and Marketing
In 1999, St. Laurent reorganized its paperboard marketing and sales group in
order to
. support its new products,
. better serve its customers and
. explore new sales opportunities to increase its share of value-added
sales of high-quality paperboard substrates in North America and selected
international markets.
This reorganization created three areas of responsibility:
. containerboard sales,
. foodboard sales and
. graphic and specialty sales.
St. Laurent has also implemented a more comprehensive marketing
communications strategy focused on re-launching the St. Laurent brand by
increasing the level of awareness in its various markets and optimizing the
sales process. Beginning in the first quarter of 2000, this marketing and
communication strategy calls for
. print advertising in trade magazines,
. trade show participation,
. brochures,
. direct mail,
. ongoing public relations efforts and
. a point-of-sale system.
A key component of this reorganization is the creation of St. Laurent's graphic
and specialty sales team. The team's goal is to grow St. Laurent's high-end
bleached and coated white top linerboard business by increasing sales to the
pre-print, high-end post-print, display design and packaged goods segments of
the packaging industry.
In 1999, approximately 15% of St. Laurent's net sales of paperboard were to
its own converting facilities. St. Laurent also uses trading arrangements with
other producers of containerboard to
. secure additional white top linerboard sales,
. procure unbleached kraft linerboard and corrugating medium for its own
converting plants and
. reduce the costs associated with shipping paperboard to its converting
plants and third party customers.
Approximately 33% of St. Laurent's total sales of white top linerboard in 1999
were transacted under such arrangements.
On the paperboard converting and packaging side of its business, St. Laurent
primarily relies on the sales force located at each of its converting
facilities to introduce and deliver a wide range of proven products and
services custom-tailored to its customers' needs. To assist the packaging
marketing and sales forces in reaching their goals, each of St. Laurent's
containerboard converting plants has been designed to offer new packaging
products and services by, among other things, upgrading or expanding their
design and graphics capabilities and competencies. Furthermore, in 1999, St.
Laurent opened three new sales offices with expanded design capabilities to
ensure a greater presence in the key markets of Atlanta, Georgia, Charlotte,
North Carolina and Milwaukee, Wisconsin. In 2000, St. Laurent plans to
establish a new design and graphics center in Richmond, Virginia. This center
will maximize the ability of St. Laurent's converting plants in Baltimore,
Maryland and Roanoke and Richmond, Virginia to fully meet the ever-expanding
customer requirements for multi-color graphics, point-of-purchase displays, co-
packing and fulfilment.
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Competition
St. Laurent generally competes against a number of North American producers
in each of its product lines. St. Laurent considers its principal competitors
in white top linerboard to be International Paper and Green Bay Packaging. In
its other product lines, St. Laurent considers its principal competitors to be
Norampac, Georgia-Pacific, International Paper, Mead and Visy Industries. In
corrugated containers, St. Laurent competes against a number of producers who
have converting facilities within a limited radius of its customers. While the
marketplace demands competitive pricing, quality and service are often
determining factors. St. Laurent believes that it is positioned to compete
effectively against other paperboard producers from Canada, the United States
and abroad in the production of its paperboard products and against other
corrugated container producers in its regional markets for converted products
and services.
Research and Development
St. Laurent has built a team of researchers and applied scientists to
continue to develop state-of-the-art products and technologies for its primary
mills and packaging plants. St. Laurent's research and development team is
located in Montreal, Quebec. In addition to this team, St. Laurent has
established a research organization network to support its ongoing product
development initiatives in fields of expertise such as
. coating and paper technology,
. packaging printing,
. coating and fiber,
. coating technology and
. coating machinery.
In February 1999, St. Laurent's Marketing and Technical Centre "MTC" began
operations to support St. Laurent's packaging business. Located in Richmond,
Virginia, this marketing-focused R&D center is a full-featured laboratory
equipped to handle most corrugated packaging tests. The MTC works closely with
St. Laurent's customers to ensure that their expectations are met. The MTC is
also dedicated to the development of new specialty packaging products and
production techniques. The MTC has also developed training services for St.
Laurent's customers and employees to keep them up-to-date on new industry
initiatives.
Environmental Compliance
St. Laurent's operations are subject to a wide range of federal, provincial,
state and local environmental laws and regulations dealing, among other things,
with air emissions, wastewater discharge, waste management and landfill sites.
Except as may be otherwise discussed in this proxy statement/prospectus, all of
St. Laurent's facilities are in material compliance with current environmental
laws and regulations.
In April 1999, the U.S. Environmental Protection Agency and the Virginia
Department of Environmental Quality (the "Virginia DEQ") each issued a notice
of violation under the Clean Air Act to St. Laurent's primary mill located in
West Point, Virginia, which was acquired from Chesapeake Corporation in May,
1997. In general, the notices of violations allege that, from 1984 to the
present, the West Point mill installed certain equipment and modified certain
production processes without obtaining the required permits. In the purchase
agreement between St. Laurent and Chesapeake Corporation, Chesapeake
Corporation agreed to indemnify St. Laurent for remediation work resulting from
violations of applicable laws, including the Clean Air Act, that existed at the
mill before and on the date of the purchase agreement, as to which Chesapeake
Corporation had "knowledge" (as defined in the purchase agreement), up to a
maximum of $50 million. While such costs cannot be estimated with certainty at
this time, based on presently available information, St. Laurent believes that
the cost of remediation work, which represents capital expenditures comprising
engineering, procurement and construction work of mill modifications (including
the installation of air emission controls, etc.) associated with the notices of
violations may approximate $25 million. In addition, civil or criminal
penalties may be
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pursued by the EPA and Virginia DEQ; however, based upon discussions with the
EPA and Virginia DEQ to date, St. Laurent believes that the total cost of
remediation work associated with the notices of violations and fines and
penalties that may be imposed by the EPA and Virginia DEQ will not exceed the
maximum amount of Chesapeake Corporation's indemnification obligation. St.
Laurent and Chesapeake Corporation have appointed a third party arbitrator to
decide the scope and timing of future remediation work that is the subject of
the indemnification in the purchase agreement. The arbitrator has ruled that
any fines and penalties that may result from any breach of Chesapeake
Corporation's representations and warranties arising out of the notices of
violations, either by adjudication or settlement, are part of the costs and
expenses that are subject to reimbursement by Chesapeake Corporation to St.
Laurent under the purchase agreement. By agreement of the parties, the 30-month
period for reimbursement by Chesapeake Corporation of costs and expenses
incurred by St. Laurent under the provisions of the purchase agreement has been
extended indefinitely. St. Laurent and Chesapeake Corporation are cooperating
to analyze, respond to, and defend against the matters alleged in the notices
of violations and, with the assistance of the arbitrator, are working together
in attempting to develop and implement a remediation plan which will provide
for a cost-effective resolution of the issues raised by the notices of
violations.
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OPINION OF FINANCIAL ADVISOR
Deutsche Bank has acted as financial advisor to Stone Container in
connection with the proposed merger of SCC Merger Co. and Stone Container in
accordance with the merger agreement. At the August 8, 2000 meeting of the
board of directors of Stone Container, Deutsche Bank delivered its oral
opinion, subsequently confirmed in writing as of the same date, to the board of
directors of Stone Container to the effect that, as of the date of such
opinion, based upon and subject to the assumptions made, matters considered and
limits of the review undertaken by Deutsche Bank, the consideration to be
received by the holders of Series E Preferred Stock under the merger agreement
was fair, from a financial point of view, to the holders of Series E Preferred
Stock.
The full text of Deutsche Bank's written opinion, dated August 8, 2000,
which sets forth among other things, the assumptions made, matters considered
and limits on the review undertaken by Deutsche Bank in connection with its
opinion, is attached as Annex E to this proxy statement/prospectus and is
incorporated herein by reference. You are urged to read Deutsche Bank's opinion
in its entirety. The summary of Deutsche Bank's opinion set forth in this proxy
statement/prospectus is qualified in its entirety by reference to the full text
of Deutsche Bank's opinion.
Materials summarizing Deutsche Bank's analyses in connection with its
opinion as to the fairness of the consideration to be received by the holders
of Series E Preferred Stock were presented on August 8, 2000 before the meeting
of the board of directors of Stone Container. Copies of these materials are
available for inspection and copying at Stone Container's principal executive
offices at 150 North Michigan Avenue, Chicago, Illinois 60601, during regular
business hours, by any interested Stone Container stockholder or representative
who has been so designated in writing. We have also filed these materials with
the SEC as an exhibit to the Form S-4 registration statement filed in
connection with the merger. You may obtain these materials from the SEC in the
same manner as set forth on Stone Container's SEC filings under "Where You Can
Find More Information", beginning on page 131.
In connection with Deutsche Bank's role as financial advisor to Stone
Container, and in arriving at its opinion, Deutsche Bank has, among other
things:
. reviewed certain publicly available financial and other information
concerning Stone Container and Smurfit-Stone;
. reviewed certain internal analyses and other information furnished to it
by Stone Container and Smurfit-Stone;
. held discussions with members of the senior managements of Stone
Container and Smurfit-Stone regarding the business and prospects of Stone
Container and Smurfit-Stone;
. reviewed the reported prices and trading activity for the Series E
Preferred Stock;
. compared the terms of the Series E Preferred Stock with the terms of the
Smurfit-Stone Series A Preferred Stock and performed financial analyses
related thereto;
. reviewed certain financial projections of Stone Container and Smurfit-
Stone and performed financial analyses related thereto;
. reviewed the merger agreement and certain related documents;
. reviewed the draft dated July 25, 2000 of the Form S-4 registration
statement for Smurfit-Stone; and
. performed such other studies and analyses and considered such other
factors as it deemed appropriate.
In preparing its opinion, Deutsche Bank did not assume responsibility for
the independent verification of, and did not independently verify, any
information, whether publicly available or furnished to it, concerning Stone
Container or Smurfit-Stone, including, without limitation, any financial
information, forecasts or projections considered in connection with the
rendering of its opinion. Accordingly, for purposes of its opinion,
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Deutsche Bank assumed and relied upon the accuracy and completeness of all
such information. Furthermore, Deutsche Bank did not conduct a physical
inspection of any of the properties or assets, and did not prepare or obtain
any independent evaluation or appraisal of any of the assets or liabilities,
of Stone Container or Smurfit-Stone. With respect to the financial forecasts
and projections made available to Deutsche Bank and used in its analyses,
Deutsche Bank assumed that they were reasonably prepared on bases reflecting
the best currently available estimates and judgments of the management of
Stone Container and Smurfit-Stone as to the matters covered thereby. In
rendering its opinion, Deutsche Bank expressed no view as to the
reasonableness of such forecasts and projections or the assumptions on which
they are based. Deutsche Bank's opinion was necessarily based upon economic,
market and other conditions as in effect on, and the information made
available to it as of, the date of its opinion.
For purposes of rendering its opinion, Deutsche Bank assumed that, in all
respects material to its analysis:
. the representations and warranties of Stone Container, SCC Merger Co. and
Smurfit-Stone contained in the merger agreement were true and correct;
. Stone Container, SCC Merger Co. and Smurfit-Stone will each perform all
of the covenants and agreements to be performed by it under the merger
agreement;
. all conditions to the obligations of each of Stone Container, SCC Merger
Co. and Smurfit-Stone to consummate the merger will be satisfied without
any waiver thereof;
. all material governmental, regulatory or other approvals and consents
required in connection with the consummation of the merger will be
obtained;
. in connection with obtaining any necessary governmental, regulatory or
other approvals and consents, or any amendments, modifications or waivers
to any agreements, instruments or orders to which any of Stone Container,
SCC Merger Co. or Smurfit-Stone is a party or is subject or by which it
is bound, no limitations, restrictions or conditions will be imposed or
amendments, modifications or waivers made that would have a material
adverse effect on Stone Container, SCC Merger Co. or Smurfit-Stone or
materially reduce the contemplated benefits of the merger; and
. Smurfit-Stone will receive sufficient funds from intercompany loans
necessary to consummate the merger and pay the cash portion of the
consideration to be received by the holders of Series E Preferred Stock
in connection with the merger.
The following is a summary of the material financial analyses performed by
Deutsche Bank in reaching its opinion. This summary does not purport to be a
complete description of the analyses performed by Deutsche Bank. The following
quantitative information, to the extent it is based on market data, is based
on market data as it existed at or about August 4, 2000 and is not necessarily
indicative of current market conditions. You should understand that the order
of analyses and the results derived from these analyses described below do not
represent relative importance or weight given to these analyses by Deutsche
Bank.
Historical Series E Preferred Stock Performance. Deutsche Bank reviewed and
analyzed recent and historical market prices and trading volume for shares of
Series E Preferred Stock. Deutsche Bank observed that the closing price for
shares of Series E Preferred Stock on August 4th, 2000 was $15.125 and that
the average daily closing prices and the average daily volumes during the one-
month, three-month, six-month and twelve-month periods preceding that date
were as follows:
<TABLE>
<CAPTION>
Series E Preferred Stock
Average Daily Volumes
-------------------------
As a % of total
Series E Preferred Series E Preferred
Stock Average Stock Shares
Closing Price Volume Outstanding
------------------ ------ ------------------
<S> <C> <C> <C>
One month daily average...... $16.15 3,633 0.08%
Three month daily average.... 16.58 4,207 0.09
Six month daily average...... 17.20 4,698 0.10
Twelve month daily average... 19.42 5,849 0.13
</TABLE>
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Deutsche Bank also observed that the 52-week trading range preceding August
4, 2000 was as follows:
<TABLE>
<S> <C>
52-Week Low (8/4/00) 52-Week High (12/31/99)
------------------------------- -------------------------------
$15.125 $23.50
</TABLE>
Equity Derivative Valuation. Deutsche Bank performed an equity derivative
valuation of the Series E Preferred Stock and the Smurfit-Stone Series A
Preferred Stock based upon certain assumptions related to:
. the timing of the receipt of dividends;
. the volatility in the price of shares of Smurfit-Stone common stock; and
. the discount rate to be applied to the expected dividends and liquidation
payments
In conducting the equity derivative valuation, Deutsche Bank assumed the
following with respect to the Series E Preferred Stock and the Smurfit-Stone
Series A Preferred Stock:
<TABLE>
<CAPTION>
Stone Container Smurfit-Stone
Series E Preferred Stock Series A Preferred Stock
---------------------------------------- ----------------------------------------
<S> <C> <C>
Liquidation price: $25 $25
Convertible into shares of Smurfit-Stone Convertible into shares of Smurfit-Stone
Conversion feature: common stock common stock
Conversion ratio: 0.7293 0.7293
Maturity date: 100 years 12 years
Current Smurfit-Stone
Common Stock per share
price: $11.25 $11.25
Smurfit-Stone Common
Stock per share price
volatility: 35%-45% 35%-45%
Discount rate: 12.7%-14.7% 12.7%-14.7%
</TABLE>
Deutsche Bank also assumed that all dividends with respect to the Series E
Preferred Stock and the Smurfit-Stone Series A Preferred Stock dividends were
paid in cash on a quarterly basis and that all shares of common stock of
Smurfit-Stone did not pay any dividend while the Series E Preferred Stock and
the Smurfit-Stone Series A Preferred Stock remained outstanding.
On these assumptions, Deutsche Bank calculated that, excluding the value of
accrued dividends, the theoretical per share value range for the Series E
Preferred Stock was from $14.49-$16.54 and for the Smurfit-Stone Series A
Preferred Stock was from $18.96-$ 20.62.
Dividend Discount Model. Deutsche Bank conducted a dividend discounted cash
flow analysis for both the Series E Preferred Stock and the Smurfit-Stone
Series A Preferred Stock under each of the following four dividend payment
scenarios:
. Scenario 1: All dividends paid in cash with (i) dividends with respect to
the Series E Preferred Stock to be paid starting on February 15, 2001 and
(ii) dividends with respect to the Smurfit-Stone Series A Preferred Stock
to be paid after the merger closes.
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<PAGE>
. Scenario 2: Dividends paid in cash to the extent permitted under existing
borrowing agreements and commencing (i) with respect to the Series E
Preferred Stock, in May 2003 when, based on the Company's projections,
Stone's restricted payment baskets are forecasted to be positive and (ii)
with respect to the Smurfit-Stone Series A Preferred Stock, after the
closing of the merger.
. Scenario 3: No dividends are declared or paid.
. Scenario 4: No cash dividends are paid, but paid-in-kind dividends are
declared on the Smurfit-Stone Series A Preferred Stock.
Deutsche Bank based the dividend discounted cash flow analyses conducted for
each of the four foregoing scenarios on the assumptions set forth below:
. Redemption/Conversion Assumptions:
--Redemption/conversion on February 15, 2001 at $25.175 per share;
--Redemption/conversion on February 15, 2002 at $25 per share;
--Redemption/conversion on February 15, 2012 at $25 per share;
--Non-redemption in the case of the Series E Preferred Stock; and
--Value at conversion equals the liquidation value/optional redemption
value.
. Assumed Closing Date of the Merger:
--Merger closes on October 15, 2000.
. Merger related expenses:
--$0.12 per share
. Dividend Payment Assumptions:
--Accrued Dividends: dividends with respect to the Series E Preferred
Stock are assumed to be paid on the first cash dividend declaration.
Based on a range of discount rates of 10% to 20% , the following tables set
forth (i) the implied value ranges for the Series E Preferred Stock and the
consideration to be received by the holders of Series E Preferred Stock in the
merger assuming the specified redemption/conversion dates and (ii) the
difference between such implied values under each of the dividend payment
scenarios.
Scenario 1--All Cash Dividend Payment
<TABLE>
<CAPTION>
Assumed date of redemption/conversion
-----------------------------------------------------------------------------------
02/15/01 02/15/02 02/15/12 Perpetual/2012
-------------------- -------------------- -------------------- --------------------
Discount Series Merger Series Merger Series Merger Series Merger
Rate E consideration E consideration E consideration E consideration
-------- ------ ------------- ------ ------------- ------ ------------- ------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
10.0% $30.61 $30.69 $29.85 $29.93 $26.20 $26.29 $23.91 $26.29
12.5 30.25 30.38 29.01 29.13 23.01 23.14 20.34 23.14
15.0 29.91 30.08 28.20 28.38 20.48 20.65 17.94 20.65
17.5 29.57 29.79 27.44 27.66 18.45 18.66 16.21 18.66
20.0 29.25 29.50 26.72 26.98 16.80 17.06 14.89 17.06
<CAPTION>
Difference Difference Difference Difference
<S> <C> <C> <C> <C> <C> <C> <C> <C>
10.0% $0.08 $0.08 $0.08 $2.37
12.5 0.13 0.13 0.13 2.79
15.0 0.17 0.17 0.17 2.71
17.5 0.21 0.21 0.21 2.45
20.0 0.26 0.26 0.26 2.16
</TABLE>
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<PAGE>
Scenario 2--Dividends Paid in Cash to the extent permitted under Borrowing
Agreements
<TABLE>
<CAPTION>
Assumed date of redemption/conversion
-----------------------------------------------------------------------------------
02/15/01 02/15/02 02/15/12 Perpetual/2012
-------------------- -------------------- -------------------- --------------------
Discount Series Merger Series Merger Series Merger Series Merger
Rate E consideration E consideration E consideration E consideration
-------- ------ ------------- ------ ------------- ------ ------------- ------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
10.0% $30.61 $30.69 $29.19 $29.93 $24.61 $26.29 $22.32 $26.29
12.5 30.25 30.38 28.21 29.13 21.12 23.14 18.45 23.14
15.0 29.91 30.08 27.28 28.38 18.31 20.65 15.78 20.65
17.5 29.57 29.79 26.40 27.66 16.04 18.66 13.80 18.66
20.0 29.25 29.50 25.57 26.98 14.17 17.06 12.26 17.06
<CAPTION>
Difference Difference Difference Difference
<S> <C> <C> <C> <C> <C> <C> <C> <C>
10.0% $0.08 $0.74 $1.67 $3.96
12.5 0.13 0.93 2.02 4.69
15.0 0.17 1.10 2.34 4.87
17.5 0.21 1.26 2.62 4.86
20.0 0.26 1.41 2.89 4.80
</TABLE>
Scenario 3--No Dividends Declared
<TABLE>
<CAPTION>
Assumed date of redemption/conversion
-----------------------------------------------------------------------------------
02/15/01 02/15/02 02/15/12 Perpetual/2012
-------------------- -------------------- -------------------- --------------------
Discount Series Merger Series Merger Series Merger Series Merger
Rate E consideration E consideration E consideration E consideration
-------- ------ ------------- ------ ------------- ------ ------------- ------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
10.0% $30.61 $30.68 $29.19 $29.79 $17.08 $20.94 -- $20.94
12.5 30.25 30.37 28.21 28.96 13.18 17.48 -- 17.48
15.0 29.91 30.06 27.28 28.18 10.23 14.86 -- 14.86
17.5 29.57 29.77 26.40 27.44 7.98 12.86 -- 12.86
20.0 29.25 29.48 25.57 26.73 6.26 11.32 -- 11.32
<CAPTION>
Difference Difference Difference Difference
<S> <C> <C> <C> <C> <C> <C> <C> <C>
10.0% $0.07 $0.60 $3.86 $20.94
12.5 0.12 0.76 4.30 17.48
15.0 0.16 0.90 4.63 14.86
17.5 0.20 1.04 4.87 12.86
20.0 0.24 1.16 5.06 11.32
</TABLE>
Scenario 4--No Cash Dividends Paid, but Series A Preferred Stock Paid-in-Kind
Dividends Declared
<TABLE>
<CAPTION>
Assumed date of redemption/conversion
-----------------------------------------------------------------------------------
02/15/01 02/15/02 02/15/12 Perpetual/2012
-------------------- -------------------- -------------------- --------------------
Discount Series Merger Series Merger Series Merger Series Merger
Rate E consideration E consideration E consideration E consideration
-------- ------ ------------- ------ ------------- ------ ------------- ------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
10.0% $30.61 $30.69 $29.19 $29.89 $17.08 $24.41 -- $24.41
12.5 30.25 30.37 28.21 29.06 13.18 20.16 -- 20.16
15.0 29.91 30.07 27.28 28.27 10.23 16.94 -- 16.94
17.5 29.57 29.78 26.40 27.53 7.98 14.48 -- 14.48
20.0 29.25 29.49 25.57 26.82 6.26 12.59 -- 12.59
<CAPTION>
Difference Difference Difference Difference
<S> <C> <C> <C> <C> <C> <C> <C> <C>
10.0% $0.08 $0.70 $7.33 $24.41
12.5 0.12 0.85 6.98 20.16
15.0 0.16 1.00 6.70 16.94
17.5 0.20 1.13 6.49 14.48
20.0 0.24 1.25 6.33 12.59
</TABLE>
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<PAGE>
Credit Statistics Analysis. Deutsche Bank reviewed certain credit related
financial data for each of Stone Container, Smurfit-Stone and Jefferson Smurfit
Corporation. The following tables set forth the ratios for each of Stone
Container, Smurfit-Stone and Jefferson Smurfit Corporation (i) for calendar
years 1998 and 1999, (ii) for the latest twelve months ("LTM") ended March 31,
2000 (in the case of Stone Container and Smurfit-Stone, on an actual basis and
on a pro forma basis for the acquisition of St. Laurent), and (iii) for the
latest quarter ("LQ") run rate, of:
. earnings before interest, income taxes and depreciation and amortization
("EBITDA") to interest;
. EBITDA minus capital expenditures ("CAPEX") to interest;
. senior secured debt to EBITDA;
. senior debt to EBITDA; and
. total debt to EBITDA.
Stone Container
<TABLE>
<CAPTION>
Stone
Container
alone LTM 3/31/00 LQ run rate
--------- --------------------- ---------------------
Pro forma Pro forma
Actual-- for the Actual-- for the
Stone acquisition Stone acquisition
Container of St. Container of St.
1998 1999 Alone Laurent Alone Laurent
---- ---- --------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
EBITDA/interest......... 0.5x 1.5x 2.0x 2.0x 2.6x 2.5x
(EBITDA--
CAPEX)/interest........ 0.1 1.2 1.7 1.6 2.2 2.0
Senior secured
debt/EBITDA............ 9.4 2.6 3.1 3.4 2.3 2.7
Senior debt/EBITDA...... 14.5 4.8 3.9 4.0 2.9 3.2
Total debt/EBITDA....... 18.7 6.4 5.1 4.9 3.8 3.9
</TABLE>
Smurfit-Stone
<TABLE>
<CAPTION>
Smurfit-
Stone
alone LTM 3/31/00 LQ run rate
---------- -------------------- --------------------
Pro forma Pro forma
for the for the
Actual-- acquisition Actual-- acquisition
Smurfit- of St. Smurfit- of St.
1998 1999 Stone Laurent Stone Laurent
---- ---- -------- ----------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
EBITDA/interest........... 0.8x 1.7x 2.2x 2.2x 2.8x 2.7x
(EBITDA--CAPEX)/interest.. 0.2 1.4 1.8 1.7 2.4 2.2
Senior secured
debt/EBITDA.............. 6.9 2.3 2.5 2.9 2.2 2.5
Senior debt/EBITDA........ 10.6 4.6 3.9 4.0 3.4 3.5
Total debt/EBITDA......... 12.5 5.5 4.7 4.6 4.0 4.1
</TABLE>
Jefferson Smurfit Corporation
<TABLE>
<CAPTION>
Historicals
------------------------
LQ
LTM run
1998 1999 3/31/00 rate
---- ---- ------- ----
<S> <C> <C> <C> <C>
EBITDA/interest....................................... 1.6x 2.1x 2.6x 3.4x
(EBITDA--CAPEX)/interest.............................. 0.3 1.7 2.1 2.7
Senior secured debt/EBITDA............................ 5.1 1.8 1.7 1.9
Senior debt/EBITDA.................................... 8.0 4.2 4.0 4.3
Total debt/EBITDA..................................... 8.2 4.4 4.1 4.5
</TABLE>
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<PAGE>
Deutsche Bank also compared certain credit related financial information of
each of Stone Container and Smurfit-Stone with corresponding publicly available
data for a group of five packaging companies with publicly-traded high yield
debt outstanding, consisting of Gaylord Container Corporation, Kappa Beheer BV,
Norampac Inc., Packaging Corporation of America and Riverwood International
Corporation. The following table sets forth the values for each of Stone
Container, Smurfit-Stone and the selected companies for the LTM ended March 31,
2000 (in the case of Stone Container and Smurfit-Stone, on a pro-forma basis
for the acquisition of St. Laurent), of: (i) the ratio of EBITDA to interest,
(ii) the ratio of EBITDA minus CAPEX to interest and (iii) the ratio of debt to
EBITDA.
<TABLE>
<CAPTION>
LTM ended 03/31/00
--------------------------------------------------------------------
Kappa Packaging
Stone Smurfit- Gaylord Beheer Corp. of Riverwood
Container Stone Container BV Norampac America International
--------- -------- --------- ------ -------- --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
EBITDA/interest......... 2.0x 2.2x 1.3x 2.2x 5.0x 2.8x 1.5x
(EBITDA-CAPEX)/interest. 1.6 1.7 1.0 1.3 4.9 2.1 1.2
Debt/EBITDA............. 4.9 4.6 8.2 4.8 2.0 3.2 6.3
</TABLE>
The following table sets forth the values for each of Stone Container,
Smurfit-Stone and the selected companies for the LQ run rate (in the case of
Stone Container and Smurfit-Stone, on a pro forma basis for the acquisition of
St. Laurent), of: (i) the ratio of EBITDA to interest and (ii) the ratio of
EBITDA minus CAPEX to interest.
<TABLE>
<CAPTION>
LQ run rate
-----------------------------------------------------------------------
Packaging
Stone Smurfit- Gaylord Kappa Corp. of Riverwood
Container Stone Container Beheer BV Norampac America International
--------- -------- --------- --------- -------- --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
EBITDA/interest......... 2.5x 2.7x 1.3x 2.2x 5.8x 3.5x 1.4x
(EBITDA-CAPEX)/interest. 2.0x 2.2x 0.8x 1.1x 4.9x 2.3x 1.1x
</TABLE>
Deutsche Bank also reviewed the summary information related to the publicly-
traded debt securities of the selected companies set forth in the following
table.
<TABLE>
<CAPTION>
Rating
------------
Issue Coupon Maturity Moody's S&P Yield to worst
-------------------- ------ ---------- ------- ---- --------------
<S> <C> <C> <C> <C> <C> <C>
Gaylord Container Corp.. Sr. Notes 9.375 06/15/2007 Caa1 B- 13.98
Gaylord Container Corp.. Sr. Notes 9.750 06/15/2007 Caa1 B- 13.88
Gaylord Container Corp.. Sr. Sub Notes 9.875 02/15/2008 Caa2 CCC+ 19.03
Kappa Beheer BV
(Dollar)............... Sr. Sub Notes 10.625 07/15/2009 B2 B 10.32
Kappa Beheer BV (Euro).. Sr. Sub Notes 10.625 07/15/2009 B2 B 10.22
Kappa Beheer BV (Euro).. Sr. Sub. Disc. Notes 12.500 07/15/2009 B2 B 11.77
Norampac Inc............ Sr. Notes 9.500 02/01/2008 B1 BB 10.08
Packaging Corp of
America................ Sr. Sub Notes 9.625 04/01/2009 B2 B+ 9.66
Riverwood Int'l......... Sr. Notes 10.250 04/01/2006 B3 B- 11.12
Riverwood Int'l......... Sr. Notes 10.625 08/01/2007 B3 B- 11.15
Riverwood Int'l......... Sr. Sub Notes 10.875 04/01/2008 Caa1 CCC+ 13.24
</TABLE>
None of the companies utilized as a comparison is identical to Stone
Container or Smurfit-Stone. Accordingly, Deutsche Bank believes the analysis of
the selected companies is not simply mathematical. Rather, it involves complex
considerations and qualitative judgments, reflected in Deutsche Bank's opinion,
concerning differences in financial and operating characteristics of the
selected companies and other factors that could affect the creditworthiness of
the selected companies.
Other Factors and Comparative Analyses. In its presentation to the board of
directors of Stone Container, Deutsche Bank reviewed other factors and
comparative analyses, including, among other things, (i) the
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historical and pro forma financial profile of Stone Container and Smurfit-Stone
and (ii) the redemption features of the Series E Preferred Stock and the
Smurfit-Stone Series A Preferred Stock.
The foregoing summary describes analyses and factors that Deutsche Bank
deemed material in its presentation to the board of directors of Stone
Container, but is not a comprehensive description of all analyses performed and
factors considered by Deutsche Bank in connection with preparing its opinion.
The preparation of a fairness opinion is a complex process involving the
application of subjective business judgment in determining the most appropriate
and relevant methods of financial analysis and the application of those methods
to the particular circumstances and, therefore, is not readily susceptible to
summary description. Deutsche Bank believes that its analyses must be
considered as a whole and that considering any portion of such analyses and of
the factors considered without considering all analyses and factors could
create a misleading view of the process underlying the opinion. In arriving at
its fairness determination, Deutsche Bank did not assign specific weights to
any particular analyses.
In conducting its analyses and arriving at its opinions, Deutsche Bank
utilized a variety of valuation methods. The analyses were prepared solely for
the purpose of enabling Deutsche Bank to provide its opinion to the board of
directors of Stone Container as to the fairness, from a financial point of
view, to holders of Series E Preferred Stock of the consideration to be
received by them in connection with the merger. The analyses do not purport to
be appraisals or necessarily reflect the prices at which securities actually
may be sold, which are inherently subject to uncertainty. In connection with
its analyses, Deutsche Bank made, and was provided by the management of Stone
Container with, numerous assumptions with respect to industry performance,
general business and economic conditions and other matters, many of which are
beyond the control of Stone Container and Smurfit-Stone. Analyses based on
estimates or forecasts of future results are not necessarily indicative of
actual past or future values or results, which may be significantly more or
less favorable than suggested by such analyses. Because such analyses are
inherently subject to uncertainty, being based upon numerous factors or events
beyond the control of Stone Container, Smurfit-Stone or their respective
advisors, neither Stone Container nor Deutsche Bank nor any other person
assumes responsibility if future results or actual values are materially
different from these forecasts or assumptions.
The terms of the merger were determined through negotiations between Stone
Container and Smurfit-Stone and were approved by the board of directors of
Stone Container. Deutsche Bank did not provide advice to Stone Container during
the course of these negotiations and the decision to enter into the merger
agreement was solely that of the board of directors of Stone Container. As
described above, the opinion and presentation of Deutsche Bank to the board of
directors of Stone Container were only one of a number of factors taken into
consideration by the board of directors of Stone Container in making its
determination to approve the merger. Deutsche Bank's opinion was provided to
the board of directors of Stone Container to assist it in connection with its
consideration of the merger and does not constitute a recommendation to any
holder of Series E Preferred Stock as to how to vote with respect to the
merger.
Stone Container selected Deutsche Bank, an affiliate of Deutsche Bank AG,
which together with its affiliates comprises Deutsche Bank Group, as financial
advisor in connection with the proposed merger based on Deutsche Bank's
qualifications, expertise, reputation and experience in mergers and
acquisitions. Stone Container retained Deutsche Bank pursuant to an engagement
letter dated July 20, 2000 between Stone Container and Deutsche Bank. As
compensation for Deutsche Bank's delivery of its opinion, Stone Container paid
Deutsche Bank a cash fee of $200,000. In addition, Stone Container will
reimburse Deutsche Bank for the reasonable fees and disbursements of Deutsche
Bank's counsel and all of Deutsche Bank's reasonable travel and other out-of-
pocket expenses incurred in connection with the merger or otherwise arising out
of the retention of Deutsche Bank under the engagement letter. Stone Container
has also agreed to indemnify Deutsche Bank and certain related persons to the
full extent lawful against certain liabilities, including certain liabilities
under the federal securities laws arising out of its engagement or the merger.
Deutsche Bank is an internationally recognized investment banking firm
experienced in providing advice in connection with mergers and acquisitions and
related transactions. One or more members of the Deutsche Bank Group have, from
time to time, provided investment banking and other financial services to Stone
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<PAGE>
Container, Smurfit-Stone and their affiliates for which it has received
approximately $16.2 million in compensation, including (i) a pending engagement
with Jefferson Smurfit Corporation (U.S.) to provide a fairness opinion in a
transaction related to the proposed merger and (ii) over the past two years, as
joint bookrunner in connection with Stone Container's May 2000 $1.1 billion
bank financing; as advisor to Stone Container in connection with its
participation in Folding Carton Partners in May 1999; as advisor to Jefferson
Smurfit Corporation in connection with its October 1999 disposal of the
Newberg, Oregon newsprint mill; as joint bookrunner in connection with
Jefferson Smurfit Corporation (U.S.) November 1998 $550 million term loan
financing; as lead arranger and syndication agent in connection with Jefferson
Smurfit Corporation (U.S.) March 1998 $1.3 billion bank financing; as joint
bookrunner in connection with Stone Container's and Jefferson Smurfit
Corporation's November 1998 $3.5 billion bank financing; and as advisor to
Jefferson Smurfit Group PLC in connection with the November 1998 merger between
Stone Container and Jefferson Smurfit Corporation. In the ordinary course of
business, members of the Deutsche Bank Group may actively trade in the
securities and other instruments and obligations of Stone Container, Jefferson
Smurfit Corporation, Smurfit-Stone and their affiliates for their own accounts
or the accounts of their customers. Accordingly, the Deutsche Bank Group may
from time to time hold a long or short position in such securities, instruments
or obligations.
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INTERESTS OF CERTAIN PERSONS IN THE MERGER
Ownership of Stone Container Common Stock
As of March 31, 2000, Smurfit-Stone owned 110,000,000 shares, or 100%, of
the issued and outstanding Stone Container Common Stock.
Management's Ownership of Stone Container Series E Preferred Stock
As of March 31, 2000, Stone Container's directors and officers as a group
beneficially owned 680,200 shares of Stone Container Series E Preferred Stock,
which represents less than 15% of the issued and outstanding shares of Series E
Preferred Stock. Such beneficial ownership is attributed to affiliates of the
two Stone Container directors appointed by the holders of Series E Preferred
Stock, which own an aggregate of 679,200 shares of Stone Container Series E
Preferred Stock, in addition to the 1,000 shares directly held by Mr. Gale, a
director.
Directors and Officers of Smurfit-Stone and Stone Container
Of Stone Container's five members of the board of directors, Mr. Ray M.
Curran also serves as a director of Smurfit-Stone. In addition, Messrs. Curran,
Leslie T. Lederer and Patrick J. Moore serve as the respective President and
Chief Executive Officer, Vice President--Strategic Investment Dispositions and
Vice President and Chief Financial Officer for both Smurfit-Stone and Stone
Container.
Voting Agreement
Pursuant to a voting agreement to be entered into concurrently with the
merger agreement, Smurfit-Stone will pay the legal fees incurred by Smurfit-
Stone, Stone Container and the two Stone Container directors appointed by the
holders of Stone Container Series E Preferred Stock in connection with the
merger agreement and the merger. The merger agreement provides that the cash
consideration payable to the holders of Series E Preferred Stock in connection
with the merger with be reduced by an amount equal to $0.12 per share. As a
result, the holders of Series E Preferred Stock, as a group, will bear
approximately $550,000 of the fees and expenses incurred in connection with the
merger agreement and the merger.
In addition, the voting agreement prohibits Smurfit-Stone and Stone
Container from amending, modifying or waiving any provision of the merger
agreement in a manner adverse to the rights of holders of the Series E
Preferred Stock without the written consent of the other parties to the voting
agreement. The voting agreement also requires Smurfit-Stone's board of
directors to authorize additional shares of Series A Preferred Stock as is
necessary to pay dividend obligations on the Series A Preferred Stock, to the
extent such obligations are not paid in cash. Furthermore, the voting agreement
requires Smurfit-Stone to use its commercially reasonable efforts to maintain
the listing of the Series A Preferred Stock on the Nasdaq National Market or a
national securities exchange for as long as any shares of Series A Preferred
Stock are outstanding.
Purchases of Stone Container Series E Preferred Stock by Affiliates
Smurfit-Stone is not aware of any of its affiliates having purchased any
shares of Series E Preferred Stock during the last two years.
102
<PAGE>
PRINCIPAL STOCKHOLDERS
Smurfit-Stone
Principal Stockholders
The table below sets forth certain information regarding the beneficial
ownership of Smurfit-Stone common stock by each person who is known to Smurfit-
Stone to be the beneficial owner of more than 5% of Smurfit-Stone's voting
stock as of March 31, 2000. The stockholders named below have sole voting and
investment power with respect to all shares of common stock shown as being
beneficially owned by them.
<TABLE>
<CAPTION>
Name and Address of Amount and Nature of Percent of
Beneficial Owner Beneficial Ownership Common Stock (a)
------------------- -------------------- ----------------
<S> <C> <C>
SIBV.............................. 71,638,462 32.8%
Smurfit International B.V.
Strawinskylaan 2001
Amsterdam 1077ZZ, The
Netherlands
Attention: Rokin Corporate
Services B.V.
MSLEF Associated Entities......... 15,820,101 7.3%
c/o Morgan Stanley Dean Witter &
Co.
1221 Avenue of the Americas
New York, NY 10020
Attention: Alan E. Goldberg
</TABLE>
--------
(a) As of June 30, 2000, following the issuance of 25,335,381 shares in
connection with the St. Laurent acquisition, the percent of Common Stock
owned by SIBV and MSLEF Associated Entities was reduced to 29.4% and 6.5%,
respectively.
Security Ownership of Management
Except as noted otherwise, the table below sets forth certain information
regarding the beneficial ownership of Smurfit-Stone's common stock as of March
31, 2000 for (1) each of the directors, (2) each of the Named Executive
Officers (as defined below) and (3) all directors and executive officers of
Smurfit-Stone as a group.
<TABLE>
<CAPTION>
Shares of Common Stock
--------------------------------------------
Amount and Nature of Percent of
Beneficial Owner Beneficial Ownership (a)(b) Common Stock (c)
---------------- --------------------------- ----------------
<S> <C> <C>
Michael W.J. Smurfit (d).... 1,112,579 0.5%
Ray M. Curran............... 696,879 0.3%
Richard A. Giesen........... 16,663 *
Alan E. Goldberg (e)........ 0 *
Howard E. Kilroy (d)........ 423,000 0.2%
James J. O'Connor........... 10,750 *
Jerry K. Pearlman........... 9,194 *
Thomas A. Reynolds, III..... 4,000 *
Dermot F. Smurfit (d)....... 91,000 *
Patrick J. Moore............ 553,299 0.3%
William N. Wandmacher....... 193,308 0.1%
David C. Stevens............ 91,862 *
Anthony P.J. Smurift (e).... 12,000 N/A
All directors and executive
officers as a
group (29 persons)
(d)(f)(g).................. 4,541,279 2.1%
</TABLE>
103
<PAGE>
--------
(a) Except for Mr. A. Smurfit, shares shown as beneficially owned include
shares of common stock that directors and executive officers have the right
to acquire within 60 days after March 31, 2000 pursuant to exercisable
options under stock option plans.
(b) Shares shown include shares of common stock held in the savings plans
maintained by Smurfit-Stone as of December 31, 1999 that the executive
officers have the right to vote.
(c) Based upon a total of 218,183,257 shares of common stock issued and
outstanding as of March 31, 2000. Percentages less than 0.1% are indicated
by an asterisk.
(d) Excludes shares of common stock owned by JS Group. Dr. Michael Smurfit, Dr.
Dermot Smurfit and Mr. Kilroy beneficially owned 7.4%, 0.5% and 0.8%,
respectively, of the outstanding shares of JS Group as of March 31, 2000.
Dr. Michael Smurfit and Dr. Dermot Smurfit are officers and directors of JS
Group. Mr. Kilroy is a director of JS Group.
(e) Mr. A. Smurift was appointed to Smurfit-Stone's board of directors on July
20, 2000. Shares shown as beneficially owned include shares of common stock
that Mr. A. Smurfit has the right to acquire within 60 days after August 1,
2000 pursuant to exercisable options under stock option plans.
(f) Excludes shares of common stock owned by MSLEF and related entities.
(g) Excludes Mr. A. Smurfit and the shares owned by this director.
Stone Container
Security Ownership of Certain Beneficial Owners
As of March 31, 2000, the following persons were known to Stone Container to
own beneficially more than 5% of the outstanding shares of the respective
classes of Stone Container's stock:
<TABLE>
<CAPTION>
Number of Number of
Shares of Shares of
Common Stock Parent of Preferred Stock Percent of
Beneficially Common Stock Beneficially Preferred Stock
Name and Address Owned Outstanding Owned Outstanding
---------------- ------------ ------------ --------------- ---------------
<S> <C> <C> <C> <C>
Smurfit-Stone Container
Corporation............ 110,000,000 100.0% 0 0
150 North Michigan
Avenue
Chicago, Illinois 60601-
7568
Mariner Investment
Group, Inc............. 0 0 622,200(a) 13.5%
65 East 55th Street
New York, New York 10022
</TABLE>
--------
(a) Mariner Investment Group, Inc., as the investment advisor of (1) Mariner
LDC, Inc., which holds 455,350 shares of the Series E Preferred Stock, and
(2) Caspian Capital Partners, L.P., which holds 166,850 shares of the
Series E Preferred Stock, has sole voting and dispositive powers over the
shares held by Mariner LDC and Caspian. Accordingly, beneficial ownership
of the 622,200 shares held in the aggregate by Mariner LDC and Caspian are
attributed to Mariner.
Security Ownership of Management
As of March 31, 2000, Stone Container's directors and executive officers as
a group beneficially owned 680,200 shares of Series E Preferred Stock, which
represents less than fifteen percent of the issued and outstanding shares of
Series E Preferred Stock.
Mr. David Gale, a director of Stone Container, beneficially owns 58,000
shares of Series E Preferred Stock. Of these shares, Mr. Gale directly owns
1,000 shares and may be deemed to beneficially own 57,000 shares held by Delta
Dividend Group, Inc., for which he serves as president. Mr. Gale's indirect
beneficial ownership results from his 49% ownership interest in Delta.
Mr. Mark A. Weissman, a director of Stone Container, may be deemed to
beneficially own 622,200 shares of Series E Preferred Stock. Mr. Weissman may
be deemed to beneficially own these shares as the Manager of Corporate Bond
Trading of Mariner Investment Group, Inc., which is the investment advisor with
sole voting and dispositive power over the 455,350 shares of Series E Preferred
Stock held by Mariner LDC, Inc. and the 166,850 shares of Series E Preferred
Stock held by Caspian Capital Partners, L.P. Mr. Weissman disclaims beneficial
ownership of these shares.
104
<PAGE>
MANAGEMENT OF SMURFIT-STONE
Directors and Executive Officers
Directors
Set forth below is information concerning Smurfit-Stone's directors.
Ray M. Curran, born May 13, 1946, was named to succeed Roger W. Stone as
President and Chief Executive Officer of Smurfit-Stone as of April 1, 1999. He
was Executive Vice President and Deputy Chief Executive Officer from November
1998 until March 31, 1999. He was Financial Director of JS Group from February
1996 to November 1998 and prior to that served as Chief Financial Officer of JS
Group since 1992. Mr. Curran was first elected a director in 1998.
Richard A. Giesen, born October 7, 1929, is Chairman of the Board and CEO of
Continental Glass & Plastic, Inc. Mr. Giesen is a director of GATX Corporation
and Chairman and Chief Executive Officer of Continere Corporation and served as
a director of Stone Container from 1974 to 1998. Mr. Giesen was first elected a
director in 1998.
Alan E. Goldberg, born September 1, 1954, has been Chairman and CEO of
Morgan Stanley Dean Witter ("MSDW") Private Equity since February 1998. Prior
thereto, he was co-head of MSDW Private Equity. He has been a Managing Director
of Morgan Stanley & Co. Incorporated since January 1988. Mr. Goldberg also
serves as a director of Allegiance Telecom, Inc., Catalytica, Inc., Equant,
N.V. and several private companies. Mr. Goldberg was first elected a director
in 1989.
Howard E. Kilroy, born January 30, 1936, was named a director in July 1999.
He joined JS Group in 1973 and was appointed Chief Operations Director in 1978
and President in 1986. He was also Senior Vice President of Smurfit-Stone. Mr.
Kilroy retired from these positions in 1995. Mr. Kilroy is a director of JS
Group and CRH plc, and is Governor of the Bank of Ireland. Mr. Kilroy was first
elected a director in 1999.
James J. O'Connor, born March 15, 1937, is the former Chairman and Chief
Executive Officer of Unicom Corporation and its subsidiary, Commonwealth Edison
Company. He is a director of American National Can, Corning Incorporated, The
Tribune Company, United Airlines, and various other Chicago businesses,
cultural and charitable organizations. Mr. O'Connor was first elected a
director in 1998.
Jerry K. Pearlman, born March 27, 1939, is the retired Chairman of the Board
and Chief Executive Officer of Zenith Electronics Corporation. Mr. Pearlman is
a director of Ryerson-Tull Inc., Nanophase, Inc. and Parsons Group L.L.C. and
served as director of Stone Container from 1984 to 1998. Mr. Pearlman was first
elected a director in 1998.
Thomas A. Reynolds, III, born May 12, 1952, has been a Partner since 1984
with Winston & Strawn, a law firm that regularly represents Smurfit-Stone on
numerous matters. Mr. Reynolds is an adjunct faculty member in trial advocacy
at Northwestern University School of Law. He also serves as a director of
Westell Technologies, Inc. Mr. Reynolds was first elected a director in 1997.
Anthony P. J. Smurfit, born December 19, 1963, is chief executive of the
Smurfit Europe Division of JS Group, Smurfit-Stone's largest shareholder, and
has served as a member of JS Group's board of directors since 1989. He
previously served as deputy chief executive of Smurfit Europe, as well as chief
executive of Smurfit France. Mr. Smurfit was first elected a director in 2000.
Dermot F. Smurfit, born October 8, 1944, has been Joint Deputy Chairman of
JS Group since January 1984 and World Vice President--Marketing and Sales since
July 1997. Prior to July 1997, he held various senior positions in JS Group.
Dr. Dermot Smurfit is Chairman of Kraft Manufacturers Institute (KMI) and a
105
<PAGE>
member of the Board of the Confederation of European Paper Industries, and a
director of JS Group and ACE Ltd. He is a brother of Dr. Michael W. J. Smurfit.
Dr. Smurfit was first elected a director in 1998.
Michael W. J. Smurfit, born August 7, 1936, is Chairman of the Board of
Directors of Smurfit-Stone. He has been Chairman and Chief Executive Officer of
JS Group since 1977. Dr. Smurfit was Chief Executive Officer of Smurfit-Stone
prior to July 1990. He is a brother of Dr. Dermot F. Smurfit. Dr. Smurfit was
first elected a director in 1989.
Executive Officers
Set forth below is information concerning Smurfit-Stone's executive
officers.
Michael W. J. Smurfit--See Directors.
Ray M. Curran--See Directors.
Matthew Blanchard, born September 9, 1959, was appointed Vice President and
General Manager--Board Sales Division in July 2000. Mr. Blanchard was Vice
President Supply Chain Management for St. Laurent from 1998 until July 2000.
Prior to that, he held various managerial positions with St. Laurent, Avenor
and CIP since 1981.
Peter F. Dages, born December 13, 1950, was appointed Vice President and
General Manager--Corrugated Container Division in April 1999. Mr. Dages was
Vice President and Regional Manager of the Corrugated Container Division of
Stone Container from 1996 and held the same position with Smurfit-Stone until
April 1999. Prior to 1996, he held various managerial positions in the
Corrugated Container Division of Stone Container since 1991.
James D. Duncan, born June 12, 1941, has been Vice President and General
Manager--Specialty Packaging Division since November 1998. Mr. Duncan was Vice
President and General Manager--Industrial Packaging Division for Jefferson
Smurfit Corporation (now known as Smurfit-Stone) from October 1996 to November
1998. He was Vice President and General Manager, Converting Operations--
Industrial Packaging Division from April 1994 to October 1996 and served as
General Manager, Converting Operations--Industrial Packaging Division from
February 1993 to April 1994. Prior to that, he was President and Chief
Executive Officer of Sequoia Pacific Systems, an affiliate of JS Group, which
he joined in August 1989.
Daniel J. Garand, born December 12, 1950, joined Smurfit-Stone in October
1999 as Vice President of Supply Chain Operations. For three years prior to
joining Smurfit-Stone, Mr. Garand held senior level positions in global supply
chain management for AlliedSignal's Automotive Products Group. Prior to that,
he was employed by Digital Equipment Company for 26 years in a variety of
management positions in logistics, acquisitions and distribution.
Michael F. Harrington, born August 6, 1940, has been Vice President--
Employee Relations since November 18, 1998, and held the same position with the
former Jefferson Smurfit since January 1992. Prior to joining Jefferson
Smurfit, he was Corporate Director of Labor Relations/Safety and Health with
Boise Cascade Corporation for more than five years.
Charles A. Hinrichs, born December 3, 1953, has been Vice President and
Treasurer since November 18, 1998, and held the same position with the former
Jefferson Smurfit since April 1995. Prior to joining Jefferson Smurfit, Mr.
Hinrichs held senior level positions at The Boatmen's National Bank of
St. Louis for 13 years, where most recently he was Senior Vice President and
Chief Credit Officer.
Craig A. Hunt, born May 31, 1961, has been Vice President, Secretary and
General Counsel since November 1998. Prior to that he was Senior Counsel and
Assistant Secretary of Jefferson Smurfit from January 1993 to November 1998. He
joined Jefferson Smurfit in 1990 as Staff Counsel.
106
<PAGE>
Paul K. Kaufmann, born May 11, 1954, has been Vice President and Corporate
Controller since November 18, 1998, and held the same position with the former
Jefferson Smurfit since July 1998. He was Corporate Controller of Jefferson
Smurfit from March 1998 to July 1998. Prior to that he was Division Controller
for the Containerboard Mill Division from November 1993 until March 1998. Prior
to that, he held other accounting positions since joining Jefferson Smurfit in
1990.
Leslie T. Lederer, born July 20, 1948, has been Vice President--Strategic
Investment Dispositions since November 1998. He was Vice President, Secretary
and General Counsel of Stone Container from 1987 to November 1998.
F. Scott Macfarlane, born January 17, 1946, has been Vice President and
General Manager--Folding Carton and Boxboard Mill Division since November 18,
1998, and held the same position with the former Jefferson Smurfit since
November 1995. He served as Vice President and General Manager of the Folding
Carton Division of Jefferson Smurfit from December 1993 to November 1995. Prior
to that, he held various managerial positions within the Folding Carton
Division since joining Jefferson Smurfit in 1971.
Timothy McKenna, born March 25, 1948, has been Vice President--Investor
Relations and Communications since November 18, 1998, and held the same
position with the former Jefferson Smurfit since July 1997. He joined Jefferson
Smurfit in October 1995 as Director of Investor Relations and Communications.
Prior to joining Jefferson Smurfit, he was employed by Union Camp Corporation
for 14 years, where most recently he was Director of Investor Relations.
Patrick J. Moore, born September 7, 1954, has been Vice President and Chief
Financial Officer of Smurfit-Stone since November 18, 1998, and held the same
position with the former Jefferson Smurfit since October 1996. He was Vice
President and General Manager--Industrial Packaging Division of Jefferson
Smurfit from December 1994 to October 1996. He served as Vice President and
Treasurer from February 1993 to December 1994 and was Treasurer from October
1990 to February 1993. He joined Jefferson Smurfit in 1987 as Assistant
Treasurer. He is a director of First Financial Planners, Inc.
Mark R. O'Bryan, born January 15, 1963, joined Smurfit-Stone in October 1999
as Vice President--Procurement. Prior to joining Smurfit-Stone, Mr. O'Bryan was
employed for 13 years at General Electric Corporation, where he held senior
level positions in global sourcing and materials management at several of
General Electric Corporation's manufacturing businesses.
Thomas A. Pagano, born January 21, 1947, has been Vice President--Planning
since November 18, 1998, and held the same position with the former Jefferson
Smurfit since May 1996. He was Director of Corporate Planning for Jefferson
Smurfit from September 1995 to May 1996. Prior to that, Mr. Pagano held various
managerial positions within Jefferson Smurfit's Container Division since
joining Jefferson Smurfit in 1971, including Area Regional General Manager from
January 1994 to September 1995.
John M. Riconosciuto, born September 4, 1952, has been Vice President and
General Manager--Bag Packaging Division since November 1998. He was Vice
President and General Manager--Industrial Bag and Specialty Packaging Division
of Stone Container from January 1997 to November 1998. From July 1995 to
January 1997, he was Vice President and General Manager of the Multiwall Group
of Stone Container, and prior to that, Vice President of Marketing and
Specialty Packaging of the Industrial and Specialty Packaging Division of Stone
Container since 1993.
David C. Stevens, born August 11, 1934, has been Vice President and General
Manager--Smurfit Recycling Company since January 1993. Prior to that, he was
General Sales Manager for the Reclamation Division since joining Jefferson
Smurfit in 1987.
William N. Wandmacher, born September 12, 1942, has been Vice President and
General Manager--Containerboard Mill Division since November 18, 1998, and held
the same position with the former Jefferson Smurfit since January 1993. He
served as Division Vice President--Medium Mills for Jefferson Smurfit from
October 1986 to January 1993. Prior to that, he held various positions in
production, plant management and planning since joining Jefferson Smurfit in
1966.
107
<PAGE>
Executive Compensation
The following table sets forth the cash and noncash compensation awarded to
or earned by each of the executive officers of Smurfit-Stone named below (the
"Named Executive Officers") for each of the last three fiscal years.
<TABLE>
<CAPTION>
Long-Term
Compensation
------------------
Annual Compensation Awards Payouts
-------------------- Other ---------- ------- All other
Annual Securities LTIP Compen-
Name and Principal Compensation Underlying Payouts sation
Positions Year Salary ($) Bonus ($) ($) Options ($)(a) ($)(b)
------------------ ---- ---------- --------- ------------ ---------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Michael W.J. Smurfit
(c).................... 1999 900,000 445,140 217,768 250,000 0 24,483
Chairman of the Board 1998 834,000 185,248 0 0 0 32,691
1997 834,000 0 0 0 0 26,757
Ray M. Curran (d)(f).... 1999 1,206,252 1,274,970 4,213 0 0 5,000
President and 1998 102,567 0 0 910,000 0 0
Chief Executive Officer 1997 0 0 0 0 0 0
Roger W. Stone (d)...... 1999 212,500 0 0 0 0 6,055,064
Former President and 1998 106,250 0 0 297,000 0 0
Chief Executive Officer 1997 0 0 0 0 0 0
Patrick J. Moore (e)(f). 1999 761,250 573,752 0 0 0 11,257
Vice President and 1998 350,016 828,779 9,489 325,000 0 7,736
Chief Financial Officer 1997 305,000 0 70,333 200,000 337,671 6,987
William N. Wandmacher... 1999 340,008 167,395 6,215 0 0 15,084
Vice President and
General 1998 291,000 99,778 1,178 75,000 0 12,767
Manager--Containerboard
Mill Division 1997 279,000 0 532 54,000 498,674 11,616
David C. Stevens........ 1999 274,992 230,127 0 0 0 15,506
Vice President and
General 1998 257,016 36,281 0 30,000 0 14,046
Manager--Reclamation
Division 1997 238,000 131,648 0 100,000 270,048 12,276
</TABLE>
--------
(a) Reflect amounts awarded under Smurfit-Stone's 1994 Long-Term Incentive
Plan. Amounts were either payable in cash or deferred into Smurfit-Stone's
Deferred Compensation Plan at the election of the Named Executive Officer.
(b) Amounts shown under "All Other Compensation" for 1999 include a $5,000
contribution to Smurfit-Stone's Savings Plan for each of the Named
Executive Officers (other than Dr. Smurfit) and company-paid split-dollar
term life insurance premiums for Dr. Smurfit ($24,483) and Messrs. Moore
($6,257), Wandmacher ($10,084) and Stevens ($10,506). Upon his retirement,
Mr. Stone received a payment of $5,833,747 under his severance agreement
with Stone Container. Mr. Stone also received $195,884 as a pension payment
and $20,433 as vacation pay.
(c) The amount shown in "Other Annual Compensation" for 1999 represents a
"gross up" payment for a portion of Dr. Smurfit's Federal and State income
tax liability.
(d) Mr. Curran was named to succeed Mr. Stone as President and Chief Executive
Officer of Smurfit-Stone as of April 1, 1999. Mr. Stone served as President
and Chief Executive Officer of Smurfit-Stone upon completion of Smurfit-
Stone's merger with Stone Container on November 18, 1998, and retired from
Smurfit-Stone as of March 31, 1999. All of Mr. Stone's restricted stock
shares or options were vested at the time of the merger and converted into
shares or options to acquire shares of Smurfit-Stone common stock, adjusted
to reflect the .99 to one ratio at which shares of common stock of Stone
Container were exchanged into shares of Smurfit-Stone common stock in
connection with the merger.
(e) The amount under Bonus for 1998 includes a one-time special bonus of
contributions in connection with the merger.
(f) In addition to their awards under the MIP for 1999 ($630,670 for Mr. Curran
and $378,402 for Mr. Moore), Messrs. Curran and Moore received additional
bonuses of $644,300 and $195,350, respectively, for 1999 in recognition of
their performance in significantly exceeding Smurfit-Stone's objectives in
key areas such as assets divestitures, debt reduction and attainment of
synergies from the merger.
108
<PAGE>
Option Grants in 1999
The following table provides information concerning stock options granted to
the Named Executive Officers during 1999.
<TABLE>
<CAPTION>
Potential Realizable Value
Number of % of Total at Annual Rates of Stock
Securities Options Price Appreciation
Underlying Granted to Exercise or for Option Term ($)(b)
Options Employees in Base Price Expiration ---------------------------
Granted Fiscal Year (a) ($ per share) Date 5% 10%
---------- --------------- ------------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Michael W. J.
Smurfit(c)............. 250,000 55.2% 17.19 03/03/09 2,702,282 6,898,112
Ray M. Curran........... 0 N/A N/A N/A N/A N/A
Roger W. Stone.......... 0 N/A N/A N/A N/A N/A
Patrick J. Moore........ 0 N/A N/A N/A N/A N/A
William N. Wandmacher... 0 N/A N/A N/A N/A N/A
David C. Stevens........ 0 N/A N/A N/A N/A N/A
</TABLE>
--------
(a) Reflects percentage of total options granted to employees in 1999 under
Smurfit-Stone's 1998 Long Term Incentive Plan.
(b) The dollar amounts under these columns are the result of calculations at 5%
and 10% rates, as set by the Securities and Exchange Commission's executive
compensation disclosure rules. Actual gains, if any, on stock option
exercises depend on future performance of the Smurfit-Stone common stock
and overall stock market conditions. No assurance can be made that the
amounts reflected in these columns will be achieved.
(c) Upon exercise of these options, Dr. Smurfit is also entitled to receive an
additional cash payment from Smurfit-Stone equal to $2.19 per option
exercised.
As of December 31, 1999, there were approximately 18,317,149 shares of
common stock reserved for issuance under all of Smurfit-Stone's stock-based
incentive plans, including approximately 3,357,000 shares available for future
grants.
Aggregated Option Exercises in Last Fiscal Year and Year-End Option Value
The following table summarizes the exercise of options and the value of
options held by Named Executive Officers as of December 31, 1999.
<TABLE>
<CAPTION>
Number of
Shares Securities Underlying Value of Unexercised
Acquired on Unexercised Options In-the-Money Options
Exercise Value at January 1, 2000 (#) at January 1, 2000 ($)(a)
Name (#) Realized Exercisable/Unexercisable Exercisable/Unexercisable
---- ----------- -------- ------------------------- -------------------------
<S> <C> <C> <C> <C>
Michael W.J. Smurfit.... 0 0 1,026,000 / 250,000 $14,879,000 / 1,828,125
Ray M. Curran........... 0 0 393,333 / 606,667 4,850,204 / 7,090,421
Roger W. Stone.......... 170,676 692,471 885,809 / 0 9,869,476 / 0
Patrick J. Moore........ 0 0 433,333 / 216,667 5,125,142 / 2,532,296
William N. Wandmacher... 0 0 168,750 / 56,250 2,187,266 / 657,422
David C. Stevens........ 75,000 964,842 82,500 / 22,500 940,781 / 262,969
</TABLE>
--------
(a) The closing market value of the common stock on December 31, 1999 was
$24.50 per share. On that date, the exercise price per share for
outstanding options held by the Named Executive Officers ranged from $10.00
to $19.82.
Employment Agreements and Severance Agreements
Smurfit-Stone has entered into employment agreements with Messrs. Curran and
Moore effective as of April 1, 1999. The employment agreements require the
executives to devote substantially all of their business time to Smurfit-
Stone's operations, each for a term expiring on April 1, 2002, which term is
automatically
109
<PAGE>
extended for a one-day period for each day that passes after April 1, 1999,
unless sooner terminated by either party in accordance with the provisions of
the employment agreements.
The employment agreements provide that Messrs. Curran and Moore shall be
eligible to participate in any annual performance bonus plans, long-term
incentive plans, and/or equity-based compensation plans established or
maintained by Smurfit-Stone for its senior executive officers, including the
MIP and the Smurfit-Stone Container Corporation 1998 Long-Term Plan.
The employment agreements provide that if Smurfit-Stone terminates the
executive's employment "without cause" or the executive terminates his
employment with "good reason," it will:
. pay the executive the full amount of base salary and annual bonus that it
would have paid under the employment agreement had the executive's
employment continued to the end of the employment term;
. continue the executive's coverage under Smurfit-Stone's medical, dental,
life, disability, pension, profit sharing and other executive benefit
plans through the end of the employment term;
. provide the executive with certain perquisites until the end of the
employment term, provided that these company-provided perquisites will be
reduced to the extent the executive receives comparable perquisites
without cost during the 36 month period following his employment
termination;
. continue to count the period through the end of the employment term for
purposes of determining the executive's age and service with Smurfit-
Stone with respect to (1) eligibility, vesting and the amount of benefits
under its executive benefit plans, and (2) the vesting of any outstanding
stock options, restricted stock or other equity-based compensation
awards; and
. provide outplacement services, as elected by the executive (and with a
firm elected by the executive), not to exceed $50,000 in total.
The employment agreements also provide that if, within 24 months following a
"change of control" of Smurfit-Stone, it terminates the executive's employment
"without cause" or the executive terminates his employment with "good reason,"
it will
. pay the executive three times the executive's base salary, as in effect
on the date of his termination;
. pay three times the highest of (1) the average annual bonus paid for the
three fiscal years immediately preceding the executive's employment
termination, (2) the target bonus for the fiscal year in which such
termination of employment occurs, or (3) the actual bonus attained for
the fiscal year in which such termination occurs;
. continue the executive's coverage under Smurfit-Stone's medical, dental,
life, disability, pension, profit sharing and other executive benefit
plans for three years following employment termination;
. pay the value of three years of continued coverage under any pension,
profit sharing or other retirement plan maintained by Smurfit-Stone;
. continue to provide the executive with certain perquisites, provided that
these company-provided perquisites will be reduced to the extent the
executive receives comparable perquisites without cost during the 36
month period following his employment termination;
. immediately vest all stock options, restricted stock and other equity-
based awards; and
. pay for outplacement services to the executive not to exceed $50,000.
Smurfit-Stone generally must make the payments described above within 10 days
of the executive's employment termination. If the payments and benefits
described above would be "excess parachute payments" as defined in Code Section
280G, with the effect that the executive is liable for the payment of an excise
tax, then Smurfit-Stone will pay the executive an additional amount to "gross-
up" the executive for such excise tax.
110
<PAGE>
The employment agreements for Messrs. Curran and Moore also forbid the
executives from:
. disclosing Smurfit-Stone's confidential information, inventions or
developments;
. diverting any business opportunities or prospects from Smurfit-Stone; and
. during their employment and for a period of up to two years following
termination of their employment, competing with any business conducted by
Smurfit-Stone or any of its affiliates, or soliciting any employees,
customers or suppliers of Smurfit-Stone, within the United States.
In general, each of the following transactions is considered a change of
control under the employment agreements:
. a third party's acquisition of 20% or more of Smurfit-Stone's common
stock;
. a change in the majority of Smurfit-Stone's board of directors;
. completing certain reorganization, merger or consolidation transactions
or a sale of all substantially all of Smurfit-Stone's assets; or
. the complete liquidation or dissolution of Smurfit-Stone.
Each of Messrs. Wandmacher and Stevens is a party to an employment security
agreement. Among other things, these agreements provide for a lump sum payment
based on a specified multiple of salary and bonus plus the payment of certain
fringe benefits under certain circumstances within two years after a "change of
control" (as such term is defined in the employment security agreements). The
Stone Container merger constituted a change of control under the employment
security agreements.
The maximum severance benefit, including the value of pension and welfare
benefits, fringe benefits and perquisites payable under the employment security
agreements, which would have been payable under these agreements to each of
Messrs. Wandmacher and Stevens in the event of termination of employment as of
December 31, 1999 by Smurfit-Stone without "cause" or resignation by the
executive officer for "good reason", is $1,024,101 for Mr. Wandmacher and
$846,588 for Mr. Stevens.
Mr. Stone retired as President and Chief Executive Officer of Smurfit-Stone
effective as of March 31, 1999. Upon his retirement, Mr. Stone received a
payment of $5,833,477 under his severance agreement with Stone Container. He
also received $195,884 as a pension payment and $20,433 as vacation pay.
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CERTAIN TRANSACTIONS OF SMURFIT-STONE
Transactions with JS Group
Net sales by Smurfit-Stone (or its predecessor Jefferson Smurfit
Corporation) to JS Group, its subsidiaries and its affiliates were $45 million,
$39 million and $34 million for the years ended December 31, 1999, 1998 and
1997, respectively. Net sales by JS Group, its subsidiaries and its affiliates
to Smurfit-Stone (or its predecessor Jefferson Smurfit Corporation) were $21
million, $54 million and $51 million for the years ended December 31, 1999,
1998 and 1997, respectively. Product sales to and purchases from JS Group, its
subsidiaries and its affiliates were consummated on terms generally similar to
those prevailing with unrelated parties. Similar transactions continue to occur
in the ordinary course of business in the year 2000.
Smurfit-Stone provides certain subsidiaries and affiliates of JS Group with
general management and elective management services under separate management
services agreements. The elective services provided include, but are not
limited to, management information services, accounting, tax and internal
auditing services, financial management and treasury services, manufacturing
and engineering services, research and development services, employee benefit
plan and management services, purchasing services, transportation services and
marketing services. In consideration of general management services, Jefferson
Smurfit was paid a negotiated fee of approximately $1 million for 1997. In
consideration for elective services provided in 1997, Jefferson Smurfit
received reimbursements of approximately $3 million in 1997. In addition,
Jefferson Smurfit paid JS Group and its affiliates approximately $1 million in
1997 for certain other services. For 1998, Smurfit-Stone was paid a negotiated
fee of approximately $0.7 million for general management services. In
consideration for elective services provided in 1998, Smurfit-Stone received
reimbursements of approximately $2.5 million in 1998. In addition, Smurfit-
Stone paid JS Group and its affiliates approximately $0.4 million in 1998 for
certain other services. For 1999, Smurfit-Stone was paid a negotiated fee,
which amounted to approximately $0.7 million, for general management services.
In consideration for elective services provided in 1999, Smurfit-Stone received
reimbursements of approximately $2.7 million in 1999. In addition, Smurfit-
Stone paid JS Group and its affiliates approximately $0.9 million in 1999 for
certain other services.
On November 18, 1998, Jefferson Smurfit Corporation (U.S.) purchased the No.
2 paperboard machine located in its Fernandina Beach, Florida paperboard mill
for $175 million from Smurfit Packaging Corporation, a subsidiary of SIBV.
Until that date, Jefferson Smurfit and Smurfit Packaging were parties to an
operating agreement whereby Jefferson Smurfit operated and managed the
paperboard machine. Jefferson Smurfit was compensated by Smurfit Packaging for
its direct production and manufacturing costs attributable to the paperboard
machine and a portion of the indirect manufacturing, selling and administrative
costs incurred by Jefferson Smurfit for the entire Fernandina Mill. The
compensation was determined by applying various formulae and agreed upon
adjustments to the subject costs. The amounts reimbursed to Jefferson Smurfit
totaled $50 million in 1998.
Board Membership
Smurfit-Stone's bylaws provide that for so long as Morgan Stanley Leveraged
Equity Fund II, Inc. owns at least 1,000,000 shares of Smurfit-Stone's common
stock, adjusted for any stock dividend, stock split or similar change, Smurfit-
Stone's board of directors will continue to nominate for election one designee
of MSLEF, who shall be entitled to serve as Chairman of the Compensation
Committee and, until November 18, 2003, shall also be entitled to serve on the
Independent Committee. Pursuant to a voting agreement dated as of May 10, 1998
among Smurfit International, MSLEF and Mr. Stone, Smurfit International has
agreed to vote all of its shares of Smurfit-Stone common stock in favor of
MSLEF's designee for so long as MSLEF has the right to nominate such
individual. Mr. Goldberg is the MSLEF designee for the board of directors.
Standstill Agreement
JS Group, MSLEF and Smurfit-Stone are parties to a standstill agreement
dated as of May 10, 1998 which provides, among other things, that prior to
November 18, 2003:
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. JS Group is prohibited from directly or indirectly acquiring any voting
securities if, after giving effect to such acquisition, it would
beneficially own more than 40% of the total voting power of the
outstanding securities of Smurfit-Stone;
. MSLEF is prohibited from acquiring any voting securities of Smurfit-Stone
(except pursuant to a stock split, stock dividend, rights offering,
recapitalization, reclassification or similar transaction); and
. JS Group is prohibited from soliciting, seeking to effect, negotiating
with or providing any information to any other party with respect to, or
making any statement or proposal (except for any statement or proposal in
response to an acquisition or business combination proposal by a party
other than JS Group or its subsidiaries), whether written or oral, to
Smurfit-Stone's board of directors or otherwise make any public
announcement (except as required by law or the requirements of any
relevant stock exchange or in the case of an acquisition or business
combination proposal by a party other than JS Group or its subsidiaries)
whatsoever with respect to, any form of acquisition or business
combination transaction involving Smurfit-Stone or any significant
portion of its assets, including, without limitation, a merger, tender
offer, exchange offer or liquidation, or any restructuring,
recapitalization or similar transaction with respect to Smurfit-Stone.
Subscription Agreement
Smurfit International, Jefferson Smurfit and Smurfit-Stone are parties to a
stock subscription agreement dated as of May 3, 1994 which provides, among
other things, Smurfit International with certain rights which generally allow
Smurfit International to maintain its percentage ownership of Smurfit-Stone
common stock in the event of public or private issuances of common stock (or
securities of Smurfit-Stone convertible into or exchangeable for its common
stock). The St. Laurent acquisition was a transaction which entitled Smurfit
International to purchase up to approximately 12,170,140 shares of Smurfit-
Stone common stock pursuant to the exercise of its preemptive rights under the
subscription agreement.
Smurfit International and Smurfit-Stone negotiated a modification to the
subscription agreement pursuant to which Smurfit International agreed not to
exercise its preemptive rights with respect to the 12,170,140 shares before the
consummation of the St. Laurent acquisition. In return, Smurfit-Stone agreed
that if Smurfit-Stone consummated a transaction covered by the subscription
agreement within an agreed upon period after the effective date of the St.
Laurent acquisition, then Smurfit International would be entitled to purchase
the 12,170,140 shares plus the number of shares of Smurfit-Stone common stock
it would be entitled to purchase pursuant to such future transaction covered by
the subscription agreement. Such modification to the subscription agreement was
approved by the Independent Committee of the Smurfit-Stone board of directors,
which reviews transactions between Smurfit-Stone and JS Group and their
respective affiliates.
Registration Rights Agreement
In connection with the Stone Container merger, Smurfit-Stone, Smurfit
International, MSLEF and certain other Smurfit-Stone stockholders associated
with MSLEF entered into a registration rights agreement dated as of May 10,
1998 that grants to Smurfit International, MSLEF and such other stockholders
certain rights to require that Smurfit-Stone register shares of its common
stock acquired by them prior to May 10, 1998 or issued thereafter in respect of
such shares. The registration rights agreement replaced a then existing
registration rights agreement.
Under the current registration rights agreement, and subject to certain
limitations contained therein, each of Smurfit International and MSLEF is
entitled to two demand registrations. Subject to certain exceptions specified
therein, the registration rights agreement entitled each of Smurfit
International, MSLEF and Smurfit-Stone to include shares for its own account
or, in the case of Smurfit-Stone, for the account of any holders of its common
stock other than the previously identified holders, in the registration
initiated by the other parties.
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In connection with any demand registration or piggyback registration,
Smurfit-Stone will be responsible for all expenses incurred in connection with
such registration, except that each holder will pay any underwriting discounts
or commissions that may be payable in connection with the sale of its
registrable securities. In addition, Smurfit-Stone will indemnify each holder
and its affiliates against certain liabilities, including liabilities under the
Securities Act of 1933, or will contribute to payments the holders may be
required to make in respect thereof.
Voting Agreement
In connection with the proposed merger of SCC Merger Co. with Stone
Container, Smurfit-Stone and Stone Container entered into a voting agreement
with Mariner Investment Group Inc., Delta Dividend Group, Inc., Mark Weissman
and David Gale, each a beneficial owner of Stone Container Series E Preferred
Stock. Messrs. Weissman and Gale are the two directors of Stone Container
appointed by the holders of Series E Preferred Stock, and Mariner and Delta are
their respective affiliates. Mariner, Delta, and Messrs. Weissman and Gale
beneficially own, in the aggregate, 680,200 shares, or 14.8% of the outstanding
Series E Preferred Stock. Pursuant to the voting agreement, Mariner, Delta, and
Messrs. Weissman and Gale each have agreed to vote their shares of Series E
Preferred Stock in favor of approving the merger agreement and the merger. The
voting agreement also prohibits Smurfit-Stone and Stone Container from
amending, modifying or waiving any provision of the merger agreement in a
manner adverse to the rights of holders of the Series E Preferred Stock without
the written consent of Mariner, Delta, and Messrs. Weissman and Gale. The
voting agreement also requires Smurfit-Stone's board of directors to authorize
additional shares of Series A Preferred Stock as is necessary to pay dividend
obligations on the Series A Preferred Stock, to the extent such obligations are
not paid in cash. Furthermore, the voting agreement requires Smurfit-Stone to
use its commercially reasonable efforts to maintain the listing of the Series A
Preferred Stock on the Nasdaq National Market or a national securities exchange
for as long as any shares of Series A Preferred Stock are outstanding.
Fee and Expense Reimbursement Letter
Pursuant to a letter dated May 10, 1998 from Smurfit-Stone to JS Group and
Smurfit International, Smurfit-Stone paid the fees and expenses of legal
counsel to JS Group and Smurfit International in connection with the
transactions contemplated by the Stone Container merger agreement. Such fees
and expenses aggregated $2.1 million. Under the terms of the letter, Smurfit-
Stone also paid the fees and expenses of Smurfit International's financial
advisor, totaling $7.2 million.
Release Letter and Executive Bonus Program
Pursuant to a letter dated October 2, 1998 between Smurfit-Stone and JS
Group, Smurfit-Stone agreed to pay JS Group, in consideration of JS Group
making Mr. Curran available to Smurfit-Stone to serve as an executive officer,
up to $6,500,000 in reimbursement of amounts payable by JS Group to Mr. Curran
(1) in relation to funding certain pension payments for his benefit, and (2)
under the terms of a long-term incentive plan maintained by JS Group. In
addition, Smurfit-Stone agreed to reimburse Mr. Curran for all reasonable
direct costs of relocation incurred by him in relation to his move to the
United States and also all reasonable legal and tax advisory fees incurred by
him in connection with such relocation and the purchase of a residence in
Chicago, Illinois.
MacMillan Bathurst
On September 4, 1998, Stone Container announced that its Canadian
subsidiary, Stone Container (Canada) Inc. purchased a 50% partnership interest
in MacMillan-Bathurst, Inc., a Canadian corrugated box company, from MacMillan
Bloedel Inc. for $185 million (Cdn.). Stone Container (Canada), which already
owned 50% of MacMillan-Bathurst, immediately resold the newly acquired 50%
interest to a subsidiary of JS Group at the same price.
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<PAGE>
MANAGEMENT OF STONE CONTAINER
Directors and Executive Officers
Directors
Set forth below is information concerning Stone Container's directors.
Ray M. Curran, born May 13, 1946, was named to succeed Roger W. Stone as
President and Chief Executive Officer of Stone Container as of April 1, 1999.
He was Executive Vice President and Deputy Chief Executive Officer from
November 1998 until March 31, 1999. He was Financial Director of JS Group from
February 1996 to November 1998 and prior to that served as Chief Financial
Officer of JS Group since 1992. Mr. Curran was first elected a director in
1998.
Patrick J. Moore, born September 7, 1954, has been Vice President and Chief
Financial Officer of Stone Container since November 18, 1998, and held the same
position with Jefferson Smurfit Corporation (now known as Smurfit-Stone
Container Corporation) since October 1996. With the former Jefferson Smurfit,
he was Vice President and General Manager--Industrial Packaging Division from
December 1994 to October 1996. He served as Vice President and Treasurer from
February 1993 to December 1994 and was Treasurer from October 1990 to February
1993. He joined Jefferson Smurfit in 1987 as Assistant Treasurer. He is a
director of First Financial Planners, Inc. Mr. Moore was first elected a
director in 1998.
Leslie T. Lederer, born July 20, 1948, has been Vice President--Strategic
Investment Dispositions since November 1998. He was Vice President, Secretary
and General Counsel of Stone Container from 1987 to November 1998. Mr. Lederer
was first elected a director in 1999.
David Gale, born February 22, 1959, has been President of Delta Dividend
Group, Inc. since 1992. He also serves as a director of Preferred Income Funds,
Preferred Income Opportunity Fund and Free Real Time.Com. Mr. Gale was first
elected a director in 1999.
Mark A. Weissman, born February 14, 1961, has been Manager of Corporate Bond
Trading of Mariner Investment Group, Inc. since 1996. Prior to that, he was a
managing director with Bear, Stearns & Co., Inc. from 1988 to 1994, and was
with Cantor Fitzgerald & Co. form 1994 to 1996. Mr. Weissman was first elected
a director in 1999.
Executive Officers
Set forth below is information concerning Stone Container's executive
officers.
Ray M. Curran--See Directors.
Matthew Blanchard, born September 9, 1959, was appointed Vice President and
General Manager--Board Sales Division in July 2000. Mr. Blanchard was Vice
President Supply Chain Management for St. Laurent from 1998 until July 2000.
Prior to that, he held various managerial positions with St. Laurent, Avenor
and CIP since 1981.
Peter F. Dages, born December 13, 1950, was appointed Vice President and
General Manager--Corrugated Container Division in April 1999. Mr. Dages was
Vice President and Regional Manager of the Corrugated Container Division of
Stone Container from 1996 until April 1999. Prior to that, he held various
managerial positions in the Corrugated Container Division of Stone Container
since 1991.
James D. Duncan, born June 12, 1941, has been Vice President and General
Manager--Specialty Packaging Division since November 1998. With the former
Jefferson Smurfit, Mr. Duncan was Vice President and General Manager--
Industrial Packaging Division from October 1996 to November 1998. He was Vice
President and General Manager, Converting Operations--Industrial Packaging
Division from April 1994 to October 1996 and served as General Manager,
Converting Operations--Industrial Packaging Division from
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<PAGE>
February 1993 to April 1994. Prior to that, he was President and Chief
Executive Officer of Sequoia Pacific Systems, an affiliate of JS Group, which
he joined in August 1989.
Daniel J. Garand, born December 12, 1950, joined Stone Container in October
1999 as Vice President of Supply Chain Operations. For three years prior to
joining Stone Container, Mr. Garand held senior level positions in global
supply chain management for AlliedSignal's Automotive Products Group. Prior to
that, he was employed by Digital Equipment Company for 26 years in a variety of
management positions in logistics, acquisitions and distribution.
Michael F. Harrington, born August 6, 1940, has been Vice President--
Employee Relations since November 18, 1998, and held the same position with the
former Jefferson Smurfit since January 1992. Prior to joining Jefferson
Smurfit, he was Corporate Director of Labor Relations/Safety and Health with
Boise Cascade Corporation for more than five years.
Charles A. Hinrichs, born December 3, 1953, has been Vice President and
Treasurer since November 18, 1998, and held the same position with the former
Jefferson Smurfit since April 1995. Prior to joining Jefferson Smurfit, Mr.
Hinrichs held senior level positions at The Boatmen's National Bank of St.
Louis for 13 years, where most recently he was Senior Vice President and Chief
Credit Officer.
Craig A. Hunt, born May 31, 1961, has been Vice President, Secretary and
General Counsel since November 1998. Prior to that he was Senior Counsel and
Assistant Secretary from January 1993 to November 1998. He joined Jefferson
Smurfit in 1990 as Staff Counsel.
Paul K. Kaufmann, born May 11, 1954, has been Vice President and Corporate
Controller since November 18, 1998, and held the same position with the former
Jefferson Smurfit since July 1998. He was Corporate Controller of Jefferson
Smurfit from March 1998 to July 1998. Prior to that he was Division Controller
for the Containerboard Mill Division from November 1993 until March 1998. Prior
to that, he held other accounting positions since joining Jefferson Smurfit in
1990.
Leslie T. Lederer--See Directors.
F. Scott Macfarlane, born January 17, 1946, has been Vice President and
General Manager--Folding Carton and Boxboard Mill Division since November 18,
1998, and held the same position with the former Jefferson Smurfit since
November 1995. He served as Vice President and General Manager of the Folding
Carton Division of Jefferson Smurfit from December 1993 to November 1995. Prior
to that, he held various managerial positions within the Folding Carton
Division since joining Jefferson Smurfit in 1971.
Timothy McKenna, born March 25, 1948, has been Vice President--Investor
Relations and Communications since November 18, 1998, and held the same
position with the former Jefferson Smurfit since July 1997. He joined Jefferson
Smurfit in October 1995 as Director of Investor Relations and Communications.
Prior to joining Jefferson Smurfit, he was employed by Union Camp Corporation
for 14 years, where most recently he was Director of Investor Relations.
Patrick J. Moore--See Directors.
Mark R. O'Bryan, born January 15, 1963, joined Stone Container in October
1999 as Vice President--Procurement. Prior to joining Stone Container, Mr.
O'Bryan was employed for 13 years at General Electric Corporation, where he
held senior level positions in global sourcing and materials management at
several of General Electric Corporation's manufacturing businesses.
Thomas A. Pagano, born January 21, 1947, has been Vice President--Planning
since November 18, 1998, and held the same position with the former Jefferson
Smurfit since May 1996. He was Director of Corporate Planning for Jefferson
Smurfit from September 1995 to May 1996. Prior to that, Mr. Pagano held various
managerial positions within Jefferson Smurfit's Container Division since
joining Jefferson Smurfit in 1971, including Area Regional General Manager from
January 1994 to September 1995.
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<PAGE>
John M. Riconosciuto, born September 4, 1952, has been Vice President and
General Manager--Bag Packaging Division since November 1998. He was Vice
President and General Manager--Industrial Bag and Specialty Packaging Division
of Stone Container from January 1997 to November 1998. From July 1995 to
January 1997, he was Vice President and General Manager of the Multiwall Group
of Stone Container, and prior to that, Vice President of Marketing and
Specialty Packaging of the Industrial and Specialty Packaging Division of Stone
Container since 1993.
David C. Stevens, born August 11, 1934, has been Vice President and General
Manager--Smurfit Recycling Company since January 1993. Prior to that, he was
General Sales Manager for the Reclamation Division since joining Jefferson
Smurfit in 1987.
William N. Wandmacher, born September 12, 1942, has been Vice President and
General Manager--Containerboard Mill Division since November 18, 1998, and held
the same position with the former Jefferson Smurfit since January 1993. He
served as Division Vice President--Medium Mills for Jefferson Smurfit from
October 1986 to January 1993. Prior to that, he held various positions in
production, plant management and planning since joining Jefferson Smurfit in
1966.
Executive Compensation
The following table sets forth the compensation earned by, as well as the
number of shares of Smurfit-Stone common stock underlying options granted to
each of Stone Container's named executive officers during the past three fiscal
years.
Except as noted, the following table sets forth certain compensation
information for the chief executive officer and certain other executive
officers of Stone Container who, based on the salary and bonus compensation
information from Smurfit-Stone and its subsidiaries, were the most highly
compensated for the year ended December 31, 1999. All information set forth in
this table reflects compensation earned by these individuals for services with
Smurfit-Stone and its subsidiaries for the fiscal years ended December 31,
1997, 1998 and 1999.
<TABLE>
<CAPTION>
Long-Term
Compensation
------------------
Annual Compensation Awards Payouts
------------------- Other ---------- -------
Annual Securities LTIP All other
Name and Principal Salary Compensation Underlying Payouts Compensation
Positions Year ($) Bonus ($) ($) Options ($)(a) ($)(b)
------------------ ---- --------- --------- ------------ ---------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Michael W.J. Smurfit
(c).................... 1999 900,000 445,140 217,768 250,000 0 24,483
Chairman of the Board 1998 834,000 185,248 0 0 0 32,691
1997 834,000 0 0 0 0 26,757
Ray M. Curran (d)(f).... 1999 1,206,252 1,274,970 4,213 0 0 5,000
President and 1998 102,567 0 0 910,000 0 0
Chief Executive Officer 1997 0 0 0 0 0 0
Roger W. Stone (d)...... 1999 212,500 0 0 0 0 6,055,064
Former President and 1998 850,000 0 0 1,897,836 297,000 4,000
Chief Executive Officer 1997 858,475 0 0 0 283,301 0
Patrick J. Moore (e)(f). 1999 761,250 573,752 0 0 0 11,257
Vice President and 1998 350,016 828,779 9,489 325,000 0 7,736
Chief Financial Officer 1997 305,000 0 70,333 200,000 337,671 6,987
William N. Wandmacher... 1999 340,008 167,395 6,215 0 0 15,084
Vice President and
General 1998 291,000 99,778 1,178 75,000 0 12,767
Manager--Containerboard 1997 279,000 0 532 54,000 498,674 11,616
Mill Division
David C. Stevens........ 1999 274,992 230,127 0 0 0 15,506
Vice President and
General 1998 257,016 36,281 0 30,000 0 14,046
Manager--Reclamation
Division 1997 238,000 131,648 0 100,000 270,048 12,276
</TABLE>
--------
(a) Reflects amounts awarded under Smurfit-Stone's 1994 Long-Term Incentive
Plan. Amounts were either payable in cash or deferred into Stone
Container's Deferred Compensation Plan at the election of the Named
Executive Officer.
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(b) Amounts shown under "All Other Compensation" for 1999 include a $5,000
contribution to Smurfit-Stone's Savings Plan for each of the Named
Executive Officers (other than Dr. Smurfit) and Smurfit-Stone paid split-
dollar term life insurance premium for Dr. Smurfit ($24,483) and Messrs.
Moore ($6,257), Wandmacher ($10,084) and Stevens ($10,506). Upon his
retirement, Mr. Stone received a payment of $5,833,747 under his severance
agreement with Stone Container. Mr. Stone also received a $195,884 as a
pension payment and $20,433 as vacation pay.
(c) The amount shown in "Other Annual Compensation" for 1999 represents a
"gross up" payment for a portion of Dr. Smurfit's Federal and State income
tax liability.
(d) Mr. Curran was named to succeed Mr. Stone as President and Chief Executive
Officer of Stone Container as of April 1, 1999. Mr. Stone served as
President and Chief Executive Officer of Stone Container upon completion of
the merger with Smurfit-Stone on November 18, 1998, and retired from Stone
Container as of March 31, 1999. All of Mr. Stone's restricted stock and
options were vested at the time of the merger and were converted into
shares or options to acquire shares of Smurfit-Stone common stock, adjusted
to reflect the .99 to one ratio at which shares of Stone Container's common
stock were exchanged into shares of Smurfit-Stone common stock in
connection with the merger.
(e) The amount under Bonus for 1998 includes a one-time special bonus of
$750,000 awarded to Mr. Moore in recognition of his significant
contributions in connection with the merger.
(f) In addition to their awards under the MIP for 1999 ($630,670 for Mr. Curran
and $378,402 for Mr. Moore), Messrs. Curran and Moore received additional
bonuses of $644,300 and $195,350, respectively, for 1999 in recognition of
their performance in significantly exceeding Stone Container's objectives
in key areas such as asset divestitures, debt reduction and attainment of
synergies from the merger.
Option Grants In 1999
The following table shows all grants of options to acquire shares of
Smurfit-Stone common stock granted to the executive officers (the "Named
Executive Officers") for the year ended December 31, 1999.
<TABLE>
<CAPTION>
Potential Realizable Value
Number of % of Total at Annual Rates of Stock
Securities Options Price Appreciation
Underlying Granted to Exercise or for Option Term ($)(b)
Options Employees in Base Price Expiration ---------------------------
Granted Fiscal Year (a) ($ per share) Date 5% 10
---------- --------------- ------------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Michael W. J.
Smurfit(c)............. 250,000 55.2% 17.19 03/03/09 2,702,282 6,898,112
Ray M. Curran........... 0 N/A N/A N/A N/A N/A
Roger W. Stone.......... 0 N/A N/A N/A N/A N/A
Patrick J. Moore........ 0 N/A N/A N/A N/A N/A
William N. Wandmacher... 0 N/A N/A N/A N/A N/A
David C. Stevens........ 0 N/A N/A N/A N/A N/A
</TABLE>
--------
(a) Reflects percentage of total options granted to employees in 1999 under
Smurfit-Stone's 1998 Long Term Incentive Plan.
(b) The dollar amounts under these columns are the result of calculations at 5%
and 10% rates, as set by the Securities and Exchange Commission's executive
compensation disclosure rules. Actual gains, if any, on stock option
exercises depend on future performance of the Smurfit-Stone common stock
and overall stock market conditions. No assurance can be made that the
amounts reflected in these columns will be achieved.
(c) Upon exercise of these options, Dr. Smurfit is also entitled to receive an
additional cash payment from Smurfit-Stone equal to $2.19 per option
exercised.
As of December 31, 1999, there were approximately 18,317,149 shares of
Smurfit-Stone common stock reserved for issuance under all of the stock-based
incentive plans of Smurfit-Stone and its subsidiaries, including Stone
Container, with approximately 3,357,000 shares available for future grants.
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Aggregated Option Exercises in Last Fiscal Year and Year-End Option Value
The following table shows aggregate exercises of options to purchase
Smurfit-Stone common stock in the year ended December 31, 1999 and the number
of securities underlying unexercised options to purchase Smurfit-Stone common
stock held at the end of 1999 by the Named Executive Officers.
<TABLE>
<CAPTION>
Number of
Shares Securities Underlying Value of Unexercised
Acquired on Unexercised Options In-the-Money Options
Exercise Value at January 1, 2000 (#) at January 1, 2000 ($)(a)
Name (#) Realized Exercisable/Unexercisable Exercisable/Unexercisable
---- ----------- -------- ------------------------- -------------------------
<S> <C> <C> <C> <C>
Michael W.J. Smurfit.... 0 0 1,026,000 / 250,000 $14,879,000 / 1,828,125
Ray M. Curran........... 0 0 393,333 / 606,667 4,850,204 / 7,090,421
Roger W. Stone.......... 170,676 692,471 885,809 / 0 9,869,476 / 0
Patrick J. Moore........ 0 0 433,333 / 216,667 5,125,142 / 2,532,296
William N. Wandmacher... 0 0 168,750 / 56,250 2,187,266 / 657,422
David C. Stevens........ 75,000 964,842 82,500 / 22,500 940,781 / 262,969
</TABLE>
--------
(a) The closing market value of the Smurfit-Stone common stock on December 31,
1999 was $24.50 per share. On that date, the exercise price per share for
outstanding options held by the Named Executive Officers ranged from $10.00
to $19.82.
Compensation of Directors
In 1999, the non-employee directors, Messrs. Gale and Weissman, received an
annual retainer of $5,000, prorated for the partial year during which they
served on the board of directors. In addition, Stone Container previously
maintained a policy pursuant to which it appointed a director with five or more
years of service as a consultant to Stone Container for a number of years equal
to the number of years the director served on Stone Container's board of
directors and for an annual consulting fee equal to the director's retainer in
effect at the date of such director's retirement.
Employment Agreements and Severance Agreements
Smurfit-Stone has entered into employment agreements with Messrs. Curran and
Moore effective as of April 1, 1999. The employment agreements require the
executive to devote substantially all of their business time to the operations
of Smurfit-Stone and its subsidiaries, including Stone Container, each for a
term expiring on April 1, 2002, which term is automatically extended for a one-
day period for each day that passes after April 1, 1999, unless sooner
terminated by either party in accordance with the provisions of the employment
agreements.
Smurfit-Stone also has entered into an employment agreement with Mr.
Gurandiano effective as of May 31, 2000. The employment agreement requires Mr.
Gurandiano to devote substantially all of his business time to St. Laurent's
and certain of Smurfit-Stone's operations, for a term expiring on May 31, 2003,
which term is automatically extended for a one-day period for each day that
passes after May 31, 2000, unless sooner terminated by either party in
accordance with the provisions of the employment agreement.
The employment agreements provide that Messrs. Curran, Moore and Gurandiano
shall be eligible to participate in any annual performance bonus plans, long-
term incentive plans, and/or equity-based compensation plans established or
maintained by Smurfit-Stone for its senior executive officers, including the
MIP and the Smurfit-Stone Container Corporation 1998 Long-Term Incentive Plan.
The employment agreements provide that if Smurfit-Stone terminates the
executive's employment "without cause" or the executive terminates his
employment with "good reason," Smurfit-Stone will:
. pay the executive the full amount of base salary and annual bonus that
Smurfit-Stone would have paid under the employment agreement had the
executive's employment continued to the end of the employment term;
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. continue the executive's coverage under Smurfit-Stone's medical, dental,
life, disability, pension, profit sharing and other executive benefit
plans through the end of the employment term;
. provide the executive with certain perquisites until the end of the
employment term, provided that these perquisites provided by Smurfit-
Stone will be reduced to the extent the executive receives comparable
perquisites without cost during the 36 month period following his
employment termination;
. continue to count the period through the end of the employment term for
purposes of determining the executive's age and service with Smurfit-
Stone with respect to (1) eligibility, vesting and the amount of benefits
under Smurfit-Stone's executive benefit plan, and (2) the vesting of any
outstanding stock options, restricted stock or other equity-based
compensation awards; and
. provide outplacement services, as elected by the executive (and with a
firm selected by the executive), not to exceed $50,000 in total.
The employment agreements also provide that if, within 24 months following
a "change of control" of Smurfit-Stone, Smurfit-Stone terminates the
executive's employment "without cause" or the executive terminates his
employment with "good reason," Smurfit-Stone will
. pay the executive three times the executive's base salary, as in effect
on the date of his termination;
. pay three times the highest of (1) the average annual bonus paid for the
three fiscal years immediately preceding the executive's employment
termination; (2) the target bonus for the fiscal year in which such
termination of employment occurs, or (3) the actual bonus attained for
the fiscal year in which such termination occurs;
. continue the executive's coverage under Smurfit-Stone's medical, dental,
life, disability, pension, profit sharing and other executive benefit
plans for the three years following employment termination;
. pay the value of three years of continued coverage under any pension,
profit sharing or other retirement plan maintained by Smurfit-Stone;
. continue to provide the executive with certain perquisites, provided that
these perquisites provided by Smurfit-Stone will be reduced to the extent
the executive receives comparable perquisites without cost during the 36
month period following his employment termination;
. immediately vest all stock options, restricted stock and other equity-
based awards; and
. pay for outplacement services to the executive not to exceed $50,000.
Smurfit-Stone generally must make the payments described above within 10
days of the executive's employment termination. If the payments and benefits
described above would be "excess parachute payments" as defined in Code
Section 280G, with the effect that the executive is liable for the payment of
an excise tax, then Smurfit-Stone will pay the executive an additional amount
to "gross-up" the executive for such excise tax.
The employment agreements for Messrs. Curran, Moore and Gurandiano also
forbid the executives from:
. disclosing confidential information, inventions or developments;
. diverting any business opportunities or prospects from Smurfit-Stone and
its subsidiaries; and
. during their employment and for a period of up to two years following
termination of their employment, competing with any business conducted by
Smurfit-Stone or any of its subsidiaries, or soliciting any employees,
customers or suppliers of Smurfit-Stone and its subsidiaries, within the
United States.
In general, each of the following transactions is considered a change of
control under the employment agreements:
. a third party's acquisition of 20% or more of Smurfit-Stone's common
stock;
. a change in the majority of Smurfit-Stone's board of directors;
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. completing certain reorganization, merger or consolidation transactions
or a sale of all or substantially all of Smurfit-Stone's assets; or
. the complete liquidation or dissolution of Smurfit-Stone.
Mr. Gurandiano also is a party to an agreement with Smurfit-Stone that
provides for the payment of certain benefits owed to him under a change of
control agreement between Mr. Gurandiano and St. Laurent. The aggregate amount
of such benefits paid to Mr. Gurandiano was approximately $3.1 million (Cdn.).
Each of Messrs. Wandmacher and Stevens is a party to an employment security
agreement. Among other things, these agreements provide for a lump sum payment
based on a specified multiple of salary and bonus plus the payment of certain
fringe benefits under certain circumstances within two years after a "change of
control" (as such term is defined in the employment security agreements). The
Stone Container merger constituted a change of control under the employment
security agreements.
The maximum severance benefit, including the value of pension and welfare
benefits, fringe benefits and perquisites payable under the employment security
agreements, which would have been payable under these agreements to each of
Messrs. Wandmacher and Stevens in the event of termination of employment as of
December 31, 1999 by Stone Container without "cause" or resignation by the
executive officer for "good reason", is $1,024,101 for Mr. Wandmacher and
$846,588 for Mr. Stevens.
Mr. Stone retired as President and Chief Executive Officer of Stone
Container effective as of March 31, 1999. Upon his retirement, Mr. Stone
received a payment of $5,833,477 under his severance agreement with Stone
Container. He also received $195,884 as a pension payment and $20,433 as
vacation pay.
Stone Container entered into consulting agreements in 1974 with each of
Messrs. Jerome H. Stone, Marvin N. Stone (deceased) and Norman H. Stone
(deceased), under which each serves or was to serve as a consultant to Stone
Container for a fee of $80,000 per annum during his lifetime and, should he die
leaving a widow, $40,000 per annum to such widow during her lifetime. Norman H.
Stone died in 1985 and Marvin N. Stone died in 1999, and their respective
widows receive the specified payments.
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CERTAIN TRANSACTIONS OF STONE CONTAINER
Transactions with JS Group
Stone Container is regularly engaged in ordinary course transactions
involving the purchase and sale of products with JS Group, a principal
shareholder of Smurfit-Stone. Net sales by Stone Container to JS Group, its
subsidiaries and its affiliates were $12 million for the year ended December
31, 1999. Net sales by JS Group, its subsidiaries and its affiliates to Stone
Container were $5 million for the year ended December 31, 1999. Product sales
to and purchases from JS Group, its subsidiaries and its affiliates were
consummated on terms generally similar to those prevailing with unrelated
parties. Similar transactions continue to occur in the ordinary course of
business in the year 2000.
Transactions with Jefferson Smurfit
Stone Container is regularly engaged in ordinary course transactions
involving the purchase and sale of products with Jefferson Smurfit. Net sales
by Stone Container to Jefferson Smurfit, its subsidiaries and its affiliates
were $237 million for the year ended December 31, 1999 and approximately $100
million for the quarter ended March 31, 2000. Net sales by Jefferson Smurfit,
its subsidiaries and its affiliates to Stone Container were $248 million for
the year ended December 31, 1999 and approximately $83 million for the quarter
ended March 31, 2000. Product sales to and purchases from Jefferson Smurfit,
its subsidiaries and its affiliates were consummated on terms generally similar
to those prevailing with unrelated parties.
Voting Agreement
In connection with the proposed merger of SCC Merger Co. with Stone
Container, Smurfit-Stone and Stone Container entered into a voting agreement
with Mariner Investment Group Inc., Delta Dividend Group, Inc., Mark Weissman
and David Gale, each a beneficial owner of Stone Container Series E Preferred
Stock. Messrs. Weissman and Gale are the two directors of Stone Container
appointed by the holders of Series E Preferred Stock, and Mariner and Delta are
their respective affiliates. Mariner, Delta, and Messrs. Weissman and Gale
beneficially own, in the aggregate, 680,200 shares, or 14.8% of the outstanding
Series E Preferred Stock. Pursuant to the voting agreement, Mariner, Delta, and
Messrs. Weissman and Gale each have agreed to vote their shares of Series E
Preferred Stock in favor of approving the merger agreement and the merger. The
voting agreement also prohibits Smurfit-Stone and Stone Container from
amending, modifying or waiving any provision of the merger agreement in a
manner adverse to the rights of holders of the Series E Preferred Stock without
the written consent of Mariner, Delta, and Messrs. Weissman and Gale. The
voting agreement also requires Smurfit-Stone's board of directors to authorize
additional shares of Series A Preferred Stock as is necessary to pay dividend
obligations on the Series A Preferred Stock, to the extent such obligations are
not paid in cash. Furthermore, the voting agreement requires Smurfit-Stone to
use its commercially reasonable efforts to maintain the listing of the Series A
Preferred Stock on the Nasdaq National Market or a national securities exchange
for as long as any shares of Series A Preferred Stock are outstanding.
Other Transactions
On September 4, 1998, Stone Container announced that its Canadian
subsidiary, Stone Container (Canada) Inc. purchased a 50% partnership interest
in MacMillan-Bathurst, Ltd., a Canadian corrugated box company, from MacMillan
Bloedel Inc. for $185 million (Cdn.). Stone Container (Canada), which already
owned 50% of MacMillan-Bathurst, immediately resold the newly acquired 50%
interest to a subsidiary of JS Group for the same price.
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During 1997, Stone Container paid approximately $225,000 to Decade Films,
Inc. for production services related to Stone Container's BREAKTIME video, an
internal employee communication presentation produced quarterly. At such time,
Lauren Stone, daughter of Roger Stone, was President of Decade Films, Inc.
During 1998, Stone Container paid approximately $233,000 to Decade Films, Inc.
for production services related to Stone Container's BREAKTIME video.
At December 31, 1997, Sunland Sales Company owed Stone Container
approximately $480,000 as a result of sales made by Stone Container of kraft
paper to Sunland. At such time, Avery Stone, the brother of Roger Stone, owned
the controlling interest of Sunland. At December 31, 1998, Sunland Sales
Company owed Stone Container approximately $361,000 as a result of sales made
by Stone Container of kraft paper to Sunland.
During 1997, Stone Container sold to Morton International industrial bags
for approximately $4.9 million. At such time, Mr. Roger Stone was a director of
Morton International.
During 1997, Stone Container sold to Prairie Packaging, Inc. containers
produced by Stone Container for $1.1 million. At such time, Mr. Roger Stone was
a 6.45% owner of Prairie Packaging.
During 1997, Stone Container sold to Con Pac, Inc. certain of Stone
Container's products for $639,747 and purchased from Con Pac products for
$72,608. At such time, Mr. Randolph Read, then an executive officer of Stone
Container, was a director of this private corporation.
During 1996 and 1997, Stone Container made loans to Mr. Randolph Read, the
then acting Senior Vice President and Chief Financial and Planning Officer of
Stone Container, in the aggregate amount of $611,384 in connection with Mr.
Read's relocation to Chicago upon his assuming his duties with Stone Container.
The loans had no stated interest rate. At April 14, 1999, Stone Container had
forgiven approximately $341,000 of the loans made to Mr. Read. In connection
with the loan forgiveness, which was accounted for as income by Mr. Read, Stone
Container paid Mr. Read $250,000 to offset the related tax liability. In
connection therewith, Stone Container purchased Mr. Read's California residence
for an amount equal to the outstanding mortgage thereon. Also during 1996,
Stone Container loaned to Mr. Harold Wright, the then acting Senior Vice
President of Stone Container, the amount of $300,000 in connection with his
relocation to Chicago. In July, 1997, Stone Container made a loan to Mr. Emil
Winograd, the then acting Vice President and General Manager--Market Pulp Sales
and Export Containerboard and Kraft Paper Sales, in the amount of $100,000 in
connection with his relocation to Chicago. These loans did not bear any
interest and are repayable (1) with respect to Mr. Read, on demand by Stone
Container, (2) with respect to Mr. Wright, on or before December 1, 2002, and
(3) with respect to Mr. Winograd, on or before June 11, 2002. The interest rate
imputed on all such loans was 5.85% during 1997. Such imputed interest was
reported by Stone Container as compensation to Mr. Read, Mr. Wright and Mr.
Winograd.
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DESCRIPTION OF SMURFIT-STONE CAPITAL STOCK
Smurfit-Stone's restated certificate of incorporation provides that Smurfit-
Stone's authorized capital stock shall consist of 400,000,000 shares of common
stock, par value $.01 per share, and 25,000,000 shares of preferred stock, par
value $.01 per share, 5,600,000 of which are designated as Series A Preferred
Stock. Smurfit-Stone's certificate of incorporation authorizes its board of
directors to issue any or all shares of preferred stock in one or more series,
and to fix the voting powers, full or limited, and the designations,
preferences and relative, participating, optional or other special rights, and
any qualification, limitations or restrictions of such rights, applicable to
the shares to be included in any such series as may be permitted by Delaware
General Corporation Law. As of the date of this proxy statement/prospectus,
Smurfit-Stone had 243,600,151 issued and outstanding shares of its common
stock. Upon completion of the merger contemplated in this proxy
statement/prospectus, Smurfit-Stone will have 4,599,300 issued and outstanding
shares of its Series A Preferred Stock.
Series A Preferred Stock
The statements under this caption relating to Smurfit-Stone's Series A
Preferred Stock are summaries and are not complete. Such summaries make use of
terms defined in the certificate of designation for the 7% Series A Cumulative
Exchangeable Redeemable Convertible Series A Preferred Stock. These summaries
are qualified in their entirety by express reference to the certificate of
designation, a copy of which is filed as an exhibit to the registration
statement of which this proxy statement/prospectus is a part. Summaries in this
proxy statement/prospectus of provisions of Smurfit-Stone's certificate of
incorporation are not complete and are subject and qualified in their entirety
by reference to all provisions of the certificate of incorporation.
Dividend Rights
The holders of Series A Preferred Stock described in this proxy
statement/prospectus will be entitled to receive, when, as and if declared by
Smurfit-Stone's board of directors, out of Smurfit-Stone's funds legally
available therefor (and subject to the limitation described in the last
sentence of this paragraph), cumulative dividends at the rate per annum equal
to 7% of the "Liquidation Preference" (as described below) per share, payable
in equal quarterly installments on February 15, May 15, August 15 and November
15 in each year, commencing 15, 2000. Such dividends shall be
cumulative from the date of the closing of the merger. Dividends on the Series
A Preferred Stock shall be payable in cash except to the extent that
(a) the aggregate amount of such dividends would exceed 10% of Smurfit-
Stone's Net Income (as described below) for the most recently ended four
full fiscal quarters for which internal financial statements are available,
(b) payment of cash dividends on the Series A Preferred Stock would
conflict with, violate or result in a breach of, any of the credit
agreements, indentures or debt instruments of Smurfit-Stone or any of its
subsidiaries, or
(c) Smurfit-Stone's board of directors has made a good faith
determination that Smurfit-Stone does not have legally available funds to
pay a cash dividend on the Series A Preferred Stock.
To the extent not paid in cash, dividends shall be paid in additional shares
of Series A Preferred Stock having an aggregate Liquidation Preference equal to
the unpaid dividend obligation. Shares of Series A Preferred Stock (not issued
in exchange for shares of Series E Preferred Stock or to replace lost, stolen
or mutilated certificates evidencing shares of Series A Preferred Stock) will
only be issued to pay unpaid dividend obligations. If any dividend, or portion
thereof, is not timely paid in cash and additional shares of authorized but
undesignated preferred stock are not available to be designated as Series A
Preferred Stock to satisfy the unpaid dividend obligation, then the amount of
such unpaid dividends shall automatically accrete to the Liquidation
Preference.
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As used in this section of the proxy statement/prospectus, "Net Income"
shall mean, for any period, the aggregate net income (or loss) of Smurfit-Stone
and its consolidated subsidiaries for such period determined in conformity with
general accepted accounting principles; provided that the following items shall
be excluded in computing Net Income (without duplication):
(a) the net income (or loss) of any subsidiary of Smurfit-Stone in which
any other Person (other than Smurfit-Stone or any of its subsidiaries)
has a joint interest, except to the extent of the amount of dividends
or other distributions actually paid to Smurfit-Stone or any of its
subsidiaries by such other Person during such period;
(b) except to the extent includable pursuant to clause (a) above, the net
income (or loss) of any Person accrued prior to the date it becomes a
subsidiary of Smurfit-Stone or is merged into or consolidated with
Smurfit-Stone or any of its subsidiaries or all or substantially all of
the property and assets of such Person are acquired by Smurfit-Stone or
any of its subsidiaries;
(c) the net income (or loss) of any subsidiary of Smurfit-Stone to the
extent that the declaration or payment of dividends or similar
distributions by such subsidiary of such net income is not at the time
permitted by the operation of the terms of its charter or any
agreement, instrument, judgment, decree, order, statute, rule or
governmental regulation applicable to such subsidiary;
(d) any gains or losses (on an after-tax basis) attributable to the sale,
transfer or other disposition of all or any of the capital stock of any
subsidiary of Smurfit-Stone, all or substantially all of the property
or assets of an operating unit or business of Smurfit-Stone or any of
its subsidiaries or any other property and assets of Smurfit-Stone or
any of its subsidiaries outside the ordinary course of business of
Smurfit-Stone or such subsidiary;
(e) any amounts paid or accrued as dividends on preferred stock of Smurfit-
Stone or preferred stock of any subsidiary of Smurfit-Stone owned by
Persons other than Smurfit-Stone and any of its subsidiaries;
(f) all extraordinary gains and extraordinary losses; and
(g) all non-cash charges reducing net income of Smurfit-Stone or any of its
subsidiaries that relate to stock options as stock appreciation rights,
and all cash payments reducing net income of Smurfit-Stone or any of
its subsidiaries that relate to stock options as stock appreciation
rights.
Smurfit-Stone will pay each such dividend to the holders of record of the
Series A Preferred Stock as they appear on its stock register on the record
date, which shall not be more than 30 days nor less than 10 days preceding the
dividend payment date. If a holder converts shares of Series A Preferred Stock
after the close of business on the record date for a dividend and before the
opening of business on the payment date for such dividend, the holder will be
required to pay to Smurfit-Stone at the time of such conversion the amount of
such dividend if received by the holder on the dividend payment date on the
shares so converted.
If dividends are not paid in full, or declared in full and sums are not set
apart for the payment thereof, upon the Series A Preferred Stock and any other
preferred stock ranking on a parity as to dividends with the Series A Preferred
Stock, all dividends declared upon the Series A Preferred Stock and any other
preferred stock ranking on a parity as to dividends will be paid or declared
pro rata so that in all cases the amount of dividends paid or declared per
share on the Series A Preferred Stock and such other preferred stock will bear
to each other the same ratio that accumulated dividends per share, including
dividends accrued or in arrears, if any, on the Series A Preferred Stock and
such other preferred stock bear to each other. Except as provided in the
preceding sentence, unless full cumulative dividends on the Series A Preferred
Stock have been paid or declared in full and sums set aside for the payment
thereof, no dividends (other than dividends of common stock or other shares of
Smurfit-Stone's capital stock ranking junior to the Series A Preferred Stock as
to dividends) may be paid or declared and set aside for payment or other
distribution upon Smurfit-Stone's common stock or, except as provided above, on
any other capital stock of Smurfit-Stone ranking junior to or on
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a parity with the Series A Preferred Stock as to dividends, nor may any common
stock or any other capital stock ranking junior to or on a parity with the
Series A Preferred Stock as to dividends be redeemed, purchased or otherwise
acquired for any consideration (or any payment made to or available for a
sinking fund for the redemption of any shares of such stock) by Smurfit-Stone
or any subsidiary of Smurfit-Stone (except by conversion into or exchange for
capital stock of Smurfit-Stone ranking junior to the Series A Preferred Stock
as to dividends).
Dividends payable on the Series A Preferred Stock for any period less than a
full quarterly dividend period will be computed on the basis of a 360-day year
of twelve 30-day months and the actual number of days elapsed in the period for
which payable.
Conversion
Holders of the Series A Preferred Stock will have the right, exercisable at
any time and from time to time, except in the case of Series A Preferred Stock
called for redemption or to be exchanged for Debentures, to convert all or any
portion of such Series A Preferred Stock into shares of Smurfit-Stone common
stock at the conversion price of $34.28 per share of Smurfit-Stone common
stock, subject to adjustment as described below. In the case of the Series A
Preferred Stock called for redemption or to be exchanged for Debentures,
conversion rights will expire at the close of business on the business day
immediately preceding the date fixed for redemption or on the business day
immediately preceding the exchange date, as the case may be. Notice of an
optional redemption or an exchange must be mailed not less than 30 days and not
more than 60 days prior to the redemption date or exchange date, as the case
may be.
Upon conversion or exchange, no adjustment or payment will be made for
dividends or interest, but if any holder surrenders a share of Series A
Preferred Stock for conversion after the close of business on the record date
for the payment of a dividend and prior to the opening of business on the next
dividend payment date, then, notwithstanding such conversion, the dividend
payable on such dividend payment date will be paid to the registered holder of
such share on such record date. In such event, such share, when surrendered for
conversion, must be accompanied by payment of an amount equal to the dividend
payable on such dividend payment date on the share so converted. No fractional
shares of Smurfit-Stone common stock will be issued upon conversion and, if the
conversion results in a fractional interest, an amount will be paid in cash
equal to the value of such fractional interest based on the market price of
Smurfit-Stone common stock on the last trading day prior to the date of
conversion. The conversion price is subject to adjustment in a manner
substantially identical to that provided with respect to the Debentures.
Liquidation Rights
In the event of any liquidation, dissolution, or winding up of the affairs
of Smurfit-Stone, whether voluntary or otherwise, after payment or provision
for payment of Smurfit-Stone's debts and other liabilities, the holders of the
Series A Preferred Stock will be entitled to receive, out of the remaining net
assets of Smurfit-Stone, an amount per share equal to the "Liquidation
Preference", plus an amount equal to all dividends accrued and unpaid on each
such share up to the distribution date, before any distribution is made to the
holders of the common stock or any other capital stock of Smurfit-Stone ranking
(as to any such distribution) junior to the Series A Preferred Stock. If upon
any liquidation, dissolution or winding up of Smurfit-Stone, the assets
distributable among the holders of shares of Series A Preferred Stock and all
other classes and series of preferred stock ranking (as to any such
distribution) on a parity with the Series A Preferred Stock are insufficient to
permit the payment in full to the holders of all such shares of all
preferential amounts payable to all such holders, then the entire assets of
Smurfit-Stone thus distributable will be distributed ratably among the holders
of the Series A Preferred Stock and of all classes and series of preferred
stock ranking (as to any such distribution) on a parity with the Series A
Preferred Stock in proportion to the respective amounts that would be payable
per share if such assets were sufficient to permit payment in full.
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For purposes of this section, a distribution of assets in any dissolution,
winding up or liquidation will not include
. any consolidation, merger, business combination or reorganization of
Smurfit-Stone with or into any other corporation or entity,
. any dissolution, liquidation, winding up, or reorganization of Smurfit-
Stone immediately followed by reincorporation of another corporation or
. a sale or other disposition of all or substantially all of Smurfit-
Stone's assets to another corporation;
provided that, in each case, effective provision is made in the certificate of
incorporation of the resulting and surviving corporation or otherwise for the
protection of the rights of the holders of Series A Preferred Stock, providing
for preferred stock of such entity to be issued to the holders of Series A
Preferred Stock with rights, preferences and designations no less favorable
than those of the Series A Preferred Stock.
As used in this section of the proxy statement/prospectus, "Liquidation
Preference" means an amount equal to $25.00 plus any amounts that accrete to
this amount as a result of the nonpayment of any dividend when due.
Optional Redemption
The Series A Preferred Stock may be redeemed at the option of Smurfit-Stone,
in whole or from time to time in part, at any time, at the following redemption
prices per share (expressed as a percentage of the Liquidation Preference) if
redeemed during the twelve-month period beginning February 15 of the year
indicated below, plus, in each case, all dividends accrued and unpaid on the
Series A Preferred Stock up to the date fixed for redemption, upon giving
notice as provided below:
<TABLE>
<CAPTION>
Year Price
---- -----
<S> <C>
2000................................................................ 101.4
2001................................................................ 100.7
2002 and thereafter................................................. 100.0
</TABLE>
If fewer than all of the outstanding shares of the Series A Preferred Stock are
to be redeemed, the shares to be redeemed will be determined pro rata or by lot
or in such other manner as prescribed by Smurfit-Stone's board of directors. No
optional redemption may be authorized or made unless on or before such
redemption, full cumulative dividends will have been paid or a sum set apart
for such payment on the Series A Preferred Stock.
At least 30 days but not more than 60 days prior to the date fixed for the
redemption of the Series A Preferred Stock, a written notice will be mailed to
each holder of record of Series A Preferred Stock to be redeemed, notifying
such holder of Smurfit-Stone's election to redeem such shares, stating the date
fixed for redemption, the number of shares of Series A Preferred Stock held by
the holder that Smurfit-Stone intends to redeem and calling upon such holder to
surrender to Smurfit-Stone on the redemption date at the place designated in
such notice the certificate or certificates representing the number of shares
specified in the notice. On or after the redemption date, each holder of Series
A Preferred Stock to be redeemed must present and surrender his or her
certificates for such shares to Smurfit-Stone at the place designated in such
notice and thereupon the redemption price of such shares will be paid to or on
the order of the person whose name appears on such certificate or certificates
as the owner thereof and each surrendered certificate will be cancelled. Should
fewer than all the shares represented by any such certificate be redeemed, a
new certificate will be issued representing the unredeemed shares. From and
after the redemption date (unless Smurfit-Stone defaults in payment of the
redemption price), all dividends on the shares of the Series A Preferred Stock
designated for redemption in such notice will cease to accrue and all rights of
the holders thereof as stockholders of Smurfit-Stone, except the right to
receive the redemption price thereof (including all accrued and unpaid
dividends up to the redemption date), will cease and terminate and such shares
will not thereafter be transferred (except with the consent of Smurfit-Stone)
on Smurfit-Stone's books, and such shares shall not be deemed to be outstanding
for any purpose whatsoever.
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At its election, Smurfit-Stone, before the redemption date, may deposit the
redemption price of the shares of the Series A Preferred Stock so called for
redemption in trust for the holders thereof with a bank or trust company, in
which case such notice to the holders of the shares of the Series A Preferred
Stock to be redeemed will
. state the date of such deposit,
. specify the office of such bank or trust company as the place of payment
of the redemption price and
. call upon such holders to surrender the certificates representing such
shares at such place on or after the date fixed in such redemption notice
(which may not be later than the redemption date), against payment of the
redemption price (including all accrued and unpaid dividends up to the
redemption date).
Any moneys so deposited which remain unclaimed by the holders of the Series A
Preferred Stock at the end of two years after the redemption date will be
returned by such bank or trust company to Smurfit-Stone.
Mandatory Redemption
Smurfit-Stone shall redeem all outstanding shares of Series A Preferred
Stock on February 15, 2012, at a price per share equal to the Liquidation
Preference plus an amount equal to all accrued but unpaid dividends thereon,
whether or not declared, to the mandatory redemption date. Such redemption
price shall be payable at Smurfit-Stone's option in (a) cash or (b) that number
of shares of Smurfit-Stone's common stock with an aggregate "Fair Market Value"
equal to the redemption price; provided, however, that if on February 15, 2012,
the shares of Smurfit-Stone common stock are not traded on the Nasdaq National
Market or a national securities exchange, Smurfit-Stone shall pay the
redemption price only in cash.
As used herein, "Fair Market Value" means
. if shares of Smurfit-Stone common stock are traded on the Nasdaq National
Market, the average of the closing prices of the common stock as reported
on the Nasdaq National Market during the five (5) consecutive trading
days commencing immediately preceding the mandatory redemption date or,
if no sale occurred on a trading day, then the mean between the highest
bid and lowest asked prices as of the close of business on such trading
day, as reported on the Nasdaq National Market;
. if shares of Smurfit-Stone common stock are listed on a national
securities exchange, the average of the closing prices as reported for
composite transactions during the five (5) consecutive trading days
commencing immediately preceding the mandatory redemption date or, if no
sale occurred on a trading day, then the mean between the closing bid and
asked prices on such exchange on such trading day; or
. if shares of Smurfit-Stone common stock are not traded on the Nasdaq
National Market or a national securities exchange but are otherwise
traded over-the-counter, the arithmetic average (for consecutive trading
days) of the mean between the highest bid and lowest asked prices as of
the close of business during the five (5) consecutive trading days
commencing immediately preceding the mandatory redemption date as quoted
on the National Association of Securities Dealers Automated Quotation
system or an equivalent generally accepted reporting service.
For purposes of the mandatory redemption of the Series A Preferred Stock,
"Smurfit-Stone common stock" shall include Smurfit-Stone common stock and the
common stock of any successor corporation or purchaser in the case of
. any reclassification or change of outstanding shares of Smurfit-Stone
common stock issuable upon conversion of shares of the Series A Preferred
Stock (other than a change in par value, or from par value to no par
value, or from no par value to par value, or as a result of a subdivision
or combination),
. any consolidation or merger to which Smurfit-Stone is a party other than
a merger in which Smurfit-Stone is the continuing corporation and which
does not result in any reclassification of, or change (other than a
change in name, or par value, or from par value to no par value, or from
no par value to par value, or as a result of a subdivision or
combination) in, outstanding shares of Smurfit-Stone common stock or
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<PAGE>
. any sale or conveyance of all or substantially all of the property or
business of Smurfit-Stone as an entirety.
Exchange
At Smurfit-Stone's option, all, but not less than all, of the then
outstanding shares of the Series A Preferred Stock may be exchanged on any
dividend payment date, subject to certain conditions stated below, for Smurfit-
Stone's 7% Convertible Subordinated Exchange Debentures due February 15, 2012
on not less than 30 days nor more than 60 days notice, at an exchange rate such
that the principal amount of Debentures issued for each share of the Series A
Preferred Stock shall equal the Liquidation Preference thereof. Such exchange
may be made only if, at the time of exchange
. the indenture governing the Debentures shall have been qualified under
the Trust Indenture Act of 1939,
. there shall be no dividend arrearage on the Series A Preferred Stock
(including the dividend payable on the date of exchange) and
. no Event of Default under the indenture shall have occurred and be
continuing.
The form of the indenture may not be amended or supplemented before the date
of exchange without the affirmative vote or consent of the holders of two-
thirds of outstanding shares of the Series A Preferred Stock, except for those
changes which would not adversely affect the legal rights of such holders. In
the event such exchange would result in the issuance of a Debenture in a
principal amount which is not an integral multiple of $1,000, the difference
between such principal amount and the next lowest multiple of $1,000 shall be
paid to the holder in cash. At the exchange date, the rights of holders of the
Series A Preferred Stock shall cease and the person or persons entitled to
receive Debentures issuable upon such exchange shall be treated as the
registered holder or holders of such Debentures. Interest will accrue on the
Debentures from the date of exchange.
Voting Rights
Holders of the Series A Preferred Stock will not have voting rights, except
(1) as provided under "Limitations" below and (2) as required by law.
Limitations
In addition to any other rights provided by applicable law, so long as any
shares of the Series A Preferred Stock are outstanding, Smurfit-Stone will not,
without the affirmative vote, or the written consent as provided by law, of the
holders of at least two-thirds of the outstanding shares of the Series A
Preferred Stock, voting as a class:
(a) create, authorize or issue any class or series of capital stock
ranking senior to the Series A Preferred Stock either as to payment of
dividends or in distribution of assets upon liquidation; or
(b) change the preferences, rights or powers with respect to the Series
A Preferred Stock so as to affect such capital stock adversely.
Except as may otherwise be required by applicable law, such a class vote or
consent is not required (1) in connection with any increase in the total number
of authorized shares of common stock, or (2) in connection with the
authorization or increase of any class or series of shares ranking, as to
dividends and in liquidation, junior to or on a parity with the Series A
Preferred Stock. No such vote or written consent of the holders of the Series A
Preferred Stock is required if, at or prior to the time when the issuance of
any such stock ranking prior to the Series A Preferred Stock is to be made or
any such change is to take effect, as the case may be, provision is made for
the redemption of all of the Series A Preferred Stock at the time outstanding.
Smurfit-Stone may issue its presently authorized but unissued shares of its
capital stock, or bonds, notes, mortgages, debentures, and other obligations,
and incur indebtedness to banks and to other lenders, without any such class
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<PAGE>
vote or consent. Certain changes in the indenture may not be effected without
the affirmative vote or consent of the holders of two-thirds of the outstanding
shares of the Series A Preferred Stock.
Preemptive Rights
No holder of the Series A Preferred Stock will have preemptive rights to
subscribe for or acquire any unissued shares of Smurfit-Stone or securities of
Smurfit-Stone convertible into or carrying a right to subscribe to or acquire
shares.
Ranking
The Series A Preferred Stock will rank prior to Smurfit-Stone's common
stock. Without the requisite vote of holders of the Series A Preferred Stock as
described above under "Limitations," no class or series of capital stock can be
created ranking senior to the Series A Preferred Stock as to dividend rights or
liquidation preference.
Transfer Agent
The Registrar, Transfer Agent and Conversion Agent for the Series A
Preferred Stock will be ChaseMellon Shareholder Services, L.L.C. Smurfit-Stone
will act as Paying Agent for the Series A Preferred Stock.
Listing
Smurfit-Stone has applied to list for quotation the shares of the Series A
Preferred Stock to be issued in the merger on the Nasdaq National Market.
Debentures
General
The Debentures will, if and when issued, be issued under an indenture to be
dated as of the date of issuance of the Debentures, between Smurfit-Stone and
Bankers Trust Company, as trustee. A copy of the proposed form of indenture has
been filed as an exhibit to the registration statement of which this proxy
statement/prospectus is a part. The form of indenture may not be amended or
supplemented before the date of issuance of the Debentures without the
affirmative vote or consent of the holders of two-thirds of the outstanding
shares of the Series A Preferred Stock, except for those changes which would
not adversely affect the legal rights of the holders. The summaries of certain
provisions of the indenture hereunder are not complete and are subject to, and
are qualified in their entirety by reference to, all of the provisions of the
indenture, including the definitions therein of certain terms. Those terms are
made part of the indenture by reference to the Trust Indenture Act of 1939 as
in effect on the date of the indenture.
The Debentures will bear interest from the date of their issuance at the
rate of 7% per annum payable on February 15, May 15, August 15 and November 15
in each year, commencing on the first such interest payment date next
succeeding their date of issuance, to holders of record at the close of
business on the first day of the month of such interest payment date. The
Debentures will be due on February 15, 2012, will be issued in registered form,
without coupons, only in denominations of $1,000 and integral multiples of
$1,000 and will be unsecured obligations of Smurfit-Stone which will be
subordinated to the senior indebtedness of Smurfit-Stone. The indenture
authorizes an aggregate principal amount of $115,000,000 of the Debentures,
plus an amount equal to (1) the aggregate Liquidation Preference of any shares
of Series A Preferred Stock issued in satisfaction of any dividend obligation
and (2) the aggregate Liquidation Preference that otherwise accretes to the
Series A Preferred Stock.
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<PAGE>
Conversion
The Debentures will be convertible at their principal amount at any time
prior to maturity (in the amount of $1,000 or integral multiples thereof) into
shares of Smurfit-Stone's common stock at the conversion price per share in
effect at the time of the exchange of the Debentures for the Series A Preferred
Stock, subject to adjustments identical to those described above.
Optional Redemption
The Debentures may be redeemed at Smurfit-Stone's option, in whole or in
part, at any time from time to time, on not less than 30 nor more than 60 days'
notice by first class mail, at the following redemption prices (expressed as
percentages of the principal amount) if redeemed during the twelve-month period
beginning February 15 of the year indicated below, in each case, together with
accrued interest thereon to the redemption date:
<TABLE>
<CAPTION>
Year Price
---- -----
<S> <C>
2000................................................................ 101.4
2001................................................................ 100.7
2002 and thereafter................................................. 100.0
</TABLE>
If less than all the Debentures are to be redeemed, the trustee will select
Debentures for redemption pro rata or by lot. If any Debenture is to be
redeemed in part only, a new Debenture or Debentures in principal amount equal
to the unredeemed principal portion thereof will be issued. The Debentures may
be redeemed on similar notice through the operation of the sinking fund
described below at 100% of the principal amount thereof, together with accrued
and unpaid interest to the redemption date.
Sinking Fund
If the Debenture's date of issuance is before February 15, 2011, Smurfit-
Stone will redeem on the February 15 next succeeding the issuance date (but no
earlier than February 15, 2002) and on each February 15 thereafter through
February 15, 2011, an aggregate principal amount of Debentures equal to 10% of
the aggregate principal amount of Debentures issued on their issuance date at a
redemption price equal to 100% of principal amount plus accrued and unpaid
interest to the redemption date. Smurfit-Stone may, at its option, receive
credit against sinking fund payments in substantially similar circumstances to
those described above.
If fewer than all of the Debentures are to be redeemed (whether by optional
redemption or through the sinking fund) at any time, selection of Debentures
for redemption will be made by the trustee in such manner as it shall deem
appropriate and fair in its discretion. If any Debenture is to be redeemed in
part only, the notice of redemption that relates to such Debenture shall state
the portion of the principal amount to be redeemed. A new Debenture in
principal amount equal to the unredeemed portion thereof will be issued in the
name of the holder thereof upon cancellation of the original Debenture.
Delisting Repurchase Offer
If, as a result of (1) any consolidation, merger, business combination or
reorganization of Smurfit-Stone with any other corporation or entity or (2) any
sale or conveyance of all or substantially all of Smurfit-Stone's property or
business, Smurfit-Stone's common stock or the capital stock or other securities
receivable by the holders of Smurfit-Stone's common stock, as the case may be,
ceases to be quoted on the Nasdaq National Market or is not listed on a
national securities exchange, Smurfit-Stone will be obligated to make an offer
to purchase the outstanding Debentures at a purchase price equal to 100% of the
principal amount of the Debentures, plus accrued and unpaid interest, if any,
to the "Delisting Payment Date" (as defined below) in accordance with Section
14(e) of the Exchange Act and the procedures described below.
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Within 30 days of the consummation of the transaction resulting in the
delisting of the Smurfit-Stone common stock, Smurfit-Stone will send by first-
class mail to the Trustee and to each holder of Debentures, a notice stating:
. that a repurchase offer due to the delisting of Smurfit-Stone common
stock is being made and that all Debentures tendered will be accepted for
payment;
. the purchase price and the date on which payment thereof will be made
(which will be a business day within 30 to 60 days from the date the
notice is mailed, referred to in this section of the proxy
statement/prospectus as the "Delisting Payment Date");
. that any Debenture not tendered will continue to accrue interest;
. that, unless Smurfit-Stone defaults in the payment of the purchase price,
any Debentures accepted for payment pursuant to this repurchase offer
will cease to accrue interest after the Delisting Payment Date;
. that holders accepting this repurchase offer will be required to
surrender the Debentures to the paying agent, at the address specified in
the notice, before the close of business on the business day immediately
preceding the Delisting Payment Date;
. that holders will be entitled to withdraw their acceptance of the
repurchase offer if, by the close of business on the business day
immediately preceding the Delisting Payment Date, the paying agent
receives written notice from such holder of a withdrawal of such holder's
acceptance of the repurchase offer;
. any other procedures that a holder must follow to accept the repurchase
offer or withdraw such acceptance; and
. the name and address of the paying agent.
On the Delisting Payment Date, Smurfit-Stone will, to the extent lawful,
. accept for payment Debentures tendered pursuant to the repurchase offer;
. deposit with the paying agent money sufficient to pay the purchase price
of all tendered Debentures; and
. deliver to the Trustee Debentures so accepted, together with an officer's
certificate stating the amount of Debentures tendered to Smurfit-Stone.
The paying agent will promptly mail to each holder of accepted Debentures
payment in an amount equal to the purchase price for such Debentures.
Other Terms
The payment of principal, premium, if any, and interest on the Debentures
will be subordinate in right of payment, as set forth in the indenture, to the
prior payment in full of all senior indebtedness (as defined in the indenture)
whether outstanding on the date of the indenture or thereafter created,
incurred, assumed or guaranteed.
Listing
Smurfit-Stone will use its best efforts to list the Debentures, when and if
issued, on the New York Stock Exchange as soon as practicable on or after the
date of their issuance.
Common Stock
General
Holders of Smurfit-Stone common stock are entitled to receive, from funds
available for the payment thereof, dividends when, as and if declared by the
Smurfit-Stone board of directors at any regular or special
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<PAGE>
meeting, subject to any preferential dividend rights granted to the holders of
any outstanding shares of preferred stock. In the event of liquidation, each
share of Smurfit-Stone common stock will be entitled to share pro rata in any
distribution of Smurfit-Stone's assets after payment or providing for the
payment of liabilities and the liquidation preference of any outstanding shares
of preferred stock, including the Series A Preferred Stock. Each holder of
Smurfit-Stone common stock is entitled to one vote for each share of Smurfit-
Stone common stock held of record on the applicable record date on all matters
submitted to a vote of stockholders, including the election of directors.
Holders of Smurfit-Stone common stock generally have no cumulative voting
rights or preemptive rights (except as set forth under "Subscription Agreement"
below) to purchase or subscribe for any stock or other securities and there are
no conversion rights or redemption rights or sinking fund provisions with
respect to Smurfit-Stone common stock. The outstanding shares of Smurfit-Stone
common stock are duly authorized, validly issued, fully paid and nonassessable.
Listing
Smurfit-Stone common stock is traded on the Nasdaq National Market.
Subscription Agreement
Pursuant to a Stock Subscription Agreement, dated as of May 3, 1994, among
Smurfit-Stone, Jefferson Smurfit Corporation (U.S.) and Smurfit International,
Smurfit-Stone has granted Smurfit International contractual rights that
generally allow Smurfit International to maintain its percentage ownership of
Smurfit-Stone common stock in the event of public or private issuances of
Smurfit-Stone common stock, including securities of Smurfit-Stone that are
convertible into or exchangeable for Smurfit-Stone common stock. The St.
Laurent acquisition was a transaction which entitled Smurfit International to
purchase up to approximately 12,170,140 shares of Smurfit-Stone common stock
pursuant to the exercise of its preemptive rights under the subscription
agreement.
Smurfit International and Smurfit-Stone negotiated a modification to the
subscription agreement pursuant to which Smurfit International agreed not to
exercise its preemptive rights with respect to the 12,170,140 shares before the
consummation of the St. Laurent acquisition. In return, Smurfit-Stone agreed
that if Smurfit-Stone consummated a transaction covered by the subscription
agreement within an agreed upon period after the effective date of the St.
Laurent acquisition, then Smurfit International would be entitled to purchase
the 12,170,140 shares plus the number of shares of Smurfit-Stone common stock
it would be entitled to purchase pursuant to such future transaction covered by
the subscription agreement. Such modification to the subscription agreement was
approved by the Independent Committee of the Smurfit-Stone board of directors,
which reviews transactions between Smurfit-Stone and JS Group and their
respective affiliates.
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WHERE YOU CAN FIND MORE INFORMATION
Smurfit-Stone and Stone Container each file annual, quarterly and special
reports, proxy statements and other information with the Securities and
Exchange Commission. You may read and copy any reports, statements or other
information Smurfit-Stone and Stone Container file at the Securities and
Exchange Commission's public reference rooms at Room 1024, 450 Fifth Street,
N.W., Washington, D.C. 20549, as well as at the Securities and Exchange
Commission's regional offices at 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661 and 7 World Trade Center, Suite 1300, New York, New York 10048.
Copies of these materials may also be obtained from the Securities and Exchange
Commission at prescribed rates by writing to the Public Reference Section of
the Securities and Exchange Commission, 450 Fifth Street, N.W., Washington,
D.C. 20549. Please call the Securities and Exchange Commission at 1-800-SEC-
0330 for further information on the public reference rooms. Each of Smurfit-
Stone's and Stone Container's filings are also available to the public from
commercial document retrieval services and at the web site maintained by the
Securities and Exchange Commission at www.sec.gov.
Smurfit-Stone has filed with the Securities and Exchange Commission a
registration statement on Form S-4 with respect to the Smurfit-Stone Series A
Preferred Stock to be issued to holders of Stone Container Series E Preferred
Stock under the merger agreement. This proxy statement/prospectus constitutes
the prospectus of Smurfit-Stone that is filed as part of the registration
statement. Other parts of the registration statement are omitted from this
proxy statement/prospectus in accordance with the rules and regulations of the
Securities and Exchange Commission. Copies of the registration statement,
including exhibits, may be inspected, without charge, at the offices of the
Securities and Exchange Commission at 450 Fifth Street, N.W., Washington, D.C.
20549, and copies may be obtained from the Securities and Exchange Commission
at prescribed rates.
You should rely only on the information contained or incorporated by
reference in this proxy statement/prospectus to vote on the proposals presented
at the special meeting. Smurfit-Stone and Stone Container have not authorized
anyone to provide you with information that is different from what is contained
in this proxy statement/prospectus. This proxy statement/prospectus is dated
, 2000. You should not assume that the information contained in this proxy
statement/prospectus is accurate as of any date other than that date, and
neither the mailing of this proxy statement/prospectus to you nor the issuance
of Smurfit-Stone Series A Preferred Stock in the merger shall create any
implication to the contrary.
This proxy statement/prospectus is being furnished to Stone Container
stockholders in connection with the solicitation of proxies by the Stone
Container board of directors for use at Stone Container's special meeting. Each
copy of this proxy statement/prospectus mailed to Stone Container stockholders
is accompanied by a form of proxy for use at Stone Container's special meeting.
This proxy statement/prospectus also serves as a prospectus for holders of
Stone Container Series E Preferred Stock in connection with the Smurfit-Stone
Series A Preferred Stock to be issued upon completion of the merger.
Smurfit-Stone has supplied all information contained or incorporated by
reference in this proxy statement/ prospectus relating to Smurfit-Stone, and
Stone Container has supplied all such information relating to Stone Container.
EXPERTS
The financial statements of St. Laurent for the years ended December 31,
1999 and December 31, 1998 included in this proxy statement/prospectus and
registration statement have been so included in reliance on the report of
PricewaterhouseCoopers LLP, given upon the authority of said firm as experts in
accounting and auditing. The consolidated financial statements of Smurfit-Stone
at December 31, 1999 and 1998 and for each of the three years in the period
ended December 31, 1999 included in this proxy statement/prospectus and
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<PAGE>
registration statement have been audited by Ernst & Young LLP, independent
auditors, as set forth in their report thereon appearing elsewhere herein, and
are included in reliance upon such report, given on the authority of said firm
as experts in accounting and auditing. The consolidated financial statements of
Stone Container Corporation at December 31, 1999 and 1998 and for each of the
two years in the period ended December 31, 1999 included in this proxy
statement/prospectus and registration statement have been audited by Ernst &
Young LLP, independent auditors, and at December 31, 1997 and for the year then
ended by PricewaterhouseCoopers LLP, independent auditors, as set forth in
their respective reports thereon appearing elsewhere herein, and are included
in reliance upon such reports, given upon the authority of said firms as
experts in accounting and auditing.
LEGAL MATTERS
Legal matters relating to the validity of the Smurfit-Stone Series A
Preferred Stock issuable in connection with the merger and certain federal
income tax matters relating to the merger will be passed upon for Smurfit-Stone
and Stone Container by Winston & Strawn, Chicago, Illinois.
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<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Smurfit-Stone Container Corporation Consolidated Financial Statements
Audited Consolidated Financial Statements
Report of Ernst & Young LLP, Independent Public Accountants.............. F-3
Consolidated Balance Sheets as of December 31, 1999 and 1998............. F-4
Consolidated Statements of Operations for the Years Ended December 31,
1999, 1998 and 1997..................................................... F-5
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1999, 1998 and 1997........................................ F-6
Consolidated Statements of Cash Flows for the Years Ended December 31,
1999, 1998 and 1997..................................................... F-7
Notes to Consolidated Financial Statements............................... F-8
Schedule of Valuation and Qualifying Accounts and Reserves............... F-36
Unaudited Interim Consolidated Financial Statements
Consolidated Statements of Operations for the Quarters Ended June 30,
2000 and 1999........................................................... F-37
Consolidated Balance Sheets as of June 30, 2000 and December 31, 1999.... F-38
Consolidated Statements of Cash Flows for the Quarters Ended June 30,
2000 and 1999........................................................... F-39
Notes to Consolidated Financial Statements............................... F-40
Stone Container Corporation Consolidated Financial Statements
Audited Consolidated Financial Statements
Report of Ernst & Young LLP, Independent Public Accountants.............. F-46
Report of PricewaterhouseCoopers LLP, Independent Public Accountants..... F-47
Consolidated Balance Sheets as of December 31, 1999 and 1998............. F-48
Consolidated Statements of Operations for the Year Ended December 31,
1999, the Period from November 19 to December 31, 1998, the Period from
January 1 to November 18, 1998, and the Year Ended December 31, 1997.... F-49
Consolidated Statements of Stockholders' Equity for the Year Ended
December 31, 1999, the Period from November 19 to December 31, 1998, the
Period from January 1 to November 18, 1998, and the Year Ended December
31, 1997................................................................ F-50
Consolidated Statements of Cash Flows for the Year Ended December 31,
1999, the Period from November 19 to December 31, 1998, the Period from
January 1 to November 18, 1998, and the Year Ended December 31, 1997.... F-51
Notes to Financial Statements............................................ F-52
Report of PricewaterhouseCoopers LLP, Independent Public Accountants..... F-77
Schedule of Valuation and Qualifying Accounts and Reserves............... F-78
Unaudited Interim Consolidated Financial Statements
Consolidated Statements of Operations for the Quarters Ended June 30,
2000 and 1999........................................................... F-79
Consolidated Balance Sheets as of June 30, 2000 and December 31, 1999.... F-80
Consolidated Statements of Cash Flows for the Quarters Ended June 30,
2000 and 1999........................................................... F-81
Notes to Consolidated Financial Statements............................... F-82
St. Laurent Paperboard Inc. Consolidated Financial Statements
Audited Consolidated Financial Statements
Report of PricewaterhouseCoopers LLP, Chartered Accountants.............. F-87
Consolidated Statement of Earnings (Loss) and Retained Earnings for the
Years Ended December 31, 1999, 1998 and 1997............................ F-88
Consolidated Statement of Cash Flows for the Years Ended December 31,
1999, 1998 and 1997..................................................... F-89
Consolidated Balance Sheet as of December 31, 1999 and 1998.............. F-90
Notes to Consolidated Financial Statements............................... F-91
</TABLE>
F-1
<PAGE>
<TABLE>
<S> <C>
Unaudited Interim Consolidated Financial Statements
Consolidated Statement of Earnings and Retained Earnings for the
Quarters Ended March 31, 2000 and 1999................................. F-116
Consolidated Statement of Changes in Cash Position for the Quarters
Ended March 31, 2000 and 1999.......................................... F-117
Consolidated Balance Sheets as of March 31, 2000 and December 31, 1999.. F-118
Notes to Consolidated Financial Statements.............................. F-119
Smurfit-Stone Container Corporation Unaudited Pro Forma Condensed
Consolidated Financial Data............................................. F-122
Unaudited Pro Forma Condensed Consolidated Balance Sheet as of June 30,
2000................................................................... F-123
Unaudited Pro Forma Condensed Consolidated Statement of Operations for
the Quarter Ended June 30, 2000 and the Year Ended December 31, 1999... F-124
Notes to Unaudited Pro Forma Condensed Consolidated Financial
Statements............................................................. F-125
Stone Container Corporation Unaudited Pro Forma Condensed Consolidated
Financial Data.......................................................... F-127
Unaudited Pro Forma Condensed Consolidated Balance Sheet as of June 30,
2000................................................................... F-128
Unaudited Pro Forma Condensed Consolidated Statement of Operations for
the Quarter Ended June 30, 2000 and the Year Ended December 31, 1999... F-129
Notes to Unaudited Pro Forma Condensed Consolidated Financial
Statements............................................................. F-130
</TABLE>
F-2
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Smurfit-Stone Container Corporation
We have audited the accompanying consolidated balance sheets of Smurfit-
Stone Container Corporation as of December 31, 1999 and 1998, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 1999. Our audits also
included the financial statement schedule listed in Part II of the Registration
Statement at Item 21(b)(1). These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Smurfit-Stone
Container Corporation at December 31, 1999 and 1998, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1999 in conformity with accounting principles
generally accepted in the United States. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
As discussed in Note 1 to the financial statements, in 1998 the Company
changed its method of accounting for start-up costs.
/s/ Ernst & Young LLP
_________________________________
Ernst & Young LLP
St. Louis, Missouri
January 24, 2000
except for Note 20, as to which
the date is February 23, 2000
F-3
<PAGE>
SMURFIT-STONE CONTAINER CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
---------------------
1999 1998
---------- ----------
(In millions, except
share data)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents............................. $ 24 $ 155
Receivables, less allowances of $50 in 1999 and $70 in
1998................................................. 647 743
Inventories
Work-in-process and finished goods.................. 238 227
Materials and supplies.............................. 496 546
--------- ----------
734 773
Refundable income taxes............................... 7 24
Deferred income taxes................................. 130 160
Prepaid expenses and other current assets............. 69 129
--------- ----------
Total current assets.............................. 1,611 1,984
Net property, plant and equipment....................... 4,395 5,496
Timberland, less timber depletion....................... 24 276
Goodwill, less accumulated amortization of $151 in 1999
and $73 in 1998........................................ 3,328 2,869
Investment in equity of non-consolidated affiliates..... 176 638
Other assets............................................ 325 368
--------- ----------
$ 9,859 $ 11,631
========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current maturities of long-term debt.................. $ 174 $ 205
Accounts payable...................................... 662 533
Accrued compensation and payroll taxes................ 238 181
Interest payable...................................... 111 126
Other current liabilities............................. 384 304
--------- ----------
Total current liabilities......................... 1,569 1,349
Long-term debt, less current maturities................. 4,619 6,428
Other long-term liabilities............................. 894 1,026
Deferred income taxes................................... 839 1,113
Minority interest....................................... 91 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, 217,820,762 and 214,959,041 issued
and outstanding in 1999 and 1998, respectively....... 2 2
Additional paid-in capital.............................. 3,436 3,376
Retained earnings (deficit)............................. (1,586) (1,743)
Accumulated other comprehensive income (loss)........... (5) (1)
--------- ----------
Total stockholders' equity........................ 1,847 1,634
--------- ----------
$ 9,859 $ 11,631
========= ==========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
SMURFIT-STONE CONTAINER CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended
December 31,
----------------------
1999 1998 1997
------ ------ ------
(In millions, except
per share data)
<S> <C> <C> <C>
Net sales.............................................. $7,151 $3,485 $2,957
Costs and expenses
Cost of goods sold.................................... 6,022 2,952 2,532
Selling and administrative expenses................... 696 369 249
Restructuring charge.................................. 10 257
------ ------ ------
Income (loss) from operations......................... 423 (93) 176
Other income (expense)
Interest expense, net................................. (563) (247) (196)
Other, net............................................ 479 4 (2)
------ ------ ------
Income (loss) from continuing operations before
income taxes, minority interest, extraordinary item
and cumulative effect of accounting change........... 339 (336) (22)
Benefit from (provision for) income taxes............. (168) 126 3
Minority interest expense............................. (8) (1)
------ ------ ------
Income (loss) from continuing operations before
extraordinary item and cumulative effect of
accounting change.................................... 163 (211) (19)
Discontinued operations
Income from discontinued operations, net of income
taxes of $(1) in 1999, $(17) in 1998 and $(14) in
1997................................................. 2 27 20
Gain on disposition of discontinued operations, net
of income taxes of $2................................ 4
------ ------ ------
Income (loss) before extraordinary item and
cumulative effect of accounting change............... 169 (184) 1
Extraordinary item
Loss from early extinguishment of debt, net of income
tax benefit of $7 in 1999 and $9 in 1998............. (12) (13)
Cumulative effect of accounting change
Start-up costs, net of income tax benefit of $2....... (3)
------ ------ ------
Net income (loss)................................... $ 157 $ (200) $ 1
====== ====== ======
Basic earnings per common share
Income (loss) from continuing operations before
extraordinary item and cumulative effect of
accounting change.................................... $ .75 $(1.70) $ (.17)
Discontinued operations............................... .01 .22 .18
Gain on disposition of discontinued operations........ .01
Extraordinary item.................................... (.05) (.11)
Cumulative effect of accounting change................ (.02)
------ ------ ------
Net income (loss)................................... $ .72 $(1.61) $ .01
====== ====== ======
Weighted average shares outstanding.................... 217 124 111
====== ====== ======
Diluted earnings per common share
Income (loss) from continuing operations before
extraordinary item and cumulative effect of
accounting change.................................... $ .74 $(1.70) $ (.17)
Discontinued operations............................... .01 .22 .18
Gain on disposition of discontinued operations........ .01
Extraordinary item.................................... (.05) (.11)
Cumulative effect of accounting change................ (.02)
------ ------ ------
Net income (loss)................................... $ .71 $(1.61) $ .01
====== ====== ======
Weighted average shares outstanding.................... 220 124 111
====== ====== ======
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
SMURFIT-STONE CONTAINER CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock
------------------ Accumulated
Par Additional Retained Other
Number of Value, Paid-In Earnings Comprehensive
Shares $.01 Capital (Deficit) Income (Loss) Total
----------- ------ ---------- --------- ------------- ------
(In millions, except share data)
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1,
1997................... 110,989,156 $ 1 $1,168 $(1,544) $ $ (375)
Comprehensive income
Net income............ 1 1
Other comprehensive
income, net of tax...
----------- --- ------ ------- ---- ------
Comprehensive income.. 1 1
Issuance of common stock
under stock option
plan................... 7,638
----------- --- ------ ------- ---- ------
Balance at December 31,
1997................... 110,996,794 1 1,168 (1,543) (374)
Comprehensive income
(loss)
Net loss.............. (200) (200)
Other comprehensive
income (loss)
Foreign currency
translation
adjustment, net of
tax of $2........... 3 3
Minimum pension
liability
adjustment, net of
tax of $(2)......... (4) (4)
----------- --- ------ ------- ---- ------
Comprehensive
income (loss)..... (200) (1) (201)
Issuance of common stock
for acquisition of
Stone Container
Corporation, net of
registration costs..... 103,954,782 1 2,168 2,169
Fair value of Smurfit-
Stone Container
Corporation stock
options issued to
convert Stone Container
Corporation stock
options................ 40 40
Issuance of common stock
under stock option
plan................... 7,465
----------- --- ------ ------- ---- ------
Balance at December 31,
1998................... 214,959,041 2 3,376 (1,743) (1) 1,634
Comprehensive income
(loss)
Net income............ 157 157
Other comprehensive
income (loss)
Unrealized holding
gain on marketable
securities, net of
tax of $2........... 3 3
Foreign currency
translation
adjustment, net of
tax of $(7)......... (11) (11)
Minimum pension
liability
adjustment, net of
tax of $2........... 4 4
----------- --- ------ ------- ---- ------
Comprehensive
income (loss)..... 157 (4) 153
Issuance of common stock
under stock option
plan................... 2,861,721 60 60
----------- --- ------ ------- ---- ------
Balance at December 31,
1999................... 217,820,762 $ 2 $3,436 $(1,586) $ (5) $1,847
=========== === ====== ======= ==== ======
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
SMURFIT-STONE CONTAINER CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended
December 31,
-----------------------
1999 1998 1997
------- ------- -----
(In millions)
<S> <C> <C> <C>
Cash flows from operating activities
Net income (loss)................................... $ 157 $ (200) $ 1
Adjustments to reconcile net income (loss) to net
cash provided by operating activities
Gain on disposition of discontinued operations..... (2)
Extraordinary loss from early extinguishment of
debt.............................................. 19 22
Cumulative effect of accounting change for start-up
costs............................................. 5
Depreciation, depletion and amortization........... 430 168 127
Amortization of deferred debt issuance costs....... 14 8 11
Deferred income taxes.............................. 137 (113) 13
Gain on sale of assets............................. (446)
Non-cash employee benefit expense.................. 31 9 4
Foreign currency transaction gains................. (7) (4)
Noncash restructuring charge....................... 4 179
Change in current assets and liabilities, net of
effects from acquisitions and dispositions
Receivables........................................ (186) 98 (24)
Inventories........................................ 8 3 (32)
Prepaid expenses and other current assets.......... 38 (13) 3
Accounts payable and accrued liabilities........... 88 (77) (4)
Interest payable................................... (15) 26 (5)
Income taxes....................................... 6 (18) (6)
Other, net......................................... (93) 36
------- ------- -----
Net cash provided by operating activities........ 183 129 88
------- ------- -----
Cash flows from investing activities
Property additions.................................. (156) (285) (166)
Timberland additions................................ (2) (16)
Investments in affiliates and acquisitions.......... (9)
Cash acquired with acquisition, net of acquisition
costs.............................................. 222
Construction funds held in escrow................... 9
Proceeds from property and timberland disposals and
sale of businesses................................. 1,417 6 7
Net proceeds from sale of receivables............... 226
------- ------- -----
Net cash provided by (used for) investing
activities...................................... 1,487 (59) (175)
------- ------- -----
Cash flows from financing activities
Borrowings under bank credit facilities............. 1,502
Net borrowings (repayments) under accounts
receivable securitization programs................. (211) (1) 30
Payments of long-term debt.......................... (1,611) (1,384) (7)
Other increases in long-term debt................... 64
Proceeds from exercise of stock options............. 17
Deferred debt issuance costs........................ (44)
------- ------- -----
Net cash provided by (used for) financing
activities...................................... (1,805) 73 87
------- ------- -----
Effect of exchange rate changes on cash.......... 4
------- ------- -----
Increase (decrease) in cash and cash equivalents...... (131) 143
Cash and cash equivalents
Beginning of year................................... 155 12 12
------- ------- -----
End of year......................................... $ 24 $ 155 $ 12
======= ======= =====
</TABLE>
See notes to consolidated financial statements.
F-7
<PAGE>
SMURFIT-STONE CONTAINER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in millions, except share data)
1. Significant Accounting Policies
Basis of Presentation: Smurfit-Stone Container Corporation ("SSCC"),
formerly Jefferson Smurfit Corporation and hereafter referred to as the
"Company," 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 unsecured indebtedness of JSC(U.S.). JSCE, Inc. has no
operations other than its investment in JSC(U.S.). JSC(U.S.) has operations
throughout the United States. Stone has domestic and international operations.
Nature of Operations: The Company's major operations are in paper products,
recycled and renewable fiber resources, and consumer and specialty packaging.
In February 1999, the Company announced its intention to divest its newsprint
subsidiary, and accordingly, its newsprint segment is accounted for as a
discontinued operation (See Note 13). The Company's paperboard mills procure
virgin and recycled fiber and produce paperboard for conversion into corrugated
containers, folding cartons, industrial bags and industrial packaging at
Company-owned facilities and third-party converting operations. Paper product
customers represent a diverse range of industries including paperboard and
paperboard packaging, wholesale trade, retailing and agri-business. Recycling
operations collect or broker wastepaper for sale to Company-owned and third-
party paper mills. Specialty packaging produces labels and flexible packaging
for use in industrial, medical and consumer product applications. Customers and
operations are principally located in the United States. Credit is extended to
customers based on an evaluation of their financial condition.
Principles of Consolidation: The consolidated financial statements include
the accounts of the Company and majority-owned and controlled subsidiaries.
Investments in majority-owned affiliates where control does not exist and non-
majority owned affiliates are accounted for on the equity method. Significant
intercompany accounts and transactions are eliminated in consolidation.
Cash and Cash Equivalents: The Company considers all highly liquid
investments with an original maturity of three months or less to be cash
equivalents. Cash and cash equivalents of $3 million and $55 million were
pledged at December 31, 1999 and 1998 as collateral for obligations associated
with the accounts receivable securitization programs (See Note 6).
Revenue Recognition: Revenue is recognized at the time products are shipped
to external customers.
Inventories: Inventories are valued at the lower of cost or market,
principally under the last-in, first-out ("LIFO") method except for $225
million in 1999 and $303 million in 1998 which are valued at the lower of
average cost or market. First-in, first-out ("FIFO") costs (which approximate
replacement costs) exceed the LIFO value by $64 million and $45 million at
December 31, 1999 and 1998, respectively.
Net Property, Plant and Equipment: Property, plant and equipment are carried
at cost. The costs of additions, improvements and major replacements are
capitalized, while maintenance and repairs are charged to expense as incurred.
Provisions for depreciation and amortization are made using straight-line rates
over the estimated useful lives of the related assets and the terms of the
applicable leases for leasehold improvements. Papermill machines have been
assigned a useful life of 23 years, while major converting equipment and
folding carton presses have been assigned useful lives ranging from 12-20
years. Property, plant and equipment acquired in the Merger were recorded at
fair value based on the final appraisal results (See Note 2). These assets were
assigned remaining useful lives of 18 years for papermill machines and 12 years
for major converting equipment.
F-8
<PAGE>
SMURFIT-STONE CONTAINER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Timberland, less Timber Depletion: Timberland is stated at cost less
accumulated cost of timber harvested. The portion of the costs of timberland
attributed to standing timber is charged against income as timber is cut, at
rates determined annually, based on the relationship of unamortized timber
costs to the estimated volume of recoverable timber. The costs of seedlings and
reforestation of timberland are capitalized. The Company sold approximately
980,000 acres of owned and leased timberlands in 1999 (See Note 4).
Goodwill: The excess of cost over the fair value assigned to the net assets
acquired is recorded as goodwill and is being amortized using the straight-line
method over 40 years.
Deferred Debt Issuance Costs: Deferred debt issuance costs included in other
assets are amortized over the terms of the respective debt obligations using
the interest method.
Long-lived Assets: In accordance with Statement of Financial Accounting
Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-lived Assets
and for Long-lived Assets to be Disposed of," long-lived assets held and used
by the Company and the related goodwill are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable.
Income Taxes: The Company accounts for income taxes in accordance with the
liability method of accounting for income taxes. Under the liability method,
deferred assets and liabilities are recognized based upon anticipated future
tax consequences attributable to differences between financial statement
carrying amounts of assets and liabilities and their respective tax bases (See
Note 8).
Foreign Currency Translation: The functional currency for the majority of
the Company's foreign operations is the applicable local currency. Accordingly,
assets and liabilities are translated at the exchange rate in effect at the
balance sheet date, and income and expenses are translated at average exchange
rates prevailing during the year. Translation gains or losses are included
within stockholders' equity as part of Accumulated Other Comprehensive Income.
Foreign currency transaction gains or losses are credited or charged to income.
The functional currency for foreign operations operating in highly inflationary
economies is the U.S. dollar and any gains or losses are credited or charged to
income.
Financial Instruments: The Company periodically enters into interest rate
swap agreements that involve the exchange of fixed and floating rate interest
payments without the exchange of the underlying principal amount. For interest
rate instruments that effectively hedge interest rate exposures, the net cash
amounts paid or received on the agreements are accrued and recognized as an
adjustment to interest expense. If an arrangement is replaced by another
instrument and no longer qualifies as a hedge instrument, then it is marked to
market and carried on the balance sheet at fair value. Gains and losses
realized upon settlement of these agreements are deferred and amortized to
interest expense over a period relevant to the agreement if the underlying
hedged instrument remains outstanding, or immediately if the underlying hedged
instrument is settled.
Transfers of Financial Assets: The Company accounts for transfers of
financial assets in accordance with SFAS No. 125 "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." Accordingly,
financial assets transferred to qualifying special-purpose entities and the
liabilities of such entities are not reflected in the consolidated financial
statements of the Company (See Note 4).
Employee Stock Options: Accounting for stock-based plans is in accordance
with Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock
Issued to Employees," and related interpretations. Under APB 25, because the
exercise price of the Company's employee stock options equals the market price
of the underlying stock on the date of grant, no compensation expense is
recognized. The Company has adopted the disclosure-only provisions of SFAS No.
123 "Accounting for Stock-Based Compensation" (See Note 11).
Environmental Matters: The Company expenses environmental expenditures
related to existing conditions resulting from past or current operations from
which no current or future benefit is discernible.
F-9
<PAGE>
SMURFIT-STONE CONTAINER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Expenditures that extend the life of the related property or mitigate or
prevent future environmental contamination are capitalized. Reserves for
environmental liabilities are established in accordance with the American
Institute of Certified Public Accountants ("AICPA") Statement of Position
("SOP") 96-1, "Environmental Remediation Liabilities." The Company records a
liability at the time when it is probable and can be reasonably estimated. Such
liabilities are not discounted or reduced for potential recoveries from
insurance carriers.
Use of Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Reclassifications: Certain reclassifications of prior year presentations
have been made to conform to the 1999 presentation.
Start-up Costs: In April 1998, the AICPA issued SOP 98-5, "Reporting the
Costs of Start-Up Activities," which requires that costs related to start-up
activities be expensed as incurred. Prior to 1998, the Company capitalized
certain costs to open new plants or to start new production processes. The
Company adopted the provisions of the SOP in its financial statements as of the
beginning of 1998. The Company recorded a charge for the cumulative effect of
an accounting change of $3 million, net of taxes of $2 million ($.02 per
share), to expense costs that had been capitalized prior to 1998.
Computer Software-Internal Use: In March 1998, the AICPA issued SOP 98-1,
"Accounting for Computer Software Developed or Obtained for Internal Use,"
which requires that certain costs incurred in connection with developing or
obtaining software for internal-use must be capitalized. The adoption of SOP
98-1 did not have a material effect on the 1999 financial statements.
Prospective Accounting Pronouncements: In 1998, the Financial Accounting
Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities." SFAS No. 133 requires that all derivative instruments be
recorded on the balance sheet at fair value. SFAS No. 133 is effective for all
fiscal quarters of fiscal years beginning after June 15, 2000. The Company is
currently assessing what the impact of SFAS No. 133 will be on the Company's
future earnings and financial position.
2. Merger and Restructurings
Merger with Stone Container Corporation
On November 18, 1998, Stone merged with a wholly-owned subsidiary of the
Company ("the Merger"). Under the terms of the Merger, each share of Stone
common stock was exchanged for the right to receive .99 of one share of Company
common stock. A total of 104 million shares of Company common stock were issued
in the Merger, resulting in a total purchase price (including the fair value of
stock options and related fees) of approximately $2,245 million. 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 purchase price
allocation was completed during the fourth quarter of 1999, and includes
adjustments for the final appraisals on property, plant and equipment and
investments in non-consolidated affiliates, resulting in a decrease in
valuations of $726 million and $38 million, respectively; the resolution of
litigation related to the Company's investment in Florida Coast Paper Company
L.L.C ("FCPC") and Stone Savannah River Pulp and Paper Corporation ("SSR"); the
shutdown of converting facilities; and the related deferred taxes.
F-10
<PAGE>
SMURFIT-STONE CONTAINER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The final allocation resulted in acquired goodwill of $3,202 million, which is
being amortized on a straight-line basis over 40 years.
In October 1999, FCPC and a committee representing the holders of the FCPC
secured debt filed a bankruptcy reorganization plan to resolve all matters
relating to the bankruptcies of the FCPC Companies. In January 2000, the plan
was confirmed and consummated and Stone paid approximately $123 million to
satisfy the claims of creditors of FCPC, Stone received title to the FCPC mill,
and all claim of the Output Purchase Agreement, as well as any obligations of
Stone involving FCPC or its affiliates, were released and discharged. In
addition, Four M Corporation ("Four M") issued $25 million of convertible
preferred stock to Stone in connection with the consummation of the plan. (See
Note 18).
The litigation related to the Company's purchase of the common stock of SSR
was settled for cash payments of approximately $32 million during the third
quarter of 1999.
The following unaudited pro forma combined information presents the results
of operations of the Company as if the Merger had taken place on January 1,
1998 and 1997, respectively:
Pro Forma Information
<TABLE>
<CAPTION>
1998 1997
------ ------
<S> <C> <C>
Net sales................................................... $7,550 $7,748
Loss from continuing operations before extraordinary item
and cumulative effect of accounting change................. (999) (453)
Net loss.................................................... (992) (445)
Net loss per common share
Basic..................................................... (4.61) (2.08)
Diluted................................................... (4.61) (2.08)
</TABLE>
These unaudited pro forma results of operations have been prepared for
comparative purposes only and do not purport to be indicative of the results of
operations which actually would have resulted had the Merger occurred as of
January 1, 1998 and 1997, respectively.
Stone Purchase Allocation
Included in the allocation of the cost to acquire Stone is the adjustment to
fair value of property and equipment associated with the permanent shutdown of
certain containerboard mill and pulp mill facilities of Stone, liabilities for
the termination of certain Stone employees, and liabilities for long-term
commitments. The assets at these facilities were recorded at their estimated
fair value less cost to sell based upon appraisals. The terminated employees
included approximately 550 employees at these mill facilities and 200 employees
in Stone's corporate office. These employees were terminated in December 1998.
The facilities were shut down during 1998 and the Company is in the process of
either selling or dismantling these facilities. The long-term commitments
consist of lease commitments and funding commitments on debt guarantees that
are associated with the shutdown of Stone's containerboard mill and pulp mill
facilities or other investments in which the Company will no longer participate
as a result of its merger plan.
During 1999, the Company permanently closed five Stone converting
facilities. Included in the purchase price allocation for these facilities are
the adjustment to fair value of property, plant and equipment less the costs to
sell, liabilities for the termination of employees, and liabilities for long-
term commitments, primarily leases. Approximately 500 employees were terminated
in 1999. The amounts associated with these closures are included in the
following table of exit liabilities as part of the 1999 adjustments.
F-11
<PAGE>
SMURFIT-STONE CONTAINER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following is a summary of the exit liabilities recorded in the
allocation of the cost of Stone:
<TABLE>
<CAPTION>
Balance at Balance at
Opening Dec. 31, Dec. 31,
Balance Payments 1998 Payments Adjustments 1999
------- -------- ---------- -------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Severance............... $ 14 $ (4) $ 10 $(13) $ 8 $ 5
Lease commitments....... 38 (1) 37 (6) 8 39
Settlement of FCPC
litigation............. 37 37 (1) 87 123
Other commitments....... 19 (6) 13 (2) 4 15
Mill closure costs...... 9 9 (7) (1) 1
---- ---- ---- ---- ---- ----
$117 $(11) $106 $(29) $106 $183
==== ==== ==== ==== ==== ====
</TABLE>
Restructuring
In connection with the Merger, the Company recorded a pretax restructuring
charge of $257 million in 1998 related to the permanent shutdown of certain
containerboard mill operations and related facilities formerly operated by
JSC(U.S.), the termination of certain JSC(U.S.) employees, and liabilities for
lease commitments at the closed JSC(U.S.) facilities. The containerboard mill
facilities were permanently shut down on December 1, 1998 and the Company is in
various stages of dismantling these facilities. The assets at these facilities
were adjusted to their estimated fair value less cost to sell based upon
appraisals. The sales and operating income of these mill facilities in 1998
prior to closure were $209 million and $9 million respectively. The terminated
employees included approximately 700 employees at these mills and 50 employees
in the Company's corporate office. These employees were terminated in December
1998. During 1999, the Company permanently closed eight facilities, which
resulted in approximately 400 employees being terminated. A $15 million
restructuring charge was recorded related to the facility closures. The 1999
adjustments below include a reduction to 1998 exit liabilities of $5 million
and a reclassification of pension liabilities of $12 million.
The following is a summary of the restructuring liabilities recorded:
<TABLE>
<CAPTION>
Balance at Balance at
Opening Dec. 31, Dec. 31,
Balance Payments Adjustments 1998 Charge Payments Adjustments 1999
------- -------- ----------- ---------- ------ -------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Write-down of property
and equipment to fair
value.................. $179 $ $(179) $ $ 4 $ $ (4) $
Severance............... 27 (3) 24 5 (27) 2
Lease commitments....... 21 (1) 20 (3) 17
Pension curtailments.... 9 9 3 (12)
Facility closure costs.. 13 (3) 10 1 (3) 8
Other................... 8 8 2 (3) (5) 2
---- --- ----- --- --- ---- ---- ---
$257 $(7) $(179) $71 $15 $(36) $(21) $29
==== === ===== === === ==== ==== ===
</TABLE>
Other Merger Related Charges
In addition, the Company recorded $23 million of Merger related charges as
selling and administrative expenses during the fourth quarter of 1998. These
charges pertained to professional management fees to achieve operating
efficiencies from the Merger, fees for management personnel changes and other
Merger cost.
F-12
<PAGE>
SMURFIT-STONE CONTAINER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Cash Requirements
Future cash outlays under the restructuring of Stone and JSC(U.S.)
operations are anticipated to be $158 million in 2000 (including the $123
million FCPC settlement), $11 million in 2001, $11 million in 2002, and $32
million thereafter. The Company is continuing to evaluate all areas of its
business in connection with its merger integration, including the
identification of additional converting facilities that might be closed.
3. Net Property, Plant and Equipment
Net property, plant and equipment at December 31 consists of:
<TABLE>
<CAPTION>
1999 1998
------- ------
<S> <C> <C>
Land........................................................ $ 122 $ 145
Buildings and leasehold improvements........................ 496 780
Machinery, fixtures and equipment........................... 4,662 5,279
Construction in progress.................................... 127 156
------- ------
5,407 6,360
Less accumulated depreciation and amortization.............. (1,012) (864)
------- ------
Net property, plant and equipment......................... $ 4,395 $5,496
======= ======
</TABLE>
Property, plant and equipment was adjusted by $726 million in Stone's final
purchase price allocation (See Note 2). Depreciation and depletion expense was
$352 million, $153 million, $119 million for 1999, 1998 and 1997 respectively.
Net property, plant and equipment include capitalized leases of $76 million and
$68 million and related accumulated amortization of $32 million and $23 million
at December 31, 1999 and 1998, respectively.
4. SFAS No. 125 Transactions
Stone Receivables Securitization Program
On October 15, 1999, the Company entered into a new six-year $250 million
accounts receivable securitization program whereby the Company sells, without
recourse, on an ongoing basis, certain of its accounts receivable to Stone
Receivables Corporation ("SRC"), a wholly-owned non-consolidated subsidiary of
the Company. SRC transfers the receivables to a trust for which it has sold
beneficial interest to third-party investors. The Company retained a junior
interest in the trust which has been classified as accounts receivable in the
accompanying consolidated balance sheet.
SRC is a qualified special-purpose entity under the provisions of SFAS No.
125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities". Accordingly accounts receivable sold to SRC
for which the Company did not retain an interest, are not included in the
Company's consolidated balance sheets.
At December 31, 1999, $304 million of accounts receivable had been sold
under the program, of which $79 million was retained by the Company as a junior
interest and recorded as an accounts receivable in the accompanying
consolidated balance sheets.
Timberland Sale and Note Monetization
The Company sold approximately 980,000 acres of owned and leased timberland
in Florida, Georgia and Alabama in October 1999. The final purchase price,
after adjustments, was $710 million. The Company received $225 million in cash,
with the balance of $485 million in the form of installment notes.
F-13
<PAGE>
SMURFIT-STONE CONTAINER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company entered into a program to monetize the installment notes
receivable. The notes were sold to Timber Notes Holdings, a qualified special
purpose entity under the provisions of SFAS No. 125, for $430 million cash
proceeds and a residual interest in the notes. The transaction has been
accounted for as a sale under SFAS No. 125. The cash proceeds from the sale and
the monetization transactions were used to prepay borrowings under the
JSC(U.S.) Credit Agreement. At December 31, 1999 the residual interest of $33
million was included in other assets.
The pretax gain of $407 million on the timberland sale and the related note
monetization program is included in Other, net in the consolidated statements
of operations.
5. Non-Consolidated Affiliates
The Company has several non-consolidated affiliates that are engaged in
paper and packaging operations in North America, South America and Europe. The
Company's significant non-consolidated affiliate at December 31, 1999 is
Smurfit-MBI (formerly MacMillian 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 $389 million and $351 million in 1999 and 1998, respectively.
As of December 31, 1998, the Company owned 25% of Abitibi Consolidated Inc.
("Abitibi"), which had sales of $2,313 million in 1998. In 1999, the Company
sold its interest in Abitibi and recorded a $39 million gain, which is
reflected in Other, net in the consolidated statements of operations.
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 as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Results of operations
Net sales...................................................... $668 $417
Cost of sales.................................................. 576 384
Loss before income taxes, minority interest and extraordinary
charges....................................................... 34 (55)
Net income (loss).............................................. 32 (43)
</TABLE>
<TABLE>
<CAPTION>
December 31, December 31,
1999 1998
------------ ------------
<S> <C> <C>
Financial position:
Current assets................................... $160 $ 964
Non-current assets............................... 150 4,238
Current liabilities.............................. 111 782
Non-current liabilities.......................... 107 1,973
Stockholders' equity............................. 93 2,447
</TABLE>
F-14
<PAGE>
SMURFIT-STONE CONTAINER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
6. Long-Term Debt
Long-term debt, as of December 31, is as follows:
<TABLE>
<CAPTION>
1999 1998
----- -----
<S> <C> <C>
Bank Credit Facilities
JSC(U.S.)
1998 Tranche A Term Loan (8.7% weighted average variable rate),
payable in various installments through March 31, 2005............ $ 275 $ 400
1998 Tranche B Term Loan (9.4% weighted average variable rate),
payable in various installments through March 31, 2006............ 115 900
Revolving Credit Facility (9.0% weighted average variable rate),
due March 31, 2005................................................ 50 85
Stone
Tranche B Term Loan, payable in various installments through April
1, 2000........................................................... 368
Tranche C Term Loan (9.5% weighted average variable rate), payable
in various installments through October 1, 2003................... 181 194
Tranche D Term Loan (9.5% weighted average variable rate), payable
in various installments through October 1, 2003................... 173 185
Tranche E Term Loan (9.5% weighted average variable rate), payable
in various installments through October 1, 2003................... 234 248
Revolving Credit Facility (10.6% weighted average rate), due
December 31, 2000................................................. 93 161
4.98% to 7.96% term loans, denominated in foreign currencies,
payable in varying amounts through 2004........................... 40 79
----- -----
1,161 2,620
Accounts Receivable Securitization Program Borrowings
JSC(U.S.) accounts receivable securitization program borrowings
(5.9% weighted average variable rate), due in February 2002....... 224 209
Stone accounts receivable securitization program term loans (6.2%
weighted average variable rate), due December 15, 2000............ 210
----- -----
224 419
Senior Notes
JSC(U.S.)
11.25% Series A unsecured senior notes, due May 1, 2004............ 300 300
10.75% Series B unsecured senior notes, due May 1, 2002............ 100 100
9.75% unsecured senior notes, due April 1, 2003.................... 500 500
Stone
10.75% first mortgage notes, due October 1, 2002 (plus unamortized
premium of $13 and $18)........................................... 513 518
8.45% mortgage notes, payable in monthly installments through
August 1, 2007 and $69 on September 1, 2007....................... 81 82
9.875% unsecured senior notes, due February 1, 2001 (plus
unamortized premium of $3 and $7)................................. 562 578
11.5% unsecured senior notes, due October 1, 2004 (plus unamortized
premium of $10 and $12)........................................... 210 212
11.5% unsecured senior notes, due August 15, 2006 (plus unamortized
premium of $5 and $6)............................................. 205 206
12.58% rating adjustable unsecured senior notes, due August 1, 2016
(plus unamortized premium of $2 and $2)........................... 127 127
----- -----
2,598 2,623
</TABLE>
F-15
<PAGE>
SMURFIT-STONE CONTAINER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
1999 1998
------ ------
<S> <C> <C>
Other Debt
Other (including obligations under capitalized leases of $43
and $44)...................................................... 329 344
Stone Subordinated Debt
10.75% senior subordinated debentures and 1.5% supplemental
interest certificates, due on April 1, 2002 (less unamortized
discount of $3 and $5)........................................ 244 270
10.75% senior subordinated debentures, due April 1, 2002 (less
unamortized discount of $1 at December 31, 1998).............. 200 200
11.0% senior subordinated debentures, due August 15, 1999 (plus
unamortized premium of $1 at December 31, 1998)............... 120
6.75% convertible subordinated debentures (convertible at
$34.28 per share), due February 15, 2007 (less unamortized
discount of $8 and $8)........................................ 37 37
------ ------
481 627
------ ------
Total debt................................................... 4,793 6,633
Less current maturities........................................ (174) (205)
------ ------
Total long-term debt......................................... $4,619 $6,428
====== ======
</TABLE>
The amounts of total debt outstanding at December 31, 1999 maturing during
the next five years are as follows:
<TABLE>
<S> <C>
2000.................................................................. $ 174
2001.................................................................. 612
2002.................................................................. 1,378
2003.................................................................. 1,111
2004.................................................................. 598
Thereafter............................................................ 920
</TABLE>
Bank Credit Facilities
JSC(U.S.) Credit Agreement
In March 1998, JSC(U.S.) entered into a bank credit facility (the "JSC(U.S.)
Credit Agreement") consisting of a $550 million revolving credit facility
("Revolving Credit Facility") of which up to $150 million may consist of
letters of credit, a $400 million Tranche A Term Loan and a $350 million
Tranche B Term Loan. Net proceeds from the offering were used to repay the 1994
JSC(U.S.) Tranche A, Tranche B, and Tranche C Term Loans and revolving credit
facility. The write-off of related deferred debt issuance costs totaling $13
million (net of income tax benefits of $9 million) for 1998 is reflected in the
accompanying consolidated statements of operations as an extraordinary item.
A commitment fee of .5% per annum is assessed on the unused portion of the
Revolving Credit Facility. At December 31, 1999, the unused portion of this
facility, after giving consideration to outstanding letters of credit, was $485
million.
On November 18, 1998, JSC(U.S.) and its bank group amended and restated the
JSC(U.S.) Credit Agreement to, among other things, (i) allow an additional $550
million borrowing on the Tranche B Term Loan, (ii) allow the purchase of a
paper machine from an affiliate (See Note 15), (iii) make a $300 million
intercompany loan to SSCC, which was contributed to Stone as additional paid-in
capital, (iv) permit the Merger, and (v) ease certain financial covenants.
F-16
<PAGE>
SMURFIT-STONE CONTAINER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
On October 15, 1999 JSC(U.S.) and its bank group amended the JSC(U.S.)
Credit Agreement to (i) permit the sale of the timberlands and the Newberg
newsprint mill, (ii) permit the cash proceeds from these asset sales to be
applied as prepayments against the JSC(U.S.) Credit Agreement, (iii) permit
certain prepayments of other indebtedness, and (iv) ease certain quarterly
financial covenants for 1999 and 2000. The proceeds from the timberland sale
and the Newberg newsprint mill were used to reduce the balance of the Tranche A
and Tranche B Term Loans. The write-off of related deferred debt issuance costs
totaling $10 million (net of income tax benefits of $6 million) for 1999 is
reflected in the accompanying consolidated statements of operations as an
extraordinary item.
The JSC(U.S.) Credit Agreement contains various covenants and restrictions
including, among other things, (i) limitations on dividends, redemptions and
repurchases of capital stock, (ii) limitations on the incurrence of
indebtedness, liens, leases and sale-leaseback transactions, (iii) limitations
on capital expenditures, and (iv) maintenance of certain financial covenants.
The JSC(U.S.) Credit Agreement also requires prepayments if JSC(U.S.) has
excess cash flows, as defined, or receives proceeds from certain asset sales,
insurance, issuance of certain equity securities or incurrence of certain
indebtedness.
The obligations under the JSC(U.S.) Credit Agreement are unconditionally
guaranteed by the Company and JSCE, Inc. and its subsidiaries, and are secured
by a security interest in substantially all of the assets of JSC(U.S.) and its
material subsidiaries, with the exception of cash, cash equivalents and trade
receivables. The JSC(U.S.) Credit Agreement is also secured by a pledge of all
the capital stock of JSCE, Inc. and each of its material subsidiaries and by
certain intercompany notes.
Stone Credit Agreement
Stone has a bank credit agreement which provides for four secured senior
term loans (Tranche B, Tranche C, Tranche D, and Tranche E Term Loans),
aggregating $588 million at December 31, 1999 which mature through October 1,
2003 and a $560 million senior secured revolving credit facility, up to which
$62 million may consist of letters of credit, maturing December 31, 2000
(collectively the "Stone Credit Agreement"). Stone pays a .5% commitment fee on
the unused portions of its revolving credit facility. At December 31, 1999, the
unused portion of this facility, after giving consideration to outstanding
letters of credit, was $447 million.
On November 18, 1998, Stone and its bank group amended and restated the
Stone Credit Agreement to, among other things, (i) extend the maturity date on
the Tranche B Term Loan $190 million payment due on October 1, 1999 to April 1,
2000, (ii) extend the maturity date of the revolving credit facility to April
1, 2000 and to provide a further extension to December 31, 2000 upon repayment
of the Tranche B Term Loan on or before its maturity date of April 1, 2000,
(iii) permit the use of the net proceeds from the sale of the newsprint and
related assets at the Snowflake, AZ, facility to repay a portion of Stone's
11.875% Senior Notes due December 1, 1998, (iv) permit the Merger, and (v) ease
certain financial covenants. On April 23, 1999, the Company repaid all
outstanding amounts under Tranche B Term Loan with proceeds from the sale of
Abitibi.
The Stone Credit Agreement (as amended) contains various covenants and
restrictions including, among other things, (i) limitations on dividends,
redemptions and repurchases of capital stock, (ii) limitations on the
incurrence of indebtedness, liens, leases and sale-leaseback transactions,
(iii) limitations on capital expenditures, and (iv) maintenance of certain
covenants. The Stone Credit Agreement also requires prepayments of the term
loans if Stone has excess cash flows, as defined, or receives proceeds from
certain asset sales, insurance, issuance of certain equity securities or
incurrence of certain indebtedness. Current maturities include $43 million of
excess cash flow payments due prior to April 5, 2000. Any prepayments are
allocated against the term loan amortization in inverse order of maturity.
F-17
<PAGE>
SMURFIT-STONE CONTAINER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
During January 1999, the Company obtained a waiver from its bank group for
relief from certain financial covenant requirements under the Stone Credit
Agreement as of December 31, 1998. Subsequently, on March 23, 1999 the Company
and its bank group amended the Stone Credit Agreement to ease certain quarterly
financial covenant requirements for 1999.
At December 31, 1999, borrowings and accrued interest outstanding under the
Stone Credit Agreement were secured by a security interest in substantially all
of the assets of Stone and 65% of the stock of its Canadian subsidiary. The
security interest excludes cash, cash equivalents, certain trade receivables,
five paper mills and the land and buildings of the corrugated container plants.
Accounts Receivable Securitization Program Borrowings
JSC(U.S.) Securitization Program
JSC(U.S.) has a $315 million accounts receivable securitization program (the
"JSC(U.S.) Securitization Program") which provides for the sale of certain of
the Company's trade receivables to a wholly owned, bankruptcy remote, limited
purpose subsidiary, Jefferson Smurfit Finance Corporation ("JS Finance"). The
accounts receivable purchases are financed through the issuance of commercial
paper or through borrowings under a revolving liquidity facility and a $15
million term loan. Under the JSC(U.S.) Securitization Program, JS Finance has
granted a security interest in all its assets, principally cash and cash
equivalents and trade accounts receivable. The Company has $91 million
available for additional borrowing at December 31, 1999, subject to eligible
accounts receivable. Borrowings under the JSC(U.S.) Securitization Program,
which expire February 2002, have been classified as long-term debt because of
the Company's intent to refinance this debt on a long-term basis and the
availability of such financing under the terms of the program.
Stone Securitization Program
On October 15, 1999, the Company entered into the Stone Securitization
Program, which is accounted for under SFAS No. 125 (See Note 4). Proceeds from
the Stone Securitization Program were used to repay borrowings outstanding
under its prior $210 million accounts receivable securitization program.
Senior Notes
JSC(U.S.)
The 11.25% Series A Senior Notes are redeemable in whole or in part at the
option of JSC(U.S.), at any time on or after May 1, 1999 with a premium of
5.625% and after May 1, 2000 with a premium of 2.813% of the principal amount.
The 10.75% Series B Senior Notes and the 9.75% Senior Notes are not redeemable
prior to maturity. Holders of the JSC(U.S.) Senior Notes have the right,
subject to certain limitations, to require JSC(U.S.) to repurchase their
securities at 101% of the principal amount plus accrued and unpaid interest,
upon the occurrence of a change in control or, in certain events, from proceeds
of major asset sales, as defined.
The Senior Notes, which are unconditionally guaranteed on a senior basis by
JSCE, Inc., rank pari passu with the JSC(U.S.) Credit Agreement and contain
business and financial covenants which are less restrictive than those
contained in the JSC(U.S.) Credit Agreement.
Stone
Stone's senior notes (the "Stone Senior Notes"), aggregating $1,698 million
at December 31, 1999, are redeemable in whole or in part at the option of Stone
at various dates, at par plus a weighted average premium of 2.57%. The Merger
constituted a "Change of Control" under the Stone Senior Notes and Stone's
$481 million outstanding senior subordinated debentures (the "Stone Senior
Subordinated Debentures"). As a result, Stone is required, subject to certain
limitations, to offer to repurchase the Stone Senior Notes and the Stone Senior
Subordinated Debentures at a price equal to 101% of the principal amount,
together with accrued interest. However, because the Stone Credit Agreement
prohibits Stone from making an offer to repurchase the
F-18
<PAGE>
SMURFIT-STONE CONTAINER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Stone Senior Notes and the Stone Senior Subordinated Debentures, Stone could
not make the offer. Although the terms of the Stone Senior Notes refer to an
obligation to repay the bank debt or obtain the consent of the bank lenders to
such repurchase, the terms do not specify a deadline, if any, following the
Merger for repayment of bank debt or obtaining such consent. Stone intends to
actively seek commercially acceptable sources of financing to repay the
outstanding indebtedness under the Stone Credit Agreement or alternative
financing arrangements which would cause the bank lenders to consent to the
repurchase. There can be no assurance that the Company will be successful in
obtaining such financing or consents.
In the event Stone does not maintain the minimum Subordinated Capital Base
(as defined) of $1 billion for two consecutive quarters, the indentures
governing the Stone Senior Notes require Stone to semiannually offer to
purchase 10% of such outstanding indebtedness at par until the minimum
Subordinated Capital Base (as defined) is attained. In the event the Stone
Credit Agreement prohibits such an offer to repurchase, the interest rate on
the Stone Senior Notes is increased by 50 basis points per semiannual coupon
period up to a maximum of 200 basis points until the minimum Subordinated
Capital Base is attained.
Stone's Subordinated Capital Base (as defined) was $2,998 million and $3,096
million at December 31, 1999 and December 31, 1998, respectively; however, it
was below the $1 billion minimum at September 30, June 30, and March 31, 1998.
In April 1998, Stone offered to repurchase 10% of the outstanding Stone Senior
Notes. Approximately $1 million of such indebtedness was redeemed under this
offer. Effective February 1, 1999 the interest rate on the 9.875% Senior Notes
due February 1, 2001 and 12.58% Senior Notes due August 1, 2016 was increased
by 50 basis points. Effective February 15, 1999 the interest rate on the 11.5%
Senior Notes due August 15, 2006 was also increased 50 basis points. The
interest rates on all of the Stone Senior Notes returned to the original
interest rate on April 1, 1999 due to Stone's Subordinated Capital Base
exceeding the minimum on December 31, 1998.
The 10.75% first mortgage notes are secured by the assets at four of Stone's
containerboard mills. The 8.45% mortgage notes are secured by the assets at 37
of Stone's corrugated container plants.
Stone Subordinated Debt
The Stone Senior Subordinated Debentures, aggregating $481 million, are
redeemable as of December 31, 1999, in whole or in part at the option of Stone
with premiums of the principal amount at par plus a weighted average premium of
.16%.
In the event Stone does not maintain a minimum Net Worth, as defined, of
$500 million, for two consecutive quarters, the interest rate on Stone's 10.75%
senior subordinated debentures and 11.0% senior subordinated debentures will be
increased by 50 basis points per semiannual coupon period up to a maximum
amount of 200 basis points, until the minimum Net Worth is attained.
Stone's Net Worth (as defined) was $2,506 million and $2,590 million at
December 31, 1999 and 1998, respectively; however, it was below the $500
million minimum at September 30, June 30 and March 31, 1998. The interest rate
on the 11.0% senior subordinated debentures was increased 50 basis points on
August 15, 1998 and 50 basis points on February 15, 1999. The interest rate on
the 10.75% senior subordinated debentures and the 10.75% senior subordinated
debentures with the 1.5% supplemental interest certificates was increased 50
basis points on October 1, 1998. The interest rate on all of the Stone Senior
Subordinated Debentures returned to the original interest rate on April 1,
1999, due to Stone's Net Worth exceeding the minimum at December 31, 1998.
On August 15, 1999, the Company repaid its $120 million 11.0% Senior
Subordinated Debentures at maturity with borrowings under its revolving credit
facility.
F-19
<PAGE>
SMURFIT-STONE CONTAINER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Other
Interest costs capitalized on construction projects in 1999, 1998 and 1997
totaled $4 million, $2 million and $5 million, respectively. Interest payments
on all debt instruments for 1999, 1998 and 1997 were $583 million, $206
million and $188 million, respectively.
7. Leases
The Company leases certain facilities and equipment for production, selling
and administrative purposes under operating leases. Future minimum rental
commitments (exclusive of real estate taxes and other expenses) under
operating leases having initial or remaining non-cancelable terms in excess of
one year, excluding lease committments on closed facilities, are reflected
below:
<TABLE>
<S> <C>
2000................................................................... $ 99
2001................................................................... 78
2002................................................................... 64
2003................................................................... 54
2004................................................................... 45
Thereafter............................................................. 116
----
Total minimum lease payments......................................... $456
====
</TABLE>
Net rental expense for operating leases, including leases having a duration
of less than one year, was approximately $156 million, $69 million and $50
million for 1999, 1998 and 1997, respectively.
8. Income Taxes
Significant components of the Company's deferred tax assets and liabilities
at December 31 are as follows:
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Deferred tax liabilities
Property, plant and equipment and timberland............... $(1,350) $(1,622)
Inventory.................................................. (35) 2
Prepaid pension costs...................................... (42) (41)
Investments in affiliates.................................. (45) (57)
Timber installment sale.................................... (129)
Other...................................................... (151) (153)
------- -------
Total deferred tax liabilities........................... $(1,752) $(1,871)
------- -------
Deferred tax assets
Employee benefit plans..................................... $ 198 $ 227
Net operating loss, alternative minimum tax and tax credit
carryforwards............................................. 702 559
Deferred gain.............................................. 29 23
Purchase accounting liabilities............................ 132 103
Deferred debt issuance cost................................ 48 52
Restructuring.............................................. 7 49
Other...................................................... 135 113
------- -------
Total deferred tax assets................................ 1,251 1,126
Valuation allowance for deferred tax asset............... (208) (208)
------- -------
Net deferred tax assets.................................. 1,043 918
------- -------
Net deferred tax liabilities............................. $ (709) $ (953)
======= =======
</TABLE>
F-20
<PAGE>
SMURFIT-STONE CONTAINER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
At December 31, 1999, the Company had approximately $1,420 million of net
operating loss carryforwards for U. S. federal income tax purposes that expire
from 2009 through 2019, with a tax value of $497 million. A valuation allowance
of $152 million has been established for a portion of these deferred tax
assets. Further, the Company had net operating loss carryforwards for state
purposes with a tax value of $111 million, which expire from 2000 to 2019. A
valuation allowance of $56 million has been established for a portion of these
deferred tax assets. The Company had approximately $94 million of alternative
minimum tax credit carryforwards for U.S. federal income tax purposes, which
are available indefinitely.
Benefit from (provision for) income taxes from continuing operations before
income taxes, minority interest, extraordinary item and cumulative effect of
accounting change is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
----- ---- ----
<S> <C> <C> <C>
Current
Federal.................................................. $ 7 $ 11 $10
State and local.......................................... 1 3
Foreign.................................................. (19) (5)
----- ---- ---
Total current benefit (expense)........................ (11) 9 10
Deferred
Federal.................................................. (123) 103 (5)
State and local.......................................... (27) 11 (2)
Foreign.................................................. (7) 3
----- ---- ---
Total deferred benefit (expense)....................... (157) 117 (7)
----- ---- ---
Total benefit from (provision for) income taxes...... $(168) $126 $ 3
===== ==== ===
</TABLE>
F-21
<PAGE>
SMURFIT-STONE CONTAINER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company's benefit from (provision for) income taxes differed from the
amount computed by applying the statutory U.S. federal income tax rate to
income (loss) from continuing operations before income taxes, minority
interest, extraordinary items, and cumulative effect of accounting change is as
follows:
<TABLE>
<CAPTION>
1999 1998 1997
----- ---- ----
<S> <C> <C> <C>
U.S. federal income tax benefit (provision) at federal
statutory rate............................................... $(119) $119 $ 8
Permanent differences from applying purchase accounting....... (29) (6) (3)
Permanently non-deductible expenses........................... (3) (2) (8)
State income taxes, net of federal income tax effect.......... (17) 14 2
Effect of valuation allowances on deferred tax assets, net of
federal benefit.............................................. 7
Other......................................................... 1 (3)
----- ---- ---
Total benefit from (provision for) income taxes............. $(168) $126 $ 3
===== ==== ===
</TABLE>
The components of the income (loss) from continuing operations before income
taxes, minority interest, extraordinary item and cumulative effect of
accounting change are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ----- ----
<S> <C> <C> <C>
United States................................................ $282 $(338) $(22)
Foreign...................................................... 57 2
---- ----- ----
Income (loss) from continuing operations before income taxes,
minority interest, extraordinary item and cumulative effect
of accounting change........................................ $339 $(336) $(22)
==== ===== ====
</TABLE>
The IRS has examined the company tax returns for all years through 1991, and
the years have been closed through 1988. The years 1992 through 1994 are
currently under examination. While the ultimate results cannot be predicted
with certainty, the Company's management believes that the examination will not
have a material adverse effect on its consolidated financial condition or
results of operations.
The Company made income tax payments of $47 million, $22 million and $8
million in 1999, 1998 and 1997, respectively.
9. Employee Benefit Plans
Defined Benefit Plans
The Company sponsors noncontributory defined benefit pension plans covering
substantially all employees. The defined benefit plans of JSCE, Inc. were
merged with the domestic defined benefit plans of Stone on December 31, 1998
and assets of these plans are available to meet the funding requirements of the
combined plans. Approximately 29% of the Company's domestic pension plan assets
at December 31, 1999 are invested in cash equivalents or debt securities and
71% are invested in equity securities. Equity securities at December 31, 1999
include .7 million shares of SSCC common stock with a market value of
approximately $18 million and 26 million shares of JS Group common stock having
a market value of approximately $79 million. Dividends paid on JS Group common
stock during 1999 and 1998 were approximately $2 million in each year.
The Company sponsors noncontributory defined benefit pension plans for its
foreign operations. Approximately 21% of the foreign pension plan assets at
December 31, 1999, are invested in cash equivalents or debt securities and 79%
are invested in equity securities.
F-22
<PAGE>
SMURFIT-STONE CONTAINER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Postretirement Health Care and Life Insurance Benefits
The Company provides certain health care and life insurance benefits for
all salaried as well as certain hourly employees. The assumed health care cost
trend rates used in measuring the accumulated postretirement benefit
obligation ("APBO") range from 5.25% to 6.5% at December 31, 1999 decreasing
to the ultimate rate of 5.25%. The effect of a 1% increase in the assumed
health care cost trend rate would increase the APBO as of December 31, 1999 by
$9 million and have an immaterial effect on the annual net periodic
postretirement benefit cost for 1999.
The following provides a reconciliation of benefit obligations, plan
assets, and funded status of the plans:
<TABLE>
<CAPTION>
Defined Benefit Plans Postretirement Plans
---------------------- ----------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Change in benefit obligation:
Benefit obligation at January
1............................. $ 1,789 $ 950 $ 178 $ 103
Service cost................... 43 18 3 1
Interest cost.................. 121 68 12 7
Amendments..................... 10 8
Plan participants'
contributions................. 1 6 4
Curtailments................... (2)
Actuarial (gain) loss.......... (150) 22 (9) 3
Acquisitions................... 778 73
Foreign currency rate changes.. (8) 1
Benefits paid.................. (95) (55) (21) (13)
---------- ---------- ---------- ----------
Benefit obligation at December
31............................ $ 1,711 $ 1,789 $ 168 $ 178
========== ========== ========== ==========
Change in plan assets:
Fair value of plan assets at
January 1..................... $ 1,512 $ 1,013 $ $
Actual return on plan assets... 256 49
Employer contributions......... 14 1 11 9
Plan participants'
contributions................. 4 4
Acquisitions................... 504
Foreign currency rate changes.. 10
Benefits paid.................. (95) (55) (15) (13)
---------- ---------- ---------- ----------
Fair value of plan assets at
December 31................... $ 1,697 $ 1,512 $ $
========== ========== ========== ==========
Over (under) funded status: ... $ (14) $ (277) $ (168) $ (178)
Unrecognized actuarial (gain)
loss.......................... (287) (9) (5) 6
Unrecognized prior service
cost.......................... 50 44 (2) (2)
Net transition obligation...... (6) (9)
---------- ---------- ---------- ----------
Net amount recognized.......... $ (257) $ (251) $ (175) $ (174)
========== ========== ========== ==========
Amounts recognized in the
balance sheets:
Prepaid benefit cost........... $ 71 $ 52 $ $
Accrued benefit liability...... (328) (303) (175) (174)
Additional minimum liability... (3) (32)
Intangible asset............... 3 26
Accumulated other comprehensive
income........................ 4
Deferred tax................... 2
---------- ---------- ---------- ----------
Net amount recognized.......... $ (257) $ (251) $ (175) $ (174)
========== ========== ========== ==========
</TABLE>
F-23
<PAGE>
SMURFIT-STONE CONTAINER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The weighted-average assumptions used in the accounting for the defined
benefit plans and postretirement plans were:
<TABLE>
<CAPTION>
Defined Benefit
Plans Postretirement Plans
-------------------- ----------------------
1999 1998 1999 1998
--------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Weighted average discount rate:
U.S. Plans..................... 8.00% 7.00% 8.00% 7.00%
Foreign Plans.................. 6.50-8.00% 6.00-7.00% 8.00% 7.00%
Rate of compensation............. 3.00-4.50% 3.00-3.75% N/A N/A
Expected return on assets........ 9.50% 9.50% N/A N/A
Health care cost trend on covered
charges......................... N/A N/A 6.50% 6.50%
</TABLE>
The components of net pension expense for the defined benefit plans and the
components of the postretirement benefit costs are as follows:
<TABLE>
<CAPTION>
Defined Benefit Plans Postretirement Plans
------------------------ ----------------------
1999 1998 1997 1999 1998 1997
------- ------- ------- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Service cost.................. $ 48 $ 26 $ 19 $ 2 $ 1 $ 1
Interest cost................. 121 74 65 12 8 7
Expected return on plan
assets....................... (138) (90) (80)
Curtailment cost.............. 6 2
Amortization of transitional
asset........................ (4) (4)
Recognized actuarial loss..... 3 4
Multi-employer plans.......... 4 1
------- ------ ------ ------ ------ ------
Net periodic benefit cost..... $ 40 $ 12 $ 4 $ 15 $ 9 $ 8
======= ====== ====== ====== ====== ======
</TABLE>
The projected benefit obligation, accumulated benefit obligation, and fair
value of plan assets for the pension plans with accumulated benefit obligations
in excess of plan assets were $144 million, $133 million and zero,
respectively, as of December 31, 1999 and $795 million, $778 million and $601
million as of December 31, 1998.
Savings Plans
The Company sponsors voluntary savings plans covering substantially all
salaried and certain hourly employees. The Company match is paid in SSCC common
stock, up to an annual maximum. The Company's expense for the savings plans
totaled $17 million, $10 million and $9 million in 1999, 1998 and 1997,
respectively.
10. Minority Interest
Stone has approximately 4.6 million shares of $1.75 Series E Cumulative
Convertible Exchangeable Preferred Stock, $.01 par value, (the "Preferred
Stock") issued and outstanding. Each share of Preferred Stock is entitled to
one vote on all matters submitted to a vote of Stone's stockholders. The
Preferred Stock is convertible, at the option of the holder, into shares of
SSCC common stock at a conversion price of $34.28 (equivalent to a conversion
rate of .729 shares of SSCC common stock for each share of Preferred Stock),
subject to adjustment based on certain events. The Preferred Stock may
alternatively be exchanged, at the option of Stone, for new 7% Convertible
Subordinated Exchange Debentures of Stone due February 15, 2007 in a principal
amount equal to $25.00 per share of Preferred Stock so exchanged. Additionally,
the Preferred Stock is redeemable at the option of Stone, in whole or in part,
from time to time. Preferred dividends are
F-24
<PAGE>
SMURFIT-STONE CONTAINER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
reflected as a minority interest in the Company's Consolidated Statements of
Operations. At December 31, 1999 and 1998, Stone had accumulated dividend
arrearages on the Preferred Stock of $22 million and $14 million, respectively.
The payment of dividends is prohibited by covenants in certain of the
agreements and indentures relating to indebtedness of Stone. However, the
accumulated dividend arrearages on the preferred stock are payable upon their
conversion, exchange or redemption.
11. Stock Option and Incentive Plans
Prior to the Merger, the Company and Stone each maintained incentive plans
for selected employees. The Company's plan included non-qualified stock options
issued at prices equal to the fair market value of the Company's stock at the
date of grant which expire upon the earlier of 12 years from the date of grant
or termination of employment, death, or disability. The Stone plans included
incentive stock options and non-qualified stock options issued at prices equal
to the fair market value of Stone's common stock at the date of grant which
expire upon the earlier of 10 years from the date of grant or termination of
employment, death, or disability. Effective with the Merger, options
outstanding under the Stone plans were converted into options to acquire SSCC
common stock, with the number of shares and exercise price being adjusted in
accordance with the exchange ratio of .99 to one established in the Merger
Agreement, and all outstanding options under both the Company and the Stone
plans became exercisable and fully vested.
In November 1998, the stockholders approved the 1998 Long-Term Incentive
Plan (the "1998 Plan") reserving 8.5 million shares of Company common stock for
non- qualified stock options and performance awards to officers, key employees,
and non-employee directors of the Company. The stock options are exercisable at
a price equal to the fair market value of the Company's common stock on the
date of grant. The vesting schedule and other terms and conditions of options
granted under the 1998 Plan are established separately for each grant. The
stock options granted during 1999 and 1998 vest and become exercisable eight
years after the date of grant subject to acceleration based upon the attainment
of pre-established stock price targets. The number of options that become
vested and exercisable in any one year may not exceed one-third of the options
granted for certain participants and may not exceed one-fourth of the options
granted for other participants. In general, options expire 10 years from the
date of grant. The performance awards permit the holder to receive amounts,
denominated in shares of Company common stock, based on the Company's
performance during the period between the date of grant and a pre-established
future date. Performance criteria, the length of the performance period, and
the form and time of payment of the award are established separately for each
grant. There were no performance awards outstanding under the 1998 Plan at
December 31, 1999 and 1998.
During the second quarter of 1999, the Company recorded a $26 million charge
in selling and administrative expenses related to the cashless exercise of SSCC
stock options under the Jefferson Smurfit Corporation stock option plan.
Pro forma information regarding net income and earnings per share is
required by SFAS No. 123 and has been determined as if the Company had
accounted for its employee stock options issued subsequent to December 31, 1994
under the fair value method. The pro forma net income information required by
SFAS No. 123 is not likely to be representative of the effects on reported net
income for future years. The fair value for these options was estimated at the
date of grant using a Black-Scholes option pricing model with the following
assumptions:
<TABLE>
<CAPTION>
1999 1998 1997
----- ----- -----
<S> <C> <C> <C>
Expected option life (years)............................ 6 6 5
Risk-free weighted average interest rate................ 5.43% 4.79% 6.49%
Stock price volatility.................................. 52.80% 53.30% 44.20%
Dividend yield.......................................... 0.0% 0.0% 0.0%
</TABLE>
F-25
<PAGE>
SMURFIT-STONE CONTAINER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those of traded options and because changes in the subjective
input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
unaudited pro forma information is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ------ -----
<S> <C> <C> <C>
As Reported
Net income (loss)........................................ $157 $ (200) $ 1
Basic earnings (loss) per share.......................... .72 (1.61) .01
Diluted earnings (loss) per share........................ .71 (1.61) .01
Pro Forma
Net income (loss)........................................ $156 $ (209) $ (1)
Basic earnings (loss) per share.......................... .72 (1.69) (.01)
Diluted earnings (loss) per share........................ .71 (1.69) (.01)
</TABLE>
The weighted average fair values of options granted during 1999, 1998 and
1997 were $9.67, $6.98 and $6.63 per share, respectively.
Additional information relating to the plans is as follows:
<TABLE>
<CAPTION>
Weighted
Shares Average
Under Option Price Exercise
Option Range Price
---------- ------------ --------
<S> <C> <C> <C>
Outstanding at January 1, 1997................. 7,117,473 $10.00-17.63 $10.91
Granted...................................... 1,238,500 13.13-15.81 13.43
Exercised.................................... 23,825 10.00 10.00
Cancelled.................................... 164,375 10.00-15.81 12.98
----------
Outstanding at December 31, 1997............... 8,167,773 10.00-17.63 11.25
Granted...................................... 4,728,000 12.81-15.81 12.94
Exercised.................................... 36,950 10.00 10.00
Cancelled.................................... 9,918 11.13-22.35 13.67
Stone addition............................... 6,050,196 11.87-29.59 14.35
----------
Outstanding at December 31, 1998............... 18,899,101 10.00-29.59 12.67
Granted...................................... 636,500 12.81-23.38 17.14
Exercised.................................... 4,475,476 10.00-22.35 12.37
Cancelled.................................... 99,976 10.00-29.59 13.77
----------
Outstanding at December 31, 1999............... 14,960,149 10.00-23.38 12.86
</TABLE>
F-26
<PAGE>
SMURFIT-STONE CONTAINER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table summarizes information about stock options outstanding
at December 31, 1999:
<TABLE>
<CAPTION>
Average
Weighted Remaining Weighted
Range of Average Contractual Average
Exercise Options Exercise Life Options Exercise
Prices Outstanding Price (Years) Exercisable Price
------------ ----------- -------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C>
$10.00-12.50 4,688,619 $10.57 5.63 4,688,619 $10.57
12.81-13.51 7,723,164 13.01 8.41 4,320,675 13.16
14.06-15.81 1,486,281 14.47 7.63 1,486,281 14.47
17.19-23.38 1,062,085 19.63 7.03 609,585 20.18
---------- ----------
14,960,149 11,105,160
</TABLE>
The number of options exercisable at December 31, 1998 and 1997 was
14,386,101 and 483,100 respectively. As of December 31, 1999, approximately
3,357,000 shares were available for grant under the 1998 Plan.
12. Accumulated Other Comprehensive Income (Loss)
Accumulated other comprehensive income (loss) is as follows:
<TABLE>
<CAPTION>
Unrealized
Foreign Holding Accumulated
Currency Minimum Gain on Other
Translation Pension Marketable Comprehensive
Adjustment Liability Securities Income (Loss)
----------- --------- ---------- -------------
<S> <C> <C> <C> <C>
Balance at January 1, 1998....... $ $ $ $
Current period change.......... 3 (4) (1)
---- --- --- ---
Balance at December 31, 1998..... 3 (4) (1)
Current period change.......... (11) 4 3 (4)
---- --- --- ---
Balance at December 31, 1999..... $ (8) $ $ 3 $(5)
==== === === ===
</TABLE>
13. 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 was accounted for as a discontinued operation in the prior
consolidated financial statements. SNC consists of two newsprint mills in
Oregon, and its Cladwood (R) operation, which consists of two plants which
manufacture a wood composite panel used in the housing industry. The Company
subsequently decided to continue to operate its Cladwood(R) business and
therefore Cladwood's(R). The operating income (loss) of $1 million in 1999,
$(29) million in 1998 and $1 million in 1997 was reclassified to continuing
operations. Cladwood's(R) operating loss in 1998 includes the $30 million
charge related to a class action settlement agreement (See Note 18). The
revenues and net assets of Cladwood(R) were not material to the consolidated
financial statements in any of the periods presented.
In November 1999, the Company sold its Newberg, Oregon newsprint mill for
proceeds of approximately $211 million. The Company is in negotiations to
transfer ownership of the Oregon City newsprint mill and does not expect to
realize any significant proceeds from the transaction. Net gain on disposition
of discontinued operations of $4 million includes the realized gain on the sale
of the Newberg, Oregon newsprint mill, an expected loss on the sale of the
Oregon City, Oregon newsprint mill, actual results from the measurement date
through December 31, 1999 and the estimated losses on the Oregon City newsprint
mill through the expected disposition date.
F-27
<PAGE>
SMURFIT-STONE CONTAINER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
SNC newsprint revenues were $235 million, $303 million and $281 million for
1999, 1998 and 1997, respectively. The net assets of SNC newsprint included in
the accompanying consolidated balance sheets as of December 31, 1999 and 1998
consisted of the following:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Inventories and current assets................................... $34 $ 36
Net property, plant and equipment................................ 48 183
Other assets..................................................... 11 7
Accounts payable and other current liabilities................... (94) (63)
Other liabilities................................................ (4) (42)
--- ----
Net assets (liabilities) of discontinued operations............ $(5) $121
=== ====
</TABLE>
14. Earnings Per Share
The following table sets forth the computation of basic and diluted earnings
per share:
<TABLE>
<CAPTION>
1999 1998 1997
---- ------ -----
<S> <C> <C> <C>
Numerator:
Income (loss) from continuing operations before
extraordinary Item and cumulative effect of accounting
change.................................................. $163 $ (211) $ (19)
Denominator:
Denominator for basic earnings per share--weighted
average shares.......................................... 217 124 111
Effect of dilutive securities
Employee stock options................................. 3
---- ------ -----
Denominator for diluted earnings per share--adjusted
weighted average shares and assumed conversions......... 220 124 111
---- ------ -----
Basic earnings (loss) per share from continuing operations
before extraordinary item and cumulative effect of
accounting change......................................... $.75 $(1.70) $(.17)
==== ====== =====
Diluted earnings (loss) per share from continuing
operations before extraordinary item and cumulative effect
of accounting change...................................... $.74 $(1.70) $(.17)
==== ====== =====
</TABLE>
For 1999, convertible debt to acquire one million shares of common stock
with an earnings effect of $2 million and additional minority interest shares
of three million with an earnings effect of $8 million are excluded from the
diluted earnings per share computation because they are antidilutive.
For 1998, options to purchase one million shares of common stock under the
treasury stock method, convertible debt to acquire one million shares of common
stock with an earnings effect of $2 million, and additional minority interest
shares of three million with an earnings effect of $1 million are excluded from
the diluted earnings (loss) per share computation because they are
antidilutive. Options to purchase an immaterial number of shares of common
stock for 1997 were outstanding, but not included in the computation of diluted
earnings (loss) per share because the option exercise price was greater than
the average market price of the common shares for the year.
F-28
<PAGE>
SMURFIT-STONE CONTAINER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
15. Related Party Transactions
Transactions with JS Group
Transactions with Jefferson Smurfit Group plc ("JS Group"), a significant
shareholder of the Company, its subsidiaries and affiliated companies were as
follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Product sales................................................... $45 $39 $34
Product and raw material purchases.............................. 21 54 51
Management services income...................................... 3 4 4
Charges from JS Group for services provided..................... 1 1
Charges to JS Group for costs pertaining to the Fernandina No. 2
paperboard machine through November 18, 1998................... 50 53
Receivables at December 31...................................... 2 5 3
Payables at December 31......................................... 14 4 11
</TABLE>
Product sales to and purchases from JS Group, its subsidiaries and
affiliates are consummated on terms generally similar to those prevailing with
unrelated parties.
The Company provides certain subsidiaries and affiliates of JS Group with
general management and elective management services under separate Management
Services Agreements. In consideration for general management services, the
Company is paid a fee up to 2% of the subsidiaries' or affiliates' gross sales.
In consideration for elective services, the Company is reimbursed for its
direct cost of providing such services.
On November 18, 1998 the Company purchased the No. 2 paperboard machine
located in the Company's Fernandina Beach, Florida, paperboard mill (the
"Fernandina Mill") for $175 million from an affiliate of JS Group. Until that
date, the Company and the affiliate were parties to an operating agreement
whereby the Company operated and managed the No. 2 paperboard machine. The
Company was compensated for its direct production and manufacturing costs and
indirect manufacturing, selling and administrative costs incurred for the
entire Fernandina Mill. The compensation was determined by applying various
formulas and agreed-upon amounts to the subject costs. The amounts reimbursed
to the Company are reflected as reductions of cost of goods sold and selling
and administrative expenses in the accompanying consolidated statements of
operations.
Stone's Canadian subsidiary, Stone Container (Canada) Inc. ("Stone Canada")
owns a 50% interest in Smurfit-MBI. On September 4, 1998, Stone Canada
purchased the remaining 50% of Smurfit-MBI from MacMillan Bloedel Ltd. for $185
million (Canadian). Simultaneously, Stone Canada sold the newly acquired 50%
interest to JS Group for the same amount.
The Company, in connection with Merger related activities, either paid or
reimbursed $16 million in legal fees, financial advisory fees and executive
compensation to JS Group in 1998.
Transactions with Non-consolidated Affiliates
The Company sold paperboard, market pulp and fiber to and purchased
containerboard and kraft paper from various non-consolidated affiliates. The
following table summarizes the Company's related party transactions with its
non-consolidated affiliates for each year presented:
F-29
<PAGE>
SMURFIT-STONE CONTAINER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Product sales...................................................... $303 $57
Product and raw material purchases................................. 65
Receivables at December 31......................................... 43 70
Payables at December 31............................................ 3
</TABLE>
On October 15, 1998, the Company sold its Snowflake, Arizona newsprint
manufacturing operations and related assets to Abitibi for approximately $250
million. The Company retained ownership of a corrugating medium machine located
in the facility that Abitibi operated on behalf of the Company pursuant to an
operating agreement entered into as part of the sale. Payments made to Abitibi,
prior to the sale of the Company's remaining interest (see Note 5), were $17
million in the period from January 1 to April 23, 1999 and $4 million in the
period from November 19 to December 31, 1998.
16. Fair Value of Financial Instruments
The carrying values and fair values of the Company's financial instruments
are as follows:
<TABLE>
<CAPTION>
1999 1998
--------------- ---------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- ------ -------- ------
<S> <C> <C> <C> <C>
Cash and cash equivalents....................... $ 24 $ 24 $ 155 $ 155
Notes receivable and long-term investments...... 26 26 22 22
Residual interest in timber notes............... 33 33
Long-term debt including current maturities..... 4,793 4,860 6,633 6,690
</TABLE>
The carrying amount of cash equivalents approximates fair value because of
the short maturity of those instruments. The fair values of notes receivable
and long-term investments are based on discounted future cash flows or the
applicable quoted market price. The fair value of the Company's debt is
estimated based on the quoted market prices for the same or similar issues or
on the current rates offered to the Company for debt of the same remaining
maturities. The fair value of the residual interest is based on discounted
future cash flows.
17. Other, Net
The significant components of other, net are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Foreign currency transaction gains............................. $ 7 $ 4 $
Gain on sale of assets (See Note 4 and 5)...................... 446
Income from non-consolidated affiliates........................ 12 4
Other.......................................................... 14 (4) (2)
---- --- ---
Total other, net............................................. $479 $ 4 $(2)
==== === ===
</TABLE>
18. 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. In addition, the
Company faces potential liability for response costs at various sites for which
it has received notice as being a potentially responsible party ("PRP")
concerning hazardous
F-30
<PAGE>
SMURFIT-STONE CONTAINER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
substance contamination. In estimating its reserves for environmental
remediation and future costs, the Company's estimated liability reflects only
the Company's expected share after consideration for the number of other PRPs
at each site, the identity and financial condition of such parties and
experience regarding similar matters.
Stone was 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 required 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 required 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, and FCPC and certain of its affiliates filed for Chapter 11 bankruptcy
protection in April 1999. Certain creditors of FCPC filed an adverse proceeding
in the bankruptcy against Stone and Four M, and certain of their officers and
directors, alleging among other things, default with respect to the obligations
of Stone and Four M under the OPA. On October 20, 1999, FCPC and a committee
representing the holders of the FCPC debt securities filed a bankruptcy
reorganization plan ("Plan") that provided for the settlement of all
outstanding claims in exchange for cash payments. Under the Plan, which was
confirmed and consummated in January 2000, Stone paid approximately $123
million to satisfy the claims of creditors of FCPC, Stone received title to the
FCPC mill, and all claims under the OPA, as well as any obligations of Stone
involving FCPC or its affiliates, were released and discharged. In addition,
Four M issued $25 million of convertible preferred stock to Stone in connection
with the consummation of the Plan.
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. In 1998, the Company recorded a
$30 million pre-tax charge to reflect amounts SNC has paid into a settlement
fund, administrative costs, plaintiff's 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.
19. Business Segment Information
The Company adopted SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information," in 1998 which changes the way operating
segment information is presented. The information for 1998 and 1997 has been
restated from the prior year's presentation in order to conform to the 1999
presentation.
The Company has two reportable segments: (1) Containerboard and Corrugated
Containers, and (2) Folding Cartons and Boxboard. 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
F-31
<PAGE>
SMURFIT-STONE CONTAINER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
appliances, electric motors, small machinery, grocery products, produce, books,
tobacco and furniture. The Folding Cartons and Boxboard 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.
The Company evaluates performance and allocates resources based on profit or
loss from operations before income taxes, and other gains and losses. The
accounting policies of the reportable segments are the same as those described
in the summary of significant accounting policies except that the Company
accounts for inventory on a FIFO basis at the segment level compared to a LIFO
basis at the consolidated level. Intersegment sales and transfers are recorded
at market prices. Intercompany profit is eliminated at the corporate division
level.
The Company's reportable segments are strategic business units that offer
different products. The reportable segments are each managed separately because
they manufacture distinct products. Other includes four non-reportable
segments, specialty packaging, industrial bags, reclamation, international and
corporate related items. Corporate related items include goodwill, equity
investments, income and expense not allocated to reportable segments (goodwill
amortization, interest expense and depreciation expense related to the fair
value adjustments made to the historical basis of Stone property, plant and
equipment in the purchase price allocation), the adjustment to record inventory
at LIFO, and the elimination of intercompany assets and intercompany profit.
In 1998, corporate related items also included a $257 million restructuring
charge (See Note 2). The restructuring charge included $179 million for the
write-down of property, plant and equipment of the Containerboard and
Corrugated Containers segment. In 1999, corporate related items included a $407
million gain on the timberland sale and related note monetization program and a
$39 million gain on the sale of Abitibi.
F-32
<PAGE>
SMURFIT-STONE CONTAINER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
Container- Folding
board & Cartons
Corrugated &
Containers Boxboard Other Total
---------- -------- ------ -------
<S> <C> <C> <C> <C>
Year ended December 31, 1999
Revenues from external customers........ $4,636 $836 $1,679 $ 7,151
Intersegment revenues................... 193 287 480
Depreciation, depletion and
amortization........................... 187 24 208 419
Segment profit (loss)................... 478 62 (201) 339
Total assets............................ 4,288 449 5,122 9,859
Capital expenditures.................... 81 15 60 156
Year ended December 31, 1998
Revenues from external customers........ $2,014 $785 $ 686 $ 3,485
Intersegment revenues................... 57 149 206
Depreciation, depletion and
amortization........................... 85 22 48 155
Segment profit (loss)................... 117 67 (520) (336)
Total assets............................ 5,765 454 5,412 11,631
Capital expenditures.................... 221 26 40 287
Year ended December 31, 1997
Revenues from external customers........ $1,607 $752 $ 598 $ 2,957
Intersegment revenues................... 35 167 202
Depreciation, depletion and
amortization........................... 67 21 27 115
Segment profit (loss)................... 56 68 (146) (22)
Total assets............................ 1,467 435 869 2,771
Capital expenditures.................... 101 37 44 182
</TABLE>
The following table presents net sales to external customers by country of
origin:
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
United States.............................................. $6,359 $3,395 $2,952
Canada..................................................... 211 22 5
Europe and other........................................... 581 68
------ ------ ------
Total net sales.......................................... $7,151 $3,485 $2,957
====== ====== ======
</TABLE>
The following table presents long-lived assets by country:
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
United States............................................. $3,902 $5,254 $1,787
Canada.................................................... 228 191 1
Europe and other.......................................... 289 327
------ ------ ------
4,419 5,772 1,788
Goodwill.................................................. 3,328 2,869 237
------ ------ ------
Total long lived assets................................. $7,747 $8,641 $2,025
====== ====== ======
</TABLE>
F-33
<PAGE>
SMURFIT-STONE CONTAINER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
20. Subsequent Event
On February 23, 2000, SSCC, Stone and a newly-formed subsidiary of Stone
entered into a Pre-Merger Agreement with St. Laurent Paperboard Inc. ("St.
Laurent") pursuant to which the Company will acquire St. Laurent for
approximately $1.4 billion, consisting of approximately $625 million in cash,
the issuance of approximately 25 million shares of SSCC common stock and the
assumption of approximately $386 million of St. Laurent's debt. Stone expects
to borrow $1,050 million to finance the acquisition of St. Laurent.
Consummation of the transaction, which is subject to St. Laurent shareholder
and certain regulatory approvals, is expected to occur in the second quarter of
2000.
F-34
<PAGE>
SMURFIT-STONE CONTAINER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
21. Quarterly Results (Unaudited)
The following is a summary of the unaudited quarterly results of operations:
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
<S> <C> <C> <C> <C>
1999
Net sales.................................... $1,705 $1,730 $1,792 $1,924
Gross profit................................. 191 273 304 361
Income (loss) from continuing operations
before extraordinary
item and cumulative effect of accounting
change...................................... (92) (23) (11) 289
Discontinued operations...................... 4 (1) (4) 3
Gain on disposition of discontinued
operations.................................. 4
Extraordinary item........................... (1) (1) (10)
Net income (loss)............................ (88) (25) (16) 286
Basic earnings (loss) per share:
Income (loss) from continuing operations
before extraordinary
item and cumulative effect of accounting
change...................................... (.43) (.11) (.05) 1.33
Discontinued operations...................... .02 (.01) (.02) .03
Extraordinary item........................... (.05)
------ ------ ------ ------
Net income (loss)............................ (.41) (.12) (.07) 1.31
Diluted earnings (loss) per share:
Income (loss) from continuing operations
before extraordinary
item and cumulative effect of accounting
change...................................... (.43) (.11) (.05) 1.29
Discontinued operations...................... .02 (.01) (.02) .03
Extraordinary item........................... (.04)
------ ------ ------ ------
Net income (loss)............................ (.41) (.12) (.07) 1.28
1998
Net sales.................................... $ 769 $ 769 $ 763 $1,184
Gross profit................................. 128 126 125 154
Income (loss) from continuing operations
before extraordinary
item and cumulative effect of accounting
change...................................... 3 2 3 (219)
Discontinued operations...................... 8 9 5 5
Extraordinary item........................... (13)
Cumulative effect of accounting change....... (3)
Net income (loss)............................ (5) 11 8 (214)
Basic earnings (loss) per share:
Income (loss) from continuing operations
before extraordinary
item and cumulative effect of accounting
change...................................... .03 .02 .03 (1.36)
Discontinued operations...................... .07 .08 .04 .03
Extraordinary item........................... (.12)
Cumulative effect of accounting change....... (.03)
------ ------ ------ ------
Net income (loss)............................ (.05) .10 .07 (1.33)
Diluted earnings (loss) per share:
Income (loss) from continuing operations
before extraordinary
item and cumulative effect of accounting
change...................................... .03 .02 .03 (1.36)
Discontinued operations...................... .07 .08 .04 .03
Extraordinary item........................... (.11)
Cumulative effect of accounting change....... (.03)
------ ------ ------ ------
Net income (loss)............................ (.04) .10 .07 (1.33)
</TABLE>
F-35
<PAGE>
SMURFIT-STONE CONTAINER CORPORATION
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(In millions)
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E Column F
-------- ---------- --------- -------- ---------- ----------
Additions
Charged
Balance at to Costs Balance at
Beginning and Deductions End of
Description of Period Expenses Other Describe Period
----------- ---------- --------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful
accounts and
sales returns and
allowances:
Year ended December 31,
1999.................. $ 70 $ $ (9)(a) $ 11(b) $ 50
==== ==== ==== ==== ====
Year ended December 31,
1998.................. $ 10 $ 3 $ 60 (c) $ 3(b) $ 70
==== ==== ==== ==== ====
Year ended December 31,
1997.................. $ 9 $ 2 $ $ 1(b) $ 10
==== ==== ==== ==== ====
Stone exit liabilities:
Year ended December 31,
1999.................. $106 $ $106 (d) $ 29(e) $183
==== ==== ==== ==== ====
Year ended December 31,
1998.................. $ $ $117 (d) $ 11(e) $106
==== ==== ==== ==== ====
Restructuring:
Year ended December 31,
1999.................. $ 71 $ 15 $ (5)(f) $ 52(e) $ 29
==== ==== ==== ==== ====
Year ended December 31,
1998.................. $ $257 $ $186(e) $ 71
==== ==== ==== ==== ====
</TABLE>
--------
(a) Includes the effect of the accounts receivable securitization application
of SFAS No. 125.
(b) Uncollectible amounts written off, net of recoveries.
(c) Amount related to the acquisition of Stone.
(d) Charges associated with exit activities and litigation settlements included
in the purchase price allocation of Stone.
(e) Charges against the reserves.
(f) Reduction to 1998 exit liabilities.
F-36
<PAGE>
SMURFIT-STONE CONTAINER CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Six Months
Ended
June 30,
----------------------
2000 1999
---------- ----------
(In millions, except
per share data)
<S> <C> <C> <C>
Net sales.......................................... $ 4,057 $ 3,435
Costs and expenses
Cost of goods sold............................... 3,255 2,971
Selling and administrative expenses.............. 359 371
Restructuring charge............................. 46 9
---------- ----------
Income from operations........................... 397 84
Other income (expense)
Interest expense, net............................ (250) (296)
Other, net....................................... 7 57
---------- ----------
Income (loss) from continuing operations before
income taxes and minority interest.............. 154 (155)
Benefit from (provision for) income taxes.......... (79) 44
Minority interest expense.......................... (4) (4)
---------- ----------
Income (loss) from continuing operations before
extraordinary item.............................. 71 (115)
Discontinued operations
Income from discontinued operations, net of
income tax benefit of $0........................ 3
Gain on disposition of discontinued operations,
net of income taxes of $4....................... 6
---------- ----------
Income (loss) before extraordinary item.......... 77 (112)
Extraordinary item
Gain (loss) from early extinguishment of debt,
net of income tax benefit of $1 for the six
months ended June 30, 2000 and 1999............. 1 (1)
Net income (loss).................................. $ 78 $ (113)
========== ==========
Basic earnings per common share
Income (loss) from continuing operations before
extraordinary item.............................. $ .32 $ (.53)
Discontinued operations.......................... .01
Gain on disposition of discontinued operations... .03
Extraordinary item...............................
---------- ----------
Net income (loss).............................. $ .35 $ (.52)
========== ==========
Weighted average shares outstanding................ 222 216
========== ==========
Diluted earnings per common share
Income (loss) from continuing operations before
extraordinary item.............................. $ .32 $ (.53)
Discontinued operations.......................... .01
---------- ----------
Gain on disposition of discontinued operations... .03
Extraordinary item...............................
---------- ----------
Net income (loss).............................. $ .35 $ (.52)
========== ==========
Weighted average shares outstanding................ 224 216
========== ==========
</TABLE>
See notes to consolidated financial statements.
F-37
<PAGE>
SMURFIT-STONE CONTAINER CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
----------- ------------
(Unaudited)
(In millions, except
share data)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents........................... $ 53 $ 24
Receivables, less allowances of $51 in 2000 and $50
in 1999............................................ 778 647
Inventories
Work-in-process and finished goods................. 265 238
Materials and supplies............................. 535 496
-------- -------
800 734
Refundable income taxes............................. 36 7
Deferred income taxes............................... 125 130
Prepaid expenses and other current assets........... 88 69
-------- -------
Total current assets............................. 1,880 1,611
Net property, plant and equipment..................... 5,594 4,395
Timberland, less timber depletion..................... 42 24
Goodwill, less accumulated amortization of $194 in
2000 and $151 in 1999................................ 3,406 3,328
Investment in equity of non-consolidated affiliates... 176 176
Other assets.......................................... 342 325
-------- -------
$ 11,440 $ 9,859
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current maturities of long-term debt................ $ 55 $ 174
Accounts payable.................................... 678 662
Accrued compensation and payroll taxes.............. 225 238
Interest payable.................................... 107 111
Other current liabilities........................... 241 384
-------- -------
Total current liabilities........................ 1,306 1,569
Long-term debt, less current maturities............... 5,660 4,619
Other long-term liabilities........................... 934 894
Deferred income taxes................................. 1,116 839
Minority interest..................................... 97 91
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, 243,541,323 and 217,820,762
issued and outstanding in 2000 and 1999,
respectively....................................... 2 2
Additional paid-in capital............................ 3,835 3,436
Retained earnings (deficit)........................... (1,509) (1,586)
Accumulated other comprehensive income (loss)......... (1) (5)
-------- -------
Total stockholders' equity....................... 2,327 1,847
-------- -------
$ 11,440 $ 9,859
======== =======
</TABLE>
See notes to consolidated financial statements.
F-38
<PAGE>
SMURFIT-STONE CONTAINER CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months
Ended
June 30,
------------
2000 1999
----- -----
(In
millions)
<S> <C> <C>
Cash flows from operating activities
Net income (loss).............................................. $ 78 $(113)
Adjustments to reconcile net income (loss) to net cash used for
operating activities
Gain on disposition of discontinued operations............... (10)
Extraordinary gain (loss) from early extinguishment of debt.. (2) 2
Depreciation, depletion and amortization..................... 201 219
Amortization of deferred debt issuance costs................. 5 7
Deferred income taxes........................................ 92 (69)
Gain on sale of assets....................................... (2) (39)
Non-cash employee benefit expense............................ 1 29
Foreign currency transaction gains........................... (1) (6)
Non-cash restructuring charge................................ 32 6
Change in current assets and liabilities, net of effects from
acquisitions and dispositions
Receivables.................................................. (1) (113)
Inventories.................................................. 24 48
Prepaid expenses and other current assets.................... (2)
Accounts payable and accrued liabilities..................... (54) 112
Interest payable............................................. (6) (15)
Income taxes................................................. (37) 14
Other, net................................................... (143) (10)
----- -----
Net cash used for operating activities..................... 177 70
----- -----
Cash flows from investing activities
Property additions............................................. (115) (69)
Proceeds from property and investment disposals and sale of
businesses.................................................... 67 546
Payments on acquisition, net of cash received.................. (631)
----- -----
Net cash provided by (used for) investing activities....... (679) 477
----- -----
Cash flows from financing activities
Borrowings under bank credit facilities........................ 1,525
Net borrowings (repayments) of debt............................ (993) (579)
Net borrowings under the accounts receivable securitization
program....................................................... 10 10
Proceeds from exercise of stock options........................ 6 8
Deferred debt issuance costs................................... (17)
----- -----
Net cash provided by (used for) financing activities....... 531 (561)
----- -----
Effect of exchange rate changes on cash.......................... 2
Increase (decrease) in cash and cash equivalents................. 29 (12)
Cash and cash equivalents
Beginning of period............................................ 24 155
----- -----
End of period.................................................. $ 53 $ 143
===== =====
</TABLE>
See notes to consolidated financial statements.
F-39
<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, 1999, (the
"SSCC 1999 10-K"), filed March 14, 2000 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. St. Laurent Acquisition
On May 31, 2000, the Company, through a subsidiary of Stone, acquired St.
Laurent Paperboard Inc. ("St. Laurent"). Under the terms of the merger
agreement, each common share and restricted share unit of St. Laurent was
exchanged for 0.5 shares of SSCC common stock and $12.50 in cash. A total of
approximately 25.3 million shares of SSCC common stock were issued. The total
purchase price, including cash paid of $631 million and debt assumed of $376
million, was approximately $1.4 billion.
The acquisition (the "St. Laurent Acquisition") was accounted for as a
purchase business combination and, accordingly, the results of operations of
St. Laurent have been included in the consolidated statements of operations of
the Company after May 31, 2000. The cost to acquire St. Laurent has been
preliminarily allocated to the assets acquired and liabilities assumed
according to estimated fair values and are subject to adjustment when
additional information concerning asset and liability valuations are finalized.
The preliminary allocation has resulted in acquired goodwill of approximately
$180 million, which is being amortized on a straight-line basis over 40 years.
F-40
<PAGE>
SMURFIT-STONE CONTAINER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following unaudited pro forma combined information presents the results
of operations of the Company as if the St. Laurent Acquisition had taken place
on January 1, 2000 and 1999, respectively:
<TABLE>
<CAPTION>
Six months
ended June
30,
-------------
2000 1999
------ ------
<S> <C> <C>
Pro Forma Information
Net sales....................................................... $4,512 $3,825
Income (loss) before extraordinary item......................... 68 (131)
Net income (loss)............................................... 69 (132)
Net income (loss) per common share
Basic......................................................... $ .28 $ (.55)
Diluted....................................................... $ .28 $ (.55)
</TABLE>
The unaudited pro forma results of operations have been prepared for
comparative purposes only and do not purport to be indicative of the results of
operations which actually would have resulted had the St. Laurent Acquisition
occurred as of January 1, 2000 and 1999, respectively.
4. Merger and Restructuring
On November 18, 1998, Stone merged with a wholly-owned subsidiary of the
Company (the "Stone Merger"). The Stone Merger was accounted for as a purchase
business combination. The cost to acquire Stone was allocated to the assets
acquired and liabilities assumed according to their fair values. The allocation
resulted in acquired goodwill of $3,202 million, which is being amortized on a
straight-line basis over 40 years.
In May 2000, the Company sold the market pulp mill at its closed Port
Wentworth facility to a third party for approximately $63 million. Net cash
proceeds of $58 million from the sale were used for debt reduction. No gain was
recognized.
As part of the Company's continuing evaluation of all areas of its business
in connection with its Stone Merger integration, the Company recorded a pretax
restructuring charge of $40 million during the second quarter of 2000 related
to the permanent shutdown of a containerboard mill and a corrugated container
facility. Included in the restructuring charge is the adjustment to fair value
of property and equipment and spare parts ($31 million) of closed facilities,
liabilities for the termination of certain employees ($5 million), and
liabilities for long-term commitments ($4 million). The assets at these
facilities were adjusted to their estimated fair value less cost to sell. The
terminated employees included approximately 105 employees at the mill facility
and 150 employees at the container facility. The long-term commitments consist
of environmental clean-up and one-time closure costs. Restructuring charges
were $46 million for the six months ended June 30, 2000.
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.
5. Long-Term Debt
On March 31, 2000, Stone amended and restated its existing credit agreement
(the "Stone Credit Agreement") pursuant to which a group of financial
institutions provided an additional $575 million to Stone in the form of a
Tranche F term loan maturing on December 31, 2005 and extended the maturity
dates of the revolving credit facilities under the Stone Credit Agreement to
December 31, 2005. On April 28, 2000, Stone used the proceeds of the Tranche F
term loan to redeem the 9.875 % senior notes due February 1, 2001.
F-41
<PAGE>
SMURFIT-STONE CONTAINER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
On May 31, 2000, Stone and certain of its wholly-owned subsidiaries closed
on new credit facilities (the "Stone Additional Credit Agreement") with a group
of financial institutions consisting of (i) $950 million in the form of Tranche
G and Tranche H term loans maturing on December 31, 2006, and (ii) a $100
million revolving credit facility maturing on December 31, 2005. The proceeds
of the Stone Additional Credit Agreement were used to fund the cash component
of the St. Laurent Acquisition, refinance certain existing indebtedness of St.
Laurent, and pay fees and expenses related to the St. Laurent Acquisition. The
new
revolving credit will be used for general corporate purposes. The Stone
Additional Credit Agreement is secured by a security interest in substantially
all of the assets acquired in the St. Laurent Acquisition.
6. Other Significant Events
During 1999, the Company sold its interest in Abitibi-Consolidated, Inc., a
Canadian-based manufacturer and marketer of publication paper, resulting in a
gain of $39 million, which was reflected in other, net during the second
quarter of 1999.
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.
7. Non-Consolidated Affiliates
The Company has several non-consolidated affiliates that are engaged in
paper and packaging operations in North America, South America and Europe.
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 only significant non-consolidated affiliate at June 30, 2000
is Smurfit-MBI, 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 $112 million and $98
million for the three months ended June 30, 2000 and 1999, respectively, and
$222 million and $182 million for the six months ended June 30, 2000 and 1999,
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 Six
months months
ended ended
June 30, June 30,
--------- ---------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Results of operations (a)
Net sales................................................ $170 $154 $337 $332
Cost of sales............................................ 149 122 296 269
Income before income taxes, minority interest and
extraordinary charges................................... 10 12 18 16
Net income............................................... 10 10 17 15
</TABLE>
(a) Includes results of operations for each of the Company's affiliates for the
period it was accounted for under the equity method.
8. Discontinued Operations
During February 1999 the Company adopted a formal plan to sell the newsprint
mills of its subsidiary, Smurfit Newsprint Corporation ("SNC"). Accordingly,
the newsprint operations of SNC are accounted for as
F-42
<PAGE>
SMURFIT-STONE CONTAINER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
discontinued operations in the accompanying consolidated financial statements.
The Company transferred ownership of the Oregon City, Oregon newsprint mill to
a third party in May 2000, thereby completing its exit from the newsprint
business. No proceeds from the transfer were received. During the second
quarter of 2000, the Company recorded a $6 million after tax gain to reflect
adjustments to previous estimates on disposition of discontinued operations.
9. Comprehensive Income (Loss)
Comprehensive income (loss) is as follows:
<TABLE>
<CAPTION>
Three months Six months
ended ended June
June 30, 30,
------------- -----------
2000 1999 2000 1999
------ ------ ---- ------
<S> <C> <C> <C> <C>
Net income (loss).................................. $ 38 $ (25) $778 $ (113)
Other comprehensive income (loss), net of tax:
Foreign currency translation..................... 13 2 4 (9)
------ ------ ---- ------
Comprehensive income (loss)........................ $ 51 $ 23 $ 82 $ (122)
====== ====== ==== ======
</TABLE>
10. Earnings Per Share
The following table sets forth the computation of basic and diluted earnings
per share:
<TABLE>
<CAPTION>
Three
months Six months
ended ended
June 30, June 30,
----------- ------------
2000 1999 2000 1999
---- ------ ----- ------
<S> <C> <C> <C> <C>
Numerator:
Income (loss) from continuing operations before
extraordinary item................................. $ 31 $ (23) $ 71 $(115)
Denominator:
Denominator for basic earnings per share-- Weighted
average shares..................................... 226 216 222 216
---- ------ ----- ------
Effect of dilutive securities:
Employee stock options.............................. 2 2
---- ------ ----- ------
Denominator for diluted earnings per share--
Adjusted weighted average shares................... 228 216 224 216
==== ====== ===== ======
Basic earnings (loss) per share from continuing
operations before extraordinary item............... $.14 $ (.11) $ .32 $ (.53)
==== ====== ===== ======
Diluted earnings (loss) per share from continuing
operations before extraordinary item............... $.14 $ (.11) $ .32 $ (.53)
==== ====== ===== ======
</TABLE>
For the three and six month periods ended June 30, 2000 and 1999,
convertible debt to acquire one million shares of common stock with an earnings
effect of $.5 million and $1 million, respectively, and 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. For the three and six month periods
ended June 30, 1999, options to purchase four million shares of common stock
under the treasury stock method were also excluded from the diluted earnings
per share computation because they are antidilutive.
F-43
<PAGE>
SMURFIT-STONE CONTAINER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
11. Business Segment Information
The Company has two reportable segments: (1) Containerboard and Corrugated
Containers and (2) Folding Cartons and Boxboard. 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 Folding Cartons and
Boxboard 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 five non-reportable segments (specialty packaging, industrial
bags, reclamation, St. Laurent converting plants acquired May 31, 2000 and
international) and corporate related items. Corporate related items include
income and expense not allocated to reportable segments, goodwill amortization,
net interest expense, the adjustment to record inventory at LIFO and the
elimination of intercompany profit.
The information for 1999 has been restated from the prior year's
presentation in order to conform to the 2000 presentation.
<TABLE>
<CAPTION>
Container- Folding
board & Cartons
Corrugated &
Containers Boxboard Other Total
---------- -------- ----- ------
<S> <C> <C> <C> <C>
Three months ended June 30,
2000
Revenues from external customers.......... $1,348 $227 $ 529 $2,104
Intersegment revenues..................... 31 96 127
Income (loss) from continuing operations
before income taxes and minority
interest................................. 208 22 (161) 69
1999
Revenues from external customers.......... $1,130 $208 $ 392 $1,730
Intersegment revenues..................... 49 66 115
Income (loss) from continuing operations
before income taxes and minority
interest................................. 96 18 (137) (23)
Six months ended June 30,
2000
Revenues from external customers.......... $2,624 $439 $ 994 $4,057
Intersegment revenues..................... 88 190 278
Income (loss) from continuing operations
before income taxes and minority
interest................................. 440 37 (323) 154
1999
Revenues from external customers.......... $2,230 $405 $ 800 $3,435
Intersegment revenues..................... 96 138 234
Income (loss) from continuing operations
before income taxes and minority
interest................................. 152 33 (340) (155)
</TABLE>
12. 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
F-44
<PAGE>
SMURFIT-STONE CONTAINER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
environmental liability as a result of violations of permit terms and similar
authorizations that have occurred from time to time at its facilities. In
addition, the Company faces potential liability for response costs at various
sites for which it has received notice as being a potentially responsible party
("PRP") 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 after
consideration for the number of other PRPs at each site, the identity and
financial condition of such parties and experience regarding similar matters.
In March 1999, management of SNC's former Oregon City, Oregon newsprint mill
became aware of possible alterations by one of its employees of data utilized
in determining compliance with the mill's National Pollutant Discharge
Elimination System permit. SNC conducted a thorough internal investigation of
this matter. Based on this investigation, it concluded that such alterations
did occur and, as a result, the mill may have violated its permit limits on
suspended solids on several occasions. SNC provided both the Environmental
Protection Agency ("EPA") and the Oregon Department of Environmental Quality
("ODEQ") with a detailed report of its investigation, and the agencies
conducted additional investigations based on this report. SNC fully cooperated
with these investigations. In July 2000 SNC paid a civil penalty of less than
$100,000 to the ODEQ
to settle the Notice of Assessment of Civil Penalty issued by the ODEQ in
connection with this matter. In addition, the U.S. Attorney's Office has
advised SNC that it does not intend to commence a criminal prosecution against
SNC. Accordingly, SNC now considers this matter fully resolved.
In April 1999, the EPA and the Virginia Department of Environmental Quality
("VDEQ") each issued a notice of violation under the Clean Air Act to St.
Laurent's mill located in West Point, Virginia, which was acquired from
Chesapeake Corporation ("Chesapeake") in May, 1997. In general, the notices of
violations allege that, from 1984 to the present, the West Point mill installed
certain equipment and modified certain production processes without obtaining
the required permits. In the purchase agreement between St. Laurent and
Chesapeake, Chesapeake agreed to indemnify St. Laurent for remediation work
resulting from violations of applicable laws, including the Clean Air Act, that
existed at the mill before and on the date of the purchase agreement, as to
which Chesapeake had "knowledge" (as defined in the purchase agreement), up to
a maximum of $50 million. While such costs cannot be estimated with certainty
at this time, based on presently available information, St. Laurent believes
that the cost of remediation work, which represents capital expenditures
comprising engineering, procurement and construction work of mill modifications
(including the installation of air emission controls, etc.) associated with the
notices of violations may approximate $25 million. In addition, civil or
criminal penalties may be pursued by the EPA and VDEQ; however, based upon
discussions with the EPA and VDEQ to date, St. Laurent believes that the total
cost of remediation work associated with the notices of violations and fines
and penalties that may be imposed by the EPA and VDEQ will not exceed the
maximum amount of Chesapeake's indemnification obligation. St. Laurent and
Chesapeake have appointed a third party arbitrator to decide the scope and
timing of future remediation work that is the subject of the indemnification in
the purchase agreement. The arbitrator has ruled that any fines and penalties
that may result from any breach of Chesapeake's representations and warranties
arising out of the notices of violations, either by adjudication or settlement,
are part of the costs and expenses that are subject to reimbursement by
Chesapeake to St. Laurent under the purchase agreement. By agreement of the
parties, the 30-month period for reimbursement by Chesapeake of costs and
expenses incurred by St. Laurent under the provisions of the purchase agreement
has been extended indefinitely. St. Laurent is cooperating with Chesapeake to
analyze, respond to and defend against the matters alleged in the notices of
violation and to develop and implement a remediation plan as required by the
notices of violation.
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.
F-45
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Stone Container Corporation
We have audited the accompanying consolidated balance sheets of Stone
Container Corporation as of December 31, 1999 and 1998, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the year ended December 31, 1999, the period from November 19 to December 31,
1998, and the period from January 1 to November 18, 1998 (Predecessor). Our
audits also included the financial statement schedule listed in Part II of the
Registration Statement in Item 21(b)(2). These financial statements and
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and schedule based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Stone
Container Corporation at December 31, 1999 and 1998 and the consolidated
results of its operations and its cash flows for the year ended December 31,
1999, the period from November 19 to December 31, 1998, and the period from
January 1 to November 18, 1998 (Predecessor) in conformity with accounting
principles generally accepted in the United States. Also, in our opinion, the
related financial statement schedule for the year ended December 31, 1999, the
period from November 19 to December 31, 1998, and the period from January 1 to
November 18, 1998 (Predecessor), when considered in relation to the basic
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
/s/ Ernst & Young LLP
_____________________________________
Ernst & Young LLP
St. Louis, Missouri
January 24, 2000
except for Note 19, as to which
the date is February 23, 2000
F-46
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of Stone Container Corporation
In our opinion, the consolidated statements of operations and cash flows for
the year ended December 31, 1997 present fairly, in all material respects, the
results of operations and cash flows of Stone Container Corporation and its
subsidiaries for the year ended December 31, 1997, in conformity with
accounting principles generally accepted in the United States. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these statements in accordance with
auditing standards generally accepted in the United States, which require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for the opinion expressed above. We have not audited the consolidated financial
statements of Stone Container Corporation for any period subsequent to December
31, 1997.
/s/ PricewaterhouseCoopers LLP
_____________________________________
PricewaterhouseCoopers LLP
Chicago, Illinois
March 26, 1998
F-47
<PAGE>
STONE CONTAINER CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
--------------
1999 1998
------ ------
(In millions,
except share
data)
<S> <C> <C>
ASSETS
------
Current assets
Cash and cash equivalents.................................... $ 13 $ 137
Receivables, less allowances of $41 in 1999 and $61 in 1998.. 343 462
Inventories
Work-in-process and finished goods......................... 143 123
Materials and supplies..................................... 357 422
------ ------
500 545
Deferred income taxes........................................ 88 38
Prepaid expenses and other current assets.................... 48 119
------ ------
Total current assets..................................... 992 1,301
Net property, plant and equipment.............................. 3,089 3,997
Timberland, less timber depletion.............................. 21 15
Goodwill, less accumulated amortization of $79 in 1999 and $8
in 1998....................................................... 3,123 2,643
Investment in equity of non-consolidated affiliates............ 136 632
Other assets................................................... 204 205
------ ------
$7,565 $8,793
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities
Current maturities of long-term debt......................... $ 162 $ 161
Accounts payable............................................. 365 270
Accrued compensation and payroll taxes....................... 150 106
Interest payable............................................. 82 98
Other current liabilities.................................... 232 178
------ ------
Total current liabilities................................ 991 813
Long-term debt, less current maturities........................ 2,995 3,902
Other long-term liabilities.................................... 637 734
Deferred income taxes.......................................... 436 754
Stockholders' equity
Series E preferred stock, par value $.01 per share;
10,000,000 shares authorized; 4,599,300 issued and
outstanding in 1999 and 1998................................ 78 78
Common stock, par value $.01 per share; 110,000,000 shares
authorized, issued and outstanding in 1999 and 1998......... 2,545 2,545
Retained earnings (deficit).................................... (113) (36)
Accumulated other comprehensive income (loss).................. (4) 3
------ ------
Total stockholders' equity............................... 2,506 2,590
------ ------
$7,565 $8,793
====== ======
</TABLE>
See notes to consolidated financial statements.
F-48
<PAGE>
STONE CONTAINER CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Predecessor
-------------------------
Period from Period from
Year Ended November 19 to January 1 to Year Ended
December 31, December 31, November 18, December 31,
1999 1998 1998 1997
------------ -------------- ------------ ------------
(In millions, except per share data)
<S> <C> <C> <C> <C>
Net sales................ $ 4,341 $465 $ 4,254 $ 4,696
Costs and expenses
Cost of goods sold..... 3,755 433 3,904 4,340
Selling and
administrative
expenses.............. 389 47 502 445
------- ---- ------- -------
Income (loss) from
operations.......... 197 (15) (152) (89)
Other income (expense)
Interest expense, net.. (340) (45) (407) (441)
Equity income (loss) of
affiliates............ 12 4 (92) (71)
Other, net............. 56 4 (186) (4)
------- ---- ------- -------
Loss before income
taxes and
extraordinary item.. (75) (52) (837) (605)
Benefit from income
taxes................... 16 88 200
------- ---- ------- -------
Loss before
extraordinary item.... (75) (36) (749) (405)
Extraordinary item
Loss from early
extinguishment of
debt, net of income
tax benefit of $1 in
1999 and $7 in 1997... (2) (13)
------- ---- ------- -------
Net loss............. (77) (36) (749) (418)
Preferred stock
dividends............... (8) (1) (7) (8)
------- ---- ------- -------
Net loss applicable
to common shares.... $ (85) $(37) $ (756) $ (426)
------- ---- ------- -------
Basic earnings per common
share
Loss before
extraordinary item.... $ (7.43) $ (4.16)
Extraordinary item..... (.13)
------- ---- ------- -------
Net loss............. $ (7.43) $ (4.29)
------- ---- ------- -------
Weighted average shares
outstanding............. 102 99
------- ---- ------- -------
Diluted earnings per
common share
Loss before
extraordinary item.... $ (7.43) $ (4.16)
Extraordinary item..... (.13)
------- ---- ------- -------
Net loss............. $ (7.43) $ (4.29)
------- ---- ------- -------
Weighted average shares
outstanding............. 102 99
======= ==== ======= =======
</TABLE>
See notes to consolidated financial statements.
F-49
<PAGE>
STONE CONTAINER CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Stockholders' Equity
--------------------------------
Number of Shares Accumulated
---------------- Retained Other
Preferred Common Preferred Common Earnings Comprehensive
Stock Stock Stock Stock (Deficit) Income (Loss) Total
--------- ------ --------- ------- -------- ------------- --------
(In millions)
<S> <C> <C> <C> <C> <C> <C> <C>
Predecessor
Balance at January 1,
1997................... 5 99 $ 115 $ 955 $ (53) $ (221) $ 796
Comprehensive income
(loss)
Net loss............... (418) (418)
Other comprehensive
income (loss), net of
tax
Decrease in minimum
pension liability.... 3 3
Foreign currency
translation
adjustment........... (114) (114)
--- ---- ----- ------- ------- ------ --------
Comprehensive income
(loss).............. (418) (111) (529)
Amortization of
restricted stock plan.. 1 1
Subsidiary issuance of
stock.................. 11 11
Preferred stock
dividends ($0.4375 per
share)................. (2) (2)
--- ---- ----- ------- ------- ------ --------
Balance at December 31,
1997................... 5 99 115 966 (472) (332) 277
Comprehensive income
(loss)
Net loss............... (749) (749)
Other comprehensive
income (loss), net of
tax
Increase in minimum
pension liability.... (21) (21)
Foreign currency
translation
adjustment........... (76) (76)
--- ---- ----- ------- ------- ------ --------
Comprehensive income
(loss).............. (749) (97) (846)
Debt conversion to
common stock........... 5 59 59
Exercise of stock
options and issuance of
common stock under
deferred benefit plan.. 1 8 8
--- ---- ----- ------- ------- ------ --------
Balance at November 18,
1998................... 5 105 115 1,033 (1,221) (429) (502)
Effect of Merger
Retire predecessor
common equity......... (105) (1,033) 1,221 429 617
Excess of purchase
price over common
stock................. (37) 2,245 2,208
Issuance of common
stock................. 110
Comprehensive income
(loss)
Net loss............... (36) (36)
Other comprehensive
income (loss), net of
tax
Foreign currency
translation
adjustment........... 3 3
--- ---- ----- ------- ------- ------ --------
Comprehensive income
(loss).............. (36) 3 (33)
Capital contribution
from SSCC.............. 300 300
--- ---- ----- ------- ------- ------ --------
Balance at December 31,
1998................... 5 110 78 2,545 (36) 3 2,590
Comprehensive income
(loss)
Net loss............... (77) (77)
Other comprehensive
income (loss), net of
tax
Unrealized holding
gain on marketable
securities........... 3 3
Foreign currency
translation
adjustment........... (10) (10)
--- ---- ----- ------- ------- ------ --------
Comprehensive income
(loss).............. (77) (7) (84)
--- ---- ----- ------- ------- ------ --------
Balance at December 31,
1999................... 5 110 $ 78 $ 2,545 $ (113) $ (4) $ (2,506)
=== ==== ===== ======= ======= ====== ========
</TABLE>
See notes to consolidated financial statements.
F-50
<PAGE>
STONE CONTAINER CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Predecessor
-------------------------
Period from Period from
Year Ended November 19 to January 1 to Year Ended
December 31, December 31, November 18, December 31,
1999 1998 1998 1997
------------ -------------- ------------ ------------
(In millions)
<S> <C> <C> <C> <C>
Cash flows from
operating activities
Net loss.............. $ (77) $ (36) $(749) $(418)
Adjustments to
reconcile net loss to
net cash provided by
(used for) operating
activities:
Extraordinary loss
from early
extinguishment of
debt............... 3 13
Depreciation and
amortization....... 296 34 239 302
Amortization of
deferred debt
issuance costs..... 4 19 20
Deferred income
taxes.............. (17) (21) (106) (217)
Noncash employee
benefits........... 1 4 5 (1)
Foreign currency
transaction (gains)
losses............. (7) (4) 24 11
Equity (income) loss
of affiliates...... (12) (4) 92 71
Writedown of
investments in
nonconsolidated
affiliates......... 155
Gain on sale of
assets............. (39) (37)
Change in current
assets and
liabilities, net of
effects from
acquisitions and
dispositions
Receivables......... (166) 77 65 (131)
Inventories......... 23 111 3
Prepaid expenses and
other current
assets............. 51 (12) 22 11
Accounts payable and
other current
liabilities........ 104 (48) 49 (4)
Interest payable.... (17) 24 (29) 10
Income taxes........ (3) (10) 5
Other, net.......... (72) (2) 134 66
----- ----- ----- -----
Net cash provided
by (used for)
operating
activities....... 72 12 (16) (259)
----- ----- ----- -----
Cash flows from
investing activities
Property additions.... (87) (22) (145) (137)
Investments in and
advances to
affiliates, net...... (74) (13)
Proceeds from sales of
assets............... 544 252 7
Net proceeds from sale
of receivables....... 226
Other, net............ 2 (31)
----- ----- ----- -----
Net cash provided
by (used for)
investing
activities....... 683 (22) 35 (174)
----- ----- ----- -----
Cash flows from
financing activities
Debt repayments....... (657) (463) (323) (492)
Borrowings............ 61 453 950
Net repayments under
accounts receivable
securitization
program.............. (226)
Deferred debt issuance
costs................ (9) (4) (18)
Capital contribution
from SSCC............ 300
Proceeds from issuance
of common stock...... 2
Cash dividends........ (2)
----- ----- ----- -----
Net cash provided
by (used for)
financing
activities....... (883) (111) 128 438
----- ----- ----- -----
Effect of exchange
rate changes on
cash............. 4 (2) (5)
----- ----- ----- -----
Increase (decrease) in
cash and cash
equivalents............ (124) (121) 145
Cash and cash
equivalents
Beginning of period... 137 258 113 113
----- ----- ----- -----
End of period......... $ 13 $ 137 $ 258 $ 113
===== ===== ===== =====
</TABLE>
See notes to consolidated financial statements.
F-51
<PAGE>
STONE CONTAINER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in millions, except per share data)
1. Significant Accounting Policies
Basis of Presentation: Stone Container Corporation ("Stone"), hereafter
referred to as the "Company," is a wholly-owned subsidiary of Smurfit-Stone
Container Corporation ("SSCC"), which was formerly known as Jefferson Smurfit
Corporation ("JSC"). On November 18, 1998 Stone was merged with a wholly-owned
subsidiary of SSCC (the "Merger"). The Merger was accounted for as a purchase
business combination and, accordingly, purchase accounting adjustments,
including goodwill, have been pushed down and are reflected in these financial
statements subsequent to November 18, 1998. The financial statements for
periods ended before November 18, 1998, were prepared using Stone's historical
basis of accounting and are designated as "Predecessor". The comparability of
operating results for the Predecessor periods and the periods subsequent to the
Merger date are affected by the purchase accounting adjustments.
Nature of Operations: The Company's major operations are in paper products
and industrial bags. The Company's paperboard mills procure virgin and recycled
fiber and produce paperboard for conversion into corrugated containers and
industrial bags at Company-owned facilities and third-party converting
operations. Paper product customers represent a diverse range of industries
including paperboard and paperboard packaging, wholesale trade, retailing and
agri-business. Customers and operations are located throughout the world.
Credit is extended to customers based on an evaluation of their financial
condition.
Principles of Consolidation: The consolidated financial statements include
the accounts of the Company and majority-owned and controlled subsidiaries.
Investments in majority-owned affiliates where control does not exist and non-
majority owned affiliates are primarily accounted for under the equity method.
Significant intercompany accounts and transactions are eliminated in
consolidation.
Cash and Cash Equivalents: The Company considers all highly liquid
investments with an original maturity of three months or less to be cash
equivalents. Cash and cash equivalents of $41 million were pledged at December
31, 1998 as collateral for obligations associated with the accounts receivable
securitization program (See Note 6). No amounts were pledged at December 31,
1999 due to the implementation of a new accounts receivable securitization
program (See Note 3).
Revenue Recognition: Revenue is recognized at the time products are shipped
to external customers.
Inventories: Inventories are valued at the lower of cost or market, under
the last-in, first-out ("LIFO") method except for $186 million in 1999 and $261
million in 1998, which are valued at the lower of average cost or market.
First- in, first-out ("FIFO") costs (which approximate replacement costs)
exceed the LIFO value by $12 million at December 31, 1999. As of the Merger
date, inventories were recorded at fair value in the purchase price allocation,
consequently LIFO approximated FIFO at December 31, 1998.
Net Property, Plant and Equipment: Based upon final appraisal results,
property, plant and equipment were recorded at fair market value on the date of
the Merger. These assets were assigned remaining useful lives of 18 years for
papermill machines and 12 years for major converting equipment (See Note 2).
The costs of additions, improvements and major replacements are capitalized,
while maintenance and repairs are charged to expense as incurred. Provisions
for depreciation and amortization are made using straight-line rates over the
estimated useful lives of the related assets and the terms of the applicable
leases for leasehold improvements.
Timberland, less Timber Depletion: Timberland is stated at cost less
accumulated cost of timber harvested. The portion of the costs of timberland
attributed to standing timber is charged against income as timber is cut, at
rates determined annually, based on the relationship of unamortized timber
costs to the estimated volume of recoverable timber. The costs of seedlings and
reforestation of timberland are capitalized.
F-52
<PAGE>
STONE CONTAINER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Goodwill: The excess of cost over the fair value assigned to the net assets
acquired is recorded as goodwill and is being amortized using the straight-line
method over 40 years.
Deferred Debt Issuance Costs: Deferred debt issuance costs included in other
assets are amortized over the terms of the respective debt obligations using
the interest method.
Long-lived Assets: In accordance with SFAS No. 121, "Accounting for the
Impairment of Long-lived Assets and for Long-lived Assets to be Disposed of,"
long-lived assets held and used by the Company and the related goodwill are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable.
Income Taxes: The Company accounts for income taxes in accordance with the
liability method of accounting for income taxes. Under the liability method,
deferred assets and liabilities are recognized based upon anticipated future
tax consequences attributable to differences between financial statement
carrying amounts of assets and liabilities and their respective tax bases (See
Note 8).
Foreign Currency Translation: The functional currency for the majority of
the Company's foreign operations is the applicable local currency. Accordingly,
assets and liabilities are translated at the exchange rate in effect at the
balance sheet date, and income and expenses are translated at average exchange
rates prevailing during the year. Translation gains or losses are included
within stockholders' equity as part of Accumulated Other Comprehensive Income.
Foreign currency transaction gains or losses are credited or charged to income.
The functional currency for foreign operations operating in highly inflationary
economies is the U.S. dollar and any gains or losses are credited or charged to
income.
Financial Instruments: The Company periodically enters into interest rate
swap agreements that involve the exchange of fixed and floating rate interest
payments without the exchange of the underlying principal amount. For interest
rate instruments that effectively hedge interest rate exposures, the net cash
amounts paid or received on the agreements are accrued and recognized as an
adjustment to interest expense. If an arrangement is replaced by another
instrument and no longer qualifies as a hedge instrument, then it is marked to
market and carried on the balance sheet at fair value. Gains and losses
realized upon settlement of these agreements are deferred and amortized to
interest expense over a period relevant to the agreement if the underlying
hedged instrument remains outstanding, or immediately if the underlying hedged
instrument is settled.
Transfers of Financial Assets: The Company accounts for transfers of
financial assets in accordance with SFAS No. 125 "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." Accordingly,
financial assets transferred to qualifying special-purpose entities and the
liabilities of such entities are not reflected in the consolidated financial
statements of the Company (See Note 3).
Employee Stock Options: Accounting for stock-based plans is in accordance
with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued
to Employees," and related interpretations. Under APB 25, because the exercise
price of the Company's employee stock options equals the market price of the
underlying stock on the date of grant, no compensation expense is recognized.
The Company has adopted the disclosure-only provisions of SFAS No. 123
"Accounting for Stock-Based Compensation" (See Note 11).
Environmental Matters: The Company expenses environmental expenditures
related to existing conditions resulting from past or current operations and
from which no current or future benefit is discernible. Expenditures that
extend the life of the related property or mitigate or prevent future
environmental contamination are capitalized. Reserves for environmental
liabilities are established in accordance with the American Institute of
Certified Public Accountants ("AICPA") Statement of Position ("SOP") 96-1,
"Environmental Remediation Liabilities." The Company records a liability at the
time when it is probable and
F-53
<PAGE>
STONE CONTAINER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
can be reasonably estimated. Such liabilities are not discounted or reduced for
potential recoveries from insurance carriers.
Use of Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Reclassifications: Certain reclassifications of prior year presentations
have been made to conform to the 1999 presentation.
Start-up Costs: In April 1998, the AICPA issued SOP 98-5, "Reporting the
Costs of Start-Up Activities," which requires that costs related to start-up
activities be expensed as incurred. Prior to 1998, the Company capitalized
certain costs to open new plants or to start new production processes. As a
result of the Merger, unamortized start-up costs were written off in the
purchase price allocation.
Computer Software-Internal Use: In March 1998, the AICPA issued SOP 98-1,
"Accounting for Computer Software Developed or Obtained For Internal Use." SOP
98-1 is effective beginning on January 1, 1999 and requires that certain costs
incurred after the date of adoption in connection with developing or obtaining
software for internal use must be capitalized. The adoption of SOP 98-1 did not
have a material effect on the 1999 financial statements.
Prospective Accounting Pronouncements: In 1998, the Financial Accounting
Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities." SFAS No. 133 requires that all derivative instruments be
recorded on the balance sheet at fair value. SFAS No. 133 is effective for all
fiscal quarters of fiscal years beginning after June 15, 2000. The Company is
currently assessing what the impact of SFAS No. 133 will be on the Company's
future earnings and financial position.
2. Merger and Restructuring
Under the terms of the Merger, each share of the Company's common stock was
exchanged for the right to receive .99 of one share of SSCC common stock. A
total of 104 million shares of SSCC common stock were issued in the Merger
resulting in a total purchase price (including the fair value of stock options
and related fees) of approximately $2,245 million. The Merger was accounted for
as a purchase business combination and, accordingly, the cost to acquire the
Company was preliminarily allocated to the assets acquired and liabilities
assumed according to their estimated fair values. The purchase price allocation
was completed during the fourth quarter of 1999, and includes adjustments for
the final appraisals on property, plant and equipment and investments in non-
consolidated affiliates, resulting in a decrease in valuations of $726 million
and $38 million, respectively; the resolution of litigation related to the
Company's investment in Florida Coast Paper Company L.L.C ("FCPC") and Stone
Savannah River Pulp and Paper Corporation ("SSR"); the shutdown of converting
facilities; and the related deferred taxes. The final allocation resulted in
acquired goodwill of $3,202 million, which is being amortized on a straight-
line basis over 40 years.
In October 1999, FCPC and a committee representing the holders of the FCPC
secured debt filed a bankruptcy reorganization plan to resolve all matters
relating to the bankruptcies of the FCPC Companies. In January 2000, the plan
was confirmed and consummated and the Company paid approximately $123 million
to satisfy the claims of creditors of FCPC, the Company received title to the
FCPC mill, and all claims under the Output Purchase Agreement, as well as any
obligations of the Company involving FCPC or its affiliates, were
F-54
<PAGE>
STONE CONTAINER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
released and discharged. In addition, Four M Corporation ("Four M") issued $25
million of convertible preferred stock to the Company in connection with the
consummation of the plan (See Note 17).
The litigation related to the Company's purchase of the common stock of SSR
was settled for cash payments of approximately $32 million during the third
quarter of 1999.
Included in the allocation of the cost to acquire the Company is the
adjustment to fair value of property and equipment associated with the
permanent shutdown of certain containerboard mill and pulp mill facilities,
liabilities for the termination of certain Company employees, and liabilities
for long-term commitments. The assets at these facilities were recorded at
their estimated fair value less cost to sell based upon appraisals. The
terminated employees included approximately 550 employees at these mill
facilities and 200 employees in the corporate office. These employees were
terminated in December 1998. The facilities were shut down during 1998 and the
Company is in the process of either selling or dismantling these facilities.
The long-term commitments consist of lease commitments and funding commitments
on debt guarantees that are associated with the shutdown of the containerboard
mill and pulp mill facilities or other investments in which the Company will no
longer participate as a result of its merger plan.
During 1999, the Company permanently closed five converting facilities.
Included in the purchase price allocation for these facilities are the
adjustments to fair value of property, plant and equipment less the costs to
sell, liabilities for the termination of employees, and liabilities for long-
term commitments, primarily leases. Approximately 500 employees were terminated
in 1999. The amounts associated with these closures are included in the
following table of exit liabilities as part of the 1999 adjustments.
The following is a summary of the exit liabilities recorded in the
allocation of the purchase price:
<TABLE>
<CAPTION>
Balance at Balance at
Opening Dec. 31, Dec. 31,
Balance Payments 1998 Payments Adjustments 1999
------- -------- ---------- -------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Severance............... $ 14 $ (4) $ 10 $(13) $ 8 $ 5
Lease commitments....... 38 (1) 37 (6) 8 39
Settlement of FCPC
litigation............. 37 37 (1) 87 123
Other commitments....... 19 (6) 13 (2) 4 15
Mill closure costs...... 9 9 (7) (1) 1
---- ---- ---- ---- ---- ----
$117 $(11) $106 $(29) $106 $183
==== ==== ==== ==== ==== ====
</TABLE>
Future cash outlays under the exit liabilities are anticipated to be $149
million in 2000 (including the $123 million FCPC settlement), $7 million in
2001, $7 million in 2002, and $20 million thereafter.
In addition, the Company is continuing to evaluate all areas of its business
in connection with its merger integration,including the identification of
additional converting facilities that might be closed.
3. Stone Receivables Securitization Program
On October 15, 1999, the Company entered into a new six-year $250 million
accounts receivable securitization program whereby the Company sells, without
recourse, on an ongoing basis, certain of its accounts receivable to Stone
Receivables Corporation ("SRC"), a wholly-owned non-consolidated subsidiary of
the Company. SRC transfers the receivables to a trust for which it has sold
beneficial interest to third-party investors. The Company retained a junior
interest in the trust which has been classified as accounts receivable in the
accompanying consolidated balance sheets.
F-55
<PAGE>
STONE CONTAINER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
SRC is a qualified special-purpose entity under the provisions of SFAS No.
125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities." Accordingly, accounts receivable sold to SRC
for which the Company did not retain an interest are not included in the
Company's consolidated balance sheets.
At December 31, 1999, $304 million of accounts receivable had been sold
under the program, of which $79 million was retained by the Company as a junior
interest and recorded as an accounts receivable in the accompanying
consolidated balance sheets.
4. Net Property, Plant and Equipment
Net property, plant and equipment at December 31 consists of:
<TABLE>
<CAPTION>
1999 1998
------ ------
<S> <C> <C>
Land......................................................... $ 67 $ 84
Buildings and leasehold improvements......................... 249 499
Machinery, fixtures and equipment............................ 2,901 3,336
Construction in progress..................................... 87 105
------ ------
3,304 4,024
Less accumulated depreciation and amortization............... (215) (27)
------ ------
Net property, plant and equipment.......................... $3,089 $3,997
====== ======
</TABLE>
Property, plant and equipment was adjusted by $726 million in the final
purchase price allocation (See Note 2). Depreciation expense was $225 million
in 1999, $26 million for the period from November 19 to December 31, 1998, $212
million for the period from January 1 to November 18, 1998 and $260 million in
1997. Property, plant and equipment includes capitalized leases of $18 million
and $14 million and related accumulated amortization of $2 million and $.2
million at December 31, 1999 and 1998, respectively.
5. Non-Consolidated Affiliates
The Company has several non-consolidated affiliates that are engaged in
paper and packaging operations in North America, South America and Europe.
Investments in majority-owned affiliates where control does not exist and non
majority-owned affiliates are accounted for under the equity method.
On April 4, 1997, the Company's then 90% owned subsidiary, Stone Venepal
(Celgar) Pulp, Inc. ("SVCPI") acquired the remaining 50% interest in the Celgar
pulp mill (the "Celgar Mill") located in Castlegar, British Columbia from CITIC
B.C., Inc. ("CITIC") in exchange for assuming $273 million of the Celgar Mill's
indebtedness owed by CITIC, after which the Company included SVCPI in its
consolidated results. On June 26, 1997, the Company sold half of its ownership
in SVCPI to Celgar Investments, Inc., a 49% owned affiliate of the Company.
Following the sale, the Company retained a 45% direct voting interest in the
stock of SVCPI and began accounting for its interest in SVCPI under the equity
method of accounting. As a result of the deconsolidation, the $538 million in
related indebtedness was no longer included in the Company's consolidated debt
total. On July 23, 1998 SVCPI filed for bankruptcy protection. SVCPI's lenders
and creditors have no recourse against the Company. As a result of the
bankruptcy filing, the Company recorded a loss in the second quarter of 1998 to
write-off the Company's investment in SVCPI of $67 million.
On May 30, 1997, Stone-Consolidated Corporation ("Stone-Consolidated"), an
affiliate of the Company, and Abitibi-Price Inc. amalgamated to form Abitibi.
For U.S. GAAP purposes, the combination of Stone-Consolidated and Abitibi-Price
Inc. was accounted for under the purchase method of accounting, as the
F-56
<PAGE>
STONE CONTAINER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
acquisition of Abitibi-Price Inc. by Stone-Consolidated. Following the
amalgamation, the Company owned approximately 25% of the common stock of
Abitibi and accounted for its interest in this Canadian affiliate under the
equity method of accounting. Effective with the amalgamation, the Company
recorded a credit of $11 million to common stock related to the excess of the
market value per common share over the carrying value of its investment per
common share. Additionally, the Company reported a non-cash extraordinary
charge of $13 million, net of tax, representing its share of a loss from the
early extinguishment of debt incurred by Stone-Consolidated. Abitibi had sales
of $2,313 million in 1998. During 1999, the Company sold its interest in
Abitibi and recorded a $39 million gain.
Due to the continued operating losses and deteriorating financial liquidity
conditions experienced in the second half of 1998, the Company recorded
impairment charges of $32 million and $56 million related to its investments in
Venepal S.A.C.A. ("Venepal") and Financiere Carton Papier ("FCP"),
respectively. Venepal is a publicly traded, Venezuelan based, manufacturer of
paperboard and paper packaging products in which the Company owns a 20%
interest. FCP is a privately held folding carton converting operation based in
France that is 50% owned by the Company.
The Company's significant non-consolidated affiliate at December 31, 1999 is
Smurfit-MBI (formerly MacMillian 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 $389 million and $351 million in 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 as follows:
<TABLE>
<CAPTION>
Predecessor
------------
Period from Period from
November 19 to January 1 to
December 31, November 18,
1999 1998 1998
---- -------------- ------------
<S> <C> <C> <C>
Results of operations (a)
Net sales................................ $628 $380 $3,219
Cost of sales............................ 540 351 2,528
Income (loss) before income taxes,
minority interest and extraordinary
charges................................. 32 (56) (312)
Net income (loss)........................ 31 (43) (261)
</TABLE>
<TABLE>
<CAPTION>
December 31, December 31,
1999 1998
------------ ------------
<S> <C> <C>
Financial position:
Current assets................................... $154 $ 960
Non-current assets............................... 136 4,224
Current liabilities.............................. 101 773
Non-current liabilities.......................... 106 1,972
Stockholders' equity............................. 84 2,439
</TABLE>
--------
(a) Includes results of operations for each of the Company's affiliates for the
period it was accounted for under the equity method.
F-57
<PAGE>
STONE CONTAINER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
6. Long-term Debt
Long-term debt as of December 31 is as follows:
<TABLE>
<CAPTION>
1999 1998
----- ------
<S> <C> <C>
Bank Credit Facilities
Tranche B Term Loan, payable in various installments through
April 1, 2000................................................. $ $ 368
Tranche C Term Loan (9.5% weighted average variable rate),
payable in various installments through October 1, 2003....... 181 194
Tranche D Term Loan (9.5% weighted average variable rate),
payable in various installments through October 1, 2003....... 173 185
Tranche E Term Loan (9.5% weighted average variable rate),
payable in various installments through October 1, 2003....... 234 248
Revolving credit facility (10.6% weighted average rate), due
December 31, 2000............................................. 93 161
Europa Carton AG (a wholly-owned German subsidiary) 7.96% term
loan, denominated in German DMs, payable in March 2003........ 22 49
4.98% to 7.96% term loans, denominated in foreign currencies,
payable in varying amounts through 2004....................... 18 30
----- ------
721 1,235
Accounts Receivable Securitization Program Borrowings
Stone accounts receivable securitization program term loans
(6.2% weighted average variable rate), due December 15, 2000.. 210
Senior Notes
10.75% first mortgage notes, due October 1, 2002 (plus
unamortized premium of $13 and $18)........................... 513 518
8.45% mortgage notes, payable in monthly installments through
August 1, 2007 and $69 on September 1, 2007................... 81 82
9.875% unsecured senior notes, due February 1, 2001 (plus
unamortized premium of $3 and $7)............................. 562 578
11.5% unsecured senior notes, due October 1, 2004 (plus
unamortized premium of $10 and $12)........................... 210 212
11.5% unsecured senior notes, due August 15, 2006 (plus
unamortized premium of $5 and $6) 205 206
12.58% rating adjustable unsecured senior notes, due August 1,
2016 (plus unamortized premium of $2 and $2).................. 127 127
----- ------
1,698 1,723
Other Debt
Fixed rate utility systems and pollution control revenue bonds
(fixed rates ranging from 6.0% to 9.0%), payable in varying
annual sinking fund payments through 2027..................... 235 238
Other (including obligations under capitalized leases of $9 and
$7)........................................................... 22 30
----- ------
257 268
</TABLE>
F-58
<PAGE>
STONE CONTAINER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
1999 1998
------ ------
<S> <C> <C>
Subordinated Debt
10.75% senior subordinated debentures and 1.5% supplemental
interest certificates, due on April 1, 2002 (less
unamortized discount of $3 and $5)........................ 244 270
10.75% senior subordinated debentures, due April 1, 2002... 200 200
11.0% senior subordinated notes, due August 15, 1999 (plus
unamortized premium of $1 at December 31, 1998)........... 120
6.75% convertible subordinated debentures (convertible at
$34.28 per share), due February 15, 2007 (less unamortized
discount of $8 and $8).................................... 37 37
------ ------
481 627
------ ------
Total debt............................................... 3,157 4,063
Less current maturities.................................... (162) (161)
------ ------
Long-term debt........................................... $2,995 $3,902
====== ======
</TABLE>
The amounts of total debt outstanding at December 31, 1999 maturing during
the next five years are as follows:
<TABLE>
<S> <C>
2000.................................................................... $162
2001.................................................................... 603
2002.................................................................... 992
2003.................................................................... 551
2004.................................................................... 220
Thereafter.............................................................. 629
</TABLE>
Bank Credit Facilities
The Company has a bank credit agreement which provides for four secured
senior term loans (Tranche B, Tranche C, Tranche D, and Tranche E Term Loans),
aggregating $588 million at December 31, 1999 which mature through October 1,
2003 and a $560 million senior secured revolving credit facility, of which up
to $62 million may consist of letters of credit, maturing December 31, 2000
(collectively the "Credit Agreement"). The Company pays a .5% commitment fee on
the unused portions of its revolving credit facility. At December 31, 1999, the
unused portion of this facility, after giving consideration to outstanding
letters of credit, was $447 million.
On November 18, 1998, the Company and its bank group amended and restated
the Credit Agreement to, among other things, (i) extend the maturity date on
the Tranche B Term Loan $190 million payment due on October 1, 1999 to April 1,
2000, (ii) extend the maturity date of the revolving credit facility to April
1, 2000 and to provide a further extension to December 31, 2000 upon repayment
of the Tranche B Term Loan on or before its maturity date of April 1, 2000,
(iii) permit the use of the net proceeds from the sale of the Snowflake mill to
repay a portion of the Company's 11.875% Senior Notes due December 1, 1998,
(iv) permit the Merger, and (v) ease certain financial covenants. On April 23,
1999, the Company repaid all outstanding amounts under the Tranche B Term Loan
with proceeds from the sale of Abitibi.
The Credit Agreement (as amended) contains various covenants and
restrictions including, among other things, (i) limitations on dividends,
redemptions and repurchases of capital stock, (ii) limitations on the
incurrence of indebtedness, liens, leases and sale-leaseback transactions,
(iii) limitations on capital expenditures, and (iv) maintenance of certain
financial covenants. The Credit Agreement also requires prepayments of the term
loans if the Company has excess cash flows, as defined, or receives proceeds
from
F-59
<PAGE>
STONE CONTAINER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
certain asset sales, insurance, issuance of certain equity securities or
incurrence of certain indebtedness. Current maturities include $43 million of
excess cash flow payments due prior to April 5, 2000. Any prepayments are
allocated against the term loan amortization in inverse order of maturity.
During January 1999, the Company obtained a waiver from its bank group for
relief from certain financial covenant requirements under the Credit Agreement
as of December 31, 1998. Subsequently, on March 23, 1999 the Company and its
bank group amended the Credit Agreement to ease certain quarterly financial
covenant requirements for 1999.
At December 31, 1999, borrowings and accrued interest outstanding under the
Credit Agreement were secured by a security interest in substantially all of
the assets of the Company and 65% of the stock of its Canadian subsidiary. The
security interest excludes cash, cash equivalents, certain trade receivables,
five paper mills and the land and buildings of the corrugated container plants.
Accounts Receivable Securitization Program Borrowings
On October 15, 1999, the Company entered into an accounts receivable
securitization program, which qualified for SFAS No. 125 (See Note 3). Proceeds
from this securitization program were used to repay borrowings outstanding
under its prior $210 million accounts receivable securitization program.
Senior Notes
The Company's senior notes (the "Senior Notes"), aggregating $1,698 million
at December 31, 1999, are redeemable in whole or in part at the option of the
Company at various dates, at par plus a weighted average premium of 2.57%. The
Merger constituted a "Change of Control" under the Senior Notes and the
Company's $481 million outstanding senior subordinated debentures (the "Senior
Subordinated Debentures"). As a result, the Company is required, subject to
certain limitations, to offer to repurchase the Senior Notes and the Senior
Subordinated Debentures at a price equal to 101% of the principal amount,
together with accrued interest. However, because the Credit Agreement prohibits
the Company from making an offer to repurchase the Senior Notes and the Senior
Subordinated Debentures, the Company could not make the offer. Although the
terms of the Senior Notes refer to an obligation to repay the bank debt or
obtain the consent of the bank lenders to such repurchase, the terms do not
specify a deadline, if any, following the Merger for repayment of bank debt or
obtaining such consent. The Company intends to actively seek commercially
acceptable sources of financing to repay the outstanding indebtedness under the
Credit Agreement or alternative financing arrangements which would cause the
bank lenders to consent to the repurchase. There can be no assurance that the
Company will be successful in obtaining such financing or consents.
In the event the Company does not maintain the minimum Subordinated Capital
Base (as defined) of $1 billion for two consecutive quarters, the indentures
governing the Senior Notes require the Company to semiannually offer to
purchase 10% of such outstanding indebtedness at par until the minimum
Subordinated Capital Base is attained. In the event the Credit Agreement
prohibits such an offer to repurchase, the interest rate on the Senior Notes is
increased by 50 basis points per semiannual coupon period up to a maximum of
200 basis points until the minimum Subordinated Capital Base is attained. The
Company's Subordinated Capital Base (as defined) was $2,998 million and $3,096
million at December 31, 1999 and December 31, 1998, respectively; however, it
was below the $1 billion minimum at September 30, June 30, and March 31, 1998.
In April 1998, the Company offered to repurchase 10% of the outstanding Senior
Notes. Approximately $1 million of such indebtedness was redeemed under this
offer. Effective February 1, 1999 the interest rates on the 9.875% Senior Notes
due February 1, 2001 and 12.58% Senior Notes due August 1, 2016 were increased
by 50 basis points. Effective February 15, 1999 the interest rate on the 11.5%
Senior Notes due August 15, 2006 was also increased 50 basis points. The
interest rates on all of the Senior Notes returned to the original interest
rate on April 1, 1999 due to the Company's Subordinated Capital Base exceeding
the minimum on December 31, 1998.
F-60
<PAGE>
STONE CONTAINER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The 10.75% first mortgage notes are secured by the assets at four of the
Company's containerboard mills. The 8.45% mortgage notes are secured by the
land and buildings comprising 37 of the Company's corrugated container plants.
Subordinated Debt
The Company's Senior Subordinated Debentures, aggregating $481 million, are
redeemable as of December 31, 1999, in whole or in part at the option of the
Company at par plus a weighted average premium of .16%.
In the event the Company does not maintain a minimum Net Worth, as defined,
of $500 million, for two consecutive quarters, the interest rate on the 10.75%
senior subordinated debentures and 11% senior subordinated indentures will be
increased by 50 basis points per semiannual coupon period up to a maximum
amount of 200 basis points, until the minimum Net Worth is attained. The
Company's Net Worth (as defined) was $2,506 million and $2,590 million at
December 31, 1999 and December 31, 1998, respectively, however, it was below
the $500 million minimum at September 30, June 30 and March 31, 1998. The
interest rate on the 11.0% senior subordinated debentures was increased 50
basis points on August 15, 1998 and 50 basis points on February 15, 1999. The
interest rate on the 10.75% senior subordinated debentures was increased 50
basis points on October 1, 1998. The interest rate on all of the Company's
Senior Subordinated Debentures returned to the original interest rate on April
1, 1999, due to the Company's Net Worth exceeding the minimum at December 31,
1998.
On August 15, 1999, the Company repaid its $120 million 11.0% Senior
Subordinated Debentures at maturity with borrowings under its revolving credit
facility.
Other
Interest costs capitalized on construction projects was $1 million for 1999,
zero for the period from November 19 to December 31, 1998, $2 million for the
period from January 1 to November 18, 1998 and $3 million in 1997. Interest
payments on all debt instruments were $369 million for 1999, $22 million for
the period from November 19 to December 31, 1998, $424 million for the period
from January 1 to November 18, 1998 and $424 million in 1997.
7. Leases
The Company leases certain facilities and equipment for production, selling
and administrative purposes under operating leases. Future minimum rental
commitments (exclusive of real estate taxes and other expenses) under operating
leases having initial or remaining non-cancelable terms in excess of one year,
excluding lease commitments on closed facilities, are reflected below:
<TABLE>
<S> <C>
2000................................................................... $ 70
2001................................................................... 53
2002................................................................... 43
2003................................................................... 36
2004................................................................... 29
Thereafter............................................................. 73
----
Total minimum lease payments......................................... $304
====
</TABLE>
Net rental expense for operating leases, including leases having a duration
of less than one year, was approximately $106 million in 1999, $15 million for
the period from November 19 to December 31, 1998, $106 million for the period
from January 1 to November 18, 1998, and $114 million in 1997.
F-61
<PAGE>
STONE CONTAINER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
8. Income Taxes
Significant components of the Company's deferred tax assets and liabilities
at December 31 are as follows:
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Deferred tax liabilities
Property, plant and equipment and timberland............... $ (951) $(1,287)
Inventory.................................................. (15) 19
Prepaid pension costs...................................... (11) (11)
Investment in affiliate.................................... (45) (57)
Other...................................................... (69) (29)
------- -------
Total deferred tax liabilities........................... (1,091) (1,365)
------- -------
Deferred tax assets
Employee benefit plans..................................... 105 136
Net operating loss, alternative minimum tax and tax credit
carryforwards............................................. 558 456
Deferred gain.............................................. 29 23
Purchase accounting liabilities............................ 132 103
Deferred debt issuance costs............................... 48 52
Other...................................................... 69 77
------- -------
Total deferred tax assets................................ 941 847
Valuation allowance for deferred tax asset................. (198) (198)
------- -------
Net deferred tax assets.................................. 743 649
------- -------
Net deferred tax liabilities............................. $ (348) $ (716)
======= =======
</TABLE>
At December 31, 1999, the Company had approximately $1,337 million of net
operating loss carryforwards for U. S. Federal income tax purposes that expire
from 2009 through 2019, with a tax value of $468 million. A valuation
allowance of $152 million has been established for a portion of these deferred
tax assets. Further, the Company had net operating loss carryforwards for
state purposes with a tax value of $68 million, which expire from 2000 through
2019. A valuation allowance of $46 million has been established for a portion
of these deferred tax assets. The Company had approximately $22 million of
alternative minimum tax credit carryforwards for U.S. federal tax purposes,
which are available indefinitely.
F-62
<PAGE>
STONE CONTAINER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Benefit from income taxes on loss before income taxes and extraordinary item
as follows:
<TABLE>
<CAPTION>
Predecessor
-----------------
Period from Period from
November 19 to January 1 to
December 31, November 18,
1999 1998 1998 1997
---- -------------- ------------ ----
<S> <C> <C> <C> <C>
Current
Federal............................... $ $ $ $ 4
Foreign............................... (19) (5) (18) (21)
---- --- ---- ----
Total current expense............... (19) (5) (18) (17)
Deferred
Federal............................... 24 15 121 166
State and local....................... 2 3 (34) 30
Foreign............................... (7) 3 19 21
---- --- ---- ----
Total deferred benefit.............. 19 21 106 217
---- --- ---- ----
Total benefit from income taxes... $ $16 $ 88 $200
==== === ==== ====
</TABLE>
The Company's benefit from income taxes differed from the amount computed by
applying the statutory U.S. federal income tax rate to loss before income taxes
and extraordinary item is as follows:
<TABLE>
<CAPTION>
Predecessor
-----------------
Period from Period from
November 19 to January 1 to
December 31, November 18,
1999 1998 1998 1997
---- -------------- ------------ ----
<S> <C> <C> <C> <C>
U.S. federal income tax benefit at
federal statutory rate................ $ 26 $18 $ 293 $212
Effect of valuation allowances on
deferred tax assets, net of federal
benefit............................... (151) (9)
Unutilized capital loss................ (36)
Permanent differences from applying
purchase accounting................... (26) (3)
Permanently non-deductible expenses.... (1) (7) (8)
Equity earnings of affiliates, net of
tax................................... (30) (19)
State income taxes, net of federal
income tax effect..................... 2 2 22 19
Minimum taxes-foreign jurisdictions.... (4) (4)
Other-net.............................. (1) (1) 1 9
---- --- ----- ----
Total benefit from income taxes...... $ $16 $ 88 $200
==== === ===== ====
</TABLE>
The components of the loss before income taxes and extraordinary item are as
follows:
<TABLE>
<CAPTION>
Predecessor
------------------
Period from Period from
November 19 to January 1 to
December 31, November 18,
1999 1998 1998 1997
----- -------------- ------------ -----
<S> <C> <C> <C> <C>
United States........................ $(128) $(54) $(405) $(521)
Foreign.............................. 53 2 (432) (84)
----- ---- ----- -----
Loss before income taxes and
extraordinary item.................. $ (75) $(52) $(837) $(605)
===== ==== ===== =====
</TABLE>
F-63
<PAGE>
STONE CONTAINER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company made income tax payments of $14 million in 1999, $6 million for
the period from November 19 to December 31, 1998 and $27 million for the period
from January 1 to November 18, 1998 and $13 million in 1997.
9. Employee Benefit Plans
Defined Benefit Plans
The Company participates in the SSCC sponsored noncontributory defined
benefit pension plans covering substantially all employees. On December 31,
1998, the domestic defined benefit plans of the Company were merged with the
defined benefit plans of Jefferson Smurfit Corporation (U.S.) ("JSC(U.S.)"),
and assets of these plans are available to meet the funding requirements of the
combined plans. The Company intends to fund its proportionate share of the
future contributions based on the funded status of the Company's plan
determined on an actuarial basis. Therefore, the plan asset information
provided below is based on an actuarial estimate of assets and liabilities,
excluding the effect of the plan merger, in order to be consistent with the
presentation of the consolidated statements of operations and balance sheets.
The benefit obligation, fair value of plan assets and the over funded status
of the JSC(U.S.) defined benefit plans at December 31, 1999 were $957 million,
$1,155 million and $198 million, respectively.
Approximately 29% of the merged pension plan assets at December 31, 1999 are
invested in cash equivalents or debt securities and 71% are invested in equity
securities. Equity securities at December 31, 1999 include .7 million shares of
SSCC common stock with a market value of approximately $18 million and 26
million shares of JS Group common stock having a market value of approximately
$79 million. Dividends paid on JS Group common stock during 1999 were
approximately $2 million.
The Company sponsors noncontributory defined benefit pension plans for its
foreign operations. Approximately 21% of the foreign pension plan assets at
December 31, 1999, are invested in cash equivalents or debt securities and 79%
are invested in equity securities.
Postretirement Health Care and Life Insurance Benefits
The Company provides certain health care and life insurance benefits for all
salaried as well as certain hourly employees. The assumed health care cost
trend rates used in measuring the accumulated postretirement benefit obligation
("APBO") range from 5.25% to 6.50% at December 31, 1999, decreasing to the
ultimate rate of 5.25%. The effect of a 1% increase in the assumed health care
cost trend rate would increase the APBO as of December 31, 1999 by $7 million
and would have an immaterial effect on the annual net periodic postretirement
benefit cost for 1999.
F-64
<PAGE>
STONE CONTAINER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
As a result of the Merger, the Company recorded previously unrecognized
actuarial gains and losses and prior service cost in its purchase price
allocation. The following provides a reconciliation of benefit obligations,
plan assets, and funded status of the plans:
<TABLE>
<CAPTION>
Postretirement
Defined Benefit Plans Plans
---------------------- ----------------
1999 1998 1999 1998
---------- ---------- ------- -------
<S> <C> <C> <C> <C>
Change in benefit obligation:
Benefit obligation at January 1...... $ 778 $ 708 $ 73 $ 72
Service cost......................... 22 21 1 1
Interest cost........................ 52 49 5 5
Amendments........................... 5 1
Actuarial (gain) loss................ (60) 35 (2) 2
Plan participants' contributions..... 1 2
Benefits paid........................ (36) (32) (6) (6)
Foreign currency rate changes........ (8) (4) 1 (1)
---------- ---------- ------- -------
Benefit obligation at December 31.... $ 754 $ 778 $ 74 $ 73
---------- ---------- ------- -------
Change in plan assets:
Fair value of plan assets at January
1................................... $ 504 $ 468 $ $
Actual return on plan assets......... 51 56
Employer contributions............... 13 24
Benefits paid........................ (36) (32)
Foreign currency rate changes........ 10 (12)
---------- ---------- ------- -------
Fair value of plan assets at
December 31......................... $ 542 $ 504 $ $
---------- ---------- ------- -------
Over (under) funded status:.......... $ (212) $ (274) $ (74) $ (73)
Unrecognized actuarial (gain) loss... (98) (29) (2)
Unrecognized prior service cost...... 10
---------- ---------- ------- -------
Net amount recognized................ $ (300) $ (303) $ (76) $ (73)
---------- ---------- ------- -------
Amounts recognized in the balance
sheets:
Accrued pension liability............ $ (300) $ (303) $ (76) $ (73)
---------- ---------- ------- -------
</TABLE>
The weighted-average assumptions used in the accounting for the defined
benefit plans and postretirement plans were:
<TABLE>
<CAPTION>
Postretirement
Defined Benefit Plans Plans
---------------------- ----------------
1999 1998 1999 1998
---------- ---------- ------- -------
<S> <C> <C> <C> <C>
Weighted discount rate:
U.S. plans......................... 8.00% 7.00% 8.00% 7.00%
Foreign plans...................... 6.50--8.00% 6.00--7.00% 8.00% 7.00%
Rate of compensation increase........ 3.00--4.50% 3.00--3.75% N/A N/A
Expected return on plan assets....... 9.50% 9.50% N/A N/A
Health care cost trend on covered
charges............................. N/A N/A 6.50% 6.50%
</TABLE>
F-65
<PAGE>
STONE CONTAINER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The components of net pension expense for the defined benefit plans and the
components of the postretirement benefits costs follow:
Defined Benefit Plans
<TABLE>
<CAPTION>
Predecessor
-----------------
Period from Period from
November 19 to January 1 to
December 31, November 18,
1999 1998 1998 1997
---- -------------- ------------ ----
<S> <C> <C> <C> <C>
Service cost............................ $ 22 $ 2 $ 19 $ 19
Interest cost........................... 52 6 43 47
Expected return on plan assets.......... (47) (5) (44) (43)
Net amortization and deferral........... (1) 9 10
Multi-employer plans.................... 4 5 5
---- --- ---- ----
Net periodic benefit cost............... $ 30 $ 3 $ 32 $ 38
---- --- ---- ----
</TABLE>
Postretirement Benefit Plans
<TABLE>
<CAPTION>
Predecessor
-----------------
Period from Period from
November 19 to January 1 to
December 31, November 18,
1999 1998 1998 1997
---- -------------- ------------ ----
<S> <C> <C> <C> <C>
Service cost.............................. $ 1 $ $ 1 $ 1
Interest cost............................. 5 1 4 5
Net amortization and deferral............. 1
Multi-employer plans...................... 1 1
--- --- --- ---
Net periodic benefit cost................. $ 7 $ 1 $ 6 $ 7
--- --- --- ---
</TABLE>
The projected benefit obligation, accumulated benefit obligation, and fair
value of plan assets for the pension plans with accumulated benefit obligations
in excess of plan assets were $272 million, $262 million and $126 million,
respectively, as of December 31, 1999 and $601 million, $534 million and $335
million as of December 31, 1998.
Savings Plans
The Company sponsors voluntary savings plans covering substantially all
salaried and certain hourly employees. The Company match is paid in SSCC common
stock, up to an annual maximum. The Company's expense for the savings plans
totaled $8 million in 1999, $5 million in 1998, and an immaterial amount in
1997.
10. Preferred Stock
The Company has approximately 4.6 million shares of $1.75 Series E
Cumulative Convertible Exchangeable Preferred Stock, $.01 par value, (the
"Preferred Stock") issued and outstanding. Each share of Preferred Stock is
entitled to one vote on all matters submitted to a vote of the Company's common
stockholders. The Preferred Stock is convertible, at the option of the holder,
into shares of SSCC common stock at a conversion price of $34.28 (equivalent to
a conversion rate of .729 shares of SSCC common stock
F-66
<PAGE>
STONE CONTAINER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
for each share of Preferred Stock), subject to adjustment based on certain
events. The Preferred Stock may alternatively be exchanged, at the option of
the Company, for new 7% Convertible Subordinated Exchange Debentures of the
Company due February 15, 2007 in a principal amount equal to $25.00 per share
of Preferred Stock so exchanged. Additionally, the Preferred Stock is
redeemable at the option of the Company, in whole or in part, from time to
time.
The Company paid cash dividends of $.4375 per share on the Preferred Stock
in 1997. No cash dividends were paid in 1999 and 1998. The declaration of
dividends by the Board of Directors is subject to, among other things, certain
restrictive provisions contained in the Credit Agreement, Senior Note
Indentures and Senior Subordinated Indenture. Due to these restrictive
provisions, the Company cannot declare or pay dividends on its Preferred Stock
or common stock until the Company generates income or issues capital stock to
replenish the dividend pool under various of its debt instruments and total Net
Worth (as defined) equals or exceeds $750 million. At December 31, 1999, the
dividend pool under the Senior Subordinated Indenture (which contains the most
restrictive dividend pool provision) had a deficit of approximately $1,043
million and Net Worth (as defined) was $2.5 billion. Because more than ten
quarterly dividends remain unpaid on the Preferred Stock, the holders of the
Preferred Stock are currently entitled to elect two members to the Company's
Board of Directors until the accumulated dividends on such Preferred Stock have
been declared and paid or set apart for payment. The Company had accumulated
dividend arrearages on the Preferred Stock of $22 million and $14 million at
December 31, 1999 and 1998, respectively. The accumulated dividend arrearages
on the preferred stock are payable upon their conversion, exchange or
redemption.
11. Stock Option and Incentive Plans
Prior to the Merger, the Company maintained incentive plans for selected
employees. The Company's plans included incentive stock options and non-
qualified stock options issued at prices equal to the fair market value of the
Company's common stock at the date of grant which expire upon the earlier of 10
years from the date of grant or termination of employment, death, or
disability. Effective with the Merger, options outstanding under the Company's
plans were converted into options to acquire SSCC common stock, with the number
of shares and exercise price being adjusted in accordance with the exchange
ratio of .99 established in the Merger Agreement and all outstanding options
under both the Company and SSCC plans became exercisable and fully vested.
In November 1998, the Company's parent, SSCC, adopted the 1998 Long-Term
Incentive Plan ("1998 Plan") and reserved 8.5 million shares of SSCC common
stock for non-qualified stock options and performance awards. Certain employees
of the Company are covered under the 1998 Plan. The options are exercisable at
a price equal to the fair market value of SSCC's common stock at the date of
grant and vest eight years after the date of grant subject to accelerations
based upon the attainment of pre-established stock price targets. The options
expire ten years after the date of grant.
The Company and its parent have elected to continue to follow APB Opinion
No. 25 to account for stock awards granted to employees. If the Company adopted
SFAS No. 123 to account for stock awards granted to employees, the Company's
net income for the period from November 19 to December 31, 1998 and the year
ended December 31, 1999, based on a Black-Scholes option pricing model, would
not have been materially different. The effects of applying SFAS No. 123 as
described above may not be representative of the effects on reported net income
for future years.
F-67
<PAGE>
STONE CONTAINER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Pro forma information for the Predecessor period regarding net income and
earnings per share is required by SFAS No. 123 and has been determined as if
the Company had accounted for its employee stock options issued subsequent to
December 31, 1994 under the fair value method. The pro forma net income
information required by SFAS No. 123 is not likely to be representative of the
effects on reported net income for future years. The fair value for these
options was estimated at the date of grant using a Black-Scholes option pricing
model with the following assumptions:
<TABLE>
<CAPTION>
Predecessor
-----------------
Period from
January 1 to
November 18,
1998 1997
------------ ----
<S> <C> <C>
Expected option life (years).............................. 7 7
Risk-free weighted average interest rate.................. 5.6% 6.6%
Stock price volatility.................................... 50% 51%
Dividend yield............................................ 0.0% 4.2%
</TABLE>
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those of traded options and because changes in the subjective
input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
unaudited pro forma information is as follows:
<TABLE>
<CAPTION>
Predecessor
-------------------
Period from
January 1 to
November 18,
1998 1997
------------ ------
<S> <C> <C>
As Reported
Net income (loss).................................... $ (749) $ (418)
Basic earnings (loss) per share...................... (7.43) (4.29)
Diluted earnings (loss) per share.................... (7.43) (4.29)
Pro Forma
Net income (loss).................................... $ (753) $ (423)
Basic earnings (loss) per share...................... (7.46) (4.34)
Diluted earnings (loss) per share.................... (7.46) (4.34)
</TABLE>
The weighted average fair values of options granted during 1998 and 1997
were $6.93 and $5.59 per share, respectively.
F-68
<PAGE>
STONE CONTAINER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Additional information relating to the Plans is as follows:
<TABLE>
<CAPTION>
Shares Under Option Weighted Average
Option Price Range Exercise Price
------------ ------------ ----------------
<S> <C> <C> <C>
Outstanding at January 1, 1997....... 3,750,536 $13.38-29.29 $19.23
Granted............................ 1,296,706 14.00 14.00
Exercised.......................... (12,500) 13.38 13.38
Cancelled.......................... (247,644) 13.38-29.29 23.28
----------
Outstanding at December 31, 1997..... 4,787,098 13.38-29.29 15.23
Granted............................ 1,617,870 11.75 11.75
Exercised.......................... (180,616) 13.38-18.00 13.68
Cancelled.......................... (125,328) 13.38-29.29 22.89
----------
Outstanding at November 18, 1998..... 6,099,024 13.38-29.29 14.21
Converted to SSCC options.......... (6,099,024) 13.38-29.29 (14.21)
----------
Outstanding at December 31, 1998.....
----------
</TABLE>
The number of options exercisable at December 31, 1997 were 1,599,482.
12. Accumulated Other Comprehensive Income (Loss)
Accumulated other comprehensive income (loss) is as follows:
<TABLE>
<CAPTION>
Unrealized
Foreign Holding Accumulated
Currency Minimum Gain on Other
Translation Pension Marketable Comprehensive
Adjustment Liability Securities Income (Loss)
----------- --------- ---------- -------------
<S> <C> <C> <C> <C>
Predecessor:
Balance at January 1, 1997....... $(179) $(42) $ $(221)
Current period change.......... (114) 3 (111)
----- ---- ---- -----
Balance at December 31, 1997..... (293) (39) (332)
Current period change.......... (76) (21) (97)
----- ---- ---- -----
Balance at November 18, 1998..... (369) (60) (429)
Effect of Merger:
Retire predecessor Equity...... 369 60 429
Current period change.......... 3 3
----- ---- ---- -----
Balance at December 31, 1998..... 3 3
Current period change.......... (10) 3 (7)
----- ---- ---- -----
Balance at December 31, 1999..... $ (7) $ $ 3 $ (4)
----- ---- ---- -----
</TABLE>
F-69
<PAGE>
STONE CONTAINER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
13. Earnings Per Share
Subsequent to the Merger, earnings per share information is no longer
presented because the Company is a wholly-owned subsidiary of SSCC.
The following table sets forth the computation of basic and diluted earnings
per share for the Predecessor periods:
<TABLE>
<CAPTION>
Predecessor
-------------------
Period from
January 1 to
November 18,
1998 1997
------------ ------
<S> <C> <C>
Numerator:
Loss from continuing operations before extraordinary
item................................................... $ (749) $ (405)
Less: Preferred stock dividends......................... (7) (8)
------ ------
Loss applicable to common stockholders.................. $ (756) $ (413)
------ ------
Denominator:
Denominator for basic earnings per share--
Weighted average shares................................. 102 99
Denominator for diluted earnings per share--
Adjusted weighted average shares........................ 102 99
------ ------
Basic earnings (loss) per share before extraordinary item. $(7.43) $(4.16)
------ ------
Diluted earnings (loss) per share before extraordinary
item..................................................... $(7.43) $(4.16)
------ ------
</TABLE>
Convertible debt to acquire four million shares of common stock with an
earnings effect of $3 million, and exchangeable preferred stock to acquire four
million shares of common stock with an earnings effect of $7 million are
excluded from the diluted earnings per share computation in the period from
January 1 to November 18, 1998 because they are antidilutive.
Convertible debt to acquire six million shares of common stock with an
earnings effect of $5 million are excluded from the diluted earnings per share
computation in 1997 because they are antidilutive.
14. Related Party Transactions
On September 4, 1998, Stone Canada purchased the remaining 50% of MBI from
MacMillan Bloedel ltd. for $185 million (Canadian). Simultaneously, Stone
Canada sold the newly acquired 50% interest to Jefferson Smurfit Group plc, a
significant stockholder of SSCC, for the same amount.
On October 15, 1998, the Company sold its Snowflake, Arizona newsprint
manufacturing operations and related assets to Abitibi for approximately $250
million. The Company retained ownership of a corrugating medium machine located
in the facility that Abitibi operated on behalf of the Company pursuant to an
operating agreement entered into as part of the sale. Payments made to Abitibi,
prior to the sale of the Company's remaining interest (see Note 5), were $17
million in the period from January 1 to April 23, 1999, $4 million in the
period from January 1 to November 18, 1998 and $4 million in the period from
November 19 to December 31, 1998.
F-70
<PAGE>
STONE CONTAINER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Transactions with JSC(U.S.)
The Company sold and purchased containerboard at market prices from
JSC(U.S.), a subsidiary of SSCC, as follows:
<TABLE>
<CAPTION>
Period from
November 19 to
December 31,
1999 1998
---- --------------
<S> <C> <C>
Product sales............................................ $237 $ 8
Product and raw material purchases....................... 248 14
Receivables at December 31............................... 32 4
Payables at December 31.................................. 60 8
</TABLE>
Corporate shared expenses are allocated between the Company and JSC based on
an established formula using a weighted average rate based on the net book
value of fixed assets, number of employees and sales.
Transactions with JS Group
The Company sold and purchased containerboard at market prices from
Jefferson Smurfit Group plc, a significant stockholder of SSCC, as follows:
<TABLE>
<CAPTION>
1999
----
<S> <C>
Product sales........................................................... $12
Product and raw material purchases...................................... 5
Receivables at December 31.............................................. 1
Payables at December 31................................................. 1
</TABLE>
Transactions with Non-consolidated Affiliates
The Company sold paperboard, market pulp and fiber to and purchased
containerboard and kraft paper from various non-consolidated affiliates. The
following table summarizes the Company's related party transactions with its
non-consolidated affiliates for each year presented:
<TABLE>
<CAPTION>
Predecessor
-----------------
Period from Period from
November 19 to January 1 to
December 31, November 18,
1999 1998 1998 1997
---- -------------- ------------ ----
<S> <C> <C> <C> <C>
Product sales............................. $297 $24 $220 $206
Product and raw material purchases........ 29 113 103
Receivables at December 31................ 42 65 60
Payables at December 31................... 2 5
Commissions for services rendered......... 2
Fees payable for services received........ 10 11
</TABLE>
The Company had outstanding loans and interest receivable from non-
consolidated affiliates of zero and $5 million at December 31, 1999 and 1998,
respectively.
F-71
<PAGE>
STONE CONTAINER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
15. Fair Value of Financial Instruments
The carrying values and fair values of the Company's financial instruments
at December 31 are as follows:
<TABLE>
<CAPTION>
1999 1998
--------------- ---------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- ------ -------- ------
<S> <C> <C> <C> <C>
Cash and cash equivalents....................... $ 13 $ 13 $ 137 $ 137
Notes receivable and long-term investments...... 26 26 22 22
Long-term debt including current maturities..... 3,157 3,196 4,063 4,090
</TABLE>
The carrying value of cash equivalents approximates fair value because of
the short maturity of those instruments. The fair values of notes receivable
and long-term investments are based on discounted future cash flows or the
applicable quoted market price. The fair value of the Company's debt is
estimated based on the quoted market prices for the same or similar issues or
on the current rates offered to the Company for debt of the same remaining
maturities. The fair value of interest rate swap agreements are obtained from
dealer quotes. These values represent the estimated amount the Company would
pay to terminate agreements, taking into consideration the current interest
rate and market conditions. These financial instruments are not held for
trading purposes.
The Company was party to an interest rate swap contract that expired in
February 1999. The swap contract had the effect of converting the fixed rate of
interest into a floating interest rate on $100 million of the 9.875% Senior
Notes. The interest rate swap contract was entered into in order to balance the
Company's fixed rate and floating rate debt portfolios. Under the interest rate
swap, the Company agreed with the other party to exchange, at specified
intervals, the difference between fixed rate and floating rate interest amounts
calculated by reference to an agreed notional principal amount. The Company
terminated an interest rate swap contract during 1998, which had converted the
fixed rate of interest into floating rate on $150 million of 11.5% Senior Notes
due October 1, 2004.
The following table indicates the weighted average receive rate and pay rate
relating to the interest rate swaps outstanding at December 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Interest rate swap notional amount................................ $
Average receive rate (fixed by contract terms)..................
Average pay rate................................................
Interest rate swap notional amount................................ $100
Average receive rate (fixed by contract terms). 5.6%
Average pay rate................................................ 5.6%
</TABLE>
F-72
<PAGE>
STONE CONTAINER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
16. Other, Net
The significant components of other, net are as follows:
<TABLE>
<CAPTION>
Predecessor
-----------------
Period from Period from
November 19 to January 1 to
December 31, November 18,
1999 1998 1998 1997
---- -------------- ------------ ----
<S> <C> <C> <C> <C>
Foreign currency transaction gains
(losses)............................... $ 7 $ 4 $ (24) $(11)
Gains (losses) on sales of investments
or assets.............................. 39 37 1
Write-down of investments in non-
consolidated affiliates................ (155)
Merger related and change of control
expenses............................... (32)
Other................................... 10 (12) 6
--- --- ----- ----
Total other, net...................... $56 $ 4 $(186) $ (4)
=== === ===== ====
</TABLE>
17. Commitments and 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. In addition, the
Company faces potential liability for response costs at various sites for which
it has received notice as being a potentially responsible party ("PRP")
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 after consideration for the number
of other PRPs at each site, the identity and financial condition of such
parties and experience regarding similar matters.
The Company was 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 the Company and Four M. The OPA required
that the Company 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 required the
Company 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, and FCPC and certain of its affiliates filed for
Chapter 11 bankruptcy protection in April 1999. Certain creditors of FCPC filed
an adverse proceeding in the bankruptcy against the Company and Four M, and
certain of their officers and directors, alleging among other things, default
with respect to the obligations of the Company and Four M under the OPA. On
October 20, 1999, FCPC and a committee representing the holders of the FCPC
debt securities filed a bankruptcy reorganization plan ("Plan") that provided
for the settlement of all outstanding claims in exchange for cash payments.
Under the Plan, which was confirmed and consummated in January 2000, the
Company paid approximately $123 million to satisfy the claims of creditors of
FCPC, the Company received title to the FCPC mill, and all claims under the
OPA, as well as any obligations of the Company involving FCPC or its
affiliates, were released and discharged. In addition, Four M issued
$25 million of convertible preferred stock to the Company in connection with
the consummation of the Plan.
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.
F-73
<PAGE>
STONE CONTAINER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
18. Business Segment Information
The Company adopted SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information," in 1998 which changes the way operating
segment information is presented. The information for 1998 and 1997 has been
restated from the prior year's presentation in order to conform to the 1999
presentation.
The Company has three reportable segments: (1), Containerboard and
Corrugated Containers, (2) Industrial Bags, and (3) International. 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 Industrial Bag segment converts kraft and specialty paper into
multi-wall bags, consumer bags, and intermediate bulk containers. These bags
and containers are designed to ship and protect a wide range of industrial and
consumer products including fertilizers, chemicals, concrete and pet and food
products. The international segment is primarily composed of the Company's
containerboard mills and corrugating facilities located in Europe and Central
and South America.
The Company evaluates performance and allocates resources based on profit or
loss from operations before income taxes, interest expense, and other non-
operating gains and losses. The accounting policies of the reportable segments
are the same as those described in the summary of significant accounting
policies except that the Company accounts for inventory on a FIFO basis at the
segment level compared to a LIFO basis at the consolidated level. Intersegment
sales and transfers are recorded at market prices. Intercompany profit is
eliminated at the corporate division level.
The Company's North American reportable segments are strategic business
units that offer different products and each are managed separately because
they manufacture distinct products. The International segment is managed
separately because it has different customers and its operations are based in
markets outside of the North American market. Other includes corporate related
items which include goodwill, equity investments, income and expense not
allocated to reportable segments (goodwill amortization, interest expense and
depreciation expense related to the fair value adjustments made to the
historical basis of property, plant and equipment in the purchase price
allocation), the adjustment to record inventory at LIFO, the elimination of
intercompany assets and intercompany profit and a $39 million gain on the sale
of Abitibi (See Note 5).
Purchase price allocation adjustments related to property, plant and
equipment have been pushed down to the applicable operating segment assets as
of December 31, 1999 and 1998, with the exception of the International segment.
International valuation adjustments to property, plant and equipment are
included in Other.
F-74
<PAGE>
STONE CONTAINER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A summary by business segment follows:
<TABLE>
<CAPTION>
Container-
Board &
Corrugated Industrial Inter-
Containers Bags National Other Total
---------- ---------- -------- ------ ------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1999
Revenues from external
customers..................... $3,245 $513 $581 $ 2 $4,341
Intersegment revenues.......... 153 153
Depreciation and amortization.. 119 5 28 144 296
Segment profit (loss).......... 301 31 28 (435) (75)
Segment assets................. 3,093 193 495 3,784 7,565
Expenditures for long-lived
assets........................ 51 5 29 2 87
Period from November 19 to
December 31, 1998
Revenues from external
customers..................... $ 339 $ 57 $ 68 $ 1 $ 465
Intersegment revenues.......... 18 18
Depreciation and amortization.. 15 1 3 15 34
Segment profit (loss).......... 4 3 1 (60) (52)
Segment assets................. 4,355 217 562 3,659 8,793
Expenditures for long-lived
assets........................ 13 1 8 22
Period from January 1 to
November 18, 1998--Predecessor
Revenues from external
customers..................... $3,270 $456 $518 $ 10 $4,254
Intersegment revenues.......... 171 1 172
Depreciation and amortization.. 153 5 25 56 239
Segment profit (loss).......... 2 32 29 (900) (837)
Expenditures for long-lived
assets........................ 109 6 30 145
Year ended December 31, 1997--
Predecessor
Revenues from external
customers..................... $3,640 $491 $556 $ 9 $4,696
Intersegment revenues.......... 53 53
Depreciation and amortization.. 189 5 31 77 302
Segment profit (loss).......... (35) 31 27 (628) (605)
Segment assets................. 3,161 203 627 1,833 5,824
Expenditures for long-lived
assets........................ 109 6 22 137
</TABLE>
The following table presents net sales to external customers by country of
origin:
<TABLE>
<CAPTION>
Predecessor
-------------------
Period from Period from
November 19 to January 1 to
December 31, November 18,
1999 1998 1998 1997
------ -------------- ------------ ------
<S> <C> <C> <C> <C>
United States......................... $3,555 $380 $3,555 $3,848
Canada................................ 205 17 181 292
Europe and other...................... 581 68 518 556
------ ---- ------ ------
Total............................... $4,341 $465 $4,254 $4,696
------ ---- ------ ------
</TABLE>
F-75
<PAGE>
STONE CONTAINER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table presents long-lived assets by country at December 31:
<TABLE>
<CAPTION>
Predecessor
-----------
1999 1998 1997
------ ------ -----------
<S> <C> <C> <C>
United States......................................... $2,594 $3,495 $1,751
Canada................................................ 227 190 374
Europe and other...................................... 289 327 302
------ ------ ------
3,110 4,012 2,427
Goodwill.............................................. 3,123 2,643 444
------ ------ ------
Total............................................... $6,233 $6,655 $2,871
------ ------ ------
</TABLE>
The Company's export sales from the United States were approximately $208
million for 1999, $448 million for 1998, and $548 million for 1997.
19. Subsequent Event
On February 23, 2000, SSCC, the Company and a newly-formed subsidiary of the
Company entered into a Pre-Merger Agreement with St. Laurent Paperboard Inc.
pursuant to which the Company will acquire St. Laurent for approximately $1.4
billion, consisting of approximately $625 million in cash, the issuance of
approximately 25 million shares of SSCC common stock and the assumption of
approximately $386 million of St. Laurent's debt. The Company expects to borrow
$1,050 million to finance the acquisition of St. Laurent. Consummation of the
transaction is expected to occur in the second quarter of 2000.
20. Summary of Quarterly Data (Unaudited)
The following table summarizes quarterly financial data for 1999 and 1998.
Per share information is for the Predecessor period only.
<TABLE>
<CAPTION>
First Second Third Fourth
1999 Quarter Quarter Quarter Quarter
---- ------- ------- ------- -------
<S> <C> <C> <C> <C>
Net sales....................................... $1,063 $1,043 $1,085 $1,150
Gross profit.................................... 96 132 163 195
Income (loss) before extraordinary charges...... (65) (12) (10) 12
Net income (loss)............................... (65) (13) (11) 12
</TABLE>
<TABLE>
<CAPTION>
Predecessor
---------------------------------------
Period from Period from
October 1 to November 19 to
First Second Third November 18, December 31,
1998 Quarter Quarter Quarter 1998 1998
---- ------- ------- ------- ------------ --------------
<S> <C> <C> <C> <C> <C>
Net sales.............. $1,226 $1,235 $1,178 $ 615 $465
Gross profit........... 119 135 93 3 32
Loss before
extraordinary charges. (69) (157) (275) (248) (36)
Net loss............... (69) (157) (275) (248) (36)
Per share of common
stock (basic and
diluted):
Loss before
extraordinary
charges............. (.71) (1.59) (2.66) (2.37)
</TABLE>
F-76
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors of Stone Container Corporation
Our audits of the consolidated financial statements referred to in our report
dated March 26, 1998, appearing in this Registration Statement on Form S-4,
also included an audit of the Financial Statement Schedule immediately
following this report. In our opinion, the Financial Statement Schedule
presents fairly, in all material respects, the information set forth therein
for the year ended December 31, 1997 when read in conjunction with the related
consolidated financial statements. We have not audited the consolidated
financial statements of Stone Container Corporation for any period subsequent
to December 31, 1997.
PricewaterhouseCoopers LLP
Chicago, Illinois
March 26, 1998
F-77
<PAGE>
STONE CONTAINER CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(In millions)
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E Column F
-------- --------- --------- -------- ---------- --------
Additions
Balance Charged Balance
at to Costs at end
beginning and of
Description of period Expenses Other Deductions period
----------- --------- --------- -------- ---------- --------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful
accounts and notes and
sales returns and
allowances:
Year ended December 31,
1999.................... $ 61 $ $(10)(a) $10(b) $ 41
Period from November 19
to December 31, 1998.... $ 61 $ $ $ $ 61
Predecessor
Period from January 1
to November 18, 1998.. $ 14 $64 $ $17(b) $ 61
Year ended December 31,
1997.................. $ 10 $12 $ $ 8(b) $ 14
Exit liabilities:
Year ended December 31,
1999.................... $106 $ $106 (c) $29(d) $183
Period from November 19
to December 31, 1998.... $ $ $117 (c) $11(d) $106
</TABLE>
--------
(a) Includes the effect of the accounts receivable securitization application
of SFAS No. 125.
(b) Uncollectible amounts written off, net of recoveries.
(c) Charges associated with exit activities and litigation settlements included
in the purchase price allocation.
(d) Charges against the exit liability reserves.
F-78
<PAGE>
STONE CONTAINER CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Six Months
Ended June
30,
--------------
2000 1999
------ ------
(In millions)
<S> <C> <C>
Net sales...................................................... $2,537 $2,106
Costs and expenses
Cost of goods sold........................................... 2,042 1,878
Selling and administrative expenses.......................... 211 206
Restructuring charge......................................... 46
------ ------
Income from operations..................................... 238 22
Other income (expense)
Interest expense, net........................................ (170) (179)
Equity income of affiliates.................................. 6 5
Other, net................................................... (4) 51
------ ------
Income (loss) before income taxes and extraordinary........ 70 (101)
Benefit from (provision for) income taxes...................... (44) 24
------ ------
Income (loss) before extraordinary item...................... 26 (77)
Extraordinary Item
Gain (loss) from early extinguishment of debt, net of
income tax (provision) benefit of $(1) in 2000 and $1 in
1999...................................................... 2 (1)
------ ------
Net income (loss).......................................... 28 (78)
Preferred stock dividends...................................... (4) (4)
------ ------
Net income (loss) applicable to common shares.............. $ 24 $ (82)
====== ======
</TABLE>
See notes to consolidated financial statements.
F-79
<PAGE>
STONE CONTAINER CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
----------- ------------
(Unaudited)
(In millions, except
share data)
<S> <C> <C>
ASSETS
------
Current assets
Cash and cash equivalents........................... $ 45 $ 13
Receivables, less allowances of $43 in 2000 and $41
in 1999............................................ 411 343
Inventories
Work-in-process and finished goods................ 162 143
Materials and supplies............................ 399 357
------ ------
561 500
Deferred income taxes............................... 88 88
Prepaid expenses and other current assets........... 50 48
------ ------
Total current assets............................ 1,155 992
Net property, plant and equipment..................... 4,343 3,089
Timberland, less timber depletion..................... 39 21
Goodwill, less accumulated amortization of $119 in
2000 and $79 in 1999................................. 3,204 3,123
Investment in equity of non-consolidated affiliates... 135 136
Other assets.......................................... 217 204
------ ------
$9,093 $7,565
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities
Current maturities of long-term debt................ $ 46 $ 162
Accounts payable.................................... 392 365
Accrued compensation and payroll taxes.............. 149 150
Interest payable.................................... 78 82
Other current liabilities........................... 157 232
------ ------
Total current liabilities....................... 822 991
Long-term debt, less current maturities............... 3,983 2,995
Other long-term liabilities........................... 685 637
Deferred income taxes................................. 673 436
Stockholders' equity
Series E preferred stock, par value $.01 per share;
10,000,000 shares authorized; 4,599,300 issued and
outstanding in 2000 and 1999....................... 78 78
Common stock, par value $.01 per share; 200,000,000
shares authorized, 135,335,381 shares issued and
outstanding in 2000 and 200,000,000 shares
authorized, 110,000,000 shares issued and
outstanding in 1999................................ 2,545 2,545
Additional paid in capital.......................... 393
Retained earnings (deficit)........................... (85) (113)
Accumulated other comprehensive income (loss)......... (1) (4)
------ ------
Total stockholders' equity...................... 2,930 2,506
------ ------
$9,093 $7,565
====== ======
</TABLE>
See notes to consolidated financial statements.
F-80
<PAGE>
STONE CONTAINER CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months
Ended June
30,
--------------
2000 1999
------- -----
(In millions)
<S> <C> <C>
Cash flows from operating activities
Net income (loss)............................................ $ 28 $ (78)
Adjustments to reconcile net income (loss) to net cash used
for operating activities:
Extraordinary (gain) loss from early extinguishment of
debt...................................................... (3) 2
Depreciation and amortization.............................. 141 152
Amortization of deferred debt issuance costs............... 2 2
Deferred income taxes...................................... 38 (38)
Non-cash employee benefits................................. 9 3
Non-cash restructuring charge.............................. 32
Foreign currency transaction gains......................... (1) (6)
Equity income of affiliates................................ (6) (5)
Gain on sale of assets..................................... (39)
Change in current assets and liabilities, net of effects from
acquisitions and dispositions
Receivables................................................ 63 (97)
Inventories................................................ 28 61
Prepaid expenses and other current assets.................. 16 (2)
Accounts payable and other current liabilities............. (16) 111
Interest payable........................................... (4) (12)
Income taxes............................................... 1 (3)
Other, net................................................. (136) (9)
------- -----
Net cash used for operating activities................... 192 42
------- -----
Cash flows from investing activities
Property additions........................................... (66) (36)
Proceeds from sales of assets and investments................ 61 544
Payment on acquisition, net of cash received................. (631)
------- -----
Net cash provided by (used for) investing activities..... (636) 508
------- -----
Cash flows from financing activities
Borrowings under bank credit facilities...................... 1,525
Net repayments of debt....................................... (1,031) (574)
Deferred debt issuance costs................................. (17)
------- -----
Net cash provided by (used for) financing activities..... 477 (574)
------- -----
Effect of exchange rate changes on cash.................. (1) 3
------- -----
Increase (decrease) in cash and cash equivalents............... 32 (21)
Cash and cash equivalents
Beginning of period.......................................... 13 137
------- -----
End of period................................................ $ 45 $ 116
======= =====
</TABLE>
See notes to consolidated financial statements.
F-81
<PAGE>
STONE CONTAINER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in millions, except per share data)
1. Significant Accounting Policies
The accompanying consolidated financial statements and notes thereto of
Stone Container Corporation ("Stone" 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 which
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 Company's
Annual Report on Form 10-K for the year ended December 31, 1999 (the "Stone
1999 10-K"), filed March 14, 2000, with the Securities Exchange Commission.
The Company is a wholly-owned subsidiary of Smurfit-Stone Container
Corporation ("SSCC"). On November 18, 1998, Stone was merged with a wholly-
owned subsidiary of SSCC (the "Merger").
2. Reclassifications
Certain prior year amounts have been reclassified to conform with the
current year presentation.
3. St. Laurent Acquisition
On May 31, 2000, the Company completed its acquisition ("St. Laurent
Acquisition") of St. Laurent Paperboard Inc. ("St. Laurent") pursuant to an
amended and restated pre-merger agreement dated as of April 13, 2000 among
SSCC, the Company and St. Laurent.
Pursuant to the agreement, each outstanding common share and restricted
share unit of St. Laurent was exchanged for $12.50 in cash and 0.5 shares of
SSCC common stock. The total consideration paid by the Company in connection
with the St. Laurent Acquisition was approximately $1.4 billion, consisting of
approximately $631 million in cash, approximately 25.3 million shares of SSCC
common stock and the assumption of $376 million of St. Laurent's debt. The cash
portion of the purchase price was financed through borrowings under certain of
the Company's credit facilities, including a new credit facility entered into
by the Company.
The St. Laurent Acquisition was accounted for as a purchase business
combination and, accordingly, the results of operations of St. Laurent have
been included in the consolidated statements of operation of the Company after
May 31, 2000. The cost to acquire St. Laurent has been preliminarily allocated
to the assets acquired and liabilities assumed according to estimated fair
values and are subject to adjustment when additional information concerning
asset and liability valuations are finalized. The preliminary allocation has
resulted in acquired goodwill of approximately $180 million, which is being
amortized on a straight-line basis over 40 years.
F-82
<PAGE>
STONE CONTAINER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following unaudited pro forma combined information presents the results
of operations of the Company as if the St. Laurent Acquisition had taken place
on January 1, 2000 and 1999, respectively:
<TABLE>
<CAPTION>
Six months
ended June
30,
-------------
2000 1999
------ ------
<S> <C> <C>
Pro Forma Information
Net sales..................................................... $2,992 $2,496
Income (loss) before extraordinary item....................... 17 (96)
Net income (loss)............................................. 19 (97)
</TABLE>
The unaudited pro forma results of operations have been prepared for
comparative purposes only and do not purport to be indicative of the results of
operations which actually would have resulted had the St. Laurent Acquisition
occurred as of January 1, 2000 and 1999, respectively.
4. SSCC Merger and Restructuring
The Merger with a wholly-owned subsidiary of SSCC was accounted for as a
purchase business combination and, accordingly, the cost to acquire the Company
was allocated to the assets acquired and liabilities assumed according to their
fair values. The allocation resulted in acquired goodwill of $3,202 million,
which is being amortized on a straight-line basis over 40 years.
In May 2000, the Company sold the market pulp mill at its closed Port
Wentworth facility to a third party for approximately $63 million. Net cash
proceeds of $58 million from the sale were used for debt reduction. No gain was
recognized on the sale.
As part of the Company's continuing evaluation of all areas of its business
in connection with its Merger integration, the Company recorded a pretax
restructuring charge of $40 million during the second quarter of 2000 related
to the permanent shutdown of a containerboard mill and a corrugated container
facility. Included in the restructuring charge is the adjustment to fair value
of property and equipment and spare parts ($31 million) of closed facilities,
liabilities for the termination of certain employees ($5 million), and
liabilities for long-term commitments ($4 million). The assets at these
facilities were adjusted to their estimated fair value less cost to sell. The
terminated employees included approximately 105 employees at the mill facility
and 150 employees at the container facility. The long-term commitments consist
of environmental clean-up and one-time closure costs. Restructuring charges
were $46 million for the six months ended June 30, 2000.
5. Long-Term Debt
On March 31, 2000, the Company amended and restated its existing credit
agreement (the "Credit Agreement") pursuant to which a group of financial
institutions provided an additional $575 million to the Company in the form of
a Tranche F term loan maturing on December 31, 2005 and extended the maturity
dates of the revolving credit facilities under its Credit Agreement to December
31, 2005. On April 28, 2000, the Company used the proceeds of the Tranche F
term loan to redeem the 9.875% senior notes due February 1, 2001.
On May 31, 2000, the Company and certain of its wholly-owned subsidiaries
closed on new credit facilities (the "Stone Additional Credit Agreement") with
a group of financial institutions consisting of (i) $950 million in the form of
Tranche G and Tranche H term loans maturing on December 31, 2006, and (ii) a
$100 million revolving credit facility maturing on December 31, 2005. The
proceeds of the Stone Additional Credit Agreement were used to fund the cash
component of the St. Laurent Acquisition, refinance certain
F-83
<PAGE>
STONE CONTAINER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
existing indebtedness of St. Laurent, and pay fees and expenses related to the
St. Laurent Acquisition. The new revolving credit will be used for general
corporate purposes. The Stone Additional Credit Agreement is secured by a
security interest in substantially all of the assets acquired in the St.
Laurent Acquisition.
6. Other, Net
During 1999, the Company sold its interest in Abitibi-Consolidated, Inc., a
Canadian-based manufacturer and marketer of publication paper, resulting in a
gain of $39 million, which was recorded during the second quarter of 1999.
7. Non-Consolidated Affiliates
The Company has several non-consolidated affiliates that are engaged in
paper and packaging operations in North America, South America and Europe.
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 only significant non-consolidated affiliate at June 30, 2000
is Smurfit-MBI, 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 $112 million and $98
million for the three months ended June 30, 2000 and 1999, respectively, and
$222 million and $182 million for the six months ended June 30, 2000 and 1999,
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 Six
months months
ended ended
June 30, June 30,
--------- ---------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Results of operations (a)
Net sales............................................. $159 $144 $316 $314
Cost of sales......................................... 139 113 276 252
Income before income taxes, minority interest and
extraordinary charges................................ 10 11 18 16
Net income............................................ 10 10 17 15
</TABLE>
--------
(a) Includes results of operations for each of the Company's affiliates for the
period it was accounted for under the equity method.
8. Comprehensive Income (Loss)
Comprehensive income (loss) is as follows:
<TABLE>
<CAPTION>
Three
months Six months
ended ended
June 30, June 30,
---------- ----------
2000 1999 2000 1999
---- ----- ---- -----
<S> <C> <C> <C> <C>
Net income (loss)................................... $ $ (13) $ 28 $ (78)
Other comprehensive income (loss), net of tax:
Foreign currency translation........................ 12 2 3 (9)
--- ----- ---- -----
Comprehensive income (loss)......................... $12 $ (11) $ 31 $ (87)
=== ===== ==== =====
</TABLE>
F-84
<PAGE>
STONE CONTAINER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
9. Business Segment Information
The Company has three reportable segments: (1) Containerboard and Corrugated
Containers, (2) Industrial Bags and (3) International. 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 Industrial Bags segment
converts kraft and specialty paper into multi-wall bags, consumer bags and
intermediate bulk containers. These bags and containers are designed to ship
and protect a wide range of industrial and consumer products including
fertilizers, chemicals, concrete and pet and food products. The International
segment is primarily composed of the Company's containerboard mills and
corrugating facilities located in Europe and Central and South America.
Other includes corporate related items which include income and expense not
allocated to reportable segments, goodwill amortization, net interest expense,
the adjustment to record inventory at LIFO and the elimination of intercompany
profit. In addition, the converting facilities acquired from St. Laurent are
currently categorized as Other.
The information for 1999 has been restated from the prior year's
presentation in order to conform to the 2000 presentation.
A summary by business segment follows:
<TABLE>
<CAPTION>
Container-
board &
Corrugated Industrial Inter-
Containers Bags national Other Total
---------- ---------- -------- ----- ------
<S> <C> <C> <C> <C> <C>
Three months ended June 30,
2000
Revenues from external
customers...................... $ 985 $124 $156 $ 47 $1,312
Intersegment revenues........... 21 21
Segment profit (loss)........... 147 7 6 (150) 10
1999
Revenues from external
customers...................... $ 778 $126 $139 $ $1,043
Intersegment revenues........... 39 39
Segment profit (loss)........... 48 9 6 (70) (7)
Six months ended June 30,
2000
Revenues from external
customers...................... $1,927 $253 $310 $ 47 $2,537
Intersegment revenues........... 66 66
Segment profit (loss)........... 322 15 15 (282) 70
1999
Revenues from external
customers...................... $1,552 $257 $295 $ 2 $2,106
Intersegment revenues........... 77 77
Segment profit (loss)........... 81 19 15 (216) (101)
</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
F-85
<PAGE>
STONE CONTAINER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
from time to time at its facilities. In addition, the Company faces potential
liability for response costs at various sites for which it has received notice
as being a potentially responsible party ("PRP") 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 after consideration for the number of other PRPs
at each site, the identity and financial condition of such parties and
experience regarding similar matters.
In April 1999, the Environmental Protection Agency ("EPA") and the Virginia
Department of Environmental Quality ("VDEQ") each issued a notice of violation
under the Clean Air Act to St. Laurent's mill located in West Point, Virginia,
which was acquired from Chesapeake Corporation ("Chesapeake") in May, 1997. In
general, the notices of violations allege that, from 1984 to the present, the
West Point mill installed certain equipment and modified certain production
processes without obtaining the required permits. In the purchase agreement
between St. Laurent and Chesapeake, Chesapeake agreed to indemnify St. Laurent
for remediation work resulting from violations of applicable laws, including
the Clean Air Act, that existed at the mill before and on the date of the
purchase agreement, as to which Chesapeake had "knowledge" (as defined in the
purchase agreement), up to a maximum of $50 million. While such costs cannot be
estimated with certainty at this time, based on presently available
information, St. Laurent believes that the cost of remediation work, which
represents capital expenditures comprising engineering, procurement and
construction work of mill modifications (including the installation of air
emission controls, etc.) associated with the notices of violations may
approximate $25 million. In addition, civil or criminal penalties may be
pursued by the EPA and VDEQ; however, based upon discussions with the EPA and
VDEQ to date, St. Laurent believes that the total cost of remediation work
associated with the notices of violations and fines and penalties that may be
imposed by the EPA and VDEQ will not exceed the maximum amount of Chesapeake's
indemnification obligation. St. Laurent and Chesapeake have appointed a third
party arbitrator to decide the scope and timing of future remediation work that
is the subject of the indemnification in the purchase agreement. The arbitrator
has ruled that any fines and penalties that may result from any breach of
Chesapeake's representations and warranties arising out of the notices of
violations, either by adjudication or settlement, are part of the costs and
expenses that are subject to reimbursement by Chesapeake to St. Laurent under
the purchase agreement. By agreement of the parties, the 30-month period for
reimbursement by Chesapeake of costs and expenses incurred by St. Laurent under
the provisions of the purchase agreement has been extended indefinitely. St.
Laurent is cooperating with Chesapeake to analyze, respond to and defend
against the matters alleged in the notices of violation and to develop and
implement a remediation plan as required by the notices of violation.
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.
F-86
<PAGE>
ST. LAURENT PAPERBOARD INC.
AUDITORS' REPORT
To the Directors of ST. LAURENT PAPERBOARD INC.
We have audited the consolidated balance sheets of St. Laurent Paperboard
Inc. as at December 31, 1999 and 1998 and the consolidated statements of
earnings (loss), retained earnings and cash flows for each of the years in the
three-year period ended December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards in Canada. Those standards require that we plan and perform an audit
to obtain reasonable assurance whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation.
In our opinion, these consolidated financial statements present fairly, in
all material respects, the financial position of the Company as at December 31,
1999 and 1998 and the results of its operations and its cash flows for each of
the years in the three-year period ended December 31, 1999 in accordance with
generally accepted accounting principles in Canada.
(Signature) PricewaterhouseCoopers
LLP
Chartered Accountants
Montreal, Canada
January 24, 2000,
except as to Note 10 b), which
is as of February 25, 2000 and
Note 20, which is as of
February 23, 2000.
F-87
<PAGE>
ST. LAURENT PAPERBOARD INC.
CONSOLIDATED STATEMENT OF EARNINGS (LOSS)
<TABLE>
<CAPTION>
Year Ended December 31
----------------------------
1999 1998 1997
-------- -------- --------
(in thousands of US
dollars,
except per share amounts)
<S> <C> <C> <C>
Sales............................................ $986,819 $860,473 $642,700
Cost of delivery................................. 71,022 68,566 52,258
-------- -------- --------
Net sales........................................ 915,797 791,907 590,442
-------- -------- --------
Cost of sales.................................... 711,030 665,102 509,162
Amortization..................................... 67,023 63,508 47,621
Selling and administrative expenses.............. 62,651 51,919 42,563
Restructuring charge (Note 17)................... -- 12,878 --
-------- -------- --------
840,704 793,407 599,346
-------- -------- --------
Operating earnings (loss)........................ 75,093 (1,500) (8,904)
Interest expense, net (Note 12).................. 28,609 29,397 33,760
Other income, net (Note 12)...................... (13,792) (497) (213)
-------- -------- --------
Earnings (loss) before income taxes.............. 60,276 (30,400) (42,451)
Provision for (recovery of) income taxes (Note
13)............................................. 21,836 (7,137) (12,010)
-------- -------- --------
Net earnings (loss) before non-controlling
interest........................................ 38,440 (23,263) (30,441)
Non-controlling interests........................ (103) -- --
Increase in equity component of convertible
Debentures, net of income taxes (1997--$1,480).. -- -- (3,094)
-------- -------- --------
Net earnings (loss) attributable to common
shares.......................................... $ 38,337 $(23,263) $(33,535)
======== ======== ========
Net earnings (loss) per common share.............
Basic.......................................... $ 0.78 $ (0.47) $ (0.98)
======== ======== ========
Fully diluted.................................. $ 0.77 (1) (1)
======== ======== ========
Weighted average number of outstanding common
shares (in
thousands)...................................... 49,328 49,124 34,384
======== ======== ========
</TABLE>
--------
(1) Anti-dilutive
CONSOLIDATED STATEMENT OF RETAINED EARNINGS
<TABLE>
<CAPTION>
Year Ended December 31
------------------------
1999 1998 1997
------- ------- -------
(in thousands of US
dollars)
<S> <C> <C> <C>
Balance at beginning of year.......................... $ 1,769 $25,032 $58,567
Net earnings (loss) attributable to common shares..... 38,337 (23,263) (33,535)
------- ------- -------
Balance at end of year................................ $40,106 $ 1,769 $25,032
======= ======= =======
</TABLE>
See notes to the Consolidated Financial Statements.
F-88
<PAGE>
ST. LAURENT PAPERBOARD INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31
-------------------------------
1999 1998 1997
--------- --------- ---------
(in thousands of US dollars)
<S> <C> <C> <C>
CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES
Net earnings (loss)......................... $ 38,337 $ (23,263) $ (30,441)
Items not involving cash
Amortization of property, plant and
equipment, start-up and deferred costs
and goodwill............................. 67,023 63,508 47,621
Amortization and write-off of debt issue
costs.................................... 1,438 1,422 9,538
Future income taxes....................... 20,379 (8,163) (13,560)
Gain on asset disposals................... (5,094) (235) (235)
Other..................................... (927) (758) (2,019)
Start-up and other deferred costs incurred.. (2,199) 414 (2,267)
Pension expense, net of funding............. 3,242 9,358 1,129
Interest payments, net of expense........... -- -- (4,795)
Non-controlling interests................... 103 -- --
--------- --------- ---------
122,302 42,283 4,971
Change in non-cash working capital relating
to operations
Accounts receivable....................... (10,588) 11,913 (8,856)
Inventory................................. 9,704 (1,942) (11,846)
Prepaid expenses.......................... 226 (8,153) (2,608)
Accounts payable and accrued liabilities.. 23,854 (8,825) 11,804
Income and other taxes payable............ (538) 123 1,829
--------- --------- ---------
22,658 (6,884) (9,677)
--------- --------- ---------
Cash provided by (used in) operations....... 144,960 35,399 (4,706)
--------- --------- ---------
INVESTING ACTIVITIES
Business acquisitions, including bank
indebtedness assumed of $5,678 in 1997
(Note 3)................................... (70,415) -- (506,353)
Additions to property, plant and equipment.. (57,138) (49,235) (44,038)
Proceeds from disposals of property, plant
and equipment.............................. 9,059 235 312
--------- --------- ---------
Cash used in investing activities........... (118,494) (49,000) (550,079)
--------- --------- ---------
FINANCING ACTIVITIES
Issuance of common shares, net of expenses.. 1,537 2,144 349,442
Redemption of common shares................. -- (370) --
Issuance of long-term debt.................. 610 230,256 245,453
Repayment of long-term debt................. (9,549) (241,892) (12,940)
Debt issue costs............................ (1,354) (4,496) (8,487)
Minority interests.......................... 700 -- --
Cash held in escrow......................... -- 11,000 (11,000)
--------- --------- ---------
Cash provided by (used in) financing
activities................................. (8,056) (3,358) 562,468
--------- --------- ---------
INCREASE (DECREASE) IN CASH................... 18,410 (16,959) 7,683
CASH (INDEBTEDNESS) AT BEGINNING OF YEAR...... (3,519) 13,440 5,757
--------- --------- ---------
CASH (INDEBTEDNESS) AT END OF YEAR............ $ 14,891 $ (3,519) $ 13,440
========= ========= =========
CASH (INDEBTEDNESS) CONSISTS OF:
Cash........................................ $ 9,125 $ -- $ 3,689
Temporary investments....................... 5,766 2,607 9,751
Bank indebtedness........................... -- (6,126) --
--------- --------- ---------
$ 14,891 $ (3,519) $ 13,440
========= ========= =========
</TABLE>
See notes to the Consolidated Financial Statements.
F-89
<PAGE>
ST. LAURENT PAPERBOARD INC.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
December 31
---------------------
1999 1998
---------- ----------
(in thousands of US
dollars)
<S> <C> <C>
ASSETS
Current assets
Cash and temporary investments......................... $ 14,891 $ 2,607
Accounts receivable.................................... 124,279 95,895
Income and other taxes recoverable..................... 4,792 4,870
Inventories (Note 4)................................... 106,481 98,542
Prepaid expenses and other assets...................... 13,984 13,832
---------- ----------
264,427 215,746
Property, plant and equipment (Note 5)................... 816,879 775,960
Future income taxes (Note 13)............................ -- 8,437
Deferred charges and other assets (Note 6)............... 33,898 30,347
Goodwill, net of accumulated amortization of $3,991
(1998--$2,777).......................................... 40,339 19,923
---------- ----------
$1,155,543 $1,050,413
========== ==========
LIABILITIES
Current liabilities
Bank indebtedness...................................... $ -- $ 6,126
Accounts payable and accrued liabilities............... 102,846 72,112
Current portion of long-term debt (Note 7)............. 47,397 5,975
---------- ----------
150,243 84,213
Long-term debt (Note 7).................................. 338,206 356,455
Other liabilities (Note 8)............................... 32,804 27,271
Future income taxes (Note 13)............................ 18,305 6,363
Commitments and contingencies (Note 10)
Shareholders' equity
Common shares (Note 9)................................... 573,471 571,934
Contributed surplus...................................... 2,408 2,408
Retained earnings........................................ 40,106 1,769
---------- ----------
615,985 576,111
---------- ----------
$1,155,543 $1,050,413
========== ==========
</TABLE>
APPROVED BY THE BOARD OF DIRECTORS,
Signature
Jay J. Gurandiano
Director
Signature
Raymond R. Pinard
Director
See notes to the Consolidated Financial Statements.
F-90
<PAGE>
ST. LAURENT PAPERBOARD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All Amounts Are Expressed in United States ("US") Dollars
Except Where Otherwise Indicated)
1. Significant Accounting Policies
Nature of Operations
The Company is a producer, supplier and converter of paperboard products.
Its principal products are white top linerboard, brown linerboard, corrugating
medium and solid bleached paperboard (foodboard and linerboard). The Company
converts approximately one third of its paperboard capacity into corrugated
boxes, point-of-purchase displays and other products. Its assets are located in
the United States and Canada and the products are sold mostly in the United
States and Canada.
Principles of Consolidation
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles in Canada. As described in Note 19,
those principles differ in certain material respects from those that the
Company would have followed had its financial statements been prepared in
accordance with generally accepted accounting principles in the United States.
The consolidated financial statements include the accounts of the Company
and all its subsidiary companies. All significant inter-company transactions
and balances have been eliminated.
Use of Estimates
The preparation of financial statements requires the Company's management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities shown on the balance sheet and disclosure of contingent assets and
liabilities at the date of the financial statements, and the reported amounts
of revenues and expenses on the statement of earnings during the reporting
period. Actual results may differ from those estimates.
Foreign Exchange and Hedging Activities
Non-monetary assets and liabilities of Canadian activities are translated
into US dollars at historical exchange rates. As explained in Note 2, the
historical rate for non-monetary items at December 31, 1996 is the rate in
effect as at that date. Monetary assets and liabilities are translated from
other currencies into US dollars at rates of exchange in effect at the date of
the balance sheet. Exchange gains or losses on Canadian dollar denominated
long-term debt are deferred and amortized over the expected life of the related
debt using the straight-line method.
Revenues and expenses are translated at the average rate during the month in
which the transaction took place, except amortization, which is translated at
historical rates.
The Company currently manages its foreign exchange exposure to future
expenses denominated in Canadian dollars through the use of forward contracts
and options. Resulting gains and losses on contracts designated as hedges are
recognized as part of the related Canadian transactions as they occur and,
therefore, are included in the cost of sales.
The Company also manages its risk exposure to interest rate variations by
entering into swap and option agreements. Payments made or received under these
agreements are accounted for as adjustments to interest expense.
F-91
<PAGE>
ST. LAURENT PAPERBOARD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company also manages its commodities price exposures by entering into
cash settled-swap agreements. Resulting gains and losses on contracts
designated as hedges are recognized as part of the related transaction as they
occur and, therefore, are included in sales or cost of sales, as applicable.
Temporary Investments
Temporary investments are stated at the lower of cost and market value. They
are composed of debt instruments with maturities of less than three months.
Inventories
Finished products are valued at the lower of average cost and net realizable
value. Fibre, maintenance materials and operating supplies are valued at
average cost. The average cost includes, where applicable, direct labor,
manufacturing overhead expenses and amortization.
Property, Plant and Equipment
Property, plant and equipment are stated at cost, net of related investment
tax credits. They are amortized over their estimated useful lives, which are
approximately 20 years, using the unit of production method for manufacturing
facilities and the straight-line method for converting facilities.
Timberlands are stated at cost and are managed on a sustained yield basis.
Major roads are capitalized and amortized over their expected useful life.
Amortization is recorded based on timber harvested.
During the construction period, interest is capitalized on major
improvements and expansion projects. No amortization is charged on major
improvements or expansion projects until construction is completed.
Environmental Expenditures
Environmental expenditures related to current operations are expensed or
capitalized as appropriate. Provisions are made for costs of anticipated
remedial action when they can be reasonably estimated.
Other Assets
Start-up costs, which include pre-production costs, incurred on significant
construction and modernization projects are deferred until the projects are
ready to commence commercial production and are then amortized over a period of
five years. Debt issue expenses are deferred and amortized over the expected
life of the related debt using the straight-line method.
Goodwill
Goodwill is recorded at cost less accumulated amortization. It is amortized
over a 20-year period using the straight-line method. The Company assesses
annually whether there has been a permanent impairment in the value of the
unamortized portion of goodwill by determining whether projected undiscounted
future cash flows from the related operations exceed the net book value of
goodwill at the assessment date.
Pension Costs and Other Post-Retirement Benefits
Pension costs are determined annually in consultation with independent
actuaries and include current service costs, a provision for the amortization
of prior service costs and settlement costs related to special events. The
pension plans' surplus or deficit, after including the liabilities for past
service, is amortized over the estimated average remaining service lives of the
employees. The assets of the pension plans are invested in listed common
stocks, fixed income securities and cash equivalents.
F-92
<PAGE>
ST. LAURENT PAPERBOARD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In addition to pension benefits, the Company provides limited life
insurance, dental and health care benefits to eligible retired employees. The
cost of providing these benefits is recognized on an accrual basis during the
service years of these employees. The costs include also a provision for the
amortization of prior service costs.
Long-Term Incentive Plans
The Company recognizes compensation costs related to awards of restricted
share units and stock options (see Note 9) when the shares are issued. The
costs accounted for on the issuance date are based on the market value of the
shares at that date.
Income Taxes
The Company adopted in 1998 the new accounting rules for income taxes
approved by the Canadian Institute of Chartered Accountants in September 1997.
Under the new rules, the Company recognizes the amount of taxes payable or
refundable for the current year and recognizes also the future income tax
liabilities and assets related to the other assets and liabilities recognized
in the balance sheet, using the current income tax rate. The impact of the
change on 1998 net earnings was not significant. The change has not been
applied retroactively since the impact was not significant on financial
statements of prior years. The Company does not make provisions for income
taxes on the undistributed earnings of foreign subsidiaries, part of which may
be subject to certain taxes on distribution to the parent company as such
income is reinvested in foreign operations. The amount of such undistributed
earnings is not significant at December 31, 1999.
Earnings Per Common Share
Earnings per common share are calculated using the weighted average number
of common shares outstanding during the year. Fully diluted earnings per common
share are calculated using the weighted average number of common shares
outstanding during the year and assuming that all convertible debentures were
converted to common shares at the beginning of their respective years, that all
outstanding stock options and warrants were exercised from the beginning of the
year, and that all shares, entitled to be received through the restricted share
units, were issued also at the beginning of the year.
2. Change in Reporting Currency in 1997
The consolidated financial statements of the Company were presented in
Canadian dollars up to December 31, 1996. Until that date, the Canadian dollar
was also considered the functional currency of the Company. With the major
acquisition of U.S. assets made in May 1997 (see Note 3), substantially all the
Company's revenues are received in US dollars and the Company's Canadian assets
and expenses denominated in Canadian dollars represent less than half of the
assets and expenses of the Company. For these reasons, the US dollar was
adopted in 1997 as the Company's reporting and functional currency. The
comparative financial information for 1996 is presented in US dollars in
accordance with a translation of convenience method using the Closing exchange
rate at December 31, 1996 of $0.73 for CAN$1.00. The translated amount for
Canadian non-monetary items at December 31, 1996 became the historical basis
for those items in 1997 and subsequently.
3. Business Acquisitions
The Company completed the following business acquisitions:
On December 22, 1999, the Company acquired for cash consideration of $6.5
million all the assets of The Kimball Companies in East Longmeadow,
Massachusetts. The Kimball Companies manufacture protective packaging including
triplewall, foam, wood and corrugated products.
F-93
<PAGE>
ST. LAURENT PAPERBOARD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
On January 29, 1999, the Company purchased a 49% interest in Eastern
Container Corporation which operates converting facilities in Massachusetts and
New Hampshire and, on November 30, 1999, the Company acquired the remaining 51%
interest. The total cash consideration paid by the Company for this acquisition
amounted to $25.3 million.
On July 30, 1999, the Company acquired from Chesapeake Corporation all the
assets of the building products business, consisting of two softwood sawmills
located in West Point, Virginia and Princess Anne, Maryland; a hardwood lumber
re-processing facility located in Milford, Virginia; as well as a chip mill
facility located in Pocomoke City, Maryland for cash consideration of $13.8
million.
On May 28, 1999, the Company acquired all the assets of Castle Rock
Container Company, a custom manufacturer of high-quality corrugated packaging,
point-of-purchase displays and communication kit, from Consolidated Papers Inc.
located in Adams, Wisconsin for cash consideration of $24.8 million.
In 1998, there were no business acquisitions.
On May 23, 1997, the Company acquired from Chesapeake Corporation certain
assets of its paperboard business consisting of a pulp and paper mill located
in West Point, Virginia, four converting plants located in Richmond and
Roanoke, Virginia, Baltimore, Maryland and North Tonawanda, New York, and other
related assets for $498 million paid in cash. The acquisition was financed by
the issuance of common shares and term loans.
In January 1997, the Company acquired for cash consideration of $2.9 million
(CAN$3.9 million) all of the outstanding shares of Usine Francobec Inc., a wood
chipping facility located near La Tuque, Quebec.
The acquisitions have been accounted for using the purchase method and the
results of operations therefrom are included in the consolidated statement of
earnings of the Company from the respective acquisition dates. The initial
investment in Eastern Container Corporation on January 29, 1999 was accounted
for using the equity method up to December 1, 1999 when the remaining 51% was
acquired.
The net assets acquired, at assigned values, are summarized as follows:
<TABLE>
<CAPTION>
1999 1998
-------- --------
(in thousands of
dollars)
<S> <C> <C>
Current assets........................................ $ 35,817 $ 79,610
Property, plant and equipment......................... 51,477 457,121
Goodwill.............................................. 21,630 702
Other assets.......................................... 2,429 19,626
-------- --------
111,353 557,059
Current liabilities................................... (7,503) (32,080)
Other liabilities..................................... (33,435) (24,304)
-------- --------
$ 70,415 $500,675
======== ========
</TABLE>
F-94
<PAGE>
ST. LAURENT PAPERBOARD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
4. Inventories
<TABLE>
<CAPTION>
1999 1998
-------- --------
(in thousands of
dollars)
<S> <C> <C>
Primary mills
Fibre................................................ $ 11,699 $ 11,058
Maintenance materials and operating supplies......... 29,796 29,910
Finished products.................................... 10,013 24,518
Converting plants
Raw materials........................................ 22,915 14,107
Maintenance materials and operating supplies......... 3,218 3,639
Finished products.................................... 18,461 10,282
Lumber
Fibre................................................ 8,500 4,921
Finished products.................................... 1,879 107
-------- --------
$106,481 $ 98,542
======== ========
</TABLE>
5. Property, Plant and Equipment
<TABLE>
<CAPTION>
1999
--------------------------------
Accumulated
Cost Amortization Net
---------- ------------ --------
(in thousands of dollars)
<S> <C> <C> <C>
Land................................... $ 12,334 $ -- $ 12,334
Timberlands and roads.................. 12,986 2,504 10,482
Buildings and equipment................ 995,460 201,397 794,063
---------- -------- --------
$1,020,780 $203,901 $816,879
========== ======== ========
<CAPTION>
1998
--------------------------------
Accumulated
Cost Amortization Net
---------- ------------ --------
(in thousands of dollars)
<S> <C> <C> <C>
Land................................... $ 6,549 $ -- $ 6,549
Timberlands and roads.................. 12,990 2,058 10,932
Buildings and equipment................ 894,329 135,850 758,479
---------- -------- --------
$ 913,868 $137,908 $775,960
========== ======== ========
</TABLE>
Amortization expense for the year was $63,731 (1998--$60,602; 1997--
$43,837).
6. Deferred Charges and Other Assets
<TABLE>
<CAPTION>
1999 1998
------- -------
(in thousands
of dollars)
<S> <C> <C>
Deferred charges, net of accumulated amortization
Start-up costs.......................................... $ 5,979 $ 5,626
Debt issue expenses..................................... 6,005 5,016
Foreign exchange loss on long-term debt................. 1,527 1,909
Other................................................... 3,765 2,107
Prepaid pension costs (Note 11).......................... 15,326 14,279
Advances to officers and managers (Note 9)............... 1,296 1,410
------- -------
$33,898 $30,347
======= =======
</TABLE>
F-95
<PAGE>
ST. LAURENT PAPERBOARD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
7. Long-Term Debt
<TABLE>
<CAPTION>
1999 1998
-------- --------
(in thousands of
dollars)
<S> <C> <C>
Secured term loan...................................... $224,250 $230,000
Senior secured notes
--Series A, 8.80% (1998--8.17%)...................... 30,000 30,000
--Series B, 9.04% (1998--8.41%)...................... 85,000 85,000
--Series C, 9.42% (1998--8.79%)...................... 10,000 10,000
Eastern Container Corporation term loan................ 22,500 --
Industrial development revenue bonds................... 4,760 4,880
Note payable........................................... 8,000 --
Note payable to Abitibi-Consolidated Inc. (1998--
CAN$3.7).............................................. -- 2,389
Other.................................................. 1,093 161
-------- --------
385,603 362,430
Less: Long-term debt due within one year............... 47,397 5,975
-------- --------
$338,206 $356,455
======== ========
</TABLE>
Secured Term Loan
Under a credit agreement, the Company has a 7-year term facility with an
original amount of $230 million, of which $224.3 million were outstanding at
the end of 1999, and a CAN$200 million or $ equivalent 5-year revolving
facility, of which CAN$191 million were available at the end of the year,
subject to meeting certain financial covenants. In the third quarter of 1999, a
CAN$70 million or $ equivalent, 7-year term facility available under this
credit agreement was cancelled. The remaining principal amount of the secured
term loan is payable as follows: 10% in 2000 and 2001, 17.5% in 2002, 20% in
2003, 2004 and 2005 on the original amount of $230 million. The credit
facilities bear interest at specified margins over the alternate base rate or
LIBOR. The actual interest rate as of December 31, 1999 is 7.70% on the term
facility (6.29% in 1998). The credit facilities are secured by all the assets
of St. Laurent Paperboard Inc., St. Laurent Paperboard (U.S.) Inc. and their
subsidiaries.
Senior Secured Notes
The $125 million senior secured notes are secured by all the assets of St.
Laurent Paperboard Inc., St. Laurent Paperboard (U.S.) Inc. and their
subsidiaries and rank pari passu with the lenders under the credit agreement
governing the secured term loan. The Series B senior notes carry the following
principal repayment requirements: $18.3 million in 2000 and 2002 and $12.1
million in each of the years 2003 through 2006. The Series A and C senior notes
are payable in 2002 and 2008 respectively. Subject to a make-whole provision,
the notes are redeemable at any time.
Eastern Container Corporation ("Eastern") Term Loan
Concurrent with the acquisition of the remaining 51% of Eastern and with the
Company providing a guarantee to the lenders, Eastern's existing credit
agreement was renegotiated in order to have the covenants governing Eastern's
$24 million, 7-year term facility similar to those governing the Company's
secured term loan. The principal amount of Eastern's term loan is payable as
follows: 12.5% in 2000, 2001, 2002 and 2003, 16.7% in 2004 and 27.1% in 2005 on
the original amount of $24 million. This credit facility bears interest at a
specified margin over prime rate or LIBOR. The actual interest rate as of
December 31, 1999 is 7.92%. The credit facility is secured by all the assets of
Eastern and is guaranteed by St. Laurent Paperboard Inc.
F-96
<PAGE>
ST. LAURENT PAPERBOARD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Industrial Development Revenue Bonds
In connection with the construction of a sheet corrugating facility based in
Milwaukee, Wisconsin by Innovative Packaging Corp., a subsidiary, tax-exempt
variable rate industrial development revenue bonds were issued by this
subsidiary in 1997 with a maturity of December 1, 2017. The bonds are secured
by an irrevocable bank letter of credit governed by a credit facility, imposing
certain financial covenants such as working capital and tangible net worth. The
bonds are subject to redemption at the option of Innovative Packaging Corp., in
whole or in part at any time, at par plus accrued interest. The actual interest
rate as of December 31, 1999 is 5.65% (4.20% in 1998).
Note Payable
In connection with the acquisition of Eastern, a $8 million note was issued
as a balance of sale. The principal amount of the note payable will be repaid
as follows: one third in each of the years 2000, 2001 and 2002. This note bears
interest at a fixed rate of 8.25% and a portion of this note ranks pari passu
with the lenders under the Eastern Container Corporation term loan. This note
is guaranteed by St. Laurent Paperboard Inc.
Covenants
Under the terms of its various debt agreements, the Company must meet
certain financial covenants, including ratios with respect to leverage,
tangible net worth and, under certain circumstances, interest coverage. In
addition, the Company is subject to limitations with regard to the sale or
disposal of assets. Specific rules and restrictions govern mergers and
acquisitions.
The minimum annual installments on long-term debt for the next five years
are as follows:
<TABLE>
<CAPTION>
(in thousands
of dollars)
<S> <C>
2000....................... $47,397
2001....................... 29,152
2002....................... 94,654
2003....................... 61,245
2004....................... 62,245
</TABLE>
8. Other Liabilities
<TABLE>
<CAPTION>
1999 1998
------------ ------------
(in thousands of dollars)
<S> <C> <C>
Pension liability (Note 11)..................... $ 14,529 $ 10,659
Post-retirement benefit liability (Note 11)..... 16,981 15,312
Non-controlling interest........................ 921 --
Other........................................... 373 1,300
------------ ------------
$32,804 $ 27,271
============ ============
</TABLE>
9. Common Shares and Contributed Surplus
The Company's authorized share capital consists of an unlimited number of
common shares and an unlimited number of preferred shares issuable in series,
in each case without nominal or par value. The number of shares outstanding as
at December 31, 1999 is 49,398,968 common shares (1998--49,244,696; 1997--
49,034,871).
F-97
<PAGE>
ST. LAURENT PAPERBOARD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The changes in the number and stated value of the common shares of the
Company are as follows, in thousands of dollars except the number of shares:
<TABLE>
<CAPTION>
1999 1998 1997
------------------- -------------------- -------------------
Number of Stated Number of Stated Number of Stated
Shares Value Shares Value Shares Value
---------- -------- ---------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning of
year................... 49,244,696 $571,934 49,034,871 $570,160 13,314,298 $ 90,111
Issued during the year
Public offering(i).... -- -- -- -- 24,420,000 352,894
Conversion of
debentures(ii)....... -- -- -- -- 11,190,770 125,638
Managers' Share
Purchase Plan(iii)... -- -- 9,289 107 30,603 445
Employees' Share
Purchase Plan(iv).... 136,925 1,360 202,129 1,647 43,784 520
Directors' Stock
Option and Share
Purchase Plan(v)..... 10,110 108 8,233 110 6,060 98
Restricted share units
matured.............. 7,237 69 13,960 144 26,118 416
Options exercised..... -- -- 14,814 136 3,238 38
Buy-back of shares(vi).. -- -- (38,600) (370) -- --
---------- -------- ---------- -------- ---------- --------
Balance at end of year.. 49,398,968 $573,471 49,244,696 $571,934 49,034,871 $570,160
========== ======== ========== ======== ========== ========
</TABLE>
--------
(i) Net of issue costs of $10.2 million, which are net of taxes of $4.9
million.
(ii) Net of amortized issue costs of $1.1 million, which are net of taxes of
$0.5 million. If the convertible debentures had been converted at the
beginning of 1997, the loss per share figure for 1997 would have been
$0.77.
(iii) Shares issued to eligible managers under the Managers' Share Purchase
Plan were financed by interest-free loans provided by the Company. The
Company has reserved a maximum of 300,000 shares for the purpose of the
Plan. At December 31, 1999, there were 82,293 shares held by the Plan's
participants (1998--92,269; 1997--91,201) with a market value of
$1,096,966 (1998--$646,806; 1997--$1,172,845).
(iv) The Company has reserved a maximum of 500,000 shares for the purpose of
the Employees' Share Purchase Plan. At December 31, 1999, there were
296,997 shares held by the Plan's participants (1998--267,366; 1997--
64,853).
(v) The Company has reserved a maximum of 175,000 shares for the purpose of the
Directors' Stock Option and Share Purchase Plan. At December 31, 1999,
there were 32,098 shares issued and outstanding under the provisions of the
Plan (1998--21,988; 1997--15,143).
(vi) Shares were purchased according to a normal course issuer bid that was
approved in December 1997. The bid was for approximately 5% of the 49
million common shares issued and outstanding, subject to a maximum
aggregate purchase price of CAN$40 million. The normal course issuer bid
expired in December 1998.
The Company also issued shares to eligible officers under a Long-Term
Incentive Plan which were financed by interest-free loans provided by the
Company. At December 31, 1999, there were 44,004 (1998--44,004; 1997--52,234)
shares issued and outstanding under this plan with a market value of $586,573
(1998--$308,468; 1997--$671,867).
The interest-free loans to eligible officers and managers are secured by the
common shares issued under both plans and are repayable from proceeds on the
sale of any shares purchased, by the application of any
F-98
<PAGE>
ST. LAURENT PAPERBOARD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
dividends declared and paid on such shares, and from 25% of any bonus paid to
the eligible officer or manager and, as to any remainder, upon termination of
employment.
Under the Long-Term Incentive and Managers' Share Purchase plans, at the
time of issuance of common shares, the Company granted to each eligible officer
and manager one restricted share unit ("RSU") for every two shares. Each RSU
entitles the holder to receive one common share, at no cost, three years after
its issuance. During the year, 7,237 RSUs (1998--13,960; 1997--26,118) matured
and 1,731 were cancelled (1998--13,569; 1997--1,298).
In addition, the Long-Term Incentive Plan also includes a stock option
component for its participants. The number of shares that may be issued
pursuant to the exercise of options under the plan is limited to 1,031,684
common shares. The options can be exercised between one to five years after
their respective date of grant for a period of ten years, at which time they
expire.
Under the terms of the Directors' Stock Option and Share Purchase Plan, the
options granted to directors can be exercised starting one year after their
respective date of grant for a period of ten years, at which time they expire.
The changes in the number of stock options and RSUs of the Company are as
follows:
<TABLE>
<CAPTION>
1999
-------------------------
Number Weighted
of Exercise Number
Options Price of RSUs
------- -------- -------
CAN$
<S> <C> <C> <C>
Balance at beginning of year......................... 666,340 $19.07 22,710
Issued............................................... 333,262 15.71 --
Cancelled............................................ (67,228) 17.69 (1,731)
Matured or exercised................................. -- -- (7,237)
------- ------ -------
Balance at end of year............................... 932,374 16.01 13,742
======= ====== =======
<CAPTION>
1998
-------------------------
Number Weighted Number
of Exercise of
Options Price RSUs
------- -------- -------
CAN$
<S> <C> <C> <C>
Balance at beginning of year......................... 594,359 $18.88 45,595
Issued............................................... 163,769 19.25 4,644
Cancelled............................................ (76,974) 19.10 (13,569)
Matured or exercised................................. (14,814) 13.50 (13,960)
------- ------ -------
Balance at end of year............................... 666,340 19.07 22,710
======= ====== =======
<CAPTION>
1997
-------------------------
Number Weighted
of Exercise Number
Options Price of RSUs
------- -------- -------
CAN$
<S> <C> <C> <C>
Balance at beginning of year......................... 448,234 $17.22 58,328
Issued............................................... 173,396 22.86 15,300
Cancelled............................................ (24,033) 16.12 (1,915)
Matured or exercised................................. (3,238) 16.70 (26,118)
------- ------ -------
Balance at end of year............................... 594,359 18.88 45,595
======= ====== =======
</TABLE>
F-99
<PAGE>
ST. LAURENT PAPERBOARD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table summarizes information concerning currently outstanding
and exercisable stock options:
<TABLE>
<CAPTION>
Average Weighted Weighted
Range remaining average average
of exercise Number contractual exercise Number exercise
prices outstanding life price exercisable price
----------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$13.50 -- $17.00 432,947 7.45 years $15.00 134,189 $13.50
$17.00 -- $21.00 313,785 6.52 years $19.09 155,520 $19.09
$21.00 -- $23.73 185,642 6.70 years $22.99 65,464 $22.88
------- -------
932,374 355,173
======= =======
</TABLE>
In addition to the options and the RSUs outstanding, the Company issued
380,000 warrants in the course of the acquisition of Eastern Container
Corporation. The warrants awarded give the right to the owner to buy 380,000
common shares of the Company at CAN$10.95/share and the owner has until January
2002 to exercise those warrants.
10. Commitments and Contingencies
(a) At December 31, 1999, the Company had commitments for major capital
expenditures under purchase orders and contracts amounting to approximately
$13.5 million.
Minimum payments in US and Canadian dollars required under operating leases
are as follows:
<TABLE>
<CAPTION>
US $ Can $
----- -----
(in
thousands
of dollars)
<S> <C> <C>
2000.......................................................... 5,285 1,429
2001.......................................................... 4,794 897
2002.......................................................... 4,436 813
2003.......................................................... 3,496 776
2004.......................................................... 2,614 715
Subsequent years.............................................. 5,282 1,405
</TABLE>
Under the Asset Acquisition Agreement between the Company and Avenor Inc. in
June 1994, Avenor Inc. (now Bowater Canada Inc.) has a right of first refusal
for a period of 99 years regarding disposition of the Company's private
timberlands of approximately 904,020 acres at the rate of 250 acres or more in
any one transaction or series of related transactions. Should Bowater Canada
Inc. refuse the transaction, it remains entitled to receive from the Company
any amount in excess of CAN$25 per acre.
The Company is involved in various legal actions during the normal course of
business. Management of the Company is of the opinion that the total amount of
any potential liabilities for which provisions have not already been recorded
is not expected to have a material adverse effect on the Company's financial
position or its results.
(b) On April 19, 1999, the U.S. Environmental Protection Agency ("EPA") and
the Virginia Department of Environmental Quality ("DEQ") each issued a Notice
of Violation (the "NOVS") under the Clean Air Act ("CAA") to the primary mill
located in West Point, Virginia (the "Mill"), which was acquired from
Chesapeake Corporation ("Chesapeake") in 1997. The Company is part of a group
of pulp and paper companies that were served at the same period of time with
NOVs by EPA for alleged violations of the Clean Air Act. In general, the NOVs
allege that from 1984 to the present, the Mill installed certain equipment and
F-100
<PAGE>
ST. LAURENT PAPERBOARD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
modified certain production processes without obtaining required permits. In
the 1997 Purchase Agreement, Chesapeake agreed to indemnify the Company for
remediation work resulting from violations of applicable environmental laws
(including the CAA) that existed at the Mill as of the date of the Purchase
Agreement and as of the May 1997 closing date as to which Chesapeake had
"knowledge" as defined in the Purchase Agreement. Chesapeake's maximum
indemnification obligation to St. Laurent with respect to such matters is $50
million. While such costs cannot be estimated with certainty at this time,
based on presently available information, the Company believes that the cost of
remediation work, which represents capital expenditures comprising the
engineering, procurement and construction work of Mill modifications (including
the installation of air emission controls, etc.) associated with the NOVs may
approximate $20 million.
In addition, a civil monetary penalty may be assessed by EPA and DEQ;
however, the costs associated with any such penalty cannot be estimated at this
time as the Company and Chesapeake are continuing discussions with EPA and DEQ
with respect to such matters. Based upon discussions with EPA and DEQ to date,
the Company believes that the total cost of remediation work associated with
the NOVs and fines and penalties that may be imposed by EPA and DEQ will not
exceed the maximum amount of Chesapeake's obligation. The Company and
Chesapeake have agreed to appoint a third party to decide the scope and timing
of future remediation work that is the subject of indemnification in the
Purchase Agreement. The third party ruled on February 25, 2000 that said
extension of the indemnification period has been extended to May 8, 2000, with
the possibility of a further extension, on terms that may be determined by the
third party. In the interim, the Company and Chesapeake, with the assistance of
the third party, under certain conditions, shall work together in attempting to
develop and implement a remediation plan, which will provide for a cost-
effective resolution of the issues raised by the NOVs. The Company believes
that Chesapeake has the financial ability to honor its indemnification
obligation under the 1997 Purchase Agreement. The Company is cooperating with
Chesapeake to analyze, respond to, and defend against the matters alleged in
the NOVs. Based upon an initial review of the NOVs, the Company believes that
it has substantial defenses against the alleged violations. The Company and
Chesapeake are working with EPA and DEQ to address the matters that are the
subject of the NOVs; however, the Company will vigorously defend itself against
these allegations, if necessary.
11. Employee Pension Costs and Other Post-Retirement Benefits
Pension Costs
Canadian operations
Defined Benefit Pension Plans
The Company has a registered pension plan (the "St. Laurent Plan") which
covers substantially all non-unionized employees. The St. Laurent Plan is a
defined benefit plan integrated with the Canada/Quebec Pension Plan, and is
funded through Company contributions.
Most of the unionized employees of the Company are covered by a registered
defined benefit plan integrated with the Canada/Quebec Pension Plan, funded
through Company and employee contributions. Employee contributions and pension
benefits for unionized employees are established pursuant to the collective
bargaining agreements in effect with their respective unions.
Defined Contribution Pension Plans
Certain unionized and non-unionized employees of the Company are covered by
registered defined contribution pension plan.
F-101
<PAGE>
ST. LAURENT PAPERBOARD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Supplementary Executive Retirement Plan (the "SERP")
The Company also has a SERP pursuant to which additional pension benefits in
excess of those that can be provided under St. Laurent Plans may become payable
to certain executive officers qualified for participation under the SERP based
on their position level.
United States Operations
Defined Benefit Pension Plans
The U.S. companies currently maintain two non-contributory defined benefit
retirement plans covering substantially all U.S. employees. The plan covering
represented U.S. employees generally provides benefits of stated amounts for
each year of service or a formula based on years of service and the employee's
salary history. The plan covering U.S. salaried and non-represented hourly
employees provides benefits of stated amounts for each year of service for most
hourly employees and a formula based on years of service and the employee's
salary history for salaried employees and certain hourly employees. Salaried
employees and certain represented employees are also entitled to supplemental
benefits based on service of more than ten years. The funding policy for the
qualified plans is to contribute amounts to the plans sufficient to meet the
minimum funding requirements set forth in the Employee Retirement Income
Security Act and the Internal Revenue Code. The U.S. companies also maintain
certain non-qualified pension plans for executives which provide benefits that
are based on targeted wage replacement percentages or provide other additional
benefits. These non-qualified plans are unfunded.
401(k) Plans
The U.S. companies also maintain two 401(k) Plans covering substantially all
U.S. employees. Participants are allowed to make voluntary employee
contributions on a pre-tax basis which contributions are matched based on the
employee's status and workplace.
The dates of the most recent actuarial valuations for the plans are December
31, 1997 for the Canadian plans and October 1, 1998 for the U.S. plans.
Contributions to the Company's pension plans are based on the actuarial
recommendation for each plan and meet the funding requirements of the
regulatory authorities.
Pension Expense
Net pension expense for the defined benefit plans include the following
components:
<TABLE>
<CAPTION>
1999 1998 1997
------- -------- --------
(in thousands of dollars)
<S> <C> <C> <C>
Service costs--pension benefits earned during
the year..................................... $ 5,647 $ 4,809 $ 3,069
Interest costs on projected benefit
obligation................................... 18,754 17,607 15,465
Actual return on pension fund assets.......... (9,757) (21,733) (20,543)
Net amortization, deferrals and others........ (9,222) 2,756 4,937
------- -------- --------
Net pension expense........................... $ 5,422 $ 3,439 $ 2,928
======= ======== ========
</TABLE>
F-102
<PAGE>
ST. LAURENT PAPERBOARD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Funded Status of the Plans
<TABLE>
<CAPTION>
1999 1998
------------------- -------------------
For Plans For Plans For Plans For Plans
in Which in Which in Which in Which
Assets Benefits Assets Benefits
Exceed Earned Exceed Earned
Benefits Exceed Benefits Exceed
Earned Assets Earned Assets
--------- --------- --------- ---------
(in thousands of dollars)
<S> <C> <C> <C> <C>
Plan assets at fair value.............. $63,955 $172,737 $60,187 $161,373
Projected benefit obligation........... 51,998 195,176 48,990 177,397
------- -------- ------- --------
Plan assets in excess of (less than)
projected benefit obligation.......... $11,957 $(22,439) $11,197 $(16,024)
======= ======== ======= ========
The above excess (deficiency) is
comprised of amounts to be amortized
over the expected average remaining
service lives of plan members and to
be reflected in future earnings,
namely:
Unamortized net gain (loss).......... $(2,917) $ 15,736 $(3,082) $ 7,169
Net asset (obligation) as at June
1994, the implementation date of the
current accounting policy........... -- 480 -- 584
Prior service cost of retroactive
benefits resulting from plan
amendments since June 1994.......... (452) (24,126) -- (13,118)
------- -------- ------- --------
(3,369) (7,910) (3,082) (5,365)
Prepaid pension cost (liability)....... 15,326 (14,529) 14,279 (10,659)
------- -------- ------- --------
$11,957 $(22,439) $11,197 $(16,024)
======= ======== ======= ========
</TABLE>
The following assumptions were used for the Canadian and U.S. plans:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
Average Rate Can US Can US
-------------------------------------------------- ----- ----- ----- -----
<S> <C> <C> <C> <C>
Discount rate..................................... 8.25% 7.50% 8.75% 6.75%
Salary increase................................... 3.50% 4.75% 3.50% 4.75%
Return on assets.................................. 8.25% 9.25% 8.75% 9.25%
</TABLE>
Post-Retirement Benefits Other Than Pensions
<TABLE>
<CAPTION>
1999 1998
------- -------
(in thousands
of dollars)
<S> <C> <C>
Costs of post-retirement benefits other than pensions:
Service costs............................................. $ 962 $ 690
Interest costs............................................ 1,350 1,252
Amortization of the transitional balance.................. 131 131
Actuarial loss............................................ 4 --
------- -------
Total................................................... $ 2,447 $ 2,073
======= =======
Funded status of plans:
Accumulated obligation for post-retirement benefits other
than pensions............................................ $19,444 18,740
======= =======
Unrecognized transitional balance........................... $ 1,622 $ 1,653
Unrecognized net loss....................................... 841 1,775
Accrual for post-retirement benefits other than pensions.... 16,981 15,312
------- -------
$19,444 $18,740
======= =======
</TABLE>
F-103
<PAGE>
ST. LAURENT PAPERBOARD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The assumptions used to measure the obligation for post-retirement benefits
other than pensions are as follows:
<TABLE>
<S> <C>
Average age discount
rate................... 7.50%
Health care cost trend
rate................... 7.50% in 1999 trending down to a rate of 5% in 2003
Effect of a 1% change in
the health care cost
trend rate on post-
retirement benefits
other than pensions:... --Cost $0.1 million
--Obligation $0.9 million
</TABLE>
Change in Benefits Obligation
<TABLE>
<CAPTION>
Other Post-
Retirement
Pension Benefits Benefits
------------------ ----------------
1999 1998 1999 1998
-------- -------- ------- -------
(in thousands of dollars)
<S> <C> <C> <C> <C>
Benefits obligation at beginning of
year................................. $226,387 $212,045 $18,740 $16,754
Acquisition......................... 5,811 -- 1,014 --
Unrealized foreign exchange loss
(gain)............................. 9,111 (9,887) 131 (145)
Service costs....................... 5,647 4,809 962 690
Interest costs...................... 18,754 17,607 1,350 1,252
Plan participants' contributions.... 1,326 1,159 -- --
Amendments.......................... 12,032 4,140 -- --
Actuarial loss (gain)............... (18,258) 5,216 (930) 1,054
Special termination benefits (Note
17)................................ -- 8,233 -- --
Benefits paid....................... (13,636) (16,935) (1,823) (865)
-------- -------- ------- -------
Benefits obligation at end of year.... $247,174 $226,387 $19,444 $18,740
======== ======== ======= =======
</TABLE>
Change in Plan Assets
<TABLE>
<CAPTION>
Pension Benefits
------------------
1999 1998
-------- --------
(in thousands of
dollars)
<S> <C> <C>
Fair value of plan assets at beginning of year.......... $221,560 $221,460
Acquisition........................................... 5,224 --
Unrealized foreign exchange gain (loss)............... 8,601 (9,683)
Actual return on plan assets.......................... 9,757 21,733
Employer contribution................................. 3,860 3,826
Plan participants' contributions...................... 1,326 1,159
Gross benefits paid................................... (13,636) (16,935)
-------- --------
Fair value of plan assets at end of year................ $236,692 $221,560
======== ========
</TABLE>
F-104
<PAGE>
ST. LAURENT PAPERBOARD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
12. Interest Expense (Income), Net and Other Income
Interest expense (income), net
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
(in thousands of
dollars)
<S> <C> <C> <C>
Interest on long-term debt....................... $27,019 $28,252 $25,635
Deferred debt issue expenses written off......... -- -- 8,426
Interest on debt component of convertible
debentures...................................... -- -- 260
Interest income on temporary investments......... (943) (1,103) (1,866)
Interest capitalized on major construction
projects........................................ -- -- (200)
Other............................................ 2,533 2,248 1,505
------- ------- -------
$28,609 $29,397 $33,760
======= ======= =======
</TABLE>
Cash payments of interest totaled $27.6 million in 1999 (1998--$27.1
million; 1997--$28.4 million).
Other income (expense), net
<TABLE>
<CAPTION>
1999 1998 1997
------- ---- ----
(in thousands of
dollars)
<S> <C> <C> <C>
Gain resulting from the renegotiation of fibre supply
agreements.............................................. $ 9,500 $-- $--
Gain from asset disposals................................ 5,094 235 235
Other.................................................... (802) 262 (22)
------- ---- ----
$13,792 $497 $213
======= ==== ====
</TABLE>
13. Provision for (Recovery of) Income Taxes
The composite of the applicable statutory corporate income tax rates in
Canada is 39.7% (1998--39.3%; 1997--41.1%). The following is the reconciliation
of income taxes calculated at the above composite statutory rate with the
income tax provision:
<TABLE>
<CAPTION>
1999 1998 1997
------- -------- --------
(in thousands of dollars)
<S> <C> <C> <C>
Earnings (loss) before income taxes............ $60,276 $(30,400) $(42,451)
------- -------- --------
Income taxes (recovery) at the composite
statutory rate................................ 23,943 (11,946) (17,458)
Manufacturing and processing deduction......... (2,455) 624 2,655
Large corporations tax......................... 926 714 1,310
Exchange translation items..................... (515) 3,277 1,054
Other items.................................... (63) 194 429
------- -------- --------
$21,836 $ (7,137) $(12,010)
======= ======== ========
</TABLE>
Payments for income and capital taxes in 1999 amounted to $2.9 million
(1998--payments of $2.5 million; 1997--payments of $2.6 million).
F-105
<PAGE>
ST. LAURENT PAPERBOARD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following summarizes the Company's income taxes on earnings of its
Canadian and foreign operations:
<TABLE>
<CAPTION>
1999 1998 1997
------- --------- --------
(in thousands of dollars)
<S> <C> <C> <C>
Canada
Earnings (loss) before income taxes.......... $33,678 $ (16,063) $(35,854)
Income taxes (recovery)
Current.................................... 913 921 1,550
Future..................................... 10,352 (2,760) (11,067)
------- --------- --------
11,265 (1,839) (9,517)
======= ========= ========
Net earnings (loss) before non-controlling
interest.................................... $22,413 $ (14,224) $(26,337)
======= ========= ========
Foreign
Earnings (loss) before income taxes.......... $26,598 $(14,337) $(6,597)
Income taxes (recovery)
Current.................................... 544 104 --
Future..................................... 10,027 (5,402) (2,493)
------- --------- --------
10,571 (5,298) (2,493)
======= ========= ========
Net earnings (loss) before non-controlling
interest.................................... $16,027 $ (9,039) $ (4,104)
======= ========= ========
Total
Earnings (loss) before income taxes.......... $60,276 $ (30,400) $(42,451)
Income taxes (recovery)
Current.................................... 1,457 1,026 1,550
Future..................................... 20,379 (8,163) (13,560)
------- --------- --------
21,836 (7,137) (12,010)
======= ========= ========
Net earnings (loss) before non-controlling
interest.................................... $38,440 $ (23,263) $(30,441)
======= ========= ========
</TABLE>
Principal components of future income taxes are as follows:
<TABLE>
<CAPTION>
1999 1998
----------------- ----------------
United United
Canada States Canada States
-------- ------- ------- -------
(in thousands of dollars)
<S> <C> <C> <C> <C>
Future income tax assets
Operating loss carryforwards............. $ 5,031 $48,004 $10,423 $37,870
Post retirement benefits................. -- 7,107 -- 6,958
Shares issuance costs.................... 2,864 -- 4,170 --
Other deductible timing differences...... 3,426 4,302 2,128 4,467
-------- ------- ------- -------
11,321 59,413 16,721 49,295
-------- ------- ------- -------
Future income tax liabilities
Differences between tax bases and
reported amounts of depreciable assets.. 26,648 56,617 21,174 36,548
Post retirement liabilities.............. -- 4,318 -- 4,246
Other taxable timing differences......... 1,388 68 1,910 64
-------- ------- ------- -------
28,036 61,003 23,084 40,858
-------- ------- ------- -------
Net future income tax assets (liabilities). $(16,715) $(1,590) $(6,363) $ 8,437
======== ======= ======= =======
</TABLE>
F-106
<PAGE>
ST. LAURENT PAPERBOARD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The tax loss carryforwards expire as follows:
<TABLE>
<CAPTION>
(in thousands of dollars)
<S> <C>
2003............... $ 6,800
2004............... 7,400
2010............... 900
2011............... 2,300
2012............... 23,500
2018............... 71,800
2019............... 21,800
--------
$134,500
========
</TABLE>
14. Shareholder Rights Plan
The Company has a Shareholder Rights Plan which is designed to encourage the
fair treatment of all shareholders in connection with any takeover bid for the
Company. The Shareholder Rights Plan adopted in 1995 and subject to
reconfirmation by the shareholders at every third annual meeting, has been
renewed in 1998 and will expire on February 1, 2005.
The rights issued under the Shareholder Rights Plan become exercisable under
certain specific events related to a potential takeover other than a permitted
bid. Similar to most of the rights plans implemented in Canada, the Shareholder
Rights Plan contemplates a permitted bid concept whereby a takeover bid will
not trigger the rights if it meets specified conditions. Should a bid other
than a permitted bid be carried out, each right would entitle a rights holder
to purchase common shares of the Company at a 50% discount of the market price
at the time.
15. Segmented Information
The Company's primary activity is the production and marketing of paperboard
and packaging products. The Company's manufacturing and converting facilities
are located in Quebec and Ontario, Canada, and in New York, Maryland,
Massachusetts, Ohio, North Carolina, Virginia, Wisconsin, South Carolina and
New Hampshire, U.S.A. The operating activities are split into two major
segments which are the paperboard production and marketing, and the converting
operations.
Primary production includes white top and mottled white linerboard, solid
bleached foodboard and linerboard, unbleached kraftliner board, and corrugating
medium. Containerboard, consisting of linerboard and corrugating medium, is the
principal raw material used in the manufacturing of corrugated containers.
Integrated containerboard manufacturers exchange containerboard with other
manufacturers to take advantage of freight costs, manufacturing efficiencies
and to obtain grade they do not produce.
The Company owns and operates seventeen converting plants. The converting
production consists mainly of corrugated containers, litho-labeled and direct-
printed retail packaging, point-of-purchase displays, post-print, specialty
packaging products, cupstock, baconboard and liquid packaging. The Company's
converting plants consume the equivalent of approximately 37% of the Company's
production. Accounting for segment profitability involves use of transfer
prices that attempt to approximate current market value. Segment profit and
assets have been measured in accordance with the Company's accounting policies.
F-107
<PAGE>
ST. LAURENT PAPERBOARD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
Woodlands,
Solid Wood
And
Primary Unallocated
1999 Mills Converting Amounts Total
---- -------- ---------- ----------- ---------
(in thousands of dollars)
<S> <C> <C> <C> <C>
Net sales to third parties........... $523,532 $363,178 $29,087 $ 915,797
Inter-segment sales.................. 90,240 -- -- 90,240
-------- -------- ------- ---------
Total................................ 613,772 363,178 29,087 1,006,037
EBITDA(i)............................ 117,476 21,845 2,795 142,116
Amortization......................... 56,064 8,741 2,218 67,023
Operating earnings................... 61,412 13,104 577 75,093
Total assets......................... 766,288 310,233 79,022 1,155,543
Additions to property, plant and
equipment........................... 37,251 18,556 1,331 57,138
Addition to goodwill................. -- 21,630 -- 21,630
</TABLE>
<TABLE>
<CAPTION>
Woodlands,
Solid Wood
And
Primary Unallocated
1998 Mills Converting Amounts Total
---- -------- ---------- ----------- ---------
(in thousands of dollars)
<S> <C> <C> <C> <C>
Net sales to third parties........... $478,104 $296,038 $17,765 $ 791,907
Inter-segment sales.................. 80,354 -- -- 80,354
-------- -------- ------- ---------
Total................................ 558,458 296,038 17,765 872,261
EBITDA (i) before restructuring
charge.............................. 61,300 15,206 (1,620) 74,886
Amortization......................... 54,329 7,391 1,788 63,508
Operating earnings (loss) before
restructuring charge................ 6,971 7,815 (3,408) 11,378
Total assets......................... 809,947 181,532 58,934 1,050,413
Additions to property, plant and
equipment........................... 33,913 13,129 2,193 49,235
Addition to goodwill................. -- -- -- --
</TABLE>
<TABLE>
<CAPTION>
Woodlands,
Solid Wood
And
Primary Unallocated
1997 Mills Converting Amounts Total
---- -------- ---------- ----------- ---------
(in thousands of dollars)
<S> <C> <C> <C> <C>
Net sales to third parties......... $363,436 $220,125 $6,881 $ 590,442
Inter-segment sales................ 64,727 -- -- 64,727
-------- -------- ------ ---------
Total.............................. 428,163 220,125 6,881 655,169
EBITDA(i).......................... 29,812 14,432 (5,527) 38,717
Amortization....................... 39,696 6,466 1,459 47,621
Operating earnings (loss).......... (9,884) 7,966 (6,986) (8,904)
Total assets....................... 844,388 176,792 59,741 1,080,921
Additions to property, plant and
equipment......................... 21,388 19,113 3,537 44,038
Addition to goodwill............... -- -- 702 702
</TABLE>
Starting in July 1998, corporate expenses were allocated to the primary
mills and converting segments.
--------
(i) EBITDA: earnings before interest, income taxes, depreciation and
amortization.
F-108
<PAGE>
ST. LAURENT PAPERBOARD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The operations and assets of the Company by geographic area are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
----------- ---------- ----------
(in thousands of dollars)
<S> <C> <C> <C>
Sales to third parties From Canada
Within Canada........................ $ 137,174 $ 120,620 $ 130,367
To the United States................. 208,086 151,903 125,206
Other................................ 29,222 45,583 45,296
----------- ---------- ----------
374,482 318,106 300,869
From the United States............... 541,315 473,801 289,573
----------- ---------- ----------
$ 915,797 $ 791,907 $ 590,442
=========== ========== ==========
Intercompany sales between geographic
areas(A)
From Canada.......................... $ 19,582 $ 9,723 $ 4,845
From the United States............... 1,215 2,078 1,092
----------- ---------- ----------
$ 20,797 $ 11,801 $ 5,937
=========== ========== ==========
Operating earnings (loss)
Canada............................... $ 40,967 $ (4,213) $ (22,975)
United States........................ 34,126 2,713 14,071
----------- ---------- ----------
$ 75,093 $ (1,500) $ (8,904)
=========== ========== ==========
Total assets(B)
Canada............................... $ 438,551 $ 441,710 $ 468,865
United States........................ 716,992 608,703 612,056
----------- ---------- ----------
$ 1,155,543 $1,050,413 $1,080,921
=========== ========== ==========
Property, plant, equipment and goodwill
Canada............................... $ 325,249 $ 320,371 $ 316,170
United States........................ 531,969 475,512 491,901
----------- ---------- ----------
$ 857,218 $ 795,883 $ 808,071
=========== ========== ==========
</TABLE>
--------
(A) Intercompany sales reflect transfer prices at market value.
(B) Total assets are those which are directly used in geographic areas.
F-109
<PAGE>
ST. LAURENT PAPERBOARD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
16. Financial Instruments and Risk Management
Since substantially all of the Company's revenues are denominated in US
dollars and a portion of the operating costs are incurred in Canadian dollars,
the Company has a hedging program to manage its foreign exchange exposure on
future purchases of services and products denominated in Canadian dollars. The
Company does not use derivative financial instruments for trading or
speculative purposes. At December 31, the Company had entered into various
forward contracts and options for the purchase of Canadian dollars as follows
(amounts in parentheses represent losses):
<TABLE>
<CAPTION>
1999 1998
------------------------ --------------------------
Average Average
Exchange Exchange
Nominal Rate Fair Nominal Rate Fair
Amount $/Can$ Value Amount $/Can$ Value
-------- -------- ------ -------- -------- --------
(in thousands of dollars)
<S> <C> <C> <C> <C> <C> <C>
1999................... $ -- $ -- $ -- $ 77,000 $0.7125 $ (7,422)
2000................... 108,000 0.6950 150 84,000 0.7001 (5,493)
2001................... 76,000 0.6920 919 56,000 0.7027 (3,776)
2002................... 21,000 0.6972 208 15,000 0.7068 (1,074)
-------- ------ -------- --------
$205,000 $1,277 $232,000 $(17,765)
======== ====== ======== ========
</TABLE>
The fair value of these forward contracts and options reflects the estimated
amounts that the Company would receive or (pay) to terminate the contracts at
the year-end date. The unrealized gains and losses on open contracts are equal
to the fair value as indicated above.
Interest Rate Risk Management
Cash and temporary investments bear interest at floating rates. Accounts
receivable, accounts payable and accrued liabilities are non-interest bearing.
The Company enters into interest rate swap agreements to reduce exposure to
interest rate fluctuations on its long-term debt. Payments made under these
agreements are accounted for as adjustments to interest expense.
At December 31, 1999, the Company has entered into interest rate swap
agreements with financial institutions to pay fixed rates on a notional amount
of $55 million at a rate of 5.97%. These agreements expire in 2003. The fair
value of these financial instruments as of December 31, 1999 represents an
unrealized gain of $1.5 million.
Selling Prices Risk Management
The Company enters into cash-settled swap agreements with financial
institutions to receive fixed prices on notional amounts of 26 lb. semichemical
corrugating medium and 42 lb. unbleached kraftliner. At December 31, 1999, the
Company had entered into swap agreements for 37,500 tons of corrugating medium
and 18,000 tons of unbleached kraftliner. These agreements expire in 2000 and
2001. The fair value of these financial instruments as of December 31, 1999
represents an unrealized loss of $1.6 million.
Recycled Fibre Risk Management
The Company enters into cash-settled swap agreements with financial
institutions to pay fixed prices on notional amounts of old corrugated
container. At December 31, 1999, the Company had entered into swap agreements
for 48,000 tons of old corrugated container. These agreements expire in 2001.
The fair market value of these instruments as of December 31, 1999 represents
an unrealized loss of $0.3 million.
F-110
<PAGE>
ST. LAURENT PAPERBOARD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Credit Risk Management
The Company is exposed to credit risk on the accounts receivable from its
customers. In order to reduce this risk, the Company's credit policies include
the analysis of the financial position of its customers and the regular review
of their credit limits. In some cases, the Company requires bank letters of
credit or subscribes to credit insurance. The Company does not have significant
exposure to any individual customer or counterpart and has not incurred
significant bad debt expenses in the last three years.
The Company minimizes its credit exposure to counterparties in the
derivative financial instrument transactions by entering into contracts only
with highly rated financial institutions and by distributing the transactions
among several selected financial institutions. Although the Company's credit
risk is the replacement cost at the then-estimated fair value of the
instrument, management believes that the risk of incurring losses is remote and
that such losses, if any, would not be material. The market risk related to the
derivative instruments should be offset by changes in the valuation of the
underlying items being hedged.
Fair Value of Financial Instruments
Rates currently available to the Company for long-term debt with similar
terms and remaining maturities are used to estimate the fair value of existing
borrowings using the present value of expected cash flows.
Short-term financial instruments included in the consolidated balance sheet
are valued at their carrying amounts which are reasonable estimates of fair
value due to the relatively short period to maturity of the instruments; these
include cash and temporary investments, accounts receivable, bank indebtedness
and accounts payable and accrued liabilities.
The fair value of the Company's other financial instruments and their
carrying amount are as follows:
<TABLE>
<CAPTION>
1999 1998
----------------- -----------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- -------- -------- --------
(in thousands of dollars)
<S> <C> <C> <C> <C>
Secured term loan....................... $224,250 $224,250 $230,000 $230,000
Senior secured notes.................... 125,000 130,845 125,000 135,588
Eastern Container Corporation term loan. 22,500 22,500 -- --
Industrial development revenue bonds.... 4,760 4,760 4,880 4,880
Note payable............................ 8,000 8,000 -- --
Note payable to Abitibi-Consolidated
Inc.................................... -- -- 2,389 2,389
</TABLE>
17. Restructuring Charge
In 1998, the Company completed a major restructuring of its West Point mill.
As a result, the market pulp machine was permanently shut down as well as a
chip mill. With this process, the Company has offered an enhanced early
retirement package to a certain number of eligible employees, including
severance payments and extended health benefits. The Company has renegotiated
the expiry date of the collective agreement extending it from 2001 to 2008. The
cost related to the restructuring was incurred in 1998.
18. Uncertainty Due to the Year 2000 Issue
The Year 2000 Issue arises because many computerized systems use two digits
rather than four to identify a year. Date-sensitive systems may recognize the
year 2000 as 1900 or some other date, resulting in errors
F-111
<PAGE>
ST. LAURENT PAPERBOARD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
when information using year 2000 dates is processed. In addition, similar
problems may arise in some systems which use certain dates in 1999 to represent
something other than a date. Although the change in date has occurred, it is
not yet possible to be certain that all aspects of the Year 2000 Issue
affecting the Company, including those related to the efforts of customers,
suppliers, or other third parties, will be fully resolved.
19. Reconciliation to United States Generally Accepted Accounting Principles
(U.S. GAAP)
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles in Canada (Canadian GAAP) which
conform in all material respects with generally accepted accounting principles
in the United States, except as set forth below.
(A) Reconciliation of Earnings and Balance Sheet to U.S. GAAP
Earnings Adjustments
<TABLE>
<CAPTION>
1999 1998 1997
------- -------- --------
(in thousands of dollars)
<S> <C> <C> <C>
Net earnings (loss) in accordance with Canadian
GAAP.......................................... 38,337 (23,263) (30,441)
======= ======== ========
Adjustments:
Pension expense(1)........................... $ (933) $ (722) $ (414)
Unrealized exchange loss on long-term
debt(2)..................................... 381 237 527
Interest on equity component of convertible
debentures(3)............................... -- -- (4,790)
RSU/stock options(4)......................... (804) (798) (785)
Future income taxes(5)....................... -- (394) 394
Deferred start-up costs(6)................... (455) 2,180 (75)
Change in reporting currency(7).............. -- -- (508)
Write-off of debt issue expenses(9).......... -- -- 8,426
Income tax impact of the above adjustments... 458 (481) (1,444)
------- -------- --------
$(1,353) $ 22 $ 1,331
------- -------- --------
Net earnings (loss) in accordance with U.S.
GAAP before extraordinary item................ $36,984 $(23,241) $(29,110)
Extraordinary item (net of tax)
write-off of debt issue expenses(9)........... -- (5,645) --
------- -------- --------
Net earnings (loss)............................ $36,984 $(28,886) $(29,110)
======= ======== ========
Net earnings (loss) per common share in
accordance with U.S. GAAP before extraordinary
item--basic................................... $ 0.75 $ (0.47) $ (0.85)
Extraordinary item (net of tax)................ -- (0.12) --
------- -------- --------
Net earnings (loss) per common share--basic.... $ 0.75 $ (0.59) $ (0.85)
======= ======== ========
Net earnings (loss) per common share--fully
diluted(10)................................... $ 0.75 $ (0.59) $ (0.85)
======= ======== ========
</TABLE>
Statement of Comprehensive Income
<TABLE>
<CAPTION>
1999 1998 1997
------- -------- --------
(in thousands of dollars)
<S> <C> <C> <C>
Net earning (loss)........................... $36,984 $(28,886) $(29,110)
Other comprehensive income, net of tax
Minimum pension liability................... 1,882 (1,995) 3,131
------- -------- --------
Comprehensive income (loss).................. $38,866 $(30,881) $(25,979)
======= ======== ========
</TABLE>
F-112
<PAGE>
ST. LAURENT PAPERBOARD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Consolidated balance sheet adjustments
<TABLE>
<CAPTION>
1999 1998
--------------------- -------------------
Can. GAAP U.S. GAAP Can. GAAP U.S. GAAP
---------- ---------- --------- ---------
(in thousands of dollars)
<S> <C> <C> <C> <C>
Working capital................... $ 114,184 $ 114,184 $ 131,533 $ 131,533
Property, plant and equipment..... 816,879 816,879 775,960 775,960
Future income taxes(1,6).......... -- -- 8,437 8,437
Other assets(1,2,6,8)............. 74,237 77,051 50,270 57,483
---------- ---------- --------- ---------
$1,005,300 $1,008,114 $ 966,200 $ 973,413
========== ========== ========= =========
Long-term debt.................... $ 338,206 $ 338,206 $ 356,455 $ 356,455
Future income taxes(1,6).......... 18,305 16,018 6,363 3,607
Other liabilities(1).............. 32,804 46,528 27,271 47,310
Shareholders' equity(1,2,4,6,8)... 615,985 607,362 576,111 566,041
---------- ---------- --------- ---------
$1,005,300 $1,008,114 $ 966,200 $ 973,413
========== ========== ========= =========
</TABLE>
--------
(1) Accounting for pension costs under U.S. GAAP differs from Canadian GAAP
principally with respect to the choice of the discount rate used to
calculate the projected benefit obligation and to the valuation of assets
and related effects on pension expense. In addition, under U.S. GAAP, the
Company would have recorded an additional minimum liability for underfunded
plans representing the excess of the accumulated benefit obligation over
the pension plan assets, less the pension liability already recognized and
the net unamortized prior service cost. Under U.S. GAAP, the additional
minimum liability at December 31, 1999 of $12.1 million (1998--$19.3
million) would be accounted for and offset by an intangible asset of $11.4
million (1998--$15.9 million) and a component of accumulated other
comprehensive income of $0.5 million (1998--$2.3 million), net of a tax
benefit of $0.2 million (1998--$1.1 million).
(2) Unrealized exchange gains and losses arising on the translation, at
exchange rates prevailing on the balance sheet date, of long-term debt
repayable in a foreign currency are deferred and amortized over the
remaining life of the related debt. Under U.S. GAAP, such exchange gains
and losses are included in earnings.
(3) Under Canadian GAAP, the interest expense related to the debt component of
the convertible debenture is charged to net earnings and the interest
expense related to the equity component of the convertible debentures, net
of income taxes, is charged to retained earnings. Under U.S. GAAP, the
interest related to the principal amount of the convertible debentures is
charged to earnings.
(4) Under U.S. GAAP, the Company had elected in 1995 to measure compensation
costs related to awards of RSUs and stock options using the fair value
based method of accounting as recommended under FASB Statement 123. The
recognition provision has not been applied to awards granted in 1994. The
fair value of options granted was estimated using the Black-Scholes options
pricing model, taking into account an interest risk-free rate of 6% in 1999
(6% in 1998; 7% in 1997), an expected volatility of 25% and an expected
life of four years. The weighted average grant date fair value of options
granted during the year was $3.39: (1998--$3.42 and 1997--$5.28). The
expected rate of cancellation of options and RSUs is estimated at 5% and
6.5% respectively per year. The cost related to the RSUs, which is
amortized over a period of three years, is based on the market value of the
Company's shares as of the grant date, which was $12.30 in 1998 (1997--
$15.08). The program was terminated in 1998. No RSUs were granted in 1999.
F-113
<PAGE>
ST. LAURENT PAPERBOARD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(5) Under Canadian GAAP, future income taxes were, until 1997, considered as
non-monetary elements and were therefore translated into US dollars using
historical exchange rates. Under U.S. GAAP, future income taxes were
considered as monetary elements and were, therefore, translated into US
dollars using the exchange rate in effect at the end of the year. In 1998,
the Company adopted the new Canadian accounting for income taxes approved
by CICA, which had the effect of considering future income taxes as
monetary items; therefore, there is no difference in the measurement of
future income taxes at the end of December 1998 and 1999.
(6) Under Canadian GAAP, start-up costs can be deferred and amortized. Under
U.S. GAAP, such costs are charged to earnings as incurred.
(7) As mentioned in Note 2, the Company has adopted, in 1997, the US dollar as
its reporting and functional currency. Under Canadian GAAP, prior years'
financial statements are presented in US dollars in accordance with a
translation of convenience method using the closing exchange rate at
December 31, 1996 of $0.73 per CAN$1.00. Under U.S. GAAP, prior years'
financial statements are translated according to the current rate method
using the year-end rate or the rate in effect at the transaction dates, as
appropriate.
(8) Under U.S. GAAP, advances to officers and managers for the purchase of
shares of the Company must be deducted from shareholders' equity.
(9) Under U.S. GAAP, the write-off (Note 12) of unamortized debt issue expense
was recognized when the debt was extinguished in 1998.
(10) Under U.S. GAAP, the effect of potential conversion is calculated using
the treasury stock method for options and warrants. Under the treasury
stock method, earnings per share are calculated as if options and
warrants were exercised at the beginning of the year and as if the funds
were used to purchase the Company's stock in the market. Under Canadian
GAAP, the funds theoretically received on conversion are assumed to earn
an appropriate rate of return.
(B) Supplementary Disclosures Under U.S. GAAP
1. Accounts Receivable
<TABLE>
<CAPTION>
1999 1998
-------- -------
(in thousands of
dollars)
<S> <C> <C>
Trade receivable....................................... $112,380 $94,189
Other.................................................. 13,038 2,856
-------- -------
125,418 97,045
Less: Allowance for doubtful accounts.................. (1,139) (1,150)
-------- -------
$124,279 $95,895
======== =======
</TABLE>
2. Accounts Payable and Accrued Charges
<TABLE>
<CAPTION>
1999 1998
-------- -------
(in thousands of
dollars)
<S> <C> <C>
Trade payable........................................... $ 67,781 $41,136
Accrued vacation pay and payroll deduction.............. 13,387 9,068
Other................................................... 21,678 21,908
-------- -------
$102,846 $72,112
======== =======
</TABLE>
3. Operating Leases
Operating lease expenses amounted to $7.4 million in 1999 (1998--$6.6
million; 1997--$4.7 million).
F-114
<PAGE>
ST. LAURENT PAPERBOARD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
4. Supplementary Information to Consolidated Statement of Cash Flows
Under US GAAP, bank indebtedness is considered as a financing activity and
is reported as such in the statement of cash flows.
5. Pro Forma Statement of Earnings Data (Unaudited)
The following unaudited pro forma statement of earnings data assume that the
acquisitions discussed in Note 3 occurred as at January 1, 1998. The unaudited
pro forma statement of earnings data were prepared based upon the historical
consolidated statements of earnings of the Company for the years ended December
31, 1999 and 1998, on the statements of earnings of the businesses acquired for
the year ended December 31, 1998 and for the period from January 1, 1999 to the
date of their respective acquisition. The statements of earnings of the
businesses acquired have been adjusted to bring accounting policies for
amortization of property, plant and equipment and inventory valuation in line
with those of the Company. The unaudited pro forma data are not necessarily
indicative of the combined results of operations of the Company and the
businesses acquired that would have resulted had the transactions occurred on
the date previously indicated, nor is it necessarily indicative of future
operating results of the Company.
Pro forma statement of earnings data 1999
<TABLE>
<CAPTION>
1999 1998
---------- --------
(in thousands of
dollars,
except per share
amounts)
<S> <C> <C>
Net sales............................................ $1,049,161 $950,830
Net earnings (loss).................................. 39,475 (26,213)
Net earnings (loss) per share........................ 0.80 (0.53)
</TABLE>
6. Pending Accounting Standard
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities", which standardized the accounting for
all derivatives. This standard will be effective for fiscal years beginning
after June 15, 2000. Management has not yet determined the impact of this
new Standard.
In March 1999, the Canadian Institute of Chartered Accountants ("CICA")
released new accounting rules regarding employee future benefits under
section 3461 of the CICA Handbook. The new accounting standards will be
applicable in fiscal year 2000. Management has not yet determined if the
new rules will be applied retroactively or prospectively as permitted under
section 3461. If the new rules are applied retroactively, the benefit
liability will increase by approximately $31 million and retained earnings
will decrease by approximately $21 million net of income taxes.
20. Subsequent Event
On February 23, 2000, Smurfit-Stone Container Corporation ("SSCC") and
the Company entered into a pre-merger agreement pursuant to which SSCC has
agreed to acquire all of the issued and outstanding shares of the Company
for a per share consideration of $12.50 and one-half share of SSCC. In
certain circumstances, including in the event that the Company receives a
superior proposal and the Board of Directors of the Company withdraws its
support for the SSCC offer, SSCC will be entitled to a $30 million break
fee. Subject to obtaining shareholders and regulatory approvals, the SSCC
transaction is scheduled to close towards the end of the second quarter.
21. Comparative Amounts
Certain comparative amounts have been restated to comply with the
current year's presentation.
F-115
<PAGE>
ST. LAURENT PAPERBOARD INC.
CONSOLIDATED STATEMENT OF EARNINGS AND RETAINED EARNINGS
(unaudited)
(in thousands of US dollars, except per share amounts)
<TABLE>
<CAPTION>
First Quarter
ended March 31,
------------------
2000 1999
-------- --------
<S> <C> <C>
Sales................................................... $300,110 $216,475
Cost of delivery........................................ 17,921 18,051
-------- --------
Net sales............................................... 282,189 198,424
-------- --------
Cost of sales........................................... 213,621 164,592
Selling and administrative expenses..................... 23,694 12,687
Amortization............................................ 18,631 16,435
-------- --------
255,946 193,714
-------- --------
Operating earnings...................................... 26,243 4,710
Interest expense, net................................... 8,193 7,057
Other expense (income).................................. 3,373 (4,816)
-------- --------
Earnings before income taxes............................ 14,677 2,469
Provision for income taxes.............................. 6,207 479
-------- --------
8,470 1,990
Earnings from equity investment/minority interests...... (137) 285
-------- --------
Net earnings............................................ $ 8,333 $ 2,275
======== ========
Net earnings per common share
Basic................................................. $ 0.17 $ 0.05
======== ========
Fully diluted......................................... $ 0.17 $ 0.05
======== ========
Weighted average number of outstanding common shares (in
thousands)............................................. 49,559 49,264
======== ========
Retained earnings at beginning of period................ $ 40,106 $ 1,769
Employee future benefits transitional amount............ (19,643) --
Net earnings............................................ 8,333 2,275
-------- --------
Retained earnings at end of period...................... $ 28,796 $ 4,044
======== ========
</TABLE>
F-116
<PAGE>
ST. LAURENT PAPERBOARD INC.
CONSOLIDATED STATEMENT OF CHANGES IN CASH POSITION
(unaudited)
(in thousands of US dollars)
<TABLE>
<CAPTION>
First Quarter
Ended March 31,
------------------
2000 1999
-------- --------
<S> <C> <C>
CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES
Net earnings............................................. $ 8,333 $ 2,275
Items not involving cash.................................
Amortization of property, plant and equipment, start
up, deferred costs and goodwill....................... 18,631 16,435
Amortization of debt issue costs....................... 510 399
Future income taxes.................................... 5,456 185
Loss (gain) on sale of property, plant and equipment... 185 (4,553)
Other.................................................. 135 (222)
Start-up and other deferred costs incurred............... (1,511) (691)
Post retirement expense, net of funding.................. (378) 1,041
Earnings from equity investment/minority interests....... 137 (285)
-------- --------
31,498 14,584
Change in non-cash working capital relating to operations
Accounts receivable.................................... (6,120) (9,674)
Inventory.............................................. (4,732) 8,345
Prepaid expenses....................................... 7,445 1,464
Accounts payable and accruals.......................... 2,597 11,092
Income and other taxes payable......................... (425) (42)
-------- --------
(1,235) 11,185
-------- --------
Cash provided by operating activities.................... 30,263 25,769
-------- --------
INVESTING ACTIVITIES
Equity investment........................................ -- (9,607)
Additions to property, plant and equipment............... (23,245) (6,204)
Proceeds from disposals of property, plant and equipment. 142 5,655
-------- --------
(23,103) (10,156)
-------- --------
FINANCING ACTIVITIES
Issuance of common shares, net of expenses............... 3,318 333
Minority interests....................................... 729 --
Issuance of long-term debt............................... 8,790 70
Repayment of long-term debt.............................. (9,561) (24)
Debt issue costs......................................... 19 (127)
-------- --------
3,295 252
-------- --------
INCREASE (DECREASE) IN CASH................................ 10,455 15,865
CASH (INDEBTEDNESS) AT BEGINNING OF PERIOD................. 14,891 (3,519)
-------- --------
CASH (INDEBTEDNESS) AT END OF PERIOD....................... $ 25,346 $ 12,346
======== ========
CASH AND CASH EQUIVALENTS
Cash on hand............................................. 22,225 6,713
Temporary investments.................................... 3,121 5,633
-------- --------
$ 25,346 $ 12,346
======== ========
</TABLE>
F-117
<PAGE>
ST. LAURENT PAPERBOARD INC.
CONSOLIDATED BALANCE SHEET
(in thousands of US dollars)
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
----------- ------------
(unaudited) (audited)
<S> <C> <C>
ASSETS
Current assets
Cash and temporary investments....................... $ 25,346 $ 14,891
Accounts receivable.................................. 130,399 124,279
Income and other taxes receivable.................... 5,217 4,792
Inventories.......................................... 111,213 106,481
Prepaid expenses..................................... 6,539 13,984
----------- ----------
278,714 264,427
Property, plant and equipment.......................... 822,530 816,879
Deferred charges and other assets...................... 33,008 33,898
Goodwill............................................... 39,783 40,339
----------- ----------
$ 1,174,035 $1,155,543
=========== ==========
LIABILITIES
Current liabilities
Accounts payable and accrued liabilities............. $ 105,443 $ 102,846
Current portion of long-term debt.................... 48,167 47,397
----------- ----------
153,610 150,243
Long-term debt......................................... 336,735 338,206
Future income taxes.................................... 14,501 18,305
Other liabilities...................................... 61,196 32,804
Shareholders' equity
Common shares........................................ 576,789 573,471
Contributed surplus.................................. 2,408 2,408
Retained earnings.................................... 28,796 40,106
----------- ----------
607,993 615,985
----------- ----------
$ 1,174,035 $1,155,543
=========== ==========
</TABLE>
F-118
<PAGE>
ST. LAURENT PAPERBOARD INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (All
amounts are expressed in United States (unaudited) ("US") dollars
except where otherwise indicated)
1. CHANGE IN ACCOUNTING POLICY
In the first quarter of 2000, the Company retroactively adopted the new
accounting standard of the Canadian Institute of Chartered Accountants
regarding employee future benefits which requires all employee future benefits
to be accounted for on an accrual basis. Financial statements of prior periods
were not restated. The impact of this change was to increase other liabilities
by $28.9 million, increase future tax benefits by $9.3 million and decrease
retained earnings by $19.6 million. The impact on earnings was not significant.
2. SUBSEQUENT EVENTS
Contingency
The consolidated financial statements of the Company as at December 31, 1999
mentioned the issuance of Notices of Violations under the Clear Air Act by the
U.S. Environmental Protection Agency and the Virginia Department of
Environmental Quality to its West Point mill which was acquired in 1997 from
Chesapeake Corporation and the related circumstances. Under the Purchase
Agreement, the Company is entitled to indemnification up to a maximum of $50
million. A third party appointed by the Company and Chesapeake has ruled to
extend the indemnification period from May 8, 2000, as previously reported, to
August 7, 2000 and further extended by agreement of the parties to November 6,
2000.
Merger with Smurfit-Stone Container Corporation ("SSCC")
On February 20, 2000, SSCC and the Company entered into a pre-merger
agreement pursuant to which SSCC agreed to acquire all the issued and
outstanding shares of the Company for a per share consideration of $12.50 and
one-half share of SSCC. Shareholders and regulatory approvals were subsequently
obtained and the transaction closed on May 31, 2000.
3. RECONCILIATION TO UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(U.S. GAAP)
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles in Canada (Canadian GAAP) which
conform in all material respects with generally accepted accounting principles
in the United States to the extent as required by Item 17 of Form 20-F, except
as set forth below.
Reconciliation of Earnings and Balance Sheet to U.S. GAAP
Earnings Adjustments
<TABLE>
<CAPTION>
First quarter First quarter
2000 1999
------------- -------------
<S> <C> <C>
Net earnings (loss) in accordance with Canadian
GAAP........................................... $8,333 $2,275
------ ------
Adjustments:
Pension expense (1)............................. (225) (233)
Unrealized exchange loss on long-term debt (2).. 96 95
RSU/stock options (3)........................... (169) (126)
Deferred start-up costs (4)..................... (742) 172
Income tax impact of the above adjustments...... 319 20
------ ------
(721) (72)
------ ------
Net earnings (loss) in accordance with U.S.
GAAP........................................... $7,612 $2,203
====== ======
Net earnings (loss) per common share in
accordance with U.S. GAAP--basic............... $ 0.15 $ 0.04
====== ======
Net earnings (loss) per common share--fully
diluted (6).................................... $ 0.15 $ 0.04
====== ======
</TABLE>
F-119
<PAGE>
Consolidated Balance Sheet Adjustments
<TABLE>
<CAPTION>
March 31, 2000 December 31, 1999
---------------------- ---------------------
Can. GAAP U.S. GAAP Can. GAAP U.S. GAAP
----------- ---------- ---------- ----------
(in thousands of dollars)
<S> <C> <C> <C> <C>
Working capital.................... $ 125,104 $ 125,104 $ 114,184 $ 114,184
Property, plant and equipment...... 822,530 822,530 816,879 816,879
Future income taxes (1,4).......... -- -- -- --
Other assets (1,2,4,5)............. 72,791 75,316 74,237 77,051
----------- ---------- ---------- ----------
$ 1,020,425 $1,022,950 $1,005,300 $1,008,114
=========== ========== ========== ==========
Long-term debt..................... $ 336,735 $ 336,735 $ 338,206 $ 338,206
Future income taxes (1,4).......... 14,501 21,156 18,305 16,018
Other liabilities (1).............. 61,196 46,241 32,804 46,528
Shareholders' equity (1,2,3,4,5)... 607,993 618,818 615,985 607,362
----------- ---------- ---------- ----------
$ 1,020,425 $1,022,950 $1,005,300 $1,008,114
=========== ========== ========== ==========
</TABLE>
--------
(1) Until December 1999, accounting for pension costs under U.S. GAAP differed
from Canadian GAAP principally with respect to the choice of the discount
rate used to calculate the projected benefit obligation and to the
valuation of assets and related effects on pension expense. The adoption in
2000 of a new accounting standard for pension costs in Canada eliminated
most of the differences with the U.S. accounting rule. With the adoption of
the new Canadian accounting rule, the Company recognized as of the
beginning of the year, the liability for underfunded plans representing the
excess of the projected benefit obligation over the pension plan assets,
less the pension liability already recognized. Under U.S. GAAP, the Company
would have recorded an additional minimum liability for underfunded plans
representing the excess of the accumulated benefit obligation over the
pension plan assets, less the pension liability already recognized and the
net unamortized prior service cost. Starting in 2000, the amortization of
the unrecognized liability under U.S. GAAP represented by the difference
between the projected benefit obligation and the accumulated benefit
obligation will create the main difference between the Canadian and U.S.
GAAP. Under U.S. GAAP, a minimum liability at December 31, 1999 and March
31, 2000 of $12.1 million would be accounted for and offset by an
intangible asset of $11.4 million and a component of accumulated other
comprehensive income of $0.5 million net of a tax benefit of $0.2 million.
(2) Unrealized exchange gains and losses arising on the translation, at
exchange rates prevailing on the balance sheet date, of long-term debt
repayable in a foreign currency are deferred and amortized over the
remaining life of the related debt. Under U.S. GAAP, such exchange gains
and losses are included in earnings.
(3) Under U.S. GAAP, the Company had elected in 1995 to measure compensation
costs related to awards of RSUs and stock options using the fair value
based method of accounting as recommended under FASB Statement 123. The
recognition provision has not been applied to awards granted in 1994. The
fair value of options granted in 1999 was estimated using the Black-Scholes
options pricing model, taking into account an interest risk-free rate of
6%, an expected volatility of 25% and an expected life of four years. The
weighted average grant date fair value of options granted during 1999 was
$3.39. The expected rate of cancellation of options and RSUs is estimated
at 5% and 6.5% respectively per year. The cost related to the RSUs, which
is amortized over a period of three years, is based on the market value of
the Company's shares as of the grant date. The program was terminated in
1998. No RSUs were granted in 1999 and 2000 and no options were granted in
the first quarter of 2000.
(4) Under Canadian GAAP, start-up costs can be deferred and amortized. Under
U.S. GAAP, such costs are charged to earnings as incurred.
(5) Under U.S. GAAP, advances to officers and managers for the purchase of
shares of the Company must be deducted from shareholders' equity.
(6) Under U.S. GAAP, the effect of potential conversion is calculated using the
treasury stock method for options and warrants. Under the treasury stock
method, earnings per share are calculated as if options and
F-120
<PAGE>
warrants were exercised at the beginning of the year and as if the funds
were used to purchase the Company's stock in the market. Under Canadian
GAAP, the funds theoretically received on conversion are assumed to earn an
appropriate rate of return.
4. SEGMENTED INFORMATION
<TABLE>
<CAPTION>
Woodlands,
Solid Wood
and
Primary unallocated
First Quarter ended March 31, 2000 mills Converting amounts Total
---------------------------------- -------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Net sales to third parties.......... $134,819 $133,674 $13,696 $ 282,189
Inter-segment sales................. 31,744 -- -- 31,744
-------- -------- ------- ----------
Total............................... $166,563 $133,674 $13,696 $ 313,933
EBITDA.............................. 38,193 6,410 271 44,874
Amortization........................ 14,401 3,474 756 18,631
Operating earnings (loss)........... 23,792 2,936 (485) 26,243
Identifiable assets................. 764,941 345,428 63,666 1,174,035
Additions to property, plant and
equipment.......................... 10,163 12,759 323 23,245
<CAPTION>
Woodlands,
Solid Wood
and
Primary unallocated
First Quarter ended March 31, 1999 mills Converting amounts Total
---------------------------------- -------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Net sales to third parties.......... $119,521 $ 75,271 $ 3,632 $ 198,424
Inter-segment sales................. 18,338 -- -- 18,338
-------- -------- ------- ----------
Total............................... $137,859 $ 75,271 $ 3,632 $ 216,762
EBITDA.............................. 16,052 5,629 (536) 21,145
Amortization........................ 13,994 2,034 407 16,435
Operating earnings (loss)........... 2,058 3,595 (943) 4,710
Identifiable assets................. 785,028 188,866 85,943 1,059,837
Additions to property, plant and
equipment.......................... 3,783 2,246 175 6,204
</TABLE>
F-121
<PAGE>
SMURFIT-STONE CONTAINER CORPORATION
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA
The following unaudited pro forma condensed consolidated statements of
operations of Smurfit-Stone were prepared to illustrate the estimated effects
of the St. Laurent Merger Transaction, including the financing plan and the
Preferred Stock Exchange Transaction, as if those transactions had occurred for
the statements of operations as of the beginning of the periods presented.
The Smurfit-Stone historical statement of operations for the period ended
June 30, 2000 includes the operating results of St. Laurent from June 1 through
June 30, 2000. The St. Laurent historical statement of operations for the
period ended June 30, 2000 includes the operating results of St. Laurent from
January 1 through May 31, 2000.
The following unaudited pro forma condensed consolidated balance sheet of
Smurfit-Stone was prepared to illustrate the estimated effects of the Preferred
Stock Transaction as if the Transaction had occurred as of June 30, 2000.
The St. Laurent Merger Transaction was consummated May 31, 2000. As a
result, the June 30, 2000 Smurfit-Stone historical balance sheet includes the
financing effects of the acquisition as well as the acquired St. Laurent assets
and liabilities, at fair value.
The pro forma adjustments are based upon available information and upon
certain assumptions that Smurfit-Stone and St. Laurent believe are reasonable.
The unaudited pro forma condensed consolidated financial statements and
accompanying notes should be read in conjunction with the historical financial
statements of Smurfit-Stone and St. Laurent, and the related notes thereto. The
historical condensed consolidated statements of operations of St. Laurent are
presented in accordance with accounting principles generally accepted in the
United States.
The unaudited pro forma condensed consolidated financial statements are
provided for informational purposes only in response to Securities and Exchange
Commission ("SEC") requirements and do not purport to represent what Smurfit-
Stone's financial position or results of operations would actually have been if
the Transactions had in fact occurred at such dates or to project Smurfit-
Stone's financial position or results of operations for any future date or
period.
For financial accounting purposes, the acquisition of St. Laurent has been
accounted for using the purchase method of accounting. Accordingly, St.
Laurent's assets and liabilities have been adjusted, on a preliminary basis, to
reflect their fair values in the unaudited pro forma condensed consolidated
balance sheet as of June 30, 2000. The estimated effects resulting from these
adjustments have been reflected in the unaudited pro forma condensed
consolidated statements of operations. The allocation of the purchase price and
the transaction fees and expenses included in the unaudited pro forma condensed
consolidated financial statements are preliminary; final amounts may differ
from those set forth herein and such differences may be material. Also the fair
value of the new Smurfit-Stone Series A preferred stock is preliminary; the
final fair value of the preferred stock may differ from the amount set forth
herein and such difference may be material.
F-122
<PAGE>
SMURFIT-STONE CONTAINER CORPORATION
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
June 30, 2000
-------------------------------------------
Smurfit-Stone Preferred Stock Smurfit-Stone
Historical Adjustments Pro Forma
------------- --------------- -------------
(In millions)
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash
equivalents............. $ 53 $(26)(f) $ 27
Receivables.............. 778 778
Inventories.............. 800 800
Refundable income taxes.. 36 36
Deferred income taxes.... 125 125
Prepaid expenses and
other current assets.... 88 88
-------- ---- -------
Total current assets... 1,880 (26) 1,854
Property, plant and
equipment, net............ 5,594 5,594
Timberland, net............ 42 42
Goodwill, net.............. 3,406 3,406
Investment in non-
consolidated affiliates... 176 176
Other assets............... 342 342
-------- ---- -------
$ 11,440 $(26) $11,414
======== ==== =======
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of
long-term debt.......... $ 55 $ $ 55
Accounts payable......... 678 678
Other accrued
liabilities............. 573 573
-------- ---- -------
Total current
liabilities........... 1,306 1,306
Long-term debt, less
current maturities........ 5,660 5,660
Other long-term
liabilities............... 934 934
Deferred income taxes...... 1,116 1,116
Minority interest.......... 97 (92)(f) 5
Stockholders' equity:
Redeemable preferred
stock................... 92 (f) 92
Common stock and
additional paid-in
capital................. 3,837 (26)(f) 3,811
Retained earnings
(deficit)............... (1,509) (1,509)
Accumulated other
comprehensive income
(loss).................. (1) (1)
-------- ---- -------
Total stockholders'
equity................ 2,327 66 2,393
-------- ---- -------
$ 11,440 $(26) $11,414
======== ==== =======
Common stock shares
outstanding............. 244 244
</TABLE>
See accompanying notes to the Unaudited Pro Forma Condensed Consolidated
Financial Statements.
F-123
<PAGE>
SMURFIT-STONE CONTAINER CORPORATION
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
St.
Smurfit-Stone St. Laurent Laurent Preferred Stock Smurfit-Stone
Historical Historical Adjustments Adjustments Pro Forma
------------- ------------ ----------- --------------- -------------
(in millions, except per share data)
<S> <C> <C> <C> <C> <C>
Six months ended June
30, 2000:
Net sales............. $4,057 $ 479 $ (24)(b) $ $4,512
Cost of goods sold.... 3,255 396 8 (a) 3,635
(24)(b)
Selling and
administrative
expenses............. 359 41 400
Restructuring charge.. 46 46
------ ------ ------ ------ ------
Income from
operations........... 397 42 (8) 431
Interest expense, net. (250) (11) (30)(d) (291)
Other income
(expense)--net....... 7 (3) 4
------ ------ ------ ------ ------
Income from continuing
operations before
income taxes,
minority interest and
extraordinary item... 154 28 (38) 144
Benefit from
(provision for)
income taxes......... (79) (13) 14(a) (78)
Minority interest
expense.............. (4) 4 (f)
------ ------ ------ ------ ------
Income from continuing
operations before
extraordinary item... $ 71 $ 15 $ (24) $ 4 (g) $ 66
====== ====== ====== ====== ======
Basic earnings per
common share from
continuing operations
before extraordinary
item................. $ .32 $ .30 $ $ $ .27
====== ====== ====== ====== ======
Diluted earnings per
common share from
continuing operations
before extraordinary
item................. $ .32 $ .30 $ $ $ .27
====== ====== ====== ====== ======
Weighted average
common shares
outstanding--Basic... 222 50 (29)(c) 243
Weighted average
common shares
outstanding--Diluted. 224 50 (28)(c) 246
Year ended December 31,
1999:
Net sales............. $7,151 $ 916 $ (53)(b) $ $8,014
Cost of goods sold.... 6,022 778 18 (a) 6,765
(53)(b)
Selling and
administrative
expenses............. 696 64 760
Restructuring charge.. 10 10
------ ------ ------ ------ ------
Income from
operations........... 423 74 (18) 479
Interest expense, net. (563) (29) (73)(d) (665)
Other income--net..... 479 (e) 14 493
------ ------ ------ ------ ------
Income from continuing
operations before
income taxes,
minority interest and
extraordinary item... 339 59 (91) 307
Benefit from
(provision for)
income taxes......... (168) (22) 34 (a) (156)
Minority interest
expense.............. (8) 8 (f)
------ ------ ------ ------ ------
Income from continuing
operations before
extraordinary item... $ 163 $ 37 $ (57) $ 8 (g) $ 151
====== ====== ====== ====== ======
Basic earnings per
common share from
continuing operations
before extraordinary
item................. $ .75 $ .75 $ .62(g)
====== ====== ====== ====== ======
Diluted earnings per
common share from
continuing operations
before extraordinary
item................. $ .74 $ .75 $ .61(g)
====== ====== ====== ====== ======
Weighted average
common shares
outstanding--Basic... 217 50 (24)(c) 243
Weighted average
common shares
outstanding--Diluted. 220 50 (24)(c) 246
</TABLE>
See accompanying notes to the Unaudited Pro Forma Condensed Consolidated
Financial Statements.
F-124
<PAGE>
SMURFIT-STONE CONTAINER CORPORATION
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
St. Laurent Transaction
(a) To record:
Statements of operations
--Depreciation of property, plant and equipment acquired in the St. Laurent
transaction over an average life of seventeen years; and
--Amortization of goodwill over a forty year period.
Tax effects are recorded assuming a 39% tax rate.
The allocation of fair values to assets and liabilities, including
intangibles and property, plant and equipment was performed on a
preliminary basis. Based upon additional analyses and evaluations to be
performed, the final amounts to be allocated to assets and liabilities
may differ from those amounts included herein and such differences may be
material. In particular the amount allocated to property, plant and
equipment will change upon completion of certain valuations and other
studies. A $100 million increase in property, plant and equipment and a
corresponding decrease in goodwill would decrease the pro forma after-tax
income by $1 million for the year ended December 31, 1999 and by $.6
million for the six months ended June 30, 2000.
St. Laurent selling and administrative expense for the period ended June
30, 2000 exclude $28 million of nonrecurring charges directly related to
the Merger Transaction, representing $14 million of financial advisor and
transaction fees and $14 million of change in control payments.
(b) To eliminate the effects of sales transactions between Smurfit-Stone and
St. Laurent.
(c) To convert St. Laurent common stock to Smurfit-Stone common stock using a
0.5 conversion factor.
(d) To record interest expense in connection with the $1,025 million
additional borrowings under the Smurfit-Stone senior secured credit
facilities and repayment of $371 million of St. Laurent debt.
The interest rate on the term facilities is based on the assumed LIBOR
rate of 6.50%. A one-eighth of one percent change in the interest rate
would increase or decrease interest expense by $1 million for the year
ended December 31, 1999 and by $.6 million for the six months ended June
30, 2000.
<TABLE>
<CAPTION>
Six
months
Year ended ended
December 31, June 30,
Statements of operations 1999 2000
------------------------ ------------ --------
<S> <C> <C>
Interest expense on $1,025 million new borrowings
used to finance the acquisition................... $103 $ 43
Amortization of new deferred debt issuance costs... 1
Less interest expense on extinguished debt......... (31) (13)
---- ----
Net interest expense increase...................... $ 73 $ 30
==== ====
</TABLE>
(e) Other, net for Smurfit-Stone includes pretax gains on asset sales of $446
million resulting from the sales of a majority of its timberlands and its
interest in Abitibi.
F-125
<PAGE>
SMURFIT-STONE CONTAINER CORPORATION
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--
(Continued)
Preferred Stock Exchange Transaction
(f) To record:
Balance sheet
--The issuance of 4.6 million shares of Series A Preferred Stock at its
estimated fair value in exchange for 4.6 million shares of Stone Series E
Preferred Stock which had been previously accounted for as a minority
interest; and
--The cash inducement payment of $26 million representing 13 quarters of
dividend arrearages based on 4.6 million shares of Stone Series E
Preferred Stock at a rate of $1.75 per annum.
Statements of operations
--Eliminate minority interest expense.
(g) Preferred dividend requirements of $8 million on an annual basis ($4
million for the six months ended June 30) and the accretion of $2 million
on an annual basis ($1 million for the six months ended June 30)
representing the difference between fair value of the Series A Preferred
Stock and the mandatory redemption value of $115 million, maturing in 12
years are excluded from income. These items would reduce earnings per
share available to common shareholders by $.04 per diluted share for the
year ended December 31, 1999 and $.02 per diluted share for the six
months ended June 30, 2000.
F-126
<PAGE>
STONE CONTAINER CORPORATION
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA
The following unaudited pro forma condensed consolidated statements of
operations of Stone were prepared to illustrate the estimated effects of the
St. Laurent Merger Transaction, including the financing plan and the Preferred
Stock Exchange Transaction, as if those transactions had occurred for the
statements of operations as of the beginning of the periods presented.
The Stone historical statement of operations for the period ended June 30,
2000 includes the operating results of St. Laurent from June 1 through June 30,
2000. The St. Laurent historical statement of operations for the period ended
June 30, 2000 includes the operating results of St. Laurent from January 1
through May 31, 2000.
The following unaudited pro forma condensed consolidated balance sheet of
Stone was prepared to illustrate the estimated effects of the Preferred Stock
Transaction as if the Transaction had occurred as of June 30, 2000.
The St. Laurent Merger Transaction was consummated May 31, 2000. As a
result, the June 30, 2000 Stone historical balance sheet includes the financing
effects of the acquisition as well as the acquired St. Laurent assets and
liabilities, at fair value.
The pro forma adjustments are based upon available information and upon
certain assumptions that Stone and St. Laurent believe are reasonable. The
unaudited pro forma condensed consolidated financial statements and
accompanying notes should be read in conjunction with the historical financial
statements of Stone and St. Laurent, and the related notes thereto. The
historical condensed consolidated statements of operations of St. Laurent are
presented in accordance with accounting principles generally accepted in the
United States.
The unaudited pro forma condensed consolidated financial statements are
provided for informational purposes only in response to Securities and Exchange
Commission ("SEC") requirements and do not purport to represent what Stone's
financial position or results of operations would actually have been if the
Transactions had in fact occurred at such dates or to project Stone's financial
position or results of operations for any future date or period.
For financial accounting purposes, the acquisition of St. Laurent has been
accounted for using the purchase method of accounting. Accordingly, St.
Laurent's assets and liabilities have been adjusted, on a preliminary basis, to
reflect their fair values in the unaudited pro forma condensed consolidated
balance sheet as of June 30, 2000. The estimated effects resulting from these
adjustments have been reflected in the unaudited pro forma condensed
consolidated statements of operations. The allocation of the purchase price and
the transaction fees and expenses included in the unaudited pro forma condensed
consolidated financial statements are preliminary; final amounts may differ
from those set forth herein and such differences may be material.
F-127
<PAGE>
STONE CONTAINER CORPORATION
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
June 30, 2000
----------------------------------
Stone Preferred Stone
Container Stock Container
Historical Adjustments Pro Forma
---------- ----------- ---------
(in millions)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................. $ 45 $ $ 45
Receivables................................ 411 411
Inventories................................ 561 561
Deferred income taxes...................... 88 88
Prepaid expenses and other current assets.. 50 50
------ ------ ------
Total current assets..................... 1,155 1,155
Property, plant and equipment, net........... 4,343 4,343
Timberland, net.............................. 39 39
Goodwill, net................................ 3,204 3,204
Investment in non-consolidated affiliates.... 135 135
Other assets................................. 217 217
------ ------ ------
$9,093 $ $9,093
====== ====== ======
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current maturities of long-term debt....... $ 46 $ $ 46
Accounts payable........................... 392 392
Other accrued liabilities.................. 384 384
------ ------ ------
Total current liabilities................ 822 822
Long-term debt, less current maturities...... 3,983 3,983
Other long-term liabilities.................. 685 685
Deferred income taxes........................ 673 673
Stockholder's equity:
Preferred stock............................ 78 (78)(d)
Common stock and additional paid-in
capital................................... 2,938 78 (d) 3,016
Retained earnings (deficit)................ (85) (85)
Accumulated other comprehensive income
(loss).................................... (1) (1)
------ ------ ------
Total stockholder's equity............... 2,930 2,930
------ ------ ------
$9,093 $ $9,093
====== ====== ======
Common stock shares outstanding............ 135 135
</TABLE>
See accompanying notes to the Unaudited Pro Forma Condensed Consolidated
Financial Statements.
F-128
<PAGE>
STONE CONTAINER CORPORATION
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Stone Preferred
Container St. Laurent St. Laurent Stock Stone Container
Historical Historical Adjustments Adjustments Pro Forma
---------- ----------- ----------- ----------- ---------------
(in millions)
<S> <C> <C> <C> <C> <C>
Six Months Ended June
30, 2000:
Net sales............. $2,537 $479 $(24)(b) $2,992
Cost of goods sold.... 2,042 396 8 (a) 2,422
(24)(b)
Selling and
administrative
expenses............. 211 41 252
Restructuring charge.. 46 46
------ ---- ---- ----- ------
Income from
operations........... 238 42 (8) 272
Interest expense, net. (170) (11) (30)(c) (211)
Equity income from
affiliates........... 6 6
Other income
(expense)--net....... (4) (3) (7)
------ ---- ---- ----- ------
Income from continuing
operations before
income taxes and
extraordinary item... 70 28 (38) 60
Benefit from
(provision for)
income taxes......... (44) (13) 14(a) (43)
------ ---- ---- ----- ------
Income from continuing
operations before
extraordinary item... $ 26 $ 15 $(24) $ 17
====== ==== ==== ===== ======
Year Ended December 31,
1999:
Net sales............. $4,341 $916 $(53)(b) $5,204
Cost of goods sold.... 3,755 778 18 (a) 4,498
(53)(b)
Selling and
administrative
expenses............. 389 64 453
------ ---- ---- ----- ------
Income from
operations........... 197 74 (18) 253
Interest expense, net. (340) (29) (73)(c) (442)
Equity income from
affiliates........... 12 12
Other income--net..... 56 14 70
------ ---- ---- ----- ------
Income (loss) from
continuing operations
before income taxes
and extraordinary
item................. (75) 59 (91) (107)
Benefit from
(provision for)
income taxes......... -- (22) 34 (a) 12
------ ---- ---- ----- ------
Income (loss) from
continuing operations
before extraordinary
item................. $ (75) $ 37 $(57) $ (95)
====== ==== ==== ===== ======
</TABLE>
See accompanying notes to the Unaudited Pro Forma Condensed Consolidated
Financial Statements.
F-129
<PAGE>
STONE CONTAINER CORPORATION
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
St. Laurent Transaction
(a) To record:
Statements of Operations
--Depreciation of property, plant and equipment acquired in the St. Laurent
transaction over an average life of seventeen years; and
--Amortization of goodwill over a forty year period.
Tax effects are recorded assuming a 39% tax rate.
The allocation of fair values to assets and liabilities, including
intangibles and property, plant and equipment was performed on a
preliminary basis. Based upon additional analyses and evaluations to be
performed, the final amounts to be allocated to assets and liabilities
may differ from those amounts included herein and such differences may be
material. In particular the amount allocated to property, plant and
equipment will change upon completion of certain valuations and other
studies. A $100 million increase in property, plant and equipment and a
corresponding decrease in goodwill would increase the pro forma after-tax
loss by $1 million for the year ended December 31, 1999 and decrease the
pro forma after-tax income by $.6 million for the six months ended June
30, 2000.
St. Laurent selling and administrative expense for the period ended June
30, 2000 exclude $28 million of nonrecurring charges directly related to
the Merger Transaction representing $14 million of financial advisor and
transaction fees and $14 million of change in control payments.
(b) To eliminate the effects of sales transactions between Stone and St.
Laurent.
(c) To record interest expense in connection with the $1,025 million
additional borrowings under the Stone senior secured credit facilities
and repayment of $371 million of St. Laurent debt.
The interest rate on the term facilities is based on the assumed LIBOR
rate of 6.50%. A one-eighth of one percent change in the interest rate
would increase or decrease interest expense by $1 million for the year
ended December 31, 1999 and by $.6 million for the six months ended June
30, 2000.
<TABLE>
<CAPTION>
Year Ended Six Months Ended
Statements of operations December 31, 1999 June 30, 2000
------------------------ ----------------- ----------------
<S> <C> <C>
Interest expense on $1,025 million new
borrowings used to finance the
acquisition............................ $103 $43
Amortization of new deferred debt
issuance costs......................... 1
Less interest expense on extinguished
debt................................... (31) (13)
---- ---
Net interest expense increase........... $ 73 $30
==== ===
</TABLE>
Preferred Stock Exchange Transaction
(d) To record:
Balance Sheet
To record the Smurfit-Stone capital contribution to effect the exchange
of 4.6 million shares of Series E Preferred Stock in exchange for 4.6
million shares of Smurfit-Stone Series A Preferred Stock.
F-130
<PAGE>
Annex A
AGREEMENT AND PLAN OF MERGER
AMONG
SMURFIT-STONE CONTAINER CORPORATION,
SCC MERGER CO.,
AND
STONE CONTAINER CORPORATION
August 8, 2000
<PAGE>
AGREEMENT AND PLAN OF MERGER
This AGREEMENT AND PLAN OF MERGER ("Agreement") is made and entered into as
of August 8, 2000 by and among Smurfit-Stone Container Corporation, a Delaware
corporation ("SSCC"), SCC Merger Co., a Delaware corporation and a wholly-owned
subsidiary of SSCC ("Sub"), and Stone Container Corporation, a Delaware
corporation ("Stone").
RECITALS
A. The parties to this Agreement believe it is in the best interests of each
company and the stockholders of SSCC that Sub merge with and into Stone
pursuant to which Stone shall continue as the surviving corporation and as a
wholly-owned subsidiary of SSCC (the "Merger").
B. Pursuant to the Merger, among other things, each of the issued and
outstanding shares of $1.75 Series E Cumulative Convertible Exchangeable
Preferred Stock, $.01 par value per share, of Stone (the "Series E Preferred
Stock") shall be converted into the right to receive (i) one Series A Preferred
Share of SSCC (as defined below) and (ii) the Cash Consideration (as defined
below) as provided herein.
C. As a condition to, and in connection with the execution of this
Agreement, certain holders of the Series E Preferred Stock have entered into a
Voting Agreement with SSCC in the form attached hereto as Exhibit A.
D. The parties to this Agreement desire to make certain representations,
warranties, covenants and other agreements in connection with the Merger.
NOW, THEREFORE, in consideration of the covenants, promises and
representations set forth herein, and for other good and valuable
consideration, the receipt and sufficiency of which is hereby acknowledged, the
parties agree as follows:
ARTICLE I
THE MERGER
1.1 The Merger. At the Effective Time and subject to and upon the terms and
conditions of this Agreement and the applicable provisions of the Delaware
General Corporation Law (the "DGCL"), Sub shall be merged with and into Stone,
and the separate corporate existence of Sub shall cease, Stone shall continue
as the surviving corporation and as a wholly-owned subsidiary of SSCC following
the Merger. Stone, as the surviving corporation after the Merger, is
hereinafter sometimes referred to as the "Surviving Corporation."
1.2 Closing; Effective Time. Unless it is earlier terminated pursuant to
Section 6.1 below, the closing of the Merger (the "Closing") will take place no
later than three business days after the satisfaction or, if permissible,
waiver of the conditions set forth in Article V, at the offices of Winston &
Strawn, 35 West Wacker Drive, Chicago, Illinois 60601, at 10:00 a.m. (Chicago
time). The date upon which the Closing actually occurs is herein referred to as
the "Closing Date." On the Closing Date, the parties hereto shall cause the
Merger to be consummated by filing a certificate of merger in the form required
by the DGCL with the Secretary of State of Delaware (the "Certificate of
Merger"), in accordance with the relevant provisions of the DGCL (the time of
acceptance by the Secretary of State of Delaware of such filing being referred
to herein as the "Effective Time").
1.3 Effect of the Merger. At the Effective Time, the effect of the Merger
shall be as provided in the applicable provisions of the DGCL. Without limiting
the generality of the foregoing, and subject thereto, at the Effective Time,
except as otherwise provided herein, all the property, assets, rights,
privileges, powers and
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franchises of Stone and Sub shall vest in the Surviving Corporation, and all
debts, liabilities, duties and obligations of Stone and Sub shall become the
debts, liabilities, duties and obligations of the Surviving Corporation.
1.4 Certificate of Incorporation; Bylaws.
(a) At the Effective Time, the Certificate of Incorporation of Sub shall
be the Certificate of Incorporation of the Surviving Corporation until
thereafter amended as provided by law and such Certificate of
Incorporation.
(b) At the Effective Time, the Bylaws of Sub shall be the Bylaws of the
Surviving Corporation until thereafter amended as provided therein.
1.5 Directors and Officers. The directors of Sub immediately prior to the
Effective Time shall be the initial directors of the Surviving Corporation,
each to hold office in accordance with the Certificate of Incorporation and
Bylaws of the Surviving Corporation. The officers of Stone immediately prior to
the Effective Time (with the exception of those individuals above) shall be the
initial officers of the Surviving Corporation each to hold office in accordance
with the Certificate of Incorporation and Bylaws of the Surviving Corporation.
1.6 Merger Consideration; Exchange Procedures.
(a) Merger Consideration. Each share of Series E Preferred Stock of
Stone (each a "Series E Preferred Share") that is issued and outstanding
immediately prior to the Effective Time shall become and be converted into
the right to receive (i) an amount in cash equal to (A) the accrued and
unpaid dividends in respect of such share as of the Effective Time less (B)
$0.12 ( the "Cash Consideration") and (ii) one share of 7% Series A
Cumulative Exchangeable Redeemable Convertible Preferred Stock of SSCC, par
value $0.01 per share, (each a "Series A Preferred Share" and, in the
aggregate, the "Series A Preferred Shares"), which shares shall be issued
at Closing (the "Share Consideration" and together with the Cash
Consideration, the "Merger Consideration").
(b) Exchange Procedures. At the Effective Time, SSCC shall deposit with
an exchange agent (the "Exchange Agent") (as directed pursuant to a
disbursement letter executed by the Exchange Agent), to distribute to the
holders of the Series E Preferred Shares (the "Series E Stockholders"), the
aggregate amount of the Merger Consideration. The Exchange Agent shall
deliver the Merger Consideration to the Series E Stockholders in accordance
with the provisions of the Exchange Agreement.
(c) Cancellation of Series E Preferred Shares. From and after the
Effective Time all Series E Preferred Shares shall no longer be outstanding
and shall automatically be cancelled and retired and shall cease to exist,
and each holder of a Certificate representing any such Series E Preferred
Shares shall cease to have any rights with respect thereto, except the
right to receive the Merger Consideration represented by such Certificate.
1.7 Surrender of Certificates. The Exchange Agent shall deliver the Merger
Consideration contemplated to be paid to the Series E Stockholders pursuant to
Section 1.6 hereof in accordance with the terms of the Exchange Agreement to be
entered into on the Closing Date between SSCC and the Exchange Agent (the
"Exchange Agreement"). Within five (5) days after the Effective Time, SSCC
shall instruct the Exchange Agent to mail to each holder of record of a
certificate representing outstanding Series E Preferred Shares (the
"Certificates") (1) a letter of transmittal (which shall specify that delivery
shall be effected, and risk of loss and title to the Certificates shall pass
only upon proper delivery by such Series E Stockholder of his or its
Certificates to the Exchange Agent) and (2) instructions for use in effecting
the surrender of the Certificates in exchange for the Merger Consideration
contemplated to be paid to the Series E Stockholders pursuant to Section 1.6
hereof. Upon surrender of a Certificate to the Exchange Agent for cancellation,
the holder of such Certificate shall be entitled to receive in exchange
therefor (i) the Cash Consideration represented by such Certificate as set
forth above which shall be payable upon such proper surrender and (ii) the
Share Consideration which shall be delivered upon such proper surrender, which
Cash Consideration shall be payable as set forth in Section 1.6 hereof, in each
case by the Exchange Agent by delivery of a certified or bank
A-2
<PAGE>
cashier's check and which Share Consideration shall be delivered via certified
mail, and the Certificate so surrendered shall forthwith be canceled upon
delivery thereof to the Exchange Agent. No interest will be paid or accrued on
any cash payable to holders of Certificates. In the event of a transfer of
ownership of Series E Preferred Shares which is not registered in the transfer
records of Stone, payment may be made to a transferee if the Certificate
representing such Series E Preferred Shares is presented to SSCC, accompanied
by all documents required to evidence and effect such transfer and by evidence
that any applicable stock transfer taxes have been paid.
1.8 No Further Ownership or Other Rights in Series E Preferred Shares. From
and after the Effective Time, each Certificate, until surrendered as
contemplated by Section 1.7, shall be deemed at any time after the Effective
Time to represent only the right to receive upon such surrender the Merger
Consideration which the holder thereof has the right to receive in respect of
such Certificate pursuant to this Article I. The payments to be made to Series
E Stockholders in the manner set forth in Section 1.6 in accordance with the
terms hereof shall be deemed to have been in full satisfaction of all rights
pertaining to Series E Preferred Shares represented by such Certificates and
there shall be no further registration of transfers on the appropriate transfer
books of the Surviving Corporation of Series E Preferred Shares which were
outstanding immediately prior to the Effective Time. Subject to applicable law,
Certificates presented after the Effective Time to the Surviving Corporation
shall be canceled and exchanged as provided herein.
1.9 Lost, Stolen and Destroyed Certificates. If any Certificate shall have
been lost, stolen or destroyed, upon the making of an affidavit of that fact by
the Person claiming such Certificate to be lost, stolen or destroyed and, if
required by SSCC, the posting by such Person of a bond in such reasonable
amount as SSCC may direct as indemnity against any claim that may be made
against it with respect to such Certificate, the Surviving Corporation will
issue in exchange for such lost, stolen or destroyed Certificate, the Merger
Consideration deliverable in respect thereof pursuant to this Agreement.
1.10 Effect of Merger on Capital Stock of Sub. At the Effective Time, each
share of Sub's common stock, $0.01 par value per share that is issued and
outstanding immediately prior to the Effective Time, shall, by virtue of the
Merger and without any action on the part of SSCC, Sub, or Stone, be converted
automatically into and exchanged for one share of common stock of the Surviving
Corporation.
1.11 Effect of Merger on Common Stock of Stone. At the Effective Time, each
share of Stone's common stock, $0.01 par value per share that is issued and
outstanding immediately prior to the Effective Time, shall remain outstanding
as the common stock of the Surviving Corporation and shall be unaffected by the
Merger.
ARTICLE II
PRE-CLOSING COVENANTS
The parties to this Agreement covenant as follows with respect to the period
between the execution of this Agreement and the Closing.
2.1 General. Each of the parties will use its commercially reasonable
efforts to take all action and to do all things necessary, proper, or advisable
in order to consummate and make effective the transactions contemplated by this
Agreement (including satisfaction, but not waiver, of the closing conditions
set forth in Article V below).
2.2 Notices and Consents. Each of the parties shall give any notices to
third parties, and will use commercially reasonable efforts to obtain any third
party consents that are necessary to vest in the Surviving Corporation all
right, title and interest of Sub and Stone or that any of the parties may
reasonably request in connection with the matters referred to herein. Each of
the parties will give any notices to, make any filings with, and use
commercially reasonable efforts to obtain any authorizations, consents, and
approvals of governments and governmental agencies necessary or desirable in
connection with the matters referred to herein.
A-3
<PAGE>
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF STONE
Stone hereby represents and warrants to SSCC and Sub that the statements
contained in this Article III are correct and complete as of the date of this
Agreement and, unless such statement shall refer to a date other than the date
of this Agreement, will be correct and complete as of the Closing Date.
3.1 Organization. Stone is a corporation duly organized, validly existing
and in good standing under the laws of the state of Delaware.
3.2 Corporate Authority. Stone has full corporate power and authority to
enter into this Agreement and this Agreement constitutes the valid and legally
binding obligation of Stone, enforceable in accordance with its terms and
conditions.
3.3 Opinion of Financial Advisor. Stone has received the opinion of its
financial advisor, dated as of the date of this Agreement, to the effect that,
as of the date of this Agreement, the Merger Consideration to be received in
the Merger by the holders of the Series E Preferred Shares is fair to such
holders from a financial point of view. A complete and correct signed copy of
such opinion will be delivered to SSCC as soon as practicable after the date of
this Agreement, and such opinion has not been withdrawn or modified.
3.4 Noncontravention. Neither the execution and the delivery of this
Agreement, nor the consummation of the transactions contemplated hereby, will:
(a) violate any constitution, statute, regulation, rule, injunction, judgment,
order, decree, ruling, charge, or other restriction of any government,
governmental agency, or court to which Stone is subject or any provision of its
charter or bylaws; or (b) conflict with, result in a breach of, constitute a
default under, result in the acceleration of, create in any party the right to
accelerate, terminate, modify, or cancel, or require any notice under any
agreement, contract, lease, license, instrument, or other arrangement to which
Stone is a party or by which it is bound or to which any of its assets is
subject, which (in either case of clause (a) or clause (b)) would have a
material adverse effect on the business, financial condition, operations, or
results of operations of Stone.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF SSCC AND SUB
SSCC and Sub hereby represent and warrant to Stone that the statements
contained in this Article IV are correct and complete as of the date of this
Agreement and, unless such statement shall refer to a date other than the date
of this Agreement, will be correct and complete as of the Closing Date.
4.1 Organization. SSCC and Sub are each corporations duly organized, validly
existing and in good standing under the laws of the state of Delaware.
4.2 Corporate Authority. Each of SSCC and Sub has full corporate power and
authority to enter into this Agreement and this Agreement constitutes the valid
and legally binding obligation of Stone, enforceable in accordance with its
terms and conditions.
4.3 Noncontravention. Neither the execution and the delivery of this
Agreement, nor the consummation of the transactions contemplated hereby, will:
(a) violate any constitution, statute, regulation, rule, injunction, judgment,
order, decree, ruling, charge, or other restriction of any government,
governmental agency, or court to which SSCC or Sub is subject or any provision
of their charter or bylaws; or (b) conflict with, result in a breach of,
constitute a default under, result in the acceleration of, create in any party
the right to accelerate, terminate, modify, or cancel, or require any notice
under any agreement, contract, lease, license, instrument, or other arrangement
to which SSCC or Sub is a party or by which they are bound or to which any of
their assets is subject, which (in either case of clause (a) or clause (b))
would have a material adverse effect on the business, financial condition,
operations, or results of operations of SSCC or Sub.
A-4
<PAGE>
ARTICLE V
CONDITIONS TO OBLIGATION TO CLOSE
5.1 Conditions Precedent to the Obligations of Stone. All obligations of
Stone hereunder are subject to the fulfillment, to the satisfaction of Stone
and its legal counsel, prior to or at the Closing, of each of the following
conditions (any or all of which may be waived by Stone in its sole discretion).
(a) The representations and warranties of SSCC and Sub set forth in
Article IV above shall be true and correct in all material respects at and
as of the Closing Date.
(b) The Series E Stockholders shall have approved this Agreement and
the Merger and the transactions contemplated thereby in accordance with the
terms of the DGCL and the certificate of incorporation and the bylaws of
Stone.
(c) Any and all notices, filings, authorizations, consents and
approvals of any federal, state, local or foreign governmental entity
necessary to consummate the transactions contemplated by this Agreement
shall have been given, made or obtained by the parties hereto.
(d) The Certificate of Designation setting forth the rights and
preferences of the holders of the Series A Preferred Shares shall have been
filed with the Secretary of State of Delaware in substantially the form
attached as Exhibit B hereto and in accordance with the relevant provisions
of the DGCL.
(e) The Series A Preferred Shares shall have been accepted for
quotation on the Nasdaq National Market, subject to official notice of
issuance.
(f) The Form S-4 Registration Statement registering the Series A
Preferred Shares shall have been declared effective by the Securities and
Exchange Commission (the "Commission"). No stop order suspending the
effectiveness of the Form S-4 Registration Statement shall have been issued
by the Commission and no proceedings for that purpose shall have been
initiated or threatened by the Commission.
(g) No material adverse effect on the business, financial condition,
operations, prospects or results of operations of SSCC (other than a
material adverse effect of SSCC resulting solely from a material adverse
effect of Stone) shall be or shall have been existing.
(h) Neither SSCC nor Sub shall be subject to any outstanding injunction,
judgment, order, decree, ruling or charge or a party to or, to its
knowledge, has been threatened to be made a party to any action, suit,
proceeding, hearing, investigation, charge, complaint, claim or demand of,
in or before any court or quasi judicial or administrative agency of any
federal, state, local or foreign jurisdiction or before any arbitrator
which would prevent or forbid the consummation of the transactions
contemplated by this Agreement.
5.2 Conditions Precedent to the Obligations of SSCC and Sub. All obligations
of SSCC and Sub hereunder are subject to the fulfillment, to the satisfaction
of SSCC and its legal counsel, prior to or at the Closing, of each of the
following conditions (any or all of which may be waived by SSCC in its sole
discretion).
(a) The representations and warranties of Stone set forth in Article III
above shall be true and correct in all material respects at and as of the
Closing Date.
(b) The Series E Stockholders shall have approved this Agreement and the
Merger and the transactions contemplated thereby in accordance with the
terms of the DGCL and the certificate of incorporation and the bylaws of
Stone.
(c) Any and all notices, filings, authorizations, consents and approvals
of any federal, state, local or foreign governmental entity necessary to
consummate the transactions contemplated by this Agreement shall have been
given, made or obtained by the parties hereto.
A-5
<PAGE>
(d) No material adverse effect on the business, financial condition,
operations, prospects or results of operations of Stone shall be or shall
have been existing.
(e) The Form S-4 Registration Statement registering the Series A
Preferred Shares shall have been declared effective by the Commission. No
stop order suspending the effectiveness of the Form S-4 Registration
Statement shall have been issued by the Commission and no proceedings for
that purpose shall have been initiated or threatened by the Commission.
(f) Stone shall not be or have been subject to any outstanding
injunction, judgment, order, decree, ruling or charge or a party to or, to
its knowledge, has been threatened to be made a party to any action, suit,
proceeding, hearing, investigation, charge, complaint, claim or demand of,
in or before any court or quasi judicial or administrative agency of any
federal, state, local or foreign jurisdiction or before any arbitrator
which would prevent or forbid the consummation of the transactions
contemplated by this Agreement.
ARTICLE VI
TERMINATION
6.1 Termination of Agreement.
(a) The parties may terminate this Agreement by mutual written consent
at any time prior to the Closing.
(b) In addition, either party may terminate the Agreement if: (i) the
Series E Stockholders do not adopt the Agreement; (ii) a law or regulation
makes the transaction illegal or any order or injunction permanently
prohibits the transaction; or (iii) the other party breaches its
representations, warranties or other obligations under the Agreement in any
material respect and does not or cannot cure the breach.
(c) In addition, (i) Stone may, in its sole discretion, terminate the
Agreement if any of the conditions set forth in Section 5.1 above cannot be
satisfied on or prior to December 31, 2000; and (ii) SSCC may, in its sole
discretion, terminate the Agreement if any of the conditions set forth in
Section 5.2 above cannot be satisfied on or prior to December 31, 2000;
provided, however, that the right to terminate this Agreement under this
Section 6.1(c) shall not be available to any party whose failure to fulfill
any of its obligations under this Agreement has been the cause of, or
resulted in, the failure of the other party to satisfy the conditions set
forth in Article V above.
ARTICLE VII
MISCELLANEOUS
7.1 No Third-Party Beneficiaries. This Agreement shall not confer any rights
or remedies upon any Person other than the parties named herein and their
respective successors and permitted assigns.
7.2 Entire Agreement. This Agreement (including the documents referred to
herein) constitutes the entire agreement among the parties and supersedes any
prior understandings, agreements, or representations by or among the parties,
written or oral, to the extent they related in any way to the subject matter
hereof.
7.3 Succession and Assignment. This Agreement shall be binding upon and
inure to the benefit of the parties named herein and their respective
successors and permitted assigns.
7.4 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original but all of which
together will constitute one and the same instrument.
7.5 Headings. The section headings contained in this Agreement are inserted
for convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
A-6
<PAGE>
7.6 Amendments and Waivers. No amendment of any provision of this Agreement
shall be valid unless the same shall be in writing and signed by SSCC, Sub and
Stone. No waiver by any party of any default, misrepresentation, or breach of
warranty or covenant hereunder, whether intentional or not, shall be deemed to
extend to any prior or subsequent default, misrepresentation, or breach of
warranty or covenant hereunder or affect in any way any rights arising by
virtue of any prior or subsequent such occurrence.
7.7 Governing Law. This Agreement shall be governed by and construed in
accordance with the domestic laws of the State of Delaware without giving
effect to principles of conflicts of laws.
7.8 Severability. Any term or provision of this Agreement that is invalid or
unenforceable in any situation in any jurisdiction shall not affect the
validity or enforceability of the remaining terms and provisions hereof or the
validity or enforceability of the offending term or provision in any other
situation or in any other jurisdiction. The parties further agree to replace
such invalid or unenforceable provision of this Agreement with a valid and
enforceable provision that will achieve, to the extent possible, the economic,
business or other purposes of the invalid or unenforceable provision.
7.9 Incorporation of Exhibits. The Exhibits identified in this Agreement are
incorporated herein by reference and made a part hereof.
[signature page follows]
A-7
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
SSCC:
Smurfit-Stone Container Corporation,
a Delaware corporation
/s/ Craig A. Hunt
By: _________________________________
Craig A. Hunt
Name: _______________________________
Vice President, General Counsel and
Secretary
Title: ______________________________
SUB:
SCC Merger Co., a Delaware
corporation and a wholly-owned
subsidiary of SSCC
/s/ Craig A. Hunt
By: _________________________________
Craig A. Hunt
Name: _______________________________
Vice President, General Counsel and
Secretary
Title: ______________________________
STONE:
Stone Container Corporation, a
Delaware corporation
/s/ Craig A. Hunt
By: _________________________________
Craig A. Hunt
Name: _______________________________
Vice President, General Counsel and
Secretary
Title: ______________________________
A-8
<PAGE>
Annex B
RESTATED CERTIFICATE OF INCORPORATION
OF
JEFFERSON SMURFIT CORPORATION
(BEING RENAMED SMURFIT-STONE CONTAINER CORPORATION)
Jefferson Smurfit Corporation, a Delaware corporation, the original
Certificate of Incorporation of which was filed with the Secretary of State of
the State of Delaware on August 4, 1989 and a Restated Certificate of
Incorporation of which was filed with the Secretary of State of the State of
Delaware on May 11, 1994, HEREBY CERTIFIES that this Restated Certificate of
Incorporation, restating, integrating and amending its Certificate of
Incorporation, was duly adopted in accordance with Sections 242 and 245 of the
General Corporation Law of the State of Delaware.
FIRST: The name of the Corporation is Smurfit-Stone Container Corporation
(the "Corporation").
SECOND: The address of the registered office of the Corporation in the State
of Delaware is 1209 Orange Street in the City of Wilmington, County of New
Castle. The name of its registered agent at such address is The Corporation
Trust Company.
THIRD: The purpose of the Corporation is to engage in any lawful act or
activity for which a corporation may be organized under the General Corporation
Law of the State of Delaware (the "GCL").
FOURTH: The total number of shares of capital stock which the Corporation
shall have authority to issue is 425,000,000 shares, consisting of 400,000,000
shares of common stock, par value $.01 per share (the "Common Stock"), and
25,000,000 shares of preferred stock, par value $.01 per share (the "Preferred
Stock").
The Board of Directors is expressly authorized to provide for the issuance
of all or any shares of the Preferred Stock in one or more classes or series,
and to fix for each such class or series such voting powers, full or limited,
or no voting powers, and such distinctive designations, preferences and
relative, participating, optional or other special rights and such
qualifications, limitations or restrictions thereof, as shall be stated and
expressed in the resolution or resolutions adopted by the Board of Directors
providing for the issuance of such class or series and as may be permitted by
the GCL, including, without limitation, the authority to provide that any such
class or series may be (i) subject to redemption at such time or times and at
such price or prices, (ii) entitled to receive dividends (which may be
cumulative or non-cumulative) at such rates, on such conditions, and at such
times, and payable in preference to, or in such relation to, the dividends
payable on any other class or classes or any other series, (iii) entitled to
such rights upon the dissolution of, or upon any distribution of the assets of,
the Corporation or (iv) convertible into, or exchangeable for, shares of any
other class or classes of stock, or of any other series of the same or any
other class or classes of stock, of the Corporation at such price or prices or
at such rates of exchange and with such adjustments, all as may be stated in
such resolution or resolutions.
FIFTH: As and when Stone Container Corporation, a Delaware corporation
("Stone"), is required to deliver shares of Common Stock (or other securities
of the Corporation, if applicable), upon conversion of shares of Stone's Series
E Cumulative Convertible Exchangeable Preferred Stock, par value $.01 per share
("Series E Preferred Stock") (or upon conversion of any 7% Convertible
Subordinate Exchange Debentures due 2007 issued in exchange for the Series E
Preferred Stock (the "7% Convertible Debentures")) in accordance with Section 6
of Subpart I.B. of Stone's Restated Certificate of Incorporation, as amended
(or in accordance with the terms of the indenture under which the 7%
Convertible Debentures were issued, as it may be amended or supplemented (the
"7% Indenture")) the Corporation shall make available to Stone sufficient
shares of Common Stock (or other securities and property of the Corporation, if
applicable) to permit Stone to satisfy such conversion requirements. The
Corporation shall deliver such shares of Common Stock (or other securities and
property of the Corporation, if applicable) to Stone no later than the time
when Stone is required
B-1
<PAGE>
to deliver such securities and property upon conversion of the Stone Series E
Preferred Stock (or upon conversion of any 7% Convertible Debentures), and the
Corporation shall not be required to deliver such securities and property prior
to such time. In addition, the Corporation shall take any and all action
contemplated to be taken by the Corporation when, as and if required pursuant
to the provisions of Section 6 of Subpart I.B. of Stone's Restated Certificate
of Incorporation, as amended, or the 7% Indenture, as the case may be.
SIXTH: A. The business and affairs of the Corporation shall be managed by or
under the direction of a Board of Directors consisting of not less than three
(3) and not more than fifteen (15) directors, the exact number of directors to
be determined as set forth in the Amended and Restated Bylaws of the
Corporation (such Bylaws, as amended from time to time in accordance with this
Restated Certificate of Incorporation and the Amended and Restated Bylaws,
being referred to herein as the "Bylaws"). Notwithstanding the first sentence
of this Paragraph A of this Article SIXTH, until the date (the "Article 5
Termination Date") which is the earlier of (i) the date upon which Mr. Roger W.
Stone ("Mr. Stone") ceases to be the President and Chief Executive Officer (the
"CEO") of the Corporation or (ii) February 16, 2001, the Board of Directors
shall consist of twelve (12) members unless such number shall be increased or
decreased upon the affirmative vote of stockholders holding at least 75% of the
voting power of the Corporation's then outstanding capital stock entitled to
vote thereon.
B. Each director shall serve for a term expiring at the next annual meeting
of stockholders and at each annual meeting of stockholders directors shall be
elected for a term expiring at the next annual meeting of stockholders,
provided that each director shall hold office until his or her successor shall
be elected and shall qualify, subject to prior death or incapacity,
resignation, retirement, disqualification or removal from office.
C. To the extent and for so long as provided in Article 5 of the Bylaws, the
Nominating Committees, the Compensation Committee, the Audit Committee, the
Independent Committee, the Supervisory Committees and the Officer Appointment
Committee (as each such term is defined in Article 5 of the Bylaws) shall each
be constituted in accordance with, and shall be vested with such powers and
authority as are provided in, Article 5 of the Bylaws.
D. Notwithstanding anything in this Restated Certificate of Incorporation to
the contrary, the second sentence of Paragraph A, Paragraph C and this
Paragraph D of this Article SIXTH may not be altered, amended or repealed, nor
may any provision inconsistent therewith be adopted, except by the affirmative
vote of stockholders holding at least 75% of the voting power of the
Corporation's then outstanding capital stock entitled to vote thereon.
SEVENTH: No director shall be personally liable to the Corporation or any of
its stockholders for monetary damages for any breach of fiduciary duty as a
director, except for liability (i) for breach of the director's duty of loyalty
to the Corporation or its stockholders, (ii) for acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law,
(iii) pursuant to Section 174 of the GCL or (iv) for any transaction from which
the director derived an improper personal benefit. Any alteration, amendment or
repeal of this Article SEVENTH by the stockholders of the Corporation shall not
adversely affect any right or protection of a director of the Corporation
existing at the time of such alteration, amendment or repeal with respect to
acts or omissions occurring prior to such alteration, amendment or repeal.
EIGHTH: The Corporation is to have perpetual existence.
NINTH: The private property of the stockholders shall not be subject to the
payment of corporate debts to any extent whatsoever.
TENTH: A. The Bylaws may be altered, amended or repealed in whole or in
part, and new Bylaws may be adopted, (i) by the Board of Directors with the
affirmative vote of such number of directors as may be required by, and
otherwise in accordance with the procedures specified in, the Bylaws or (ii) by
the affirmative vote of stockholders required pursuant to the Bylaws and the
GCL.
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B. Notwithstanding Paragraph A of this Article TENTH, until the Article 5
Termination Date, no provision of Article 5 of the Bylaws may be altered,
amended or repealed by the stockholders, nor may any provision inconsistent
with Article 5 of the Bylaws be adopted by the stockholders, except by the
affirmative vote of stockholders holding at least 75% of the voting power of
the Corporation's then outstanding capital stock entitled to vote thereon.
C. Notwithstanding Paragraph A of this Article TENTH, for so long as Morgan
Stanley Leveraged Equity Fund II, Inc. ("MSLEF") beneficially owns (such term,
as used herein, as defined in Rule 13d-3 under the Securities Exchange Act of
1934, as such rule is in effect on the date of adoption hereof) at least the
MSLEF Threshold Amount of Shares (as defined below), no provision of the Bylaws
relating to (i) the authority and membership of the MSLEF Committee and the
Compensation Committee of the Corporation, (ii) the inclusion of the MSLEF
Director (as defined in the Bylaws) on the Independent Committee and the JSG
Supervisory Committee of the Corporation (if such committees exist) or (iii)
the nomination, removal or replacement of the MSLEF Director, may be altered,
amended or repealed by the stockholders, nor may any provision inconsistent
with any such provision of the Bylaws be adopted by the stockholders, except by
the affirmative vote of stockholders holding at least 75% of the voting power
of the Corporation's then outstanding capital stock entitled to vote thereon.
D. Notwithstanding anything in this Restated Certificate of Incorporation to
the contrary, no provision of Paragraphs B or C or this Paragraph D of this
Article TENTH may be altered, amended or repealed, nor may any provision
inconsistent therewith be adopted, except by the affirmative vote of
stockholders holding at least 75% of the voting power of the Corporation's then
outstanding capital stock entitled to vote thereon.
ELEVENTH: Any action required or permitted to be taken by the stockholders
of the Corporation may be effected solely at a duly called annual or special
meeting of stockholders of the Corporation and may not be effected by any
consent in writing by such stockholders in lieu of such a meeting.
TWELFTH: A. Special meetings of stockholders may be called by any of (i) the
Chairman of the Board of Directors, (ii) the CEO, (iii) any Vice President or
(iv) the Secretary, and shall be called by any such officer, only at the
request in writing (delivered to such officer at the executive offices of the
Corporation) of either (x) subject to Paragraph B of this Article TWELFTH, a
majority of the entire Board of Directors pursuant to a resolution adopted
thereby (which resolution shall constitute the aforementioned written request)
or (y) stockholders holding at least 25% of the voting power of the
Corporation's then outstanding capital stock entitled to vote, in either case,
as promptly as practicable following such request. Such request shall state the
purpose or purposes of the meeting and the place, date and hour of the meeting.
In the event a special meeting of stockholders is called for the purpose of
electing one or more directors, any stockholder may nominate a person or
persons (as the case may be) for election to such positions as are specified in
the Corporation's notice of the special meeting. In order for a stockholder to
make a nomination, such stockholder must provide timely notice thereof in
proper written form (as set forth in the Bylaws) to the Secretary of the
Corporation.
B. Notwithstanding Paragraph A of this Article TWELFTH, (i) until the
Article 5 Termination Date, with respect to any director other than a MSLEF
Director, and (ii) until MSLEF beneficially owns less than the MSLEF Threshold
Amount of Shares, with respect to the MSLEF Director, the Board of Directors
shall not request that a special meeting of stockholders be called, at which
meeting the removal of a director from office is to be voted on, unless the
Board of Directors has first determined, by the affirmative vote of at least
75% of the members of the entire Board of Directors, that there exists Cause
(as defined below) to remove such director from the Board of Directors.
C. Notwithstanding anything in this Restated Certificate of Incorporation to
the contrary, no provision of Paragraph B or this Paragraph C of this Article
TWELFTH may be altered, amended or repealed, nor may any provision inconsistent
therewith be adopted, except by the affirmative vote of stockholders holding at
least 75% of the voting power of the Corporation's then outstanding capital
stock entitled to vote thereon.
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THIRTEENTH: As used in this Restated Certificate of Incorporation:
(x) the term "entire Board of Directors" means the total number of
directors which the Corporation would have if there were no vacancies;
(y) the term "Cause" means a director's (i) willful and continued
failure to substantially perform his or her duties to the Corporation as a
director, (ii) willful conduct which is significantly injurious to the
Corporation, monetarily or otherwise, or (iii) conviction for, or guilty
plea to, a felony; and
(z) the term "MSLEF Threshold Amount of Shares" means 1,000,000 shares
of Common Stock, determined on a primary basis and adjusted, as
appropriate, for any stock dividend or similar distribution of capital
stock of the Corporation, stock split, reclassification, recapitalization,
stock combination or other similar change involving the Common Stock.
FOURTEENTH: The Corporation reserves the right to amend, alter or repeal any
provision contained in this Restated Certificate of Incorporation, and all
rights conferred upon stockholders hereby are granted subject to this
reservation.
IN WITNESS WHEREOF, the Corporation has caused this certificate to be signed
in its name and attested by its duly authorized officers this 18th day of
November, 1998.
JEFFERSON SMURFIT CORPORATION
/s/ Craig A. Hunt
By: _________________________________
Name: Craig A. Hunt
Title: Vice President, General
Counsel and Secretary
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Annex C
AMENDED AND RESTATED
BYLAWS
OF
SMURFIT-STONE CONTAINER CORPORATION
(hereinafter called the "Corporation")
ARTICLE 1
OFFICES
SECTION 1.01. Registered Office. The registered office of the Corporation
shall be in the City of Wilmington, County of New Castle, State of Delaware.
SECTION 1.02. Other Offices. The Corporation may also have offices at such
other places both within and without the State of Delaware as the Board of
Directors may from time to time determine.
ARTICLE 2
MEETING OF STOCKHOLDERS
SECTION 2.01. Place of Meetings. Subject to Section 2.03 hereof, meetings of
the stockholders for the election of directors or for any other purpose shall
be held at such time and place, either within or without the State of Delaware,
as shall be designated from time to time by the Board of Directors and stated
in the notice of the meeting or in a duly executed waiver of notice thereof.
SECTION 2.02. Annual Meetings. The annual meeting of stockholders shall be
held on such date and at such time as shall be designated from time to time by
the Board of Directors and stated in the notice of the meeting, at which
meeting the stockholders shall elect directors by a plurality vote, and
transact such other business as may properly be brought before the meeting.
Written notice of the annual meeting stating the place, date and hour of the
meeting shall be given to each stockholder entitled to vote at such meeting not
less than ten (10) nor more than sixty (60) days before the date of the
meeting.
SECTION 2.03. Special Meetings. Unless otherwise prescribed by applicable
law, rule or regulation or by the Restated Certificate of Incorporation as it
may be amended from time to time (the "Certificate of Incorporation"), special
meetings of stockholders ("Special Meetings") may be called by any of (i) the
Chairman of the Board of Directors (the "Chairman"), (ii) the President and
Chief Executive Officer (the "CEO"), (iii) any Vice President, or (iv) the
Secretary, and shall be called by such officer, only at the request in writing
(delivered to such officer at the executive offices of the Corporation) of (x)
subject to Section 5.03(b) hereof, a majority of the entire Board of Directors
pursuant to a resolution adopted thereby (which resolution shall constitute the
aforementioned written request) or (y) the holders of at least 25% of the
voting power of the capital stock of the Corporation issued and outstanding and
entitled to vote, in either case, as promptly as practicable following such
request. Such request shall state the purpose or purposes of the meeting and
the place, date and hour of the meeting. The Corporation shall provide written
notice of a Special Meeting, stating the place, date and hour of the meeting
and the purpose or purposes for which the meeting is called (as set forth in
the written request), not less than ten (10) nor more than sixty (60) days
before the date of the meeting to each stockholder entitled to vote at such
meeting.
In the event a Special Meeting is called for the purpose of electing one or
more directors, any stockholder may nominate a person or persons (as the case
may be) for election to such positions as are specified in the Corporation's
notice of the Special Meeting. In order for a stockholder to make a nomination,
such stockholder must provide timely notice thereof in proper written form to
the Secretary of the Corporation. To be timely, a
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stockholder's notice to the Secretary must be delivered to or received at the
principal executive offices of the Corporation not later than the close of
business on the tenth (10th) day following the day on which the notice of the
date of the Special Meeting was mailed or public disclosure of the date of the
Special Meeting was first made, whichever first occurs. To be in proper written
form, the stockholder's notice must set forth, as to each person whom the
stockholder proposes to nominate for election as a director, the name, age,
business address and residence address of the person.
No business shall be conducted at a Special Meeting except as described in
the notice of the Special Meeting, provided that, once business has been
properly brought before a Special Meeting, nothing in this Section 2.03 shall
be deemed to preclude discussion by any stockholder of any such business. If
the officer presiding at a Special Meeting determines that business was not
properly brought before the Special Meeting in accordance with the foregoing
procedures, such officer shall declare to the meeting that the business was not
properly brought before the meeting and such business shall not be transacted.
SECTION 2.04. Quorum. Except as otherwise provided by law or by the
Certificate of Incorporation, the holders of a majority of the capital stock of
the Corporation issued and outstanding and entitled to vote thereat, present in
person or represented by proxy, shall constitute a quorum at all meetings of
the stockholders for the transaction of business. If, however, such quorum
shall not be present or represented at any meeting of the stockholders, the
stockholders entitled to vote thereat, present in person or represented by
proxy, shall have the power to adjourn the meeting from time to time, without
notice other than announcement at the meeting, until a quorum shall be present
or represented. At such adjourned meeting at which a quorum shall be present or
represented, any business may be transacted which might have been transacted at
the meeting as originally noticed. If the adjournment is for more than thirty
(30) days, or if after the adjournment a new record date is fixed for the
adjourned meeting, a notice of the adjourned meeting (satisfying the
requirements of the notice described in Section 2.03 above) shall be given to
each stockholder entitled to vote at the meeting.
SECTION 2.05. Voting. Unless otherwise required by applicable law, rule or
regulation or the Certificate of Incorporation or these Amended and Restated
Bylaws, any question brought before any meeting of stockholders shall be
decided by the vote of the holders of a majority of the voting power of the
capital stock of the Corporation represented and entitled to vote thereat. Each
stockholder represented at a meeting of stockholders shall be entitled to cast
one vote for each share of the capital stock entitled to vote thereat held by
such stockholder or such other vote as is set forth in the Certificate of
Incorporation. Such votes may be cast in person or by proxy but no proxy shall
be voted on or after three years from its date, unless such proxy provides for
a longer period. The Board of Directors, in its discretion, or the officer of
the Corporation presiding at a meeting of stockholders, in his or her
discretion, may require that any votes cast at such meeting shall be cast by
written ballot, provided that all elections of directors shall be by written
ballot.
SECTION 2.06. List of Stockholders Entitled to Vote. The officer of the
Corporation who has charge of the stock ledger of the Corporation shall prepare
and make, at least ten (10) days before every meeting of stockholders, a
complete list of the stockholders entitled to vote at the meeting, arranged in
alphabetical order, and showing the address of each stockholder and the number
of shares registered in the name of each stockholder. Such list shall be open
to the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten (10) days prior to
the meeting of stockholders, either at a place within the city where the
meeting is to be held, which place shall be specified in the notice of the
meeting, or, if not so specified, at the place where the meeting is to be held.
The list shall also be produced and kept at the time and place of the meeting
of stockholders during the whole time thereof, and may be inspected by any
stockholder of the Corporation who is present.
SECTION 2.07. Stock Ledger. The stock ledger of the Corporation shall be the
only evidence as to who are the stockholders entitled to examine the stock
ledger, the list required by Section 2.06 or the books of the Corporation, or
to vote in person or by proxy at any meeting of stockholders.
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SECTION 2.08. Nomination of Directors at Annual Meetings. Subject to Article
5 hereof, only persons who are nominated in accordance with the following
procedures shall be eligible for election as directors of the Corporation at an
annual meeting, except as may be otherwise provided in the Certificate of
Incorporation with respect to the right of holders of preferred stock of the
Corporation to nominate and elect a specified number of directors in certain
circumstances. Nominations of persons for election to the Board of Directors
may be made at any annual meeting of stockholders (a) subject to Article 5
hereof, by or at the direction of the Board of Directors (or any duly
authorized committee of the Board of Directors) or (b) by any stockholder of
the Corporation (i) who is a stockholder of record on the date of the giving of
the notice provided for in this Section 2.08 and on the record date for the
determination of stockholders entitled to vote at such annual meeting and (ii)
who complies with the notice procedures set forth in this Section 2.08.
In addition to any other applicable requirements, for a nomination to be
made by a stockholder at an annual meeting, such stockholder must have given
timely notice thereof in proper written form to the Secretary of the
Corporation. To be timely, a stockholder's notice to the Secretary must be
delivered to or mailed and received at the principal executive offices of the
Corporation not less than sixty (60) days nor more than ninety (90) days prior
to the anniversary date of the immediately preceding annual meeting of
stockholders; provided, however, that in the event that the annual meeting is
called for a date that is not within thirty (30) days before or after such
anniversary date, notice by the stockholder in order to be timely must be so
received not later than the close of business on the tenth (10th) day following
the day on which notice of the date of the annual meeting was mailed or public
disclosure of the date of the annual meeting was first made, whichever first
occurs.
To be in proper written form, a stockholder's notice to the Secretary must
set forth (a) as to each person whom the stockholder proposes to nominate for
election as a director (i) the name, age, business address and residence
address of the person, (ii) the principal occupation or employment of the
person, (iii) the class or series and number of shares of capital stock of the
Corporation which are owned of record or beneficially owned (such term, as used
herein, as defined in Section 5.13 below) by the person and (iv) any other
information relating to the person that would be required to be disclosed in a
proxy statement or other filings required to be made in connection with
solicitations of proxies for election of directors pursuant to Section 14 of
the Securities Exchange Act of 1934, as amended from time to time (the
"Exchange Act"), and the rules and regulations promulgated thereunder, and (b)
as to the stockholder giving the notice (i) the name and record address of such
stockholder, (ii) the class or series and number of shares of capital stock of
the Corporation which are owned beneficially or of record by such stockholder,
(iii) a description of all arrangements or understandings between such
stockholder and each proposed nominee and any other person or persons
(including their names) pursuant to which the nomination(s) are to be made by
such stockholder, to the extent such information would be required to be
disclosed in a proxy statement or other filings required to be made in
connection with solicitations of proxies for election of directors pursuant to
Section 14 of the Exchange Act and the rules and regulations promulgated
thereunder, (iv) a representation that such stockholder intends to appear in
person or by proxy at the annual meeting to nominate the persons named in its
notice and (v) any other information relating to such stockholder that would be
required to be disclosed in a proxy statement or other filings required to be
made in connection with solicitations of proxies for election of directors
pursuant to Section 14 of the Exchange Act and the rules and regulations
promulgated thereunder. Such notice must be accompanied by a written consent of
each proposed nominee to being named as a nominee and to serve as a director if
elected.
Subject to Article 5 hereof, no person shall be eligible for election as a
director of the Corporation at an annual meeting unless nominated in accordance
with the procedures set forth in this Section 2.08. If the officer presiding at
an annual meeting of stockholders determines that a nomination was not made in
accordance with the foregoing procedures, such officer shall declare to the
meeting that the nomination was defective and such defective nomination shall
be disregarded. Nothing in this Section 2.08 shall affect the rights of
stockholders to remove and replace directors, or otherwise nominate and elect
directors, at a Special Meeting duly called for such purpose.
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SECTION 2.09. Business at Annual Meetings. No business may be transacted at
an annual meeting of stockholders, other than business that is either (a)
specified in the notice of meeting (or any supplement thereto) given by or at
the direction of the Board of Directors (or any duly authorized committee
thereof), (b) otherwise properly brought before the annual meeting by or at the
direction of the Board of Directors (or any duly authorized committee thereof)
or (c) otherwise properly brought before the annual meeting by any stockholder
of the Corporation who (i) is a stockholder of record on the date of the giving
of the notice provided for in this Section 2.09 and on the record date for the
determination of stockholders entitled to vote at such annual meeting and (ii)
complies with the notice procedures set forth in this Section 2.09.
In addition to any other applicable requirements, for business to be
properly brought before an annual meeting by a stockholder, such stockholder
must have given timely notice thereof in proper written form to the Secretary
of the Corporation. To be timely, a stockholder's notice to the Secretary must
be delivered to or mailed and received at the principal executive offices of
the Corporation not less than sixty (60) days nor more than ninety (90) days
prior to the anniversary date of the immediately preceding annual meeting of
stockholders; provided, however, that in the event that the annual meeting is
called for a date that is not within thirty (30) days before or after such
anniversary date, notice by the stockholder in order to be timely must be so
received not later than the close of business on the tenth (10th) day following
the day on which notice of the date of the annual meeting was mailed or public
disclosure of the date of the annual meeting was first made, whichever first
occurs. To be in proper written form, a stockholder's notice to the Secretary
must set forth as to each matter such stockholder proposes to bring before the
annual meeting (i) a brief description of the business desired to be brought
before the annual meeting and the reasons for conducting such business at the
annual meeting, (ii) the name and record address of such stockholder, (iii) the
class or series and number of shares of capital stock of the Corporation which
are owned beneficially or of record by such stockholder, (iv) a description of
all arrangements or understandings between such stockholder and any other
person or persons (including their names) in connection with the proposal of
such business by such stockholder and any material interest of such stockholder
in such business and (v) a representation that such stockholder intends to
appear in person or by proxy at the annual meeting to bring such business
before the meeting.
No business shall be conducted at the annual meeting of stockholders except
business brought before the annual meeting in accordance with the procedures
set forth in this Section 2.09; provided, however, that once business has been
properly brought before the annual meeting in accordance with such procedures,
nothing in this Section 2.09 shall be deemed to preclude discussion by any
stockholder of any such business. If the officer presiding at an annual meeting
of stockholders determines that business was not properly brought before the
annual meeting in accordance with the foregoing procedures, such officer shall
declare to the meeting that the business was not properly brought before the
meeting and such business shall not be transacted.
ARTICLE 3
DIRECTORS
SECTION 3.01. Number and Election of Directors. The Board of Directors shall
consist of not less than three (3) nor more than fifteen (15) members, the
exact number of which shall initially upon the adoption of these Amended and
Restated Bylaws be twelve (12) and, subject to the Certificate of Incorporation
and Section 5.02(a) hereof, shall be fixed thereafter from time to time by
resolution of the Board of Directors adopted in accordance with Section 3.05
hereof. Except as provided in Section 3.02, directors shall be elected by a
plurality of the votes cast at annual meetings of stockholders, or at a Special
Meeting duly called for such purpose, and each director so elected shall hold
office until the next annual meeting of stockholders and until his or her
successor is duly elected and qualified, or until his or her earlier death or
incapacity, resignation, retirement, disqualification or removal from office.
Any director may resign at any time upon notice to the Corporation. Directors
need not be stockholders.
SECTION 3.02. Vacancies. Subject to Article 5 hereof and the terms of any
one or more classes or series of preferred stock of the Corporation, newly
created directorships resulting from any increase in the number of
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directors and any vacancies in the Board of Directors resulting from death or
incapacity, resignation, retirement, disqualification or removal from office
may be filled only by the affirmative vote of a majority of the directors then
in office, though less than a quorum, or by a sole remaining director, or by
stockholders at a Special Meeting duly called for such purpose, and directors
so elected shall hold office until the next annual meeting of stockholders and
until their successors are duly elected and qualified, or until their earlier
death or incapacity, resignation, retirement, disqualification or removal from
office.
SECTION 3.03. Duties and Powers. The business of the Corporation shall be
managed by or under the direction of the Board of Directors which, directly or
through one or more committees thereof as provided herein, may exercise all
such powers of the Corporation and do all such lawful acts and things as are
not by statute or by the Certificate of Incorporation or by these Amended and
Restated Bylaws directed or required to be exercised or done by the
stockholders.
SECTION 3.04. Meetings. The Board of Directors may hold meetings, both
regular and special, either within or without the State of Delaware. Regular
meetings of the Board of Directors may be held without notice at such time and
at such place as may from time to time be determined by the Board of Directors.
Special meetings of the Board of Directors may be called by the Chairman, the
CEO, or any director. Notice thereof stating the place, date and hour of the
meeting and the matters to be acted on at such meeting shall be given to each
director either by mail not less than forty-eight (48) hours before the date of
the meeting (and, if such notice is given by mail within seven (7) days prior
to the date of the meeting, concurrently by telephone, telegram, facsimile,
electronic mail, telex or cable), by telephone, telegram, facsimile, telex or
cable on twenty-four (24) hours' notice, or on such shorter notice as the
person or persons calling such meeting may deem necessary or appropriate in the
circumstances.
SECTION 3.05. Quorum; Actions by Board. Except as may be otherwise
specifically provided by applicable law, the Certificate of Incorporation or
these Amended and Restated Bylaws, at all meetings of the Board of Directors, a
majority of the entire Board of Directors shall constitute a quorum for the
transaction of business and the act of a majority of the directors present at
any meeting at which there is a quorum shall be the act of the Board of
Directors. If a quorum shall not be present at any meeting of the Board of
Directors, the directors present thereat may adjourn the meeting from time to
time, without notice other than announcement at the meeting, until a quorum
shall be present.
SECTION 3.06. Action by Written Consent. Unless otherwise provided by the
Certificate of Incorporation or these Amended and Restated Bylaws, any action
required or permitted to be taken at any meeting of the Board of Directors or
of any committee thereof may be taken without a meeting, if all the members of
the Board of Directors or any committee thereof, as the case may be, consent
thereto in writing, and the writing or writings are filed with the minutes of
proceedings of the Board of Directors or such committee.
SECTION 3.07. Meetings by Means of Conference Telephone. Unless otherwise
provided by the Certificate of Incorporation or these Amended and Restated
Bylaws, members of the Board of Directors, or any committee thereof, may
participate in a meeting of the Board of Directors or such committee by means
of conference telephone or similar communications equipment by means of which
all persons participating in the meeting can hear each other, and participation
in a meeting pursuant to this Section 3.07 shall constitute presence in person
at such meeting.
SECTION 3.08. Committees. Subject to Article 5 hereof, the Board of
Directors may, by resolution, designate one or more committees, each committee
to consist of one or more of the directors of the Corporation. Except as
otherwise provided in these Amended and Restated Bylaws, any committee, to the
extent allowed by applicable law and provided in the resolution establishing
such committee, shall have and may exercise all the powers and authority of the
Board of Directors in the management of the business and affairs of the
Corporation. Each committee shall keep regular minutes and report to the Board
of Directors when required.
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SECTION 3.09. Compensation. The directors may be paid their expenses, if
any, of attendance at each meeting of the Board of Directors and may be paid a
fixed sum for attendance at each meeting of the Board of Directors and/or a
stated salary as director. No such payment shall preclude any director from
serving the Corporation in any other capacity and receiving compensation
therefor. Members of special or standing committees may be allowed like
compensation for attending committee meetings.
SECTION 3.10. Interested Directors. No contract or transaction between the
Corporation and one or more of its directors or officers, or between the
Corporation and any other corporation, partnership, association or other
organization in which one or more of its directors or officers are directors or
officers, or have a financial interest, shall be void or voidable solely for
this reason, or solely because the director or officer is present at or
participates in the meeting of the Board of Directors or committee thereof
which authorizes the contract or transaction, or solely because his, her or
their votes are counted for such purpose if (i) the material facts as to his,
her or their relationship or interest and as to the contract or transaction are
disclosed or are known to the Board of Directors or the committee, and the
Board of Directors or committee in good faith authorizes the contract or
transaction by the affirmative votes of a majority of the disinterested
directors, even though the disinterested directors be less than a quorum; or
(ii) the material facts as to his, her or their relationship or interest and as
to the contract or transaction are disclosed or are known to the stockholders
entitled to vote thereon, and the contract or transaction is specifically
approved in good faith by vote of the stockholders; or (iii) the contract or
transaction is fair as to the Corporation as of the time it is authorized,
approved or ratified by the Board of Directors, a committee thereof or the
stockholders. Interested directors may be counted in determining the presence
of a quorum at a meeting of the Board of Directors or of a committee which
authorizes the contract or transaction.
SECTION 3.11. Compensation Committee. There is hereby established a
Compensation Committee. Until the Article 5 Termination Date (as defined in
Section 5.01(a) below), the Compensation Committee shall be constituted in
accordance with Section 5.05 hereof. After the Article 5 Termination Date, but
subject to Section 5.01(b) hereof, the Compensation Committee shall consist of
such number of directors as from time to time shall be designated by the Board
of Directors, who shall serve on such committee for the term for which each
member is designated or until such member's successor is duly elected and
qualified, or until such member's earlier death or incapacity, resignation,
retirement, disqualification or removal from office. None of the members of the
Compensation Committee shall be an officer or an employee of the Corporation or
of any subsidiary of the Corporation. The Compensation Committee shall have the
duty to review at least once each fiscal year and to establish compensation
(including fringe benefits) for all Executive Officers (such term, as used in
these Amended and Restated Bylaws, shall have the meaning of the term "officer"
as defined in Rule 16a-1 under the Exchange Act) of the Corporation and its
subsidiaries. The Compensation Committee shall also have the exclusive
authority to approve the adoption of, amendment to and make all decisions with
respect to, all bonus, incentive and other employee benefit plans (including,
without limitation, equity-based or equity-related plans) and shall make all
decisions with respect to grants or awards thereunder.
ARTICLE 4
OFFICERS
SECTION 4.01. General. Subject to Article 5 hereof, the officers of the
Corporation shall be chosen by the Board of Directors and there shall be a
Chairman (who must be a director), a CEO, an Executive Vice President-Deputy
Chief Executive (the "EVP"), a Chief Financial Officer (the "CFO"), a Secretary
and a Treasurer. Subject to Article 5 hereof, the Board of Directors in its
discretion may also choose one or more Vice Presidents, Assistant
Secretaries/Assistant Treasurers and other officers. Any number of offices may
be held by the same person, unless otherwise prohibited by applicable law, rule
or regulation, the Certificate of Incorporation or these Amended and Restated
Bylaws. The officers of the Corporation need not be stockholders of the
Corporation nor, except in the case of the Chairman and subject to Article 5
hereof, need such officers be directors of the Corporation.
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SECTION 4.02. Election. Subject to Article 5 hereof, the Board of Directors
at its meeting held after each annual meeting of stockholders shall elect the
officers of the Corporation who shall hold their offices for such terms and
shall exercise such powers and perform such duties as shall be determined from
time to time by the Board of Directors; and all officers of the Corporation
shall hold office until their successors are chosen and qualified, or until
their earlier death or incapacity, resignation, retirement, disqualification or
removal from office. Subject to Article 5 hereof, any officer elected by the
Board of Directors may be removed at any time by the affirmative vote of a
majority of the directors present at any meeting of the Board of Directors at
which there is a quorum. Subject to Article 5 hereof, any vacancy occurring in
any office of the Corporation shall be filled by the Board of Directors. The
compensation of all officers of the Corporation shall be determined as set
forth in Section 3.11 hereof.
SECTION 4.03. Voting Securities Owned by the Corporation. Subject to the
control of the Board of Directors, powers of attorney, proxies, waivers of
notice of meeting, consents and other instruments relating to securities owned
by the Corporation may be executed in the name of and on behalf of the
Corporation by the CEO, the EVP, the CFO or any Vice President and any such
officer may, in the name of and on behalf of the Corporation, take all such
action as any such officer may deem advisable to vote in person or by proxy at
any meeting of security holders of any corporation in which the Corporation may
own securities and at any such meeting shall possess and may exercise any and
all rights and powers incident to the ownership of such securities and which,
as the owner thereof, the Corporation might have exercised and possessed if
present. The Board of Directors may, by resolution, from time to time confer
like powers upon any other person or persons.
SECTION 4.04. Chairman of the Board of Directors. The Chairman shall serve
as the non-executive chairman of the Board of Directors and shall be a member
of the Board of Directors. The Chairman shall preside at all meetings of the
stockholders and of the Board of Directors at which the Chairman is present.
Subject to Article 5 hereof and subject to the control of the Board of
Directors, the Chairman, together with the CEO, shall have general supervisory
responsibilities with respect to the business affairs and officers of the
Corporation. Subject to Article 5 hereof, the Chairman shall also perform such
other duties and may exercise such other powers as from time to time may be
assigned to him or her by these Amended and Restated Bylaws or by the Board of
Directors.
SECTION 4.05. Chief Executive Officer. Subject to Article 5 hereof and
subject to the control of the Board of Directors, the CEO, together with the
Chairman, shall have general supervisory responsibilities with respect to the
business affairs and officers of the Corporation. The CEO shall execute all
bonds, mortgages, contracts and other instruments of the Corporation requiring
a seal, under the seal of the Corporation, except where required or permitted
by applicable law, rule or regulation to be otherwise signed and executed and
except that the other officers of the Corporation may sign and execute
documents when so authorized by these Amended and Restated Bylaws, the Board of
Directors (subject to Article 5 hereof) or the CEO. In the absence or
disability of the Chairman, the CEO shall preside at all meetings of the
stockholders and of the Board of Directors. Subject to Article 5 hereof, the
CEO shall also perform such other duties and may exercise such other powers as
from time to time may be assigned to him or her by these Amended and Restated
Bylaws or by the Board of Directors.
SECTION 4.06. Executive Vice President-Deputy Chief Executive. The EVP, in
his or her capacity as chairman of the Cost Reduction/Divestiture Committee (as
described in Section 5.10(b) below), shall be the officer principally
responsible for (i) the development of the Corporation's asset divestiture
program and cost reduction program and (ii) implementation of the asset
divestiture program and, in consultation with the CEO, implementation of the
cost reduction program, in each case subject to the control of the Board of
Directors. In addition to the normal responsibilities of the EVP, the EVP shall
also have the operating responsibilities of the CEO (in the absence of the
CEO), and such other operating responsibilities as may be determined by the
Board of Directors not inconsistent with the responsibilities of the CEO as
provided herein. The EVP shall have the authority of a Vice President.
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SECTION 4.07. Chief Financial Officer. The CFO shall exercise general
supervision over the finances of the Corporation and shall supervise and be
responsible for all matters pertaining to the raising of debt and equity
capital and cash management functions of the Corporation. The CFO shall render
periodically such balance sheets and other financial statements or reports
relating to the business of the Corporation as may be required by the Board of
Directors, the Chairman, the CEO or any other authorized officer of the
Corporation. The CFO shall be a Vice President and shall report to the CEO.
SECTION 4.08. Vice Presidents. Subject to Article 5 hereof, at the request
of the CEO or in the absence of the CEO or in the event of the inability or
refusal of the CEO to act, the Vice President or the Vice Presidents if there
is more than one (first the EVP, second the CFO and then in the order
designated by the Board of Directors) shall perform the duties of the CEO, and
when so acting, shall have all the powers of and be subject to all the
restrictions upon the CEO. Subject to Article 5 hereof, each Vice President
shall perform such other duties and have such other powers as the Board of
Directors from time to time may prescribe. Subject to Article 5 hereof, if
there be no Vice President, the Board of Directors shall designate the officer
of the Corporation who, in the absence of the CEO or in the event of the
inability or refusal of the CEO to act, shall perform the duties of the CEO,
and when so acting, shall have all the powers of and be subject to all the
restrictions upon the CEO.
SECTION 4.09. Secretary. The Secretary shall attend all meetings of the
Board of Directors and all meetings of stockholders and record all the
proceedings thereat in a book or books to be kept for that purpose; the
Secretary shall also perform like duties for the standing committees of the
Board of Directors when required. The Secretary shall give, or cause to be
given, notice of all meetings of the stockholders and special meetings of the
Board of Directors, and, subject to Article 5 hereof, shall perform such other
duties as may be prescribed by the Board of Directors or the CEO, under whose
supervision he or she shall be. If the Secretary shall be unable or shall
refuse to cause to be given notice of all meetings of the stockholders and
special meetings of the Board of Directors, and if there be no Assistant
Secretary then, subject to Article 5 hereof, either the Board of Directors or
the CEO may choose another officer to cause such notice to be given. The
Secretary shall have custody of the seal of the Corporation and the Secretary
or any Assistant Secretary, if there be one, shall have authority to affix the
same to any instrument requiring it and when so affixed, it may be attested by
the signature of the Secretary or by the signature of any such Assistant
Secretary. The Board of Directors may give general authority to any other
officer to affix the seal of the Corporation and to attest the affixing by his
signature. The Secretary shall see that all books, reports, statements,
certificates and other documents and records required by law to be kept or
filed are properly kept or filed, as the case may be.
SECTION 4.10. Treasurer. The Treasurer shall have custody of the corporate
funds and securities and shall keep full and accurate accounts of receipts and
disbursements in books belonging to the Corporation and shall deposit all
moneys and other valuable effects in the name and to the credit of the
Corporation in such depositories as may be designated by the Board of
Directors. The Treasurer shall disburse the funds of the Corporation as may be
ordered by the Board of Directors, taking proper vouchers for such
disbursements, and shall render to the CEO and the Board of Directors, at its
regular meetings, or when the Board of Directors so requires, an account of all
his or her transactions as Treasurer and of the financial condition of the
Corporation. If required by the Board of Directors, the Treasurer shall give
the Corporation a bond in such sum and with such surety or sureties as shall be
satisfactory to the Board of Directors for the faithful performance of the
duties of his or her office and for the restoration to the Corporation, in case
of his or her death or incapacity, resignation, retirement, disqualification or
removal from office, of all books, papers, vouchers, money and other property
of whatever kind in his or her possession or under his or her control belonging
to the Corporation.
SECTION 4.11. Assistant Secretaries. Subject to Article 5 hereof and except
as may be otherwise provided in these Amended and Restated Bylaws, Assistant
Secretaries, if there be any, shall perform such duties and have such powers as
from time to time may be assigned to them by the Board of Directors, the CEO,
any Vice President, if there be one, or the Secretary and in the absence of the
Secretary or in the event of his or her disability or refusal to act, shall
perform the duties of the Secretary, and when so acting, shall have all the
powers of and be subject to all the restrictions upon the Secretary.
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SECTION 4.12. Assistant Treasurers. Subject to Article 5 hereof, assistant
Treasurers, if there be any, shall perform such duties and have such powers as
from time to time may be assigned to them by the Board of Directors, the CEO,
any Vice President, if there be one, or the Treasurer, and in the absence of
the Treasurer or in the event of his or her disability or refusal to act, shall
perform the duties of the Treasurer, and when so acting, shall have all the
powers of and be subject to all the restrictions upon the Treasurer. If
required by the Board of Directors, an Assistant Treasurer shall give the
Corporation a bond in such sum and with such surety or sureties as shall be
satisfactory to the Board of Directors for the faithful performance of the
duties of his or her office and for the restoration to the Corporation, in case
of his or her death or incapacity, resignation, retirement, disqualification or
removal from office, of all books, papers, vouchers, money and other property
of whatever kind in his or her possession or under his or her control belonging
to the Corporation.
SECTION 4.13. Other Officers. Subject to Article 5 hereof, such other
officers as the Board of Directors may choose shall perform such duties and
have such powers as from time to time may be assigned to them by the Board of
Directors. Subject to Article 5, the Board of Directors may delegate to any
other officer of the Corporation the power to choose such other officers and to
prescribe their respective duties and powers.
ARTICLE 5
CERTAIN PROVISIONS CONCERNING THE BOARD OF DIRECTORS AND OFFICERS
SECTION 5.01. Effectiveness and Interpretation. (a) Except as provided in
paragraph (b) below, this Article 5 shall be in effect from the date of
adoption of these Amended and Restated Bylaws until the earlier of (i) the date
upon which Mr. Roger W. Stone ("Mr. Stone") ceases to be CEO or (ii) February
16, 2001, at which time (the "Article 5 Termination Date"), subject to
paragraph (b) below, the terms and provisions of this Article 5 shall,
immediately and automatically, terminate and no longer have any force or
effect. Subject to paragraph (b) below, upon the termination of Article 5
pursuant to this Section 5.01, the provisions of these Amended and Restated
Bylaws other than Article 5 shall be the Bylaws of the Corporation until
amended, modified or repealed in accordance with the terms hereof.
(b) Notwithstanding paragraph (a) above, (i) the terms of Section 5.11(f)
shall remain in effect until the annual meeting of stockholders referred to
therein, (ii) the terms of Sections 5.07(b), 5.07(d) and 5.08 shall remain in
effect until the Fifth Anniversary (as defined in Section 5.07(b) below), and
(iii) so long as MSLEF beneficially owns at least the MSLEF Threshold Amount of
Shares (as defined in Section 5.13 below), (A) the MSLEF Committee and the
MSLEF Director (as defined in Section 5.13 below) shall each continue to
exercise all power and authority delegated to them, respectively, pursuant to
these Amended and Restated Bylaws (including, but not limited to, pursuant to
Section 5.02 (with respect to the nomination or replacement of the MSLEF
Director), Section 5.03 (with respect to the removal of the MSLEF Director),
Section 5.05, Section 5.07 (unless there is no Independent Committee), and
Section 5.08 (unless there is no JSG Supervisory Committee)) and (B) the
proviso contained in Section 5.12(b) shall remain in effect.
(c) In the event of any conflict between the provisions of this Article 5
and any other provisions of these Amended and Restated Bylaws or, to the extent
that any of the provisions of this Article 5 overlap with and/or are more
specific or more restrictive than any other provisions contained in these
Amended and Restated Bylaws, the provisions of this Article 5 shall govern.
SECTION 5.02. Representation on the Board of Directors. (a) The total
authorized number of directors constituting the entire Board of Directors shall
be twelve (12) and such number shall not be increased or decreased without the
affirmative vote of the holders of at least 75% of the voting power of the
Corporation's then outstanding capital stock entitled to vote thereon.
(b) There are hereby established the following three committees for
designating persons as the nominees of the Board of Directors for election as
directors and for filling director vacancies, as provided below: the
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Stone Committee, the JSC Committee and the MSLEF Committee (each, a "Nominating
Committee"). The three Nominating Committees shall be comprised as follows: (i)
the Stone Committee shall be comprised exclusively of each of the Stone
Directors (as defined in Section 5.13 below), (ii) the JSC Committee shall be
comprised exclusively of each of the JSC Directors (as defined in Section 5.13
below) and (iii) the MSLEF Committee shall be comprised exclusively of the
MSLEF Director. Except as otherwise provided in this Article 5, the Nominating
Committees shall exercise all power and authority of the Board of Directors
with respect to designating persons as the nominees of the Board of Directors
for election to, or appointing persons to fill vacancies on, the Board of
Directors.
(c) Prior to each meeting of the stockholders at which directors are to be
elected, (i) the Stone Committee shall designate four persons as nominees for
election as directors and, in addition, one person as nominee both for election
as a director and for appointment as CEO (subject to Section 5.11(a) hereof),
(ii) the JSC Committee shall designate four persons as nominees for election as
directors and, in addition, one person as nominee both for election as a
director and for appointment as Chairman (subject to Sections 5.11(a) hereof)
and one person as nominee both for election as a director and for appointment
as EVP (subject to Sections 5.11(a) hereof) and (iii) subject to paragraph (g)
below, the MSLEF Committee shall designate one person as nominee for election
as a director.
(d) At each meeting of the stockholders at which directors are to be
elected, the officer of the Corporation presiding at such meeting shall
nominate, on behalf of the Nominating Committees, as directors the persons
designated for nomination by the Nominating Committees in accordance with
paragraph (c) above, and the nominations so made shall be deemed for purposes
of Section 2.08 hereof to be made at the direction of the Nominating
Committees. At any meeting of stockholders at which directors are to be
elected, neither the Board of Directors nor any committee thereof shall
nominate or direct there to be nominated as a director any person not
designated by one of the Nominating Committees.
(e) If any director (other than an Unaffiliated Director (as defined in
Section 5.13 below)) is removed from the Board of Directors, resigns, retires,
dies or otherwise cannot continue to serve as a member of the Board of
Directors, and such director is:
(i) a Stone Director, then the Stone Committee shall have the exclusive
authority to appoint a person to fill such vacancy;
(ii) a JSC Director, then the JSC Committee shall have the exclusive
authority to appoint a person to fill such vacancy; provided that if (x)
such JSC Director is also the Chairman or the EVP and (y) Jefferson Smurfit
Group plc ("JSG") and its subsidiaries beneficially own less than 15% of
the then outstanding shares of Common Stock of the Corporation, then such
vacancy shall not be filled by the JSC Committee but shall instead only be
filled by vote of a majority of the entire Board of Directors, in which
case such newly appointed director shall be considered an Unaffiliated
Director; or
(iii) a MSLEF Director, then a majority of the entire Board of Directors
shall have the exclusive authority to appoint a person to fill such
vacancy, in which case such newly appointed director shall be considered an
Unaffiliated Director, provided that if (A) a MSLEF Director tenders his or
her resignation from the Board of Directors effective as of a future date,
(B) prior to and in contemplation of such future date the MSLEF Committee
designates a person to replace such resigning MSLEF Director, and (C) at
such future date MSLEF beneficially owns at least the MSLEF Threshold
Amount of Shares, then such person so designated by the MSLEF Committee
shall be appointed to the Board of Directors effective as of such future
date (to fill the vacancy left by the resigning MSLEF Director) and such
successor shall be considered as the MSLEF Director.
(f) If an Unaffiliated Director is removed from the Board of Directors or
resigns, retires, dies or otherwise cannot continue to serve as a member of the
Board of Directors, then a majority of the entire Board of Directors shall have
the exclusive authority to appoint a person to fill such vacancy, and such
newly appointed director shall be considered an Unaffiliated Director.
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(g) Notwithstanding anything to the contrary contained herein, if at any
time Morgan Stanley Leveraged Equity Fund II, Inc. ("MSLEF") beneficially owns
less than the MSLEF Threshold Amount of Shares (i) from and after such time,
the director serving as the MSLEF Director shall no longer be considered as the
MSLEF Director and shall instead be considered as an Unaffiliated Director,
(ii) the MSLEF Committee shall be immediately disbanded, (iii) all powers and
authority theretofore vested in the MSLEF Committee to designate a person as
the nominee of the Board of Directors for election to, and to fill vacancies
on, the Board of Directors pursuant to this Article 5, shall revert immediately
to, and be exercised exclusively by, a majority of the members of the entire
Board of Directors and (iv) any director nominated or appointed by the Board of
Directors pursuant to this paragraph (g) shall be considered an Unaffiliated
Director and there shall no longer be any director designated as a MSLEF
Director on the Board of Directors.
(h) The Stone Committee shall use its best efforts to ensure that at all
times at least two of its nominees or appointees to the Board of Directors are
Independent Directors (as defined in Section 5.13 below), and the JSC Committee
shall use its best efforts to ensure that at all times at least two of its
nominees or appointees to the Board of Directors are Independent Directors.
SECTION 5.03. Retirement/Removal of Directors. (a) Each director shall be
required to retire no later than, and shall not be qualified for re-election as
of or after, the date of the first annual meeting of stockholders to be held
following his or her 72nd birthday.
(b) The Board of Directors shall not request that a Special Meeting be
called, at which meeting the removal of a director from office is to be voted
on, unless the Board of Directors has first determined, by the affirmative vote
of at least 75% of the members of the entire Board of Directors, that there
exists Cause (as defined in Section 5.13) to remove such director from the
Board of Directors, provided that this Section 5.03(b) shall not apply to the
calling of a Special Meeting to remove the MSLEF Director at any time after
MSLEF beneficially owns less than the MSLEF Threshold Amount of Shares.
SECTION 5.04. Actions by the Board. In addition to any other actions of the
Board of Directors which require the approval of at least 75% of the members of
the entire Board of Directors pursuant to these Amended and Restated Bylaws,
the Board of Directors shall not authorize or approve any of the following
actions without the affirmative vote of at least 75% of the members of the
entire Board of Directors:
(i) any recommendation to the stockholders to change the number of
directors constituting the entire Board of Directors;
(ii) subject to Section 5.11(a) hereof, any change in the tenure of Mr.
Stone as CEO as provided for in Section 5.11(f);
(iii) any change in the title or any material diminution in the
responsibilities of the Chairman, the CEO or the EVP;
(iv) any stock repurchase that would result in the aggregate beneficial
ownership by JSG and its subsidiaries of capital stock of the Corporation
representing more than 40% of the voting power represented by all
outstanding capital stock of the Corporation (or, if such ownership is
already more than 40%, increasing such beneficial ownership); and
(v) other than pursuant to this Article 5, any change in the scope or
composition of any of the committees of the Board of Directors (including
any change of the chairman of the Compensation Committee) or the two
management committees (including any change of the chairman of the Cost
Reduction/Divestiture Committee (as defined in Section 5.10 below))
described in Section 5.10 hereof.
SECTION 5.05. Compensation Committee. The Compensation Committee (as
described in Section 3.11 hereof) shall be comprised exclusively of (i) one
Independent Director designated by the Stone Committee, (ii) one Independent
Director designated by the JSC Committee and (iii) one director, who shall be
chairman of the committee, designated by the MSLEF Committee, provided that if
there is no MSLEF Committee pursuant to Section 5.02(g) hereof or if the MSLEF
Committee, by resolution, permanently waives its right to designate a
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director to serve on the Compensation Committee, the Compensation Committee
shall include, in lieu of the director specified in clause (iii) above, a third
director designated by a majority of the members of the entire Board of
Directors and shall be chaired by one of the directors of the committee
designated by at least 75% of the members of the entire Board of Directors.
SECTION 5.06. Audit Committee. (a) There is hereby established an Audit
Committee of the Board of Directors which shall be comprised exclusively of
each of the Independent Directors. The Audit Committee shall have the following
powers and authority to: (i) employ independent public accountants to audit the
books of account, accounting procedures and financial statements of the
Corporation and to perform such other duties from time to time as the Audit
Committee may prescribe, (ii) receive the reports and comments of the
Corporation's internal auditors and of the independent public accountants
employed by the committee and to take such action with respect thereto as may
seem appropriate, (iii) request the Corporation's consolidated subsidiaries and
affiliated companies to employ independent public accountants to audit their
respective books of account, accounting procedures, and financial statements,
(iv) request the independent public accountants to furnish to the Compensation
Committee the certifications required under any present or future stock option,
incentive compensation or employee benefit plan of the Corporation, (v) review
the adequacy of internal financial controls, (vi) approve the accounting
principles employed in financial reporting, (vii) approve the appointment or
removal of the Corporation's general auditor, and (viii) review the accounting
principles employed in financial reporting.
SECTION 5.07. Independent Committee. (a) There is hereby established an
Independent Committee of the Board of Directors which shall be comprised
exclusively of (i) two Independent Directors designated by the Stone Committee,
(ii) two Independent Directors designated by the JSC Committee and (iii) the
MSLEF Director, provided that if there is no MSLEF Director, the Independent
Committee shall be comprised of only four directors.
(b) From the Effective Time (as defined in the Merger Agreement (as defined
in Section 5.13 below)), until the date which is the fifth anniversary (the
"Fifth Anniversary") of the Effective Time, the Board of Directors shall not
authorize or approve any of the following actions unless such actions shall
first have been recommended by at least a majority of the members of the entire
Independent Committee: any commercial or other transactions (including, without
limitation, any squeeze-out of other stockholders effected by merger, reverse
stock split or otherwise) and agreements between the Corporation and its
subsidiaries, on the one hand, and JSG and its subsidiaries (other than the
Corporation and its subsidiaries), on the other hand, other than (x)
transactions pursuant to the current terms of agreements currently in effect on
the date of the Merger Agreement or entered into in connection with the Merger
Agreement, or replacement agreements (so long as the terms of such replacement
agreements are not materially less favorable to the Corporation), (y) any
individual sale of assets involving a net book value or purchase price of less
than $500,000 (provided that the aggregate amount of all such sales within any
12-month period shall not exceed $5,000,000), or (z) product sales in the
ordinary course of business effected on arm's length equivalent terms and not
otherwise requiring Board of Directors approval.
(c) The Independent Committee shall also have the exclusive authority to
make such decisions and to take such actions as delegated to the Independent
Committee pursuant to Section 5.09 hereof.
(d) From the Article 5 Termination Date until the Fifth Anniversary, the
Independent Committee shall consist exclusively of Independent Directors
designated by not less than a majority of the members of the entire Board of
Directors, provided that, solely for purposes of this paragraph (d), the MSLEF
Director, if any, shall be considered an Independent Director so long as such
MSLEF Director is not an officer or employee of the Corporation or a director,
officer or employee of any beneficial owner of 15% or more of the capital stock
of the Corporation.
SECTION 5.08. Supervisory Committees. There are hereby established two
committees of the Board of Directors to ensure enforcement of the Standstill
Agreement (as defined in Section 5.13 below): the JSG
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Supervisory Committee and the MSLEF Supervisory Committee (together, the
"Supervisory Committees"). The JSG Supervisory Committee shall be comprised
exclusively of the MSLEF Director and each director who is both Independent (as
defined in Section 5.13 below) with respect to JSG and not a JSC Director. The
JSG Supervisory Committee shall have the authority and responsibility for
enforcing against JSG the Standstill Agreement. The MSLEF Supervisory Committee
shall be comprised exclusively of each director, other than the MSLEF Director
(if any), who is Independent with respect to MSLEF. The MSLEF Supervisory
Committee shall have the authority and responsibility for enforcing against
MSLEF the Standstill Agreement.
SECTION 5.09. Officer Appointment Committee. (a) There is hereby established
an Officer Appointment Committee of the Board of Directors which, subject to
paragraph (b) below, shall have the exclusive authority to appoint or terminate
the employment of Executive Officers of the Corporation other than the CEO, EVP
and the CFO, including the creation of additional Executive Officer positions.
The Officer Appointment Committee shall also have the authority set forth in
Section 5.10(c) below. The Officer Appointment Committee shall be comprised
exclusively of the Chairman and, if and for so long as the CEO is a director,
the CEO. The Officer Appointment Committee shall exercise its authority only in
accordance with the recommendations of the CEO, subject to the unanimous
approval of the Officer Appointment Committee.
(b) If any disagreement arises between the Officer Appointment Committee and
the CEO with respect to any decision of the Officer Appointment Committee, the
Independent Committee (instead of the Officer Appointment Committee) shall have
exclusive authority with respect to the subject of such disagreement (i.e.
whether or not to appoint or terminate the employment of the person in
question, to create the new Executive Officer position in question or designate
the officer in question to the Management Operating Committee, as the case may
be).
SECTION 5.10. Management Committees. (a) There are hereby established two
management committees: the Cost Reduction/Divestiture Committee and the
Management Operating Committee. These committees shall report to the Board of
Directors and shall not be considered committees of the Board of Directors.
(b) The Cost Reduction/Divestiture Committee shall have responsibility for
the development and implementation, subject to approval by the Board of
Directors, of a plan that is designed to (i) achieve asset divestitures by the
Corporation, over a period of time to be determined by such committee and (ii)
develop a program of cost reductions and other synergies. The Cost
Reduction/Divestiture Committee shall be comprised of the Chairman, the CEO,
the EVP (who shall be chairman of the Committee) and the CFO.
(c) The Management Operating Committee shall be responsible for setting and
implementing, subject to approval by the Board of Directors, policies and
objectives of the Corporation and reviewing performance and the achievement of
such policies and objectives. The Management Operating Committee shall be
comprised of the Chairman, the CEO, the EVP, the CFO and certain other officers
designated by the CEO, subject to review and approval by the Officer
Appointment Committee (subject to Section 5.09). There shall be no chairman of
the Management Operating Committee.
SECTION 5.11. Officers. (a) The termination of employment of the Chairman
(in his or her capacity as an officer), the CEO or the EVP shall only be for
Cause as determined by at least 75% of the members of the entire Board of
Directors.
(b) If the Chairman (in his or her capacity as an officer) or the EVP is
removed from office in accordance with paragraph (a) above, resigns, retires,
dies or otherwise cannot continue to serve as an officer of the Corporation,
then (i) in the case of the Chairman, the JSC Committee shall appoint one of
the directors to serve as Chairman and (ii) in the case of the EVP, the JSC
Committee shall appoint a person to serve as EVP.
(c) Termination of the employment or any material diminution in the
responsibilities of the CFO shall require the approval of at least a majority
of the members of the entire Board of Directors. The CFO shall report to the
CEO.
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(d) The CEO shall be the officer principally responsible for the day-to-day
operations of the Corporation and shall report directly to the Board of
Directors.
(e) The Chairman and the CEO together shall have general supervisory
responsibilities with respect to the business affairs and officers of the
Corporation.
(f) Notwithstanding anything to the contrary contained herein but subject to
earlier termination pursuant to paragraph (a) above and subject to Section
5.04(ii) hereof, the term of office of Mr. Stone as CEO shall expire upon the
date of the first annual meeting of stockholders occurring after February 16,
2001.
SECTION 5.12. Amendment. Article 5 of these Amended and Restated Bylaws may
not be altered, amended or repealed, nor may any provision inconsistent with
Article 5 be adopted except by:
(a) the Board of Directors, with the approval of at least 75% of the members
of the entire Board of Directors, provided that, for so long as MSLEF owns not
less than the MSLEF Threshold Amount of Shares, the unanimous approval of each
of the members of the entire Board of Directors shall be required for the Board
of Directors to amend any provisions of these Amended and Restated Bylaws
relating to (i) the authority and membership of the MSLEF Committee and the
Compensation Committee, (ii) the inclusion of the MSLEF Director on the
Independent Committee and the JSG Supervisory Committee (if such committees
exist), (iii) the nomination, removal or replacement of the MSLEF Director or
(iv) this proviso of this paragraph (a); or
(b) the stockholders, with the affirmative vote of the holders of at least
75% of the voting power of the Corporation's then outstanding capital stock
entitled to vote thereon provided that, notwithstanding the occurrence of the
Article 5 Termination Date, for so long as MSLEF owns not less than the MSLEF
Threshold Amount of Shares, the affirmative vote of the holders of at least 75%
of the voting power of the Corporation's then outstanding capital stock
entitled to vote thereon shall be required for the stockholders to amend any
provisions of these Amended and Restated Bylaws relating to (i) the authority
and membership of the MSLEF Committee and the Compensation Committee, (ii) the
inclusion of the MSLEF Director on the Independent Committee and the JSG
Supervisory Committee (if such committees exist), (iii) the nomination, removal
or replacement of the MSLEF Director or (iv) this proviso of this paragraph
(b).
SECTION 5.13. Certain Definitions. The following terms as used in these
Amended and Restated Bylaws shall have the following meanings:
"beneficially owns" (or any similar phrase) shall have the meaning set
forth in Rule 13d-3 under the Securities Exchange Act of 1934, as such rule
was in effect on May 10, 1998. An entity shall not be deemed to
beneficially own securities held in a pension trust or non-profit
foundation or trust controlled by such entity.
"Cause" means an officer's or director's (i) willful and continued
failure to substantially perform his or her duties to the Corporation in
accordance with his or her established position at the Corporation, (ii)
willful conduct which is significantly injurious to the Corporation,
monetarily or otherwise or (iii) conviction for, or guilty plea to, a
felony.
"Independent" means, with respect to any director or prospective
director and with respect to any corporation, an individual who, in
accordance with Rule 303.00 of the New York Stock Exchange (the "NYSE"), as
such rule or any successor rule may be amended from time to time, would be
eligible for membership on an Audit Committee of such corporation if it
were listed on the NYSE and who is not (i) an officer or employee of, or
consultant or professional advisor (or employee, officer or partner of an
entity that is such) to the corporation or any of its subsidiaries, (ii) a
beneficial owner of more than 15% of the outstanding shares of common stock
of the corporation or (iii) an officer or employee of, or consultant or
professional advisor (or employee, officer or partner of an entity that is
such) to, any such beneficial owner.
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"Independent Director" means, with respect to any director or
prospective director of the Corporation, an individual who is Independent
with respect to the Corporation, provided that any director of the
Corporation who was serving as a director of the Corporation on May 10,
1998 and was considered an independent director of the Corporation pursuant
to the former Bylaws and policies of the Corporation at such time, shall be
considered an Independent Director so long as such director continues to
satisfy the requirements of such former Bylaws and policies.
"JSC Directors" means (i) each of the four directors initially
designated as such by the Board of Directors (effective as of the Effective
Time), (ii) the Chairman and the EVP, each as of the Effective Time and
(iii) each other director nominated or appointed by the JSC Committee in
accordance with this Article 5.
"Merger Agreement" means the Merger Agreement by and among Jefferson
Smurfit Corporation, JSC Acquisition Corporation and Stone Container
Corporation, dated May 10, 1998, as amended on October 2, 1998 and as it
may be further amended from time to time.
"MSLEF Director" means, subject to Section 5.02(g) hereof, (i) the
director initially designated as such by the Board of Directors (effective
as of the Effective Time), (ii) each other director nominated or appointed
by the MSLEF Committee in accordance with this Article 5 and (iii) if there
is then otherwise no MSLEF Director, no more than one director designated
as such by the affirmative vote of the holders of at least a majority of
the voting power of the Corporation's then outstanding capital stock
entitled to vote thereon.
"MSLEF Threshold Amount of Shares" means 1,000,000 shares of the Common
Stock of the Corporation, determined on a primary basis and adjusted, as
appropriate, for any stock dividend or similar distribution of capital
stock of the Corporation, stock split, reclassification, recapitalization,
stock combination or other similar change involving the Common Stock of the
Corporation.
"Standstill Agreement" means the Standstill Agreement by and among JSG,
MSLEF and the Corporation, dated as of May 10, 1998, as amended on October
2, 1998 and as it may be further amended from time to time.
"Stone Directors" means (i) each of the four directors initially
designated as such by the Board of Directors (as of the Effective Time),
(ii) the CEO, as of the Effective Time, and (iii) each other director
nominated or appointed by the Stone Committee in accordance with this
Article 5.
"Unaffiliated Director" means (i) any member of the Board of Directors
who has not been nominated or appointed to the Board of Directors by one of
the Nominating Committees or (ii) any other member of the Board of
Directors designated as such pursuant to these Amended and Restated Bylaws.
ARTICLE 6
STOCK
SECTION 6.01. Forms of Certificates. Every holder of stock in the
Corporation shall be entitled to have a certificate signed, in the name of the
Corporation (i) by the Chairman, the CEO or a Vice President and (ii) by the
Treasurer or an Assistant Treasurer, or the Secretary or an Assistant Secretary
of the Corporation, certifying the number of shares owned by him in the
Corporation.
SECTION 6.02. Signatures. Any or all of the signatures on a certificate may
be a facsimile. In case any officer, transfer agent or registrar who has signed
or whose facsimile signature has been placed upon a certificate shall have
ceased to be such officer, transfer agent or registrar before such certificate
is issued, it may be issued by the Corporation with the same effect as if he or
she were such officer, transfer agent or registrar at the date of issue.
SECTION 6.03. Lost Certificates. The Board of Directors may direct a new
certificate to be issued in place of any certificate theretofore issued by the
Corporation alleged to have been lost, stolen or destroyed, upon the making of
an affidavit of that fact by the person claiming the certificate of stock to be
lost, stolen or
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destroyed. When authorizing such issue of a new certificate, the Board of
Directors may, in its discretion and as a condition precedent to the issuance
thereof, require the owner of such lost, stolen or destroyed certificate, or
his or her legal representative, to advertise the same in such manner as the
Board of Directors shall require and/or to give the Corporation a bond in such
amount as it may direct as indemnity against any claim that may be made against
the Corporation with respect to the certificate alleged to have been lost,
stolen or destroyed.
SECTION 6.04. Transfers. Stock of the Corporation shall be transferable in
the manner prescribed by applicable law, rule or regulation and in these
Amended and Restated Bylaws. Transfers of stock shall be made on the books of
the Corporation only by the person named in the certificate or by his or her
attorney lawfully constituted in writing and upon the surrender of the
certificate therefor, which shall be canceled before a new certificate shall be
issued.
SECTION 6.05. Record Date. In order that the Corporation may determine the
stockholders entitled to notice of or to vote at any meeting of stockholders or
any adjournment thereof, or entitled to receive payment of any dividend or
other distribution or allotment of any rights, or entitled to exercise any
rights in respect of any change, conversion or exchange of stock, or for the
purpose of any other lawful action, the Board of Directors may fix a record
date, which record date shall not precede the date upon which the resolution
fixing the record date is adopted by the Board of Directors, and which record
date shall not be more than sixty (60) days nor less than ten (10) days before
the date of such meeting, nor more than sixty (60) days prior to any other
action. A determination of stockholders of record entitled to notice of or to
vote at a meeting of stockholders shall apply to any adjournment of the
meeting; provided, however, that the Board of Directors may fix a new record
date for the adjourned meeting.
SECTION 6.06. Beneficial Owners. The Corporation shall be entitled to
recognize the exclusive right of a person registered on its books as the owner
of shares of capital stock to receive dividends, and to vote as such owner, and
to hold liable for calls and assessments a person registered on its books as
the owner of shares, and shall not be bound to recognize any equitable or other
claim to or interest in such share or shares on the part of any other person,
whether or not it shall have express or other notice thereof, except as
otherwise provided by law. Notwithstanding this Section 6.06, the determination
of whether MSLEF owns the MSLEF Threshold Amount of Shares shall be calculated
based on the beneficial ownership of such stock by MSLEF.
ARTICLE 7
NOTICES
SECTION 7.01. Notices. Whenever written notice is required by applicable
law, rule or regulation, the Certificate of Incorporation or these Amended and
Restated Bylaws to be given to any director, member of a committee or
stockholder, such notice may be given by mail, addressed to such director,
member of a committee or stockholder, at his or her address as it appears on
the records of the Corporation, with postage thereon prepaid, and such notice
shall be deemed to be given at the time when the same shall be deposited in the
United States mail. Written notice may also be given personally or by telegram,
facsimile, telex or cable.
SECTION 7.02. Waivers of Notice. Whenever any notice is required by
applicable law, rule or regulation, the Certificate of Incorporation or these
Amended and Restated Bylaws to be given to any director, member of a committee
or stockholder, a waiver thereof in writing, signed by the person or persons
entitled to said notice, whether before or after the time stated therein, shall
be deemed equivalent thereto.
ARTICLE 8
GENERAL PROVISIONS
SECTION 8.01. Dividends. Dividends upon the capital stock of the
Corporation, if any, may, subject to the provisions of the Certificate of
Incorporation, be declared by the Board of Directors at any regular or special
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meeting, and may be paid in cash, in property, or in shares of capital stock.
Before payment of any dividend, there may be set aside out of any funds of the
Corporation available for dividends such sum or sums as the Board of Directors
from time to time, in its absolute discretion, deems proper as a reserve or
reserves to meet contingencies, or for equalizing dividends, or for repairing
or maintaining any property of the Corporation, or for any proper purpose, and
the Board of Directors may modify or abolish any such reserve.
SECTION 8.02. Disbursements. All checks or demands for money and notes of
the Corporation shall be signed by such officer or officers or such other
person or persons as the Board of Directors may from time to time designate.
SECTION 8.03. Fiscal Year. The fiscal year of the Corporation shall be fixed
by resolution of the Board of Directors.
SECTION 8.04. Corporate Seal. The corporate seal shall have inscribed
thereon the name of the Corporation, and may have inscribed thereon the year of
its organization and the words "Corporate Seal, Delaware". The seal may be used
by causing it or a facsimile thereof to be impressed or affixed or reproduced
or otherwise.
ARTICLE 9
INDEMNIFICATION
SECTION 9.01. Power to Indemnify in Actions, Suits or Proceedings other than
those by or in the Right of the Corporation. Subject to Section 9.03 hereof,
the Corporation shall indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the Corporation) by reason of the
fact that such person is or was a director or officer of the Corporation, or is
or was a director or officer of the Corporation serving at the request of the
Corporation as a director, officer, trustee, administrator, employee or agent
of another corporation, partnership, joint venture, trust, employee benefit
plan or other enterprise, against expenses (including attorneys' fees),
judgments, fines and amounts (including attorneys' fees) paid in settlement
actually and reasonably incurred by such person in connection with such action,
suit or proceeding if such person acted in good faith and in a manner
reasonably believed to be in or not opposed to the best interests of the
Corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe such person's conduct was unlawful. The termination
of any action, suit or proceeding by judgment, order, settlement, conviction,
or upon a plea of nolo contendere or its equivalent, shall not, of itself,
create a presumption that the person did not act in good faith and in a manner
which such person reasonably believed to be in or not opposed to the best
interests of the Corporation, and, with respect to any criminal action or
proceeding, had reasonable cause to believe that such person's conduct was
unlawful.
SECTION 9.02. Power to Indemnify in Actions, Suits or Proceedings by or in
the Right of the Corporation. Subject to Section 9.03 hereof, the Corporation
shall indemnify any person who was or is a party or is threatened to be made a
party to any threatened, pending or completed action or suit by or in the right
of the Corporation to procure a judgment in its favor by reason of the fact
that such person is or was a director or officer of the Corporation, or is or
was a director or officer of the Corporation serving at the request of the
Corporation as a director, officer, trustee, administrator, employee or agent
of another corporation, partnership, joint venture, trust, employee benefit
plan or other enterprise against expenses (including attorneys' fees) actually
and reasonably incurred by such person in connection with the defense or
settlement of such action or suit if such person acted in good faith and in a
manner such person reasonably believed to be in or not opposed to the best
interests of the Corporation; except that no indemnification shall be made in
respect of any claim, issue or matter as to which such person shall have been
adjudged to be liable to the Corporation unless and only to the extent that the
Court of Chancery or the court in which such action or suit was brought shall
determine upon application that, despite the adjudication of liability but in
view of all the circumstances of the
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case, such person is fairly and reasonably entitled to indemnity for such
excuses which the Court of Chancery or such other court shall deem proper.
SECTION 9.03. Authorization of Indemnification. Any indemnification under
this Article 9 (unless ordered by a court) shall be made by the Corporation
only as authorized in the specific case upon a determination that
indemnification of such person is proper in the circumstances because such
person has met the applicable standard of conduct set forth in Section 9.01 or
Section 9.02 hereof, as the case may be. Such determination shall be made with
respect to a person who is a director or officer at the time of such
determination, (i) by the Board of Directors by a majority vote of the
directors who were not parties to such action, suit or proceeding (the
"Uninvolved Directors"), even though less than a quorum, or (ii) by a committee
of such Uninvolved Directors designated by majority vote of the Uninvolved
Directors, even though less than a quorum, or (iii) if there are no Uninvolved
Directors, or if the Uninvolved Directors so direct, by independent legal
counsel in a written opinion, or (iv) by the stockholders. To the extent,
however, that a director or officer of the Corporation has been successful on
the merits or otherwise in defense of any action, suit or proceeding described
above, or in defense of any claim, issue or matter therein, such person shall
be indemnified against expenses (including attorneys' fees) actually and
reasonably incurred by such person in connection therewith, without the
necessity of authorization in the specific case.
SECTION 9.04. Good Faith Defined. For purposes of any determination under
Section 9.03 hereof, a person shall be deemed to have acted in good faith and
in a manner such person reasonably believed to be in or not opposed to the best
interests of the Corporation, or, with respect to any criminal action or
proceeding, to have had no reasonable cause to believe such person's conduct
was unlawful, if such person's action is based on the records or books of
account of the Corporation or another enterprise, or on information supplied to
such person by the officers of the Corporation or another enterprise in the
course of their duties, or on the advice of legal counsel for the Corporation
or another enterprise or on information or records given or reports made to the
Corporation or another enterprise by an independent certified public accountant
or by an appraiser or other expert selected with reasonable care by the
Corporation or another enterprise. The term "another enterprise" as used in
this Section 9.04 shall mean any other corporation or any partnership, joint
venture, trust, employee benefit plan or other enterprise of which such person
is or was serving at the request of the Corporation as a director, officer,
trustee, administrator, employee or agent. The provisions of this Section 9.04
shall not be deemed to be exclusive or to limit in any way the circumstances in
which a person may be deemed to have met the applicable standard of conduct set
forth in Section 9.01 or 9.02 hereof, as the case may be.
SECTION 9.05. Indemnification by a Court. Notwithstanding any contrary
determination in the specific case under Section 9.03 hereof, and
notwithstanding the absence of any determination thereunder, any director or
officer may apply to any court of competent jurisdiction in the State of
Delaware for indemnification to the extent otherwise permissible under Sections
9.01 and 9.02 hereof. The basis of such indemnification by a court shall be a
determination by such court that indemnification of the director or officer is
proper in the circumstances because he has met the applicable standards of
conduct set forth in Section 9.01 or 9.02 hereof, as the case may be. Neither a
contrary determination in the specific case under Section 9.03 hereof nor the
absence of any determination thereunder shall be a defense to such application
or create a presumption that the director or officer seeking indemnification
has not met any applicable standard of conduct. Notice of any application for
indemnification pursuant to this Section 9.05 shall be given to the Corporation
promptly upon the filing of such application. If successful, in whole or in
part, the director or officer seeking indemnification shall also be entitled to
be paid the expense of prosecuting such application.
SECTION 9.06. Expenses Payable in Advance. Expenses (including, without
limitation, attorneys' fees) actually and reasonably incurred by a director or
officer in defending or investigating a threatened or pending action, suit or
proceeding shall be paid by the Corporation in advance of the final disposition
of such action, suit or proceeding upon receipt of an undertaking by or on
behalf of such director or officer to repay such amount if it shall ultimately
be determined that such person is not entitled to be indemnified by the
Corporation as authorized in this Article 9.
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SECTION 9.07. Nonexclusivity of Indemnification and Advancement of Expenses.
The indemnification and advancement of expenses provided by or granted pursuant
to this Article 9 shall not be deemed exclusive of any other rights to which
those seeking indemnification or advancement of expenses may be entitled under
any Bylaw, agreement, contract, vote of stockholders or disinterested directors
or pursuant to the direction (howsoever embodied) of any court of competent
jurisdiction or otherwise, both as to action in such person's official capacity
and as to action in another capacity while holding such office, it being the
policy of the Corporation that indemnification of, and advances of expenses to,
the persons specified in Section 9.01 and 9.02 hereof shall be made to the
fullest extent permitted by law. The provisions of this Article 9 shall not be
deemed to preclude the indemnification of, and advancement of expenses to, any
person who is not specified in Sections 9.01 or 9.02 of this Article 9 but whom
the Corporation has the power or obligation to indemnify under the provisions
of the General Corporation Law of the State of Delaware (the "GCL"), or
otherwise.
SECTION 9.08. Insurance. The Corporation may purchase and maintain insurance
on behalf of any person who is or was a director or officer of the Corporation
or is or was a director or officer of the Corporation serving at the request of
the Corporation as a director, officer, trustee, administrator, employee or
agent of another corporation, partnership, joint venture, trust, employee
benefit plan or other enterprise against any liability asserted against such
person and incurred by such person in any such capacity, or arising out of such
person's status as such, whether or not the Corporation would have the power or
the obligation to indemnify such person against such liability under the
provisions of this Article 9.
SECTION 9.09. Certain Definitions. For purposes of this Article 9,
references to "the Corporation" shall include, in addition to the Corporation,
any constituent corporation (including any constituent of a constituent)
absorbed in a consolidation or merger which, if its separate existence had
continued, would have had power and authority to indemnify its directors or
officers, so that any person who is or was a director or officer of such
constituent corporation, or is or was a director or officer of such constituent
corporation serving at the request of such constituent corporation as a
director, officer, trustee, administrator, employee or agent of another
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise, shall stand in the same position under the provisions of this
Article 9 with respect to the resulting or surviving corporation as such person
would have had with respect to such constituent corporation if its separate
existence had continued. For purposes of this Article 9, references to "fines"
shall include any excise taxes assessed on a person with respect to an employee
benefit plan; and references to "serving at the request of the Corporation"
shall include any service as a director, officer, trustee, administrator,
employee or agent of the Corporation which imposes duties on, or involves
services by, such director or officer with respect to an employee benefit plan,
its participants or beneficiaries; and a person who acted in good faith and in
a manner such person reasonably believed to be in the interest of the
participants and beneficiaries of an employee benefit plan shall be deemed to
have acted in a manner "not opposed to the best interests of the Corporation"
as referred to in this Article 9.
SECTION 9.10. Survival of Indemnification and Advancement of Expenses. The
indemnification and advancement of expenses obligations set forth in this
Article 9 shall inure to the benefit of the heirs, executors, administrators
and personal representatives of those persons entitled thereto and shall be
binding upon any successor to the Corporation to the fullest extent permitted
by law. Neither any amendment or repeal of the provisions of this Article 9 nor
adoption of any provision of the Certificate of Incorporation or of these
Amended and Restated Bylaws which is inconsistent with the provisions of this
Article 9 shall adversely affect any right or protection of a person existing
at the time of such amendment, repeal or adoption with respect to actions,
suits or proceedings relating to acts or omissions of such person occurring
prior to such amendment, repeal or adoption.
SECTION 9.11. Limitation on Indemnification. Notwithstanding anything
contained in this Article 9 to the contrary, except for proceedings to enforce
rights to indemnification and rights to advancement of expenses (which shall be
governed by Section 9.06 hereof), the Corporation shall not be obligated to
indemnify, or advance expenses to, any director or officer in connection with a
proceeding (or part thereof) initiated by such person unless such proceeding
(or part thereof) was authorized or consented to by the Board of Directors.
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SECTION 9.12. Indemnification of Employees and Agents. The Corporation may,
to the extent authorized from time to time by the Board of Directors, provide
rights to indemnification and to the advancement of expenses to employees and
agents of the Corporation similar to those conferred in this Article 9 to
directors and officers of the Corporation.
ARTICLE 10
AMENDMENTS
SECTION 10.01. Subject to Article 5 hereof, these Amended and Restated
Bylaws may not be altered, amended or repealed, in whole or in part, nor may
new Bylaws be adopted, except by a majority of the members of the entire Board
of Directors or by the affirmative vote of stockholders as required by the
Certificate of Incorporation, these Amended and Restated Bylaws and the GCL;
provided, that notice of such alteration, amendment, repeal or adoption of new
Bylaws be contained in the notice of such meeting of stockholders or Board of
Directors, as the case may be.
SECTION 10.02. Entire Board of Directors. As used in these Amended and
Restated Bylaws generally, the term "entire Board of Directors" means the total
number of directors which the Corporation would have if there were no
vacancies.
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Annex D
FORM OF CERTIFICATE OF DESIGNATIONS, PREFERENCES AND RIGHTS
OF
7% SERIES A CUMULATIVE EXCHANGEABLE REDEEMABLE CONVERTIBLE PREFERRED STOCK
OF
SMURFIT-STONE CONTAINER CORPORATION
Pursuant to Section 151 of the General Corporation Law
of the State of Delaware
I, Craig A. Hunt, as Vice President, General Counsel and Secretary of
Smurfit-Stone Container Corporation, a corporation organized and existing under
the General Corporation Law of the State of Delaware (the "Corporation"), in
accordance with the provisions of Section 103 thereof, DO HEREBY CERTIFY THAT:
In accordance with the provisions of Section 151 of the General Corporation
Law of the State of Delaware and pursuant to Article IV of the Restated
Certificate of Incorporation of the Corporation (the "Certificate of
Incorporation"), the Board of Directors of the Corporation (the "Board of
Directors") is authorized to issue from time to time 25,000,000 shares of
Preferred Stock, par value $0.01 per share, in one or more series; and
The Board of Directors has approved and adopted the following resolutions
creating a series of preferred stock, par value $0.01 per share, designated 7%
Series A Cumulative Exchangeable Redeemable Convertible Preferred Stock:
RESOLVED, that pursuant to the authority expressly vested in the Board of
Directors in accordance with the provisions of its Certificate of
Incorporation, a series of preferred stock of the Corporation ("Preferred
Stock"), par value $0.01 per share, be, and it is hereby, created and
classified, and the designation and amount thereof and the voting powers,
preferences and relative, participating, optional and other special rights of
the shares of such series and the qualifications, limitations or restrictions
thereof are as follows:
Section 1. Designation and Amount. The shares of such series shall be
designated as "7% Series A Cumulative Exchangeable Redeemable Convertible
Preferred Stock" (the "Series A Preferred Stock") and the authorized number of
shares constituting such series shall be 5,600,000. Additional shares of Series
A Preferred Stock shall be authorized from time to time, as necessary to ensure
that, at all times, shares of Series A Preferred Stock are available to pay
unpaid dividend obligations under Section 2 hereof, to the extent such
dividends are not paid in cash. The par value of the Series A Preferred Stock
shall be $0.01 per share.
Section 2. Dividends.
(a) The holders of shares of the Series A Preferred Stock will be entitled
to receive, when, as and if declared by the Board of Directors out of funds of
the Corporation legally available therefor, cumulative dividends, on the shares
of the Series A Preferred Stock at the rate per annum equal to 7% of the
Liquidation Preference (as defined in Section 6 below) per share, and no more,
payable in equal quarterly installments on February 15, May 15, August 15, and
November 15 in each year, commencing 15, 2000. Dividends on the Series A
Preferred Stock shall be payable in cash except to the extent that:
i. the aggregate amount of such dividends would exceed 10% of the
Corporation's Consolidated Net Income (as defined below) for the most
recently ended four full fiscal quarters for which internal financial
statements are available,
ii. payment of cash dividends on the Series A Preferred Stock would
conflict with, violate or result in a breach of, any of the credit
agreements, indentures or debt instruments of the Corporation or any of
its subsidiaries, or
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iii. the Board of Directors has made a good-faith determination that the
Corporation does not have legally available funds to pay a cash
dividend on the Series A Preferred Stock.
To the extent not paid in cash, dividends shall be paid in additional shares of
Series A Preferred Stock having an aggregate Liquidation Preference equal to
the unpaid dividend obligation. Shares of Series A Preferred Stock (not issued
in exchange for shares of Series E Preferred Stock of Stone Container
Corporation or to replace lost, stolen or mutilated certificates evidencing
shares of Series A Preferred Stock) shall only be issued to stockholders to pay
unpaid dividend obligations under this Section 2. If any dividend, or portion
thereof, is not timely paid in cash and additional shares of authorized but
undesignated Preferred Stock are not available to be designated as Series A
Preferred Stock to satisfy the unpaid dividend obligation, then the amount of
such unpaid dividends shall automatically accrete to the Liquidation
Preference. Such dividends shall be cumulative from the date of original issue
of each share of the Series A Preferred Stock. Each such dividend shall be paid
to the holders of record of the shares of the Series A Preferred Stock as they
appear on the share register of the Corporation on such record date, not more
than 30 days nor less than 10 days preceding the dividend payment date thereof,
as shall be fixed by the Board of Directors or a duly authorized committee
thereof. If a holder converts a share or shares of the Series A Preferred Stock
after the close of business on the record date for a dividend and before the
opening of business on the payment date for such dividend, then, pursuant to
Section 7 hereof, the holder will be required to pay to the Corporation at the
time of such conversion the amount of such dividend if received by the holder
on the dividend payment date on the shares so converted.
As used in this Section 2, the term "Consolidated Net Income" shall mean,
for any period, the aggregate net income (or loss) of the Corporation and its
consolidated Subsidiaries for such period determined in conformity with general
accepted accounting principles; provided that the following items shall be
excluded in computing Consolidated Net Income (without duplication): (i) the
net income (or loss) of any Subsidiary of the Corporation in which any other
Person (other than the Corporation or any of its Subsidiaries) has a joint
interest, except to the extent of the amount of dividends or other
distributions actually paid to the Corporation or any of its Subsidiaries by
such other Person during such period; (ii) except to the extent includable
pursuant to clause (i) above, the net income (or loss) of any Person accrued
prior to the date it becomes a Subsidiary of the Corporation or is merged into
or consolidated with the Corporation or any of its Subsidiaries or all or
substantially all of the property and assets of such Person are acquired by the
Corporation or any of its Subsidiaries; (iii) the net income (or loss) of any
Subsidiary of the Corporation to the extent that the declaration or payment of
dividends or similar distributions by such Subsidiary of such net income is not
at the time permitted by the operation of the terms of its charter or any
agreement, instrument, judgment, decree, order, statute, rule or governmental
regulation applicable to such Subsidiary; (iv) any gains or losses (on an
after-tax basis) attributable to the sale, transfer or other disposition of all
or any of the capital stock of any Subsidiary of the Corporation, all or
substantially all of the property or assets of an operating unit or business of
the Corporation or any of its Subsidiaries or any other property and assets of
the Corporation or any of its Subsidiaries outside the ordinary course of
business of the Corporation or such Subsidiary; (v) any amounts paid or accrued
as dividends on preferred stock of the Corporation or preferred stock of any
Subsidiary of the Corporation owned by Persons other than the Corporation and
any of its Subsidiaries; (vi) all extraordinary gains and extraordinary losses;
and (vii) all non-cash charges reducing net income of the Corporation or any of
its Subsidiaries that relate to stock options as stock appreciation rights, and
all cash payments reducing net income of the Corporation or any of its
Subsidiaries that relate to stock options as stock appreciation rights.
As used in the definition of Consolidated Net Income, (i) "Person" shall
mean any individual, corporation, partnership, joint venture, association,
joint-stock company, trust, unincorporated organization or government or other
agency or political subdivision thereof, and (ii) "Subsidiary" shall mean any
corporation of which at least a majority of the outstanding capital stock
having voting power under ordinary circumstances to elect directors of such
corporation shall at the time be held, directly or indirectly, by the
Corporation and one or more Subsidiaries or by one or more Subsidiaries.
(b) If dividends are not paid in full, or declared in full and sums are not
set apart for the payment thereof, upon the shares of the Series A Preferred
Stock and shares of any other Preferred Stock ranking on a parity as
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<PAGE>
to dividends with the Series A Preferred Stock, all dividends declared upon
shares of the Series A Preferred Stock and of any other Preferred Stock ranking
on a parity as to dividends shall be paid or declared pro rata so that in all
cases the amount of dividends paid or declared per share on the Series A
Preferred Stock and such other shares of Preferred Stock shall bear to each
other the same ratio that accumulated dividends per share, including dividends
accrued or in arrears, if any, on the shares of the Series A Preferred Stock
and such other shares of Preferred Stock bear to each other. Except as provided
in the preceding sentence, unless full cumulative dividends on the shares of
the Series A Preferred Stock have been paid or declared in full and sums set
aside for the payment thereof, no dividends (other than dividends in shares of
the Common Stock (as defined below) or in shares of any other capital stock of
the Corporation ranking junior to the Series A Preferred Stock as to dividends)
shall be paid or declared and set aside for payment or other distribution made
upon the common stock of the Corporation, par value $0.01 per share (the
"Common Stock"), or any other capital stock of the Corporation ranking junior
to or on a parity with the Series A Preferred Stock as to dividends, nor shall
any shares of the Common Stock or shares of any other capital stock of the
Corporation ranking junior to or on a parity with the Series A Preferred Stock
as to dividends be redeemed, purchased or otherwise acquired for any
consideration (or any payment made to or available for a sinking fund for the
redemption of any such shares) by the Corporation or any subsidiary of the
Corporation (except by conversion into or exchange for shares of capital stock
of the Corporation ranking junior to the Series A Preferred Stock as to
dividends). Holders of shares of the Series A Preferred Stock shall not be
entitled to any dividends, whether payable in cash, property or shares of
capital stock, in excess of full accrued and cumulative dividends as herein
provided. No interest or sum of money in lieu of interest shall be payable in
respect of any dividend payment or payments on the shares of the Series A
Preferred Stock that may be in arrears.
The terms "accrued dividends," "dividends accrued" and "dividends in
arrears," whenever used with reference to shares of Series A Preferred Stock
shall be deemed to mean an amount which shall be equal to dividends thereon at
the annual dividend rates per share for the respective series from the date or
dates on which such dividends commence to accrue to the end of the then current
quarterly dividend period for such Series A Preferred Stock (or, in the case of
redemption, to the date of redemption), less the sum of (i) the amount of all
dividends paid, or declared in full and sums set aside for the payment thereof,
upon such shares of Series A Preferred Stock, and (ii) any amounts that shall
have accreted to the Liquidation Preference (as defined in Section 6 hereof) of
such Series A Preferred Stock in accordance with Section 2(a) hereof.
(c) Dividends payable on the shares of the Series A Preferred Stock for any
period less than a full quarterly dividend period shall be computed on the
basis of a 360-day year of twelve 30-day months and the actual number of days
elapsed in the period for which such dividend is payable.
Section 3. Optional Redemption.
(a) The shares of the Series A Preferred Stock will be redeemable at the
option of the Corporation by resolution of its Board of Directors, in whole or
from time to time in part, subject to the limitations set forth below, at the
following redemption prices per share (expressed as a percentage of the
Liquidation Preference), plus, in each case, all dividends accrued and unpaid
on the shares of the Series A Preferred Stock up to the date fixed for
redemption, upon giving notice as provided herein below:
<TABLE>
<CAPTION>
If redeemed during
the twelve-
month
period
beginning
February 15, Price
------------------ -----
<S> <C>
2000............................ 101.4
2001............................ 100.7
2002 and thereafter............. 100.0
</TABLE>
(b) No optional redemption may be authorized or made unless on or prior to
such redemption, full cumulative dividends shall have been paid or a sum set
apart for such payment on the Series A Preferred Stock. If fewer than all of
the outstanding shares of the Series A Preferred Stock are to be redeemed, the
number of
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<PAGE>
shares to be redeemed shall be determined by the Board of Directors and the
shares to be redeemed shall be determined pro rata or by lot or in such other
manner and subject to such regulations as the Board of Directors in its sole
discretion shall prescribe.
(c) At least 30 days but not more than 60 days prior to the date fixed for
the redemption of shares of the Series A Preferred Stock, a written notice
shall be mailed to each holder of record of shares of the Series A Preferred
Stock to be redeemed in a postage prepaid envelope addressed to such holder at
his post office address as shown on the records of the Corporation, notifying
such holder of the election of the Corporation to redeem such shares, stating
the date fixed for redemption thereof (the "Series A Redemption Date"), stating
the number of shares of Series A Preferred Stock held by the holder that the
Corporation intends to redeem and calling upon such holder to surrender to the
Corporation on the Series A Redemption Date at the place designated in such
notice such holder's certificate or certificates representing the number of
shares specified in such notice of redemption. On or after the Series A
Redemption Date each holder of shares of the Series A Preferred Stock to be
redeemed shall present and surrender such holder's certificate or certificates
for such shares to the Corporation at the place designated in such notice and
thereupon the redemption price of such shares shall be paid to or on the order
of the person whose name appears on such certificate or certificates as the
owner thereof, and each surrendered certificate shall be cancelled. In case
less than all the shares represented by any such certificate are redeemed, a
new certificate shall be issued representing the unredeemed shares. From and
after the Series A Redemption Date (unless default shall be made by the
Corporation in payment of the redemption price), all dividends on the shares of
the Series A Preferred Stock designated for redemption in such notice shall
cease to accrue, and all rights of the holders thereof as stockholders of the
Corporation, except the right to receive the redemption price of such shares
(including all accrued and unpaid dividends up to the Series A Redemption Date)
upon the surrender of certificates representing the same, shall cease and
terminate and such shares shall not thereafter be transferred (except with the
consent of the Corporation) on the books of the Corporation, and such shares
shall not be deemed to be outstanding for any purpose whatsoever. At its
election, the Corporation prior to the Series A Redemption Date may deposit the
redemption price (including all accrued and unpaid dividends up to the Series A
Redemption Date) of shares of the Series A Preferred Stock so called for
redemption in trust for the holders thereof with a bank or trust company
(having a capital surplus and undivided profits aggregating not less than
$50,000,000) in the Borough of Manhattan, City and State of New York, the City
of Chicago, State of Illinois, or in any other city in which the Corporation at
the time shall maintain a transfer agency with respect to such shares, in which
case the aforesaid notice to holders of shares of the Series A Preferred Stock
to be redeemed shall state the date of such deposit, shall specify the office
of such bank or trust company as the place of payment of the redemption price,
and shall call upon such holders to surrender the certificates representing
such shares at such place on or after the date fixed in such redemption notice
(which shall not be later than the Series A Redemption Date) against payment of
the redemption price (including all accrued and unpaid dividends up to the
Series A Redemption Date). Any interest accrued on such funds shall be paid to
the Corporation from time to time. Any moneys so deposited which shall remain
unclaimed by the holders of such shares of the Series A Preferred Stock at the
end of two years after the Series A Redemption Date shall be returned by such
bank or trust company to the Corporation.
(d) Shares of the Series A Preferred Stock redeemed, repurchased or
retired pursuant to the provisions of this Section 3 or Section 4 or
surrendered to the Corporation upon conversion or exchange shall thereupon be
retired and may not be reissued as shares of the Series A Preferred Stock but
shall thereafter have the status of authorized but unissued shares of the
Preferred Stock, without designation as to series until such shares are once
more designated as part of a particular series of the Preferred Stock.
Section 4. Mandatory Redemption. The Corporation shall redeem all
outstanding shares of Series A Preferred Stock on February 15, 2012, at a price
per share equal to the Liquidation Preference plus an amount equal to all
accrued but unpaid dividends thereon, whether or not declared, to the mandatory
redemption date (the "Redemption Price"). Such Redemption Price shall be
payable at Smurfit-Stone's option in (a) cash or (b) that number of shares of
the Common Stock with an aggregate "Fair Market Value" equal to the Redemption
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<PAGE>
Price; provided, however, that if on February 15, 2012 the shares of Common
Stock are not traded on the Nasdaq National Market or a national securities
exchange, the Corporation shall pay the Redemption Price only in cash.
As used herein, "Fair Market Value" means:
(1) if shares of the Common Stock are traded on the Nasdaq National Market,
the average of the closing prices of the common stock as reported on
Nasdaq National Market during the five (5) consecutive trading days
commencing immediately preceding the mandatory redemption date or, if
no sale occurred on a trading day, then the mean between the highest
bid and lowest asked prices as of the close of business on such trading
day, as reported on the Nasdaq National Market;
(2) if shares of the Common Stock are listed on a national securities
exchange, the average of the closing prices are reported for composite
transactions during the five (5) consecutive trading days commencing
immediately preceding the mandatory redemption date or, if no sale
occurred on a trading day, then the mean between the closing bid and
asked prices on such exchange on such trading day; or
(3) if shares of the Common Stock are not traded on the Nasdaq National
Market or a national securities exchange but are otherwise traded over-
the-counter, the arithmetic average (for consecutive trading days) of
the mean between the highest bid and lowest asked prices as of the
close of business during the five (5) consecutive trading days
commencing immediately preceding the mandatory redemption date as
quoted on the National Association of Securities Dealers Automated
Quotation system or an equivalent generally accepted reporting service.
As used in this Section 4, "Common Stock" shall include the common stock of
the Corporation and the common stock of any successor corporation or purchaser
in the case of (i) any reclassification or change of outstanding shares of
Common Stock issuable upon conversion of shares of the Series A Preferred Stock
(other than a change in par value, or from par value to no par value, or from
no par value to par value, or as a result of a subdivision or combination),
(ii) any consolidation or merger to which the Corporation is a party other than
a merger in which the Corporation is the continuing corporation and which does
not result in any reclassification of, or change (other than a change in name,
or par value, or from par value to no par value, or from no par value to par
value, or as a result of a subdivision or combination) in, outstanding shares
of Common Stock or (iii) any sale or conveyance of all or substantially all of
the property or business of the Corporation as an entirety.
Section 5. Voting Rights. Except as provided in Sections 8(b) and 10 and as
otherwise required by law, the holders of shares of the Series A Preferred
Stock shall not be entitled to any voting rights.
Section 6. Liquidation Rights.
(a) In the event of any liquidation, dissolution or winding up of the
affairs of the Corporation, whether voluntary or otherwise, after payment or
provision for payment of the debts and other liabilities of the Corporation,
the holders of shares of the Series A Preferred Stock shall be entitled to
receive, in cash, out of the remaining net assets of the Corporation, an amount
equal to the Liquidation Preference of each share of the Series A Preferred
Stock, plus an amount equal to all dividends accrued and unpaid on each such
share up to the date fixed for distribution, before any distribution shall be
made to the holders of shares of the Common Stock or any other capital stock of
the Corporation ranking (as to any such distribution) junior to the Series A
Preferred Stock. If upon any liquidation, dissolution or winding up of the
Corporation, the assets distributable among the holders of shares of the Series
A Preferred Stock and all other classes and series of Preferred Stock ranking
(as to any such distribution) on a parity with the Series A Preferred Stock are
insufficient to permit the payment in full to the holders of all such shares of
all preferential amounts payable to all such holders, then the entire assets of
Corporation thus distributable shall be distributed ratably among the holders
of the shares of the Series A Preferred Stock and such other classes and series
of Preferred Stock ranking (as to any such
D-5
<PAGE>
distribution) on a parity with the Series A Preferred Stock in proportion to
the respective amounts that would be payable per share if such assets were
sufficient to permit payment in full.
(b) For purposes of this Section 6 but subject to Section 7(l) hereof, a
distribution of assets in any dissolution, winding up or liquidation shall not
include (i) any consolidation, merger, business combination or reorganization
of the Corporation with or into any other corporation or entity, (ii) any
dissolution, liquidation, winding-up or reorganization of the Corporation
immediately followed by reincorporation of another corporation or (iii) a sale
or other disposition of all or substantially all of the Corporation's assets to
another corporation; provided, however, that, in each case, for the protection
of the rights of the holders of shares of the Series A Preferred Stock,
effective provision is made in the certificate of incorporation of the
resulting and surviving corporation or otherwise, providing for preferred stock
of such entity to be issued to the holders of the outstanding Series A
Preferred Stock at the close of such transaction with rights, preferences and
designations no less favorable than those provided herein.
(c) After the payment of the full preferential amounts provided for in this
certificate to the holders of shares of the Series A Preferred Stock or funds
necessary for such payment have been set aside in trust for the holders
thereof, such holders shall be entitled to no other or further participation in
the distribution of the assets of the Corporation.
As used herein, "Liquidation Preference" shall mean an amount equal to
$25.00 plus any amounts that accrete to this amount as a result of the
nonpayment in cash or additional shares of Series A Preferred Stock, as
applicable, of any dividend when due.
Section 7. Conversion.
(a) Holders of shares of the Series A Preferred Stock shall have the right,
exercisable at any time and from time to time, except in the case of shares of
the Series A Preferred Stock called for redemption or to be exchanged for
Series A Debentures (as described in Section 8 hereof), to convert all or any
such shares of the Series A Preferred Stock into shares of Common Stock of the
Corporation (calculated as to each conversion to the nearest 1/100th of a
share) equal to the product of the number of shares of Series A Preferred Stock
being converted, multiplied by the quotient of (1) the Liquidation Preference
divided by (2) the conversion price then in effect. The conversion price of
$34.28 per share of Common Stock is subject to adjustment as described below.
In the case of shares of the Series A Preferred Stock called for redemption or
to be exchanged for Series A Debentures (as described in Section 8 hereof),
conversion rights will expire at the close of business on the last business day
preceding the Series A Redemption Date or the last business day preceding the
Series A Exchange Date (as hereinafter defined), as the case may be. Notice of
an optional redemption or exchange must be mailed not less than 30 days and not
more than 60 days prior to the Series A Redemption Date or Series A Exchange
Date, as the case may be. Upon conversion or exchange, no adjustment or payment
will be made for dividends or interest, but if any holder surrenders a share of
the Series A Preferred Stock for conversion after the close of business on the
record date for the payment of a dividend and prior to the opening of business
on the next dividend payment date, then, notwithstanding such conversion, the
dividend payable on such dividend payment date will be paid to the registered
holder of such share on such record date. In such event, such share, when
surrendered for conversion, must be accompanied by payment of an amount equal
to the dividend payable on such dividend payment date on the share so
converted.
(b) Any holder of a share or shares of the Series A Preferred Stock
electing to convert such share or shares thereof shall deliver the certificate
or certificates therefor to the principal office of any transfer agent for the
Common Stock, with the form of notice of election to convert as the Corporation
shall prescribe fully completed and duly executed and (if so required by the
Corporation or any conversion agent) accompanied by instruments of transfer in
form satisfactory to the Corporation and to any conversion agent, duly executed
by the registered holder or such holder's duly authorized attorney, and
transfer taxes, stamps or funds therefor or evidence of payment thereof if
required pursuant to Section 7(a) or 7(d) hereof. The conversion right with
respect to any such shares shall be deemed to have been exercised at the date
upon which the certificates therefor accompanied by such duly executed notice
of election and instruments of transfer and such taxes, stamps, funds, or
evidence of payment shall have been so delivered, and the person or persons
entitled to
D-6
<PAGE>
receive the shares of Common Stock issuable upon such conversion shall be
treated for all purposes as the record holder or holders of such shares of
Common Stock upon said date.
(c) No fractional shares of Common Stock or scrip representing fractional
shares shall be issued upon conversion of shares of the Series A Preferred
Stock. If more than one share of the Series A Preferred Stock shall be
surrendered for conversion at one time by the same holder, the number of full
shares of Common Stock which shall be issuable upon conversion thereof shall
be computed on the basis of the Liquidation Preference of the aggregate number
of shares of the Series A Preferred Stock so surrendered. Instead of any
fractional shares of Common Stock which would otherwise be issuable upon
conversion of any shares of the Series A Preferred Stock, the Corporation
shall pay a cash adjustment in respect of such fraction in an amount equal to
the same fraction of the closing price for Common Stock on the last business
day preceding the date of conversion. The closing price for such day shall be
the last reported sales price regular way or, in case no such reported sale
takes place on such date, the average of the reported closing bid and asked
prices regular way, in either case on the New York Stock Exchange, or if
Common Stock is not listed or admitted to trading on such Exchange, on the
principal national securities exchange on which Common Stock is listed or
admitted to trading or, if not listed or admitted to trading on any national
securities exchange, the closing sale price of Common Stock or in case no
reported sale takes place, the average of the closing bid and asked prices, on
the Nasdaq National Market or any comparable system. If Common Stock is not
quoted on the Nasdaq National Market or any comparable system, the Board of
Directors shall in good faith determine the current market price on the basis
of such quotation as it considers appropriate.
(d) If a holder converts a share or shares of the Series A Preferred Stock,
the Corporation shall pay any documentary, stamp or similar issue or transfer
tax due on the issue of Common Stock upon the conversion. The holder, however,
shall pay to the Corporation the amount of any tax which is due (or shall
establish to the satisfaction of the Corporation payment thereof) if the
shares are to be issued in a name other than the name of such holder and shall
pay to the Corporation any amount required by the last sentence of Section
7(a) hereof.
(e) The Corporation shall reserve and at all times have reserved out of its
authorized but unissued shares of Common Stock enough shares of Common Stock
to permit the conversion of the then outstanding shares of the Series A
Preferred Stock and to take all action necessary so that all shares of Common
Stock which may be issued upon conversion of shares of the Series A Preferred
Stock shall be validly issued, fully-paid and nonassessable. In order that the
Corporation may deliver shares of Common Stock upon conversion of shares of
the Series A Preferred Stock, the Corporation will endeavor to comply with all
applicable Federal and State securities laws and will endeavor to cause the
Corporation to list such shares of Common Stock to be issued upon conversion
on each securities exchange on which Common Stock is listed.
(f) The conversion rate in effect at any time shall be subject to
adjustment from time to time as follows:
(i) In case the Corporation shall (1) pay a dividend in shares of Common
Stock to holders of Common Stock, (2) make a distribution in shares of
Common Stock to holders of Common Stock, (3) subdivide the outstanding
shares of Common Stock into a greater number of shares of Common Stock or
(4) combine the outstanding shares of Common Stock into a smaller number of
shares of Common Stock, the conversion rate immediately prior to such
action shall be adjusted so that the holder of any shares of the Series A
Preferred Stock thereafter surrendered for conversion shall be entitled to
receive the number of shares of Common Stock which he would have owned
immediately following such action had such shares of the Series A Preferred
Stock been converted immediately prior thereto. An adjustment made pursuant
to this Section 7(f)(i) shall become effective immediately after the record
date in the case of a dividend or distribution and shall become effective
immediately after the effective date in the case of a subdivision or
combination.
(ii) In case the Corporation shall issue rights or warrants to
substantially all holders of Common Stock entitling them (for a period
commencing no earlier than the record date for the determination of holders
of Common Stock entitled to receive such rights or warrants and expiring
not more than 45 days after such record date) to subscribe for or purchase
shares of Common Stock (or securities convertible into
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<PAGE>
shares of Common Stock) at a price per share less than the current market
price (as determined pursuant to Section 7(f)(iv)) of Common Stock on such
record date, the number of shares of Common Stock into which each share of
the Series A Preferred Stock shall be convertible shall be adjusted so that
such number shall be equal to the number determined by multiplying the
number of shares of Common Stock into which such share of the Series A
Preferred Stock was convertible immediately prior to such record date by a
fraction of which the numerator shall be the number of shares of Common
Stock outstanding on such record date plus the number of additional shares
of Common Stock offered (or into which the convertible securities so
offered are convertible), and of which the denominator shall be the number
of shares of Common Stock outstanding on such record date, plus the number
of shares of Common Stock which the aggregate offering price of the offered
shares of Common Stock (or the aggregate conversion price of the
convertible securities so offered) would purchase at such current market
price. Such adjustments shall become effective immediately after such
record date.
(iii) In case the Corporation shall distribute to all holders of Common
Stock shares of any class of capital stock other than Common Stock,
evidences of indebtedness or other assets (other than cash dividends out of
current or retained earnings), or shall distribute to substantially all
holders of Common Stock rights or warrants to subscribe for securities
(other than those referred to in Section 7(f)(ii)), then in each such case
the number of shares of Common Stock into which each share of the Series A
Preferred Stock shall be convertible shall be adjusted so that such number
shall equal the number determined by multiplying the number of shares of
Common Stock into which such share of the Series A Preferred Stock was
convertible immediately prior to the date of such distribution by a
fraction of which the numerator shall be the current market price
(determined as provided in Section 7(f)(iv)) of Common Stock on the record
date mentioned below, and of which the denominator shall be such current
market price of Common Stock, less the then fair market value (as
determined by the Board of Directors, whose determination shall be
conclusive evidence of such fair market value) of the portion of the assets
so distributed or of such subscription rights or warrants applicable to one
share of Common Stock. Such adjustment shall become effective immediately
after the record date for the determination of the holders of Common Stock
entitled to receive such distribution. Notwithstanding the foregoing, in
the event that the Corporation shall distribute rights or warrants (other
than those referred to in Section 7(f)(ii)) ("Rights") pro rata to holders
of Common Stock, the Corporation may, in lieu of making any adjustment
pursuant to this Section 7(f)(iii), have the Corporation make proper
provision so that each holder of a share of Series A Preferred Stock who
converts such share after the record date for such distribution and prior
to the expiration or redemption of the Rights shall be entitled to receive
upon such conversion, in addition to the shares of Common Stock issuable
upon such conversion (the "Conversion Shares"), a number of Rights to be
determined as follows: (i) if such conversion occurs on or prior to the
date for the distribution to the holders of Rights of separate certificates
evidencing such Rights (the "Distribution Date"), the same number of Rights
to which a holder of a number of shares of Common Stock equal to the number
of Conversion Shares is entitled at the time of such conversion in
accordance with the terms and provisions of and applicable to the Rights;
and (ii) if such conversion occurs after the Distribution Date, the same
number of Rights to which a holder of the number of shares of Common Stock
into which a share of the Series A Preferred Stock so converted was
convertible immediately prior to the Distribution Date would have been
entitled on the Distribution Date in accordance with the terms and
provisions of and applicable to the Rights.
(iv) The current market price per share of Common Stock on any date
shall be deemed to be the average of the daily closing prices for thirty
consecutive trading days commencing forty-five trading days before the day
in question. The closing price for each day shall be the last reported
sales price regular way or, in case no such reported sale takes place on
such date, the average of the reported closing bid and asked prices regular
way, in either case on the New York Stock Exchange, or if Common Stock is
not listed or admitted to trading on such exchange, on the principal
national securities exchange on which Common Stock is listed or admitted to
trading or, if not listed or admitted to trading on any national securities
exchange, the closing sale price of Common Stock, or in case no reported
sale takes place, the average of the closing bid and asked prices, on the
Nasdaq National Market or any comparable system, or
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if Common Stock is not quoted on the Nasdaq National Market or any
comparable system, the closing sale price or, in case no reported sale
takes place, the average of the closing bid and asked prices, as furnished
by any two members of the National Association of Securities Dealers, Inc.
selected from time to time by the Corporation for that purpose.
(v) In any case in which this Section 7 shall require that an adjustment
be made immediately following a record date, the Corporation may elect to
defer (but only until five business days following the mailing of the
notice described in Section 7(j)) delivering to the holder of any share of
the Series A Preferred Stock converted after such record date the shares of
Common Stock and other capital stock of the Corporation deliverable upon
such conversion over and above the shares of Common Stock and other capital
stock of the Corporation issuable upon such conversion only on the basis of
the conversion rate prior to adjustment; and, in lieu of the shares the
delivery of which is so deferred, the Corporation shall request that the
Corporation issue or cause its transfer agents to issue due bills or other
appropriate evidence of the right to receive such shares.
(g) No adjustment in the conversion rate shall be required until cumulative
adjustments result in a concomitant change of 1% or more of the conversion
price as existed prior to the last adjustment of the conversion rate; provided,
however, that any adjustments which by reason of this Section 7(g) are not
required to be made shall be cumulatively carried forward and taken into
account in any subsequent adjustment. All calculations under this Section 7
shall be made to the nearest cent or to the nearest one-hundredth of a share,
as the case may be. No adjustment to the conversion rate shall be made for cash
dividends.
(h) In the event that, as a result of an adjustment made pursuant to Section
7(f), the holder of any share of the Series A Preferred Stock thereafter
surrendered for conversion shall become entitled to receive any shares of
capital stock of the Corporation other than shares of Common Stock, thereafter
the number of such other shares so receivable upon conversion of any shares of
the Series A Preferred Stock shall be subject to adjustment from time to time
in a manner and on terms as nearly equivalent as practicable to the provisions
with respect to Common Stock contained in this Section 7.
(i) The Corporation may make such increases in the conversion rate, in
addition to those required by Sections 7(f)(i), (ii) and (iii), as it considers
to be advisable in order that any event treated for Federal income tax purposes
as a dividend of stock or stock rights shall not be taxable to the recipients
thereof.
(j) Whenever the conversion rate is adjusted, the Corporation shall promptly
mail to all holders of record of shares of the Series A Preferred Stock a
notice of the adjustment.
(k) In the event that:
(1) the Corporation takes any action which would require an adjustment
in the conversion rate,
(2) the Corporation consolidates or merges with, or transfers all or
substantially all of its assets to, another corporation and stockholders of
the Corporation must approve the transaction, or
(3) there is a dissolution or liquidation of the Corporation,
a holder of shares of the Series A Preferred Stock may wish to convert some
or all of such shares into shares of Common Stock prior to the record date
for, or the effective date of, the transaction so that such holder may
receive the rights, warrants, securities or assets which a holder of shares
of Common Stock on that date may receive. Therefore, the Corporation shall
mail to holders of shares of the Series A Preferred Stock a notice stating
the proposed record or effective date, as the case may be. The Corporation
shall mail the notice at least 10 days before such date; however, failure
to mail such notice or any defect therein shall not affect the validity of
any transaction referred to in clause (1), (2) or (3) of this Section 7(k).
(l) If any of the following shall occur, namely: (i) any reclassification or
change of outstanding shares of Common Stock issuable upon conversion of shares
of the Series A Preferred Stock (other than a change in par value, or from par
value to no par value, or from no par value to par value, or as a result of a
subdivision or combination), (ii) any consolidation or merger to which the
Corporation is a party other than a merger in which
D-9
<PAGE>
the Corporation is the continuing corporation and which does not result in any
reclassification of, or change (other than a change in name, or par value, or
from par value to no par value, or from no par value to par value, or as a
result of a subdivision or combination) in, outstanding shares of Common Stock
or (iii) any sale or conveyance of all or substantially all of the property or
business of the Corporation as an entirety, then the Corporation or such
successor or purchasing corporation, as the case may be, shall as a condition
precedent to such reclassification, change, consolidation, merger, sale or
conveyance, provide in its certificate of incorporation or other charter
document that each share of the Series A Preferred Stock shall be convertible
into the kind and amount of shares of capital stock and other securities and
property (including cash) receivable upon such reclassification, change,
consolidation, merger, sale or conveyance by a holder of the number of shares
of Common Stock deliverable upon conversion of such share of the Series A
Preferred Stock immediately prior to such reclassification, change,
consolidation, merger, sale or conveyance; provided, however, if the capital
stock or other securities receivable upon such reclassification, change,
consolidation, merger, sale or conveyance by the holders of shares of Common
Stock are not traded on a national securities exchange or Nasdaq National
Market, then such reclassification, change, consolidation, merger, sale or
conveyance shall be deemed a liquidation, dissolution or winding-up of the
Corporation under Section 6 hereof, and the holder of the Series A Preferred
Stock shall be entitled to receive in cash, an amount equal to the Liquidation
Preference of each share of the Series A Preferred Stock, plus an amount equal
to all accrued and unpaid dividends. Such certificate of incorporation or other
charter document shall provide for adjustments which shall be as nearly
equivalent as may be practicable to the adjustments provided for in this
Section 7. The foregoing, however, shall not in any way affect the right a
holder of a share of the Series A Preferred Stock may otherwise have, pursuant
to clause (ii) of the last sentence of Section 7(f)(iii), to receive Rights
upon conversion of a share of the Series A Preferred Stock. If, in the case of
any such consolidation, merger, sale or conveyance, the stock or other
securities and property (including cash) receivable thereupon by a holder of
Common Stock includes shares of capital stock or other securities and property
of a corporation other than the successor or purchasing corporation, as the
case may be, in such consolidation, merger, sale or conveyance, then the
certificate of incorporation or other charter document of such other
corporation shall contain such additional provisions to protect the interests
of the holders of shares of the Series A Preferred Stock as the Board of
Directors shall reasonably consider necessary by reason of the foregoing;
provided, however, if the capital stock or other securities receivable upon
such consolidation, merger, sale or conveyance by the holders of shares of
Common Stock are not traded on a national securities exchange or Nasdaq
National Market, then such consolidation, merger, sale or conveyance shall be
deemed a liquidation, dissolution or winding-up of the Corporation under
Section 6 hereof, and the holder of the Series A Preferred Stock shall be
entitled to receive in cash, an amount equal to the Liquidation Preference of
each share of the Series A Preferred Stock, plus an amount equal to all accrued
and unpaid dividends. The provision of this Section 7(1) shall similarly apply
to successive consolidations, mergers, sales or conveyances.
Section 8. Exchange.
(a) Requirements of Exchange. At the Corporation's option, all, but not less
than all, of the then outstanding shares of the Series A Preferred Stock may be
exchanged on any dividend payment date, subject to certain conditions stated in
the immediately following sentence, for the 7% Convertible Subordinated
Exchange Debentures due February 15, 2012 (the "Series A Debentures") of the
Corporation to be issued pursuant to an indenture (the "Series A Indenture")
substantially in the form of Exhibit 4.3 to the Corporation's Registration
Statement on Form S-4 (Registration No. 333-43656), as amended, declared
effective by the Securities and Exchange Commission on , 2000, at
an exchange rate such that the principal amount of Series A Debentures issued
for each share of the Series A Preferred Stock shall equal the Liquidation
Preference thereof. Such exchange may be made only if, at the time of exchange
(i) the Series A Indenture shall have been qualified under the Trust Indenture
Act of 1939, as amended, (ii) there shall be no dividend arrearage (including
the dividend payable on the date of exchange) on the shares of the Series A
Preferred Stock, and (iii) no Event of Default (as defined in the Series A
Indenture) under the Series A Indenture shall have occurred and be continuing.
In the event that such exchange would result in the issuance of a Series A
Debenture in a principal amount which is not an integral multiple of $1,000,
the difference between such principal amount and
D-10
<PAGE>
the highest integral multiple of $1,000 (which may be zero) which is less than
such principal amount shall be paid to the holder in cash.
(b) Notice of Exchange. The Corporation will mail to each holder of record
of shares of the Series A Preferred Stock written notice of its intention to
exchange not less than 30 nor more than 60 days prior to the date fixed for the
exchange (the "Series A Exchange Date"). Each such notice shall state: (i) the
Series A Exchange Date, (ii) the place or places where certificates for such
shares of the Series A Preferred Stock are to be surrendered for exchange into
the Series A Debentures, and (iii) that dividends on the shares of the Series A
Preferred Stock to be exchanged will cease to accrue on such Series A Exchange
Date. Prior to giving notice of intention to exchange, the Corporation shall
execute and deliver to a bank or trust company selected by the Corporation, and
qualify under the Trust Indenture Act of 1939, as amended, the Series A
Indenture in substantially the form filed as an exhibit to the Registration
Statement referred to above with such changes as may be required by law or
usage. Except as may be otherwise required by applicable law, the form of the
Series A Indenture may not be amended or supplemented before the Series A
Exchange Date without the affirmative vote or consent of the holders of two-
thirds ( 2/3) of the outstanding shares of the Series A Preferred Stock, except
for those changes which would not adversely affect the legal rights of the
holders. Notwithstanding anything to the contrary in this Section 8, prior to
giving notice of intention to exchange, the Corporation shall amend or
supplement the Series A Indenture prior to the Series A Exchange Date in order
to conform the relevant terms thereof to read substantially similar to the
provisions of Section 7. The Corporation will cause the Series A Debentures to
be authenticated on the dividend payment date on which the exchange is
effective, and the Corporation will pay interest on the Series A Debentures at
the rate and on the dates specified in such Series A Indenture from and after
the Series A Exchange Date.
(c) Rights After Series A Exchange Date. If notice has been mailed as
aforesaid, from and after the Series A Exchange Date (unless default shall be
made by the Corporation in issuing Series A Debentures in exchange for, or in
making the final dividend payment on, the outstanding shares of the Series A
Preferred Stock on the Series A Exchange Date), dividends on the shares of the
Series A Preferred Stock shall cease to accrue, and such shares shall no longer
be deemed to be issued and outstanding, and all rights of the holders thereof
as stockholders of the Corporation (except the right to receive from the
Corporation the Series A Debentures) shall cease and terminate. Upon surrender
in accordance with said notice of the certificates for any shares of the Series
A Preferred Stock so exchanged (properly endorsed or assigned for transfer, if
the Corporation shall so require and the notice shall so state), such shares
shall be exchanged by the Corporation into Series A Debentures as aforesaid.
Dividends due on the quarterly dividend payment date on which the exchange is
effected will be mailed to holders in the regular course.
Section 9. Ranking. With regard to rights to receive dividends and
distributions upon dissolution of the Corporation, the Series A Preferred Stock
shall rank prior to the Common Stock of the Corporation.
Section 10. Limitations. In addition to any other rights provided by
applicable law, so long as any shares of the Series A Preferred Stock are
outstanding, the Corporation shall not, without the affirmative vote, or the
written consent as provided by law, of the holders of at least two-thirds (
2/3) of the outstanding shares of the Series A Preferred Stock, voting
separately,
(a) create, authorize or issue any class or series of capital stock
ranking senior to the Series A Preferred Stock either as to payment of
dividends or distribution of assets upon liquidation; or
(b) change the preferences, rights or powers with respect to the Series
A Preferred Stock so as to affect the Series A Preferred Stock adversely;
but (except as otherwise required by applicable law) nothing contained in this
certificate shall require such a vote or consent (i) in connection with any
increase in the total number of authorized shares of the Common Stock, or (ii)
in connection with the authorization or increase of any class or series of
shares ranking, as to dividends and in liquidation, junior to or on a parity
with the Series A Preferred Stock; provided, however, that
D-11
<PAGE>
no such vote or written consent of the holders of the shares of the Series A
Preferred Stock shall be required if, at or prior to the time when the issuance
of any such shares ranking prior to the Series A Preferred Stock is to be made
or any such change is to take effect, as the case may be, provision is made for
the redemption or exchange of all the then outstanding shares of the Series A
Preferred Stock; and provided, further, that the provisions of this Section 10
shall not in any way limit the right and power of the Corporation to issue its
currently authorized but unissued shares or bonds, notes, mortgages,
debentures, and other obligations, and to incur indebtedness to banks and to
other lenders.
Section 11. No Preemptive Rights. No holder of shares of the Series A
Preferred Stock will possess any preemptive rights to subscribe for or acquire
any unissued shares of capital stock of the Corporation (whether now or
hereafter authorized) or securities of the Corporation convertible into or
carrying a right to subscribe to or acquire shares of capital stock of the
Corporation.
D-12
<PAGE>
IN WITNESS WHEREOF, Smurfit-Stone Container Corporation has caused this
certificate to be signed by , its , and attested
by , its Secretary, this day of , 2000.
Smurfit-Stone Container Corporation
By: _________________________________
[Name]
[Title]
Attest:
-------------------------------------
Craig A. Hunt
Vice President, General Counsel and
Secretary
D-13
<PAGE>
Annex E
[DEUTSCHE BANC ALEX. BROWN LOGO]
[DEUTSCHE BANK LOGO]
August 8th, 2000
The Board of Directors
Stone Container Corporation
150 North Michigan Avenue
Chicago, IL 60601
Members of the Board:
Deutsche Bank Securities Inc. ("Deutsche Bank") has acted as financial
advisor to Stone Container Corporation (the "Company") in connection with the
Agreement and Plan of Merger (the "Merger Agreement") dated as of August 8,
2000, among the Company, Smurfit-Stone Container Corporation ("Smurfit-Stone"),
and SCC Merger Co., a wholly owned subsidiary of Smurfit-Stone ("Merger Sub"),
which provides, among other things, for Merger Sub to be merged with and into
the Company (the "Merger"). As a result of the Merger, subject to the
provisions of the Merger Agreement, each outstanding share of the Company's
Series E Preferred Stock (the "Preferred Stock") will convert into the right to
receive one share of Smurfit-Stone Series A Preferred Stock, plus an amount in
cash equal to the accrued and unpaid dividends on each outstanding share of
Preferred Stock, less $0.12 per share for certain merger-related expenses (the
"Consideration"). After the Merger, all shares of common stock of the Company
will continue to be owned and held by Smurfit-Stone. The terms and conditions
of the Merger are more fully set forth in the Merger Agreement.
You have requested Deutsche Bank's opinion, as investment bankers, as to the
fairness of the Consideration, from a financial point of view, to the holders
of the Preferred Stock.
In connection with Deutsche Bank's role as financial advisor to the Company,
and in arriving at its opinion, Deutsche Bank has reviewed certain publicly
available financial and other information concerning the Company and Smurfit-
Stone and certain internal analyses and other information furnished to it by
the Company and Smurfit-Stone. Deutsche Bank has also held discussions with
members of the senior managements of the Company and Smurfit-Stone regarding
the business and prospects of the Company and Smurfit-Stone. In addition,
Deutsche Bank has (i) reviewed the reported prices and trading activity for the
Preferred Stock, (ii) compared the terms of the Preferred Stock with the terms
of the Smurfit-Stone Series A Preferred Stock, and performed financial analyses
related thereto; (iii) reviewed certain financial projections of the Company
and Smurfit-Stone and performed financial analyses related thereto, (iv)
reviewed the draft dated July 25th, 2000 of the Form S-4 Registration Statement
for Smurfit-Stone, the Merger Agreement and certain related documents, and (v)
performed such other studies and analyses and considered such other factors as
we deemed appropriate.
Deutsche Bank has not assumed responsibility for independent verification
of, and has not independently verified, any information, whether publicly
available or furnished to it, concerning the Company or Smurfit-Stone,
including, without limitation, any financial information, forecasts or
projections considered in connection with the rendering of its opinion.
Accordingly, for purposes of its opinion, Deutsche Bank has assumed and
E-1
<PAGE>
relied upon the accuracy and completeness of all such information and Deutsche
Bank has not conducted a physical inspection of any of the properties or
assets, and has not prepared or obtained any independent evaluation or
appraisal of any of the assets or liabilities, of the Company or Smurfit-Stone.
With respect to the financial forecasts and projections made available to
Deutsche Bank and used in its analyses, Deutsche Bank has assumed that they
have been reasonably prepared on bases reflecting the best currently available
estimates and judgments of the management of the Company and Smurfit-Stone, as
to the matters covered thereby. In rendering its opinion, Deutsche Bank
expresses no view as to the reasonableness of such forecasts and projections or
the assumptions on which they are based. Deutsche Bank's opinion is necessarily
based upon economic, market and other conditions as in effect on, and the
information made available to it as of, the date hereof.
For purposes of rendering its opinion, Deutsche Bank has assumed that, in
all respects material to its analysis, the representations and warranties of
the Company, Smurfit-Stone, and Merger Sub contained in the Merger Agreement
are true and correct, the Company, Smurfit-Stone and Merger Sub will each
perform all of the covenants and agreements to be performed by it under the
Merger Agreement and all conditions to the obligations of each of the Company,
Smurfit-Stone and Merger Sub to consummate the Merger will be satisfied without
any waiver thereof. Deutsche Bank has also assumed that all material
governmental, regulatory or other approvals and consents required in connection
with the consummation of the Merger will be obtained and that in connection
with obtaining any necessary governmental, regulatory or other approvals and
consents, or any amendments, modifications or waivers to any agreements,
instruments or orders to which any of the Company, Smurfit-Stone or Merger Sub
is a party or subject or by which it is bound, no limitations, restrictions or
conditions will be imposed or amendments, modifications or waivers made that
would have a material adverse effect on the Company, Smurfit-Stone or Merger
Sub or materially reduce the contemplated benefits of the Merger. Deutsche Bank
has further assumed for purposes of rendering its opinion that Smurfit-Stone
will receive sufficient funds from intercompany loans necessary to consummate
the Merger and pay the cash portion of the Consideration.
This opinion is addressed to, and for the use and benefit of, the Board of
Directors of the Company and is not a recommendation to the holders of the
Preferred Stock to approve the Merger. This opinion is limited to the fairness,
from a financial point of view, to the holders of the Preferred Stock of the
Consideration, and Deutsche Bank expresses no opinion as to the merits of the
underlying decision by the Company to engage in the Merger. We are not
expressing an opinion herein as to the prices at which the Smurfit-Stone Series
A Preferred Stock would trade in the public market.
Deutsche Bank will be paid a fee for the delivery of this opinion to the
board of directors of the Company. We are an affiliate of Deutsche Bank AG
(together with its affiliates, the "DB Group"). One or more members of the DB
Group have, from time to time, provided investment banking and other financial
services to the Company, Smurfit-Stone and their affiliates for which it has
received compensation, including (i) a pending engagement with Jefferson
Smurfit Corporation (U.S.) to provide a fairness opinion in a transaction
related to the Merger and (ii) over the past two years, as joint bookrunner in
connection with the Company's May 2000 $1.1 billion bank financing, as advisor
to the Company to sell its participation in Folding Carton Partners in May
1999, as advisor to Jefferson Smurfit Corporation (U.S.) in connection with its
October 1999 disposal of the Newberg, Oregon newsprint mill, as joint book
runner in connection with Jefferson Smurfit Corporation (U.S.)'s November 1998
$550 million term loan financing, as lead arranger and syndication agent in
connection with Jefferson Smurfit Corporation (U.S.)'s March 1998 $1.3 billion
bank financing, as joint bookrunner in connection with the Company's and
Jefferson Smurfit Corporation (U.S.)'s November 1998 $3.5 billion bank
financing, and as advisor to Jefferson Smurfit Group PLC in connection with the
November 1998 merger between Jefferson Smurfit Corporation and the Company. In
the ordinary course of business, members of the DB Group may actively trade in
the securities and other instruments and obligations of the Company, Jefferson
Smurfit Corporation, Smurfit-Stone and their affiliates for their own accounts
and for the accounts of their customers. Accordingly, the DB Group may at any
time hold a long or short position in such securities, instruments and
obligations.
E-2
<PAGE>
Based upon and subject to the foregoing, it is Deutsche Bank's opinion as
investment bankers that the Consideration is fair, from a financial point of
view, to the holders of Preferred Stock.
Very truly yours,
Deutsche Bank Securities Inc.
E-3
<PAGE>
Annex F
August 8, 2000
Smurfit-Stone Container Corporation
150 North Michigan Avenue
Chicago, Illinois 60601
Attention: Craig A. Hunt
Stone Container Corporation
150 North Michigan Avenue
Chicago, Illinois 60601
Attention: Craig A. Hunt
Ladies and Gentlemen:
Each of the undersigned understands that Smurfit-Stone Container
Corporation, a Delaware corporation (the "Parent"), SCC Merger Co., a Delaware
corporation and wholly-owned subsidiary of the Parent ("Merger Sub"), and Stone
Container Corporation, a Delaware corporation (the "Company"), are entering
into an Agreement and Plan of Merger, dated as of the date hereof (the "Merger
Agreement"), providing for, among other things, a merger of Merger Sub with and
into the Company (the "Merger"), in which all of the outstanding shares of
$1.75 Series E Cumulative Convertible Exchangeable Preferred Stock, par value
$0.01 per share, of the Company (the "Series E Shares") will be exchanged for
(i) 7% Series A Cumulative Exchangeable Redeemable Convertible Preferred Stock,
par value $0.01 per share, of the Parent (the "Series A Shares") and (ii)
certain cash consideration as more specifically set forth in the Merger
Agreement. Terms that are defined in the Merger Agreement but that are not
defined in this letter agreement will have the meaning ascribed to them in the
Merger Agreement.
Each of the undersigned is a holder of certain of the Series E Shares (each
a "Series E Shareholder", and together with all other holders of the Series E
Shares, the "Series E Shareholders") and is entering into this letter agreement
to induce you to enter into the Merger Agreement and to consummate the
transactions contemplated thereby.
Each of the undersigned confirms its agreement with you as follows:
1. The undersigned represents, warrants and agrees that Schedule I annexed
hereto sets forth the number of Series E Shares of which the undersigned is the
beneficial owner. The undersigned represents, warrants and agrees that, as of
the date hereof, the undersigned owns such shares free and clear of all voting
agreements and commitments of every kind.
2. The undersigned represents and warrants that the undersigned has all
necessary power and authority to enter into this letter agreement, and that
this agreement is the legal, valid and binding agreement of the undersigned,
and is enforceable against the undersigned in accordance with its terms.
3. The undersigned represents and warrants that (A) no filing with, and no
permit, authorization, consent or approval of, any state or federal public body
or authority is necessary for the execution of this letter agreement by the
undersigned and the consummation by the undersigned of the transactions
contemplated hereby and (B) none of the execution and delivery of this letter
agreement by the undersigned, the consummation by the undersigned of the
transactions contemplated hereby or compliance by the undersigned with any of
the provisions hereof shall (i) result in a violation or breach of, or
constitute (with or without notice or lapse of time or both) a default (or give
rise to any third party right of termination, cancellation, material
modification or acceleration of any obligation or to a loss of a material
benefit) under any of the terms,
F-1
<PAGE>
conditions or provisions of any contract, agreement or arrangement to which the
undersigned is a party or by which the undersigned may be bound, or (ii)
violate any law, order, injunction, judgment, decree or award of any court, or
quasi judicial or administrative agency of any federal, state, local or foreign
jurisdiction or arbitrator.
4. The undersigned agrees that, so long as the Merger is consummated on or
before December 31, 2000, it will not, and will not agree to, contract to sell
or otherwise transfer or dispose of any of the Series E Shares, other than (A)
pursuant to the Merger or (B) with your prior written consent; provided,
however, that nothing herein shall prevent the sale, transfer, pledge,
encumbrance, assignment or other disposition of any of such Series E Shares,
provided that the purchaser, transferee, pledgee or assignee thereof agrees in
writing to be bound by the terms of this letter agreement.
5. The undersigned agrees that, so long as the Merger is consummated on or
before December 31, 2000, all of the Series E Shares that are beneficially
owned by the undersigned at the record date for any meeting of the Series E
Shareholders called to consider and vote to approve the Merger Agreement, the
Merger and other transactions contemplated by the Merger Agreement will be
voted by the undersigned in favor thereof.
6. The undersigned agrees to cooperate fully with you in connection with the
Merger Agreement and the transactions contemplated thereby. The undersigned and
the Parent agree that all Covered Legal Fees (as defined below) incurred by the
undersigned in connection with the Merger Agreement and the transactions
contemplated thereby shall be borne by the Parent.
As used herein, "Covered Legal Fees" shall mean legal fees and expenses of
Schulte Roth & Zabel L.L.P.; provided, however, that in no event shall such
Covered Legal Fees exceed $225,000.
7. Each of the undersigned agrees that at the Effective Time all restricted
stock agreements, registration rights agreements and shareholders' agreement
with the Company to which the undersigned is a party shall terminate and be of
no further force and effect, and the undersigned shall enter into further
documentation as requested by the Parent to evidence such termination prior to
the Effective Time.
8. Each of the undersigned agrees to surrender all Series E Shares of which
it has beneficial ownership in exchange for the Merger Consideration in the
manner described in the Merger Agreement.
9. In the event any of the undersigned is a director of the Company,
notwithstanding anything to the contrary in this letter agreement, nothing in
this letter agreement is intended or shall be construed to require any of the
undersigned to take or in any way limit any action that any of the undersigned
may take to discharge his fiduciary duties as a director of the Company;
provided, however, that no such duty shall excuse the undersigned as a
stockholder of the Parent from its obligations as a stockholder of the Parent
to vote their Series E Shares, to the extent that they may be so voted, or
otherwise perform any obligation as herein provided and to otherwise comply
with the terms and conditions of this letter agreement.
10. This letter agreement may be terminated at the option of any party
hereto at any time after the earliest of (a) termination of the Merger
Agreement in accordance with its terms, and (b) the day following the Effective
Time, provided that the obligations of the Parent under paragraphs 12 and 13
shall survive the termination of this letter agreement under this clause (b).
Notwithstanding any other provision hereof, this letter agreement shall
terminate automatically on the date of the termination of the Merger Agreement.
11. The Parent and the Company each agree that, absent the prior written
consent of the undersigned, it will not amend, modify or waive any provision of
the Merger Agreement if such amendment, modification or waiver would adversely
affect the rights of the holders of the Series E Shares. Without limiting the
foregoing, the Parent and the Company each agree that it will not terminate the
Merger Agreement pursuant to Section 6.1(a) thereof without the prior written
consent of the undersigned. Nothing contained in this Paragraph 11 will limit
the ability of the Parent or the Company to exercise its rights to terminate
the Merger Agreement in accordance with Sections 6.1(b) or (c) thereof.
F-2
<PAGE>
12. The Parent agrees that its board of directors shall, from time to time,
authorize additional shares of Series A Shares as necessary to ensure that, at
all times, shares of Series A Shares are available to pay unpaid dividend
obligations under Section 2 of the Certificate of Designation, to the extent
not paid in cash.
13. The Parent agrees that it shall use commercially reasonable efforts to
maintain the Series A Preferred Stock listed on the Nasdaq National Market or a
national securities exchange for as long as any Series A Preferred Stock is
outstanding.
14. The Parent acknowledges that, to the best of its knowledge, the
representations and warranties made in Article IV of the Merger Agreement are
true and correct in all material respects as of the date hereof. The Company
acknowledges that, to the best of its knowledge, the representations and
warranties made in Article III of the Merger Agreement are true and correct in
all material respects as of the date hereof.
15. This letter agreement shall be governed by, and construed in accordance
with, the laws of the State of Delaware, without reference to principles of
conflicts of law. This letter agreement may be executed in any number of
counterparts and by the parties hereto on separate counterparts but all such
counterparts shall together constitute one and the same letter agreement.
[signature page follows]
F-3
<PAGE>
Please confirm that the foregoing correctly states the understanding between
us and you by signing and returning to us a counterpart hereof.
Very truly yours,
Mariner Investment Group Inc.
/s/ Mark Weissman
By: _________________________________
Mark Weissman
Name: _______________________________
Manager
Title: ______________________________
Delta Dividend Group, Inc.
/s/ David Gale
By: _________________________________
David Gale
Name: _______________________________
President
Title: ______________________________
/s/ Mark Weissman
_____________________________________
Mark Weissman
/s/ David Gale
_____________________________________
David Gale
Confirmed as of the date
first above written:
Smurfit-Stone Container Corporation
/s/ Craig A. Hunt
By: _________________________________
Craig A. Hunt
Name: _______________________________
Vice President, General Counsel
and Secretary
Title: ______________________________
Stone Container Corporation
/s/ Craig A. Hunt
By: _________________________________
Craig A. Hunt
Name: _______________________________
Vice President, General Counsel
and Secretary
Title: ______________________________
F-4
<PAGE>
SCHEDULE I
<TABLE>
<CAPTION>
Number of Series E
Cumulative Convertible
Exchangeable Preferred
Stockholder Shares
----------- ----------------------
<S> <C>
Mariner Investment Group Inc....................... 622,200
Delta Dividend Group, Inc.......................... 57,000
Mark Weissman...................................... 622,200
David Gale......................................... 58,000
</TABLE>
F-5
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers
Exculpation. Section 102(b)(7) of the General Corporation Law of the State
of Delaware (the "Delaware Law") permits a corporation to include in its
certificate of incorporation a provision eliminating or limiting the personal
liability of a director to the corporation or its stockholders for monetary
damages for breach of fiduciary duty as a director, provided that such
provision may not eliminate or limit the liability of a director for any breach
of the director's duty of loyalty to the corporation or its stockholders, for
acts or omissions not in good faith or which involve intentional misconduct or
a knowing violation of law, for the payment of unlawful dividends or unlawful
stock repurchases, or for any transaction from which the director derived an
improper personal benefit.
The Restated Certificate of Incorporation of the Registrant incorporates the
exculpation provisions permitted by Section 102(b)(7) of the Delaware Law
described above.
Indemnification. Section 145 of the Delaware Law permits a corporation to
indemnify any of its directors, officers, employees or agents who was or is a
party, or is threatened to be made a party, to any third party proceeding by
reason of the fact that such person is or was a director, officer, employee or
agent of the corporation, for expenses (including attorneys' fees), judgments,
fines and amounts paid in settlement actually and reasonably incurred by such
person in connection with such action, suit or proceeding, if such person acted
in good faith and in a manner such person reasonably believed to be in or not
opposed to the best interests of the corporation, and, with respect to any
criminal action or proceeding, had no reason to believe that such person's
conduct was unlawful. In a derivative action, i.e., one by or in the right of a
corporation, the corporation is permitted to indemnify directors, officers,
employees or agents against expenses (including attorneys' fees) actually and
reasonably incurred by them in connection with the defense or settlement of an
action or suit if they acted in good faith and in a manner that they reasonably
believed to be in or not opposed to the best interests of the corporation,
except that no indemnification shall be made if such person shall have been
adjudged liable to the corporation, unless and only to the extent that the
court in which the action or suit was brought shall determine upon application
that such person is fairly and reasonably entitled to indemnity for such
expenses despite such adjudication of liability.
The Restated Bylaws of the Registrant make mandatory the indemnification
permitted by Section 145 of the Delaware Law described above.
Insurance. The directors and officers of the Registrant are insured under a
policy of directors' and officers' liability insurance.
Stone Container Corporation Directors and Officers. The Agreement and Plan
of Merger, dated May 10, 1998 among Jefferson Smurfit Corporation (now known as
Smurfit-Stone Container Corporation), JSC Acquisition Corporation and Stone
Container Corporation ("Stone Container") (the "Merger Agreement"), providing
for the acquisition of Stone Container by the Registrant by way of a merger of
JSC Acquisition Corporation into Stone Container (the "Merger"), provides that
the Registrant will (or will cause an affiliate to) indemnify and hold
harmless, to the same extent provided for in the Stone Container charter and
Stone Container bylaws, current or former directors or officers of Stone
Container for damages and liabilities (including reasonable attorneys' fees)
arising out of or pertaining to any action or inaction in their capacity as an
officer or director occurring before the effective time of the Merger (the
"Effective Time") (including transactions contemplated by the Merger
Agreement). The Merger Agreement further provides that the indemnification
obligations set forth in the Stone Container charter and Stone Container
bylaws, as of the date hereof, will survive the Merger and will not be amended,
repealed or otherwise modified for a period of six years after the Effective
Time in a manner that would adversely affect the rights of individuals who were
directors, officers, employees or agents of Stone Container or its subsidiaries
on or prior to the Effective Time.
II-1
<PAGE>
The Merger Agreement also provides that for a period of six years after the
Effective Time, the Registrant will provide to Stone Container's current
directors and officers liability insurance protection substantially equivalent
in kind and scope to that provided by Stone Container's directors' and
officers' liability insurance policies in effect as of the date thereof;
provided, however, the Registrant will not be required to expend in any one
year an amount in excess of 300% of the annual premiums currently paid by Stone
for such insurance (such amount, the "Maximum Premium"); provided, further,
that if during such period the annual premiums for comparable insurance
coverage exceed the Maximum Premium, the Registrant shall be obligated to
provide a policy that, in the reasonable judgement of the Registrant, provides
the best coverage available for a cost not exceeding the Maximum Premium.
Item 21. Exhibits and Financial Statement Schedules.
(a) Exhibits.
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
2.1* Agreement and Plan of Merger, dated as of August 8, 2000, by and
among Smurfit-Stone Container Corporation ("Smurfit-Stone"), SCC
Merger Co. and Stone Container Corporation ("Stone Container")
(included as Annex A to the proxy statement/prospectus filed as
a part of this registration statement).
3.1* Restated Certificate of Incorporation of Smurfit-Stone
(incorporated by reference to Exhibit 3(a) to Smurfit-Stone's
Registration Statement on Form S-4 (File No. 333-65431)).
3.2* Restated Bylaws of Smurfit-Stone (incorporated by reference to
Exhibit 3(b) to Smurfit-Stone's Registration Statement on Form
S-4 (File No. 333-65431)).
4.1* Certificate for Smurfit-Stone's Common Stock (incorporated by
reference to Exhibit 4.3 to Smurfit-Stone's Registration
Statement on Form S-8 (File No. 33-57085)).
4.2* Form of Certificate of Designation establishing the terms of
Smurfit-Stone's Series A Preferred Stock (included as Annex D to
the proxy statement/prospectus filed as a part of this
registration statement).
4.3 Form of Indenture governing Smurfit-Stone's Debentures.
4.4 Certificate for Smurfit-Stone's Series A Preferred Stock.
5.1* Opinion of Winston & Strawn.
5.2* Tax Opinion of Winston & Strawn.
Indentures and other debt instruments with respect to long-term debt, none of
which exceeds 10 percent of the total assets of Smurfit-Stone and its
subsidiaries on a consolidated basis, are not filed herewith. The Registrant
agrees to furnish a copy of such documents to the Commission upon request.
10.1* Subscription Agreement among Smurfit-Stone, Jefferson Smurfit
Corporation (U.S.) ("Jefferson Smurfit"), Container Corporation
of America ("CCA") and Smurfit International B.V. ("Smurfit
International") (incorporated by reference to Exhibit 10.4 to
Smurfit-Stone's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1994).
10.2* Jefferson Smurfit Deferred Compensation Plan, as amended
(incorporated by reference to Exhibit 10.7 to Smurfit-Stone's
Annual Report on Form 10-K for the fiscal year ended December
31, 1996).
10.3* Jefferson Smurfit Corporation Management Incentive Plan
(incorporated by reference to Exhibit 10.10 to Smurfit-Stone's
Annual Report on Form 10-K for the fiscal year ended December
31, 1995).
10.4(a)* Jefferson Smurfit Corporation Amended and Restated 1992 Stock
Option Plan, dated as of May 1, 1997 (incorporated by reference
to Exhibit 10.10 to Smurfit-Stone's Annual Report on Form 10-K
for the fiscal year ended December 31, 1997).
10.4(b)* Amendment of the Jefferson Smurfit Corporation Amended and
Restated 1992 Stock Option Plan (incorporated by reference to
Exhibit 10.3 to Smurfit-Stone's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1999).
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
10.5(a)* Amended and Restated Credit Agreement, dated as of November 18,
1998, among Smurfit-Stone, JSCE, Inc. ("JSCE"), Jefferson
Smurfit and the banks party thereto (incorporated by reference
to Exhibit 10.6 to Smurfit-Stone's Annual Report on Form 10-K
for the fiscal year ended December 31, 1998).
10.5(b)* First Amendment of Amended and Restated Credit Agreement, dated
as of June 30, 1999, among Smurfit-Stone, JSCE, Jefferson
Smurfit and the banks party thereto (incorporated by reference
to Exhibit 10.1 to Smurfit-Stone's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1999).
10.5(c)* Second Amendment of Amended and Restated Credit Agreement, dated
as of October 15, 1999, among Smurfit-Stone, JSCE, Jefferson
Smurfit and the banks party thereto (incorporated by reference
to Exhibit 10.1 to Smurfit-Stone's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1999).
10.6(a)* Term Loan Agreement, dated as of February 23, 1995, among
Jefferson Smurfit Finance Corporation ("JS Finance") and Bank
Brussels Lambert, New York Branch (incorporated by reference to
Exhibit 10.1 to Smurfit-Stone's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1995).
10.6(b)* Depositary and Issuing and Paying Agent Agreement (Series A
Commercial Paper), dated as of February 23, 1995 (incorporated
by reference to Exhibit 10.2 to Smurfit-Stone's Quarterly Report
on Form 10-Q for the quarter ended March 31, 1995).
10.6(c)* Depositary and Issuing and Paying Agent Agreement (Series B
Commercial Paper), dated as of February 23, 1995 (incorporated
by reference to Exhibit 10.3 to Smurfit-Stone's Quarterly Report
on Form 10-Q for the quarter ended March 31, 1995).
10.6(d)* Receivables Purchase and Sale Agreement, dated as of February
23, 1995, among Jefferson Smurfit, as the Initial Servicer, and
JS Finance, as the Purchaser (incorporated by reference to
Exhibit 10.4 to Smurfit-Stone's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1995).
10.6(e)* Liquidity Agreement, dated as of February 23, 1995, among JS
Finance, the financial institutions party thereto, as Banks,
Bankers Trust Company, as Facility Agent, and Bankers Trust
Company, as Collateral Agent (incorporated by reference to
Exhibit 10.6 to Smurfit-Stone's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1995).
10.6(f)* Commercial Paper Dealer Agreement, dated as of February 23,
1995, among BT Securities Corporation, Morgan Stanley & Co.,
Jefferson Smurfit and JS Finance (incorporated by reference to
Exhibit 10.7 to Smurfit-Stone's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1995).
10.6(g)* Addendum dated March 6, 1995 to Commercial Paper Dealer
Agreement (incorporated by reference to Exhibit 10.8 to Smurfit-
Stone's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1995).
10.6(h)* First Omnibus Amendment, dated as of March 31, 1996, to the
Receivables Purchase and Sale Agreement among Jefferson Smurfit,
JS Finance and the banks party thereto (incorporated by
reference to Exhibit 10.3 to Smurfit-Stone's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1996).
10.6(i)* Affiliate Receivables Sale Agreement, dated as of March 31,
1996, between Smurfit Newsprint Corporation ("Smurfit
Newsprint") and Smurfit-Stone (incorporated by reference to
Exhibit 10.4 to Smurfit-Stone's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1996).
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
10.6(j)* Amendment No. 2 to the Term Loan Agreement, dated as of August
19, 1997, among JS Finance, Bank Brussels Lambert, New York
Branch and Jefferson Smurfit, as Servicer (incorporated by
reference to Exhibit 10.12(j) to Smurfit-Stone's Annual Report
on Form 10-K for the fiscal year ended December 31, 1997).
10.6(k)* Amendment No. 2 to the Receivables Purchase and Sale Agreement,
dated as of August 19, 1997, among Jefferson Smurfit, as the
Seller and Servicer, and JS Finance, as the Purchaser, Bankers
Trust Company, as Facility Agent, and Bank Brussels Lambert, New
York Branch, as the Term Bank (incorporated by reference to
Exhibit 10.12(k) to Smurfit-Stone's Annual Report on Form 10-K
for the fiscal year ended December 31, 1997).
10.6(l)* Amendment No. 2 to the Liquidity Agreement, dated as of August
19, 1997, among JS Finance, Bankers Trust Company, as Facility
Agent, Jefferson Smurfit, as Servicer, Bank Brussels Lambert,
New York Branch, as Term Bank, and the financial institutions
party thereto, as Banks (incorporated by reference to Exhibit
10.12(l) to Smurfit-Stone's Annual Report on Form 10-K for the
fiscal year ended December 31, 1997).
10.7(a)* Amended and Restated Credit Agreement, dated as of November 18,
1998, among Stone Container, the financial institutions
signatory thereto, and Bankers Trust Company, as Agent
(incorporated by reference to Exhibit 15 to Stone Container's
Report on Form 8-K/A dated November 18, 1998).
10.7(b)* First Amendment of Amended and Restated Credit Agreement, dated
as of March 23, 1999, among Stone Container, the financial
institutions signatory thereto, and Bankers Trust Company, as
Agent (incorporated by reference to Exhibit 4(b)(ii) to Stone
Container's Annual Report on Form 10-K for the fiscal year ended
December 31, 1998).
10.7(c)* Second Amendment of Amended and Restated Credit Agreement, dated
as of June 30, 1999, among Stone Container, the financial
institutions signatory thereto, and Bankers Trust Company, as
Agent (incorporated by reference to Exhibit 10.1 to Stone
Container's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1999).
10.8* Consulting Agreement, dated as of October 24, 1996, by and
between James E. Terrill and Jefferson Smurfit (incorporated by
reference to Exhibit 10.15 to Smurfit-Stone's Annual Report on
Form 10-K for the fiscal year ended December 31, 1996).
10.9* Standstill Agreement, dated as of May 10, 1998, as amended,
among Jefferson Smurfit Group plc ("JS Group"), Morgan Stanley
Leveraged Equity Fund II, Inc. ("MSLEF") and Smurfit-Stone
(incorporated by reference to Exhibit 10(a) to Smurfit-Stone's
Registration Statement on Form S-4 (File No. 333-65431)).
10.10* Registration Rights Agreement, dated as of May 10, 1998, among
MSLEF, Smurfit International, Smurfit-Stone and the other
parties identified on the signature pages thereto (incorporated
by reference to Exhibit 10(e) to Smurfit-Stone's Registration
Statement on Form S-4 (File No. 333-65431)).
10.11* Voting Agreement, dated as of May 10, 1998, as amended, among
Smurfit International, MSLEF and Mr. Roger W. Stone
(incorporated by reference to Exhibit 10(f) to Smurfit-Stone's
Registration Statement on Form S-4 (File No. 333-65431)).
10.12(a)* Smurfit-Stone Container Corporation 1998 Long Term Incentive
Plan (incorporated by reference to Exhibit 10.14 to Smurfit-
Stone's Annual Report on Form 10-K for the fiscal year ended
December 31, 1998).
10.12(b)* First Amendment of the Smurfit-Stone Container Corporation 1998
Long-Term Incentive Plan (incorporated by reference to Exhibit
10.2 to Smurfit-Stone's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1999).
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
10.13* Forms of Employment Security Agreements (incorporated by
reference to Exhibit 10(h) to Smurfit-Stone's Registration
Statement on Form S-4 (File No. 333-65431)).
10.14* Stone Container Corporation Directors' Deferred Compensation
Plan (incorporated by reference to Exhibit 10(b) to Stone
Container's Annual Report on Form 10-K for the fiscal year ended
December 31, 1997).
10.15* Stone Container Corporation 1982 Incentive Stock Option Plan
(incorporated by reference to Appendix A to the Prospectus
included in Stone Container's Form S-8 Registration Statement,
Registration Number 2-79221, effective September 27, 1982).
10.16(a)* Stone Container Corporation 1993 Stock Option Plan (incorporated
by reference to Appendix A to Stone Container's Proxy Statement
dated as of April 10, 1992).
10.16(b)* Amendment of the Stone Container 1993 Stock Option Plan
(incorporated by reference to Exhibit 10.3 to Stone Container's
Quarterly Report on Form 10-Q for the quarter ended September
30, 1999).
10.17* Stone Container Corporation 1992 Long-Term Incentive Program
(incorporated by reference to Exhibit A to Stone Container's
Proxy Statement dated as of April 11, 1991).
10.18(a)* Stone Container Corporation 1995 Long-Term Incentive Plan
(incorporated by reference to Exhibit A to Stone Container's
Proxy Statement dated as of April 7, 1995).
10.18(b)* Amendment of the 1995 Long-Term Incentive Plan of Stone
Container (incorporated by reference to Exhibit 10.2 to Stone
Container's Quarterly Report on Form 10-Q for the quarter ended
September 30. 1999).
10.19* Management Services Agreement, dated January 1, 1993, by and
between Smurfit-Stone, Smurfit Packaging Corporation and Smurfit
Newsprint (incorporated by reference to Exhibit 10.28 to
Smurfit-Stone's Annual Report on Form 10-K for the fiscal year
ended December 31, 1998).
10.20* Management Services Agreement, dated January 1, 1993, by and
between Smurfit-Stone and Smurfit Packaging Corporation
(incorporated by reference to Exhibit 10.29 to Smurfit-Stone's
Annual Report on Form 10-K for the fiscal year ended December
31, 1998).
10.21* Management Services Agreement, dated January 1, 1993, by and
between Smurfit-Stone and Sequoia Pacific Voting Equipment, Inc.
(incorporated by reference to Exhibit 10.30 to Smurfit-Stone's
Annual Report on Form 10-K for the fiscal year ended December
31, 1998).
10.22* Pension and Insurance Services Agreement, dated January 1, 1997,
by and between Smurfit-Stone and Smurfit Packaging Corporation
(incorporated by reference to Exhibit 10.31 to Smurfit-Stone's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1998).
10.23* Pension and Insurance Services Agreement, dated January 1, 1997,
by and between Smurfit-Stone and Smurfit Latin America, a
division of Smurfit Packaging Corporation (incorporated by
reference to Exhibit 10.32 to Smurfit-Stone's Annual Report on
Form 10-K for the fiscal year ended December 31, 1998).
10.24(a)* Pooling and Servicing Agreement, dated October 1, 1999, by and
among Stone Receivables Corporation, as Transferor, Stone
Container, as Securer, and The Chase Manhattan Bank, as Trustee
(incorporated by reference to Exhibit 10.1(a) to Stone
Container's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1999).
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
10.24(b)* Series 1999-1 Supplement, dated as of October 15, 1999, among
Stone Receivables Corporation, as Transferor, Stone Container,
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 Container's Quarterly Report on From
10-Q for the quarter ended September 30, 1999).
10.24(c)* Series 1999-2 Supplement, dated as of October 15, 1999, among
Stone Receivables Corporation, as Transferor, Stone Container,
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 Container's Quarterly Report on Form
10-Q for the quarter ended September 30, 1999).
10.24(d)* Receivables Purchase Agreement, dated October 15, 1999, between
Stone Container, as Seller, and Stone Receivables Corporation,
as Purchaser (incorporated by reference to Exhibit 10.1(d) to
Stone Container's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1999).
10.25(a)* Purchase and Sale Agreement, effective as of July 28, 1999,
between Rayonier, Inc. and Jefferson Smurfit (incorporated by
reference to Exhibit 2.1 to JSCE's Current Report on Form 8-K
dated October 25, 1999).
10.25(b)* First Amendment to Purchase and Sale Agreement, dated October
21, 1999, between Rayonier, Inc. and Jefferson Smurfit
(incorporated by reference to Exhibit 2.2 to JSCE's Current
Report on Form 8-K dated October 25, 1999).
10.26* Pre-Merger Agreement, dated as of February 23, 2000, among
Smurfit-Stone, Stone Container, 3038727 Nova Scotia Company and
St. Laurent Paperboard Inc. ("St. Laurent") (incorporated by
reference to Exhibit 99.2 to Smurfit-Stone's Current Report on
Form 8-K dated February 23, 2000).
10.27* Amended and Restated Credit Agreement, dated as of March 31,
2000, among Stone Container, the financial institutions
signatory thereto, and The Chase Manhattan Bank and Bankers
Trust Company, as Agents (incorporated by reference to Exhibit
10.1 to Stone Container's Quarterly Report on Form 10-Q for the
quarter ended March 31, 2000).
10.28* Credit Agreement, dated as of May 31, 2000, among Stone
Container, St. Laurent, the lenders named therein, The Chase
Manhattan Bank, as Agent, Bankers Trust Company, as
Administrative Agent, Deutsche Bank Canada, as Canadian
Administrative Agent, Chase Securities Inc., as Syndication
Agent, Co-Lead Arranger and Joint Book Manager, and DB Alex.
Brown LLC, as Co-Lead Arranger and Joint Book Manager
(incorporated by reference to Exhibit 10.1 to Stone Container's
Current Report on Form 8-K dated June 6, 2000).
10.29* Employment Agreement of Ray M. Curran (incorporated by reference
to Exhibit 10.27 to Smurfit-Stone's Annual Report on Form 10-K
for the fiscal year ended December 31, 1999).
10.30* Employment Agreement of Patrick J. Moore (incorporated by
reference to Exhibit 10.28 to Smurfit-Stone's Annual Report on
Form 10-K for the fiscal year ended December 31, 1999).
10.31* Employment Agreement of Joseph J. Gurandiano.
10.32* Agreement, dated as of May 31, 2000, between Smurfit-Stone and
Joseph J. Gurandiano.
10.33* Voting Agreement, dated as of August 8, 2000, among Smurfit-
Stone, Stone Container, Mariner, Delta and Messrs. Weissman and
Gale (included as Annex F to the proxy statement/prospectus
filed as a part of this registration statement).
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
12.1 Statement on the Computation of Earnings to Combined Fixed
Charges and Preferred Stock Dividends for Smurfit-Stone.
12.2 Statement on the Computation of Earnings to Combined Fixed
Charges and Preferred Stock Dividends for Stone Container.
21.1* Subsidiaries of Smurfit-Stone.
23.1* Consent of Winston & Strawn (included in Exhibit 5.1 hereto).
23.2 Consent of Ernst & Young LLP.
23.3 Consent of PricewaterhouseCoopers LLP.
23.4 Consent of PricewaterhouseCoopers LLP.
24.1* Powers of Attorney (included on signature page hereto).
99.1* Form T-1 of Bankers Trust Company, as Trustee for the
Debentures.
99.2 Form of Proxy of Stone Container.
</TABLE>
--------
* Previously filed.
(b) Financial Statement Schedules.
(1) Valuation and Qualifying Accounts and Reserves (appearing on page F-
36)
(2) Valuation and Qualifying Accounts and Reserves (appearing on page F-
78)
(c) Reports, Opinions, or Appraisals.
The opinion of Deutsche Bank Securities Inc. is included as Annex D to the
proxy statement/prospectus contained in this registration statement.
Item 22. Undertakings.
(a) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the Registration Statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20 percent change
in the maximum aggregate offering price set forth in the "Calculation
of Registration Fee" table in the effective registration statement;
and
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the Registration Statement
or any material change to such information in the Registration
Statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at the time shall be deemed to
be the initial bona fide offering thereof.
II-7
<PAGE>
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(4) That prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is part of this Registration
Statement, by any person or party who is deemed to be an underwriter within
the meaning of Rule 145(c), the Registrant undertakes that such reoffering
prospectus will contain the information called for by the applicable
registration form with respect to reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other items
of the applicable form.
(5) That every prospectus (i) that if filed pursuant to paragraph (4)
immediately preceding, or (ii) that purports to meet the requirements of
Section 10(a)(3) of the Securities Act of 1933 and is used in connection
with an offering of securities subject to Rule 415, will be filed as part
of an amendment to the Registration Statement and will not be used until
such amendment is effective, and that, for purposes of determining any
liability under the Securities Act of 1933, each such post-effective
amendment shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
(6) To respond to requests for information that is incorporated by
reference into the prospectus pursuant to Items 4, 10(b), 11, or 13 of this
form, within one business day of receipt of such request, and to send the
incorporated documents by first class mail or other equally prompt means.
This includes information contained in documents filed subsequent to the
effective date of the Registration Statement through the date of responding
to the request.
(7) To supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired or involved
therein, that was not the subject of and included in the Registration
Statement when it became effective.
(b) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act of 1933 and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act of 1933 and will be governed by the final adjudication of such
issue.
II-8
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this Amendment No.1 to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Chicago,
State of Illinois, on September 20, 2000.
Smurfit-Stone Container Corporation
/s/ Patrick J. Moore
By: _________________________________
Name: Patrick J. Moore
Title: Vice President and Chief
Financial Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No.1 to the Registration Statement has been signed by the following persons in
the capacities and on the date indicated.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
Chairman of the Board and Director
___________________________________________
Michael W.J. Smurfit
Ray M. Curran* President and Chief Executive Officer and
___________________________________________ Director (Principal Executive Officer)
Ray M. Curran
Patrick J. Moore* Vice President and Chief Financial Officer
___________________________________________ (Principal Financial Officer)
Patrick J. Moore
Paul K. Kaufmann* Vice President and Corporate Controller
___________________________________________ (Principal Accounting Officer)
Paul K. Kaufmann
Richard A. Giesen* Director
___________________________________________
Richard A. Giesen
Alan E. Goldberg* Director
___________________________________________
Alan E. Goldberg
Howard E. Kilroy* Director
___________________________________________
Howard E. Kilroy
James J. O'Connor* Director
___________________________________________
James J. O'Connor
Jerry K. Pearlman* Director
___________________________________________
Jerry K. Pearlman
</TABLE>
S-1
<PAGE>
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
Thomas A. Reynolds, III* Director
___________________________________________
Thomas A. Reynolds, III
Director
___________________________________________
Anthony P. J. Smurfit
Dermot F. Smurfit* Director
___________________________________________
Dermot F. Smurfit
</TABLE>
/s/ Patrick J. Moore
*By_____________________________
Patrick J. Moore, as attorney-in-
fact
S-2
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description
--------- -----------
<C> <S> <C>
2.1* Agreement and Plan of Merger, dated as of August 8, 2000, by
and among Smurfit-Stone Container Corporation ("Smurfit-
Stone"), SCC Merger Co. and Stone Container Corporation
("Stone Container") (included as Annex A to the proxy
statement/prospectus filed as a part of this registration
statement).
3.1* Restated Certificate of Incorporation of Smurfit-Stone
(incorporated by reference to Exhibit 3(a) to Smurfit-Stone's
Registration Statement on Form S-4 (File No. 333-65431)).
3.2* Restated Bylaws of Smurfit-Stone (incorporated by reference to
Exhibit 3(b) to Smurfit-Stone's Registration Statement on Form
S-4 (File No. 333-65431)).
4.1* Certificate for Smurfit-Stone's Common Stock (incorporated by
reference to Exhibit 4.3 to Smurfit-Stone's Registration
Statement on Form S-8 (File No. 33-57085)).
4.2* Form of Certificate of Designation establishing the terms of
Smurfit-Stone's Series A Preferred Stock (included as Annex D
to the proxy statement/prospectus filed as a part of this
registration statement).
4.3 Form of Indenture governing Smurfit-Stone's Debentures.
4.4 Certificate for Smurfit-Stone's Series A Preferred Stock.
5.1* Opinion of Winston & Strawn.
5.2* Tax Opinion of Winston & Strawn.
Indentures and other debt instruments with respect to long-term debt, none of
which exceeds 10 percent of the total assets of Smurfit-Stone and its
subsidiaries on a consolidated basis, are not filed herewith. The Registrant
agrees to furnish a copy of such documents to the Commission upon request.
10.1* Subscription Agreement among Smurfit-Stone, Jefferson Smurfit
Corporation (U.S.) ("Jefferson Smurfit"), Container
Corporation of America ("CCA") and Smurfit International B.V.
("Smurfit International") (incorporated by reference to
Exhibit 10.4 to Smurfit-Stone's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1994).
10.2* Jefferson Smurfit Deferred Compensation Plan, as amended
(incorporated by reference to Exhibit 10.7 to Smurfit-Stone's
Annual Report on Form 10-K for the fiscal year ended December
31, 1996).
10.3* Jefferson Smurfit Corporation Management Incentive Plan
(incorporated by reference to Exhibit 10.10 to Smurfit-Stone's
Annual Report on Form 10-K for the fiscal year ended December
31, 1995).
10.4(a)* Jefferson Smurfit Corporation Amended and Restated 1992 Stock
Option Plan, dated as of May 1, 1997 (incorporated by
reference to Exhibit 10.10 to Smurfit-Stone's Annual Report on
Form 10-K for the fiscal year ended December 31, 1997).
10.4(b)* Amendment of the Jefferson Smurfit Corporation Amended and
Restated 1992 Stock Option Plan (incorporated by reference to
Exhibit 10.3 to Smurfit-Stone's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1999).
10.5(a)* Amended and Restated Credit Agreement, dated as of November
18, 1998, among Smurfit-Stone, JSCE, Inc. ("JSCE"), Jefferson
Smurfit and the banks party thereto (incorporated by reference
to Exhibit 10.6 to Smurfit-Stone's Annual Report on Form 10-K
for the fiscal year ended December 31, 1998).
10.5(b)* First Amendment of Amended and Restated Credit Agreement,
dated as of June 30, 1999, among Smurfit-Stone, JSCE,
Jefferson Smurfit and the banks party thereto (incorporated by
reference to Exhibit 10.1 to Smurfit-Stone's Quarterly Report
on Form 10-Q for the quarter ended June 30, 1999).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description
--------- -----------
<C> <S> <C>
10.5(c)* Second Amendment of Amended and Restated Credit Agreement,
dated as of October 15, 1999, among Smurfit-Stone, JSCE,
Jefferson Smurfit and the banks party thereto (incorporated by
reference to Exhibit 10.1 to Smurfit-Stone's Quarterly Report
on Form 10-Q for the quarter ended September 30, 1999).
10.6(a)* Term Loan Agreement, dated as of February 23, 1995, among
Jefferson Smurfit Finance Corporation ("JS Finance") and Bank
Brussels Lambert, New York Branch (incorporated by reference
to Exhibit 10.1 to Smurfit-Stone's Quarterly Report on Form
10-Q for the quarter ended March 31, 1995).
10.6(b)* Depositary and Issuing and Paying Agent Agreement (Series A
Commercial Paper), dated as of February 23, 1995 (incorporated
by reference to Exhibit 10.2 to Smurfit-Stone's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1995).
10.6(c)* Depositary and Issuing and Paying Agent Agreement (Series B
Commercial Paper), dated as of February 23, 1995 (incorporated
by reference to Exhibit 10.3 to Smurfit-Stone's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1995).
10.6(d)* Receivables Purchase and Sale Agreement, dated as of February
23, 1995, among Jefferson Smurfit, as the Initial Servicer,
and JS Finance, as the Purchaser (incorporated by reference to
Exhibit 10.4 to Smurfit-Stone's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1995).
10.6(e)* Liquidity Agreement, dated as of February 23, 1995, among JS
Finance, the financial institutions party thereto, as Banks,
Bankers Trust Company, as Facility Agent, and Bankers Trust
Company, as Collateral Agent (incorporated by reference to
Exhibit 10.6 to Smurfit-Stone's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1995).
10.6(f)* Commercial Paper Dealer Agreement, dated as of February 23,
1995, among BT Securities Corporation, Morgan Stanley & Co.,
Jefferson Smurfit and JS Finance (incorporated by reference to
Exhibit 10.7 to Smurfit-Stone's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1995).
10.6(g)* Addendum dated March 6, 1995 to Commercial Paper Dealer
Agreement (incorporated by reference to Exhibit 10.8 to
Smurfit-Stone's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1995).
10.6(h)* First Omnibus Amendment, dated as of March 31, 1996, to the
Receivables Purchase and Sale Agreement among Jefferson
Smurfit, JS Finance and the banks party thereto (incorporated
by reference to Exhibit 10.3 to Smurfit-Stone's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1996).
10.6(i)* Affiliate Receivables Sale Agreement, dated as of March 31,
1996, between Smurfit Newsprint Corporation ("Smurfit
Newsprint") and Smurfit-Stone (incorporated by reference to
Exhibit 10.4 to Smurfit-Stone's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1996).
10.6(j)* Amendment No. 2 to the Term Loan Agreement, dated as of August
19, 1997, among JS Finance, Bank Brussels Lambert, New York
Branch and Jefferson Smurfit, as Servicer (incorporated by
reference to Exhibit 10.12(j) to Smurfit-Stone's Annual Report
on Form 10-K for the fiscal year ended December 31, 1997).
10.6(k)* Amendment No. 2 to the Receivables Purchase and Sale
Agreement, dated as of August 19, 1997, among Jefferson
Smurfit, as the Seller and Servicer, and JS Finance, as the
Purchaser, Bankers Trust Company, as Facility Agent, and Bank
Brussels Lambert, New York Branch, as the Term Bank
(incorporated by reference to Exhibit 10.12(k) to Smurfit-
Stone's Annual Report on Form 10-K for the fiscal year ended
December 31, 1997).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description
--------- -----------
<C> <S> <C>
10.6(l)* Amendment No. 2 to the Liquidity Agreement, dated as of August
19, 1997, among JS Finance, Bankers Trust Company, as Facility
Agent, Jefferson Smurfit, as Servicer, Bank Brussels Lambert,
New York Branch, as Term Bank, and the financial institutions
party thereto, as Banks (incorporated by reference to Exhibit
10.12(l) to Smurfit-Stone's Annual Report on Form 10-K for the
fiscal year ended December 31, 1997).
10.7(a)* Amended and Restated Credit Agreement, dated as of November
18, 1998, among Stone Container, the financial institutions
signatory thereto, and Bankers Trust Company, as Agent
(incorporated by reference to Exhibit 15 to Stone Container's
Report on Form 8-K/A dated November 18, 1998).
10.7(b)* First Amendment of Amended and Restated Credit Agreement,
dated as of March 23, 1999, among Stone Container, the
financial institutions signatory thereto, and Bankers Trust
Company, as Agent (incorporated by reference to Exhibit
4(b)(ii) to Stone Container's Annual Report on Form 10-K for
the fiscal year ended December 31, 1998).
10.7(c)* Second Amendment of Amended and Restated Credit Agreement,
dated as of June 30, 1999, among Stone Container, the
financial institutions signatory thereto, and Bankers Trust
Company, as Agent (incorporated by reference to Exhibit 10.1
to Stone Container's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1999).
10.8* Consulting Agreement, dated as of October 24, 1996, by and
between James E. Terrill and Jefferson Smurfit (incorporated
by reference to Exhibit 10.15 to Smurfit-Stone's Annual Report
on Form 10-K for the fiscal year ended December 31, 1996).
10.9* Standstill Agreement, dated as of May 10, 1998, as amended,
among Jefferson Smurfit Group plc ("JS Group"), Morgan Stanley
Leveraged Equity Fund II, Inc. ("MSLEF") and Smurfit-Stone
(incorporated by reference to Exhibit 10(a) to Smurfit-Stone's
Registration Statement on Form S-4 (File No. 333-65431)).
10.10* Registration Rights Agreement, dated as of May 10, 1998, among
MSLEF, Smurfit International, Smurfit-Stone and the other
parties identified on the signature pages thereto
(incorporated by reference to Exhibit 10(e) to Smurfit-Stone's
Registration Statement on Form S-4 (File No. 333-65431)).
10.11* Voting Agreement, dated as of May 10, 1998, as amended, among
Smurfit International, MSLEF and Mr. Roger W. Stone
(incorporated by reference to Exhibit 10(f) to Smurfit-Stone's
Registration Statement on Form S-4 (File No. 333-65431)).
10.12(a)* Smurfit-Stone Container Corporation 1998 Long Term Incentive
Plan (incorporated by reference to Exhibit 10.14 to Smurfit-
Stone's Annual Report on Form 10-K for the fiscal year ended
December 31, 1998).
10.12(b)* First Amendment of the Smurfit-Stone Container Corporation
1998 Long-Term Incentive Plan (incorporated by reference to
Exhibit 10.2 to Smurfit-Stone's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1999).
10.13* Forms of Employment Security Agreements (incorporated by
reference to Exhibit 10(h) to Smurfit-Stone's Registration
Statement on Form S-4 (File No. 333-65431)).
10.14* Stone Container Corporation Directors' Deferred Compensation
Plan (incorporated by reference to Exhibit 10(b) to Stone
Container's Annual Report on Form 10-K for the fiscal year
ended December 31, 1997).
10.15* Stone Container Corporation 1982 Incentive Stock Option Plan
(incorporated by reference to Appendix A to the Prospectus
included in Stone Container's Form S-8 Registration Statement,
Registration Number 2-79221, effective September 27, 1982).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description
--------- -----------
<C> <S> <C>
10.16(a)* Stone Container Corporation 1993 Stock Option Plan
(incorporated by reference to Appendix A to Stone Container's
Proxy Statement dated as of April 10, 1992).
10.16(b)* Amendment of the Stone Container 1993 Stock Option Plan
(incorporated by reference to Exhibit 10.3 to Stone
Container's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1999).
10.17* Stone Container Corporation 1992 Long-Term Incentive Program
(incorporated by reference to Exhibit A to Stone Container's
Proxy Statement dated as of April 11, 1991).
10.18(a)* Stone Container Corporation 1995 Long-Term Incentive Plan
(incorporated by reference to Exhibit A to Stone Container's
Proxy Statement dated as of April 7, 1995).
10.18(b)* Amendment of the 1995 Long-Term Incentive Plan of Stone
Container (incorporated by reference to Exhibit 10.2 to Stone
Container's Quarterly Report on Form 10-Q for the quarter
ended September 30. 1999).
10.19* Management Services Agreement, dated January 1, 1993, by and
between Smurfit-Stone, Smurfit Packaging Corporation and
Smurfit Newsprint (incorporated by reference to Exhibit 10.28
to Smurfit-Stone's Annual Report on Form 10-K for the fiscal
year ended December 31, 1998).
10.20* Management Services Agreement, dated January 1, 1993, by and
between Smurfit-Stone and Smurfit Packaging Corporation
(incorporated by reference to Exhibit 10.29 to Smurfit-Stone's
Annual Report on Form 10-K for the fiscal year ended December
31, 1998).
10.21* Management Services Agreement, dated January 1, 1993, by and
between Smurfit-Stone and Sequoia Pacific Voting Equipment,
Inc. (incorporated by reference to Exhibit 10.30 to Smurfit-
Stone's Annual Report on Form 10-K for the fiscal year ended
December 31, 1998).
10.22* Pension and Insurance Services Agreement, dated January 1,
1997, by and between Smurfit-Stone and Smurfit Packaging
Corporation (incorporated by reference to Exhibit 10.31 to
Smurfit-Stone's Annual Report on Form 10-K for the fiscal year
ended December 31, 1998).
10.23* Pension and Insurance Services Agreement, dated January 1,
1997, by and between Smurfit-Stone and Smurfit Latin America,
a division of Smurfit Packaging Corporation (incorporated by
reference to Exhibit 10.32 to Smurfit-Stone's Annual Report on
Form 10-K for the fiscal year ended December 31, 1998).
10.24(a)* Pooling and Servicing Agreement, dated October 1, 1999, by and
among Stone Receivables Corporation, as Transferor, Stone
Container, as Securer, and The Chase Manhattan Bank, as
Trustee (incorporated by reference to Exhibit 10.1(a) to Stone
Container's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1999).
10.24(b)* Series 1999-1 Supplement, dated as of October 15, 1999, among
Stone Receivables Corporation, as Transferor, Stone Container,
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 Container's Quarterly Report on
From 10-Q for the quarter ended September 30, 1999).
10.24(c)* Series 1999-2 Supplement, dated as of October 15, 1999, among
Stone Receivables Corporation, as Transferor, Stone Container,
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 Container's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1999).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description
--------- -----------
<C> <S> <C>
10.24(d)* Receivables Purchase Agreement, dated October 15, 1999,
between Stone Container, as Seller, and Stone Receivables
Corporation, as Purchaser (incorporated by reference to
Exhibit 10.1(d) to Stone Container's Quarterly Report on Form
10-Q for the quarter ended September 30, 1999).
10.25(a)* Purchase and Sale Agreement, effective as of July 28, 1999,
between Rayonier, Inc. and Jefferson Smurfit (incorporated by
reference to Exhibit 2.1 to JSCE's Current Report on Form 8-K
dated October 25, 1999).
10.25(b)* First Amendment to Purchase and Sale Agreement, dated October
21, 1999, between Rayonier, Inc. and Jefferson Smurfit
(incorporated by reference to Exhibit 2.2 to JSCE's Current
Report on Form 8-K dated October 25, 1999).
10.26* Pre-Merger Agreement, dated as of February 23, 2000, among
Smurfit-Stone, Stone Container, 3038727 Nova Scotia Company
and St. Laurent Paperboard Inc. ("St. Laurent") (incorporated
by reference to Exhibit 99.2 to Smurfit-Stone's Current Report
on Form 8-K dated February 23, 2000).
10.27* Amended and Restated Credit Agreement, dated as of March 31,
2000, among Stone Container, the financial institutions
signatory thereto, and The Chase Manhattan Bank and Bankers
Trust Company, as Agents (incorporated by reference to Exhibit
10.1 to Stone Container's Quarterly Report on Form 10-Q for
the quarter ended March 31, 2000).
10.28* Credit Agreement, dated as of May 31, 2000, among Stone
Container, St. Laurent, the lenders named therein, The Chase
Manhattan Bank, as Agent, Bankers Trust Company, as
Administrative Agent, Deutsche Bank Canada, as Canadian
Administrative Agent, Chase Securities Inc., as Syndication
Agent, Co-Lead Arranger and Joint Book Manager, and DB Alex.
Brown LLC, as Co-Lead Arranger and Joint Book Manager
(incorporated by reference to Exhibit 10.1 to Stone
Container's Current Report on Form 8-K dated June 6, 2000).
10.29* Employment Agreement of Ray M. Curran (incorporated by
reference to Exhibit 10.27 to Smurfit-Stone's Annual Report on
Form 10-K for the fiscal year ended December 31, 1999).
10.30* Employment Agreement of Patrick J. Moore (incorporated by
reference to Exhibit 10.28 to Smurfit-Stone's Annual Report on
Form 10-K for the fiscal year ended December 31, 1999).
10.31* Employment Agreement of Joseph J. Gurandiano.
10.32* Agreement, dated as of May 31, 2000, between Smurfit-Stone and
Joseph J. Gurandiano.
10.33* Voting Agreement, dated as of August 8, 2000, among Smurfit-
Stone, Stone Container, Mariner, Delta and Messrs. Weissman
and Gale (included as Annex F to the proxy
statement/prospectus filed as a part of this registration
statement).
12.1 Statement on the Computation of Earnings to Combined Fixed
Charges and Preferred Stock Dividends for Smurfit-Stone.
12.2 Statement on the Computation of Earnings to Combined Fixed
Charges and Preferred Stock Dividends for Stone Container.
21.1* Subsidiaries of Smurfit-Stone.
23.1* Consent of Winston & Strawn (included in Exhibit 5.1 hereto).
23.2 Consent of Ernst & Young LLP.
23.3 Consent of PricewaterhouseCoopers LLP.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description
--------- -----------
<C> <S> <C>
23.4 Consent of PricewaterhouseCoopers LLP.
24.1* Powers of Attorney (included on signature page hereto).
99.1* Form T-1 of Bankers Trust Company, as Trustee for the
Debentures.
99.2 Form of Proxy of Stone Container.
</TABLE>
--------
* Previously filed.
