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 June 30, 1998.
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act 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 August 7, 1998: 104,977,686
<TABLE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
STONE CONTAINER CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<CAPTION>
June 30, December 31,
(in millions) 1998* 1997
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 109.5 $ 112.6
Accounts and notes receivable (less allowances 684.8 652.7
of $28.2 and $27.8)
Inventories 734.0 716.0
Other 137.8 114.4
Total current assets 1,666.1 1,595.7
Property, plant and equipment 4,891.9 4,857.3
Accumulated depreciation and amortization (2,577.7) (2,479.8)
Property, plant and equipment-net 2,314.2 2,377.5
Timberlands 47.6 49.6
Goodwill 451.0 444.0
Investment in non-consolidated affiliates 844.0 878.1
Other 383.0 479.2
Total assets $ 5,705.9 $ 5,824.1
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 323.5 $ 327.9
Current maturities of long-term debt 638.5 415.9
Income taxes 22.7 26.6
Accrued and other current liabilities 326.0 318.6
Total current liabilities 1,310.7 1,089.0
Senior long-term debt 3,201.6 3,238.0
Subordinated debt 697.4 697.5
Non-recourse debt of consolidated affiliates 9.9 --
Other long-term liabilities 339.1 306.7
Deferred taxes 129.5 216.0
Commitments and contingencies (Note 12)
Stockholders' equity:
Series E preferred stock 115.0 115.0
Common stock (99.9 and 99.3 shares 974.0 966.3
outstanding)
Accumulated deficit (705.2) (479.5)
Accumulated other comprehensive income (365.9) (324.6)
Unamortized expense of restricted stock (.2) (.3)
plan
Total stockholders' equity 17.7 276.9
Total liabilities and stockholders' equity $ 5,705.9 $ 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 Six months ended
June 30, June 30,
(in millions except per 1998 1997 1998 1997
share)
<S> <C> <C> <C> <C>
Net sales $1,273.8 $1,200.2 $2,539.2 $2,381.1
Cost of products sold 1,039.3 1,016.7 2,086.5 2,003.6
Selling, general and 149.3 140.8 293.1 287.5
administrative expenses
Depreciation and 68.1 81.0 135.9 159.6
amortization
Equity loss from affiliates 32.3 10.7 35.7 23.2
Other (income) expense-net 54.8 (6.9) 47.0 (3.8)
Loss before interest
expense, income taxes, (70.0) (42.1) (59.0) (89.0)
minority interest and
extraordinary charges
Interest expense (119.8) (118.7) (237.3) (226.1)
Loss before income taxes,
minority interest and (189.8) (160.8) (296.3) (315.1)
Credit for income taxes 33.7 53.4 71.1 111.0
Minority interest (.1) -- (.1) --
Loss before extraordinary (156.2) (107.4) (225.3) (204.1)
Extraordinary charges from
early
extinguishment of debt (.4) (13.3) (.4) (13.3)
(net of
income tax benefit)
Net loss (156.6) (120.7) (225.7) (217.4)
Preferred stock dividends (2.0) (2.0) (4.0) (4.0)
Net loss applicable to $(158.6) $(122.7) $(229.7) $(221.4)
Accumulated deficit, $(548.6) $(150.2) $(479.5) $ (51.5)
Net loss (156.6) (120.7) (225.7) (217.4)
Cash dividends on common and
preferred stock -- -- -- (2.0)
Accumulated deficit, end of $(705.2) $(270.9) $(705.2) $(270.9)
Per share of common stock:
Loss before extraordinary
charges $ (1.59) $ (1.10) $ (2.30) $ (2.10)
- Basic/Diluted
Extraordinary charges from
early -- (.13) -- (.13)
extinguishment of debt
Net loss -Basic/Diluted $ (1.59) $ (1.23) $ (2.30) $ (2.23)
Cash dividends $ -- $ -- $ -- $ --
Common shares outstanding
(weighted Average, in
millions) 99.8 99.3 99.7 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 Six months ended
June 30, June 30,
(in millions except per share) 1998 1997 1998 1997
<S> <C> <C> <C> <C>
Cash flows from operating
activities:
Net loss $(156.6) $(120.7) $(225.7) $(217.4)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Depreciation and 68.1 81.0 135.9 159.6
amortization
Deferred taxes (39.8) (58.4) (83.0) (120.8)
Foreign currency transaction 10.0 (.9) 8.5 3.6
losses
(gains)
Equity loss from affiliates 32.3 10.7 35.7 23.2
Write-off investments in 53.5 -- 53.5 --
SVCPI
Extraordinary charges from
early .4 13.3 .4 13.3
Extinguishment of debt
Other-net 14.0 21.4 32.1 41.8
Changes in current assets and
liabilities
net of adjustments for an
acquisition
and a disposition:
(Increase) decrease in
accounts and 16.6 (50.8) 2.3 (52.6)
notes receivable-net
(Increase) decrease in (8.8) 73.2 (17.0) 31.5
inventories
(Increase) decrease in other (10.0) .3 (15.7) .2
current
assets
Increase (decrease) in
accounts 3.3 (8.6) (4.4) (81.2)
payable and other current
liabilities
Net cash used in operating (17.0) (39.5) (77.4) (198.8)
activities
Cash flows from financing
activities:
Payments made on debt (58.7) (420.6) (65.0) (431.1)
Payments by consolidated
affiliates on -- (9.7) -- (12.9)
non-recourse debt
Borrowings 122.6 612.8 244.0 804.2
Proceeds from issuance of 2.4 -- 2.4 --
common stock
Cash dividends -- -- -- (2.0)
Net cash provided by financing 66.3 182.5 181.4 358.2
activities
Cash flows from investing
activities:
Capital expenditures (43.8) (31.7) (67.6) (58.0)
Proceeds from sales of assets .8 .5 1.4 3.1
Investments in and advances to (12.9) (4.6) (48.3) (8.9)
affiliates, net
Other-net 7.3 (21.8) 8.0 (27.1)
Net cash used in financing (48.6) (57.6) (106.5) (90.9)
Effect of exchange rate changes .5 (1.1) (.6) (2.4)
on cash
Net increase (decrease) in cash
and cash 1.2 84.3 (3.1) 66.1
equivalents
Cash and cash equivalents, 108.3 94.4 112.6 112.6
beginning of period
Cash and cash equivalents, end $ 109.5 $ 178.7 $ 109.5 $ 178.7
of period
<FN>
See Note 11 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, as amended by a Form 10-K/A. 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 June 30, 1998 and the results of operations
and cash flows for the three and six month periods ended June 30, 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: Pending Merger
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) registration of the shares of JSC Common Stock to be issued in the
Merger under the Securities Act of 1933, as amended; and (iii)
satisfaction of certain other conditions including regulatory matters.
The Company received the requisite regulatory approvals of the Federal
Trade Commission, the European Commission and the Canadian Competition
Bureau in July.
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.
The combined company is expected to have approximately $7 billion
of debt outstanding after the Merger (without giving affect to any
divestitures prior to or upon the Merger or thereafter). In connection
with the Merger, the Company is considering various refinancing
alternatives which would be intended to reduce interest expense and
address the expected liquidity requirements of the combined company
following the Merger. Effectuation of the Merger is not conditioned on
consummation of any such refinancing. There are material uncertainties
relating to the consummation of any of the refinancing alternatives
under consideration and, as a result, the particular capital structure
that would result from any such alternative is subject to significant
variables. In addition, no assurance can be given that any of the
refinancing alternatives and planned divestitures will generate
sufficient funds to meet all of the combined company's needs or that
refinancing or divestitures can be implemented on terms acceptable to
the combined company. Even if a refinancing and all of the planned
divestitures are implemented, the combined company will continue to a
have highly leveraged capital structure.
NOTE 4: Subsequent Event
On July 24, 1998 MacMillan Bloedel Inc. ("MacBlo") informed the Company
that it was exercising its compulsory buy-sell option to purchase the
50 percent partnership interest owned by the Company in MacMillan
Bathurst Inc., a Canadian corrugated box company in which MacBlo owns
the other 50 percent. The purchase price offer was $185 million (Cdn).
On or before August 23, 1998, the Company will either be required to
accept such offer or purchase MacBlo's interest in the partnership for
the same price. The closing of the transaction is required to be
completed by September 4, 1998. The Company has not yet determined its
course of action on this offer.
NOTE 5: Write-off Investments in Non-Consolidated Affiliate
On July 23, 1998 Stone Venepal (Celgar) Pulp, Inc. ("SVCPI"), a non-
consolidated Canadian affiliate of the Company, filed for bankruptcy
protection. The Company and its partners, after evaluating SVCPI's
losses and cash flow under current market conditions, decided to end
their relationship with SVCPI. As a result, the Company recorded a one-
time write-off of $54 million in the 1998 second quarter related to its
interest in SVCPI. The lenders to SVCPI and any other SVCPI creditors
do not have recourse against the Company.
The following pro forma financial information assumes that the
Company ended its affiliation with SVCPI as of the beginning of each
period presented. The pro forma information does not purport to be
indicative of the future combined results of operations, or of those
which would have resulted had the identified event occurred at the
beginning of each period presented.
Three months ended Six months ended
June 30, June 30,
(in millions except 1998 1997 1998 1997
per share)
Net sales 1,273.8 1,153.2 2,539.2 2,318.8
Net loss before
extraordinary charges 89.1 96.5 146.2 185.6
Net loss 89.5 109.8 146.6 198.9
Net loss per share
before extraordinary .92 .99 1.51 1.91
charges .92 .99 1.51 1.91
- basic
-
diluted
Net loss per share - .92 1.12 1.51 2.04
basic .92 1.12 1.51 2.04
- - diluted
NOTE 6: Adoption of New Accounting Standards
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 Six months ended
June 30, June 30,
(in millions) 1998 1997 1998 1997
Net loss $ (156.6) $ (120.7) $ (225.7) $ (217.4)
Other comprehensive
income,
net of tax:
Foreign currency (44.5) (12.0) (41.3) (54.7)
translation
Comprehensive income $ (201.1) $ (132.7) $ (267.0) $ (272.1)
Accumulated through Accumulated through
June 30, 1998 June 30, 1997
Beginn Current Ending Beginn Current Ending
ing Period Balance ing Period Balance
Balance Change Balance Change
Minimum pension
liability $(31.3) $ -- $(31.3) $(42.7) $ -- $(42.7)
Foreign currency
translation (293.3) (41.3) (334.6) (178.8) (54.7) (233.5)
adjustment
Accumulated
other $(324.6) $(41.3) $(365.9) $(221.5) $ (54.7) $(276.2)
comprehensive
income
Pensions and Other Postretirement Benefits
In February 1998, the Financial Accounting Standards Board ("FASB")
issued Statement No. 132, "Employers' Disclosures about Pensions and
Other Postretirement Benefits," which is effective for fiscal years
beginning after December 15, 1997, and requires restatement of prior
year periods presented. The Statement does not change the measurement
or recognition of pension and other postretirement plans. It
standardizes the disclosure requirements, requires additional
information on changes in benefit obligations and fair values of plan
assets, and eliminates certain disclosures. The Company will adopt the
new disclosure rules in its year-end 1998 financial statements.
Start-up Costs
On April 3, 1998 Statement of Position 98-5 "Reporting on the Costs of
Start-Up Activities" ("SOP 98-5") was issued which requires that the
costs of start-up activities be expensed as incurred. SOP 98-5 is
effective for financial statements for fiscal years beginning after
December 15, 1998. The Company will adopt SOP 98-5 effective January
1, 1999 by recognizing a charge of approximately $8 million, net of
tax, as a cumulative effect of an accounting change.
Derivative Instruments
In June 1998, the FASB issued Statement No. 133, "Accounting for
Derivative Instruments and Hedging Activities," which is effective for
all fiscal quarters of fiscal years beginning after June 15, 1999.
This Statement requires that all derivatives be recorded in the balance
sheet as either assets or liabilities and be measured at fair value.
The accounting for changes in the fair value of a derivative depends on
the intended use of the derivative and the resulting designation. The
Company is in the process of evaluating this standard and does
not anticipate that it will have a material effect on the Company's
financial statements.
NOTE 7: Reconciliation of Basic and Diluted EPS
Three months ended Six months ended
1998 1997 1998 1997
Income Income Income Income
In millions, (Loss) Shares (Loss) Shares (Loss) Shares (Loss) Shares
except per
share data
Loss before $(156.2) $(107.4) $(225.3) $(204.1)
extraordinary
charges
Less:
Preferred (2.0) (2.0) (4.0) (4.0)
dividends
Basic EPS
Income
available to (158.2) 99.8 (109.4) 99.3 (229.3) 99.7 (208.1) 99.3
common
stockholders
Effect of
Dilutive
Securities:
Convertible Debt (a) (a) (a) (a) (c) (c) (c) (c)
Exchangeable (b) (b) (b) (b) (d) (d) (d) (d)
Preferred
Stock
Options and (e) (e)
warrants
Diluted EPS $(158.2) 99.8 $(109.4) 99.3 $(229.3) 99.7 $(208.1) 99.3
Basic Earnings $(1.59) $(1.10) $(2.30) $(2.10)
Per Share
Amount
Diluted $(1.59) $(1.10) $(2.30) $(2.10)
Earnings Per
Share Amount
__________________
(a) Convertible debt effects of $1.3 million and 6.4 million shares
are excluded from the diluted EPS computation because they are
antidilutive.
(b) Exchange preferred stock effects of $2.0 million and 3.4 million
shares are excluded from the dilutive EPS computation because they are
antidilutive.
(c) Convertible debt effects of $2.5 million and 6.4 million shares
are excluded from the diluted EPS computation because they are
antidilutive.
(d) Exchangeable preferred stock effects of $4.0 million and 3.4
million shares are excluded from the dilutive EPS computation because
they are antidilutive.
(e) Options and warrants effects of .9 million shares and .4 million
shares for the three and six months ended June 30, 1998, respectively,
are excluded from the dilutive EPS computation because they are
antidilutive.
NOTE 8: Inventories
Inventories are summarized as follows:
June 30, December
31,
(in millions) 1998 1997
Raw materials and supplies $ 251.3 $ 263.5
Paperstock 354.9 342.1
Work in process 20.6 21.5
Finished products 126.8 108.5
753.6 735.6
Excess of current cost over
LIFO (19.6) (19.6)
Inventory value
Total inventories $ 734.0 $ 716.0
NOTE 9: Summarized Financial Information of Non-Consolidated
Affiliates
Combined summarized financial information for the Company's non-
consolidated affiliates that are accounted for under the equity method
of accounting is presented below:
Three months ended Six months ended June
June 30, 30,
(in millions) 1998 1997 1998 1997
Results of
operations:
Net sales $ 1,061.8 $ 954.6 $ 2,112.2 $ 1,633.8
Cost of products 815.4 659.2 1,640.9 1,213.6
sold
Loss before income
taxes,
minority interest (107.2) (24.6) (57.1) (55.3)
and
extraordinary
charges
Net loss (84.2) (20.1) (57.5) (45.6)
NOTE 10: Debt
Current maturities of long-term debt at June 30, 1998 and December 31,
1997 consisted of the following:
June 30, December
31,
(in millions) 1998 1997
11 7/8% Senior Notes due
December 1, 1998 $ 239.5 $ 239.7
Revolving Credit Facility
Due May 15, 1999 216.0 --
12 5/8% Senior Notes due
July 15, 1998 150.0 150.0
Other 33.0 26.2
Total current maturities of
long-term debt $ 638.5 $ 415.9
On April 3, 1998, Stone Container GMBH, a German subsidiary of the
Company, entered into a loan facility agreement with Dresdner Bank AG
for 90 million Deutsche Marks at an interest rate equal to LIBOR plus 2
percent. The loan facility expires April 30, 2005. The proceeds from
the facility were loaned to the Company and were applied against
amounts outstanding on the Company's term loans under its credit
agreement.
On June 16, 1998, the Company issued a notice to redeem all of its
outstanding 8-7/8 percent Convertible Senior Subordinated Notes due
2000 (the "Notes") on July 15, 1998 at a redemption price equal to 101
percent of the principal amount of each Note, plus accrued interest.
The $58.4 million of Notes were convertible into shares of common stock
at a conversion price of $11.55 per share. All of the Notes were
converted in July (prior to the redemption date), resulting in the
issuance of 5,060,516 shares of common stock.
On July 15, 1998, the Company repaid its 12-5/8 percent Senior
Notes at maturity with borrowings under its revolving credit facility.
See also the "Outlook" section of the MD&A for a discussion of the
Company's liquidity and financial condition.
NOTE 11: Additional Cash Flow Statement Information
The Company's non-cash investing and financing activities and cash
payments (receipts) for interest and income taxes were as follows:
Three months ended Six months ended
June 30, June 30,
(in millions) 1998 1997 1998 1997
Decrease in debt due
to deconsolidation of $ -- $ 538.0 $ -- $ 538.0
affiliate (1)
Increase in debt due
to consolidation of 11.2 264.9 11.2 264.9
affiliate (2)
Capital lease -- .9 -- .9
obligation incurred
Issuance of common
stock for .2 -- .2 --
extinguishment of
debt
Cash paid during the
periods for:
Interest (net of $ 114.8 $ 112.5 $ 218.5 $ 210.9
capitalization)
Income taxes (net of 4.6 3.5 14.9 (1.6)
refunds)
__________
(1) Decrease due to the sale of a portion of the Company's interest in
SVCPI on June 26, 1997. Such amount includes the $264.9 million of
debt assumed from CITIC as discussed below.
(2) Increase in 1997 due to the acquisition of CITIC's interest in the
Celgar Mill on April 4, 1997.
NOTE 12: 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, the
Company purchased from Chesterfield Investment its shares of common
stock of SSR for approximately $6 million plus 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.
In May 1998, four 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. On June 15, 1998, the Court of Chancery signed an order which
consolidated the four actions. Now captioned as In re Stone Container
Shareholders Litigation, C.A. 16375 (the "Action"), the Action alleges,
among other things, that the directors of the Company violated the
fiduciary duties of due care and loyalty that they owed to the public
stockholders of the Company because, the Action contends, the directors
failed to undertake an appropriate evaluation of the Company's net
worth as a merger/acquisition candidate, actively evaluate the proposed
transaction and engage in a meaningful auction with third parties in an
attempt to obtain the best value for the Company's stockholders. The
Action further alleges that the Company's directors failed to make an
informed decision and that the stockholders will not receive fair value
for their shares of common stock in the Merger, will be largely
divested of their right to share in the Company's future growth and
development and will be prevented from obtaining fair and adequate
consideration for their shares of common stock. The Action requests
that the Court of Chancery, among other things, declare that the Action
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.
On August 11, 1998, the parties to the Action entered into a
memorandum of understanding setting forth the terms of a proposed
settlement of the Action, subject to certain conditions. While the
Company, the members of the Company's board of directors and JSC
continue to deny the allegations of the Action or that they have
breached any duty or engaged in any wrongdoing in connection with the
Merger, the defendants have agreed to enter into the proposed
settlement to eliminate the burden, expense and uncertainty of
litigation. In connection with the proposed settlement, (a) the
Company and JSC agreed to provide plaintiffs' counsel with an
opportunity to review and comment upon the disclosure to be provided to
the Company's stockholders in the joint proxy statement seeking
stockholder approval of the Merger, (b) the Company agreed to obtain an
updated opinion as to the fairness of the Merger to the Company's
stockholders from a financial point of view, and (c) the Company and
JSC agreed, subject to approval by their respective boards of
directors, to amend the Merger Agreement to reduce the termination fee
payable to the Company or JSC, respectively, upon termination of the
Merger in certain circumstances, from $60 million to $50 million. The
defendants in the Action agreed not to oppose an application to the
Court of Chancery by plaintiffs' counsel for fees and expenses not to
exceed $650,000, which would be paid by the Company. The proposed
settlement set forth in the memorandum of understanding is subject to a
number of conditions, including discovery by plaintiffs' counsel,
approval of the proposed settlement by the Court of Chancery and
consummation of the Merger. If the proposed settlement is approved by
the Court of Chancery and the other conditions are satisfied, the Court
will certify a non-opt out class of the Company's stockholders for the
period from May 10, 1998 through the effective time of the Merger, the
Action will be dismissed with prejudice and the Company, the Company's
board of directors, JSC and their respective officers, directors,
employees and agents will receive a release for all claims that were or
could have been asserted in the Action.
Three class action complaints, General Refractories Company v. Stone
Container Corporation, Crest Meat Co, Inc. v. Stone Container
Corporation, and Albert I. Halper Corrugated Box Co., Inc. v. Stone
Container Corporation, have been filed in the United States District
Court for the Northern District of Illinois. The suits allege that the
Company reached agreements in restraint of trade with other producers
of corrugated sheets in violation of Section 1 of the Sherman Antitrust
Act,15 U.S.C.Section 1.The Company is the only named defendant, though the
suits allege that other unnamed firms participated in the purported
restraints of trade, and specifically allege, on information and
belief, that Jefferson Smurfit Corporation also participated. The
suits seek an unspecified amount of damages arising out of the sale of
corrugated sheets for the period October 1, 1993 through March 31,
1995. Under the provisions of the antitrust laws, any award of actual
damages would be trebled. The Company moved to dismiss the General
Refractories and Crest Meat Co. complaints on August 7, and intends to
move to dismiss the Halper complaint as well. Discovery has not yet
commenced, and a trial date has not been set. The Company believes it
has meritorious defenses to these actions, and intends to vigorously
defend itself.
Believing the allegations to be without merit and without admitting
liability, on June 4, 1998 the Company entered into a consent decree (the
"Consent Agreement") with the Federal Trade Commission (the "FTC"). In
pertinent part, the Consent Agreement requires the Company to cease and
desist from "requesting, suggesting, urging or advocating that any
manufacturer or seller of linerboard raise, fix, or stablize prices or
price levels..." and from "entering into, or attempting to enter into...
any agreement...to fix, raise, establish, maintain or stablize prices
or price levels...".
There are no monetary fines, sanctions or damages imposed by the
FTC in connection with the Consent Agreement. However, the Company
will be required to file certain reports on an annual basis with the
FTC to evidence its compliance with the Consent Agreement.
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 and six months
ended June 30, 1998 and 1997.
Three months ended Six months ended June
June 30, 30,
1998 1997 1998 1997
Net sales $ 1,273.8 $ 1,200.2 $ 2,539.2 $ 2,381.1
Depreciation and 68.1 81.0 135.9 159.6
amortization
Interest expense 119.8 118.7 237.3 226.1
Equity loss from 32.3 10.7 35.7 23.2
affiliates
Loss before income
taxes,
minority interest (189.8) (160.8) (296.3) (315.1)
and
extraordinary
charge
Net loss (156.6) (120.7) (225.7) (217.4)
The Company incurred a net loss of $156.6 million for the 1998 second
quarter, or $1.59 per share of common stock, as compared with a net
loss for the 1997 second quarter of $120.7 million, or $1.23 per share
of common stock. For the six months ended June 30, 1998, the Company
incurred a net loss of $225.7 million, or $2.30 per share of common
stock, as compared with a net loss of $217.4 million, or $2.23 per
share of common stock, for the first half of 1997. The net loss for
the second quarter and first half of 1998 includes a one-time write-off
of the Company's interest in Stone Venepal (Celgar) Pulp, Inc.
("SVCPI") of $53.5 million. See Note 5 to the Consolidated Financial
Statements. The Company's share of SVCPI's net losses were $13.6
million and $25.6 million for the three and six months ended June 30,
1998. The net loss for the second quarter and the first half of 1997
includes a non-cash extraordinary charge of $13.3 million, or $.13 per
common share, representing the Company's share of a loss from the early
extinguishment of debt incurred by Abitibi-Consolidated Inc. in
connection with the May 1997 merger of Stone-Consolidated Corporation
with Abitibi-Price Inc.
Net sales for the three and six months ended June 30, 1998,
increased $74 million and $158 million, or 6.2% and 6.6%, respectively
over the same periods of 1997. The increase resulted primarily from
improved selling prices for corrugated containers and containerboard
and increased corrugated container sales volumes, which more than
offset the effect of lower average market pulp selling prices and sales
volume. Sales for the second quarter and first half of 1997 included
$47 million and $62 million of sales generated by SVCPI, which had
become a non-consolidated affiliate effective June 26, 1997. On a pro
forma basis excluding SVCPI in 1997, sales for the second quarter and
first half of 1998 increased 10.5% and 9.5%, respectively, over the
prior year periods. Additionally, the strengthening of the U.S. dollar
relative to the German Mark and Canadian dollar had a negative affect
on sales. If the U.S. dollar exchange rates remained unchanged from
those of the 1997 periods, net sales for the three and six months ended
June 30, 1998 would have been higher by approximately $8 million and
$21 million, respectively.
Cost of products sold decreased as a percent of net sales to 81.6%
and 82.2% for the second quarter and first half of 1998, respectively,
from 84.7% and 84.1% in the prior year periods. These improvements
were mainly due to increased selling prices for most of the Company's
products over prior year levels. Selling, general and administrative
expenses remained fairly constant as a percent of net sales during the
periods reported. Depreciation and amortization decreased 15.9% and
14.8% from the prior year second quarter and first half, respectively,
due in part to the deconsolidation of SVCPI and due to the full
depreciation of certain assets in the prior year. The Company's share
of losses from equity affiliates increased $21.6 million and $12.5
million in the second quarter and first half, respectively, largely as
a result of approximately $21 million and $13 million of foreign
exchange transaction losses recorded by certain non-consolidated
affiliates in the current year periods. Additionally, the Company's
1998 earnings were negatively affected by $10.0 million and $8.5
million of foreign exchange transaction losses included in Other
(income) expense for the second quarter and first half of 1998 as
compared to $.9 million of exchange gains and $3.6 million of exchange
losses recognized in the second quarter and first half of 1997,
respectively. Interest expense was $1.1 million and $11.2 million
higher in the second quarter and first half of 1998, primarily due to
increased average borrowings.
Product Line Sales Data
Percentage Change
Three Six months Three Six months
months ended months ended
ended ended
(in millions) 1998 1997 1998 1997 Sales Sales Sales Sales es
Reve Vol Reve Vol
nue ume nue ume
Corrugated
containers $677 $600 $1,337 $1,203 12.8% 6.3% 11.1% 6.6%
Paperboard and 302 257 613 542 17.5 (2.8) 13.1 (2.4)
kraft paper
Industrial paper 116 117 236 231 (0.9) (1.0) 2.2 1.8
bags and sacks
Market pulp 81 150 155 238 (46.0) (23.4) (34.9) (6.4)
Other 98 76 198 167 28.9 nm 18.6 nm
Total Net Sales 1,274 1,200 2,539 2,381 6.2 6.6
Sales of SVCPI
(deconsolidated -- (47) -- (62)
June
1997)
Proforma sales $1,274 $1,153 $2,539 $2,319 10.5% 9.5%
excluding SVCPI
nm=not meaningful
Net sales of corrugated containers increased 12.8% over the second
quarter of 1997 as a result of improved domestic selling prices and a
6.3% increase in sales volume. Shipments of corrugated containers,
including the Company's proportionate share of the shipments by its
foreign affiliates, were 15.0 billion square feet for the second
quarter of 1998 compared with 14.0 billion square feet for the
comparable prior year period. For the first six months of 1998
corrugated container sales increased 11.1% over the prior year period
as a result of improved selling prices and a 6.6% increase in sales
volume. Shipments of corrugated containers were 29.2 billion square
feet for the six months of 1998 versus 27.2 billion in 1997.
Net sales of paperboard and kraft paper increased 17.5% over the
second quarter of 1997 due to improved paperboard selling prices, which
more than offset a 2.8% decrease in sales volume. Production of
containerboard and kraft paper was 1.36 million tons for the three
months ended June 30, 1998, compared to 1.21 million tons for the prior
year period. Sales of paperboard and kraft paper increased 13.1% over
the first half of 1997, despite a 2.4% reduction in sales volume, as a
result of significant price improvements from 1997 levels. Production
of containerboard and kraft paper was 2.72 million tons for the six
months ended June 30, 1998, compared to 2.59 million tons for the prior
year period.
Sales of industrial bags and sacks were relatively flat in the
second quarter when compared to the prior year. For the six months
ended June 30, 1998, industrial bag sales increased 2.2% over the prior
year period, primarily due to a 1.8% increase in sales volume.
Slightly higher average selling prices also contributed to the improved
sales. Shipments of paper bags and sacks, including the Company's
proportionate share of retail bag shipments of S&G Packaging Company,
L.L.C. ("S&G"), were 126 thousand tons and 247 thousand tons for the
three and six months ended June 30, 1998, compared with 130 thousand
tons and 248 thousand tons shipped during the comparable 1997 periods.
Sales of market pulp decreased $69 million, or 46.0%, from the
second quarter of 1997 partly due to the deconsolidation of SVCPI.
Excluding the $47 million of sales generated by SVCPI in the second
quarter of 1997, market pulp sales decreased 21.4% from the prior year
second quarter due to a 17.0% decrease in sales volume and lower
average selling prices. Sales of market pulp for the first half of
1998 decreased $83 million, or 34.9%, from the first half of 1997.
Excluding $62 million of SVCPI's sales during the first half of 1997,
market pulp sales decreased 11.9% from the first half of 1997 due to a
6.1% decline in sales volume and lower average selling prices.
Foreign Currency Risk
A portion of the Company's operations are located outside of the United
States. Because of this, movements in exchange rates can have an
impact on the Company's financial condition and results of operations.
The Company's significant foreign exchange exposures are the Canadian
dollar and the German Mark. In general, a weakening of the German Mark
and Canadian dollar relative to the U.S. dollar has a negative
translation effect on the Company's financial condition and results of
operations. Conversely, a strengthening of these currencies relative
to the U.S. dollar would have the opposite effect.
During the first six months of 1998, the average exchange rates
for the Canadian dollar and the German Mark strengthened (weakened)
against the U.S. dollar as follows:
Six
months Three months ended
ended
6-30- 6-30- 3-31-
98 98 98
Canadian dollar (3.9)% (1.2)% (3.3)%
German mark (4.2)% 1.4% (4.9)%
Financial Condition and Liquidity
The Company's working capital ratio was 1.3 to 1 at June 30, 1998 and
1.5 to 1 at December 31, 1997. The Company's long-term debt to total
capitalization ratio was 96.3 percent at June 30, 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 credit agreement contains covenants that include,
among other things, the maintenance of certain financial tests and
ratios. On March 26, 1998, on June 5, 1998 and on July 31, 1998, the
Company and its lenders amended the Company's credit agreement to,
among other things, modify certain financial covenant requirements. At
June 30, 1998, the Company's credit agreement, as amended, provided for
four senior secured term loans aggregating $1,001 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 August 7, 1998, the Company had borrowing availability of
approximately $110 million (net of letters of credit which reduce the
amount available to be borrowed) under its revolving credit facilities.
The weighted average interest rates on outstanding term loan and
revolver borrowings under the Credit Agreement for the six months ended
June 30, 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 senior 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 $636.0 million at June 30, 1998, $840.0
million at March 31, 1998 and $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 June 30, 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 each series of senior subordinated indebtedness
outstanding under the Senior Subordinated Indenture by 50 basis points
on each succeeding interest payment date up to a maximum amount of 200
basis points until the required Net Worth is attained. The Company's
Net Worth (as defined) was $115.8 million at June 30, 1998, $319.8
million at March 31, 1998 and $378.4 million at December 31, 1997.
Effective August 15,1998 the Company will be required to increase the
interest rate on its 11 percent Senior Subordinated Debentures due
August 15, 1999 by 50 basis points. The Company will also be required
to increase the interest rate on its 10.75 percent Senior
Subordinated Debentures due April 1, 2002 and its Senior Subordinated
Units due April 1, 2002 effective October 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 $77.4 million for the six
months ended June 30, 1998, compared with $198.8 million of cash used
by operating activities for the 1997 period. The decrease in net cash
used by operating activities was primarily the result of improved
product pricing over 1997 levels. The use of cash during the 1998
period primarily resulted from the first half net loss in conjunction
with cash outflows associated with working capital changes.
Financing activities:
During the first half of 1998 the Company increased its borrowings by
$196 million under its revolving credit facility, primarily to fund
operating cash needs, capital expenditures and debt service
obligations.
On April 3, 1998, Stone Container GMBH, a German subsidiary of the
Company, entered into a loan facility agreement with Dresdner Bank AG
for 90 million Deutsche Marks at an interest rate equal to LIBOR plus 2
percent. The loan facility expires April 30, 2005. The proceeds from
the facility were loaned to the Company and were applied against
amounts outstanding on the Company's term loans under its Credit
Agreement.
On June 16, 1998, the Company issued a notice to redeem all of its
outstanding 8-7/8 percent Convertible Senior Subordinated Notes due
2000 (the "Notes") on July 15, 1998 at a redemption price equal to 101
percent of the principal amount of each Note, plus accrued interest.
The $58.4 million of Notes were convertible into shares of common stock
at a conversion price of $11.55 per share. All of the Notes were
converted in July (prior to the redemption date), resulting in the
issuance of 5,060,516 shares of common stock.
On July 15, 1998, the Company repaid its 12-5/8 percent Senior
Notes at maturity, with borrowings under its revolving credit facility.
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 June 30, 1998, the dividend pool under the Senior
Subordinated Indenture (which contains the most restrictive dividend
pool provision) had a deficit of approximately $522 million and Net
Worth (as defined) was $115.8 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 June 30, 1998 the
Company had accumulated dividend arrearages on the Series E Cumulative
Preferred Stock of $10 million, which represents five consecutive
quarters for which dividends have not been paid. The Company did not
make its May 15, 1998 dividend payment and the Company will not make a
dividend payment on August 15, 1998. Furthermore, absent an amendment
from its senior and senior subordinated note holders, is not likely to
make a dividend payment on November 15, 1998. As a result of the
Company missing the August 15, 1998 payment, the Company will set forth
the procedures for the holders of Series E Cumulative Preferred Stock
to elect the two additional members to the Company's Board of
Directors.
Investing activities:
Capital expenditures for the six months ended June 30, 1998 totaled
approximately $68 million.
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 half 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 MacMillian-Bathurst
and its wholly owned pulp mill located at Portage-du-Fort, Quebec. The
Company still intends to sell its interest in 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 intends to 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. On May
10, 1998, the Company agreed to merge (the "Merger") with a subsidiary
of Jefferson Smurfit Corporation ("JSC") pursuant to an agreement and
Plan of Merger (the "Merger Agreement") dated as of May 10, 1998 among
JSC, JSC Acquisition Corporation and the Company. Due to the proposed
Merger, the Company is re-evaluating the previously announced
divestitures. While the Company currently intends to sell or otherwise
divest certain non-core assets, the determination of non-core assets to
be divested and the timing of any such transactions will be dependent
on, among other things, the consummation and effective date of the
Merger, discussion with management of JSC, pending planning for
integration of divestiture and cost reduction plans for JSC and the
Company post-merger, potential refinancing plans related to the Merger
and market conditions. While the Company currently believes that these
sales and/or monetizations may be consummated, subject, among other
things, to market conditions and market values for such assets;
however, no assurance can be given that such asset sales or
monetizations will be completed. Currently, the Company' 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 $255
million of principal plus interest of approximately $230 million (at
debt and interest-rate levels as of June 30, 1998 excluding the 12-5/8
percent Senior Notes repaid July 15, 1998) due in the remainder of 1998
and has significant annual debt service requirements beyond 1998. The
1998 debt amortizations include $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 significant price increases and sustaining such
levels in the future, the Company's cash resources and borrowing
availability under the existing revolving credit facilities will likely
be fully utilized, thereby reducing such sources of liquidity. Pricing
for the Company's products has not improved significantly over the
depressed levels of 1997, and as a result the Company expects to report
a net loss for the third 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 June 30, 1998, will be required to make debt principal
repayments of approximately $557 million in 1999, $472 million in 2000
and $615 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, could be
implemented or would generate the liquidity required by the Company to
operate its business and service its obligations.
On May 10, 1998, the Company agreed to the Merger. The terms of
the Merger are set forth in the Merger Agreement. 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) registration of the shares of JSC Common Stock to be issued in the
Merger under the Securities Act of 1933, as amended; and (iii)
satisfaction of certain other conditions including regulatory matters.
The Company received the requisite regulatory approvals of the Federal
Trade Commission, the European Commission and the Canadian Competition
Bureau in July.
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.
The combined company is expected to have approximately $7 billion
of debt outstanding after the Merger (without giving affect to any
divestitures prior to or upon the Merger or thereafter). In connection
with the Merger, the Company is considering various refinancing
alternatives which would be intended to reduce interest expense and
address the expected liquidity requirements of the combined company
following the Merger. Effectuation of the Merger is not conditioned on
consummation of any such refinancing. There are material uncertainties
relating to the consummation of any of the refinancing alternatives
under consideration and, as a result, the particular capital structure
that would result from any such alternative is subject to significant
variables. In addition, no assurance can be given that any of the
refinancing alternatives and planned divestitures will generate
sufficient funds to meet all of the combined company's needs or that
refinancing or divestitures can be implemented on terms acceptable to
the combined company. Even if a refinancing and all of the planned
divestitures are implemented, the combined company will continue to
have a highly leveraged capital structure.
In May 1998, four 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. On June 15, 1998, the Court of Chancery signed an order which
consolidated the four actions. Now captioned as In re Stone Container
Shareholders Litigation, C.A. 16375 (the "Action"), the Action alleges,
among other things, that the directors of the Company violated the
fiduciary duties of due care and loyalty that they owed to the public
stockholders of the Company because, the Action contends, the directors
failed to undertake an appropriate evaluation of the Company's net
worth as a merger/acquisition candidate, actively evaluate the proposed
transaction and engage in a meaningful auction with third parties in an
attempt to obtain the best value for the Company's stockholders. The
Action further alleges that the Company's directors failed to make an
informed decision and that the stockholders will not receive fair value
for their shares of common stock in the Merger, will be largely
divested of their right to share in the Company's future growth and
development and will be prevented from obtaining fair and adequate
consideration for their shares of common stock. The Action requests
that the Court of Chancery, among other things, declare that the Action
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.
On August 11, 1998, the parties to the Action entered into a
memorandum of understanding setting forth the terms of a proposed
settlement of the Action, subject to certain conditions. While the
Company, the members of the Company's board of directors and JSC
continue to deny the allegations of the Action or that they have
breached any duty or engaged in any wrongdoing in connection with the
Merger, the defendants have agreed to enter into the proposed
settlement to eliminate the burden, expense and uncertainty of
litigation. In connection with the proposed settlement, (a) the
Company and JSC agreed to provide plaintiffs' counsel with an
opportunity to review and comment upon the disclosure to be provided to
the Company's stockholders in the joint proxy statement seeking
stockholder approval of the Merger, (b) the Company agreed to obtain an
updated opinion as to the fairness of the Merger to the Company's
stockholders from a financial point of view, and (c) the Company and
JSC agreed, subject to approval by their respective boards of
directors, to amend the Merger Agreement to reduce the termination fee
payable to the Company or JSC, respectively, upon termination of the
Merger in certain circumstances, from $60 million to $50 million. The
defendants in the Action agreed not to oppose an application to the
Court of Chancery by plaintiffs' counsel for fees and expenses not to
exceed $650,000, which would be paid by the Company. The proposed
settlement set forth in the memorandum of understanding is subject to a
number of conditions, including discovery by plaintiffs' counsel,
approval of the proposed settlement by the Court of Chancery and
consummation of the Merger. If the proposed settlement is approved by
the Court of Chancery and the other conditions are satisfied, the Court
will certify a non-opt out class of the Company's stockholders for the
period from May 10, 1998 through the effective time of the Merger, the
Action will be dismissed with prejudice and the Company, the Company's
board of directors, JSC and their respective officers, directors,
employees and agents will receive a release for all claims that were or
could have been asserted in the Action.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On April 20, 1994, Carolina Power & Light ("CP&L") commenced
proceedings against the Company before The Federal Energy
Regulatory Commission ("FERC") (the "Stone FERC Proceeding") and
in the United States District Court for the Eastern District of
North Carolina (the "Federal Court Action"). Both proceedings
relate to the Company's electric cogeneration facility located at
its Florence, South Carolina plant (the "Facility") and the
Electric Power Purchase Agreement (the "Agreement") between the
Company and CP&L.
In the Stone FERC Proceeding, CP&L alleged that in August 1991
when the Company elected to switch to a "buy-all/sell-all mode of
operation" pursuant to the Agreement, the Facility lost its
qualifying facility ("QF") certification under the Public Utility
Regulatory Policy Act of 1978 thereby making it a public utility.
In the Federal Court Action, CP&L had requested declaratory
judgments that (i) sales of electric energy by the Company after
August 1991 were subject to a reasonable rate determination by the
FERC, and (ii) the Company's failure to maintain the Facility's QF
status terminated the Agreement. On September 20, 1994, the
United States District Court (the "District Court") stayed the
Federal Court Action pending the FERC's decision.
On February 11, 1998, the FERC entered its order (the "FERC
Order") denying CP&L's motion to revoke the Facility's QF status,
and the Company may, therefore, continue to sell electric power to
CP&L pursuant to the Agreement's buy-all/sell-all option. The
FERC Order was issued not only in the Stone FERC Proceeding, but
also in two separate QF proceedings before the FERC (the "Other
Proceedings"). While the Other Proceedings involve unrelated
parties and different facts and circumstances, the FERC Order
established a policy applicable to the Stone FERC Proceeding and
the Other Proceedings. Subsequent to the FERC Order, the District
Court, at CP&L's request, dismissed the Federal Court Action with
prejudice. Certain parties in the Other Proceedings have applied
to the FERC for rehearing of the FERC Order. The FERC may either
grant or deny a rehearing and, if a rehearing is denied, the FERC
Order would be final but also appealable to the appropriate U.S.
Court of Appeals. There can be no assurance that the FERC Order
will not be revised or reversed upon any rehearing or appeal in
connection with the Other Proceedings or what affect any such
revision or reversal would have on the Stone FERC Proceeding. The
Company believes that in the Stone FERC Proceeding, where no party
has requested rehearing, the FERC Order should be final,
regardless of the outcome of the Other Proceedings. Moreover, the
Company believes that the facts and policies at issue in Stone
FERC Proceeding differ materially from those at issue in the Other
Proceedings.
On January 22, 1996, the United States of America filed a suit
against the Company in the United States District Court for the
District of Montana seeking injunctive relief and an unspecified
amount in civil penalties based on the alleged failure of the
Company to comply with certain provisions of the Clean Air Act
("CAA"), its implementing regulations, and the Montana State
Implementation Plan at the Company's Missoula, Montana kraft pulp
mill, (the "Missoula Mill"). The complaint specifically alleged
that the Company exceeded the 20% opacity limitation for recovery
boiler emissions; failed to properly set the span on a recovery
boiler continuous emissions monitor; and violated limitations on
venting of an air contaminant by improperly venting non-
condensible gasses. On May 19, 1998, the Company, the United
States Department of Justice, the United States Environmental
Protection Agency and other intervening parties entered into a
consent decree settling this case. In addition to, among other
things, agreeing to certain emissions limitations and monitoring
and reporting requirements, the Company paid a civil penalty of
$312,500.
In a related matter, on January 29, 1996 a Complaint was filed in
the United States District Court for the District of Montana by
the Montana Coalition for Health, Environmental and Economic
Rights, Inc.; Cold Mountain, Cold Rivers, Inc. and Native Forest
Network, Inc. (collectively "Plaintiffs") alleging numerous
violations at the Missoula Mill of the provisions of the CAA, the
Federal Water Pollution Control Act and the Emergency Planning and
Community Right-to-Know Act. The Complaint, as amended, sought
declaratory and injunctive relief together with civil penalties of
$25,000 per day for each day of alleged violation. After
extensive discussions with Plaintiffs, on May 19, 1998 the
District Court entered a Consent Decree between the Company and
Plaintiffs pursuant to which the Company has agreed to (i) the
payment of a penalty of $50,000; (ii) the funding of $300,000 over
five years for specified projects to be undertaken by the Missoula
City-County Air Pollution Control Board, the Missoula Water
Quality District Board and the Missoula County Local Emergency
Planning Committee; (iii) the payment of specified habitat
restoration and creation projects along the Clark Fork River
($100,000 over five years) and Clark Fork River Basin ($50,000
over three years) (iv) the development and implementation of a
Pollution Prevention Program at the Missoula Mill; and (v)
undertake specified analyses with respect to alternative bleaching
technologies, UCC rejects handling technologies and use of
alternative fibers in the production process. The Company has
paid the $50,000 penalty and will pay the requisite portion of the
projects funding as required.
On April 6, 1998, a suit was filed against the Company in Los
Angeles Superior Court by Chesterfield Investments and DP
Investments L.P. alleging that the Company owes them approximately
$120 million relating to the Company's purchase of the plaintiff's
interest in Stone Savannah River Pulp & Paper Corporation ("SSR").
In 1991, the Company purchased from Chesterfield Investments its
shares of common stock of SSR for approximately $6 million plus 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 plaintiff's calculation of the
contingent payment amount.
Believing the allegations to be without merit and without admitting
liability, on June 4, 1998 the Company entered into a consent decree
(the "Consent Agreement") with the Federal Trade Commission (the
"FTC"). In pertinent part, the Consent Agreement requires the
Company to cease and desist from "requesting, suggesting, urging
or advocating that any manufacturer or seller of linerboard raise,
fix, or stablize prices or price levels..." and from "entering into,
or attempting to enter into...any agreement...to fix, raise,
establish, maintain or stablize prices or price levels...".
There are no monetary fines, sanctions or damages imposed by the
FTC in connection with the Consent Agreement. However, the
Company will be required to file certain reports on an annual
basis with the FTC to evidence its compliance with the Consent
Agreement.
In May 1998, four 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. On June 15, 1998, the Court of Chancery signed
an order which consolidated the four actions. Now captioned as In
re Stone Container Shareholders Litigation, C.A. 16375 (the
"Action"), the Action alleges, among other things, that the
directors of the Company violated the fiduciary duties of due care
and loyalty that they owed to the public stockholders of the
Company because, the Action contends, the directors failed to
undertake an appropriate evaluation of the Company's net worth as
a merger/acquisition candidate, actively evaluate the proposed
transaction and engage in meaningful auction with third parties in
an attempt to obtain the best value for the Company's
stockholders. The Action further alleges that the Company's
directors failed to make an informed decision and that
stockholders will not receive fair value for their shares of
common stock in the Merger, will be largely divested of their
right to share in the Company's further growth and development and
will be prevented from obtaining fair and adequate consideration
for their shares of common stock. The Action requests that the
Court of Chancery, among other things, declare that the Action 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.
On August 11, 1998, the parties to the Action entered into a
memorandum of understanding setting forth the terms of a proposed
settlement of the Action, subject to certain conditions. While
the Company, the members of the Company's board of directors and
JSC continue to deny the allegations of the Action or that they
have breached any duty or engaged in any wrongdoing in connection
with the Merger, the defendants have agreed to enter into the
proposed settlement to eliminate the burden, expense and
uncertainty of litigation. In connection with the proposed
settlement, (a) the Company and JSC agreed to provide plaintiffs'
counsel with an opportunity to review and comment upon the
disclosure to be provided to the Company's stockholders in the
joint proxy statement seeking stockholder approval of the Merger,
(b) the Company agreed to obtain an updated opinion as to the
fairness of the Merger to the Company's stockholders from a
financial point of view, and (c) the Company and JSC agreed,
subject to approval by their respective boards of directors, to
amend the Merger Agreement to reduce the termination fee payable
to the Company or JSC, respectively, upon termination of the
Merger in certain circumstances, from $60 million to $50 million.
The defendants in the Action agreed not to oppose an application
to the Court of Chancery by plaintiffs' counsel for fees and
expenses not to exceed $650,000, which would be paid by the
Company. The proposed settlement set forth in the memorandum of
understanding is subject to a number of conditions, including
discovery by plaintiffs' counsel, approval of the proposed
settlement by the Court of Chancery and consummation of the
Merger. If the proposed settlement is approved by the Court of
Chancery and the other conditions are satisfied, the Court will
certify a non-opt out class of the Company's shareholders for the
period from May 10, 1998 through the effective time of the Merger,
the Action will be dismissed with prejudice and the Company, the
Company's board of directors, JSC and their respective officers,
directors, employees and agents will receive a release for all
claims that were or could have been asserted in the Action.
Three class action complaints, General Refractories Company v.
Stone Container Corporation, Crest Meat Co, Inc. v. Stone
Container Corporation, and Albert I. Halper Corrugated Box Co.,
Inc. v. Stone Container Corporation, have been filed in the United
States District Court for the Northern District of Illinois. The
suits allege that the Company reached agreements in restraint of
trade with other producers of corrugated sheets in violation of
Section 1 of the Sherman Antitrust Act, 15 U.S.C.Section 1. The Company
is the only named defendant, though the suits allege that other
unnamed firms participated in the purported restraints of trade,
and specifically allege, on information and belief, that Jefferson
Smurfit Corporation also participated. The suits seek an
unspecified amount of damages arising out of the sale of
corrugated sheets for the period October 1, 1993 through March 31,
1995. Under the provisions of the antitrust laws, any award of
actual damages would be trebled. The Company moved to dismiss
the General Refractories and Crest Meat Co. complaints on August
7, and intends to move to dismiss the Halper complaint as well.
Discovery has not yet commenced, and a trial date has not been
set. The Company believes it has meritorious defenses to these
actions, and intends to vigorously defend itself.
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Company held its Annual Meeting of Stockholders on May 12,
1998.
(b) The following matters were voted upon at the Annual Meeting of
Stockholders:
1. The election of the nominees for Directors who will serve for a
term to expire at the next succeeding Annual Meeting of Stockholders
was voted on by the stockholders. The nominees, all of whom were
elected, are set forth below. The inspectors of election certified
the following vote tabulations:
For Witheld Non-
Votes
William F. Aldinger 88,771,106 620,692 0
Dionisio Garza 88,774,173 617,625 0
Richard A. Giesen 88,708,549 683,249 0
James J. Glasser 88,713,756 678,042 0
Jack M. Greenberg 88,771,129 620,669 0
John D. Nichols 88,707,950 683,848 0
Jerry K. Pearlman 88,663,973 727,825 0
Richard J. Raskin 88,703,919 687,879 0
Phillip B. Rooney 88,810,444 581,354 0
Ira N. Stone 88,636,551 755,247 0
James H. Stone 88,639,838 751,960 0
Roger W. Stone 88,642,019 749,779 0
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 six months ended June 30, 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
Corporation Controller (Principal
Accounting Officer)
Date: August 14, 1998
</TABLE>
<TABLE>
EXHIBIT 11
Stone Container Corporation
Computation of Basic and Diluted Net Loss per Share
(in millions, except per share)
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Basic Earnings Per Share
Shares of Common Stock:
Weighted average number of
common 99.8 99.3 99.7 99.3
Shares outstanding
Basic Weighted Average Shares 99.8 99.3 99.7 99.3
Outstanding
Net loss $(156.6) $(120.7) $(225.7) $(217.4)
Less:
Series E Cumulative
Convertible (2.0) (2.0) (4.0) (4.0)
Exchangeable Preferred Stock
dividend
Net loss used in computing
basic net $(158.6) $(122.7) $(229.7) $(221.4)
loss per common share
Basic Earnings Per Share $ (1.59) $ (1.23) $ (2.30) $ (2.23)
Diluted Earnings Per Share
Shares of Common Stock:
Weighted average number of
common 99.8 99.3 99.7 99.3
shares Outstanding
Dilutive effect of options .9 -- .4 --
and
warrants
Addition from assumed
conversion of 5.1 5.1 5.1 5.1
8.875% convertible senior
subordinated notes
Addition from assumed
conversion of 6.75% 1.3 1.3 1.3 1.3
convertible debentures
Addition from assumed
conversion of
Series E Cumulative 3.4 3.4 3.4 3.4
Convertible
Exchangeable Preferred Stock
Diluted Weighted Average 110.5 109.1 109.9 109.1
Shares Outstanding
Net loss $(156.6) $(120.7) $(225.7) $(217.4)
Less:
Series E Cumulative
Convertible (2.0) (2.0) (4.0) (4.0)
Exchangeable Preferred Stock
dividend
Add back:
Interest on 8.875%
convertible .8 .8 1.6 1.6
senior Subordinated notes
Interest on 6.75% convertible
subordinated .5 .5 .9 .9
Debentures
Series E Cumulative
Convertible 2.0 2.0 4.0 4.0
Exchangeable Preferred Stock
dividend
Net loss used in computing
diluted $(155.3) $(119.4) $(223.2) $(214.9)
net income per common share
Diluted Earnings Per Share(A) $ (1.41) $ (1.09) $ (2.03) $ (1.97)
<FN>
(A) Diluted earnings per share for the three and six months ended June 30,
1998 and 1997 are different from the consolidated financial statements
because amounts are anti-dilutive.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Stone
Container Corporation and Subsidiaries' June 30, 1998 Consolidated Balance Sheet
and Accumulated Deficit and Consolidated Statement of Operations and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 109
<SECURITIES> 0
<RECEIVABLES> 713
<ALLOWANCES> 28
<INVENTORY> 734
<CURRENT-ASSETS> 1666
<PP&E> 4892
<DEPRECIATION> 2578
<TOTAL-ASSETS> 5706
<CURRENT-LIABILITIES> 1311
<BONDS> 3909
0
115
<COMMON> 974
<OTHER-SE> (1071)
<TOTAL-LIABILITY-AND-EQUITY> 5706
<SALES> 2539
<TOTAL-REVENUES> 2539
<CGS> 2087
<TOTAL-COSTS> 2515
<OTHER-EXPENSES> 83
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 237
<INCOME-PRETAX> (296)
<INCOME-TAX> (71)
<INCOME-CONTINUING> (225)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (226)
<EPS-PRIMARY> (2.30)
<EPS-DILUTED> (2.30)
</TABLE>
