<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934.
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For Quarter Ended September 30, 2000
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 (IRS Employer Identification No.)
incorporation or organization)
150 North Michigan Avenue, Chicago, Illinois 60601
-----------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(312) 346-6600
----------------------------------------------------
(Registrant's telephone number, including area code)
Not Applicable
-------------------------------------------------------
(Former name, former address and former fiscal year, if
changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of September 30, 2000, the registrant had outstanding 135,335,381 shares
of common stock, $.01 par value per share, all of which are owned by Smurfit-
Stone Container Corporation.
<PAGE>
PART I - FINANCIAL INFORMATION
------------------------------
Item 1. Financial Statements
--------------------
STONE CONTAINER CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------------------------------
(In millions) 2000 1999 2000 1999
================================================================================================================================
<S> <C> <C> <C> <C>
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,502 $1,085 $4,039 $3,191
Costs and expenses
Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,175 922 3,217 2,800
Selling and administrative expenses . . . . . . . . . . . . . . . . . . . . . 128 92 339 298
Restructuring charge . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 51
-----------------------------------------
Income from operations . . . . . . . . . . . . . . . . . . . . . . . . . . 194 71 432 93
Other income (expense)
Interest expense, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . (102) (81) (272) (260)
Equity income of affiliates . . . . . . . . . . . . . . . . . . . . . . . . . 4 3 10 8
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 1 7 52
-----------------------------------------
Income (loss) before income taxes and extraordinary item . . . . . . . . . 107 (6) 177 (107)
Benefit from (provision for) income taxes . . . . . . . . . . . . . . . . . . . (51) (4) (95) 20
-----------------------------------------
Income (loss) before extraordinary item . . . . . . . . . . . . . . . . . . . 56 (10) 82 (87)
Extraordinary item
Gain (loss) from early extinguishment of debt, net of income
tax (provision) benefit of $1 and $0 for the three
months and $0 and $1 for the nine months ended
September 30, 2000 and 1999, respectively . . . . . . . . . . . . . . . . . (1) (1) 1 (2)
-----------------------------------------
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 (11) 83 (89)
Preferred stock dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . (2) (2) (6) (6)
-----------------------------------------
Net income (loss) applicable to common shares . . . . . . . . . . . . . . . $ 53 $ (13) $ 77 $ (95)
================================================================================================================================
</TABLE>
See notes to consolidated financial statements.
1
<PAGE>
STONE CONTAINER CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
(In millions, except share data) 2000 1999
===============================================================================================================
Assets (Unaudited)
<S> <C> <C>
Current assets
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . $ 38 $ 13
Receivables, less allowances of $42 in 2000 and $41 in 1999 . . . . . . . . . 391 343
Inventories
Work-in-process and finished goods . . . . . . . . . . . . . . . . . . . . 159 143
Materials and supplies . . . . . . . . . . . . . . . . . . . . . . . . . . 387 357
-----------------------
546 500
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . 89 88
Prepaid expenses and other current assets . . . . . . . . . . . . . . . . . 44 48
-----------------------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,108 992
Net property, plant and equipment . . . . . . . . . . . . . . . . . . . . . . . 4,335 3,089
Timberland, less timber depletion . . . . . . . . . . . . . . . . . . . . . . . 38 21
Goodwill, less accumulated amortization of $141 in 2000 and $79 in 1999 . . . . 3,167 3,123
Investment in equity of non-consolidated affiliates . . . . . . . . . . . . . . 132 136
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 204 204
-----------------------
$8,984 $7,565
===========================================================================================================
Liabilities and Stockholders' Equity
Current liabilities
Current maturities of long-term debt . . . . . . . . . . . . . . . . . . . . $ 32 $ 162
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 373 365
Accrued compensation and payroll taxes . . . . . . . . . . . . . . . . . . . 144 150
Interest payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87 82
Other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . 143 232
-----------------------
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . 779 991
Long-term debt, less current maturities . . . . . . . . . . . . . . . . . . . . 3,883 2,995
Other long-term liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . 654 637
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 701 436
Stockholders' equity
Series E preferred stock, par value $.01 per share; 10,000,000 shares
authorized; 4,599,300 issued and outstanding in 2000 and 1999 . . . . . . . 78 78
Common stock, par value $.01 per share; 200,000,000 shares authorized,
135,335,381 shares issued and outstanding in 2000 and 200,000,000 shares
authorized, 110,000,000 shares issued and outstanding in 1999 . . . . . . . 2,545 2,545
Additional paid in capital . . . . . . . . . . . . . . . . . . . . . . . . . . 393
Retained earnings (deficit) . . . . . . . . . . . . . . . . . . . . . . . . . . (30) (113)
Accumulated other comprehensive income (loss) . . . . . . . . . . . . . . . . . (19) (4)
-----------------------
Total stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . 2,967 2,506
-----------------------
$8,984 $7,565
===========================================================================================================
</TABLE>
See notes to consolidated financial statements.
2
<PAGE>
STONE CONTAINER CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended September 30, (In millions) 2000 1999
=====================================================================================================================
<S> <C> <C>
Cash flows from operating activities
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 83 $ (89)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Extraordinary (gain) loss from early
extinguishment of debt . . . . . . . . . . . . . . . . . . . . . . (1) 3
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . 228 227
Amortization of deferred debt issuance costs . . . . . . . . . . . . 3 3
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . 76 (46)
Non-cash employee benefits . . . . . . . . . . . . . . . . . . . . . 2 2
Non-cash restructuring charge . . . . . . . . . . . . . . . . . . . . 32
Foreign currency transaction gains. . . . . . . . . . . . . . . . . . (5)
Equity income of affiliates . . . . . . . . . . . . . . . . . . . . . (10) (8)
Gain on sale of assets . . . . . . . . . . . . . . . . . . . . . . . (39)
Change in current assets and liabilities, net of
effects from acquisitions and dispositions
Receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . 71 (136)
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 37
Prepaid expenses and other current assets . . . . . . . . . . . . 21 52
Accounts payable and other current liabilities . . . . . . . . . (37) 118
Interest payable . . . . . . . . . . . . . . . . . . . . . . . . 6 (11)
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . 1 (3)
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (135) (39)
----------------------------
Net cash provided by operating activities . . . . . . . . . . . . . . . . 378 66
----------------------------
Cash flows from investing activities
Property additions . . . . . . . . . . . . . . . . . . . . . . . . . . . . (148) (53)
Proceeds from sales of assets and investments. . . . . . . . . . . . . . . 62 544
Payment on acquisition, net of cash received . . . . . . . . . . . . . . . (631)
----------------------------
Net cash provided by (used for) investing activities . . . . . . . . . . . (717) 491
----------------------------
Cash flows from financing activities
Borrowings under bank credit facilities . . . . . . . . . . . . . . . . . 1,525
Payments of debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,142) (630)
Deferred debt issuance costs . . . . . . . . . . . . . . . . . . . . . . . (17)
----------------------------
Net cash provided by (used for) financing activities . . . . . . . . . . . 366 (630)
----------------------------
Effect of exchange rate changes on cash . . . . . . . . . . . . . . . . . (2) 1
----------------------------
Increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . . 25 (72)
Cash and cash equivalents
Beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 137
----------------------------
End of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 38 $ 65
=====================================================================================================================
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
STONE CONTAINER CORPORATION
Notes to Consolidated Financial Statements
(Tabular amounts in millions)
1. Significant Accounting Policies
The accompanying consolidated financial statements and notes thereto of Stone
Container Corporation ("Stone" or the "Company") have been prepared in
accordance with the instructions to Form 10-Q and reflect all adjustments which
management believes necessary (which include only normal recurring accruals) to
present fairly the financial position, results of operations and cash flows.
These statements, however, do not include all information and footnotes
necessary for a complete presentation of financial position, results of
operations and cash flows in conformity with generally accepted accounting
principles. Interim results may not necessarily be indicative of results which
may be expected for any other interim period or for the year as a whole. These
financial statements should be read in conjunction with the audited consolidated
financial statements and footnotes included in the Company's Annual Report on
Form 10-K for the year ended December 31, 1999 (the "Stone 1999 10-K"), filed
March 14, 2000, with the Securities Exchange Commission.
The Company is a wholly-owned subsidiary of Smurfit-Stone Container Corporation
("SSCC"). On November 18, 1998, Stone was merged with a wholly-owned subsidiary
of SSCC (the "Merger").
2. Reclassifications
Certain prior year amounts have been reclassified to conform with the current
year presentation.
3. St. Laurent Acquisition
On May 31, 2000, the Company completed its acquisition ("St. Laurent
Acquisition") of St. Laurent Paperboard Inc. ("St. Laurent") pursuant to an
amended and restated pre-merger agreement dated as of April 13, 2000 among SSCC,
the Company and St. Laurent.
Pursuant to the agreement, each outstanding common share and restricted share
unit of St. Laurent was exchanged for $12.50 in cash and 0.5 shares of SSCC
common stock. The total consideration paid by the Company in connection with
the St. Laurent Acquisition was approximately $1.4 billion, consisting of
approximately $631 million in cash, approximately 25.3 million shares of SSCC
common stock and the assumption of $376 million of St. Laurent's debt. The cash
portion of the purchase price was financed through borrowings under certain of
the Company's credit facilities, including a new credit facility entered into by
the Company.
The St. Laurent Acquisition was accounted for as a purchase business combination
and, accordingly, the results of operations of St. Laurent have been included in
the consolidated statements of operation of the Company after May 31, 2000. The
cost to acquire St. Laurent has been preliminarily allocated to the assets
acquired and liabilities assumed according to estimated fair values and are
subject to adjustment when additional information concerning asset and liability
valuations are finalized. The preliminary allocation has resulted in acquired
goodwill of approximately $175 million, which is being amortized on a straight-
line basis over 40 years.
4
<PAGE>
The following unaudited pro forma combined information presents the results of
operations of the Company as if the St. Laurent Acquisition had taken place on
January 1, 2000 and 1999, respectively:
<TABLE>
<CAPTION>
Nine months ended
Pro Forma Information September 30,
----------------------------------
2000 1999
------ ------
<S> <C> <C>
Net sales................................................ $4,494 $3,814
Income (loss) before extraordinary item.................. 73 (102)
Net income (loss)....................................... 74 (104)
</TABLE>
The unaudited pro forma results of operations have been prepared for comparative
purposes only and do not purport to be indicative of the results of operations
which actually would have resulted had the St. Laurent Acquisition occurred as
of January 1, 2000 and 1999, respectively.
4. SSCC Merger and Restructuring
The Merger with a wholly-owned subsidiary of SSCC was accounted for as a
purchase business combination and, accordingly, the cost to acquire the Company
was allocated to the assets acquired and liabilities assumed according to their
fair values. The allocation resulted in acquired goodwill of $3,136 million,
which is being amortized on a straight-line basis over 40 years.
In May 2000, the Company sold the market pulp mill at its closed Port Wentworth
facility to a third party for approximately $63 million. Net cash proceeds of
$58 million from the sale were used for debt reduction. No gain or loss was
recognized on the sale.
The Company recorded a pretax restructuring charge of $5 million during the
third quarter of 2000 related to the permanent shutdown of a multi-wall bag
facility.
Restructuring charges for the nine months ended September 30, 2000, included a
pretax restructuring charge of $40 million recorded during the second quarter of
2000 in conjunction with the permanent shutdown of a containerboard mill and a
corrugated container facility. Included in the restructuring charge was the
adjustment to fair value of property and equipment and spare parts ($31 million)
of closed facilities, liabilities for the termination of certain employees ($5
million), and liabilities for long-term commitments ($4 million). The assets at
these facilities were adjusted to their estimated fair value less cost to sell.
The terminated employees included approximately 105 employees at the mill
facility and 150 employees at the container facility. The long-term commitments
consist of environmental clean-up and one-time closure costs.
5. Long-Term Debt
On March 31, 2000, the Company amended and restated its existing credit
agreement (the "Credit Agreement") pursuant to which a group of financial
institutions provided an additional $575 million to the Company in the form of a
Tranche F term loan maturing on December 31, 2005 and extended the maturity
dates of the revolving credit facilities under its Credit Agreement to December
31, 2005. On April 28, 2000, the Company used $559 million of the proceeds of
the Tranche F term loan to redeem the 9.875% senior notes due February 1, 2001.
On May 31, 2000, the Company and certain of its wholly-owned subsidiaries closed
on new credit facilities (the "Stone Additional Credit Agreement") with a group
of financial institutions consisting of (i) $950 million in the form of Tranche
G and Tranche H term loans maturing on December 31, 2006, and (ii) a $100
million revolving credit facility maturing on December 31, 2005. The proceeds of
the Stone Additional Credit Agreement were used to fund the cash component of
the St. Laurent Acquisition, refinance certain existing indebtedness of St.
Laurent, and pay fees and expenses related to the St. Laurent Acquisition. The
new revolving credit will be used for general corporate purposes. The Stone
Additional Credit Agreement is secured by a security interest in substantially
all of the assets acquired in the St. Laurent Acquisition.
5
<PAGE>
6. Other, Net
During the third quarter of 2000, the Company recorded a $12.5 million pretax
gain related to the proceeds received from the redemption of the convertible
preferred stock of Four M Corporation that the Company had received in
connection with the consummation of the Florida Coast Paper Company
reorganization plan.
During 1999, the Company sold its interest in Abitibi-Consolidated, Inc., a
Canadian-based manufacturer and marketer of publication paper, resulting in a
gain of $39 million.
7. Non-Consolidated Affiliates
The Company has several non-consolidated affiliates that are engaged in paper
and packaging operations in North America, South America and Europe. Investments
in majority-owned affiliates where control does not exist and non majority-owned
affiliates are accounted for under the equity method.
The Company's only significant non-consolidated affiliate at September 30, 2000
is Smurfit-MBI, a Canadian corrugated container company, in which the Company
owns a 50% interest. The remaining 50% interest is owned indirectly by Jefferson
Smurfit Group plc. Smurfit-MBI had net sales of $115 million and $100 million
for the three months ended September 30, 2000 and 1999, respectively, and $337
million and $282 million for the nine months ended September 30, 2000 and 1999,
respectively.
Combined summarized financial information for all of the Company's non-
consolidated affiliates that are accounted for under the equity method of
accounting is presented below:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
September 30, September 30,
------------- -------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Results of operations (a)
Net sales .............................. $154 $144 $470 $458
Cost of sales .......................... 133 125 409 397
Income before income taxes, minority
interest and extraordinary charges ... 9 7 27 23
Net income ............................. 9 7 26 22
</TABLE>
(a) Includes results of operations for each of the Company's affiliates for the
period it was accounted for under the equity method.
8. Comprehensive Income (Loss)
Comprehensive income (loss) is as follows:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
September 30, September 30,
------------- -------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income (loss) ............................. $ 55 $(11) $ 83 $(89)
Other comprehensive income (loss), net of tax:
Foreign currency translation .............. (18) 4 (15) (5)
---- ---- ---- ----
Comprehensive income (loss) ............... $ 37 $ (7) $ 68 $(94)
===== ==== ==== ====
</TABLE>
6
<PAGE>
9. Business Segment Information
The Company has three reportable segments: (1) Containerboard and Corrugated
Containers, (2) Industrial Bags and (3) International. The Containerboard and
Corrugated Containers segment is highly integrated. It includes a system of
mills and plants that produces a full line of containerboard that is converted
into corrugated containers. Corrugated containers are used to transport such
diverse products as home appliances, electric motors, small machinery, grocery
products, produce, books, tobacco and furniture. The Industrial Bags segment
converts kraft and specialty paper into multi-wall bags, consumer bags and
intermediate bulk containers. These bags and containers are designed to ship and
protect a wide range of industrial and consumer products including fertilizers,
chemicals, concrete and pet and food products. The International segment is
primarily composed of the Company's containerboard mills located in Europe and
corrugating facilities located in Europe and Central and South America.
Other includes corporate related items which include income and expense not
allocated to reportable segments, goodwill amortization, net interest expense,
the adjustment to record inventory at LIFO and the elimination of intercompany
profit. In addition, the converting facilities acquired from St. Laurent are
currently categorized as Other.
The information for 1999 has been restated from the prior year's presentation in
order to conform to the 2000 presentation.
A summary by business segment follows:
<TABLE>
<CAPTION>
Container-
board &
Corrugated Industrial Inter-
Containers Bags national Other Total
---------- ---------- -------- ----- ------
<S> <C> <C> <C> <C> <C>
Three months ended September 30,
--------------------------------
2000
----
Revenues from external
customers......................... $1,086 $122 $162 $ 132 $1,502
Intersegment revenues............... 35 35
Segment profit (loss)............... 217 8 9 (127) 107
1999
----
Revenues from external
Customers........................ $ 824 $126 $135 $ $1,085
Intersegment revenues............... 39 39
Segment profit (loss)............... 112 8 6 (132) (6)
Nine months ended September 30,
-------------------------------
2000
----
Revenues from external
Customers........................ $3,013 $375 $472 $ 179 $4,039
Intersegment revenues............... 101 101
Segment profit (loss)............... 539 23 24 (409) 177
1999
----
Revenues from external
Customers........................ $2,376 $383 $430 $ 2 $3,191
Intersegment revenues............... 116 116
Segment profit (loss)............... 193 27 21 (348) (107)
</TABLE>
7
<PAGE>
The Company announced its plan to reorganize part of its packaging operations to
reduce costs and enhance its marketing efforts. The Company will begin reporting
its new segments in its internal reporting during the fourth quarter.
10. Contingencies
The Company's past and present operations include activities which are subject
to federal, state and local environmental requirements, particularly relating to
air and water quality. The Company faces potential environmental liability as a
result of violations of permit terms and similar authorizations that have
occurred from time to time at its facilities. In addition, the Company faces
potential liability for response costs at various sites for which it has
received notice as being a potentially responsible party ("PRP") concerning
hazardous substance contamination. In estimating its reserves for environmental
remediation and future costs, the Company's estimated liability reflects only
the Company's expected share after consideration for the number of other PRPs at
each site, the identity and financial condition of such parties and experience
regarding similar matters.
The Company is a defendant in a number of lawsuits and claims arising out of the
conduct of its business, including those related to environmental matters. While
the ultimate results of such suits or other proceedings against the Company
cannot be predicted with certainty, the management of the Company believes that
the resolution of these matters will not have a material adverse effect on its
consolidated financial condition or results of operations.
11. Subsequent Event
On October 26, 2000 the stockholders of the Company approved an Agreement and
Plan of Merger among SSCC, SCC Merger Co. and the Company pursuant to which each
share of issued and outstanding $1.75 Series E Cumulative Convertible
Exchangeable Preferred Stock of the Company (the "Stone Preferred Stock") will
be converted into the right to receive one share of $1.75 Series A Cumulative
Convertible Exchangeable Preferred Stock of SSCC (the "SSCC Preferred Stock"),
plus a cash payment from SSCC equal to the accrued and unpaid dividends on each
outstanding share of Stone Preferred Stock, less $0.12 to cover certain
transaction related expenses.
It is anticipated that the merger transaction will be completed on November 15,
2000, and that the cash payment per share of Stone Preferred Stock will be
$6.4425, resulting in total cash payments by SSCC of approximately $30 million.
Following the completion of the merger transaction, the holders of the SSCC
Preferred Stock will be entitled to dividends of $0.4375 per quarter, payable in
cash except in certain circumstances, with the first dividend to be paid on
February 15, 2001. SSCC will make a $78 million capital contribution to the
Company to effect the preferred stock exchange.
8
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
<TABLE>
<CAPTION>
(In millions) Three months ended Nine months ended
September 30, September 30,
------------------ ------------------
<S> <C> <C> <C> <C>
2000 1999 2000 1999
------ ------ ------ ------
Net sales
Containerboard and corrugated containers ... $1,086 $ 824 $3,013 $2,376
Industrial bags ............................ 122 126 375 383
International .............................. 162 135 472 430
Other operations ........................... 132 179 2
------ ------ ------ ------
Total ...................................... $1,502 $1,085 $4,039 $3,191
====== ====== ====== ======
Profit (loss)
Containerboard and corrugated containers ... $ 217 $ 112 $ 539 $ 193
Industrial bags ............................ 8 8 23 27
International .............................. 9 6 24 21
Other operations ........................... 1 3 (1)
------ ------ ------ ------
Total operations ........................... $ 235 $ 126 $ 589 $ 240
Restructuring charge ....................... (5) (51)
Interest expense, net ...................... (102) (81) (272) (260)
Other, net ................................. (21) (51) (89) (87)
------ ------ ------ ------
Income (loss) before income taxes .......... $ 107 $ (6) $ 177 $ (107)
====== ====== ====== ======
</TABLE>
Net sales for the Company for the three and nine month periods ended September
30, 2000, increased 38% and 27%, respectively, compared to the same periods last
year due to higher average sales prices for containerboard, corrugated
containers and market pulp and the St. Laurent Acquisition. St. Laurent's
results of operations are included in the consolidated results of the Company
after May 31, 2000, the date of the acquisition. Net sales included for St.
Laurent for the three and nine months ended September 30, 2000 were $279 million
and $375 million, respectively. The increases (decreases) in net sales for each
of the Company's segments are shown in the chart below.
Operating profits for the Company for the three and nine month periods ended
September 30, 2000 increased 87% and 145%, respectively, compared to last year
due to the higher average sales prices, Merger synergy savings, including
improved efficiency in the Company's mill system, and the St. Laurent
Acquisition. Operating profits in the 2000 periods were negatively impacted by
higher energy cost and downtime taken at the Company's containerboard mills for
internal inventory management and maintenance. Operating profits included for
St. Laurent for the three and nine months ended September 30, 2000 were $47
million and $64 million, respectively.
Other, net for the three months and nine months ended September 30, 2000
improved compared to last year due to the effect of lower intercompany profit
elimination and LIFO expense, and a non-recurring gain of $12.5 million related
to the proceeds received from the redemption of convertible preferred stock in
connection with the consummation of the Florida Coast Paper Company
reorganization plan. For the nine months ended September 30, 1999, other, net
included a $39 million gain on asset sales.
9
<PAGE>
<TABLE>
<CAPTION>
(In millions)
Container-
board &
Increase (decrease) Corrugated Industrial Inter- Other
in net sales due to: Containers Bags national Operations Total
-------------------- ---------- ---------- -------- ---------- -----
<S> <C> <C> <C> <C> <C>
Three months ended September 30,
2000 compared to 1999
---------------------
Sales price and product mix............ $110 $ 6 $(1) $ $ 115
Sales volume........................... 4 (7) 28 25
Acquisition and other.................. 184 132 316
Closed or sold facilities.............. (36) (3) (39)
---- ---- ---- ---- -----
Total increase (decrease).......... $262 $ (4) $27 $132 $ 417
==== ==== === ==== =====
Nine months ended September 30,
2000 compared to 1999
---------------------
Sales price and product mix............ $401 $ 10 $19 $ $ 430
Sales volume........................... 42 (13) 29 58
Acquisition and other.................. 284 179 463
Closed or sold facilities.............. (90) (5) (6) (2) (103)
---- ---- --- ---- -----
Total increase (decrease).......... $637 $ (8) $42 $177 $ 848
==== ==== === ==== =====
</TABLE>
Containerboard and Corrugated Containers Segment
------------------------------------------------
Net sales of $1,086 million for the three months ended September 30, 2000
increased 32% compared to last year and profits increased by $105 million to
$217 million. The increase in net sales was due to higher average sales prices
for containerboard, corrugated containers and market pulp and the St. Laurent
Acquisition. The increase in operating profits compared to last year were due to
the higher average sales prices, Merger synergy savings, including improved
efficiency in the Company's mill system, and the St. Laurent Acquisition.
Profits were negatively impacted by higher energy cost and mill downtime taken
for internal inventory management and maintenance. Net sales and operating
profit for the St. Laurent operations included in this segment for the three
months ended September 30, 2000 were $147 million and $46 million, respectively.
Cost of goods sold as a percent of net sales decreased to 73% for the three
months ended September 30, 2000 compared to 80% for the same period last year
due to the St. Laurent Acquisition and the higher average sales prices.
On average, linerboard prices for the third quarter of 2000 were higher than
last year by 12% and the average price of corrugated containers was higher by
16%. Strong demand for market pulp drove prices higher in the first half of 2000
and the Company implemented a price increase of $30 per metric ton on July 1,
2000. The average price of market pulp for the third quarter of 2000 was 13%
higher compared to last year.
Production of containerboard and kraft paper for the third quarter of 2000,
exclusive of St. Laurent's production of 335,000 tons, declined 6% compared to
last year due to the higher levels of downtime. Shipments of corrugated
containers increased 5% compared to last year due to the St. Laurent
Acquisition. Corrugated shipments were negatively impacted by plant closures and
customer rationalization. The Company had higher third party sales of
containerboard, but lower third party sales of kraft paper in the three and nine
month periods ended September 30, 2000. Sales volume for market pulp for the
third quarter was comparable to last year.
For the nine months ended September 30, 2000, net sales of $3,013 million
increased 27% compared to last year and profits increased by $346 million to
$539 million. The improved results were due to the higher sales prices, Merger
synergy savings and the St. Laurent Acquisition, although profits were
negatively impacted by the mill downtime and higher cost of energy and reclaimed
fiber. Net sales and
10
<PAGE>
operating profit included for St. Laurent for the nine months ended September
30, 2000 were $196 million and $61 million, respectively. On average, linerboard
prices were higher than last year by 18% and the average price of corrugated
containers was higher by 17%. Production of containerboard and kraft paper for
the nine months ended September 30, 2000, exclusive of St. Laurent's production
of 445,000 tons, decreased 3% due primarily to the downtime. Shipments of
corrugated containers increased 2% compared to last year. The average sales
price of market pulp increased 25% compared to last year while sales volume
declined 8% due to higher maintenance downtime in 2000. Cost of goods sold as a
percent of net sales decreased to 75% for the nine months ended September 30,
2000 compared to 83% for the same period last year due to the St. Laurent
Acquisition and the higher average sales prices.
Industrial Bag Segment
----------------------
Net sales for the three months ended September 30, 2000 were $122 million, a
decrease of 3%, compared to last year and profit was unchanged at $8 million.
Sales prices improved compared to last year, but sales volume was lower, due in
part to a labor strike at one of the operating facilities. Cost of goods sold as
a percent of net sales decreased to 84% for the three months ended September 30,
2000 compared to 89% for the same period last year due primarily to higher
average sales prices.
Net sales for the nine months ended September 30, 2000 were $375 million, a
decrease of 2%, compared to last year and profit decreased $4 million to $23
million. The decrease in net sales was due to the labor strike, lower sales
volume and plant closures. Cost of goods sold as a percent of net sales for the
nine months ended September 30, 2000 was 83%, unchanged from the same period
last year.
International Segment
---------------------
Net sales for the three months ended September 30, 2000 were $162 million, an
increase of 20%, compared to last year and profit increased $3 million to $9
million. The increase in net sales was due to increased volume, primarily for
container operations, and higher average sales prices for containerboard and
reclaimed fiber. Profits in the container operations declined compared to last
year however, due to the inability to pass cost increases on to customers. Cost
of goods sold as a percent of net sales increased to 88% for the three months
ended September 30, 2000 compared to 84% for the same period last year due to
higher costs for containerboard and reclaimed fiber.
Net sales for the nine months ended September 30, 2000 were $472 million, an
increase of 10%, compared to last year and profit increased $3 million to $24
million. The increase in net sales was due to increases in volume for container
operations and higher sales prices for containerboard and reclaimed fiber. Sales
were negatively impacted by the sale of a corrugated container operation in 1999
located in Australia. Cost of goods sold as a percent of net sales increased to
87% for the nine months ended September 30, 2000 compared to 85% for the same
period last year due to higher costs for containerboard and reclaimed fiber.
Other Operations
----------------
Other operations include St. Laurent's converting facilities after May 31, 2000,
the date of the acquisition. Net sales and profit for the St. Laurent converting
facilities for the three months ended September 30, 2000 were $132 million and
$1 million, respectively and for the nine months ended September 30, 2000 were
$179 million and $3 million, respectively.
Costs and Expenses
------------------
Costs and expenses for the three months and nine months ended September 30, 2000
include expenses for St. Laurent after May 31, 2000. The decreases in the
Company's overall cost of goods sold as a percent of net sales for the three
months ended September 30 from 85% in 1999 to 78% in 2000, and for the six
months ended September 30 from 88% in 1999 to 80% in 2000, were due to the St.
Laurent Acquisition and the higher average sales prices.
Selling and administrative expenses as a percent of net sales for the nine month
period ended September 30, decreased from 9% in 1999 to 8% in 2000 due primarily
to higher average sales prices. Selling and
11
<PAGE>
administrative expenses as a percent of net sales for the three months ended
September 30, 2000 was 8.5%, unchanged from the same period in 1999.
Merger synergy savings of $50 million from the St. Laurent Acquisition are
targeted by the end of 2001. These synergies will be achieved through a
combination of purchasing savings, supply chain management, manufacturing
efficiencies and administrative reductions.
Other income and expense, net for the three months ended September 30, 2000
included a non-recurring pretax gain of $12.5 million related to proceeds
received from the redemption of the convertible preferred stock of Four M
Corporation that the Company had received in connection with the consummation of
the Florida Coast Paper Company reorganization plan. For the nine months ended
September 30, 1999, the Company recorded a $39 million gain on the sale of it's
equity interest in Abitibi-Consolidated Inc. In addition, foreign exchange gains
were more favorable in 1999 as compared to 2000.
Interest expense, net for the three months and nine months ended September 30,
2000 was higher than the same periods last year by $21 million and $12 million,
respectively due to higher average interest rates and to new borrowings used to
fund the St. Laurent Acquisition. The Company's overall average effective
interest rates in the 2000 periods were higher than last year for the three and
nine month periods ended September 30, 2000 by 0.8% and 0.6%, respectively.
Provision for income taxes for the three months and nine months ended September
30, 2000 differed from the federal statutory tax rate due to several factors,
the most significant of which were state income taxes and the effect of
permanent differences from applying purchase accounting.
Statistical Data
<TABLE>
<CAPTION>
(In thousands of tons, except as noted) Three months Nine months
ended ended
September 30, September 30,
------------- -------------
2000 1999 2000 1999
----- ----- ----- -----
<S> <C> <C> <C> <C>
Mill production:
Containerboard ...................... 1,509 1,224 3,991 3,561
Kraft paper ......................... 73 99 218 324
Market pulp ......................... 145 142 452 434
Solid bleached sulfate .............. 28 39
Recycled boxboard ................... 22 21 64 61
Corrugated shipments (billion sq. ft.) .. 16.7 15.9 47.8 47.0
Industrial bag shipments ................ 74 79 228 236
</TABLE>
Restructuring
As explained in the Stone 1999 10-K, SSCC restructured its operations in
connection with the Merger. The restructuring included the permanent shutdown
of certain of the Company's containerboard mill and pulp mill facilities on
December 1, 1998 and five of the Company's converting facilities during the
allocation period in 1999. The adjustment to fair value of property, plant and
equipment associated with the permanent shutdown of the Company's facilities,
liabilities for the termination of certain employees of the Company and the
liabilities for long-term commitments, as well as resolution of litigation
related to the Company's investment in Florida Coast Paper Company, L.L.C.
("FCPC"), were included in the allocation of SSCC's cost to acquire the Company.
As part of the Company's continuing evaluation of all areas of its business in
connection with the Merger integration, the Company recorded a pretax
restructuring charge of $46 million in 2000 related to the permanent shutdown
of one containerboard mill facility and five converting facilities. The
containerboard mill shutdown in 2000 had an annual capacity of 130,000 tons of
corrugating medium. In addition, the Company recorded a pretax restructuring
charge of $5 million during the third quarter of 2000 related to the permanent
shutdown of a multi-wall bag facility.
12
<PAGE>
Since the Merger, through September 30, 2000, approximately $181 million (78%)
of the cash expenditures were incurred, the majority of which related to the
FCPC settlement. The remaining exit liabilities for the Company as of September
30, 2000 of approximately $50 million will be funded through operations as
originally planned.
Liquidity and Capital Resources
Net cash provided by operating activities for the nine months ended September
30, 2000 of $378 million, borrowings under bank credit facilities of $1,525
million and proceeds from the sale of assets of $62 million were used to fund
the $631 million cash component of the St. Laurent Acquisition, $1,142 million
of net debt repayments, $17 million of financing fees and property additions of
$148 million. Property additions include approximately $64 million of
expenditures, as planned, under the Cluster Rule (as discussed in the Stone 1999
10-K). Debt repayments for the nine months ended September 30, 2000 included the
$559 million redemption of the Company's outstanding 9.875% senior notes due
February 1, 2001, repayment of approximately $376 million of existing
indebtedness of St. Laurent, prepayments on the Company's bank term loans and
scheduled debt repayments.
On May 31, 2000, the Company, through its subsidiary, acquired St. Laurent.
Under the terms of the merger agreement, each common share and restricted share
unit of St. Laurent was exchanged for 0.5 shares of SSCC common stock and $12.50
in cash. Approximately 25.3 million shares of Company common stock were issued.
The total purchase price, including cash paid of $631 million and debt assumed
of $376 million, was approximately $1.4 billion.
On May 31, 2000, the Company and certain of its wholly-owned subsidiaries closed
on the Stone Additional Credit Agreement with a group of financial institutions
consisting of (i) $950 million in the form of Tranche G and Tranche H term loans
maturing on December 31, 2006, and (ii) a $100 million revolving credit facility
maturing on December 31, 2005. The proceeds of the Stone Additional Credit
Agreement were used to fund the cash component of the St. Laurent Acquisition,
refinance certain existing indebtedness of St. Laurent and pay fees and expenses
related to the acquisition. The new revolving credit facility will be used for
general corporate purposes. The Stone Additional Credit Agreement is secured by
a security interest in substantially all of the assets acquired in the St.
Laurent Acquisition.
In May 2000, the Company sold the market pulp mill at its Port Wentworth,
Georgia mill site to a third party. Net proceeds of approximately $58 million
from the sale were used for debt reduction.
On March 31, 2000, the Company amended and restated its existing Credit
Agreement pursuant to which a group of financial institutions provided an
additional $575 million to the Company in the form of a Tranche F term loan
maturing on December 31, 2005 and extended the maturity date of the revolving
credit agreement to December 31, 2005. On April 28, 2000, the Company used $559
million of the proceeds of the Tranche F term loan to redeem the 9.875% senior
notes due February 1, 2001.
The Company's Credit Agreements contain various business and financial covenants
including, among other things, (i) limitations on dividends, redemptions and
repurchases of capital stock, (ii) limitations on the incurrence of indebtedness
(iii) limitations on capital expenditures, and (iv) maintenance of certain
financial covenants. The Credit Agreements also require prepayments if the
Company has excess cash flows, as defined, or receives proceeds from certain
asset sales, issuance of equity securities or incurrence of certain
indebtedness. The obligations under the Credit Agreements are secured by a
security interest in substantially all of the assets of the Company and 65% of
the stock of its Canadian subsidiary. The security interest excludes cash, cash
equivalents , certain trade receivables, four paper mills and the land and
buildings of the corrugated container facilities. Such restrictions, together
with the highly leveraged position of the Company, could restrict corporate
activities, including the Company's ability to respond to market conditions, to
provide for unanticipated capital expenditures or to take advantage of business
opportunities.
13
<PAGE>
The declaration of dividends by the Board of Directors is subject to, among
other things, certain restrictive provisions contained in the Credit Agreement
and certain note indentures. At September 30, 2000, the Company had accumulated
dividend arrearages of approximately $28 million related to its $1.75 Series E
Cumulative Convertible Exchangeable Preferred Stock (the "Stone Preferred
Stock"). On October 26, 2000 the stockholders of the Company approved an
Agreement and Plan of Merger among SSCC, SCC Merger Co. and the Company pursuant
to which each share of issued and outstanding Stone Preferred Stock will be
converted into the right to receive one share of $1.75 Series A Cumulative
Convertible Exchangeable Preferred Stock of SSCC (the "SSCC Preferred Stock")
plus a cash payment from SSCC equal to the accrued and unpaid dividends on each
outstanding share of Stone Preferred Stock, less $0.12 to cover certain
transaction related expenses. It is anticipated that the merger transaction will
be completed on November 15, 2000, and that the cash payment per share of Stone
Preferred Stock will be $6.4425, resulting in total cash payments by SSCC of
approximately $30 million. Following the completion of the merger transaction,
the holders of the SSCC Preferred Stock will be entitled to dividends of $0.4375
per quarter, payable in cash except in certain circumstances, with the first
dividend to be paid on February 15, 2001. SSCC will make a $78 million capital
contribution to the Company to effect the preferred stock exchange.
The Company expects that internally generated cash flows, proceeds from asset
divestitures and existing financing resources will be sufficient for the next
several years to meet its obligations, including debt service, expenditures
under the Cluster Rule and other capital expenditures. The Company expects to
use any excess cash flows provided by operations to make further debt
reductions. As of September 30, 2000, the Company had $491 million of unused
borrowing capacity under the Credit Agreement and the Stone Additional Credit
Agreement.
Prospective Accounting Standards
In 1998, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 133 ("SFAS No. 133"), "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 requires that all derivative
instruments be recorded on the balance sheet at fair value. SFAS No. 133 is
required to be adopted effective January 1, 2001 for companies with fiscal years
ending December 31, 2000. The Company is currently assessing what the impact of
SFAS No. 133 will be on its earnings and financial position.
In 1999, the Securities and Exchange Commission staff issued Staff Accounting
Bulletin No. 101, ("SAB 101") "Revenue Recognition in Financial Statements." SAB
101 clarifies the basic principles of revenue recognition in existing generally
accepted accounting principles. SAB 101 is required to be implemented no later
than the fourth quarter of fiscal years beginning after December 15, 1999. The
Company anticipates no effect on income from operations or financial position
from the adoption of SAB 101.
In September 2000, the Emerging Issues Task Force reached a consensus on Issue
No. 00-10 ("EITF 00-10"), "Accounting for Shipping and Handling Fees and Costs."
EITF 00-10 implementation is consistent with the requirements of SAB 101. The
Company intends to adopt EITF 00-10 in the fourth quarter of 2000 and reclassify
shipping and handling costs from net sales. The reclassification will have no
effect on income from operations or financial position.
14
<PAGE>
Item 3. Quantitative and Qualitative Disclosures About Market Risk
For a discussion of certain market risks related to the Company, See Part II,
Item 7A, "Quantitative and Qualitative Disclosures About Market Risk", in the
Stone 1999 10-K.
Foreign Currency Risk
During the nine months ended September 30, 2000, the exchange rates for the
Canadian dollar and the German mark strengthened/(weakened) against the U.S.
dollar as follows:
<TABLE>
<S> <C>
Rate at September 30, 2000 vs. December 31, 1999
Canadian dollar (4.4)%
German mark (14.2)%
Average rate for the nine months ended September 30, 2000 vs. 1999
Canadian dollar 1.2%
German mark (14.0)%
</TABLE>
The Company has experienced foreign currency transaction gains and losses on the
translation of U.S. dollar denominated obligations of certain of its Canadian
subsidiaries, non-consolidated affiliates and a German mark obligation. The
Company recognized foreign currency transaction gains of less than $1 million
for the nine months ended September 30, 2000 compared to a gain of $5 million
for the same period last year.
Interest Rate Risk
The Company's earnings and cash flows are significantly affected by the amount
of interest on its indebtedness. No significant change has occurred in the
Company's exposure to such risk for the nine months ended September 30, 2000.
PART II - OTHER INFORMATION
---------------------------
Item 1. Legal Proceedings
-----------------
None
Item 2. Changes in Securities
---------------------
None
Item 3. Defaults Upon Senior Securities
-------------------------------
As of September 30, 2000, the Company had accumulated dividend arrearages of
approximately $28 million related to the Stone Preferred Stock (see Item 4,
Submission of Matters to a Vote of Security Holders). Declaration of dividends
in respect of such stock is currently prohibited by the terms of the Credit
Agreement and certain note indentures.
15
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
On October 26, 2000, a special meeting of shareholders was held. At the meeting,
the stockholders of the Company approved a proposed merger transaction pursuant
to which each share of Stone Preferred Stock will be canceled and converted into
the right to receive one share of SSCC Preferred Stock, plus $6.4425 in cash.
The transaction is expected to occur on November 15, 2000.
<TABLE>
<CAPTION>
Shares
Votes For Votes Against Abstentions Not Voted
----------- ------------- ----------- ---------
<S> <C> <C> <C> <C>
Common Stock 135,335,381
Series E Preferred 3,093,165 61,223 5,122 1,439,790
</TABLE>
Item 5. Other Information
-----------------
None
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
a) The following exhibits are included in this Form 10-Q.
27.1 Financial Data Schedule
b) Reports on Form 8-K
None
16
<PAGE>
Signatures
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
STONE CONTAINER CORPORATION
------------------------------------
(Registrant)
Date: November 9, 2000 /s/ Paul K. Kaufmann
---------------- ------------------------------------
Paul K. Kaufmann
Vice President and
Corporate Controller
(Principal Accounting Officer)
17
