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 September 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 incorporation (I.R.S. employer
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 November 10, 1998:
104,977,686
<PAGE>
<TABLE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
STONE CONTAINER CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<CAPTION>
September 30, December 31,
(in millions) 1998* 1997
<S> <C> <C
>
Assets
Current assets:
Cash and cash equivalents $ 96.4 $ 112.6
Accounts and notes receivable (less
allowances of $32.2 and $27.8) 633.4 652.7
Inventories 700.4 716.0
Other 116.4 114.4
Total current assets 1,546.5 1,595.7
Property, plant and equipment 4,898.5 4,857.3
Accumulated depreciation and (2,603.2) (2,479.8)
amortization
Property, plant and equipment-net 2,295.3 2,377.5
Timberlands 47.3 49.6
Goodwill 425.0 444.0
Investment in non-consolidated 768.3 878.1
affiliates
Other 362.6 479.2
Total assets $ 5,445.0 $ 5,824.1
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 277.2 $ 327.9
Current maturities of long-term debt 798.7 415.9
Income taxes 23.2 26.6
Accrued and other current liabilities 353.2 318.6
Total current liabilities 1,452.3 1,089.0
Senior long-term debt 3,202.2 3,238.0
Subordinated debt 519.7 697.5
Non-recourse debt of consolidated 8.4 --
affiliates
Other long-term liabilities 327.7 306.7
Deferred taxes 153.6 216.0
Commitments and contingencies (Note
12)
Stockholders' equity:
Series E preferred stock 115.0 115.0
Common stock (105.0 and 99.3 shares
outstanding) 1,033.2 966.3
Accumulated deficit (980.7) (479.5)
Accumulated other comprehensive (386.3) (324.6)
income
Unamortized expense of restricted (.1) (.3)
stock plan
Total stockholders' equity (218.9) 276.9
(deficit)
Total liabilities and stockholders' $ 5,445.0 $ 5,824.1
equity
<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 Nine months ended
September 30, September 30,
(in millions except 1998 1997 1998 1997
per share)
<S> <C> <C> <C> <C>
Net sales $ 1,218.2 $ 1,182.8 $ 3,757.4 $ 3,563.9
Cost of products sold 1,025.1 998.3 3,111.6 3,001.8
Selling, general 150.5 135.5 443.5 423.1
and administrative
expenses
Depreciation and 67.6 73.9 203.6 233.5
amortization
Equity loss from 40.3 16.9 76.0 40.1
affiliates
Other (income) 66.4 (6.6) 113.4 (10.4)
expense-net
Loss before
interest expense,
income taxes,
minority interest (131.7) (35.2) (190.7) (124.2)
and extraordinary
charges
Interest expense (117.4) (114.7) (354.7) (340.9)
Loss before income
taxes, minority
interest and extra-
ordinary charges (249.1) (149.9) (545.4) (465.1)
(Provision) credit
for income taxes (26.4) 51.3 44.7 162.4
Minority interest -- (.1) (.1) (.1)
Loss before
extraordinary (275.5) (98.7) (500.8) (302.8)
charges
Extraordinary
charges from early
extinguishment
of debt (net of
income -- -- (.4) (13.3)
tax benefit)
Net loss (275.5) (98.7) (501.2) (316.1)
Preferred stock
dividends (2.0) (2.0) (6.1) (6.0)
Net loss
applicable to $ (277.5) $ (100.7) $ (507.3) $ (322.1)
common shares
Accumulated
deficit, beginning $ (705.2) $ (270.9) $ (479.5) $ (51.5)
of period
Net loss (275.5) (98.7) (501.2) (316.1)
Cash dividends on
common and
preferred -- -- -- (2.0)
stock
Accumulated
deficit, end of $ (980.7) $ (369.6) $ (980.7) $ (369.6)
period
Per share of
common stock:
Loss before
extraordinary
charges - $ (2.66) $ (1.01) $ (5.01) $ (3.11)
Basic/Diluted
Extraordinary
charges from early
extinguishment -- -- -- (.13)
of debt
Net loss $ (2.66) $ (1.01) $ (5.01) $ (3.24)
- -Basic/Diluted
Cash dividends $ -- $ -- $ -- $ --
Common shares
outstanding
(weighted average, 104.3 99.3 101.3 99.3
in millions)
<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 Nine months ended
September 30, September 30,
(in millions except per share) 1998 1997 1998 1997
<S> <C> <C> <C> <C>
Cash flows from operating
activities:
Net loss $ (275.5) $ (98.7) $ (501.2) $ (316.1)
Adjustments to reconcile net
loss to net cash provided by
(used in)operating activities:
Depreciation and 67.6 73.9 203.6 233.5
amortization
Deferred taxes 20.8 (61.6) (62.2) (182.4)
Foreign currency transaction
losses 11.8 .7 20.3 4.3
Equity loss from affiliates 40.3 16.9 76.0 40.1
Write-off investment in -- -- 53.5 --
SVCPI
Write-down of long-term 55.0 -- 55.0 --
assets/investments
Extraordinary charges from
early extinguishment of debt -- -- .4 13.3
Other-net 48.3 20.2 80.4 62.0
Changes in current assets and
liabilities net of adjustments
for acquisitions and a
disposition:
(Increase) decrease in
accounts and 10.3 (28.7) 12.5 (81.3)
notes receivable-net
(Increase) decrease in 29.8 (12.9) 12.8 18.6
inventories
Decrease in other current 40.1 17.7 24.4 17.9
assets
Increase (decrease) in
accounts payable and (20.1) 80.3 (24.5) (.9)
other current liabilities
Net cash provided by (used in) 28.4 7.8 (49.0) (191.0)
operating activities
Cash flows from financing
activities:
Payments made on debt (156.3) (36.3) (221.3) (467.4)
Payments by consolidated
affiliates on (1.6) (.5) (1.6) (13.4)
non-recourse debt
Borrowings 190.5 101.7 434.5 905.9
Proceeds from issuance of -- .1 2.4 .1
common stock
Cash dividends -- -- -- (2.0)
Net cash provided by financing 32.6 65.0 214.0 423.2
activities
Cash flows from investing
activities:
Capital expenditures (41.7) (35.2) (109.3) (93.2)
Proceeds from sales of assets 1.3 2.4 2.7 5.5
Investments in and advances to (24.2) (5.4) (72.5) (14.3)
affiliates, net
Other-net (8.4) 1.8 (.4) (25.3)
Net cash used in investing (73.0) (36.4) (179.5) (127.3)
activities
Effect of exchange rate changes (1.1) (.3) (1.7) (2.7)
on cash
Net increase (decrease) in cash
and cash (13.1) 36.1 (16.2) 102.2
equivalents
Cash and cash equivalents, 109.5 178.7 112.6 112.6
beginning of period
Cash and cash equivalents, end $ 96.4 $ 214.8 $ 96.4 $ 214.8
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 September 30, 1998 and the results of operations
and cash flows for the three and nine month periods ended September 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, dated as of
May 10, 1998, among JSC, JSC Acquisition Corporation, a Delaware
corporation and a wholly owned subsidiary of JSC, and the Company, as
amended by Amendment No. 1 dated as of October 2, 1998 (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.
The shareholders of the Company and JSC will vote on the Merger on
November 17, 1998. Subject to shareholder approval, the Merger is
expected to close shortly thereafter.
The foregoing summary of the original Agreement and Plan of Merger
is qualified in its entirety by reference to the text of the original
Agreement and Plan of Merger, 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 Merger Agreement (as amended by
Amendment No. 1 thereto) is included in the Joint Proxy
Statement/Prospectus dated October 8, 1998 of JSC and the Company (the
"Joint Proxy Statement/Prospectus").
If the Merger is consummated, Smurfit-Stone Container Corporation
("SSCC") is expected to have approximately $7 billion of debt outstanding
after the Merger on a consolidated basis (without giving effect to any
divestitures after the Merger) and the Company will need to continue to
address its financial condition and liquidity needs. As described in the
Joint Proxy Statement/Prospectus, JSC intends to amend its existing
credit agreement to borrow $550 million (the "JSC Amendment") and use a
portion of such borrowing to make a $300 million captial contribution to
the Company at the time of the Merger. There can be no assurance that
the JSC Amendment will become effective. If the JSC Amendment does not
become effective, there can be no assurances to the extent to which any
alternative financings would be available or the terms of any such
alternative. Also in connection with the Merger, the Company expects to
amend and restate its Credit Agreement to, among other things, extend
the maturity date of its revolving credit facility and certain term
loan payments. See "Financial Condition and Liquidity." If the Merger
is consummated and the JSC Amendment is effected, it is expected that
the funds from the JSC Amendment, proceeds from divestitures and funds
generated from operations will satisfy the Company's short term liquidity
needs. The Company does not expect such sources of funds to satisfy
its long term liquidity needs and will needs to obtain additional debt
or equity financing, if available and available on acceptable terms.
A further description of the financial position of the Company and SSCC
following the Merger, if consummated, is set forth in the Joint Proxy
Statement/Prospectus under "Risk Factors - Substantial Leverage; - Ability
to Service Debt/Liquidity; and - Restrictive Covenants/Limited Ability
to Incur Indebtedness."
NOTE 4: Acquisition/Dispositions
On September 4, 1998, the Company's Canadian subsidiary, Stone Container
(Canada) Inc. ("Stone Canada") purchased MacMillan Bloedel Ltd.'s
("MacBlo") 50 percent interest in MacMillan Bathurst Inc. ("MBI") for
$185 million (Canadian). MBI is a Canadian corrugated container company
that had sales of $462 million (Canadian) in 1997. Stone Canada, which
already owned 50 percent of MBI, immediately resold the newly acquired 50
percent interest to a Canadian subsidiary of Jefferson Smurfit Group PLC
for the same amount.
On September 24, 1998 the Company and Waste Management, Inc ("Waste
Management.") announced that they would terminate their recovered paper
marketing joint venture Paper Recycling International, L.P. (PRI) at the
end of this year. The assets and accounts of PRI will be divided
between the Company and Waste Management. Waste Management will receive
PRI's waste paper marketing efforts and the Company will receive PRI's
waste paper procurement operations.
On October 15, 1998 the Company sold its Snowflake, Arizona
newsprint manufacturing operations and related assets (including the
capital stock of The Apache Railway Company, a short-line railway that
services the Snowflake facility) to Abitibi-Consolidated Inc. for
approximately $250 million. The Company retained ownership of a
corrugating medium machine located in the facility. Abitibi-Consolidated
will operate the medium machine on behalf of the Company. Approximately
$75 million of the proceeds from the sale were used to repay amounts
outstanding under the Company's revolving credit facilities. The
remaining net proceeds from the sale have been deposited in a cash
collateral account with the agent for the lenders under the Company's
Credit Agreement (as defined below). If the Merger is consummated and
the Company's Credit Agreement is amended in connection therewith, the
Company will be permitted and intends to use the net proceeds to repay a
portion of its $240,000,000 principal amount of 11-7/8% Senior Notes due
December 1, 1998. Otherwise, the net proceeds are required to be used to
repay indebtedness under the Credit Agreement.
NOTE 5: Asset Write-downs
Venepal SACA ("Venepal"), a forest products company based in Venezuela
and 20 percent owned non-consolidated affiliate of the Company, is
experiencing significant liquidity concerns as a result of adverse
market conditions that caused a severe drop in third quarter sales
(to a five year low) combined with high debt service costs.
Venepal is currently in discussions with its creditors to restructure
its debt, has announced work force reductions and is considering asset
sales to generate cash. As a result, during the third quarter, the
Company concluded that the delcine in value of its equity investment
in Venepal stock was other than temporary and wrote down the investment
to fair market value of approximately $2 million. The write down resulted
in a $30 million pretax loss that was reflected as a component of Other
income (expense) - net in the Company's Consoldiated Statements of
Operations.
Also in the third quarter of 1998, the Company determined that it
would sell or liquidate its remaining non-core wood products assets.
Accordingly, the Company recorded a pretax charge of $19 million in the
current period to write these assets down to estimated fair value less
cost to sell. Such assets held for sale (which approximate $19 million
at September 30, 1998) are included in the other current assets section
of the Consolidated Balance Sheet.
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 second quarter of 1998 related to its
interest in SVCPI. The lenders to SVCPI and any other SVCPI creditors do
not have recourse against the Company.
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 Nine months ended
September 30, September 30,
(in millions) 1998 1997 1998 1997
Net loss $ (275.5) $ (98.7) $ (501.2) $ (316.1)
Other comprehensive
income, net of tax:
Foreign currency (20.4) (4.0) (61.7) (58.7)
translation
Comprehensive income $ (295.9) $ (102.7) $ (562.9) $ (374.8)
(loss)
Accumulated through Accumulated through
September 30, 1998 September 30, 1997
Current Current
Beginni Period Ending Beginnin Period Ending
ng Change Balance g Change Balance
Balance Balance
Minimum
pension
liability
adjustment $ (31.3) $ -- $ (31.3) $ (42.7) $ -- $ (42.7)
Foreign
currency
translation
adjustment (293.3) (61.7) (355.0) (178.8) (58.7) (237.5)
Accumulated
other
comprehen-
sive $(324.6) $ (61.7) $(386.3) $ (221.5) $ (58.7) $ (280.2)
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 September Nine months ended September 30,
30,
1998 1997 1998 1997
In millions, except per share data
Income Income Income Income
(Loss) Shares (Loss) Shares (Loss) Shares (Loss) Shares
Loss
before
extra-
ordinary
charges $(275.5) $(98.7) $(500.8) $(302.8)
Less:
Preferred
dividends (2.0) (2.0) (6.1) (6.0)
Basic EPS
Income
available
to common
stock- (277.5) 104.3 (100.7) 99.3 (506.9) 101.3 (308.8) 99.3
holders
Effect
of
Dilutive
Securities:
Convertible
Debt (a) (a) (a) (a) (c ) (c ) (c) (c )
Exchan
geable
Prefer
red (b) (b) (b) (b) (d) (d) (d) (d)
Stock
Diluted
EPS $(277.5) 104.3 $(100.7) 99.3 $(506.9) 101.3 $(308.8) 99.3
Basis Earnings Per
Share $(2.66) $(1.01) $(5.01) $(3.11)
Amount
Diluted Earnings Per
Share $(2.66) $(1.01) $(5.01) $(3.11)
Amount
__________________
(a) Convertible debt effects of $.6 million and 2.0 million shares in
1998 and $1.3 million and 6.4 million shares in 1997 are excluded from
the diluted EPS computation 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 because they are
antidilutive.
(c) Convertible debt effects of $3.1 million and 4.9 million shares in
1998 and $3.8 million and 6.4 million shares in 1997 are excluded from the
diluted EPS computation because they are antidilutive.
(d) Exchangeable preferred stock effects of $6.1 million and 3.4 million
shares are excluded from the dilutive EPS computation because they are
antidilutive.
NOTE 8: Inventories
Inventories are summarized as follows:
September December
30, 31,
(in millions) 1998 1997
Raw materials and supplies $ 244.2 $ 263.5
Paperstock 322.5 342.1
Work in process 20.6 21.5
Finished products 132.7 108.5
720.0 735.6
Excess of current cost over
LIFO Inventory value (19.6) (19.6)
Total inventories $ 700.4 $ 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 Nine months ended
September 30, September 30,
(in millions) 1998 1997 1998 1997
Results of operations:
Net sales $ 699.0 $ 1,216.9 $ 2,811.2 $ 2,850.7
Cost of products sold 613.7 1,028.9 2,254.6 2,329.0
Loss before income
taxes, minority interest
and extraordinary (221.0) (41.8) (278.1) (97.1)
charges
Net loss (172.8) (50.8) (230.3) (96.4)
NOTE 10: Debt
Current maturities of long-term debt at September 30, 1998 and December
31, 1997 consisted of the following:
September December
30, 31,
(in millions) 1998 1997
11 7/8% Senior Notes due December 1, $ 239.6 $ 239.7
1998
Revolving Credit Facility due May 406.0 --
15, 1999
11% Senior Subordinated Notes due 119.4 --
August 15, 1999
12 5/8% Senior Notes due July 15, -- 150.0
1998
Other 33.7 26.2
Total current maturities of long- $ 798.7 $ 415.9
term debt
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 Nine months ended
September 30, September 30,
(in millions) 1998 1997 1998 1997
Decrease in debt due
to deconsolidation of
affiliate (1) $ -- $ -- $ -- $ 538.0
Increase in debt due
to consolidation of
affiliate (2) -- -- 11.2 264.9
Capital lease
obligation incurred .3 -- 1.2 .9
Issuance of common
stock for
extinguishment of 59.1 -- 59.3 --
debt
Cash paid during the
periods for:
Interest (net of
capitalization) $ 110.4 $ 99.6 $ 328.9 $ 310.5
Income taxes (net of
refunds) 5.8 (27.0) 20.7 (28.6)
__________
(1) Decrease in 1997 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 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 that were
contained in SSR. The Company is vigorously disputing the Plaintiffs'
calculation of the contingent payment amount. The Company has settled
the portion of the suit relating to amounts owed to DP Investment L.P.
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.
Several class action complaints have been filed in each of the
United States District Court for the Northern District of Illinois and
the United States District Court for the Eastern District of
Pennsylvania. The suits allege that the Company reached agreements in
restraint of trade that affected the manufacture, sale and pricing of
corrugated products, including corrugated sheets and corrugated
containers, in violation of Section 1 of the Sherman Antitrust Act, 15
U.S.C. 1. The Company is the only named defendant, though the suits
allege that other unnamed firms participated in the purported restraints
of trade, and some specifically allege, on information and belief, that
Jefferson Smurfit Corporation also participated. The suits seek an
unspecified amount of damages. Under the provisions of the antitrust
laws, any award of actual damages would be trebled. The Company has
moved to dismiss some of the complaints and intends to move to dismiss
the remaining complaints as well. The Company has moved before the
Judicial Panel for Multidistrict Litigation to have all of the complaints
transferred to and consolidated before the United States District Court
for the Northern District of Illinois. 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.
On June 4, 1998 the Company, believing the allegations to be without
merit and without admitting liability, 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 stabilize prices or
price levels." and from "entering into, or attempting to enter into.any
agreement.to fix, raise, establish, maintain or stabilize 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.
On October 20, 1998, two holders of the Company's Series E
Cumulative Convertible Exchangeable Preferred Stock (the "Series E
Preferred") filed a complaint against the Company in Delaware Chancery
Court. The plaintiffs have alleged that the Company is violating its
certificate of incorporation by failing to call a meeting of Series E
Preferred stockholders for the purpose of electing two directors by those
stockholders. The plaintiffs have also alleged that, in connection with the
pending Merger, the Company is seeking to change the Series E Preferred
stockholders' rights without a two-thirds class vote of the Series E
Preferred stockholders and that such stockholders should be entitled to
vote with respect to the Merger. Among other things, the plaintiffs have
requested injunctive relief with respect to the Merger.
On October 29, 1998, a separate complaint by a Series E Preferred
stockholder was filed against the Company in Delaware Chancery Court.
This complaint is similar to the October 20, 1998 complaint; however,
this second complaint purports to constitute a class action on behalf of
all Series E Preferred stockholders and also names each of the directors
of the Company as additional defendants.
The Company intends to vigorously defend these actions.
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 nine months
ended September 30, 1998 and 1997.
Three months ended Nine months ended
September 30, September 30,
1998 1997 1998 1997
Net sales $ 1,218.2 $ 1,182.8 $ 3,757.4 $ 3,563.9
Depreciation and
amortization 67.6 73.9 203.6 233.5
Interest expense 117.4 114.7 354.7 340.9
Equity loss from
affiliates 40.3 16.9 76.0 40.1
Loss before income
taxes,
minority interest 249.1 149.9 545.4 465.1
and
extraordinary
charges
Net loss 275.5 98.7 501.2 316.1
The Company incurred a net loss of $275.5 million for the 1998 third
quarter, or $2.66 per share of common stock, as compared with a net loss
for the 1997 third quarter of $98.7 million, or $1.01 per share of common
stock. For the nine months ended September 30, 1998, the Company
incurred a net loss of $501.2 million, or $5.01 per share of common
stock, as compared with a net loss of $316.1 million, or $3.24 per share
of common stock, for first the nine months of 1997. The third quarter
results include a $30 million charge to write down the Company's
investment in Venepal SACA and a $19 million charge to write certain
non-core wood products assets to fair value less cost to sell.
The Company had previously incurred a charge of $53.5 million in the
second quarter of 1998 to write-off its interest in Stone Venepal
(Celgar) Pulp, Inc. ("SVCPI"). See also Note 5 to the Consolidated
Financial Statements. The results for the third quarter and
first nine months of 1998 were also negatively impacted by the
establishment of valuation allowances against deferred tax assets on
net operating loss carryforwards which, due to continued losses, may not
be realizable. The net loss for the nine months ended September 30, 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 nine months ended September 30, 1998,
increased $35.4 million and $193.5 million, or 3.0% and 5.4%,
respectively over the same periods of 1997. The increases 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 nine months ended September 1997
included $62 million of sales generated by SVCPI, which had become a non-
consolidated affiliate effective June 26, 1997. On an ongoing basis
excluding SVCPI in 1997, sales for the nine months of 1998 increased
7.3%, over the prior year period. 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
nine months ended September 30, 1998 would have been higher by
approximately $1 million and $22 million, respectively.
Cost of products sold decreased as a percent of net sales to 84.1%
and 82.8% for the third quarter and nine months of 1998, respectively,
from 84.4% and 84.2% 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 as
percent of sales increased to 12.4% for the current quarter from 11.5%
for the third quarter of 1997. For the nine months ended September 30,
1998 selling, general and administrative expenses as a percent of sales
remained virtually unchanged from the 1997 period. Depreciation and
amortization decreased 8.5% and 12.8% from the 1997 third quarter and
nine month period, respectively, due in part to the deconsolidation of
SVCPI and due to the full depreciation of certain assets in the prior
year. For the third quarter and first nine months of 1998 the Company's
share of losses from equity affiliates increased $23.4 million and $35.9
million over the respective prior year periods, largely as a result of a
significant increase in foreign exchange transaction losses recorded by
certain non-consolidated affiliates. Additionally, the Company's
earnings were negatively affected by $11.8 million and $20.3 million of
foreign exchange transaction losses included in Other (income) expense
for the three months and nine months ended September 30, 1998 as compared
to $.8 million and $4.4 million of exchange losses recognized in the
comparable prior year periods. Interest expense was $2.7 million and
$13.8 million higher in the third quarter and nine month period of 1998,
primarily due to increased average borrowings.
Product Line Sales Data Percentage Change
Three months Nine months Three months Nine months
ended ended ended ended
Sales Sales Sales Sales
1998 1997 1998 1997 Revenue Volume Revenue Volume
(in millions)
Corrugated
containers $ 680 $ 609 $2,017 $1,812 11.7% 4.6% 11.3% 5.9%
Paperboard
and kraft 270 292 883 834 (7.5) (15.9) 5.9 (7.1)
paper
Industrial
paper bags 119 117 355 348 1.7 1.0 2.0 1.5
and sacks
Market
pulp 47 79 202 316 (40.5) (11.7) (36.1) (24.7)
Other 102 86 300 254 18.6 nm 18.1 nm
Total
Net 1,218 1,183 3,757 3,564 3.0 5.4
Sales
Sales
of
SVCPI
(deconsolidated
June 1997) -- -- -- (62)
Proforma $ 1,218 $1,183 3,757 $3,502 3.0% 7.3%
sales
excluding SVCPI
nm=not meaningful
Net sales of corrugated containers increased 11.7% over the third
quarter of 1997 as a result of improved domestic selling prices and a
4.6% increase in sales volume. Shipments of corrugated containers,
including the Company's proportionate share of the shipments by its
foreign affiliates, were 15.1 billion square feet for the third quarter
of 1998 compared with 14.3 billion square feet for the comparable prior
year period. For the first nine months of 1998 corrugated container
sales increased 11.3% over the prior year period as a result of improved
domestic selling prices and a 5.9% increase in sales volume. Shipments
of corrugated containers were 44.3 billion square feet for the nine
months of 1998 versus 41.4 billion in 1997.
Net sales of paperboard and kraft paper decreased 7.5% from the
third quarter of 1997 due to a 15.9% decrease in sales volume which more
than offset improved paperboard selling prices. Production of
containerboard and kraft paper was 1.34 million tons for the three months
ended September 30, 1998, compared to 1.35 million tons for the prior
year period. Sales of paperboard and kraft paper increased 5.9% over the
first nine months of 1997, despite a 7.1% reduction in sales volume, as a
result of significant price improvements from 1997 levels. Production of
containerboard and kraft paper was 4.06 million tons for the nine months
ended September 30, 1998, compared to 3.94 million tons for the prior
year period.
Sales of industrial bags and sacks for the third quarter and first
nine months of 1998 increased modestly over the prior year periods as a
result of improved sales volume and slightly higher average selling
prices. 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 128 thousand tons and 375 thousand tons for the
three and nine months ended September 30, 1998, compared with 134
thousand tons and 382 thousand tons shipped during the comparable 1997
periods.
Sales of market pulp decreased $32 million, or 40.5%, from the third
quarter of 1997 due to a significant decrease in selling prices and lower
sales volume. Sales of market pulp for the first nine months of 1998
decreased $114 million, or 36.1%, from the nine months of 1997.
Excluding $62 million of SVCPI's sales in 1997, market pulp sales
decreased 20.5% from the first nine months of 1997 due to a 7.7% 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 1998 the average exchange rates for the Canadian dollar and
the German Mark strengthened (weakened) against the U.S. dollar as
follows:
Nine Three
months months
ended ended
9-30-98 9-30-98
Canadian dollar (5.7)% (4.6) %
German mark (3.3)% 1.8 %
Financial Condition and Liquidity
The Company's working capital ratio was 1.1 to 1 at September 30, 1998
and 1.5 to 1 at December 31, 1997. The Company's long-term debt to total
capitalization ratio was 101.7 percent at September 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, on July 31, 1998 and on
October 5, 1998, the Company and its lenders amended the Company's credit
agreement to, among other things, modify certain financial covenant
requirements. At September 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").
On October 14, 1998, the Credit Agreement lenders approved an
amendment to the Credit Agreement which, among other things, permitted
the Company to sell the Snowflake, Arizona newsprint manufacturing
operations and related assets (including The Apache Railway Company that
services the Snowflake Facility) and further modified the required
indebtedness ratio financial covenant.
In connection with the Merger, the Company expects to enter into an
Amended and Restated Credit Agreement to become effective on the
effective date of the Merger. Effectiveness of the Amended and Restated
Credit Agreement is subject to consummation of the Merger, as well as
other customary conditions, and therefore no assurance can be given that
it will become effective. The Amended and Restated Credfit Agreement
would, among other things,
(i) extend the maturity date of the revolving credit facility to
December 31, 2000, (ii) extend the amortization payment under one of the
term loans due on October 1, 1999 to the new term loan maturity date of
October 1, 2000, (iii) permit the use of net proceeds from the sale of
the newsprint and related assets at the Snowflake, Arizona facility to
repay a portion of the $240 million principal amount of 11-7/8% Senior
Notes due December 1, 1998, (iv) increase the borrowing margins on the
various tranches of the Amended and Restated Credit Agreement by 1/8% to
7/8%, (v) amend the required interest coverage ratio covenant, and
replace the indebtedness ratio covenant with an EBITDA covenant, (vi)
permit the Merger, and (vii) provide additional collateral in the
shares of Stone Container (Canada) Inc. and Stone Finance Company of
Canada by increasing the percentage of outstanding shares pledged of each
of these subsidiaries to 65% from 51%.
At November 10, 1998, the Company had borrowing availability of
approximately $190 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 nine months ended September
30, 1998 were 9.0 percent and 8.5 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 $440.6 million at September 30, 1998, $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 September 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 $(79.6) million at September 30, 1998, $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 increased the
interest rate on its 11 percent Senior Subordinated Debentures due August
15, 1999 by 50 basis points. The Company increased the interest rate on
its 10.75 percent Senior Subordinated Debentures due April 1, 2002 and on
its Senior Subordinated Units due April 1, 2002 by 50 basis points
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. On the effective date of the Merger, if the Merger is consummated,
pursuant to accounting standards set forth in APB 16, the Company's net
worth would increase by an estimated $2.4 billion which would permit the
Company to meet its minimum Subordinated Capital Base and Net Worth
requirements under its various indentures. Additionally, on the
effective date of the Merger, if the Merger is consummated, the Company
expects to receive $300 million as a capital contribution from SSCC which
would also increase the Company's net worth thereby also increasing the
Company's Subordinated Capital Base.
Operating activities:
Net cash used by operating activities was $49.0 million for the nine
months ended September 30, 1998, compared with $191.0 million of cash
used by operating activities for the 1997 period. The results of
operations for 1998, 1997 and 1996 have had an adverse impact on the
Company's cash flow and liquidity. As a result, the Company has had to
increase its indebtedness in order to meet cash flow needs.
Financing activities:
During the first nine months of 1998 the Company increased its borrowings
by $386 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 Preferred") 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 September 30, 1998, the dividend
pool under the Senior Subordinated Indenture (which contains the most
restrictive dividend pool provision) had a deficit of approximately $709
million and Net Worth (as defined) was $(79.6) million. In the event six
quarterly dividends remain unpaid on the Series E Preferred, the holders
of the Series E Preferred would have the right to elect two members to
the Company's Board of Directors until the accumulated dividends on such
Series E Preferred have been declared and paid or set apart for payment.
At September 30, 1998 the Company had accumulated dividend arrearages on
the Series E Preferred of $12 million, which represents six consecutive
quarters for which dividends have not been paid.
It is the Company's intention to call a special meeting of the
Series E Preferred stockholders as soon as practicable after the
effective date of the Merger to elect two directors nominated by the
Series E Preferred holders.
Investing activities:
Capital expenditures for the nine months ended September 30, 1998 totaled
approximately $109 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 nine months 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 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 dated as of May 10, 1998 among JSC, JSC Acquisition Corporation
and the Company, as amended by Amendment No 1 dated as of October 2, 1998
(the "Merger Agreement"). 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; 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.
On the effective date the Merger, assuming the JSC Amendment is
effective, the Company expects to receive $300 million as a capital
contribution from its new parent company, SSCC.
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 $250 million of
principal plus interest of approximately $130 million 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
fourth 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 September
30, 1998, will be required to make debt principal repayments of
approximately $747 million in 1999, $414 million in 2000 and $617 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.
The shareholders of the Company and JSC will vote on the Merger on
November 17, 1998. Subject to shareholder approval, the Merger is
expected to close shortly afterward.
The foregoing summary of the original Agreement and Plan of Merger
is qualified in its entirety by reference to the text of the original
Agreement and Plan of Merger, 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 Merger Agreement (as amended by
Amendment No 1 thereto) is included in the Joint Proxy
Statement/Prospectus dated October 8, 1998 of JSC and the Company.
If the Merger is consummated, Smurfit-Stone Container Corporation
("SSCC") is expected to have approximately $7 billion of debt outstanding
after the Merger on a consolidated basis (without giving effect to any
divestitures after the Merger) and the Company will need to continue to
address its financial condition and liquidity needs. As described in the
Joint Proxy Statement/Prospectus, JSC intends to amend its existing
credit agreement to borrow $550 million (the "JSC Amendment") and use a
portion of such borrowing to make a $300 million captial contribution to
the Company at the time of the Merger. There can be no assurance that
the JSC Amendment will become effective. If the JSC Amendment does not
become effective, there can be no assurances to the extent to which any
alternative financings would be available or the terms of any such
alternative. Also in connection with the Merger, the Company expects to
amend and restate its Credit Agreement to, among other things, extend
the maturity date of its revolving credit facility and certain term
loan payments. See "Financial Condition and Liquidity." If the Merger
is consummated and the JSC Amendment is effected, it is expected that
the funds from the JSC Amendment, proceeds from divestitures and funds
generated from operations will satisfy the Company's short term liquidity
needs. The Company does not expect such sources of funds to satisfy
its long term liquidity needs and will needs to obtain additional debt
or equity financing, if available and available on acceptable terms.
A further description of the financial position of the Company and SSCC
following the Merger, if consummated, is set forth in the Joint Proxy
Statement/Prospectus under "Risk Factors - Substantial Leverage; - Ability
to Service Debt/Liquidity; and - Restrictive Covenants/Limited Ability
to Incur Indebtedness."
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.
On October 20, 1998, two holders of the Series E Preferred filed a
complaint against the Company in Delaware Chancery Court. The plaintiffs
have alleged that the Company is violating its certificate of incorporation
by failing to call a meeting of Series E Preferred stockholders for the
purpose of electing two directors by those stockholders. The plaintiffs
have also alleged that, in connection with the pending Merger, the Company is
seeking to change the Series E Preferred stockholders' rights without a
two-thirds class vote of the Series E Preferred stockholders and that
such stockholders should be entitled to vote with respect to the Merger.
Among other things, the plaintiffs have requested injunctive relief with
respect to the Merger.
On October 29, 1998, a separate complaint by a Series E Preferred
stockholder was filed against the Company in Delaware Chancery Court.
This complaint is similar to the October 20, 1998 complaint; however,
this second complaint purports to constitute a class action on behalf of
all Series E Preferred stockholders and also names each of the directors
of the Company as additional defendants.
The Company intends to vigorously defend these actions.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
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 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 that were
contained in SSR. The Company is vigorously disputing the
Plaintiffs' calculation of the contingent payment amount. The
Company has settled the portion of the suit relating to amounts owed
to DP Investment L.P.
Several class action complaints have been filed in each of the
United States District Court for the Northern District of Illinois
and the United States District Court for the Eastern District of
Pennsylvania. The suits allege that the Company reached agreements
in restraint of trade that affected the manufacture, sale and
pricing of corrugated products, including corrugated sheets and
corrugated containers, in violation of Section 1 of the Sherman
Antitrust Act, 15 U.S.C. 1. The Company is the only named
defendant, though the suits allege that other unnamed firms
participated in the purported restraints of trade, and some
specifically allege, on information and belief, that Jefferson
Smurfit Corporation also participated. The suits seek an
unspecified amount of damages. Under the provisions of the
antitrust laws, any award of actual damages would be trebled. The
Company has moved to dismiss some of the complaints and intends to
move to dismiss the remaining complaints as well. The Company has
moved before the Judicial Panel for Multidistrict Litigation to have
all of the complaints transferred to and consolidated before the
United States District Court for the Northern District of Illinois.
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.
On October 20, 1998, two holders of the Company's Series E
Cumulative Convertible Exchangeable Preferred Stock (the "Series E
Preferred") filed a complaint against the Company in Delaware
Chancery Court. The plaintiffs have alleged that the Company is
violating its certificate of incorporation by failing to call a
meeting of Series E Preferred stockholders for the purpose of electing
two directors by those stockholders. The plaintiffs have also alleged
that, in connection with the pending Merger, the Company is seeking to
change the Series E Preferred stockholders' rights without a two-
thirds class vote of the Series E Preferred stockholders and that
such stockholders should be entitled to vote with respect to the
Merger. Among other things, the plaintiffs have requested injunctive
relief with respect to the Merger.
On October 29, 1998, a separate complaint by a Series E Preferred
stockholder was filed against the Company in Delaware Chancery
Court. This complaint is similar to the October 20, 1998 complaint;
however, this second complaint purports to constitute a class action
on behalf of all Series E Preferred stockholders and also names each
of the directors of the Company as additional defendants.
The Company intends to vigorously defend these actions.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
4.1 Fifth Amendment of Credit Agreement dated as of October 5, 1998
between Stone Container Corporation with the financial parties
signatory thereto and Bankers Trust Company, as agent.
11. Computation of Basic and Diluted Net Loss Per Common Share.
27. Financial Data Schedule for the nine months ended September 30, 1998
99. Certain Risk Factors from pages 15-18 of the Joint Proxy
Statement/Propectus dated October 8, 1998 of Jefferson
Smurfit Corporation and Stone Container Corporation.
(b) Reports on Form 8-K
1. A Report on Form 8-K dated October 21, 1998 was filed under Item 5 -
Other Events and Item 7 - Exhibits.
2. A Report on Form 8-K dated November 4, 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: November 16, 1998
<PAGE>
<TABLE>
Exhibit 11
Stone Container Corporation
Computation of Basic and Diluted Net Loss per Share
(in millions, except per share)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Basic Earnings Per Share
Shares of Common Stock:
Weighted average number
of common shares 104.3 99.3 101.3 99.3
outstanding
Basic Weighted Average
Shares Outstanding 104.3 99.3 101.3 99.3
Net loss $ (275.5) $ (98.7) $ (501.2) $ (316.1)
Less:
Series E Cumulative
Convertible
Exchangeable (2.0) (2.0) (6.1) (6.0)
Preferred Stock
dividend
Net loss used in computing
basic net loss per common $ (277.5) $ (100.7) $ (507.3) $ (322.1)
share
Basic Earnings Per Share $ (2.66) $ (1.01) $ (5.01) $ (3.24)
Diluted Earnings Per Share
Shares of Common Stock:
Weighted average number
of common shares 104.3 99.3 101.3 99.3
Outstanding
Dilutive effect of -- --
options and warrants
Addition from assumed
conversion of 8.875%
convertible senior
subordinated notes .7 5.1 3.6 5.1
Addition from assumed
conversion of 6.75%
convertible debentures 1.3 1.3 1.3 1.3
Addition from assumed
conversion of Series E
Cumulative Convertible
exchangeable Preferred 3.4 3.4 3.4 3.4
Stock
Diluted Weighted Average
Shares Outstanding 109.7 109.1 109.6 109.1
Net loss $ (275.5) $ (98.7) $ (501.2) $ (316.1)
Less:
Series E Cumulative
Convertible Exchangeable
Preferred Stock dividend (2.0) (2.0) (6.1) (6.0)
Add back:
Interest on 8.875%
convertible senior .1 .8 1.6 2.4
Subordinated notes
Interest on 6.75%
convertible subordinated .4 .4 1.4 1.4
Debentures
Series E Cumulative
Convertible Exchangeable
Preferred Stock dividend 2.0 2.0 6.1 6.0
Net loss used in computing
diluted net income per
common share $ (275.0) $ (97.5) $ (498.2) $ (312.3)
Diluted Earnings Per $ (2.51) $ (.89) $ (4.55) $ (2.86)
Share(A)
<FN>
(A) Diluted earnings per share for the three and nine months ended
September 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 Corportion and Subsidiaries' September 30, 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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 110
<SECURITIES> 0
<RECEIVABLES> 665
<ALLOWANCES> 32
<INVENTORY> 700
<CURRENT-ASSETS> 1547
<PP&E> 4898
<DEPRECIATION> 2603
<TOTAL-ASSETS> 5445
<CURRENT-LIABILITIES> 1452
<BONDS> 3730
0
115
<COMMON> 1033
<OTHER-SE> (1367)
<TOTAL-LIABILITY-AND-EQUITY> 5445
<SALES> 3757
<TOTAL-REVENUES> 3757
<CGS> 3112
<TOTAL-COSTS> 3768
<OTHER-EXPENSES> 189
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 355
<INCOME-PRETAX> (546)
<INCOME-TAX> (45)
<INCOME-CONTINUING> (501)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (501)
<EPS-PRIMARY> (5.01)
<EPS-DILUTED> (5.01)
</TABLE>
363152.doc 8
EXHIBIT 4.1
FIFTH AMENDMENT
OF CREDIT AGREEMENT
THIS FIFTH AMENDMENT OF CREDIT AGREEMENT, dated as of
October 5, 1998 (this "Amendment"), is by and among Stone
Container Corporation, a Delaware corporation (the "Borrower"),
the undersigned financial institutions, including Bankers Trust
Company, in their capacities as lenders (collectively, the
"Lenders," and each individually, a "Lender"), Bankers Trust
Company, as agent (the "Agent") for the Lenders, and the
undersigned financial institutions designated as such in their
capacities as Co-Agents.
RECITALS:
A. The Borrower, Bank of America National Trust & Savings
Association, The Bank of New York, The Bank of Nova Scotia,
Credit Agricole Indosuez, The Chase Manhattan Bank, N.A.,
Dresdner Bank AG-Chicago and Grand Cayman Branches, The First
National Bank of Chicago, The Long-Term Credit Bank of Japan,
Ltd., NationsBank, N.A., The Sumitomo Bank, Ltd., Chicago Branch
and Toronto Dominion (Texas), Inc., as co-agents (collectively,
the "Co-Agents," and each individually, a "Co-Agent"), the Agent
and the Lenders are parties to that certain Amended and Restated
Credit Agreement dated as of June 19, 1997, as amended by the
First Amendment of Credit Agreement dated as of December 22,
1997, the Second Amendment of Credit Agreement dated as of March
26, 1998, the Third Amendment of Credit Agreement dated as of
June 5, 1998 and the Fourth Amendment of Credit Agreement dated
as of July 31, 1998 (the "Credit Agreement").
B. The Borrower has requested the Agent and the Lenders to
amend the Credit Agreement and to consent to certain actions,
including, without limitation, the amendment of various Loan
Documents and the release of certain Collateral securing the
Obligations, in order to permit, among other things, (a) Stone
Snowflake Newsprint Company to sell all or substantially all of
its assets and to engage in certain related transactions, (b) the
Borrower to sell all of the outstanding capital stock of Apache
Railway Corporation, an Arizona corporation and a Wholly-Owned
Subsidiary of the Borrower ("Apache"), and (c) the distribution
of a portion of the Abitibi Shares owned by Stone-Canada to the
Borrower as consideration for the redemption of shares of
preferred stock of Stone-Canada that are pledged to the Agent
under a Pledge Agreement, and the pledge of such Abitibi Shares
to the Agent for the benefit of the Lenders to secure the
Obligations.
C. The Borrower, the Agent and the Lenders desire to amend
the Credit Agreement and to consent to various actions, including
without limitation, the amendment of various Loan Documents, on
the terms and conditions set forth herein.
NOW THEREFORE, in consideration of the premises and of the
mutual covenants herein contained, the parties hereto agree as
follows:
SECTION 1. Defined Terms. Unless otherwise defined herein,
all capitalized terms used herein shall have the meanings given
them in the Credit Agreement as amended hereby.
SECTION 2. Amendment to the Credit Agreement. The Credit
Agreement is, as of the Effective Date (as defined below), hereby
amended as follows:
(a) Section 3.4(e) of the Credit Agreement is amended
in its entirety to read as follows:
"(e) [intentionally deleted]"
(b) A new Section 5.1.20 is added to the Credit
Agreement reading as follows:
"Section 5.1.20 Stone Snowflake Sale Proceeds.
Substantially simultaneously with the consummation of
the Stone Snowflake Sale Transaction, the Borrower
shall cause Stone Snowflake to declare and pay to the
Borrower an extraordinary dividend in an amount not
less than the amount of proceeds received by Stone
Snowflake in the Stone Snowflake Sale Transaction which
would have constituted "Material Sale Proceeds" under
Section 3.4(c) of the Credit Agreement but for the
Borrower's election to treat such proceeds as Excluded
Sale Proceeds under the Excluded Sales Proceeds Basket
pursuant to the terms of the Fifth Amendment to this
Credit Agreement dated as of October 5, 1998 (such
amount being the "Snowflake Collateral Amount"). The
Borrower shall cause (i) the amount of proceeds
received by the Borrower for the sale of all of the
capital stock of Apache Railway Corporation which would
have constituted "Material Sale Proceeds" under Section
3.4(c) of the Credit Agreement but for the Borrower's
election to treat such proceeds as Excluded Sale
Proceeds under the Excluded Sales Proceeds Basket
pursuant to the terms of the Fifth Amendment to this
Credit Agreement dated as of October 5, 1998 (such
amount being the "Apache Collateral Amount") and (ii)
the Snowflake Collateral Amount to be paid for the
Borrower's account directly into the cash collateral
account established pursuant to the Stone Snowflake
Cash Collateral Agreement. Prior to consummating the
Stone Snowflake Sale Transaction, the Borrower shall
execute and deliver to the agent the Stone Snowflake
Cash Collateral Agreement, together with such financing
statements, legal opinions and other certificates and
documents as the Agent may reasonably request, all in
form and substance satisfactory to the Agent. The
Borrower shall also take or cause to be taken all
actions reasonably requested by the Agent in order to
perfect or protect the Lien of the Stone Snowflake Cash
Collateral Agreement with respect to such cash
Collateral. The Borrower acknowledges and agrees that,
pursuant to Section 6 of the Stone Snowflake Pledge
Agreement, the Snowflake Collateral Amount constitutes,
and shall be held as, Collateral as required under the
terms of the Stone Snowflake Pledge Agreement and
pursuant to the terms and conditions of the Stone
Snowflake Cash Collateral Agreement."
(c) Section 5.2.2(y) of the Credit Agreement is
amended in its entirety to read as follows:
"(y) [intentionally deleted]; and"
(d) Section 5.2.10(a) of the Credit Agreement is
amended by replacing the ";" with a "." at the end thereof
and adding the following additional sentence at the end
thereof:
"For purposes of this Section 5.2.10(a), a "voluntary
purchase or prepayment" of Indebtedness for Money
Borrower shall include, without limitation, the
purchase of any Subordinated Debt or any Indebtedness
created pursuant to or evidenced by any of the
Specified Senior Indentures or any other indenture or
agreement in connection with or as a consequence of any
"change of control" (or any other similar term) as such
term is defined or used in any Subordinated Debt or any
indenture relating thereto or any Indebtedness created
pursuant to or evidenced by any Specified Senior
Indenture or any other indenture or agreement where
such "change of control" arises from a transaction
approved by the Board of Directors of the Borrower,
which purchase shall be prohibited by this Section
5.2.10(a)."
(e) Section 5.2.12(vi) of the Credit Agreement is
amended in its entirety to read as follows:
"(vi) [intentionally deleted] or"
(f) Subpart (y) of the second sentence of Section
5.2.12 of the Credit Agreement is amended by deleting
therefrom the phrase "("Stone Snowflake")".
(g) Section 5.3.2 of the Credit Agreement is
amended by deleting the ratio ".92 to 1" appearing opposite
September 30, 1998 and substituting therefor the ratio ".95
to 1".
(h)The Definitional Appendix to the Credit
Agreement is amended by adding the following
definitions in their appropriate alphabetical order:
""Stone Snowflake Cash Collateral Agreement" means a
cash collateral account agreement to be entered into
between the Borrower and the Agent for the benefit of
the "Beneficiaries" (as defined in the Stone Snowflake
Pledge Agreement). Such agreement shall be in form and
substance satisfactory to the Agent and shall provide,
among other things, that unless prior to such time the
Required Lenders have otherwise agreed, on November 30,
1998 all amounts in the cash collateral account
established pursuant thereto shall be applied on a pro
rata basis to repay the Term Loan, Additional Term
Loan, D Tranche Term Loan and E Tranche Term Loan in
accordance with Section 3.6(b) of the Credit Agreement
as if such amounts constituted Material Sale Proceeds
subject to application under such Section.
"Stone Snowflake Guaranty" means that certain
Subsidiary Guaranty entered into by Stone Snowflake and
dated as of December 4, 1997, as amended, restated,
supplemented or otherwise modified from time to time.
"Stone Snowflake Pledge Agreement" means that certain
Pledge Agreement dated as of December 4, 1997 by the
Borrower in favor of the Agent pursuant to which the
Borrower pledged as collateral, among other things, all
of the outstanding shares of the capital stock of Stone
Snowflake, as amended, restated, supplemented or
otherwise modified from time to time.
"Stone Snowflake Sale Transaction" means (i) the sale
by Stone Snowflake to Abitibi Consolidated Sales
Corporation or an Affiliate thereof ("Purchaser") of
all or substantially all of the assets of Stone
Snowflake and (ii) the sale by the Borrower to
Purchaser of all of the capital stock of Apache Railway
Corporation, an Arizona corporation and a Wholly-Owned
Subsidiary of the Borrower, for aggregate gross cash
consideration of not less than $240 million and the
entering into a lease agreement and other related
agreements, all pursuant to documentation reasonably
satisfactory to the Agent."
(i) The definition of "Stone Snowflake" in the
Definitional Appendix of the Credit Agreement is amended in
its entirety to read as follows:
""Stone Snowflake" means Stone Snowflake Newsprint
Company, a Delaware corporation which is the "newly
formed Wholly-Owned Subsidiary of the Borrower"
referenced in the second sentence of Section 5.2.12."
SECTION 3. Consent, Waiver and Agreement. (a) The
undersigned Lenders and the Agent hereby consent to the release
and termination of the Deed of Trust, Security Agreement,
Financing Statement and Assignment of Rents dated as of October
12, 1994, as amended, made by the Borrower and Apache Railway
Corporation in favor of the Agent (the "Stone Snowflake
Mortgage") which secures the Borrower's medium machine and
leasehold interest located at the Snowflake Mill (the "Stone
Snowflake Property"), and the release of any Liens existing under
any other Loan Documents on any Stone Snowflake Property, with
all such releases and terminations being conditioned upon, and
effective contemporaneously with, the consummation of the Stone
Snowflake Sale Transaction. The Lenders authorize the Agent to
execute and deliver such documentation (including, without
limitation, a mortgage release and UCC partial release
statements), and to take such further actions, all as may be
reasonably required to release the Agent's and the Lender's Liens
on the Stone Snowflake Property. The Lenders also authorize the
Agent to execute and deliver such further documentation and to
take such further actions (including, without limitation, to
release any Liens with respect to assets (including any assets of
Apache Railway Corporation) being sold in the Stone Snowflake
Sale Transaction), all as may reasonably be required to
facilitate the Stone Snowflake Sale Transaction. The Lenders,
the Agent and the Borrower further agree that, notwithstanding
any provision to the contrary in the Stone Snowflake Pledge
Agreement, and except as the Required Lenders may otherwise
subsequently consent to, (i) amounts held in the cash collateral
account established pursuant to the Stone Snowflake Cash
Collateral Agreement shall be applied as set forth in the
definition of Stone Snowflake Cash Collateral Agreement unless
the Loans shall have been accelerated prior to November 30, 1998
(in which case such amounts shall be applied as provided in the
Stone Snowflake Cash Collateral Agreement) and (ii) any portion
of the proceeds relating to the sale of Stone Snowflake's assets
as part of the Stone Snowflake Sale Transaction which is in
excess of the Snowflake Collateral Amount and which is dividended
to the Borrower by Stone Snowflake shall not constitute
Collateral under the Stone Snowflake Pledge Agreement or
otherwise and shall not be required to be deposited by the
Borrower with the Agent. The Lenders and the Borrower authorize
and direct the Agent to make the application of funds described
in part (i) of the preceding sentence in accordance with the
terms of the Stone Snowflake Cash Collateral Agreement.
(b) The undersigned Lenders and the Agent hereby consent
to, and waive any breach of Section 5.2.5 of the Credit Agreement
arising out of, the redemption or purchase for cancellation by
Stone-Canada of shares of its preferred stock owned of record by
the Borrower which are pledged to the Agent in exchange for the
transfer of Abitibi Shares by Stone-Canada to the Borrower in
consideration for such redemption or purchase (such transaction
being referred to as the "Stone-Canada Abitibi Share
Distribution"), so long as (i) all such Abitibi Shares
transferred to Stone are delivered to the Agent, together with
appropriately executed stock powers, to be held as Collateral
pursuant to the terms and conditions of that certain Pledge
Agreement dated as of June 19, 1997, as amended (the "Stone-
Canada Pledge Agreement"), between the Borrower and the Agent,
relating to the pledge of 51% of the capital stock of Stone-
Canada by the Borrower in favor of the Agent and (ii) 51% of the
remaining outstanding shares of preferred stock of Stone-Canada
owned by the Borrower are delivered to the Agent, together with
appropriately executed stock powers, to be held as Collateral
pursuant to the terms and conditions of the Stone-Canada Pledge
Agreement. The Lenders also authorize the Agent to execute and
deliver such further documentation (including, without
limitation, an amendment to the Stone-Canada Pledge Agreement to
facilitate the Stone-Canada Abitibi Share Distribution and to
effect a valid, first priority pledge of all Abitibi Shares and
Stone-Canada preferred shares so received by the Borrower in
favor of the Agent), and to take such further actions (including,
without limitation, to release any necessary preferred shares
which are being redeemed or repurchased from the Lien under the
Stone-Canada Stock Pledge), all as may be reasonably required to
facilitate the Stone-Canada Abitibi Share Distribution.
(c) The undersigned Lenders and the Agent hereby waive any
breach of the Credit Agreement by the Borrower resulting from the
Borrower's failure to comply with Section 5.3.2 of the Credit
Agreement as in effect prior to giving effect to this Amendment
for the Fiscal Quarter ending September 30, 1998, provided that
the Borrower shall comply with Section 5.3.2 of the Credit
Agreement as amended by this Amendment.
SECTION 4. Excluded Sales Proceeds Designation. The
Borrower hereby elects to have the net proceeds received by the
Borrower and Stone Snowflake as consideration in the Stone
Snowflake Sale Transaction designated as Excluded Sale Proceeds
and thereby excluded from the prepayment requirements of Section
3.4(c) of the Credit Agreement; provided, however, that such
designation shall in no way affect or diminish the Borrower's
agreements or obligations set forth in Section 2(b) above.
SECTION 5. Conditions Precedent to Effectiveness of
Amendment. This Amendment shall become effective upon the date
(the "Effective Date") when each of the following conditions
precedent has been satisfied:
(a) each of the Borrower, the Agent and the Required
Lenders shall have executed and delivered this Amendment;
(b) Stone Snowflake shall have executed and delivered a
Reaffirmation of Guaranty in substantially the form attached
hereto as Exhibit A; and
(c) the Agent shall have received from the Borrower such
certificates and opinions, including an opinion of Messrs. Sidley
& Austin, counsel for the Company, with respect hereto as the
Agent may reasonably require.
SECTION 6. Representations and Warranties of the Borrower.
The Borrower represents and warrants to the Lenders, the Co-
Agents and the Agent as follows:
(a) The representations and warranties contained in the Credit
Agreement and the other Loan Documents are true and correct in
all material respects at and as of the date hereof as though made
on and as of the date hereof (except to the extent specifically
made with regard to a particular date).
(b) No Event of Default or Unmatured Event of Default has
occurred and is continuing.
(c) The execution, delivery and performance of this
Amendment has been duly authorized by all necessary action on the
part of, and duly executed and delivered by, the Borrower and
this Amendment is a legal, valid and binding obligation of the
Borrower enforceable against the Borrower in accordance with its
terms, except as the enforcement thereof may be subject to the
effect of any applicable bankruptcy, insolvency, reorganization,
moratorium or similar laws affecting creditors' rights generally
and general principles of equity (regardless of whether such
enforcement is sought in a proceeding in equity or at law).
(d) The execution, delivery and performance of this
Amendment do not conflict with or result in a breach by the
Borrower of any term of any material contract, loan agreement,
indenture or other agreement or instrument to which the Borrower
is a party or is subject, including without limitation any
Specified Senior Indenture, any agreement relating to
Subordinated Debt or that certain Agreement and Plan of Merger
dated as of May 10, 1998 among the Borrower, Jefferson Smurfit
Corporation and JSC Acquisition Corporation.
SECTION 7. References to and Effect on the Credit
Agreement.
(a) On and after the Effective Date each reference in the
Credit Agreement to "this Agreement," "hereunder," "hereof,"
"herein," or words of like import, and each reference to the
Credit Agreement in the Loan Documents and all other documents
(the "Ancillary Documents") delivered in connection with the
Credit Agreement shall mean and be a reference to the Credit
Agreement as amended hereby.
(b) Except as specifically amended above, the Credit
Agreement, the Loan Documents and all other Ancillary Documents
shall remain in full force and effect and are hereby ratified and
confirmed.
(c) The execution, delivery and effectiveness of this
Amendment shall not operate as a waiver of any right, power or
remedy of the Lenders, the Co-Agents or the Agent under the
Credit Agreement, the Loan Documents or the Ancillary Documents
except as expressly provided above.
(d) The Borrower acknowledges and agrees that this
Amendment constitutes a "Loan Document" for purposes of the
Credit Agreement, including, without limitation, Section 7.1(d)
of the Credit Agreement.
SECTION 8. Execution in Counterparts. This Amendment may
be executed in counterparts, each of which when so executed and
delivered shall be deemed to be an original and all of which
taken together shall constitute but one and the same instrument.
This Amendment shall be binding upon the respective parties
hereto upon the execution and delivery of this Amendment by the
Borrower, the Agent and the Required Lenders regardless of
whether it has been executed and delivered by all of the Lenders.
Delivery of an executed counterpart of a signature page of this
Amendment by facsimile transmission shall be effective as
delivery of a manually executed counterpart of this Amendment.
SECTION 9. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED
BY, AND BE CONSTRUED AND INTERPRETED IN ACCORDANCE WITH THE LAWS
OF THE STATE OF NEW YORK, WITHOUT REGARD TO THE INTERNAL
CONFLICTS OF LAWS PROVISIONS THEREOF.
SECTION 8. Headings. Section headings in this Amendment
are included herein for convenience of reference only and shall
not constitute a part of this Amendment for any other purposes.
SECTION 9. Successors and Assigns. This Amendment shall
be binding upon and inure to the benefit of the parties hereto
and their respective successors and assigns.
[Signature Pages Follow]
EXHIBIT A
REAFFIRMATION OF GUARANTY
The undersigned acknowledges receipt of a copy of the Fifth
Amendment of Credit Agreement (the "Amendment") dated as of
October ____, 1998, consents to such amendment and each of the
transactions and waivers referenced therein and hereby reaffirms
its obligations under the Stone Snowflake Guaranty (as defined in
the Amendment).
Dated as of October ____, 1998
STONE SNOWFLAKE NEWSPRINT COMPANY
By:_____________________________________
Title: _________________________________
Exhibit 99
Excerpts from Joint Proxy Statement/Prospectus dated October 8, 1998
Risk Factors - Substantial Leverage
Each of JSC and Stone currently has a highly leveraged capital structure.
as of June 30, 1998, JSC and Stone had approximately $2.1 billion and
$4.5 billion of outstanding indebtedness, respectively, and JSC intends
to incur additional indebtedness in connection with the Merger as
described in' -- Ability to Service Debt; Liquidity' below. The level
of SSCC's indebtedness could have important consequences for SSCC and
its stockholders, including the following: (i) SSCC may be required
to seek additional sources of capital, including additional borrowings
under the existing credit agreements of JSC and Stone, other private
or public debt or equity financings to service or refinance its
indebtedness, none of which may be available on favorable terms,
(ii) a substantial portion of SSCC's cash flow from operations
will be necessary to meet the payment of principal and interest on
its indebtedness and other obligations and will not be available for
use in SSCC's business, (iii) SSCC's level of indebtedness could
make it more vulnerable to economic downturns, and reduce its
operational and business flexibility in responding to changing
business and economic conditions and (iv) SSCC will be more highly
leveraged than some of its competitors, which may place it at a
competitive disadvantage. In addition, borrowings under JSC's and
Stone's credit agreements will be at variable rates of interest,
which will expose SSCC to the risk of increased interest rates.
Risk Factors - Ability to Service Debt; Liquidity
Stone's income (loss) before interest expense and income taxes was
insufficient to cover interest expense for the six months ended
June 30, 1998 and for the year ended December 31, 1997 by $296.8
million and $618.5 million, respectively, and it is expected to
continue to be insufficient through at least the remainder of 1998.
As of September 30, 1998, JSC and Stone, respectively, have scheduled
principal payments for existing indebtedness (exclusive of non-recourse
debt of affiliates of Stone) of approximately $2 million and $247
million in the fourth quarter of 1998, approximately $36 million and
$747 million in 1999, approximately $62 million and $472 million in
2000, and approximately $2 billion and $3.1 billion thereafter.
In connection with the Merger and pursuant to an executed commitment
letter, JSC intends to amend its existing credit agreement to borrow
$550 million (the 'Amended JSC Credit Agreement'), $300 million of which
will be provided to Stone. There can be no assurance that the Amended
JSC Credit Agreement, which is subject to the execution of definitive
documentation and the satisfaction of other conditions including the
absence of any material adverse change at JSC or Stone and their
respective subsidiaries and the absence of any material adverse change
or condition in the loan or other financial markets that would have a
material adverse effect on the syndication of the Amended JSC Credit
Agreement, will become effective, that the terms thereof will be
satisfactory to JSC or that all of the conditions to borrowing
thereunder will be met. If the Amended JSC Credit Agreement does
not become effective, there can be no assurance as to the extent
to which any alternative financings would be available, and the
terms of any such alternatives. It is expected that the funds from
the Amended JSC Credit Agreement, proceeds of any divestitures and
funds generated from operations will satisfy Stone's short term
liquidity needs, including scheduled payments of principal and interest
and anticipated capital expenditure and working capital requirements.
Stone does not expect such sources of funds to be sufficient to satisfy
its long term liquidity needs and will need to obtain additional debt
or equity financing. There can be no assurance as to the availability
or terms of any such financing.
The ability of SSCC and its subsidiaries to meet their obligations
and to comply with the financial covenants contained in their respective
debt instruments will be largely dependent upon the future performance
of SSCC and its subsidiaries, which will be subject to financial,
business and other factors affecting them. Many of these factors
will be beyond SSCC's control, such as the state of the economy,
the financial markets, demand for and selling prices of its products,
costs of its raw materials and legislation and other factors relating
to the containerboard industry generally or to specific competitors.
In the event that net proceeds from borrowings or other financing sources
(including the borrowings anticipated under the Amended JSC Credit
Agreement described above) and from any divestitures and operating
cash flows do not provide sufficient liquidity for SSCC and its
subsidiaries (including Stone) to meet their operating and debt
service requirements, SSCC will be required to pursue other alternatives
to repay indebtedness and improve liquidity, including sales of other
assets, cost reductions, deferral of certain discretionary capital
expenditures and seeking amendments or waivers to their debt instruments.
No assurance can be given that such measures could be successfully completed
or would generate the liquidity required by SSCC and its subsidiaries
(including Stone) to operate its business and service its obligations.
If JSC or Stone is not able to generate sufficient cash flow or
otherwise obtain funds necessary to make required debt payments, or if
JSC or Stone fails to comply with the various covenants in their
respective debt instruments, it would be in default under the terms
thereof, which would permit the debtholders thereunder to accelerate
the maturity of such indebtedness and could cause defaults under
other indebtedness of JSC and Stone, as the case may be.
Stone and JSC will need to obtain amendments and waivers under their
respective credit agreements in order to waive change-of-control events
of default currently contained in such credit agreements that would occur
upon the consummation of the Merger and which would permit the
acceleration of the indebtedness of Stone and JSC, respectively.
Both Stone and JSC are currently seeking such amendments and waivers
from their respective bank lenders and believe that such amendments
and waivers will be available prior to the Merger, although no assurances
can be given that such amendments and waivers will be available or that
they will be available on terms acceptable to Stone and JSC. Furthermore,
Stone intends to obtain amendments under its credit agreement in order
to extend the maturity of the revolving portion of its credit agreement
(the aggregate commitment amount of $560 million) beyond its currently
scheduled maturity of May 1999 and the scheduled repayment of a portion
of its term loan facility (the aggregate amount of $190 million) beyond
its currently scheduled repayment date of October 1999. The availability
of borrowings under the Amended JSC Credit Agreement described above may
be conditioned upon Stone obtaining some or all of such amendments. Stone
is actively seeking such amendments but no assurances can be given
whether such amendments would be available or as to the terms of such
amendments. If such amendments are not obtained, the relevant portion
of Stone's indebtedness will be payable as currently scheduled and,
in such event, Stone will not have sufficient funds to satisfy its
short-term liquidity needs and will need to obtain additional debt
or equity financing. There can be no assurance as to the availability
or terms of any such financings.
The Merger will constitute a "Change of Control" under Stone's $1.85
billion outstanding senior notes and $639 million outstanding
subordinated notes. As a result thereof, Stone will be required to
offer to repurchase the subordinated notes at a price equal to 101%
of the principal amount thereof (together with accrued but unpaid
interest thereon), subject to the condition precedent that Stone has
first either repaid its outstanding bank debt or obtained the consent
of its bank lenders to make such repurchase. In the case of the senior
notes, Stone will be required to make a similar offer to repurchase
the senior notes at a price equal to 101% of the principal amount thereof
(together with accrued but unpaid interest thereon) unless such a
repurchase would constitute an event of default under Stone's outstanding
bank debt and Stone has neither repaid its bank debt nor obtained the
consent of its bank lenders to such repurchase. A repurchase of the
senior notes or of the subordinated notes will be prohibited by the
terms of Stone's bank debt. Although the terms of the senior notes refer
to an obligation to repay the bank debt or obtain the consent of the
bank lenders to such repurchase, the terms do not specify a deadline,
if any, following the Merger for repayment of bank debt or obtaining
such consent. Stone intends to actively seek commercially acceptable
sources of financing to repay such bank debt or alternative financing
arrangements which would cause the bank lenders to consent to the
repurchase of the senior or the subordinated notes. There can be no
assurance that Stone will be successful in obtaining such financing
or consents or as to the terms of any such financing or consents.
If Stone is unsuccessful in repaying its bank debt or obtaining the
requisite consents from the lenders thereunder, the holders of its
notes may assert that the failure to do so after some period of time
constitutes a default thereunder. Certain of the notes have recently
been trading at a price below 101% of the principal amount thereof,
and there can be no assurance that such notes will not continue to trade
at a price below 101% of the principal amount thereof at the consummation
of the Merger.
Risk Factors - Restrictive Covenants; Limited Ability to Incur
Indebtedness
JSC's and Stone's ability to incur additional indebtedness, and in
certain cases, refinance outstanding indebtedness, is significantly
limited or restricted under the agreements relating to JSC's and Stone's
existing indebtedness, in particular their debt indentures and credit
agreements. The indentures and agreements contain covenants that
restrict, among other things, their ability to incur indebtedness,
pay dividends, repurchase or redeem capital stock, engage in
transactions with stockholders and affiliates, issue capital stock,
create liens, sell assets, engage in mergers and consolidations and
make investments in unrestricted subsidiaries. In addition, JSC and
Stone will be limited in their ability to move capital freely within
SSCC and its subsidiaries. The limitations contained in such agreements,
together with the highly leveraged capital structure of SSCC and its
subsidiaries, could limit the ability of SSCC and its subsidiaries to
effect future debt or equity financings and may otherwise restrict their
corporate activities, including their ability to avoid defaults, to
provide for capital expenditures, to take advantage of business
opportunities or to respond to advantageous market conditions.
At September 30, 1998, Stone had borrowing availability under its
revolving credit facilities of approximately $117 million. Except
for 1995, Stone has recorded net losses annually since 1992. Stone
has recorded net losses of $225.7 million, $417.7 million, $126.2
million, $204.6 million, $358.7 million and $269.4 million for the
first half of 1998, and for the years 1997, 1996, 1994, 1993 and
1992, respectively. Unless Stone achieves significant price increases
and sustains such levels in the future, Stone will continue to incur
net losses and a deficit in net cash provided by operating activities.
Without additional cash generated by operations or funds from SSCC,
Stone may exhaust all or substantially all of its cash resources and
borrowing availability under its revolving credit facilities.
On March 26, June 5 and July 31, 1998, Stone sought and obtained
amendments to certain indebtedness ratio and interest coverage ratio
requirements under its credit agreement, which Stone anticipated it
might not have been able to comply with. Stone may need to obtain
similar amendments or waivers in the future. There can be no assurance,
however, that such amendments will be obtained and in the future such
lenders will, if requested, grant such relief for failure to comply
with the ratios or other covenants in Stone's credit agreement.
In addition, Stone was unable to maintain the minimum subordinated
capital base required under its indentures governing its approximately
$1.85 billion of outstanding senior notes. Accordingly, in April 1998
Stone offered to repurchase 10% of each series of the senior notes with
the consent of the lenders under its credit agreement. If, in the future,
Stone continues to be unable to maintain the minimum subordinated capital
base required, and the lenders do not permit such offer to repurchase
to be made, the interest rate on its senior notes would increase by 50
basis points per quarter up to a maximum of 200 basis points until the
minimum subordinated capital base is again attained. Beginning on the
first interest payment date after July 1, 1998, the interest rates on
each series of Stone's approximately $594 million aggregate outstanding
senior subordinated notes has increased by 50 basis points due to Stone's
inability to maintain a certain net worth as required under the
applicable indentures. The interest rates will continue to increase
by 50 basis points on each succeeding interest payment date up to a
maximum of 200 basis points until Stone is able to obtain the required
net worth.
