SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Quarterly period ended March 31, 1998
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from __________ to __________.
Commission file number 1-3439
STONE CONTAINER CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 36-2041256
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
150 North Michigan Avenue, Chicago, Illinois 60601
(Address of principal executive offices) (Zip Code)
Registrant's telephone number: 312-346-6600
Indicate by check mark (X) whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the Registrant was required to file such reports), and (2)
has been subject to such filing requirement for the past 90 days.
Yes X No
Number of common shares outstanding as of May 11, 1998: 99,736,993
<PAGE>
<TABLE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
STONE CONTAINER CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<CAPTION>
March 31, December 31,
(in millions) 1998* 1997
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents. . . . . . . ... $ 108.3 $ 112.6
Accounts and notes receivable (less
allowances of $26.0 and $27.8). . . . . . 665.5 652.7
Inventories. . . . . . . . . . . . . . . . 721.7 716.0
Other. . . . . . . . . . . . . . . . . . . 129.2 114.4
Total current assets. . . . . . . . 1,624.7 1,595.7
Property, plant and equipment. . . . . . . 4,859.0 4,857.3
Accumulated depreciation and amortization. (2,524.9) (2,479.8)
Property, plant and equipment-net . 2,334.1 2,377.5
Timberlands. . . . . . . . . . . . . . . . 49.8 49.6
Goodwill. . . . . . . . . . . . . . . . . 441.1 444.0
Investment in non-consolidated affiliates 896.4 878.1
Other. . . . . . . . . . . . . . . . . . . 486.1 479.2
Total assets . . . . . . . . . . . . . . . $5,832.2 $ 5,824.1
Liabilities and stockholders' equity
Current liabilities:
Accounts payable . . . . . . . . . . . . . $ 332.9 $ 327.9
Current maturities of senior long-term debt 418.2 415.9
Income taxes . . . . . . . . . . . . . . . 22.1 26.6
Accrued and other current liabilities. . . 310.5 318.6
Total current liabilities. . . . 1,083.7 1,089.0
Senior long-term debt. . . . . . . . . . . 3,353.5 3,238.0
Subordinated debt. . . . . . . . . . . . . 697.5 697.5
Other long-term liabilities. . . . . . . . 309.9 306.7
Deferred taxes . . . . . . . . . . . . . . 171.4 216.0
Commitments and contingencies Note 9. . .
Stockholders' equity:
Series E preferred stock. . . . . . . . 115.0 115.0
Common stock (99.7 and 99.3 shares
Outstanding) . . . . . . . . . . . . . 971.4 966.3
Accumulated deficit . . . . . . . . . . (548.6) (479.5)
Accumulated other comprehensive income. (321.4) (324.6)
Unamortized expense of restricted
stock plan . . . . . . . . . . . . . (.2) (.3)
Total stockholders' equity. . . 216.2 276.9
Total liabilities and stockholders' equity $5,832.2 $5,824.1
<FN>
*Unaudited; subject to year-end audit
The accompanying notes are an integral part of these statements.
</TABLE>
<TABLE>
STONE CONTAINER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
AND ACCUMULATED DEFICIT
<CAPTION>
Three months ended
March 31,
(in millions except per share) 1998 1997
<S> <C> <C>
Net sales . . . . . . . . . . . . . . . . . . $1,265.4 $1,180.8
Cost of products sold . . . . . . . . . . . . 1,047.2 986.8
Selling, general and administrative expenses. 143.8 146.7
Depreciation and amortization . . . . . . . . 67.8 78.5
Equity loss from affiliates . . . . . . . . . 3.4 12.6
Other (income) expense-net. . . . . . . . . . (7.8) 3.1
Income (loss) before interest expense, income
taxes, and minority interest. . . . . . . . 11.0 (46.9)
Interest expense. . . . . . . . . . . . . . . (117.5) (107.4)
Loss before income taxes and minority
interest. . . . . . . . . . . . . . . . . . (106.5) (154.3)
Credit for income taxes . . . . . . . . . . . 37.4 57.6
Minority interest . . . . . . . . . . . . . . -- --
Net loss. . . . . . . . . . . . . . . . . . . (69.1) (96.7)
Preferred stock dividends . . . . . . . . . . (2.0) (2.0)
Net loss applicable to common shares. . . . . $ (71.1) $ (98.7)
Accumulated deficit, beginning of period. . . $ (479.5) $ (51.5)
Net loss . . . . . . . . . . . . . . . . . . (69.1) (96.7)
Cash dividends on common and preferred stock. -- (2.0)
Accumulated deficit, end of period. . . . . . $ (548.6) $ 150.2)
Per share of common stock:
Net loss:
Basic/Diluted . . . . . . . . . . . . . . . $ (.71) $ (.99)
Cash dividends . . . . . . . . . . . . . . . $ -- $ --
Common shares and common share equivalents
outstanding (weighted average, in millions):
Basic/Diluted . . . . . . . . . . . . . . 99.6 99.3
<FN>
Unaudited; subject to year-end audit
The accompanying notes are an integral part of these statements.
</TABLE>
<TABLE>
STONE CONTAINER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
Three months ended
March 31,
(in millions except per share) 1998 1997
<S> <C> <C>
Cash flows from operating activities:
Net loss. . . . . . . . . . . . . . . . . . . . . . . $ (69.1) $ (96.7)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization . . . . . . . . . . . 67.8 78.5
Deferred taxes. . . . . . . . . . . . . . . . . . . (43.2) (62.4)
Foreign currency transaction (gains) losses . . . . (1.5) 4.5
Equity loss from affiliates . . . . . . . . . . . . 3.4 12.6
Other-net . . . . . . . . . . . . . . . . . . . . . 18.1 20.4
Changes in current assets and liabilities:
Increase in accounts and notes receivable-net . . . (14.3) (1.8)
Increase in inventories . . . . . . . . . . . . . . (8.2) (41.7)
Increase in other current assets. . . . . . . . . . (5.7) (.1)
Decrease in accounts payable and other current
Liabilities. . . . . . . . . . . . . . . . . . . . (7.7) (72.6)
Net cash used in operating activities . . . . . . . . (60.4) (159.3)
Cash flows from financing activities:
Borrowings. . . . . . . . . . . . . . . . . . . . . . 121.4 191.4
Payments made on debt . . . . . . . . . . . . . . . . (6.3) (10.5)
Payments by consolidated affiliates on non-recourse
Debt. . . . . . . . . . . . . . . . . . . . . . . . -- (3.2)
Cash dividends. . . . . . . . . . . . . . . . . . . . -- (2.0)
Net cash provided by financing activities . . . . . . 115.1 175.7
Cash flows from investing activities:
Capital expenditures. . . . . . . . . . . . . . . . . (23.8) (26.3)
Proceeds from sales of assets . . . . . . . . . . . . .6 2.6
Investments in and advances to affiliates, net . . . (35.4) (4.3)
Other-net . . . . . . . . . . . . . . . . . . . . . . .7 (5.3)
Net cash used in investing activities . . . . . . . . (57.9) (33.3)
Effect of exchange rate changes on cash . . . . . . . (1.1) (1.3)
Net decrease in cash and cash equivalents . . . . . . (4.3) (18.2)
Cash and cash equivalents, beginning of period. . . . 112.6 112.6
Cash and cash equivalents, end of period. . . . . . . $108.3 $ 94.4
<FN>
See Note 8 regarding supplemental cash flow information.
Unaudited; subject to year-end audit
The accompanying notes are an integral part of these statements.
</TABLE>
STONE CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: Basis of Presentation
Pursuant to the rules and regulations of the Securities and Exchange
Commission ("SEC") for Form 10-Q, the financial statements, footnote
disclosures and other information normally included in the financial
statements prepared in accordance with generally accepted accounting
principles have been condensed. These financial statements, footnote
disclosures and other information should be read in conjunction with the
financial statements and the notes thereto included in Stone Container
Corporation's (the "Company's") latest Annual Report on Form 10-K. In
the opinion of the Company, the accompanying unaudited consolidated
financial statements contain all normal recurring adjustments necessary
to fairly present the Company's financial position as of March 31, 1998
and the results of operations and cash flows for the three month periods
ended March 31, 1998 and 1997.
NOTE 2: Reclassifications
Certain prior year amounts have been restated to conform with the current
year presentation in the Consolidated Balance Sheets and in the
Statements of Operations and Accumulated Deficit.
NOTE 3: Subsequent Event
On May 10, 1998, the Company agreed to merge (the "Merger") with a
subsidiary of Jefferson Smurfit Corporation ("JSC"), a U.S. integrated
manufacturer of paperboard, paper and packaging products. The terms of
the Merger are set forth in an Agreement and Plan of Merger (the "Merger
Agreement"), dated as of May 10, 1998, among JSC, JSC Acquisition
Corporation, a Delaware corporation and a wholly owned subsidiary of JSC,
and the Company. In the Merger, each share of the Company's common stock
will be converted into 0.99 of a share of JSC's common stock, par value
$0.01 per share (the "JSC Common Stock"), and JSC will be renamed Smurfit-
Stone Container Corporation. The Merger is intended to constitute a tax-
free reorganization under the Internal Revenue Code of 1986, as amended,
and will be accounted for as a purchase.
Consummation of the Merger, which is expected to close in the fall of
1998, is subject to various conditions, including (i) receipt of approval
by the stockholders of each of the Company and JSC of appropriate matters
relating to the Merger Agreement and the Merger; (ii) the expiration or
termination of applicable waiting periods under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended, and the receipt of
requisite regulatory approvals from the European Union and other foreign
and domestic regulatory authorities; (iii) registration of the shares of
JSC Common Stock to be issued in the Merger under the Securities Act of
1933, as amended; and (iv) satisfaction of certain other conditions.
The foregoing summary of the Merger Agreement is qualified in its
entirety by reference to the text of the Merger Agreement, a copy of
which is filed as Exhibit 2.1 to the Company's Current Report on Form 8-K
dated May 12, 1998 and which is incorporated herein by reference.
On or about May 12, 1998, two putative class action complaints were
filed against the individual directors of the Company, the Company and
JSC in the Court of Chancery of the State of Delaware in and for New
Castle County (C.A. No. 16375-NC and C.A. No. 16391-NC, collectively, the
"Complaints"). The Complaints are substantially identical and allege,
among other things, that the directors of the Company violated the
fiduciary duties owed to the public shareholders of the Company. Each
Complaint requests that the Court, among other things, declare that the
Complaint is a proper class action and enjoin the Merger and require that
the directors place the Company up for auction and/or conduct a market-
check to ascertain the Company's value. The Company believes that the
Complaints are without merit.
NOTE 4: Adoption of New Accounting Standard
Comprehensive Income
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
130") which establishes standards for reporting and display of
comprehensive income and its components in the financial statements.
Comprehensive income represents the change in stockholders' equity during
a period resulting from transactions and other events and circumstances
from non-owner sources. It includes all changes in equity during a
period except those resulting from investments by owners and
distributions to owners. The Company has restated its prior period
financial statements for comparative purposes as required. The adoption
of SFAS 130 had no impact on the Company's consolidated results of
operations, financial position or cash flows.
Three months ended
March 31,
(in millions) 1998 1997
Net loss. . . . . . . . . . . . . . . . . $ (69.1) $ (96.7)
Other comprehensive income, net of tax:
Foreign currency translation. . . . . . . 3.2 (42.7)
Comprehensive income (loss) . . . . . . . $ (65.9) $ (139.4)
Accumulated through Accumulated through
March 31, 1998 March 31, 1997
Current Current
Beginning Period Ending Beginning Period Ending
Balance Change Balance Balance Change Balance
Minimum pension
liability adjustment. .$ (31.3) $-- $ (31.3) $ (42.7) $ -- $ (42.7)
Foreign currency
translation adjust-
ments. . . . . . . . . (293.3) 3.2 (290.1) (178.8) (42.7) (221.5)
Accumulated other
comprehensive income . $(324.6) $3.2 $(321.4) $(221.5) $(42.7) $(264.2)
NOTE 5: Reconciliation of Basic and Diluted EPS
Three months ended
1998 1997
Income Income
in millions, except per share data (Loss) Shares (Loss) Shares
Net loss $(69.1) $(96.7)
Less: Preferred dividends (2.0) (2.0)
Basic EPS
Income available to common
stockholders (71.1) 99.6 (98.7) 99.3
Effect of Dilutive Securities:
Convertible debt (a) (a) (a) (a)
Exchangeable Preferred Stock (b) (b) (b) (b)
Diluted EPS $(71.1) 99.6 $(98.7) 99.3
Basic Earnings Per Share Amount $ (.71) $ (.99)
Diluted Earnings Per Share
Amount $ (.71) $ (.99)
(a) Convertible debt effects of $1.3 million and 6.4 million shares are
excluded from the diluted EPS computation in 1998 and 1997 because they
are antidilutive.
(b) Exchangeable preferred stock effects of $2.0 million and 3.4 million
shares are excluded from the dilutive EPS computation in 1998 and 1997
because they are antidilutive.
NOTE 6: Inventories
Inventories are summarized as follows:
March 31, December 31,
(in millions) 1998 1997
Raw materials and supplies $261.7 $ 263.5
Paperstock 343.2 342.1
Work in process 20.8 21.5
Finished products 115.6 108.5
741.3 735.6
Excess of current cost over LIFO
inventory value (19.6) (19.6)
Total inventories $721.7 $ 716.0
NOTE 7: Current Maturities of Long-term Debt
Current maturities of long-term debt at March 31, 1998 and December 31,
1997 consisted of the following:
March 31, December 31,
(in millions) 1998 1997
11 7/8% Senior Notes due
December 1, $239.7 $ 239.7
12 5/8% Senior Notes due
July 15, 150.0 150.0
Other 28.5 26.2
Total current maturities of
senior long-term debt $418.2 $ 415.9
See also the "Outlook" section of the MD&A for a discussion of the
Company's liquidity and financial condition.
NOTE 8: Additional Cash Flow Statement Information
The Company's cash payments for interest and income taxes were as
follows:
Three months ended
March 31,
(in millions) 1998 1997
Cash paid during the periods for:
Interest (net of capitalization) $ 103.7 $98.4
Income taxes (net of refunds) $ 10.3 $ (5.1)
NOTE 9: Commitments and Contingencies
On April 6, 1998, a suit was filed against the Company in Los Angeles
Superior Court by Chesterfield Investments and DP Investments L.P. (the
"Plaintiffs") alleging that the Company owes them approximately $120
million relating to the Company's purchase of the Plaintiffs' interest in
Stone Savannah River Pulp & Paper Corporation ("SSR"). In 1991, Stone
purchased from Chesterfield Investment its shares of common stock of SSR
for approximately $6 million with a contingent payment payable in March
1998 based upon the performance of the operations which were contained in
SSR. The Company is vigorously disputing the Plaintiffs' calculation of
the contingent payment amount.
On or about May 12, 1998, two putative class action complaints were
filed against the individual directors of the Company, the Company and
JSC in the Court of Chancery of the State of Delaware in and for New
Castle County (C.A. No. 16375-NC and C.A. No. 16391-NC, collectively, the
"Complaints"). The Complaints are substantially identical and allege,
among other things, that the directors of the Company violated the
fiduciary duties owed to the public shareholders of the Company. Each
Complaint requests that the Court, among other things, declare that the
Complaint is a proper class action and enjoin the Merger and require that
the directors place the Company up for auction and/or conduct a market-
check to ascertain the Company's value. The Company believes that the
Complaints are without merit.
STONE CONTAINER CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Provided below is certain financial data for the three months ended March
31, 1998 and 1997.
Three months ended March 31,
1998 1997
Net sales $1,265.4 $1,180.8
Depreciation and amortization 67.8 78.5
Interest expense 117.5 107.4
Equity loss from affiliates 3.4 12.6
Loss before income taxes and minority interest (106.5) (154.3)
Net loss (69.1) (96.7)
The Company incurred a net loss of $69.1 million for the 1998 first
quarter, or $.71 per share of common stock, as compared with a net loss
for the 1997 first quarter of $96.7 million, or $.99 per share of common
stock. The increase in sales and the reduction in the Company's net loss
primarily resulted from improved selling prices and sales volume for
containerboard, corrugated containers and industrial paper bags, which
more than offset the effect of lower average selling prices for market
pulp.
Shipments of corrugated containers, including the Company's
proportionate share of the shipments by its foreign affiliates, were 14.2
billion square feet for the first quarter of 1998 compared with 13.2
billion square feet for the comparable prior year period. Shipments of
paper bags and sacks, including the Company's proportionate share of the
shipments of S&G Packaging Company, L.L.C., were 120 thousand tons for
the three months ended March 31, 1998, compared with 118 thousand tons
shipped during the comparable 1997 period.
Production of containerboard and kraft paper was 1.36 million tons for
the three months ended March 31, 1998, compared to 1.38 million tons for
the prior year period.
Financial Condition and Liquidity
The Company's working capital ratio was 1.5 to 1 at March 31, 1998 and at
December 31, 1997. The Company's long-term debt to total capitalization
ratio was 91.2 percent at March 31, 1998 and 88.8 percent at December 31,
1997. Capitalization, for purposes of this ratio, includes long-term
debt, deferred income taxes, minority interest and stockholders' equity.
The Company's primary capital requirements consist of debt service and
capital expenditures, including capital investment for compliance with
certain environmental legislation requirements and ongoing maintenance
expenditures and improvements. The Company is highly leveraged, and
while highly leveraged, will incur substantial ongoing interest expense.
The Company's bank credit agreement contains covenants that include,
among other things, the maintenance of certain financial tests and
ratios. On March 26, 1998, the Company and its bank group amended the
Company's credit agreement to, among other things, modify certain
financial covenant requirements. At March 31, 1998, the Company's bank
credit agreement, as amended, provided for four senior secured term loans
aggregating $1,054 million which mature through October 1, 2003 and $560
million of senior secured revolving credit facility commitments maturing
May 15, 1999 (collectively, the "Credit Agreement").
At May 11, 1998, the Company had borrowing availability of
approximately $294 million (net of letters of credit which reduce the
amount available to be borrowed) under its revolving credit facilities in
addition to its cash and cash equivalents. Of such amount, approximately
$36 million is restricted to fund capital expenditures. The weighted
average interest rates on outstanding term loan and revolver borrowings
under the Credit Agreement for the three months ended March 31, 1998 were
9.0 percent and 8.6 percent, respectively. The weighted average rates do
not include the effect of the amortization of deferred debt issuance
costs.
The Company's various senior note indentures ( the "Senior Notes
Indentures") (under which approximately $2.0 billion of debt is
outstanding) state that if the Company does not maintain a minimum
Subordinated Capital Base (as defined) of $1 billion for any two
successive quarters, then the Company will be required to semi-annually
offer to purchase 10 percent of such outstanding indebtedness at par
until the minimum Subordinated Capital Base is again attained. In the
event that the Company's Credit Agreement does not permit the offer to
repurchase, then the Company will be required to increase the rates on
the notes outstanding under the Senior Note Indentures by 50 basis points
per quarter up to a maximum of 200 basis points until the minimum
Subordinated Capital Base is attained. The Company's Subordinated
Capital Base was $840.1 million at March 31, 1998 and was $898.6 million
at December 31, 1997. In April 1998, the Company, as permitted by the
March 1998 Credit Agreement amendment, made a one-time offer for the
repurchase of 10 percent of the senior notes issued under the Senior Note
Indentures. The offer expired on April 28, 1998 with approximately $1.3
million of notes having been tendered and purchased at par.
The Company's senior subordinated indenture dated March 15, 1992 (the
"Senior Subordinated Indenture") (under which approximately $594 million
of debt was outstanding at March 31, 1998) states that if the Company
does not maintain $500 million of Net Worth (as defined) for any two
successive quarters, the Company will be required to increase the
interest rate on indebtedness outstanding under the Senior Subordinated
Indenture by 50 basis points per quarter up to a maximum amount of 200
basis points. The Company's Net Worth (as defined) was $319.8 million at
March 31, 1998 and was $378.4 million at December 31, 1997. The Company
is therefore required to increase the interest rate on the outstanding
debt by 50 basis points effective July 1, 1998.
There can be no assurance that the Company can achieve or maintain the
minimum Subordinated Capital Base or required Net Worth in the future.
Operating activities:
Net cash used by operating activities was $60.4 million for the three
months ended March 31, 1998, compared with $159.3 million of cash used by
operating activities for the comparable period of 1997. The use of cash
during the 1998 first quarter primarily resulted from the first quarter
net loss in conjunction with an increase in cash outflows associated with
working capital changes. The negative cash flow effects associated with
working capital changes resulted from an increase in accounts receivable
due to increased demand and improved product pricing, increases in
inventories and other current assets and a decrease in accounts payable
and other current liabilities.
Financing activities:
During the 1998 first quarter the Company increased its borrowings by
$122 million under its revolving credit facility primarily to fund
operating cash needs, capital expenditures and debt service obligations.
The declaration of dividends by the Board of Directors is subject to,
among other things, certain restrictive provisions contained in the
Company's Credit Agreement, Senior Note Indentures and Senior
Subordinated Indenture. Due to these restrictive provisions, the Company
cannot declare or pay dividends on its Series E Cumulative Convertible
Exchangeable Preferred Stock (the "Series E Cumulative 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 Net Worth (as defined) equals or exceeds $750 million.
Additionally, common stock cash dividends cannot be declared and paid in
the event accumulated preferred stock dividend arrearages exist. At
March 31, 1998, the dividend pool under the Senior Subordinated Indenture
(which contains the most restrictive dividend pool provision) had a
deficit of approximately $398 million and Net Worth (as defined) was
$319.8 million. In the event six quarterly dividends remain unpaid on
the Series E Cumulative Preferred Stock, the holders of the Series E
Cumulative Preferred Stock would have the right to elect two members to
the Company's Board of Directors until the accumulated dividends on such
Series E Cumulative Preferred Stock have been declared and paid or set
apart for payment. At March 31, 1998 the Company had accumulated
dividend arrearages on the Series E Cumulative Preferred Stock of $8
million, which represents four consecutive quarters for which dividends
have not been paid. The Company did not make its February 15, 1998
dividend payment and absent an amendment from its senior and senior
subordinated note holders, the Company is not likely to make dividend
payments in 1998.
Investing activities:
Capital expenditures for the three months ended March 31, 1998 totaled
approximately $24 million. Additionally, the Company advanced
approximately $30 million to Stone Venepal (Celgar) Pulp, Inc., a non-
consolidated affiliate of the Company, in the 1998 first quarter.
Outlook:
The Company's liquidity and financial flexibility has been adversely
impacted by the net losses and insufficient operating cash flows
generated during the past two years and in the first quarter of 1998.
On October 27, 1997, the Company announced its intent to, among other
things, sell its ownership interest in Stone-Canada which at the time of
sale would have included its 25.2 percent ownership interest in Abitibi-
Consolidated, its 50 percent interest in MacMillan-Bathurst and its
wholly owned pulp mill located at Portage-du-Fort, Quebec. The Company
now intends to sell its interest in Stone-Canada which will include the
Abitibi-Consolidated shares and possibly other Canadian assets which are
not as yet determined. If completed, this transaction would provide a
significant amount of cash to the Company, which would be used to repay
debt. Additionally, the Company announced its intent to also sell or
monetize certain other of its assets (including any remaining pulp
operations) with any proceeds received therefrom to also be applied
towards debt reduction. While the Company currently believes that these
sales and/or monetizations will be consummated, no assurance can be given
that such asset sales or monetizations will be completed. Currently, the
Company's debt agreements require that proceeds from asset sales be used
only for debt reduction.
The Company's ability to incur additional indebtedness and refinance
its 1998 debt maturities is significantly limited under the Company's
debt agreements. The Company has debt amortizations of $409 million of
principal plus interest of approximately $360 million (at debt and
interest-rate levels as of March 31, 1998) due in the remainder of 1998
and has significant annual debt service requirements beyond 1998. These
1998 debt amortizations include $150 million of 12-5/8 percent Senior
Notes due July 15, 1998 and $240 million of 11-7/8 percent Senior Notes
due December 1, 1998.
It is expected that the Company will continue to incur losses unless
prices for the Company's products substantially improve. Without
achieving price increases and sustaining such levels in the future, the
Company's cash resources and borrowing availability under the existing
revolving credit facilities could be utilized, thereby reducing such
sources of liquidity. While pricing for certain of the Company's
products has improved over the depressed levels of 1997, the Company
expects to report a net loss for the second quarter of 1998. The
Company's primary capital requirements consist of debt service and
capital expenditures, including capital investment for compliance with
certain environmental legislation requirements and ongoing maintenance
expenditures and improvements. The Company is highly leveraged and as a
result incurs substantial ongoing interest expense. Besides the 1998
debt service requirements previously mentioned, the Company, based upon
indebtedness outstanding at March 31, 1998, will be required to make debt
principal repayments of approximately $476 million in 1999, $465 million
in 2000 and $603 million in 2001. In the event that operating cash
flows, proceeds from any assets sales, borrowing availability under its
revolving credit facilities or from other financing sources do not
provide sufficient liquidity for the Company to meet its obligations,
including its debt service requirements, the Company will be required to
pursue other alternatives to repay indebtedness and improve liquidity,
including cost reductions, deferral of certain discretionary capital
expenditures and seeking amendments to its debt agreements. No
assurances can be given that such measures, if required, would generate
the liquidity required by the Company to operate its business and service
its obligations.
On May 10, 1998, the Company agreed to merge (the "Merger") with a
subsidiary of Jefferson Smurfit Corporation ("JSC"), a U.S. integrated
manufacturer of paperboard, paper and packaging products. The terms of
the Merger are set forth in an Agreement and Plan of Merger (the "Merger
Agreement"), dated as of May 10, 1998, among JSC, JSC Acquisition
Corporation, a Delaware corporation and a wholly owned subsidiary of JSC,
and the Company. In the Merger, each share of the Company's common stock
will be converted into 0.99 of a share of JSC's common stock, par value
$0.01 per share (the "JSC Common Stock"), and JSC will be renamed Smurfit-
Stone Container Corporation. The Merger is intended to constitute a tax-
free reorganization under the Internal Revenue Code of 1986, as amended,
and will be accounted for as a purchase.
Consummation of the Merger, which is expected to close in the fall of
1998, is subject to various conditions, including (i) receipt of approval
by the stockholders of each of the Company and JSC of appropriate matters
relating to the Merger Agreement and the Merger; (ii) the expiration or
termination of applicable waiting periods under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended, and the receipt of
requisite regulatory approvals from the European Union and other foreign
and domestic regulatory authorities; (iii) registration of the shares of
JSC Common Stock to be issued in the Merger under the Securities Act of
1933, as amended; and (iv) satisfaction of certain other conditions.
The foregoing summary of the Merger Agreement is qualified in its
entirety by reference to the text of the Merger Agreement, a copy of
which is filed as Exhibit 2.1 to the Company's Current Report on Form 8-K
dated May 12, 1998 and which is incorporated herein by reference.
On or about May 12, 1998, two putative class action complaints were
filed against the individual directors of the Company, the Company and
JSC in the Court of Chancery of the State of Delaware in and for New
Castle County (C.A. No. 16375-NC and C.A. No. 16391-NC, collectively, the
"Complaints"). The Complaints are substantially identical and allege,
among other things, that the directors of the Company violated the
fiduciary duties owed to the public shareholders of the Company. Each
Complaint requests that the Court, among other things, declare that the
Complaint is a proper class action and enjoin the Merger and require that
the directors place the Company up for auction and/or conduct a market-
check to ascertain the Company's value. The Company believes that the
Complaints are without merit.
PART II. OTHER INFORMATION
Item 2. Changes in Securities
As previously reported in a Report on Form 8-K dated May 13, 1998, the
Company amended the Rights Agreement, dated as of July 25, 1988 and
amended as of July 23, 1990, May 16, 1996 and
May 10, 1998.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
11 Computation of Basic and Diluted Net Loss Per Common Share.
27 Financial Data Schedule for the three months ended March 31, 1998.
(b) Reports on Form 8-K
1. A Report on Form 8-K dated May 12, 1998 was filed under Item 2 -
Acquisition or Disposition of Assets and Item 7 - Exhibits.
2. A Report on Form 8-K dated May 13, 1998 was filed under Item 5 -
Other Events and Item 7 - Exhibits.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
STONE CONTAINER CORPORATION
By: THOMAS P. CUTILLETTA
Thomas P. Cutilletta
Senior Vice President, Administration
and Corporate Controller
(Principal Accounting Officer)
Date: May 15, 1998
EXHIBIT 11
STONE CONTAINER CORPORATION
COMPUTATION OF BASIC AND DILUTED LOSS PER SHARE
(in millions, except per share)
Three Months Ended
March 31,
1998 1997
Primary Earnings Per Share
Shares of Common Stock:
Weighted average number of common shares
Outstanding. . . . . . . . . . . . . . . . . . . . 99.6 99.3
Basic Weighted Average Shares Outstanding . . . . . . 99.6 99.3
Net loss. . . . . . . . . . . . . . . . . . . . . . . $(69.1) $ (96.7)
Less:
Series E Cumulative Convertible Exchangeable
Preferred Stock dividend. . . . . . . . . . . . . (2.0) (2.0)
Net loss used in computing basic net loss per common
Share . . . . . . . . . . . . . . . . . . . . . . . $(71.1) $ (98.7)
Basic Earnings Per Share. . . . . . . . . . . . . . . $ (.71) $ (.99)
Diluted Earnings Per Share
Shares of Common Stock:
Weighted average number of common shares outstanding 99.6 99.3
Addition from assumed conversion of 8.875%
convertible senior subordinated notes. . . . . . . 5.1 5.1
Addition from assumed conversion of 6.75%
convertible subordinated debentures . . . . . . . 1.3 1.3
Addition from assumed conversion of Series E
Cumulative Convertible Exchangeable Preferred
Stock . . . . . . . . . . . . . . . . . . . . . . 3.4 3.4
Diluted Weighted Average Shares Outstanding . . . . . 109.4 109.1
Net loss. . . . . . . . . . . . . . . . . . . . . . . $(69.1) $ (96.7)
Less:
Series E Cumulative Convertible Exchangeable
Preferred Stock dividend. . . . . . . . . . . . . (2.0) (2.0)
Add back:
Interest on 8.875% convertible senior subordinated
Notes . . . . . . . . . . . . . . . . . . . . . . .8 .8
Interest on 6.75% convertible subordinated
Debentures. . . . . . . . . . . . . . . . . . . . .5 .5
Series E Cumulative Convertible Exchangeable
Preferred Stock dividend. . . . . . . . . . . . . 2.0 2.0
Net loss used in computing diluted net loss per
common share. . . . . . . . . . . . . . . . . . . . $(67.8) $ (95.4)
Diluted Earnings Per Share (A). . . . . . . . . . . . $ (.62) $ (.87)
(A) Diluted earnings per share for the three months ended March 31, 1998 and
1997 are different from the consolidated financial statements because amounts
are anti-dilutive.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Stone
Container Corporation and Subsidiaries' March 31, 1998 Consolidated Balance
Sheet and Consolidated Statement of Operations and Accumulated Deficit and
is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
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<PP&E> 4859
<DEPRECIATION> 2525
<TOTAL-ASSETS> 5832
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<BONDS> 4051
0
115
<COMMON> 971
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<SALES> 1265
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<CGS> 1047
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<OTHER-EXPENSES> (4)
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<INTEREST-EXPENSE> 117
<INCOME-PRETAX> (106)
<INCOME-TAX> (37)
<INCOME-CONTINUING> (69)
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<CHANGES> 0
<NET-INCOME> (69)
<EPS-PRIMARY> (.71)
<EPS-DILUTED> (.71)
</TABLE>
