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Securities and Exchange Commission
Washington, D.C. 20549
Form 10-K
(X) Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended December 31, 1999
( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _________________ to _______________
Commission file number 1-3439
Stone Container Corporation
(Exact name of registrant as specified in its charter)
Delaware 36-2041256
(State of incorporation or organization) (I.R.S. Employer Identification)
150 North Michigan Avenue, Chicago, Illinois 60601
(Address of principal executive offices) (Zip code)
Registrant's Telephone Number: (312) 346-6600
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class On which registered
------------------- -----------------------
$1.75 Series E Cumulative Convertible Exchangeable Preferred Stock New York Stock Exchange
9-7/8% Senior Notes due February 1, 2001 New York Stock Exchange
10-3/4% Senior Subordinated Debentures due April 1, 2002 New York Stock Exchange
Series B 10-3/4% Senior Subordinated Debentures due April 1, 2002 and
1-1/2% Supplemental Interest Certificates New York Stock Exchange
10-3/4% First Mortgage Notes due October 1, 2002 New York Stock Exchange
11-1/2% Senior Notes due October 1, 2004 New York Stock Exchange
6-3/4% Convertible Subordinated Debentures due February 15, 2007 New York Stock Exchange
Rating Adjustable Senior Notes due August 1, 2016 New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None.
Indicate by check mark whether 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
requirements for the past 90 days.
Yes X No __
--
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
All outstanding shares of the registrant's common stock are owned by Smurfit-
Stone Container Corporation.
DOCUMENTS INCORPORATED BY REFERENCE:
Part of Form 10-K
Document Into Which Document is Incorporated
- -------- ---------------------------------------
Sections of the Registrant's Proxy Statement, to be
filed on or before April 30, 2000, for the Annual
Meeting of Stockholders to be held on May 15, 2000. Part III
STONE CONTAINER CORPORATION
Annual Report on Form 10-K
December 31, 1999
TABLE OF CONTENTS
Part I Page No.
Item 1. Business................................................................................ 2
Item 2. Properties.............................................................................. 6
Item 3. Legal Proceedings....................................................................... 7
Item 4. Submission of Matters to a Vote of Security Holders..................................... 9
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters................... 9
Item 6. Selected Financial Data................................................................. 10
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations... 12
Item 7a. Quantitative and Qualitative Disclosures About Market Risk.............................. 20
Item 8. Financial Statements and Supplementary Data............................................. 22
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.... 55
Part III
Item 10. Directors and Executive Officers of the Registrant...................................... 55
Item 11. Executive Compensation.................................................................. 57
Item 12. Security Ownership of Certain Beneficial Owners and Management.......................... 57
Item 13. Certain Relationships and Related Transactions.......................................... 57
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K......................... 58
FORWARD-LOOKING STATEMENTS
Except for the historical information contained in this Annual Report on Form
10-K, certain matters discussed herein, including (without limitation) under
Part I, Item 1, "Business-Environmental Compliance", under Part 1, Item 3,
"Legal Proceedings" and under Part II, Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations," contain forward-
looking statements, within the meaning of Section 21E of the Securities Exchange
Act of 1934, as amended. Although Stone Container Corporation believes that, in
making any such statements, its expectations are based on reasonable
assumptions, any such statement may be influenced by factors that could cause
actual outcomes and results to be materially different from those projected.
When used in this document, the words "anticipates," "believes," "expects,"
"intends" and similar expressions as they relate to Stone Container Corporation
or its management are intended to identify such forward-looking statements.
These forward-looking statements are subject to numerous risks and
uncertainties. Important factors that could cause actual results to differ
materially from those in forward-looking statements, certain of which are beyond
the control of Stone Container Corporation, include the impact of general
economic conditions in the U.S. and Canada and in other countries in which Stone
Container Corporation and its subsidiaries currently do business (including in
Europe, and Latin America); industry conditions, including competition and
product and raw material prices; fluctuations in exchange rates and currency
values; capital expenditure requirements; legislative or regulatory
requirements, particularly concerning environmental matters; interest rates;
access to capital markets; the timing of and value received in connection with
asset divestitures; and obtaining required approvals, if any, of debt holders.
The actual results, performance or achievement by Stone Container Corporation
could differ materially from those expressed in, or implied by, these forward-
looking statements, and accordingly no assurances can be given that any of the
events anticipated by the forward-looking statements will transpire or occur, or
if any of them do so, what impact they will have on the results of operations or
financial condition of Stone Container Corporation.
1
PART I
ITEM 1. BUSINESS
--------
GENERAL
- -------
Stone Container Corporation, a Delaware corporation (the "Company" or "Stone"),
is an integrated producer of containerboard, corrugated containers and other
packaging products. Stone has operations throughout the United States, Canada,
Europe and Latin America. For the year ended December 31, 1999, Stone had net
sales of $4,341 million and a net loss of $77 million.
Stone is a wholly-owned subsidiary of Smurfit-Stone Container Corporation, a
Delaware corporation ("SSCC"). SSCC is a holding company with no business
operations of it own. SSCC conducts its business operations through two wholly-
owned subsidiaries: Stone and JSCE, Inc, Delaware corporations. SSCC acquired
Stone through the November 18, 1998 merger of a wholly-owned subsidiary of
Jefferson Smurfit Corporation, now known as SSCC, with and into Stone (the
"Merger").
On February 23, 2000, SSCC, Stone and a newly-formed subsidiary of Stone entered
into a Pre-Merger Agreement with St. Laurent Paperboard Inc., a corporation
organized under the laws of Canada ("St. Laurent"), pursuant to which the
Company will acquire St. Laurent for approximately $1.4 billion, consisting of
approximately $625 million in cash, the issuance of approximately 25 million
shares of SSCC common stock and the assumption of approximately $386 million of
St. Laurent's debt. St. Laurent is a leading North American producer, supplier
and converter of high-quality, value-added specialty containerboard and high
impact graphics packaging. Consummation of the transaction, which is subject to
St. Laurent shareholder and certain regulatory approvals, is expected to occur
in the second quarter of 2000.
PRODUCTS
- --------
CONTAINERBOARD AND CORRUGATED CONTAINERS SEGMENT
The primary products of the Company's Containerboard and Corrugated Containers
segment include corrugated containers, containerboard, kraft paper and market
pulp. This segment includes eleven paper mills and 81 container plants located
in the United States and three paper mills located in Canada. Total sales for
the Company's Containerboard and Corrugated Containers segment in 1999 were
$3,398 million (including $153 million of inter-segment sales).
Production for the Company's paper mills and sales volume for its corrugated
container facilities for the last three years were:
1999 1998 1997
-------- -------- --------
Tons produced (in thousands)
Containerboard................................................... 4,381 4,432 4,554
Kraft paper...................................................... 437 457 436
Market pulp...................................................... 572 639 780
Corrugated containers sold (in billion sq. ft.).................... 50.1 50.1 47.6
The Company's containerboard mills produce a full line of containerboard, which
for 1999 included 2,873,000 and 1,508,000 tons of unbleached kraft linerboard
and corrugating medium, respectively. The Company's containerboard mills and
corrugated container operations are highly integrated, with the majority of
containerboard produced by the Company used internally by its corrugated
container operations. In 1999, the Company's corrugated container plants
consumed 3,360,000 tons of
2
containerboard, representing an integration level of approximately 77%. A
significant portion of the kraft paper production is consumed internally by the
Company's industrial bag segment.
Corrugated containers are sold to a broad range of manufacturers of consumable
goods. Corrugated containers are used to ship such diverse products as home
appliances, electric motors, small machinery, grocery products, produce, books,
tobacco and furniture and for many other applications, including point of
purchase displays. The Company provides innovative packaging solutions,
stressing the value-added aspects of its corrugated containers, including
labeling and multicolor graphics to differentiate its products and respond to
customer requirements. The Company's corrugated container plants are located
nationwide, serving local customers and large national accounts.
Sales volumes shown above include the Company's proportionate share of the
operations of Smurfit-MBI (formerly MacMillan Bathurst, Inc.), a Canadian
producer of corrugated containers, and other affiliates reported on an equity
ownership basis. The Company and Jefferson Smurfit Group plc ("JS Group"), a
principal shareholder of SSCC, each own a 50% interest in Smurfit-MBI.
The Company produces bleached northern and southern hardwood pulp. Market pulp
is sold to manufacturers of paper products, including photographic and other
specialty papers, as well as the printing and writing sectors.
INDUSTRIAL BAGS SEGMENT
The Company produces multiwall bags, consumer bags and intermediate bulk
containers that are designed to safely and effectively ship a wide range of
industrial and consumer products, including fertilizers, chemicals, concrete,
flour, sugar, feed, seed, pet foods, popcorn, charcoal and salt. The Company's
bag plants are located nationwide. The Company believes it is the largest
producer of industrial bags in the United States. In 1999, the Company's bag
plants consumed approximately 45% of the kraft paper produced by the Company's
kraft paper mills. Shipments for 1999, 1998 and 1997 were 316,000, 302,000 and
297,000 tons, respectively, excluding the proportionate share of non-
consolidated affiliates. The Company's sales of industrial bags in 1999 were
$513 million.
INTERNATIONAL SEGMENT
The Company produces containerboard, boxboard and corrugated containers in
Europe and Latin America. The Company's European operations includes three
paper mills (located in Hoya and Viersen, Germany and Cordoba, Spain), 21
corrugated container plants (eleven located in Germany, three in Spain, three in
Belgium, two in France, and two in The Netherlands) and six reclamation plants
(five located in Germany and one in Spain). In addition, the Company operates
four container plants in Mexico, and several small affiliate operations, which
also produce corrugated containers. Production for the Company's international
mills and sales volume for its international corrugated container facilities for
the last three years were:
1999 1998 1997
--------- --------- ---------
Tons produced (in thousands)
Containerboard................................................... 380 380 381
Recycled boxboard................................................ 79 75 78
Corrugated containers sold (in billion sq. ft.).................... 12.5 12.3 11.4
In 1999, the Company's international corrugated container plants consumed
761,000 tons of containerboard. Total International segment sales were $581
million in 1999.
3
FIBER RESOURCES
- ---------------
Wood fiber and recycled fiber are the principal raw materials used in the
manufacture of the Company's paper products. The Company satisfies virtually
all of its need for wood fiber through purchases on the open market or under
supply agreements and essentially all of its need for recycled fiber through
SSCC's reclamation operations.
Wood fiber and recycled fiber are purchased in highly competitive, price-
sensitive markets, which have historically exhibited price and demand
cyclicality. Conservation regulations have caused, and will likely continue to
cause, a decrease in the supply of wood fiber and higher wood fiber costs in
some of the regions in which the Company procures wood fiber. Fluctuations in
supply and demand for recycled fiber have from time to time caused tight
supplies of recycled fiber, and at those times the Company has experienced an
increase in the cost of such fiber. While the Company has not experienced any
significant difficulty in obtaining wood fiber and recycled fiber in proximity
to its mills, there can be no assurances that this will continue to be the case
for any or all of its mills.
MARKETING
- ---------
The Company's marketing strategy is to sell a broad range of paper-based
packaging products to marketers of industrial and consumer products. In
managing the marketing activities of its paperboard mills, the Company seeks to
meet the quality and service needs of the customers of its package converting
plants at the most efficient cost, while balancing those needs against the
demands of its open market customers. The Company's converting plants focus on
supplying both specialized packaging with high value graphics that enhance a
product's market appeal and high-volume sales of commodity products. The
Company seeks to serve a broad customer base for each of its segments and as a
result serves thousands of accounts from its plants. Each plant has its own
sales force, and many have product design engineers and other service
professionals who are in close contact with customers to respond to their
specific needs. The Company complements the local plants' marketing and service
capabilities with regional and national design and service capabilities, as well
as national sales offices for customers who purchase through a centralized
purchasing office. National account business may be allocated to more than one
plant because of production capacity and equipment requirements.
The Company's business is not dependent upon a single customer or upon a small
number of major customers. The Company does not believe that the loss of any one
customer would have a material adverse effect on the Company.
COMPETITION
- -----------
The markets in which the Company sells its principal products are highly
competitive and comprised of many participants. Although no single company is
dominant, the Company does face significant competitors in each of its
businesses. The Company's competitors include large vertically integrated
companies as well as numerous smaller companies. The industries in which the
Company competes are particularly sensitive to price fluctuations brought about
by shifts in industry capacity and other cyclical industry conditions. Other
competitive factors include design, quality and service, with varying emphasis
depending on product line.
BACKLOG
- -------
Demand for the Company's major product lines is relatively constant throughout
the year and seasonal fluctuations in marketing, production, shipments and
inventories are not significant. Backlogs are not a significant factor in the
industry. The Company does not have a significant backlog of orders, as most
orders are placed for delivery within 30 days.
4
RESEARCH AND DEVELOPMENT
- ------------------------
The Company's research and development center uses state-of-the-art technology
to assist all levels of the manufacturing and sales processes from raw materials
supply through finished packaging performance. Research programs have provided
improvements in coatings and barriers, stiffeners, inks and printing. The
technical staff conducts basic, applied and diagnostic research, develops
processes and products and provides a wide range of other technical services.
The Company actively pursues applications for patents on new inventions and
designs and attempts to protect its patents against infringement. Nevertheless,
the Company believes that its success and growth are more dependent on the
quality of its products and its relationships with its customers, than on the
extent of its patent protection. The Company holds or is licensed to use
certain patents, licenses, trademarks and trade names on products, but does not
consider that the successful continuation of any material aspect of its business
is dependent upon such intellectual property.
EMPLOYEES
- ---------
The Company had approximately 21,900 employees at December 31, 1999, of whom
approximately 16,600 were employees of U.S. operations and the remainder were
employees of foreign operations. Of the domestic employees, approximately
11,600 employees (70%) are represented by collective bargaining units. The
expiration dates of union contracts for the Company's major paper mill
facilities are as follows: the Hodge, LA mill, expiring June 2000; the
Missoula, MT mill, expiring May 2001; the Jacksonville, FL (Seminole) mill,
expiring June 2001; the Hopewell, VA mill, expiring July 2002; the Panama City,
FL mill, expiring March 2003; and the Florence, SC mill, expiring August 2003.
The Company believes that its employee relations are generally good and is
currently in the process of bargaining with unions representing production
employees at a number of its operations. While the terms of these agreements
may vary, the Company believes that the material terms of its collective
bargaining agreements are customary for the industry and the type of facility,
the classification of the employees and the geographic location covered thereby.
ENVIRONMENTAL COMPLIANCE
- ------------------------
The Company's operations are subject to extensive environmental regulation by
federal, state, and local authorities. The Company in the past has made
significant capital expenditures to comply with water, air, solid and hazardous
waste, and other environmental laws and regulations, and expects to make
significant expenditures in the future for environmental compliance. Because
various environmental standards are subject to change, it is difficult to
predict with certainty the amount of capital expenditures that will ultimately
be required to comply with future standards. In particular, the United States
Environmental Protection Agency ("EPA") has finalized significant parts of its
comprehensive rule governing the pulp, paper and paperboard industry (the
"Cluster Rule"), which will require substantial expenditures to achieve
compliance. The Company estimates, based on engineering studies done to date,
that compliance with these portions of the Cluster Rule could require up to $180
million in capital expenditures over the next several years. The ultimate cost
of complying with the regulations cannot be predicted with certainty until
further engineering studies are completed and additional regulations are
finalized.
In addition to Cluster Rule compliance, the Company also anticipates additional
capital expenditures related to environmental compliance. For the past three
years, the Company has spent an average of approximately $18 million annually on
capital expenditures for environmental purposes. The anticipated spending for
such capital projects for fiscal 2000 is approximately $130 million. A
significant amount of the increased expenditures in 2000 will be due to
compliance with the Cluster Rule and is included in the estimate of up to $180
million set forth above. Since the Company's principal competitors are, or will
be, subject to comparable environmental standards, including the Cluster Rule,
management is of the opinion, based on current information, that compliance with
environmental standards will not adversely affect the Company's competitive
position.
5
ITEM 2. PROPERTIES
----------
The Company maintains manufacturing facilities and sales offices throughout
North America, Europe and Latin America. The Company's facilities are properly
maintained and equipped with machinery suitable for their use. The Company's
manufacturing facilities as of December 31, 1999 are summarized below:
Number of Facilities State
-------------------------------------------------
Total Owned Leased Locations
----- ----- ------ ---------
United States
Paper mills.......................................... 11 11 10
Corrugated container plants.......................... 81 46 35 32
Bag packaging plants................................. 15 8 7 13
Wood products plants................................. 1 1 1
-------------------------------------------------
Subtotal.............................................. 108 66 42 36
Canada
Paper mills.......................................... 3 3 N/A
Other................................................ 1 1 N/A
Europe and Other
Paper mills.......................................... 3 3 N/A
Reclamation plants 6 3 3 N/A
....................................
Corrugated container plants.......................... 26 23 3 N/A
-------------------------------------------------
Total................................................. 147 99 48 N/A
=================================================
Approximately 76% of the Company's investment in property, plant and equipment
is represented by its paper mills. In addition to its manufacturing facilities,
the Company owns approximately 132,000 acres of timberland in Canada and
operates wood harvesting facilities.
The approximate annual tons of productive capacity, in thousands of short tons,
of the Company's paper mills at December 31, 1999 were:
Annual
Capacity
------------
United States
Containerboard............................ 4,008
Kraft paper............................... 437
Market pulp............................... 341
------------
Subtotal.............................. 4,786
Canada
Containerboard............................ 477
Market pulp............................... 240
Europe and Other
Containerboard............................ 418
Recycled boxboard......................... 79
------------
Total........................................ 6,000
============
6
ITEM 3. LEGAL PROCEEDINGS
-----------------
LITIGATION
- ----------
The Company was a party to an Output Purchase Agreement (the "OPA") with Four M
Corporation ("Four M") and Florida Coast Paper Company, L.L.C. ("FCPC"), a joint
venture owned 50% by each of the Company and Four M. The OPA required that the
Company and Four M each purchase one-half of the linerboard produced at FCPC's
mill in Port St. Joe, FL (the "FCPC Mill") at a minimum price sufficient to
cover certain obligations of FCPC. The OPA also required the Company and Four M
to use their best efforts to cause the FCPC Mill to operate at a production rate
not less than the reported average capacity utilization of the U.S. linerboard
industry. FCPC indefinitely discontinued production at the FCPC Mill in August
1998, and FCPC and certain of its affiliates filed for Chapter 11 bankruptcy
protection in April 1999. Certain creditors of FCPC filed an adverse proceeding
in the bankruptcy against the Company and Four M, and certain of their officers
and directors, alleging, among other things, default with respect to the
obligations of the Company and Four M under the OPA. On October 20, 1999 FCPC
and a committee representing the holders of the FCPC debt securities filed a
bankruptcy reorganization plan (the "Plan") that provided for the settlement of
all outstanding claims in exchange for cash payments. Under the Plan, which was
confirmed and consummated in January 2000, the Company paid approximately $123
million to satisfy the claims of creditors of FCPC, the Company received title
to the FCPC mill, and all claims under the OPA, as well as any obligations of
the Company involving FCPC or its affiliates, were released and discharged. In
addition, Four M issued $25 million of convertible preferred stock to the
Company in connection with the consummation of the Plan.
In 1998, seven putative class action complaints were filed in the United States
District Court for the Northern District of Illinois and the United States
District Court for the Eastern District of Pennsylvania alleging that the
Company reached agreements in restraint of trade that affected the manufacture,
sale and pricing of corrugated products in violation of antitrust laws. The
complaints have been amended to name several other defendants, including
Jefferson Smurfit Corporation (U.S.) ("JSC(U.S.)") and SSCC. The suits seek an
unspecified amount of damages arising out of the sale of corrugated products for
the period from October 1, 1993 through March 31, 1995. Under the provisions of
the applicable statutes, any award of actual damages could be trebled. The
Federal Multidistrict Litigation Panel has ordered all of the complaints to be
transferred to and consolidated in the United States District Court for the
Eastern District of Pennsylvania. The Company, JSC(U.S.) and SSCC believe they
have meritorious defenses and intend to vigorously defend these cases.
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.
ENVIRONMENTAL MATTERS
- ---------------------
In October 1992, the Florida Department of Environmental Regulation, predecessor
to the Department of Environmental Protection ("DEP"), filed a civil complaint
in the Circuit Court of Bay County, FL against the Company seeking injunctive
relief, an unspecified amount of fines and civil penalties, and other relief
based on alleged groundwater contamination at the Company's Panama City, FL
mill. In addition, the complaint alleged operation of a solid waste facility
without a permit and discrepancies in hazardous waste shipping manifests. At
the parties' request, the case was stayed pending the conclusion of a related
administrative proceeding petitioned by the Company in June 1992 following DEP's
proposal to deny the Company a permit renewal to continue operating its
wastewater pretreatment facility at the mill site. The administrative
proceeding was referred to a hearing officer for an administrative hearing on
the consolidated issues of compliance with a prior consent order, denial of the
permit renewal, completion of a contamination assessment and denial of a sodium
exemption. In March 1999, DEP and the Company
7
entered into a Consent Agreement pursuant to which DEP issued an operating
permit for the wastewater treatment system, DEP granted the sodium exemption,
and the Company agreed to install and operate a hydrologic barrier well system.
As part of the settlement, the enforcement action with respect to the
groundwater contamination was dismissed.
In September 1997, the Company received a Notice of Violation ("NOV") and a
Compliance Order from the EPA alleging noncompliance with air emissions
limitations for the smelt dissolving tank at the Company's Hopewell, VA mill and
for failure to comply with New Source Performance Standards applicable to
certain other equipment at the mill. In cooperation with the EPA, the Company
responded to information requests, conducted tests and took measures to ensure
continued compliance with applicable emission limits. In December 1997 and
November 1998, the Company received additional requests from the EPA for
information about past capital projects at the mill. In April 1999, the EPA
issued a NOV alleging that the Company had "modified" the recovery boiler and
increased nitrogen oxide emissions without obtaining a required construction
permit. The Company responded to this NOV and indicated that the EPA's
allegations were without merit.
In August 1999, the Company received a Notice of Infraction from the Ministry of
Environment of the Province of Quebec (the "Ministry") alleging noncompliance
with specified environmental standards at the Company's New Richmond, Quebec
mill. The majority of the citations alleged that the Company had discharged
total suspended solids in the mill's treated effluent which exceeded the
regulatory limitations for the rolling 30-day average. The remainder of the
citations were for monitoring, reporting and administrative deficiencies
uncovered during an inspection performed by the Ministry earlier in the year.
The total fine demanded by the Ministry for all of the alleged violations is
$6.5 million (Canadian). The Company entered a plea of "not guilty" as to all
of the citations and intends to vigorously defend itself against these alleged
violations.
Federal, state and local environmental requirements are a significant factor in
the Company's business. The Company employs processes in the manufacture of
pulp, paperboard and other products which result in various discharges,
emissions, and wastes, and which are subject to numerous federal, state and
local environmental laws and regulations, including reporting and disclosure
obligations. The Company operates and expects to operate under permits and
similar authorizations from various governmental authorities that regulate such
discharges, emissions, and wastes.
The Company also faces potential liability as a result of releases, or
threatened releases, of hazardous substances into the environment from various
sites owned and operated by third parties at which Company-generated wastes have
allegedly been deposited. Generators of hazardous substances sent to off-site
disposal locations at which environmental problems exist, as well as the owners
of those sites and certain other classes of persons (generally referred to as
"potentially responsible parties" or "PRPs"), are, in most instances, subject to
joint and several liability for response costs for the investigation and
remediation of such sites under the Comprehensive Environmental Response,
Compensation and Liability Act of 1980 ("CERCLA") and analogous state laws,
regardless of fault or the lawfulness of the original disposal. The Company has
received notice that it is or may be a PRP at a number of federal and/or state
sites where response action may be required, and as a result may have joint and
several liability for cleanup costs at such sites. However, liability for
CERCLA sites is typically shared with other PRPs and costs are commonly
allocated according to relative amounts of waste deposited. The Company's
relative percentage of waste deposited at a majority of these sites is quite
small. In addition to participating in remediation of sites owned by third
parties, the Company has entered into consent orders for investigation and/or
remediation of certain Company-owned properties.
Based on current information, the Company believes that the probable costs of
the potential environmental enforcement matters discussed above, response costs
under CERCLA and similar state laws, and remediation of owned property, will not
have a material adverse effect on the Company's financial condition or results
of operations. The Company believes that its liability for these matters was
adequately reserved at December 31, 1999.
8
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
No matters were submitted to a vote of security holders of the registrant during
the fourth quarter of 1999.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
---------------------------------------------------------------------
MARKET INFORMATION
- ------------------
The Company is a wholly-owned subsidiary of SSCC, and therefore, all of the
outstanding common stock of the Company ("Stone Common Stock") is owned by SSCC.
As a result, there is no established public market for the Stone Common Stock.
DIVIDENDS
- ---------
The Company did not pay dividends on its common stock during 1998 or 1999. The
ability of the Company to pay dividends in the future is restricted by certain
restrictive provisions contained in the Company's Credit Agreement, Senior Note
Indentures, Senior Subordinated Indenture and Restated Certificate of
Incorporation.
9
ITEM 6. SELECTED FINANCIAL DATA
-----------------------
(In millions, except per share and statistical data)
Predecessor
--------------------------------------------
Year Period from Period from
Ended November 19 January 1 to
December to December November Year Ended December 31,
----------------------------
31, 1999 31, 1998(a) 18, 1998 1997 1996 1995(b)
--------------------------------------------------------------------------
Summary of Operations(c) (e)
Net sales..................................... $ 4,341 $ 465 $ 4,254 $ 4,696 $ 4,989 $ 7,198
Income (loss) from operations................. 197 (15) (152) (89) 146 1,202
Income (loss) before extraordinary item....... (75) (36) (749) (405) (122) 445
Net income (loss)............................. (77) (36) (749) (418) (126) 256
Basic earnings per share of common stock (c)
Income (loss) before extraordinary item....... (7.43) (4.16) (1.32) 4.64
Net income (loss)............................. (7.43) (4.29) (1.35) 2.63
Weighted average shares outstanding........... 102 99 99 94
Diluted earnings per share of common stock (c)
Income (loss) before extraordinary item....... (7.43) (4.16) (1.32) 3.89
Net income (loss)............................. (7.43) (4.29) (1.35) 2.24
Weighted average shares outstanding........... 102 99 99 115
Cash dividends per common share are .60 .30
- ---------------------------------------------------------------------------------------------------------------------------
Other Financial Data (e)
Net cash provided by (used for) operating
activities................................... $ 72 $ 12 $ (16) $ (259) $ 288 $ 962
Net cash provided by (used for) investing
activities................................... 683 (22) 35 (174) (342) (545)
Net cash provided by (used for) financing
activities................................... (883) (111) 128 438 128 (492)
Depreciation and amortization................. 296 34 239 302 315 372
Capital investments and acquisitions.......... 87 22 219 150 358 443
Working capital............................... 1 488 507 672 981
Property, plant, equipment and timberlands,
net.......................................... 3,110 4,012 2,427 2,668 2,694
Total assets.................................. 7,565 8,793 5,824 6,354 6,399
Long-term debt................................ 3,157 4,063 4,351 4,160 3,942
Redeemable preferred stock.................... 78 78 115 115 115
Stockholders' equity.......................... 2,506 2,590 277 795 1,005
- ---------------------------------------------------------------------------------------------------------------------------
Statistical Data (tons in thousands) (d)
Containerboard and kraft production (tons).... 5,198 604 4,664 5,371 5,030 5,008
Market pulp production (tons)................. 572 71 708 1,127 1,009 1,083
Corrugated shipments (billion sq. ft.)........ 62.6 6.2 52.7 55.7 53.1 53.0
Industrial bag shipments (tons)............... 316 59 447 509 538 574
Number of employees........................... 21,900 23,000 24,600 24,200 25,900
10
Notes to Selected Financial Data
(a) On November 18, 1998, the Company completed a merger with a wholly-owned
subsidiary of SSCC. The Merger was accounted for as a purchase business
combination, and accordingly, purchase accounting adjustments, including
goodwill, have been pushed down and are reflected in the Company's
financial statements subsequent to November 18, 1998. The financial
statements for periods before November 18, 1998 were prepared using the
Company's historical basis of accounting and are designated as
"Predecessor". The comparability of operating results for the Predecessor
periods and the periods subsequent to November 18, 1998 are affected by the
purchase accounting adjustments.
(b) On November 1, 1995, Stone-Consolidated Corporation ("Stone-Consolidated"),
a Canadian subsidiary of the Company, amalgamated its operations with Rainy
River Forest Products, Inc. a Toronto-based Canadian pulp and paper
company. As a result of the amalgamation, the Company's equity ownership
in Stone-Consolidated was reduced from 75% to 47% and accordingly,
effective November 1, 1995, the Company began reporting Stone-Consolidated
as a non-consolidated affiliate in accordance with the equity method of
accounting. Furthermore, on May 30, 1997, Stone-Consolidated merged with
Abitibi-Price Inc. to form Abitibi Consolidated, Inc. ("Abitibi") and, as
of December 31, 1998, the Company was the owner of approximately 25 percent
of the common stock of Abitibi. On January 21, 1999 the Company sold 16%
(approximately 7.8 million shares) of its interest in Abitibi for
approximately $80 million. On April 23, 1999, the Company sold its
remaining interest (approximately 41 million shares) for net proceeds of
$414 million. As a result, the Company recorded a $39 million gain during
1999. The proceeds of the sales have been applied to debt reduction.
(c) Subsequent to the Merger, earnings per share information is no longer
presented because the Company is a wholly-owned subsidiary of SSCC.
(d) Production and shipments data includes the Company's proportionate
ownership share of certain non-consolidated affiliates.
(e) Certain prior year amounts have been restated to conform to current year
presentation.
11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
-----------------------------------------------------------------------
GENERAL
- -------
Market conditions and demand for containerboard and corrugated containers, the
Company's primary products, have historically been subject to cyclical changes
in the economy and changes in industry capacity, both of which can significantly
impact selling prices and the Company's profitability.
Market conditions were generally weak from 1996 to 1998 due primarily to excess
capacity within the industry. Linerboard prices, which peaked in 1995 at
approximately $535 per ton, declined dramatically thereafter, reaching a low of
$310 per ton in April 1997. Corrugated container prices followed this same
pricing trend during the period with somewhat less fluctuation. Prices remained
at reduced levels through the end of 1998.
During the second half of 1998, the containerboard industry took extensive
economic downtime, resulting in a significant reduction in inventory levels. In
addition, several paper companies, including the Company, permanently shut down
paper mill operations, approximating 6% of industry capacity. The balance
between supply and demand for containerboard improved as a result of the
shutdowns, and inventories remained low throughout 1999. Corrugated container
shipments for the industry were strong in 1999, increasing approximately 2%
compared to 1998. Based on these developments, the Company was able to implement
two price increases during 1999, totaling $90 per ton for linerboard, bringing
the price at the end of 1999 to $430 per ton. In addition, the Company
implemented a $50 per ton price increase in February 2000 for linerboard.
Market pulp is also subject to the cyclical changes in the economy and changes
in industry capacity. The price of market pulp declined from 1996 to 1998 as a
result of excess capacity worldwide. Mill closures, market related downtime and
the recovery of the Asian markets in 1998 resulted in tighter supplies and a
recovery in prices in 1999. As a result, the Company was able to implement price
increases totaling approximately $160 per metric ton for market pulp during
1999. In addition, the Company implemented a $30 per metric ton price increase
in January 2000 for market pulp.
Wood fiber and recycled fiber are the principal raw materials used in the
manufacture of the Company's products. Fiber supplies can vary widely at times
and are highly dependent upon the demand of paper mills. Wood fiber and
reclaimed fiber prices declined in 1998 due primarily to the lower demand
brought about by extensive economic downtime taken by the containerboard
industry in 1998. The price of old corrugated containers ("OCC"), the principal
grade used in recycled containerboard mills, declined in 1998 to its lowest
level in five years. The Company's average wood fiber cost in 1999 declined
approximately 6% compared to 1998 due primarily to the number of permanent mill
closures in those areas where the Company competes for wood. Recycled fiber
prices increased approximately 11% compared to 1998, primarily as a result of
stronger export demand.
RESTRUCTURING AND MERGER
- ------------------------
As previously discussed, the Company merged with a wholly-owned subsidiary of
SSCC and became a wholly-owned subsidiary of SSCC on November 18, 1998. The
Merger was accounted for as a purchase business combination and, accordingly,
purchase accounting adjustments including goodwill were pushed down and
reflected in the Company's financial statements after November 18, 1998. In
connection with the Merger, SSCC restructured its operations. The restructuring
included the shutdown of approximately 1.1 million tons, or 15% of SSCC's North
American containerboard mill capacity and approximately 400,000 tons of its
market pulp capacity.
The restructuring included the permanent shutdown on December 1, 1998 of certain
of the Company's containerboard mill and pulp mill facilities and five of the
Company's converting facilities during the
12
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 were included in the allocation of the
cost to acquire the Company.
SSCC's cost to acquire the Company was completed during the fourth quarter of
1999 and included, among other things, adjustments for final appraisals of
assets, adjustments to exit liabilities, the resolution of litigation related
to the Company's investment in FCPC (see Part I, Item 3, Legal Proceedings) and
the related deferred taxes. The final allocation resulted in acquired goodwill
of $3,202 million, which is being amortized, on a straight-line basis over 40
years.
The exit liabilities remaining as of December 31, 1999 consisted of $183 million
of anticipated cash expenditures. Since the Merger, through December 31, 1999,
approximately $40 million (18%) of the cash expenditures were incurred, the
majority of which related to severance and facility closure costs. Future cash
outlays under the restructuring of the Company are anticipated to be $149
million (including the $123 million FCPC payment) in 2000, $7 million in 2001,
$7 million in 2002, and $20 million thereafter. The remaining cash expenditures
will continue to be funded through operations as originally planned. The Company
is continuing to evaluate all areas of its business in connection with its
Merger integration. Additional restructuring charges are expected in 2000 as
management finalizes its plans.
RESULTS OF OPERATIONS
- ---------------------
Segment Data
(In millions)
For purposes of the following discussion of results of operations, the 1998
financial information for the period before November 18, 1998 (the
"Predecessor") has been combined with the financial information for the period
from November 19 to December 31, 1998. The financial statements for the
Predecessor period were prepared using Stone's historical basis of accounting.
The comparability of operating results for the Predecessor periods and the
period encompassing push down accounting are affected by the purchase accounting
adjustments.
1999 1998 1997
------------------------------------------------------------------
Net Profit/ Net Profit/ Net Profit/
Sales (Loss) Sales (Loss) Sales (Loss)
------- ------- -------- -------- -------- --------
Containerboard and corrugated containers........... $ 3,245 $ 301 $ 3,609 $ 6 $ 3,640 $ (35)
Industrial bags.................................... 513 31 513 35 491 31
International...................................... 581 28 586 30 556 27
Other operations................................... 2 (1) 11 1 9 4
-------- ----- -------- --- -------- -------
Total operations................................. $ 4,341 359 $ 4,719 72 $ 4,696 27
======== ======== ========
Interest expense (340) (452) (441)
Other, net......................................... (94) (509) (191)
----- ------- -------
Loss before income taxes and extraordinary item.... $ (75) $ (889) $ (605)
===== ======= =======
Other, net includes, among other things, corporate expenses, gain on asset sales
and, for 1998, write-down of investments and certain Merger-related costs as
discussed below.
1999 COMPARED TO 1998
- ---------------------
Net sales of $4,341 million for 1999 decreased $378 million, or 8%, compared to
1998 due primarily to lower sales volume and the closure of operating facilities
in the Containerboard and Corrugated Containers segment. Higher sales prices
partially offset the decline in volume. Operating profits of $359 million
increased $287 million compared to 1998 due primarily to the performance of the
Company's
13
Containerboard and Corrugated Containers segment. Other, net in 1999 improved
$415 million compared to 1998 due primarily to the write-down of certain
investments in 1998, improvements in operating results of affiliates and
reductions in administrative expenses. Loss before income taxes and
extraordinary item was $75 million in 1999 as compared to $889 million in 1998.
The increases or (decreases) in net sales for each of the Company's segments are
shown in the chart below.
(In millions) 1999 Compared to 1998
------------------------------------------------------------------------------
Container-
board &
Corrugated Industrial Inter- Other
Containers Bags national Operations Total
---------- ---------- -------- ---------- -----
Increase (decrease) due to:
Sales price and product mix............ $ 124 $ 11 $(20) $ (2) $ 113
Sales volume........................... (202) 5 39 (158)
Closed or sold facilities.............. (286) (16) (24) ( 7) (333)
----- ---- ---- ---- -----
Net decrease.......................... $(364) $ 0 $ (5) $ (9) $(378)
===== ==== ==== ==== =====
Containerboard and Corrugated Containers Segment
Net sales of $3,245 million for 1999 decreased by 10% compared to 1998. The
benefit from the improvement in sales prices was offset by a reduction in
containerboard sales volume, plant closures resulting from the Merger and the
sale of the Company's newsprint operation located in Snowflake, AZ (the
"Snowflake Mill") in October 1998. The Company was able to implement two price
increases for containerboard in 1999, totaling $90 per ton for linerboard and
$130 per ton for medium. On average, linerboard and corrugated container prices
increased 8% and 2%, respectively, compared to 1998. The average prices of kraft
paper and pulp in 1999 increased 4% and 15%, respectively, compared to 1998.
Profits improved by $295 million compared to 1998 to $301 million due to higher
sales prices, plant shutdowns, reduced mill downtime and cost saving initiatives
undertaken in connection with the Merger. Cost of goods sold as a percent of net
sales decreased to 83% for 1999 compared to 92% for 1998.
Containerboard production of 4,381 tons in 1999 decreased by 1% and pulp
production declined 10% compared to 1998 due primarily to the mill closures.
Production of kraft paper declined 4%. Corrugated container shipments were
unchanged from 1998.
Industrial Bags Segment
Net sales of $513 million for 1999 were unchanged from last year and profits
decreased $4 million to $31 million. Cost of goods sold as a percent of net
sales decreased to 83% for 1999 compared to 88% for 1998 due primarily to the
higher average sales prices. The decline in profits was due primarily to higher
administrative cost.
International Segment
Net sales of $581 million decreased by 1% compared to 1998 and profits decreased
by $2 million to $28 million. The decrease in net sales was due to lower average
sales prices in Europe and the sale of the Company's corrugated container
operations located in Australia. Exclusive of the Australia operations,
shipments of corrugated containers increased 8% compared to 1998. Cost of goods
sold as a percent of net sales decreased from 86% in 1998 to 85% in 1999.
Costs and Expenses
Cost of goods sold for 1999 in the Company's Consolidated Statements of
Operations decreased compared to 1998 due primarily to the effects of the Merger
and the sale of the Snowflake Mill. Such decreases were partially offset by
higher LIFO expense, higher depreciation expense related to the fair value
adjustments made to the historical basis of property, plant and equipment in the
purchase price allocation adjustment and increased goodwill amortization
charges. The Company's overall cost of goods sold as a percent of net
14
sales decreased from 92% in 1998 to 87% in 1999 due primarily to the effects of
the Merger and higher average sales prices.
Selling and administrative expenses for 1999 decreased compared to 1998 due
primarily to staff reductions, certain other merger synergies achieved and a
reduction in bad debt expense. Selling and administrative expenses as a percent
of net sales decreased from 12% in 1998 to 9% in 1999.
Interest expense, net decreased $112 million compared to 1998 primarily as a
result of lower average outstanding borrowings during 1999.
Equity income of non-consolidated affiliates was $12 million in 1999, as
compared to a loss in 1998 of $88 million. The improvement was due primarily to
elimination of losses related to the Company's non-consolidated affiliates that
were divested during 1998 and 1999.
Other, net in the Company's Consolidated Statements of Operations improved in
1999 due primarily to non-cash charges in 1998 of $174 million for the write-
down of certain investments and assets. In addition, the Company recorded
foreign exchange gains in 1999 as compared to foreign exchange losses in 1998.
Other, net included a gain of $39 million on the sale of shares of Abitibi in
1999 and a gain of $37 million on the sale of the Snowflake Mill in 1998. In
connection with the Merger, the Company recorded charges of $32 million in the
1998 Predecessor period related to certain Merger transactions cost and change
in control payments.
The effective income tax rate for 1999 differed from the federal statutory tax
rate due to several factors, the most significant of which was the effect of
permanent differences from applying purchase accounting. At December 31, 1999,
the Company had approximately $1,337 million of net operating loss carryforwards
for U.S. federal income tax purposes that expire from 2009 through 2019, with a
tax value of $468 million. A valuation allowance of $152 million has been
established for a portion of these deferred tax assets. Further, the Company had
net operating loss carryforwards for state purposes with a tax value of $68
million, which expire from 2000 through 2019. A valuation allowance of $46
million has been established for a portion of these deferred taxes. For
information concerning the benefit from income taxes as well as information
regarding differences between effective tax rates and statutory rates, see Note
8 of the Notes to the Consolidated Financial Statements.
1998 COMPARED TO 1997
- ---------------------
Net sales of $4,719 million for 1998 increased $23 million, or 1%, compared to
1997. Operating profits of $72 million increased $45 million compared to 1997
due primarily to the Containerboard and Corrugated Containers segment.
Containerboard and Corrugated Containers Segment
Net sales of $3,609 million for 1998 decreased 1% compared to 1997 and profits
improved by $41 million to $6 million. The decrease in net sales was due to a
number of factors, including the de-consolidation of the Company's SVCPI
affiliate effective June 1997, lower average prices for market pulp, lower
volume for containerboard and the sale of the Snowflake Mill. The decreases
were partially offset by increased sales of corrugated containers. The
improvement in profit was due primarily to higher prices for containerboard and
corrugated container products. Losses for the Company's market pulp operations
increased in 1998 compared to 1997 by $75 million due primarily to lower prices,
partially offsetting the increase in containerboard and corrugated container
profits.
Corrugated container prices and sales volume increased compared to 1997 by 4%
and 5%, respectively. Containerboard prices were higher in 1998 by 8% compared
to 1997. Containerboard sales volume in 1998 declined 12% compared to 1997 due
primarily to the higher level of economic downtime and the closures of a
containerboard mill and other pulp mill facilities, effective December 1, 1998.
Kraft paper prices and sales volume declined compared to 1997 by 5% and 14%,
respectively. Cost of goods sold as
15
a percent of net sales decreased from 93% in 1997 to 92% in 1998 due primarily
to the higher sales prices in 1998.
In October 1998, the Company sold the Snowflake Mill to Abitibi. As a result of
the sale, the Company no longer operates in the newsprint business. The Company
retained ownership of a corrugating medium machine located at the Snowflake
Mill. The gain on the sale of the Snowflake Mill, of $37 million, is included
in other, net in the Segment Data table.
Industrial Bags Segment
Net sales of $513 million increased 4% compared to 1997 and profits improved $4
million to $35 million. The increase in net sales and profit were due primarily
to Interstate Packaging, which became a consolidated subsidiary of the Company
in May 1998. Sales volume, excluding Interstate Packaging, increased by 2% in
1998 and prices were comparable to 1997. Cost of goods sold as a percent of net
sales for 1998 was comparable to 1997.
International Segment
Net sales $586 million increased by 5% compared to 1997 and profit improved $3
million to $30 million. The increases were due primarily to improved sales
volume for corrugated containers, which improved 4% compared to 1997.
Corrugated container selling prices were comparable to 1997. A 2% increase in
containerboard sales price was offset by a decrease in sales volume and the
impact of strengthening of the U.S. dollar relative to local currencies. Cost
of goods sold as a percent of net sales for 1998 was comparable to 1997.
Costs and Expenses
The Company's overall cost of goods sold as a percent of net sales in 1998 of
92% was comparable to 1997. Selling and administrative expenses for 1998
increased compared to 1997 due to Merger-related costs and higher bad debt
expense. Selling and administrative expense as a percent of net sales increased
from 10% in 1997 to 12% in 1998.
Interest expense, net increased $11 million over 1997 primarily as a result of
higher average outstanding borrowings during the year.
Equity loss of non-consolidated affiliates was $88 million for 1998, as
compared to $71 million in 1997 due primarily to significant increases in
foreign exchange transaction losses recorded by Abitibi on foreign currency
forward contracts.
Other, net expense for 1998 in the Company's Consolidated Statements of
Operations increased compared to 1997 due to non-cash charges of $174 million
related to the write-down of certain investments and assets, and a charge of $32
million related to certain Merger transaction costs and change in control
payments recorded in the 1998 Predecessor period. The write-downs included (1)
$67 million related to the Company's investment in Stone Venepal (Celgar) Pulp,
Inc., which filed for bankruptcy in July, 1998; (2) $56 million related to its
50% ownership interest in Financiere Carton Papier, a privately held folding
carton converting operation based in France; (3) $32 million related to its 20%
ownership interest in Venepal S.A.C.A., a publicly traded, Venezuelan based,
manufacturer of paperboard and paper packaging products; and (4) $19 million
related to wood products operations.
The income tax benefit recorded in 1998 was $104 million. The benefit was
reduced by a valuation allowance established in the third quarter against
deferred tax assets on net operating loss carryforwards, which, due to
continuing losses, may not be realizable. For information concerning the
benefit from income taxes as well as information regarding differences between
effective tax rates and statutory rates, see Note 8 of the Notes to the
Consolidated Financial Statements.
16
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
General
In 1999, proceeds from the sale of assets of $770 million, net cash provided by
operating activities of $72 million and available cash of $124 million were used
primarily to fund capital investments of $87 million and net debt payments of
$883 million.
In January 1999, the Company sold 7.8 million shares of its interest in Abitibi
for approximately $80 million, and in April 1999, the Company sold its remaining
interest in Abitibi for approximately $414 million. Proceeds were sufficient to
prepay the entire outstanding balance of the Company's Tranche B term loan and,
in accordance with the Company's Credit Agreement (as defined below), the
revolving credit maturity date was extended from April 30, 2000 to December 31,
2000
On February 23, 2000, SSCC, Stone and a newly-formed subsidiary of Stone entered
into a Pre-Merger Agreement with St. Laurent, pursuant to which the Company will
acquire St. Laurent for approximately $1.4 billion, consisting of approximately
$625 million in cash, the issuance of approximately 25 million shares of SSCC
common stock and the assumption of approximately $386 million of St. Laurent's
debt. The Company expects to borrow $1,050 million to finance the acquisition of
St. Laurent. Consummation of the transaction, which is subject to St. Laurent
shareholder and certain regulatory approvals, is expected to occur in the second
quarter of 2000.
Financing Activities
In January 1999, the Company obtained a waiver from its bank group for relief
from certain financial covenant requirements under the Company's bank credit
agreement (the "Credit Agreement") as of December 31, 1998. Subsequently, on
March 23, 1999, the Company and its bank group amended the Credit Agreement to
further ease certain quarterly financial covenant requirements for 1999.
In August 1999, the Company repaid its $120 million 11.0% senior subordinated
debentures at maturity with borrowings under its revolving credit facility.
In October 1999, the Company entered into a new accounts receivable
securitization program (the "Securitization Program"). The Securitization
Program provides for certain trade accounts receivables to be sold to Stone
Receivables Corporation, a wholly-owned non-consolidated bankruptcy remote
qualified special purpose entity. The proceeds from the transaction were used to
prepay the borrowings under the prior accounts receivable securitization
program.
The Credit Agreement contains 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 Agreement also requires prepayments if
the Company has excess cash flows, as defined, or receives proceeds from certain
asset sales, insurance, issuance of equity securities or incurrence of certain
indebtedness. The Company generated excess cash flow in the fourth quarter of
1999 of approximately $43 million, which is classified as current maturities of
long-term debt in the Company's December 31, 1999 Consolidated Balance Sheet.
The obligations under the Credit Agreement were secured by a security interest
in substantially all of the assets of the Company and 65% of the stock of its
Canadian subsidiary. The security interest excludes cash, cash equivalents,
certain trade receivables, four paper mills and the land and buildings of the
corrugated container plants. 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.
The declaration of dividends by the Board of Directors is subject to, among
other thing, certain restrictive provisions contained in the Credit Agreement
and certain note indentures. At December 31, 1999, the
17
Company had accumulated dividend arrearages of approximately $22 million related
to a series of its preferred stock.
The Company's senior notes, aggregating $1,698 million (the "Senior Notes") are
redeemable in whole or in part at the option of the Company at various dates
beginning in February 1999, at par plus a weighted average premium of 2.57%.
The Company's senior subordinated debentures (the "Senior Subordinated
Debentures"), aggregating $481 million, are redeemable as of December 31, 1999,
in whole or in part, at the option of the Company at par plus a weighted average
premium of .16%. The indentures governing the Senior Notes and the Senior
Subordinated Debentures (the "Indentures") generally provide that in the event
of a change of control (as defined), the Company must, subject to certain
exemptions, offer to repurchase the Senior Notes and the Senior Debentures. The
Merger constituted such a change in control. As a result, the Company is
required to offer to repurchase the Senior Notes and the Senior Subordinated
Debentures at a price equal to 101% of the principal amount, together with
accrued interest. However, because the Credit Agreement prohibits the Company
from making an offer to repurchase the Senior Notes and the Senior Subordinated
Debentures, the Company could not make the offer. Although the terms of the
Senior Notes refer to an obligation to repay the bank debt or obtain the consent
of the bank lenders to such repurchase, the terms do not specify a deadline, if
any, following the Merger for repayment of bank debt or obtaining such consent.
The Company intends to actively seek commercially acceptable sources of
financing to repay the outstanding indebtedness under the Credit Agreement or
alternative financing arrangements which would cause the bank lenders to consent
to the repurchase. There can be no assurance that the Company will be
successful in obtaining such financing or consents or as to the terms of such
financing or consents.
Based upon covenants in the Indentures, the Company is required to maintain
certain levels of equity. If the minimum equity levels are not maintained for
two consecutive quarters, the applicable interest rates on the Indentures are
increased by 50 basis points per semiannual interest period (up to a maximum of
200 basis points) until the minimum equity level is attained. The Company's
equity level was below the minimum equity level during most of 1998. As a
result, the interest rates increased. The interest rates on the Indentures
returned to the original interest rates on April 1, 1999 due to the Company's
equity levels exceeding the minimum on December 31, 1998. The Company's equity
level exceeded the minimum on December 31, 1999.
The Company expects that internally generated cash flows, proceeds from asset
divestitures and existing financing resources will be sufficient for the next
year to meet its ordinary course obligations, including debt service, settlement
of the FCPC reorganization plan, expenditures under the Cluster Rule and capital
expenditures. Scheduled debt payments in 2000 and 2001 are $162 million and $603
million, respectively, with increasing amounts thereafter. Capital expenditures
for 2000 are expected to be approximately $175 million. The Company expects to
use any excess cash flow provided by operations to make further debt reductions.
As of December 31, 1999, the Company had $447 million of unused borrowing
capacity under the Credit Agreement.
In March 2000, the Company entered into a commitment letter under which a
financial institution agreed to provide a new $575 million Tranche F term loan,
the proceeds of which will be used to redeem its 9-7/8% Senior Notes maturing
February 1, 2001. The Tranche F term loan will mature on December 31, 2005 and
will be provided through an amendment and restatement of the Credit Agreement.
In connection with such amendment and restatement, the Company has requested
that the maturity date of the revolving facility under the Credit Agreement be
extended from December 31, 2000 to December 31, 2005. The transaction is
expected to close in the first quarter of 2000.
Year 2000
The year 2000 problem concerned the inability of computer systems and devices to
properly recognize and process date-sensitive information when the year changed
to 2000. The Company depends upon its information technology ("IT") and non-IT
(used to run manufacturing equipment that contain embedded hardware or software
that must handle dates) to conduct and manage the Company's business.
18
The Company utilized both internal and external resources to evaluate the
potential impact of the year 2000 problem and established a year 2000 Program
Management Office to guide and coordinate the efforts of its operating units in
developing and executing its plan. The year 2000 Program Management Office
instituted a seven-phase approach, which enabled the Company to identify all
systems and devices, which were determined to be susceptible to the year 2000
problem. Corrective actions were initiated and affected systems or devices were
replaced, repaired or upgraded. Through December 31, 1999, the Company spent
approximately $15 million to correct the year 2000 problem. The Company does not
expect to spend any significant amounts in the future on year 2000 related
problems.
Subsequent to midnight on December 31, 1999 (the "Rollover Date"), the
Company's financial and administrative systems, communication links, and process
control systems, which control and monitor production, power, emissions and
safety, were verified for operational capability. Only minor issues, relating to
these systems were noted. The Company has conducted and managed normal business
operations as planned, since the Rollover Date and has not experienced any loss
of production at any mill or converting facility as a result of the year 2000
problem. Minor issues, which surfaced at mills and converting facilities, were
addressed and resolved typically within one day. The Company was able to provide
customers, upon request, verification of operational capability on January 1,
2000. Furthermore, the Company was not adversely impacted by any disruption of
raw materials, supplies or services provided by key vendors or suppliers.
The Company's year 2000 Program Management Office continues to check for year
2000 issues. However, given the amount of system activity since the Rollover
Date, the Company does not expect any major problems related to the year 2000
problem.
Environmental Matters
The Company's operations are subject to extensive environmental regulation by
federal, state, and local authorities in the United States and regulatory
authorities with jurisdiction over its foreign operations. The Company has
made, and expects to continue to make, significant capital expenditures to
comply with water, air and solid and hazardous waste and other environmental
laws and regulations. Capital expenditures for environmental control equipment
and facilities were approximately $14 million in 1999 and approximately $8
million in 1998. The Company anticipates that environmental capital
expenditures will approximate $130 million in 2000. The majority of the
expenditures after 1999 relate to amounts that the Company currently anticipates
will be required to comply with the Cluster Rule. Although capital expenditures
for environmental control equipment and facilities and compliance costs in
future years will depend on legislative and technological developments which
cannot be predicted at this time, such costs could increase as environmental
regulations become more stringent. Environmental control expenditures include
projects which, in addition to meeting environmental concerns, may yield certain
benefits to the Company in the form of increased capacity and production cost
savings. In addition to capital expenditures for environmental control
equipment and facilities, other expenditures incurred to maintain environmental
regulatory compliance (including any remediation) represent ongoing costs to the
Company. In November 1997, the EPA issued the Cluster Rule, which made existing
requirements for discharge of wastewater under the Clean Water Act more
stringent and impose new requirements on air emissions under the Clean Air Act
for the pulp and paper industry. Though the final rule is still not fully
promulgated, the Company currently believes it may be required to make capital
expenditures of up to $170 million during the next several years in order to
meet the requirements of the new regulations. Also, additional operating
expenses will be incurred as capital installations required by the Cluster Rule
are put into service.
In addition, the Company is from time to time subject to litigation and
governmental proceedings regarding environmental matters in which compliance
action and injunctive and/or monetary relief are sought. The Company has been
named as a PRP at a number of sites which are the subject of remedial activity
under CERCLA or comparable state laws. Although the Company is subject to joint
and several liability imposed under CERCLA, at most of the multi-PRP sites there
are organized groups of PRPs and costs are being shared among PRPs. Payments
related to clean-up at existing and former operating
19
sites and CERCLA sites were not material to the Company's liquidity during 1999.
Future environmental regulations may have an unpredictable adverse effect on the
Company's operations and earnings, but they are not expected to adversely affect
the Company's competitive position.
Although capital expenditures for environmental control equipment and facilities
and compliance costs in future years will depend on engineering studies and
legislative and technological developments which cannot be predicted at this
time, such costs could increase as environmental regulations become more
stringent. Environmental expenditures include projects, which, in addition to
meeting environmental concerns, may yield certain benefits to the Company in the
form of increased capacity and production cost savings. In addition to capital
expenditures for environmental control equipment and facilities, other
expenditures incurred to maintain environmental regulatory compliance (including
any remediation costs) represent ongoing costs to the Company.
Effects of Inflation
Although inflation has slowed in recent years, it is still a factor in the
economy, and the Company continues to seek ways to mitigate its impact to the
extent permitted by competition. Inflationary increases in operating costs
have been moderate since 1996 and have not had a material impact on the
Company's financial position or operating results during the past three years.
The Company uses the last-in, first-out method of accounting for approximately
63% of its inventories. Under this method, the cost of products sold reported
in the financial statements approximates current costs and thus provides a
closer matching of revenue and expenses in periods of increasing costs. Because
of the Merger, the Company's asset values were adjusted to fair market value in
the allocation of the purchase price. As a result, depreciation expense in
future years will approximate current cost of productive capacity being
consumed.
Prospective Accounting Standards
In 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
requires that all derivative instruments be recorded on the balance sheet at
fair value. SFAS No. 133 is effective for all quarters of fiscal years beginning
after June 15, 2000. The Company is currently assessing what the impact of SFAS
No. 133 will be on the Company's future earnings and financial position.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------
Foreign Currency Risk
A portion of the Company's operations are located outside of the United States.
Accordingly, movements in exchange rates and translation effects may have an
impact on the financial condition and results of operations of the Company's
foreign subsidiaries and affiliates. The Company's significant foreign exchange
exposures are the Canadian dollar and the German mark. In general, a weakening
of these currencies relative to the U.S. dollar has a negative translation
effect on the Company's financial condition and results of operations.
Conversely, a strengthening of these currencies would have the opposite effect.
Assets and liabilities outside the United States are primarily located in Canada
and Germany. The Company's investments in foreign subsidiaries with a
functional currency other than the U.S. are not hedged. The net assets in
foreign subsidiaries translated into U.S. dollars using the year-end exchange
rates were approximately $640 million at December 31, 1999. The potential loss
in fair value resulting from a hypothetical 10% adverse change in foreign
currency exchange rates would be approximately $64 million at December 31, 1999.
Any loss in fair value would be reflected as a cumulative translation adjustment
in Accumulated Other Comprehensive Income and would not impact the net income of
the Company.
20
In 1999, 1998 and 1997, the average exchange rates for the Canadian dollar and
the German mark strengthened (weakened) against the U.S. dollar as follows:
Year ended December 31, 1999 1998 1997
- ----------------------- ----- ----- -----
Canadian dollar.......................... (0.2)% (7.1)% (1.5)%
German mark.............................. (4.4) (1.4) (15.3)
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 incurred foreign currency transaction gains of $7 million in 1999 that
have been recorded in Other, net. The Company's non-consolidated Canadian
affiliate, Abitibi, was sold in April 1999, thereby eliminating a portion of the
Company's foreign currency risk.
The Company enters into foreign currency exchange agreements, the amount of
which was not material to the consolidated financial position of the Company at
December 31, 1999.
Interest Rate Risk
The Company's earnings and cash flow are significantly affected by the amount of
interest on its indebtedness. Management's objective is to protect the Company
from interest rate volatility and reduce or cap interest expense within
acceptable levels of market risk. The Company periodically enters into interest
rate swaps, caps or options to hedge interest rate exposure and manage risk
within Company policy. The Company does not utilize derivatives for speculative
or trading purposes. Any derivative would be specific to the debt instrument,
contract or transaction, which would determine the specifics of the hedge. The
amount of interest rate swaps entered into by the Company was not material to
the consolidated financial position of the Company at December 31, 1999.
The table below presents principal amounts by year of anticipated maturity for
the Company's debt obligations and related average interest rates based on the
weighted average interest rates at the end of the period. Variable interest
rates disclosed do not attempt to project future interest rates. This
information should be read in conjunction with Note 6 to the Notes to
Consolidated Financial Statements.
Short and Long-Term Debt
Outstanding as of December 31, 1999 There- Fair
(U.S.$, in millions) 2000 2001 2002 2003 2004 After Total Value
- ------------------------------------------------------------------------------------------------------------------------------
U.S. bank term loans and revolver -
9.7% average interest rate (variable)...... $ 136 $ 7 $ 7 $ 531 $ $ $ 681 $ 682
U.S. senior and senior subordinated notes-
10.8% average interest rate (fixed)........ 10 566 954 3 203 444 2,180 2,218
U.S. industrial revenue bonds -
8.6% average interest rate (fixed)......... 1 13 13 13 13 182 235 235
German mark bank term loans -
5.2% average interest rate (variable)...... 11 12 15 1 1 40 40
Other-U.S..................................... 2 2 1 1 1 2 9 9
Other-foreign................................. 2 3 2 2 2 1 12 12
--------------------------------------------------------------------------------
Total debt.................................... $ 162 $ 603 $ 992 $ 551 $ 220 $629 $3,157 $3,196
================================================================================
21
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
PAGE NO.
--------
Index to Financial Statements
Management's Responsibility for the Financial Statements........................................ 23
Reports of Independent Auditors................................................................. 24-25
Consolidated Balance Sheets..................................................................... 26
Consolidated Statements of Operations........................................................... 27
Consolidated Statements of Stockholders' Equity................................................. 28
Consolidated Statements of Cash Flows........................................................... 29
Notes to the Consolidated Financial Statements.................................................. 30
The following consolidated financial statement schedule of Stone Container
Corporation is included in Item 14(a):
Financial Statement Schedules:
Report of Independent Accountants on Financial Statement Schedule................................. 64
Valuation and Qualifying Accounts and Reserves (Schedule II)...................................... 65
All other schedules specified under Regulation S-X for Stone Container
Corporation have been omitted because they are not applicable, because they are
not required or because the information required is included in the financial
statements or notes thereto.
22
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS
The Management of the Company is responsible for the information contained in
the consolidated financial statements and in other parts of this report. The
consolidated financial statements have been prepared by the Company in
accordance with accounting principles generally accepted in the United States
appropriate in the circumstances and necessarily include certain amounts based
on management's best estimate and judgment.
The Company maintains a system of internal accounting control, which it believes
is sufficient to provide reasonable assurance that in all material respects
transactions are properly authorized and recorded, financial reporting
responsibilities are met and accountability for assets is maintained. In
establishing and maintaining any system of internal control, judgment is
required to assess and balance the relative costs and expected benefits.
Management believes that through the careful selection of employees, the
division of responsibilities and the application of formal policies and
procedures, the Company has an effective and responsive system of internal
accounting controls. The system is monitored by the Company's staff of internal
auditors, who evaluate and report to management on the effectiveness of the
system.
/s/ Ray M. Curran
- ---------------------------------------
Ray M. Curran
President and Chief Executive Officer
(Chief Executive Officer)
/s/ Paul K. Kaufmann
- ---------------------------------------
Paul K. Kaufmann
Vice President and Corporate Controller
(Principal Accounting Officer)
23
Report of Independent Auditors
Board of Directors
Stone Container Corporation
We have audited the accompanying consolidated balance sheets of Stone
Container Corporation as of December 31, 1999 and 1998, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the year ended December 31, 1999, the period from November 19 to December 31,
1998, and the period from January 1 to November 18, 1998 (Predecessor). Our
audits also included the financial statement schedule listed in the Index at
Item 14(a). These financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Stone Container
Corporation at December 31, 1999 and 1998 and the consolidated results of its
operations and its cash flows for the year ended December 31, 1999, the period
from November 19 to December 31, 1998, and the period from January 1 to
November 18, 1998 (Predecessor) in conformity with accounting principles
generally accepted in the United States. Also, in our opinion, the related
financial statement schedule for the year ended December 31, 1999, the period
from November 19 to December 31, 1998, and the period from January 1 to
November 18, 1998 (Predecessor), when considered in relation to the basic
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
/s/ Ernst & Young LLP
---------------------
Ernst & Young LLP
St. Louis, Missouri
January 24, 2000
except for Note 19, as to which the date is February 23, 2000
24
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of Stone Container Corporation
In our opinion, the consolidated statements of operations and cash flows for the
year ended December 31, 1997 present fairly, in all material respects, the
results of operations and cash flows of Stone Container Corporation and its
subsidiaries for the year ended December 31, 1997, in conformity with accounting
principles generally accepted in the United States. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audit. We
conducted our audit of these statements in accordance with auditing standards
generally accepted in the United States, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for the opinion expressed
above. We have not audited the consolidated financial statements of Stone
Container Corporation for any period subsequent to December 31, 1997.
/s/ PricewaterhouseCoopers LLP
- ------------------------------
PricewaterhouseCoopers LLP
Chicago, Illinois
March 26, 1998
25
STONE CONTAINER CORPORATION
Consolidated Balance Sheets
December 31, (In millions, except share data) 1999 1998
- ---------------------------------------------------------------------------------------------------
Assets
Current assets
Cash and cash equivalents............................................... $ 13 $ 137
Receivables, less allowances of $41 in 1999 and $61 in 1998............. 343 462
Inventories
Work-in-process and finished goods.................................... 143 123
Materials and supplies................................................ 357 422
----------------------
500 545
Deferred income taxes................................................... 88 38
Prepaid expenses and other current assets............................... 48 119
----------------------
Total current assets................................................ 992 1,301
Net property, plant and equipment........................................ 3,089 3,997
Timberland, less timber depletion........................................ 21 15
Goodwill, less accumulated amortization of
$79 in 1999 and $8 in 1998 ............................................. 3,123 2,643
Investment in equity of non-consolidated affiliates...................... 136 632
Other assets............................................................. 204 205
----------------------
$7,565 $ 8,793
======================
Liabilities and Stockholders' Equity
Current liabilities
Current maturities of long-term debt.................................... $ 162 $ 161
Accounts payable........................................................ 365 270
Accrued compensation and payroll taxes.................................. 150 106
Interest payable........................................................ 82 98
Other current liabilities............................................... 232 178
----------------------
Total current liabilities........................................... 991 813
Long-term debt, less current maturities.................................. 2,995 3,902
Other long-term liabilities.............................................. 637 734
Deferred income taxes.................................................... 436 754
Stockholders' equity
Series E preferred stock, par value $.01 per share; 10,000,000
shares authorized; 4,599,300 issued and outstanding
in 1999 and 1998...................................................... 78 78
Common stock, par value $.01 per share; 110,000,000 shares
authorized, issued and outstanding in 1999 and 1998................... 2,545 2,545
Retained earnings (deficit)............................................. (113) (36)
Accumulated other comprehensive income (loss)........................... (4) 3
----------------------
Total stockholders' equity.......................................... 2,506 2,590
----------------------
$7,565 $ 8,793
======================
See notes to consolidated financial statements.
26
STONE CONTAINER CORPORATION
Consolidated Statements of Operations
Predecessor
-------------------------------
Period from Period from
Year Ended November 19 to January 1 to Year Ended
December 31, December 31, November 18, December 31,
(In millions, except per share data) 1999 1998 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------------
Net sales ........................................................ $ 4,341 $ 465 $ 4,254 $ 4,696
Costs and expenses
Cost of goods sold............................................. 3,755 433 3,904 4,340
Selling and administrative expenses .......................... 389 47 502 445
--------------------------------------------------------------
Income (loss) from operations ............................... 197 (15) (152) (89)
Other income (expense)
Interest expense, net.......................................... (340) (45) (407) (441)
Equity income (loss) of affiliates............................. 12 4 (92) (71)
Other, net..................................................... 56 4 (186) (4)
--------------------------------------------------------------
Loss before income taxes and extraordinary item.............. (75) (52) (837) (605)
Benefit from income taxes......................................... 16 88 200
--------------------------------------------------------------
Loss before extraordinary item................................. (75) (36) (749) (405)
Extraordinary item
Loss from early extinguishment of debt, net of income
tax benefit of $1 in 1999 and $7 in 1997..................... (2) (13)
--------------------------------------------------------------
Net loss..................................................... (77) (36) (749) (418)
Preferred stock dividends......................................... (8) (1) (7) (8)
--------------------------------------------------------------
Net loss applicable to common shares......................... $ (85) $ (37) $ (756) $ (426)
--------------------------------------------------------------
Basic earnings per common share
Loss before extraordinary item................................. $ (7.43) $ (4.16)
Extraordinary item............................................. (.13)
--------------------------------------------------------------
Net loss..................................................... $ (7.43) $ (4.29)
--------------------------------------------------------------
Weighted average shares outstanding............................... 102 99
--------------------------------------------------------------
Diluted earnings per common share
Loss before extraordinary item................................. $ (7.43) $ (4.16)
Extraordinary item............................................. (.13)
--------------------------------------------------------------
Net loss..................................................... $ (7.43) $ (4.29)
--------------------------------------------------------------
Weighted average shares outstanding............................... 102 99
--------------------------------------------------------------
See notes to consolidated financial statements.
27
STONE CONTAINER CORPORATION
Consolidated Statements of Stockholders' Equity
(In millions)
- -------------------------------------------------------------------------------------------------------------
-------------------------
Number of Shares
----------------------
Preferred Common Preferred Common
Stock Stock Stock Stock
--------------------------------------------------
Predecessor
- -----------
Balance at January 1, 1997................................ 5 99 $ 115 $ 955
Comprehensive income (loss)
Net loss................................................
Other comprehensive income (loss), net of tax
Decrease in minimum pension liability.................
Foreign currency translation adjustment...............
--------------------------------------------------
Comprehensive income (loss)..........................
Amortization of restricted stock plan.....................
Subsidiary issuance of stock.............................. 11
Preferred stock dividends ($0.4375 per share)............
--------------------------------------------------
Balance at December 31, 1997.............................. 5 99 115 966
Comprehensive income (loss)
Net loss................................................
Other comprehensive income (loss), net of tax
Increase in minimum pension liability.................
Foreign currency translation adjustment...............
--------------------------------------------------
Comprehensive income (loss)..........................
Debt conversion to common stock........................... 5 59
Exercise of stock options and issuance of
common stock under deferred benefit plan................ 1 8
--------------------------------------------------
Balance at November 18, 1998.............................. 5 105 115 1,033
Effect of Merger
Retire predecessor common equity........................ (105) (1,033)
Excess of purchase price over common stock.............. (37) 2,245
Issuance of common stock................................ 110
Comprehensive income (loss)
Net loss................................................
Other comprehensive income (loss), net of tax
Foreign currency translation adjustment...............
--------------------------------------------------
Comprehensive income (loss)..........................
Capital contribution from SSCC............................ 300
--------------------------------------------------
Balance at December 31, 1998.............................. 5 110 78 2,545
Comprehensive income (loss)
Net loss................................................
Other comprehensive income (loss), net of tax
Unrealized holding gain on marketable
securities...........................................
Foreign currency translation adjustment..............
--------------------------------------------------
Comprehensive income (loss)..........................
--------------------------------------------------
Balance at December 31, 1999.............................. 5 110 $ 78 $ 2,545
--------------------------------------------------
Stockholders' Equity
--------------------------------------------------
Accumulated
Retained Other
Earnings Comprehensive
(Deficit) Income (Loss) Total
--------------------------------------------------
Predecessor
- -----------
Balance at January 1, 1997................................ $ (53) $ (221) $ 796
Comprehensive income (loss)
Net loss................................................ (418) (418)
Other comprehensive income (loss), net of tax
Decrease in minimum pension liability................. 3 3
Foreign currency translation adjustment............... (114) (114)
--------------------------------------------------
Comprehensive income (loss).......................... (418) (111) (529)
Amortization of restricted stock plan..................... 1 1
Subsidiary issuance of stock.............................. 11
Preferred stock dividends ($0.4375 per share)............ (2) (2)
--------------------------------------------------
Balance at December 31, 1997.............................. (472) (332) 277
Comprehensive income (loss)
Net loss................................................ (749) (749)
Other comprehensive income (loss), net of tax
Increase in minimum pension liability................. (21) (21)
Foreign currency translation adjustment............... (76) (76)
--------------------------------------------------
Comprehensive income (loss).......................... (749) (97) (846)
Debt conversion to common stock........................... 59
Exercise of stock options and issuance of
common stock under deferred benefit plan................ 8
--------------------------------------------------
Balance at November 18, 1998.............................. (1,221) (429) (502)
Effect of Merger
Retire predecessor common equity........................ 1,221 429 617
Excess of purchase price over common stock.............. 2,208
Issuance of common stock................................
Comprehensive income (loss)
Net loss................................................ (36) (36)
Other comprehensive income (loss), net of tax
Foreign currency translation adjustment............... 3 3
--------------------------------------------------
Comprehensive income (loss).......................... (36) 3 (33)
Capital contribution from SSCC............................ 300
--------------------------------------------------
Balance at December 31, 1998.............................. (36) 3 2,590
Comprehensive income (loss)
Net loss................................................ (77) (77)
Other comprehensive income (loss), net of tax
Unrealized holding gain on marketable
securities........................................... 3 3
Foreign currency translation adjustment.............. (10) (10)
--------------------------------------------------
Comprehensive income (loss).......................... (77) (7) (84)
--------------------------------------------------
Balance at December 31, 1999.............................. $ (113) $ (4) $(2,506)
--------------------------------------------------
See notes to consolidated financial statements.
28
STONE CONTAINER CORPORATION
Consolidated Statements of Cash Flows
Predecessor
----------------------------
Period from Period from
Year Ended November 19 to January 1 to Year Ended
December 31, December 31, November 18, December 31,
(In millions) 1999 1998 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities
Net loss......................................................... $ (77) $ (36) $ (749) $ (418)
Adjustments to reconcile net loss to net cash
provided by (used for) operating activities:
Extraordinary loss from early
extinguishment of debt...................................... 3 13
Depreciation and amortization................................. 296 34 239 302
Amortization of deferred debt issuance costs.................. 4 19 20
Deferred income taxes......................................... (17) (21) (106) (217)
Noncash employee benefits..................................... 1 4 5 (1)
Foreign currency transaction (gains) losses................... (7) (4) 24 11
Equity (income) loss of affiliates............................ (12) (4) 92 71
Writedown of investments in nonconsolidated affiliates........ 155
Gain on sale of assets........................................ (39) (37)
Change in current assets and liabilities, net of
effects from acquisitions and dispositions
Receivables................................................ (166) 77 65 (131)
Inventories................................................ 23 111 3
Prepaid expenses and other current assets.................. 51 (12) 22 11
Accounts payable and other current liabilities............. 104 (48) 49 (4)
Interest payable........................................... (17) 24 (29) 10
Income taxes............................................... (3) (10) 5
Other, net.................................................... (72) (2) 134 66
-----------------------------------------------------
Net cash provided by (used for) operating activities............. 72 12 (16) (259)
-----------------------------------------------------
Cash flows from investing activities
Property additions............................................... (87) (22) (145) (137)
Investments in and advances to affiliates, net.................. (74) (13)
Proceeds from sales of assets.................................... 544 252 7
Net proceeds from sale of receivables............................ 226
Other, net....................................................... 2 (31)
-----------------------------------------------------
Net cash provided by (used for) investing activities.............. 683 (22) 35 (174)
-----------------------------------------------------
Cash flows from financing activities
Debt repayments.................................................. (657) (463) (323) (492)
Borrowings....................................................... 61 453 950
Net repayments under accounts receivable
securitization program..................................... (226)
Deferred debt issuance costs..................................... (9) (4) (18)
Capital contribution from SSCC................................... 300
Proceeds from issuance of common stock........................... 2
Cash dividends................................................... (2)
-----------------------------------------------------
Net cash provided by (used for) financing activities............. (883) (111) 128 438
-----------------------------------------------------
Effect of exchange rate changes on cash.......................... 4 (2) (5)
-----------------------------------------------------
Increase (decrease) in cash and cash equivalents................... (124) (121) 145
Cash and cash equivalents
Beginning of period.............................................. 137 258 113 113
-----------------------------------------------------
End of period.................................................... $ 13 $ 137 $ 258 $ 113
=====================================================
See notes to consolidated financial statements.
29
STONE CONTAINER CORPORATION
Notes to the Consolidated Financial Statements
(Tabular amounts in millions, except per share data)
1. Significant Accounting Policies
Basis of Presentation: Stone Container Corporation ("Stone"), hereafter referred
to as the "Company," is a wholly-owned subsidiary of Smurfit-Stone Container
Corporation ("SSCC"), which was formerly known as Jefferson Smurfit Corporation
("JSC"). On November 18, 1998 Stone was merged with a wholly-owned subsidiary of
SSCC (the "Merger"). The Merger was accounted for as a purchase business
combination and, accordingly, purchase accounting adjustments, including
goodwill, have been pushed down and are reflected in these financial statements
subsequent to November 18, 1998. The financial statements for periods ended
before November 18, 1998, were prepared using Stone's historical basis of
accounting and are designated as "Predecessor". The comparability of operating
results for the Predecessor periods and the periods subsequent to the Merger
date are affected by the purchase accounting adjustments.
Nature of Operations: The Company's major operations are in paper products and
industrial bags. The Company's paperboard mills procure virgin and recycled
fiber and produce paperboard for conversion into corrugated containers and
industrial bags at Company-owned facilities and third-party converting
operations. Paper product customers represent a diverse range of industries
including paperboard and paperboard packaging, wholesale trade, retailing and
agri-business. Customers and operations are located throughout the world. Credit
is extended to customers based on an evaluation of their financial condition.
Principles of Consolidation: The consolidated financial statements include the
accounts of the Company and majority-owned and controlled subsidiaries.
Investments in majority-owned affiliates where control does not exist and non-
majority owned affiliates are primarily accounted for under the equity method.
Significant intercompany accounts and transactions are eliminated in
consolidation.
Cash and Cash Equivalents: The Company considers all highly liquid investments
with an original maturity of three months or less to be cash equivalents. Cash
and cash equivalents of $41 million were pledged at December 31, 1998 as
collateral for obligations associated with the accounts receivable
securitization program (See Note 6). No amounts were pledged at December 31,
1999 due to the implementation of a new accounts receivable securitization
program (See Note 3).
Revenue Recognition: Revenue is recognized at the time products are shipped to
external customers.
Inventories: Inventories are valued at the lower of cost or market, under the
last-in, first-out ("LIFO") method except for $186 million in 1999 and $261
million in 1998, which are valued at the lower of average cost or market. First-
in, first-out ("FIFO") costs (which approximate replacement costs) exceed the
LIFO value by $12 million at December 31, 1999. As of the Merger date,
inventories were recorded at fair value in the purchase price allocation,
consequently LIFO approximated FIFO at December 31, 1998.
Net Property, Plant and Equipment: Based upon final appraisal results, property,
plant and equipment were recorded at fair market value on the date of the
Merger. These assets were assigned remaining useful lives of 18 years for
papermill machines and 12 years for major converting equipment (See Note 2). The
costs of additions, improvements and major replacements are capitalized, while
maintenance and repairs are charged to expense as incurred. Provisions for
depreciation and amortization are made using straight-line rates over the
estimated useful lives of the related assets and the terms of the applicable
leases for leasehold improvements.
30
Timberland, less Timber Depletion: Timberland is stated at cost less accumulated
cost of timber harvested. The portion of the costs of timberland attributed to
standing timber is charged against income as timber is cut, at rates determined
annually, based on the relationship of unamortized timber costs to the estimated
volume of recoverable timber. The costs of seedlings and reforestation of
timberland are capitalized.
Goodwill: The excess of cost over the fair value assigned to the net assets
acquired is recorded as goodwill and is being amortized using the straight-line
method over 40 years.
Deferred Debt Issuance Costs: Deferred debt issuance costs included in other
assets are amortized over the terms of the respective debt obligations using the
interest method.
Long-lived Assets: In accordance with SFAS No. 121, "Accounting for the
Impairment of Long-lived Assets and for Long-lived Assets to be Disposed of,"
long-lived assets held and used by the Company and the related goodwill are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable.
Income Taxes: The Company accounts for income taxes in accordance with the
liability method of accounting for income taxes. Under the liability method,
deferred assets and liabilities are recognized based upon anticipated future tax
consequences attributable to differences between financial statement carrying
amounts of assets and liabilities and their respective tax bases (See Note 8).
Foreign Currency Translation: The functional currency for the majority of the
Company's foreign operations is the applicable local currency. Accordingly,
assets and liabilities are translated at the exchange rate in effect at the
balance sheet date, and income and expenses are translated at average exchange
rates prevailing during the year. Translation gains or losses are included
within stockholders' equity as part of Accumulated Other Comprehensive Income.
Foreign currency transaction gains or losses are credited or charged to income.
The functional currency for foreign operations operating in highly inflationary
economies is the U.S. dollar and any gains or losses are credited or charged to
income.
Financial Instruments: The Company periodically enters into interest rate swap
agreements that involve the exchange of fixed and floating rate interest
payments without the exchange of the underlying principal amount. For interest
rate instruments that effectively hedge interest rate exposures, the net cash
amounts paid or received on the agreements are accrued and recognized as an
adjustment to interest expense. If an arrangement is replaced by another
instrument and no longer qualifies as a hedge instrument, then it is marked to
market and carried on the balance sheet at fair value. Gains and losses realized
upon settlement of these agreements are deferred and amortized to interest
expense over a period relevant to the agreement if the underlying hedged
instrument remains outstanding, or immediately if the underlying hedged
instrument is settled.
Transfers of Financial Assets: The Company accounts for transfers of financial
assets in accordance with SFAS No. 125 "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities." Accordingly, financial
assets transferred to qualifying special-purpose entities and the liabilities of
such entities are not reflected in the consolidated financial statements of the
Company (See Note 3).
Employee Stock Options: Accounting for stock-based plans is in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations. Under APB 25, because the exercise
price of the Company's employee stock options equals the market price of the
underlying stock on the date of grant, no compensation expense is recognized.
The Company has adopted the disclosure-only provisions of SFAS No. 123
"Accounting for Stock-Based Compensation" (See Note 11).
31
Environmental Matters: The Company expenses environmental expenditures related
to existing conditions resulting from past or current operations and from which
no current or future benefit is discernible. Expenditures that extend the life
of the related property or mitigate or prevent future environmental
contamination are capitalized. Reserves for environmental liabilities are
established in accordance with the American Institute of Certified Public
Accountants ("AICPA") Statement of Position ("SOP") 96-1, "Environmental
Remediation Liabilities." The Company records a liability at the time when it is
probable and can be reasonably estimated. Such liabilities are not discounted or
reduced for potential recoveries from insurance carriers.
Use of Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Reclassifications: Certain reclassifications of prior year presentations have
been made to conform to the 1999 presentation.
Start-up Costs: In April 1998, the AICPA issued SOP 98-5, "Reporting the Costs
of Start-Up Activities," which requires that costs related to start-up
activities be expensed as incurred. Prior to 1998, the Company capitalized
certain costs to open new plants or to start new production processes. As a
result of the Merger, unamortized start-up costs were written off in the
purchase price allocation.
Computer Software-Internal Use: In March 1998, the AICPA issued SOP 98-1,
"Accounting for Computer Software Developed or Obtained For Internal Use." SOP
98-1 is effective beginning on January 1, 1999 and requires that certain costs
incurred after the date of adoption in connection with developing or obtaining
software for internal use must be capitalized. The adoption of SOP 98-1 did not
have a material effect on the 1999 financial statements.
Prospective Accounting Pronouncements: In 1998, the Financial Accounting
Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities." SFAS No. 133 requires that all derivative instruments be
recorded on the balance sheet at fair value. SFAS No. 133 is effective for all
fiscal quarters of fiscal years beginning after June 15, 2000. The Company is
currently assessing what the impact of SFAS No. 133 will be on the Company's
future earnings and financial position.
2. Merger and Restructuring
Under the terms of the Merger, each share of the Company's common stock was
exchanged for the right to receive .99 of one share of SSCC common stock. A
total of 104 million shares of SSCC common stock were issued in the Merger
resulting in a total purchase price (including the fair value of stock options
and related fees) of approximately $2,245 million. The Merger was accounted for
as a purchase business combination and, accordingly, the cost to acquire the
Company was preliminarily allocated to the assets acquired and liabilities
assumed according to their estimated fair values. The purchase price allocation
was completed during the fourth quarter of 1999, and includes adjustments for
the final appraisals on property, plant and equipment and investments in non-
consolidated affiliates, resulting in a decrease in valuations of $726 million
and $38 million, respectively; the resolution of litigation related to the
Company's investment in Florida Coast Paper Company L.L.C ("FCPC") and Stone
Savannah River Pulp and Paper Corporation ("SSR"); the shutdown of converting
facilities; and the related deferred taxes. The final allocation resulted in
acquired goodwill of $3,202 million, which is being amortized on a straight-line
basis over 40 years.
32
In October 1999, FCPC and a committee representing the holders of the FCPC
secured debt filed a bankruptcy reorganization plan to resolve all matters
relating to the bankruptcies of the FCPC Companies. In January 2000, the plan
was confirmed and consummated and the Company paid approximately $123 million to
satisfy the claims of creditors of FCPC, the Company received title to the FCPC
mill, and all claims under the Output Purchase Agreement, as well as any
obligations of the Company involving FCPC or its affiliates, were released and
discharged. In addition, Four M Corporation ("Four M") issued $25 million of
convertible preferred stock to the Company in connection with the consummation
of the plan (See Note 17).
The litigation related to the Company's purchase of the common stock of SSR was
settled for cash payments of approximately $32 million during the third quarter
of 1999.
Included in the allocation of the cost to acquire the Company is the adjustment
to fair value of property and equipment associated with the permanent shutdown
of certain containerboard mill and pulp mill facilities, liabilities for the
termination of certain Company employees, and liabilities for long-term
commitments. The assets at these facilities were recorded at their estimated
fair value less cost to sell based upon appraisals. The terminated employees
included approximately 550 employees at these mill facilities and 200 employees
in the corporate office. These employees were terminated in December 1998. The
facilities were shut down during 1998 and the Company is in the process of
either selling or dismantling these facilities. The long-term commitments
consist of lease commitments and funding commitments on debt guarantees that are
associated with the shutdown of the containerboard mill and pulp mill facilities
or other investments in which the Company will no longer participate as a result
of its merger plan.
During 1999, the Company permanently closed five converting facilities. Included
in the purchase price allocation for these facilities are the adjustments to
fair value of property, plant and equipment less the costs to sell, liabilities
for the termination of employees, and liabilities for long-term commitments,
primarily leases. Approximately 500 employees were terminated in 1999. The
amounts associated with these closures are included in the following table of
exit liabilities as part of the 1999 adjustments.
The following is a summary of the exit liabilities recorded in the allocation of
the purchase price:
Balance at Balance at
Opening Dec. 31, Adjust- Dec. 31,
Balance Payments 1998 Payments ments 1999
--------------------------------------------------------------------------
Severance............................ $ 14 $ (4) $ 10 $(13) $ 8 $ 5
Lease commitments.................... 38 (1) 37 (6) 8 39
Settlement of FCPC litigation........ 37 37 (1) 87 123
Other commitments.................... 19 (6) 13 (2) 4 15
Mill closure costs................... 9 9 (7) (1) 1
--------------------------------------------------------------------------
$117 $(11) $106 $(29) $106 $183
--------------------------------------------------------------------------
Future cash outlays under the exit liabilities are anticipated to be $149
million in 2000 (including the $123 million FCPC settlement), $7 million in
2001, $7 million in 2002, and $20 million thereafter.
In addition, the Company is continuing to evaluate all areas of its business in
connection with its merger integration, including the identification of
additional converting facilities that might be closed.
33
3. Stone Receivables Securitization Program
On October 15, 1999, the Company entered into a new six-year $250 million
accounts receivable securitization program whereby the Company sells, without
recourse, on an ongoing basis, certain of its accounts receivable to Stone
Receivables Corporation ("SRC"), a wholly-owned non-consolidated subsidiary of
the Company. SRC transfers the receivables to a trust for which it has sold
beneficial interest to third-party investors. The Company retained a junior
interest in the trust which has been classified as accounts receivable in the
accompanying consolidated balance sheets.
SRC is a qualified special-purpose entity under the provisions of SFAS No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities." Accordingly, accounts receivable sold to SRC for which the
Company did not retain an interest are not included in the Company's
consolidated balance sheets.
At December 31, 1999, $304 million of accounts receivable had been sold under
the program, of which $79 million was retained by the Company as a junior
interest and recorded as an accounts receivable in the accompanying consolidated
balance sheets.
4. Net Property, Plant and Equipment
Net property, plant and equipment at December 31 consists of:
1999 1998
----------------------
Land ............................................... $ 67 $ 84
Buildings and leasehold improvements................. 249 499
Machinery, fixtures and equipment.................... 2,901 3,336
Construction in progress............................. 87 105
----------------------
3,304 4,024
Less accumulated depreciation and amortization....... (215) ( 27)
----------------------
Net property, plant and equipment.............. $3,089 $3,997
----------------------
Property, plant and equipment was adjusted by $726 million in the final purchase
price allocation (See Note 2). Depreciation expense was $225 million in 1999,
$26 million for the period from November 19 to December 31, 1998, $212 million
for the period from January 1 to November 18, 1998 and $260 million in 1997.
Property, plant and equipment includes capitalized leases of $18 million and $14
million and related accumulated amortization of $2 million and $.2 million at
December 31, 1999 and 1998, respectively.
5. Non-Consolidated Affiliates
The Company has several non-consolidated affiliates that are engaged in paper
and packaging operations in North America, South America and Europe. Investments
in majority-owned affiliates where control does not exist and non majority-owned
affiliates are accounted for under the equity method.
On April 4, 1997, the Company's then 90% owned subsidiary, Stone Venepal
(Celgar) Pulp, Inc. ("SVCPI") acquired the remaining 50% interest in the Celgar
pulp mill (the "Celgar Mill") located in Castlegar, British Columbia from CITIC
B.C., Inc. ("CITIC") in exchange for assuming $273 million of the Celgar Mill's
indebtedness owed by CITIC, after which the Company included SVCPI in its
consolidated results. On June 26, 1997, the Company sold half of its ownership
in SVCPI to Celgar Investments, Inc., a 49% owned affiliate of the Company.
Following the sale, the Company retained a
34
45% direct voting interest in the stock of SVCPI and began accounting for its
interest in SVCPI under the equity method of accounting. As a result of the
deconsolidation, the $538 million in related indebtedness was no longer included
in the Company's consolidated debt total. On July 23, 1998 SVCPI filed for
bankruptcy protection. SVCPI's lenders and creditors have no recourse against
the Company. As a result of the bankruptcy filing, the Company recorded a loss
in the second quarter of 1998 to write-off the Company's investment in SVCPI of
$67 million.
On May 30, 1997, Stone-Consolidated Corporation ("Stone-Consolidated"), an
affiliate of the Company, and Abitibi-Price Inc. amalgamated to form Abitibi.
For U.S. GAAP purposes, the combination of Stone-Consolidated and Abitibi-Price
Inc. was accounted for under the purchase method of accounting, as the
acquisition of Abitibi-Price Inc. by Stone-Consolidated. Following the
amalgamation, the Company owned approximately 25% of the common stock of Abitibi
and accounted for its interest in this Canadian affiliate under the equity
method of accounting. Effective with the amalgamation, the Company recorded a
credit of $11 million to common stock related to the excess of the market value
per common share over the carrying value of its investment per common share.
Additionally, the Company reported a non-cash extraordinary charge of $13
million, net of tax, representing its share of a loss from the early
extinguishment of debt incurred by Stone-Consolidated. Abitibi had sales of
$2,313 million in 1998. During 1999, the Company sold its interest in Abitibi
and recorded a $39 million gain.
Due to the continued operating losses and deteriorating financial liquidity
conditions experienced in the second half of 1998, the Company recorded
impairment charges of $32 million and $56 million related to its investments in
Venepal S.A.C.A. ("Venepal") and Financiere Carton Papier ("FCP"), respectively.
Venepal is a publicly traded, Venezuelan based, manufacturer of paperboard and
paper packaging products in which the Company owns a 20% interest. FCP is a
privately held folding carton converting operation based in France that is 50%
owned by the Company.
The Company's significant non-consolidated affiliate at December 31, 1999 is
Smurfit-MBI (formerly MacMillian Bathurst, Inc.), a Canadian corrugated
container company, in which the Company owns a 50% interest. The remaining 50%
interest is owned by an affiliate of Jefferson Smurfit Group plc. Smurfit-MBI
had net sales of $389 million and $351 million in 1999 and 1998, respectively.
Combined summarized financial information for all of the Company's non-
consolidated affiliates that are accounted for under the equity method of
accounting is presented as follows:
Predecessor
Period from Period from
November 19 to January 1 to
December 31, November 18,
1999 1998 1998
------------------------------------------------------
Results of operations (a)
Net sales.................................................. $ 628 $ 380 $3,219
Cost of sales.............................................. 540 351 2,528
Income (loss) before income taxes, minority interest and
extraordinary charges.................................... 32 (56) (312)
Net income (loss).......................................... 31 (43) (261)
35
December 31, December 31,
1999 1998
-------------------------------------
Financial position:
Current assets....................... $ 154 $ 960
Non-current assets................... 136 4,224
Current liabilities.................. 101 773
Non-current liabilities.............. 106 1,972
Stockholders' equity................. 84 2,439
(a) Includes results of operations for each of the Company's affiliates for the
period it was accounted for under the equity method.
6. Long-term Debt
Long-term debt as of December 31 is as follows:
Bank Credit Facilities
1999 1998
--------------------------
Tranche B Term Loan, payable in various installments through April 1, 2000.......... $ $368
Tranche C Term Loan (9.5% weighted average variable rate), payable in various
installments through October 1, 2003........................................... 181 194
Tranche D Term Loan (9.5% weighted av variable rate), payable in various
installments through October 1, 2003........................................... 173 185
Tranche E Term Loan (9.5% weighted avariable rate), payable in various
installments through October 1, 2003........................................... 234 248
Revolving credit facility (10.6% weighted average rate), due December 31,
2000........................................................................... 93 161
Europa Carton AG (a wholly-owned German subsidiary) 7.96% term loan, denominated in
German DMs, payable in March 2003 ............................................. 22 49
4.98% to 7.96% term loans, denominated in foreign currencies, payable in varying
amounts through 2004........................................................... 18 30
--------------------------
721 1,235
Accounts Receivable Securitization Program Borrowings
Stone accounts receivable securitization program term loans (6.2% weighted average
variable rate), due December 15, 2000.......................................... 210
36
Senior Notes
10.75% first mortgage notes, due October 1, 2002 (plus unamortized premium of $13 and
$18)................................................................................... 513 518
8.45% mortgage notes, payable in monthly installments through August 1, 2007 and $69
on September 1, 2007................................................................... 81 82
9.875% unsecured senior notes, due February 1, 2001 (plus unamortized premium of $3
and $7)................................................................................ 562 578
11.5% unsecured senior notes, due October 1, 2004 (plus unamortized premium of $10
and $12)............................................................................... 210 212
11.5% unsecured senior notes, due August 15, 2006 (plus unamortized premium of $5 and
$6).................................................................................... 205 206
12.58% rating adjustable unsecured senior notes, due August 1, 2016 (plus unamortized
premium of $2 and $2).................................................................. 127 127
------------------
1,698 1,723
Other Debt
Fixedrate utility systems and pollution control revenue bonds (fixed rates
ranging from 6.0% to 9.0%), payable in varying annual sinking fund payments
through 2027........................................................................... 235 238
Other (including obligations under capitalized leases of $9 and $7)......................... 22 30
------------------
257 268
Subordinated Debt
10.75% senior subordinated debentures and 1.5% supplemental interest certificates,
due on April 1, 2002 (less unamortized discount of $3 and $5).......................... 244 270
10.75% senior subordinated debentures, due April 1, 2002.................................... 200 200
11.0% senior subordinated notes, due August 15, 1999 (plus unamortized premium of $1
at December 31, 1998).................................................................. 120
6.75% convertible subordinated debentures (convertible at $34.28 per share), due
February 15, 2007 (less unamortized discount of $8 and $8)............................. 37 37
------------------
481 627
------------------
Total debt.................................................................................. 3,157 4,063
Less current maturities..................................................................... (162) (161)
------------------
Long-term debt.............................................................................. $2,995 $3,902
------------------
The amounts of total debt outstanding at December 31, 1999 maturing during the
next five years are as follows:
2000.......................................................... $ 162
2001.......................................................... 603
2002.......................................................... 992
2003.......................................................... 551
2004.......................................................... 220
Thereafter.................................................... 629
37
Bank Credit Facilities
The Company has a bank credit agreement which provides for four secured senior
term loans (Tranche B, Tranche C, Tranche D, and Tranche E Term Loans),
aggregating $588 million at December 31, 1999 which mature through October 1,
2003 and a $560 million senior secured revolving credit facility, of which up to
$62 million may consist of letters of credit, maturing December 31, 2000
(collectively the "Credit Agreement"). The Company pays a .5% commitment fee on
the unused portions of its revolving credit facility. At December 31, 1999, the
unused portion of this facility, after giving consideration to outstanding
letters of credit, was $447 million.
On November 18, 1998, the Company and its bank group amended and restated the
Credit Agreement to, among other things, (i) extend the maturity date on the
Tranche B Term Loan $190 million payment due on October 1, 1999 to April 1,
2000, (ii) extend the maturity date of the revolving credit facility to April 1,
2000 and to provide a further extension to December 31, 2000 upon repayment of
the Tranche B Term Loan on or before its maturity date of April 1, 2000, (iii)
permit the use of the net proceeds from the sale of the Snowflake mill to repay
a portion of the Company's 11.875% Senior Notes due December 1, 1998, (iv)
permit the Merger, and (v) ease certain financial covenants. On April 23, 1999,
the Company repaid all outstanding amounts under the Tranche B Term Loan with
proceeds from the sale of Abitibi.
The Credit Agreement (as amended) contains various covenants and restrictions
including, among other things, (i) limitations on dividends, redemptions and
repurchases of capital stock, (ii) limitations on the incurrence of
indebtedness, liens, leases and sale-leaseback transactions, (iii) limitations
on capital expenditures, and (iv) maintenance of certain financial covenants.
The Credit Agreement also requires prepayments of the term loans if the Company
has excess cash flows, as defined, or receives proceeds from certain asset
sales, insurance, issuance of certain equity securities or incurrence of certain
indebtedness. Current maturities include $43 million of excess cash flow
payments due prior to April 5, 2000. Any prepayments are allocated against the
term loan amortization in inverse order of maturity.
During January 1999, the Company obtained a waiver from its bank group for
relief from certain financial covenant requirements under the Credit Agreement
as of December 31, 1998. Subsequently, on March 23, 1999 the Company and its
bank group amended the Credit Agreement to ease certain quarterly financial
covenant requirements for 1999.
At December 31, 1999, borrowings and accrued interest outstanding under the
Credit Agreement were secured by a security interest in substantially all of the
assets of the Company and 65% of the stock of its Canadian subsidiary. The
security interest excludes cash, cash equivalents, certain trade receivables,
five paper mills and the land and buildings of the corrugated container plants.
Accounts Receivable Securitization Program Borrowings
On October 15, 1999, the Company entered into an accounts receivable
securitization program, which qualified for SFAS No. 125 (See Note 3). Proceeds
from this securitization program were used to repay borrowings outstanding under
its prior $210 million accounts receivable securitization program.
Senior Notes
The Company's senior notes (the "Senior Notes"), aggregating $1,698 million at
December 31, 1999, are redeemable in whole or in part at the option of the
Company at various dates, at par plus a weighted average premium of 2.57%. The
Merger constituted a "Change of Control" under the Senior Notes and the
Company's $481 million outstanding senior subordinated debentures (the "Senior
Subordinated Debentures"). As a result, the Company is required, subject to
certain limitations, to offer to repurchase the Senior Notes and the Senior
Subordinated Debentures at a price equal to 101% of the principal amount,
together with accrued interest. However, because the Credit Agreement prohibits
the Company from making an offer to repurchase the Senior Notes and the Senior
Subordinated Debentures, the Company could not make the offer. Although the
terms of the Senior
38
Notes refer to an obligation to repay the bank debt or obtain the consent of the
bank lenders to such repurchase, the terms do not specify a deadline, if any,
following the Merger for repayment of bank debt or obtaining such consent. The
Company intends to actively seek commercially acceptable sources of financing to
repay the outstanding indebtedness under the Credit Agreement or alternative
financing arrangements which would cause the bank lenders to consent to the
repurchase. There can be no assurance that the Company will be successful in
obtaining such financing or consents.
In the event the Company does not maintain the minimum Subordinated Capital Base
(as defined) of $1 billion for two consecutive quarters, the indentures
governing the Senior Notes require the Company to semiannually offer to purchase
10% of such outstanding indebtedness at par until the minimum Subordinated
Capital Base is attained. In the event the Credit Agreement prohibits such an
offer to repurchase, the interest rate on the Senior Notes is increased by 50
basis points per semiannual coupon period up to a maximum of 200 basis points
until the minimum Subordinated Capital Base is attained. The Company's
Subordinated Capital Base (as defined) was $2,998 million and $3,096 million at
December 31, 1999 and December 31, 1998, respectively; however, it was below the
$1 billion minimum at September 30, June 30, and March 31, 1998. In April 1998,
the Company offered to repurchase 10% of the outstanding Senior Notes.
Approximately $1 million of such indebtedness was redeemed under this offer.
Effective February 1, 1999 the interest rates on the 9.875% Senior Notes due
February 1, 2001 and 12.58% Senior Notes due August 1, 2016 were increased by 50
basis points. Effective February 15, 1999 the interest rate on the 11.5% Senior
Notes due August 15, 2006 was also increased 50 basis points. The interest rates
on all of the Senior Notes returned to the original interest rate on April 1,
1999 due to the Company's Subordinated Capital Base exceeding the minimum on
December 31, 1998.
The 10.75% first mortgage notes are secured by the assets at four of the
Company's containerboard mills. The 8.45% mortgage notes are secured by the land
and buildings comprising 37 of the Company's corrugated container plants.
Subordinated Debt
The Company's Senior Subordinated Debentures, aggregating $481 million, are
redeemable as of December 31, 1999, in whole or in part at the option of the
Company at par plus a weighted average premium of .16%.
In the event the Company does not maintain a minimum Net Worth, as defined, of
$500 million, for two consecutive quarters, the interest rate on the 10.75%
senior subordinated debentures and 11% senior subordinated indentures will be
increased by 50 basis points per semiannual coupon period up to a maximum amount
of 200 basis points, until the minimum Net Worth is attained. The Company's Net
Worth (as defined) was $2,506 million and $2,590 million at December 31, 1999
and December 31, 1998, respectively, however, it was below the $500 million
minimum at September 30, June 30 and March 31, 1998. The interest rate on the
11.0% senior subordinated debentures was increased 50 basis points on August 15,
1998 and 50 basis points on February 15, 1999. The interest rate on the 10.75%
senior subordinated debentures was increased 50 basis points on October 1, 1998.
The interest rate on all of the Company's Senior Subordinated Debentures
returned to the original interest rate on April 1, 1999, due to the Company's
Net Worth exceeding the minimum at December 31, 1998.
On August 15, 1999, the Company repaid its $120 million 11.0% Senior
Subordinated Debentures at maturity with borrowings under its revolving credit
facility.
Other
Interest costs capitalized on construction projects was $1 million for 1999,
zero for the period from November 19 to December 31, 1998, $2 million for the
period from January 1 to November 18, 1998 and $3 million in 1997. Interest
payments on all debt instruments were $369 million for 1999, $22 million for the
period from November 19 to December 31, 1998, $424 million for the period from
January 1 to November 18, 1998 and $424 million in 1997.
39
7. Leases
The Company leases certain facilities and equipment for production, selling and
administrative purposes under operating leases. Future minimum rental
commitments (exclusive of real estate taxes and other expenses) under operating
leases having initial or remaining non-cancelable terms in excess of one year,
excluding lease commitments on closed facilities, are reflected below:
2000............................................................ $ 70
2001............................................................ 53
2002............................................................ 43
2003............................................................ 36
2004............................................................ 29
Thereafter...................................................... 73
----
Total minimum lease payments............................... $304
----
Net rental expense for operating leases, including leases having a duration of
less than one year, was approximately $106 million in 1999, $15 million for the
period from November 19 to December 31, 1998, $106 million for the period from
January 1 to November 18, 1998, and $114 million in 1997.
8. Income Taxes
Significant components of the Company's deferred tax assets and liabilities at
December 31 are as follows:
1999 1998
-------------------------
Deferred tax liabilities
Property, plant and equipment and timberland............................... $ (951) $ (1,287)
Inventory.................................................................. (15) 19
Prepaid pension costs...................................................... (11) (11)
Investment in affiliate.................................................... (45) (57)
Other...................................................................... (69) (29)
-------------------------
Total deferred tax liabilities........................................... (1,091) (1,365)
-------------------------
Deferred tax assets
Employee benefit plans..................................................... 105 136
Net operating loss, alternative minimum tax and tax credit carryforwards... 558 456
Deferred gain.............................................................. 29 23
Purchase accounting liabilities............................................ 132 103
Deferred debt issuance costs............................................... 48 52
Other...................................................................... 69 77
-------------------------
Total deferred tax assets................................................ 941 847
Valuation allowance for deferred tax asset................................. (198) (198)
-------------------------
Net deferred tax assets.................................................. 743 649
-------------------------
Net deferred tax liabilities............................................. $ (348) $ (716)
-------------------------
At December 31, 1999, the Company had approximately $1,337 million of net
operating loss carryforwards for U. S. Federal income tax purposes that expire
from 2009 through 2019, with a tax value of $468 million. A valuation allowance
of $152 million has been established for a portion of these deferred tax assets.
Further, the Company had net operating loss carryforwards for state purposes
with a tax value of $68 million, which expire from 2000 through 2019. A
valuation allowance of $46
40
million has been established for a portion of these deferred tax assets. The
Company had approximately $22 million of alternative minimum tax credit
carryforwards for U.S. federal tax purposes, which are available indefinitely.
Benefit from income taxes on loss before income taxes and extraordinary item as
follows:
Predecessor
-------------------------
Period from Period from
November 19 to January 1 to
December 31, November 18
1999 1998 1998 1997
-----------------------------------------------------------
Current
Federal................................. $ $ $ $ 4
Foreign................................. (19) (5) (18) (21)
-----------------------------------------------------------
Total current expense................... (19) (5) (18) (17)
Deferred
Federal................................. 24 15 121 166
State and local......................... 2 3 (34) 30
Foreign................................. (7) 3 19 21
-----------------------------------------------------------
Total deferred benefit.................. 19 21 106 217
-----------------------------------------------------------
Total benefit from income taxes........ $ $ 16 $ 88 $200
-----------------------------------------------------------
The Company's benefit from income taxes differed from the amount computed by
applying the statutory U.S. federal income tax rate to loss before income taxes
and extraordinary item is as follows:
Predecessor
-------------------------
Period from Period from
November 19 to January 1 to
December 31, November 18
1999 1998 1998 1997
-----------------------------------------------------------
U.S. federal income tax benefit at federal
statutory rate.......................... $ 26 $ 18 $ 293 $212
Effect of valuation allowances on deferred
tax assets, net of federal benefit......
(151) (9)
Unutilized capital loss..................... (36)
Permanent differences from applying
purchase (26) (3)
accounting..............................
Permanently non-deductible expenses.........
(1) (7) (8)
Equity earnings of affiliates, net
of tax.................................. (30) (19)
State income taxes, net of federal income
tax effect.............................. 2 2 22 19
Minimum taxes-foreign jurisdictions......... (4) (4)
Other-net................................... (1) (1) 1 9
-----------------------------------------------------------
Total benefit from income taxes............. $ $ 16 $ 88 $200
-----------------------------------------------------------
41
The components of the loss before income taxes and extraordinary item are as
follows:
Predecessor
-------------------------
Period from Period from
November 19 to January 1 to
December 31, November 18,
1999 1998 1998 1997
---------------------------------------------------------
United States............................... $(128) $(54) $(405) $(521)
Foreign..................................... 53 2 (432) (84)
---------------------------------------------------------
Loss before income taxes and extraordinary
item.................................... $ (75) $(52) $(837) $(605)
---------------------------------------------------------
The Company made income tax payments of $14 million in 1999, $6 million for the
period from November 19 to December 31, 1998 and $27 million for the period from
January 1 to November 18, 1998 and $13 million in 1997.
9. Employee Benefit Plans
Defined Benefit Plans
The Company participates in the SSCC sponsored noncontributory defined benefit
pension plans covering substantially all employees. On December 31, 1998, the
domestic defined benefit plans of the Company were merged with the defined
benefit plans of Jefferson Smurfit Corporation (U.S.) ("JSC(U.S.)"), and assets
of these plans are available to meet the funding requirements of the combined
plans. The Company intends to fund its proportionate share of the future
contributions based on the funded status of the Company's plan determined on an
actuarial basis. Therefore, the plan asset information provided below is based
on an actuarial estimate of assets and liabilities, excluding the effect of the
plan merger, in order to be consistent with the presentation of the consolidated
statements of operations and balance sheets.
The benefit obligation, fair value of plan assets and the over funded status of
the JSC(U.S.) defined benefit plans at December 31, 1999 were $957 million,
$1,155 million and $198 million, respectively.
Approximately 29% of the merged pension plan assets at December 31, 1999 are
invested in cash equivalents or debt securities and 71% are invested in equity
securities. Equity securities at December 31, 1999 include .7 million shares of
SSCC common stock with a market value of approximately $18 million and 26
million shares of JS Group common stock having a market value of approximately
$79 million. Dividends paid on JS Group common stock during 1999 were
approximately $2 million.
The Company sponsors noncontributory defined benefit pension plans for its
foreign operations. Approximately 21% of the foreign pension plan assets at
December 31, 1999, are invested in cash equivalents or debt securities and 79%
are invested in equity securities.
Postretirement Health Care and Life Insurance Benefits
The Company provides certain health care and life insurance benefits for all
salaried as well as certain hourly employees. The assumed health care cost trend
rates used in measuring the accumulated postretirement benefit obligation
("APBO") range from 5.25% to 6.50% at December 31, 1999, decreasing to the
ultimate rate of 5.25%. The effect of a 1% increase in the assumed health care
cost trend rate would increase the APBO as of December 31, 1999 by $7 million
and would have an immaterial effect on the annual net periodic postretirement
benefit cost for 1999.
42
As a result of the Merger, the Company recorded previously unrecognized
actuarial gains and losses and prior service cost in its purchase price
allocation. The following provides a reconciliation of benefit obligations, plan
assets, and funded status of the plans:
Defined Benefit Plans Postretirement Plans
---------------------------------------------------------
1999 1998 1999 1998
---------------------------------------------------------
Change in benefit obligation:
Benefit obligation at January 1................ $ 778 $ 708 $ 73 $ 72
Service cost................................... 22 21 1 1
Interest cost.................................. 52 49 5 5
Amendments..................................... 5 1
Actuarial (gain) loss.......................... (60) 35 (2) 2
Plan participants' contributions............... 1 2
Benefits paid.................................. (36) (32) (6) (6)
Foreign currency rate changes.................. (8) (4) 1 (1)
---------------------------------------------------------
Benefit obligation at December 31.............. $ 754 $ 778 $ 74 $ 73
---------------------------------------------------------
Change in plan assets:
Fair value of plan assets at January 1......... $ 504 $ 468 $ $
Actual return on plan assets................... 51 56
Employer contributions......................... 13 24
Benefits paid.................................. (36) (32)
Foreign currency rate changes.................. 10 (12)
---------------------------------------------------------
Fair value of plan assets at December 31....... $ 542 $ 504 $ $
---------------------------------------------------------
Over (under) funded status:.................... $(212) $(274) $(74) $(73)
Unrecognized actuarial (gain) loss............. (98) (29) (2)
Unrecognized prior service cost................ 10
---------------------------------------------------------
Net amount recognized.......................... $(300) $(303) $(76) $(73)
---------------------------------------------------------
Amounts recognized in the balance sheets:
Accrued pension liability...................... $(300) $(303) $(76) $(73)
---------------------------------------------------------
The weighted-average assumptions used in the accounting for the defined benefit
plans and postretirement plans were:
Defined Benefit Plans Postretirement Plans
---------------------------------------------------------
1999 1998 1999 1998
---------------------------------------------------------
Weighted discount rate:
U.S. plans.................................. 8.00% 7.00% 8.00% 7.00%
Foreign plans............................... 6.50-8.00% 6.00-7.00% 8.00% 7.00%
Rate of compensation increase................... 3.00-4.50% 3.00-3.75% N/A N/A
Expected return on plan assets.................. 9.50% 9.50% N/A N/A
Health care cost trend on covered charges....... N/A N/A 6.50% 6.50%
43
The components of net pension expense for the defined benefit plans and the
components of the postretirement benefits costs follow:
Defined Benefit Plans
Predecessor
---------------------------
Period from Period from
November 19 to January 1 to
December 31, November 18,
1999 1998 1998 1997
------------------------------------------------------------------
Service cost.......................... $ 22 $ 2 $ 19 $ 19
Interest cost......................... 52 6 43 47
Expected return on plan assets........ (47) (5) (44) (43)
Net amortization and deferral......... (1) 9 10
Multi-employer plans.................. 4 5 5
------------------------------------------------------------------
Net periodic benefit cost............. $ 30 $ 3 $ 32 $ 38
------------------------------------------------------------------
Defined Benefit Plans
Predecessor
---------------------------
Period from Period from
November 19 to January 1 to
December 31, November 18,
1999 1998 1998 1997
------------------------------------------------------------------
Service cost.......................... $ 1 $ $ 1 $ 1
Interest cost......................... 5 1 4 5
Net amortization and deferral......... 1
Multi-employer plans.................. 1 1
-----------------------------------------------------------------------
Net periodic benefit cost............. $ 7 $ 1 $ 6 $ 7
-----------------------------------------------------------------------
The projected benefit obligation, accumulated benefit obligation, and fair value
of plan assets for the pension plans with accumulated benefit obligations in
excess of plan assets were $272 million, $262 million and $126 million,
respectively, as of December 31, 1999 and $601 million, $534 million and $335
million as of December 31, 1998.
Savings Plans
The Company sponsors voluntary savings plans covering substantially all salaried
and certain hourly employees. The Company match is paid in SSCC common stock, up
to an annual maximum. The Company's expense for the savings plans totaled $8
million in 1999, $5 million in 1998, and an immaterial amount in 1997.
10. Preferred Stock
The Company has approximately 4.6 million shares of $1.75 Series E Cumulative
Convertible Exchangeable Preferred Stock, $.01 par value, (the "Preferred
Stock") issued and outstanding. Each share of Preferred Stock is entitled to one
vote on all matters submitted to a vote of the Company's common stockholders.
The Preferred Stock is convertible, at the option of the holder, into shares of
SSCC common stock at a conversion price of $34.28 (equivalent to a conversion
rate of .729 shares of SSCC common stock for each share of Preferred Stock),
subject to adjustment based on certain events. The Preferred Stock may
alternatively be exchanged, at the option of the Company, for new 7% Convertible
Subordinated Exchange Debentures of the Company due February 15, 2007 in a
principal amount equal to $25.00 per share of Preferred Stock so exchanged.
Additionally, the Preferred Stock is redeemable at the option of the Company, in
whole or in part, from time to time.
44
The Company paid cash dividends of $.4375 per share on the Preferred Stock in
1997. No cash dividends were paid in 1999 and 1998. The declaration of dividends
by the Board of Directors is subject to, among other things, certain restrictive
provisions contained in the Credit Agreement, Senior Note Indentures and Senior
Subordinated Indenture. Due to these restrictive provisions, the Company cannot
declare or pay dividends on its Preferred Stock or common stock until the
Company generates income or issues capital stock to replenish the dividend pool
under various of its debt instruments and total Net Worth (as defined) equals or
exceeds $750 million. At December 31, 1999, the dividend pool under the Senior
Subordinated Indenture (which contains the most restrictive dividend pool
provision) had a deficit of approximately $1,043 million and Net Worth (as
defined) was $2.5 billion. Because more than ten quarterly dividends remain
unpaid on the Preferred Stock, the holders of the Preferred Stock are currently
entitled to elect two members to the Company's Board of Directors until the
accumulated dividends on such Preferred Stock have been declared and paid or set
apart for payment. The Company had accumulated dividend arrearages on the
Preferred Stock of $22 million and $14 million at December 31, 1999 and 1998,
respectively. The accumulated dividend arrearages on the preferred stock are
payable upon their conversion, exchange or redemption.
11. Stock Option and Incentive Plans
Prior to the Merger, the Company maintained incentive plans for selected
employees. The Company's plans included incentive stock options and non-
qualified stock options issued at prices equal to the fair market value of the
Company's common stock at the date of grant which expire upon the earlier of 10
years from the date of grant or termination of employment, death, or disability.
Effective with the Merger, options outstanding under the Company's plans were
converted into options to acquire SSCC common stock, with the number of shares
and exercise price being adjusted in accordance with the exchange ratio of .99
established in the Merger Agreement and all outstanding options under both the
Company and SSCC plans became exercisable and fully vested.
In November 1998, the Company's parent, SSCC, adopted the 1998 Long-Term
Incentive Plan ("1998 Plan") and reserved 8.5 million shares of SSCC common
stock for non-qualified stock options and performance awards. Certain employees
of the Company are covered under the 1998 Plan. The options are exercisable at a
price equal to the fair market value of SSCC's common stock at the date of grant
and vest eight years after the date of grant subject to accelerations based upon
the attainment of pre-established stock price targets. The options expire ten
years after the date of grant.
The Company and its parent have elected to continue to follow APB Opinion No. 25
to account for stock awards granted to employees. If the Company adopted SFAS
No. 123 to account for stock awards granted to employees, the Company's net
income for the period from November 19 to December 31, 1998 and the year ended
December 31, 1999, based on a Black-Scholes option pricing model, would not have
been materially different. The effects of applying SFAS No. 123 as described
above may not be representative of the effects on reported net income for future
years.
Pro forma information for the Predecessor period regarding net income and
earnings per share is required by SFAS No. 123 and has been determined as if the
Company had accounted for its employee stock options issued subsequent to
December 31, 1994 under the fair value method. The pro forma net income
information required by SFAS No. 123 is not likely to be representative of the
effects on reported net income for future years. The fair value for these
options was estimated at the date of grant using a Black-Scholes option pricing
model with the following assumptions:
Predecessor
--------------------------------------------
Period from January 1 to
November 18,
1998 1997
--------------------------------------------
Expected option life (years)......................... 7 7
Risk-free weighted average interest rate............. 5.6% 6.6%
Stock price volatility............................... 50% 51%
Dividend yield....................................... 0.0% 4.2%
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
45
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's
unaudited pro forma information is as follows:
Predecessor
--------------------------------------
Period from
January 1 to
November 18,
1998 1997
--------------------------------------
As Reported
Net income (loss)....................................................... $ (749) $ (418)
Basic earnings (loss) per share......................................... (7.43) (4.29)
Diluted earnings (loss) per share....................................... (7.43) (4.29)
Pro Forma
Net income (loss)....................................................... $ (753) $ (423)
Basic earnings (loss) per share......................................... (7.46) (4.34)
Diluted earnings (loss) per share....................................... (7.46) (4.34)
The weighted average fair values of options granted during 1998 and 1997 were
$6.93 and $5.59 per share, respectively.
Additional information relating to the Plans is as follows:
Weighted
Average
Shares Under Option Exercise
Option Price Range Price
----------------------------------------------------------------
Outstanding at January 1, 1997.............. 3,750,536 $13.38 - 29.29 $ 19.23
Granted................................... 1,296,706 14.00 14.00
Exercised................................. (12,500) 13.38 13.38
Cancelled................................. (247,644) 13.38 - 29.29 23.28
--------------
Outstanding at December 31, 1997............ 4,787,098 13.38 - 29.29 15.23
Granted................................... 1,617,870 11.75 11.75
Exercised................................. (180,616) 13.38 - 18.00 13.68
Cancelled................................. (125,328) 13.38 - 29.29 22.89
--------------
Outstanding at November 18, 1998............ 6,099,024 13.38 - 29.29 14.21
Converted to SSCC options................. (6,099,024) 13.38 - 29.29 (14.21)
--------------
Outstanding at December 31, 1998............
--------------
The number of options exercisable at December 31, 1997 were 1,599,482.
46
12. Accumulated Other Comprehensive Income (Loss)
Accumulated other comprehensive income (loss) is as follows:
Foreign Unrealized Accumulated
Currency Minimum Holding Gain on Other
Translation Pension Marketable Comprehensive
Adjustment Liability Securities Income (Loss)
---------------------------------------------------------------------------
Predecessor:
Balance at January 1, 1997................ $ (179) $ (42) $ $ (221)
Current period change................. (114) 3 (111)
---------------------------------------------------------------------------
Balance at December 31, 1997.............. (293) (39) (332)
Current period change................. (76) (21) (97)
---------------------------------------------------------------------------
Balance at November 18, 1998.............. (369) (60) (429)
Effect of Merger:
Retire predecessor Equity............. 369 60 429
Current period change................. 3 3
---------------------------------------------------------------------------
Balance at December 31, 1998.............. 3 3
Current period change................ (10) 3 (7)
---------------------------------------------------------------------------
Balance at December 31, 1999.............. $ (7) $ $ 3 $ (4)
---------------------------------------------------------------------------
13. Earnings Per Share
Subsequent to the Merger, earnings per share information is no longer presented
because the Company is a wholly-owned subsidiary of SSCC.
The following table sets forth the computation of basic and diluted earnings per
share for the Predecessor periods:
Predecessor
------------------------------------------
Period from January
1 to November 18,
1998 1997
------------------------------------------
Numerator:
Loss from continuing operations before extraordinary item......... $ (749) $ (405)
Less: Preferred stock dividends................................... (7) (8)
------------------------------------------
Loss applicable to common stockholders............................ $ (756) $ (413)
------------------------------------------
Denominator:
Denominator for basic earnings per share --
Weighted average shares......................................... 102 99
Denominator for diluted earnings per share --
Adjusted weighted average shares................................ 102 99
------------------------------------------
Basic earnings (loss) per share before extraordinary item........... $ (7.43) $ (4.16)
------------------------------------------
Diluted earnings (loss) per share before extraordinary item......... $ (7.43) $ (4.16)
------------------------------------------
Convertible debt to acquire four million shares of common stock with an earnings
effect of $3 million, and exchangeable preferred stock to acquire four million
shares of common stock with an earnings effect of $7 million are excluded from
the diluted earnings per share computation in the period from January 1 to
November 18, 1998 because they are antidilutive.
47
Convertible debt to acquire six million shares of common stock with an earnings
effect of $5 million are excluded from the diluted earnings per share
computation in 1997 because they are antidilutive.
14. Related Party Transactions
On September 4, 1998, Stone Canada purchased the remaining 50% of MBI from
MacMillan Bloedel ltd. for $185 million (Canadian). Simultaneously, Stone Canada
sold the newly acquired 50% interest to Jefferson Smurfit Group plc, a
significant stockholder of SSCC, for the same amount.
On October 15, 1998, the Company sold its Snowflake, Arizona newsprint
manufacturing operations and related assets to Abitibi for approximately $250
million. The Company retained ownership of a corrugating medium machine located
in the facility that Abitibi operated on behalf of the Company pursuant to an
operating agreement entered into as part of the sale. Payments made to Abitibi,
prior to the sale of the Company's remaining interest (see Note 5), were $17
million in the period from January 1 to April 23, 1999, $4 million in the period
from January 1 to November 18, 1998 and $4 million in the period from
November 19 to December 31, 1998.
Transactions with JSC(U.S.)
The Company sold and purchased containerboard at market prices from JSC(U.S.), a
subsidiary of SSCC, as follows:
Period from
November 19 to
December 31,
1999 1998
---- ----
Product sales........................................................... $237 $ 8
Product and raw material purchases...................................... 248 14
Receivables at December 31.............................................. 32 4
Payables at December 31................................................. 60 8
Corporate shared expenses are allocated between the Company and JSC based on an
established formula using a weighted average rate based on the net book value of
fixed assets, number of employees and sales.
Transactions with JS Group
The Company sold and purchased containerboard at market prices from Jefferson
Smurfit Group plc, a significant stockholder of SSCC, as follows:
1999
----
Product sales........................................................ $ 12
Product and raw material purchases................................... 5
Receivables at December 31........................................... 1
Payables at December 31.............................................. 1
48
Transactions with Non-consolidated Affiliates
The Company sold paperboard, market pulp and fiber to and purchased
containerboard and kraft paper from various non-consolidated affiliates. The
following table summarizes the Company's related party transactions with its
non-consolidated affiliates for each year presented:
Predecessor
-------------------------------------
Period from Period from
November 19 to January 1 to
December 31, November 18,
1999 1998 1998 1997
--------------------------------------------------------------------------
Product sales.......................... $ 297 $ 24 $220 $206
Product and raw material purchases..... 29 113 103
Receivables at December 31............. 42 65 60
Payables at December 31................ 2 5
Commissions for services rendered...... 2
Fees payable for services received..... 10 11
The Company had outstanding loans and interest receivable from non-consolidated
affiliates of zero and $5 million at December 31, 1999 and 1998, respectively.
15. Fair Value of Financial Instruments
The carrying values and fair values of the Company's financial instruments at
December 31 are as follows:
1999 1998
--------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
--------------------------------------------------
Cash and cash equivalents................................... $ 13 $ 13 $ 137 $ 137
Notes receivable and long-term investments.................. 26 26 22 22
Long-term debt including current maturities................. 3,157 3,196 4,063 4,090
The carrying value of cash equivalents approximates fair value because of the
short maturity of those instruments. The fair values of notes receivable and
long-term investments are based on discounted future cash flows or the
applicable quoted market price. The fair value of the Company's debt is
estimated based on the quoted market prices for the same or similar issues or on
the current rates offered to the Company for debt of the same remaining
maturities. The fair value of interest rate swap agreements are obtained from
dealer quotes. These values represent the estimated amount the Company would pay
to terminate agreements, taking into consideration the current interest rate and
market conditions. These financial instruments are not held for trading
purposes.
The Company was party to an interest rate swap contract that expired in February
1999. The swap contract had the effect of converting the fixed rate of interest
into a floating interest rate on $100 million of the 9.875% Senior Notes. The
interest rate swap contract was entered into in order to balance the Company's
fixed rate and floating rate debt portfolios. Under the interest rate swap, the
Company agreed with the other party to exchange, at specified intervals, the
difference between fixed rate and floating rate interest amounts calculated by
reference to an agreed notional principal amount. The Company terminated an
interest rate swap contract during 1998, which had converted the fixed rate of
interest into floating rate on $150 million of 11.5% Senior Notes due
October 1, 2004.
49
The following table indicates the weighted average receive rate and pay rate
relating to the interest rate swaps outstanding at December 31, 1999 and 1998:
1999 1998
---- ----
Interest rate swap notional amount........................................................ $
Average receive rate (fixed by contract terms).........................................
Average pay rate.......................................................................
Interest rate swap notional amount........................................................ $ 100
Average receive rate (fixed by contract terms)......................................... 5.6%
Average pay rate....................................................................... 5.6%
16. Other, Net
The significant components of other, net are as follows:
Predecessor
----------------------------------
Period from Period from
November 19 to January 1 to
December 31, November 18,
1999 1998 1998 1997
---------------------------------------------------------------------
Foreign currency transaction gains
(losses).................................... $ 7 $ 4 $ (24) $ (11)
Gains (losses) on sales of investments or
assets...................................... 39 37 1
Write-down of investments in non-consolidated
affiliates.................................. (155)
Merger related and change of control expenses. (32)
Other 10 (12) 6
---------------------------------------------------------------------
Total other, net.............................. $ 56 $ 4 $ (186) $ (4)
---------------------------------------------------------------------
17. Commitments and Contingencies
The Company's past and present operations include activities which are subject
to federal, state and local environmental requirements, particularly relating to
air and water quality. The Company faces potential environmental liability as a
result of violations of permit terms and similar authorizations that have
occurred from time to time at its facilities. In addition, the Company faces
potential liability for response costs at various sites for which it has
received notice as being a potentially responsible party ("PRP") concerning
hazardous substance contamination. In estimating its reserves for environmental
remediation and future costs, the Company's estimated liability reflects only
the Company's expected share after consideration for the number of other PRPs at
each site, the identity and financial condition of such parties and experience
regarding similar matters.
The Company was a party to an Output Purchase Agreement (the "OPA") with Four M
Corporation ("Four M") and Florida Coast Paper Company, L.L.C. (`FCPC"), a joint
venture owned 50% by each of the Company and Four M. The OPA required that the
Company and Four M each purchase one-half of the linerboard produced at FCPC's
mill in Port St. Joe, FL (the "FCPC Mill") at a minimum price sufficient to
cover certain obligations of FCPC. The OPA also required the Company and Four M
to use their best efforts to cause the FCPC Mill to operate at a production rate
not less than the reported average capacity utilization of the U.S. linerboard
industry. FCPC indefinitely discontinued production at the FCPC Mill in August
1998, and FCPC and certain of its affiliates filed for Chapter 11 bankruptcy
protection in April 1999. Certain creditors of FCPC filed an adverse proceeding
in the bankruptcy against the Company and Four
50
M, and certain of their officers and directors, alleging among other things,
default with respect to the obligations of the Company and Four M under the OPA.
On October 20, 1999, FCPC and a committee representing the holders of the FCPC
debt securities filed a bankruptcy reorganization plan ("Plan") that provided
for the settlement of all outstanding claims in exchange for cash payments.
Under the Plan, which was confirmed and consummated in January 2000, the Company
paid approximately $123 million to satisfy the claims of creditors of FCPC, the
Company received title to the FCPC mill, and all claims under the OPA, as well
as any obligations of the Company involving FCPC or its affiliates, were
released and discharged. In addition, Four M issued $25 million of convertible
preferred stock to the Company in connection with the consummation of the Plan.
The Company is a defendant in a number of lawsuits and claims arising out of the
conduct of its business, including those related to environmental matters. While
the ultimate results of such suits or other proceedings against the Company
cannot be predicted with certainty, the management of the Company believes that
the resolution of these matters will not have a material adverse effect on its
consolidated financial condition or results of operations.
18. Business Segment Information
The Company adopted SFAS No. 131, "Disclosures About Segments of an Enterprise
and Related Information," in 1998 which changes the way operating segment
information is presented. The information for 1998 and 1997 has been restated
from the prior year's presentation in order to conform to the 1999 presentation.
The Company has three reportable segments: (1), Containerboard and Corrugated
Containers, (2) Industrial Bags, and (3) International. The Containerboard and
Corrugated Containers segment is highly integrated. It includes a system of
mills and plants that produces a full line of containerboard that is converted
into corrugated containers. Corrugated containers are used to transport such
diverse products as home appliances, electric motors, small machinery, grocery
products, produce, books, tobacco and furniture. The Industrial Bag segment
converts kraft and specialty paper into multi-wall bags, consumer bags, and
intermediate bulk containers. These bags and containers are designed to ship and
protect a wide range of industrial and consumer products including fertilizers,
chemicals, concrete and pet and food products. The international segment is
primarily composed of the Company's containerboard mills and corrugating
facilities located in Europe and Central and South America.
The Company evaluates performance and allocates resources based on profit or
loss from operations before income taxes, interest expense, and other non-
operating gains and losses. The accounting policies of the reportable segments
are the same as those described in the summary of significant accounting
policies except that the Company accounts for inventory on a FIFO basis at the
segment level compared to a LIFO basis at the consolidated level. Intersegment
sales and transfers are recorded at market prices. Intercompany profit is
eliminated at the corporate division level.
The Company's North American reportable segments are strategic business units
that offer different products and each are managed separately because they
manufacture distinct products. The International segment is managed separately
because it has different customers and its operations are based in markets
outside of the North American market. Other includes corporate related items
which include goodwill, equity investments, income and expense not allocated to
reportable segments (goodwill amortization, interest expense and depreciation
expense related to the fair value adjustments made to the historical basis of
property, plant and equipment in the purchase price allocation), the adjustment
to record inventory at LIFO, the elimination of intercompany assets and
intercompany profit and a $39 million gain on the sale of Abitibi (See Note 5).
51
Purchase price allocation adjustments related to property, plant and equipment
have been pushed down to the applicable operating segment assets as of December
31, 1999 and 1998, with the exception of the International segment.
International valuation adjustments to property, plant and equipment are
included in Other.
A summary by business segment follows:
Container-
Board &
Corrugated Industrial Inter-
Containers Bags National Other Total
---------- ---- -------- ----- -----
Year ended December 31, 1999
- ----------------------------
Revenues from external customers...................... $3,245 $ 513 $ 581 $ 2 $4,341
Intersegment revenues................................. 153 153
Depreciation and amortization......................... 119 5 28 144 296
Segment profit (loss)................................. 301 31 28 (435) (75)
Segment assets........................................ 3,093 193 495 3,784 7,565
Expenditures for long-lived assets.................... 51 5 29 2 87
Period from November 19 to December 31, 1998
- --------------------------------------------
Revenues from external customers...................... $ 339 $ 57 $ 68 $ 1 $ 465
Intersegment revenues................................. 18 18
Depreciation and amortization......................... 15 1 3 15 34
Segment profit (loss)................................. 4 3 1 (60) (52)
Segment assets........................................ 4,355 217 562 3,659 8,793
Expenditures for long-lived assets.................... 13 1 8 22
Period from January 1 to November 18, 1998 -
- --------------------------------------------
Predecessor
- -----------
Revenues from external customers...................... $3,270 $456 $518 $10 $4,254
Intersegment revenues................................. 171 1 172
Depreciation and amortization......................... 153 5 25 56 239
Segment profit (loss)................................. 2 32 29 (900) (837)
Expenditures for long-lived assets.................... 109 6 30 145
Year ended December 31, 1997 - Predecessor
- ------------------------------------------
Revenues from external customers...................... $3,640 $491 $556 $9 $4,696
Intersegment revenues................................. 53 53
Depreciation and amortization......................... 189 5 31 77 302
Segment profit (loss)................................. (35) 31 27 (628) (605)
Segment assets........................................ 3,161 203 627 1,833 5,824
Expenditures for long-lived assets.................... 109 6 22 137
52
The following table presents net sales to external customers by country of
origin:
Predecessor
----------------------------------
Period from Period from
November 19 to January 1 to
December 31, November 18,
1999 1998 1998 1997
----------------------------------------------------------------------
United States............................. $3,555 $380 $3,555 $3,848
Canada.................................... 205 17 181 292
Europe and other.......................... 581 68 518 556
----------------------------------------------------------------------
Total $4,341 $465 $4,254 $4,696
----------------------------------------------------------------------
The following table presents long-lived assets by country at December 31:
Predecessor
-----------
1999 1998 1997
-----------------------------------------------------
United States.............................................. $2,594 $3,495 $1,751
Canada..................................................... 227 190 374
Europe and other........................................... 289 327 302
-----------------------------------------------------
3,110 4,012 2,427
Goodwill................................................... 3,123 2,643 444
-----------------------------------------------------
Total $6,233 $6,655 $2,871
-----------------------------------------------------
The Company's export sales from the United States were approximately $208
million for 1999, $448 million for 1998, and $548 million for 1997.
19. Subsequent Event
On February 23, 2000, SSCC, the Company and a newly-formed subsidiary of the
Company entered into a Pre-Merger Agreement with St. Laurent Paperboard Inc.
pursuant to which the Company will acquire St. Laurent for approximately $1.4
billion, consisting of approximately $625 million in cash, the issuance of
approximately 25 million shares of SSCC common stock and the assumption of
approximately $386 million of St. Laurent's debt. The Company expects to borrow
$1,050 million to finance the acquisition of St. Laurent. Consummation of the
transaction is expected to occur in the second quarter of 2000.
53
20. Summary of Quarterly Data (Unaudited)
The following table summarizes quarterly financial data for 1999 and 1998. Per
share information is for the Predecessor period only.
First Second Third Fourth
1999 Quarter Quarter Quarter Quarter
- -----------------------------------------------------------------------------------------------------------------
Net sales............................. $1,063 $1,043 $1,085 $1,150
Gross profit.......................... 96 132 163 195
Income (loss) before extraordinary
charges............................ (65) (12) (10) 12
Net income (loss)..................... (65) (13) (11) 12
Predecessor
---------------------------------------------------------------------
Period from Period from
October 1 to November 19 to
First Second Third November 18, December 31,
1998 Quarter Quarter Quarter 1998 1998
- -----------------------------------------------------------------------------------------------------------------
Net sales.................................... $1,226 $1,235 $1,178 $615 $465
Gross profit................................. 119 135 93 3 32
Loss before extraordinary charges............ (69) (157) (275) (248) (36)
Net loss..................................... (69) (157) (275) (248) (36)
Per share of common stock (basic and
diluted):
Loss before extraordinary charges............ (.71) (1.59) (2.66) (2.37)
54
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
---------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
--------------------------------------------------
Directors
Set forth below is information concerning the directors of the Company.
Ray M. Curran, born May 13, 1946, was named to succeed Roger W. Stone as
President and Chief Executive Officer of the Company as of April 1, 1999. He
was Executive Vice President and Deputy Chief Executive Officer from November
1998 until March 31, 1999. He was Financial Director of JS Group from February
1996 to November 1998 and prior to that served as Chief Financial Officer of JS
Group since 1992.
Patrick J. Moore, born September 7, 1954, has been Vice President and Chief
Financial Officer of the Company since October 1996. He was Vice President and
General Manager - Industrial Packaging Division from December 1994 to October
1996. He served as Vice President and Treasurer from February 1993 to December
1994 and was Treasurer from October 1990 to February 1993. He joined the
Company in 1987 as Assistant Treasurer. He is a director of First Financial
Planners, Inc.
Leslie T. Lederer, born July 20, 1948, has been Vice President - Strategic
Investment Dispositions since November 1998. He was Vice President, Secretary
and General Counsel of the Company from 1987 to November 1998.
David Gale, born February 22, 1959, has been President of Delta Dividend Group,
Inc. since 1992. He also serves as a director of Preferred Income Funds,
Preferred Income Opportunity Fund and Free Real Time.Com.
Mark A. Weissman, born February 14, 1961, has been Manager of Corporate Bond
Trading of Mariner Investment Group, Inc. since 1996. Prior to that, he was a
managing director with Bear, Stearns & Co., Inc. from 1988 to 1994, and was with
Cantor Fitzgerald & Co. form 1994 to 1996.
Executive Officers
Set forth below is information concerning the executive officers of the Company.
Ray M. Curran - See Directors.
Peter F. Dages, born December 13, 1950, was appointed Vice President and General
Manager - Corrugated Container Division in April 1999. Mr. Dages was Vice
President and Regional Manager of the Corrugated Container Division of the
Company from 1996 until April 1999. Prior to that, he held various managerial
positions in the Corrugated Container Division of the Company since 1991.
James D. Duncan, born June 12, 1941, has been Vice President and General Manager
- - Specialty Packaging Division since November 1998. Mr. Duncan was Vice
President and General Manager - Industrial Packaging Division from October 1996
to November 1998. He was Vice President and General Manager, Converting
Operations - Industrial Packaging Division from April 1994 to October 1996 and
served as General Manager, Converting Operations - Industrial Packaging Division
from February 1993 to April 1994. Prior to that, he was President and Chief
Executive Officer of Sequoia Pacific Systems, an affiliate of JS Group, which he
joined in August 1989.
55
Daniel J. Garand, born December 12, 1950, joined the Company in October 1999 as
Vice President of Supply Chain Operations. For three years prior to joining the
Company, Mr. Garand held senior level positions in global supply chain
management for AlliedSignal's Automotive Products Group. Prior to that, he was
employed by Digital Equipment Company for 26 years in a variety of management
positions in logistics, acquisitions and distribution.
Edwin Goffard, born October 30, 1963, joined the Company in May 1999 as Vice
President to develop the Company's synergy program. Prior to joining the
Company, Mr. Goffard was director of purchasing for Pepsi-Cola Company since
1996. Prior to that, he was a consultant for McKinsey & Company since 1989.
Michael F. Harrington, born August 6, 1940, has been Vice President - Employee
Relations since January 1992. Prior to joining the Company, he was Corporate
Director of Labor Relations/Safety and Health with Boise Cascade Corporation for
more than five years.
Charles A. Hinrichs, born December 3, 1953, has been Vice President and
Treasurer since April 1995. Prior to joining the Company, Mr. Hindrichs held
senior level positions at The Boatmen's National Bank of St. Louis for 13 years,
where most recently he was Senior Vice President and Chief Credit Officer.
Craig A. Hunt, born May 31, 1961, has been Vice President, Secretary and General
Counsel since November 1998. Prior to that he was Senior Counsel and Assistant
Secretary from January 1993 to November 1998. He joined the Company in 1990 as
Staff Counsel.
Paul K. Kaufmann, born May 11, 1954, has been Vice President and Corporate
Controller since July 1998. He was Corporate Controller from March 1998 to July
1998. Prior to that he was Division Controller for the Containerboard Mill
Division from November 1993 until March 1998. Prior to that, he held other
accounting positions since joining the Company in 1990.
Jay D. Lamb, born September 25, 1947, has been Vice President and General
Manager of SNC since May 1996. He was Director of Operations of SNC from May
1995 to May 1996. Prior to that, he held various accounting and managerial
positions with SNC since joining the Company in 1970.
Leslie T. Lederer - See Directors.
F. Scott Macfarlane, born January 17, 1946, has been Vice President and General
Manager - Folding Carton and Boxboard Mill Division since November 1995. He
served as Vice President and General Manager of the Folding Carton Division from
December 1993 to November 1995. Prior to that, he held various managerial
positions within the Folding Carton Division since joining the Company in 1971.
Timothy McKenna, born March 25, 1948, has been Vice President - Investor
Relations and Communications since July 1997. He joined the Company in October
1995 as Director of Investor Relations and Communications. Prior to joining the
Company, he was employed by Union Camp Corporation for 14 years, where most
recently he was Director of Investor Relations.
Patrick J. Moore - See Directors.
Mark R. O'Bryan, born January 15, 1963, joined the Company in October 1999 as
Vice President - Procurement. Prior to joining the Company, Mr. O'Bryan was
employed for 13 years at General Electric Corporation, where he held senior
level positions in global sourcing and materials management at several of
General Electric Corporation's manufacturing businesses.
56
Thomas A. Pagano, born January 21, 1947, has been Vice President - Planning
since May 1996. He was Director of Corporate Planning from September 1995 to
May 1996. Prior to that, Mr. Pagano held various managerial positions within
the Company's Container Division since joining the Company in 1971, including
Area Regional General Manager from January 1994 to September 1995.
John M. Riconosciuto, born September 4, 1952, has been Vice President and
General Manager - Bag Packaging Division since November 1998. He was Vice
President and General Manager - Industrial Bag and Specialty Packaging Division
of the Company from January 1997 to November 1998. From July 1995 to January
1997, he was Vice President and General Manager of the Multiwall Group of the
Company, and prior to that, Vice President of Marketing and Specialty Packaging
of the Industrial and Specialty Packaging Division of the Company since 1993.
David C. Stevens, born August 11, 1934, has been Vice President and General
Manager - Smurfit Recycling Company since January 1993. Prior to that, he was
General Sales Manager for the Reclamation Division since joining the Company in
1987.
William N. Wandmacher, born September 12, 1942, has been Vice President and
General Manager - Containerboard Mill Division since January 1993. He served as
Division Vice President - Medium Mills from October 1986 to January 1993. Prior
to that, he held various positions in production, plant management and planning
since joining the Company in 1966.
ITEM 11. EXECUTIVE COMPENSATION
----------------------
The information required in response to this item is set forth under the
captions "Executive Compensation" and "Report of the Compensation Committee on
Executive Compensation" in the Company Proxy Statement and is incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------
All of the outstanding Common Stock of the Company is owned by SSCC. Additional
information required in response to this item is set forth under the caption
"Principal Stockholders" in the Company's Proxy Statement and is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
The information required in response to this item is set forth under the caption
"Certain Transactions" in the Company's Proxy Statement and is incorporated
herein by reference.
57
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
---------------------------------------------------------------
(a) (1) and (2) The list of Financial Statements and Financial Statement
Schedules required by this item is included in Item 8.
(3) Exhibits.
3.1 Restated Certificate of Incorporation of the Company (incorporated by
reference to Exhibit 3(a) to the Company's Registration Statement on Form
S-1, Registration Number 33-54769).
3.2 Certificate of Amendment to the Restated Certificate of Incorporation of
the Company (incorporated by reference to Exhibit 6 to the Company's
Report on Form 8-A/A dated November 18, 1998).
3.3 Second Amended and Restated By-laws of the Company effective as of March
9, 1999 (incorporated by reference to Exhibit 3(c) to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1998).
Indentures with respect to other long-term debt, none of which exceeds 10
percent of the total assets of the Company and its subsidiaries on a
consolidated basis, are not filed herewith. The Registrant agrees to furnish a
copy of such documents to the Commission upon request.
4.1 Specimen certificate representing the $1.75 Series E Cumulative
Convertible Exchangeable Preferred Stock (incorporated by reference to
Exhibit 4(g) to the Company's Registration Statement on Form S-3,
Registration Number 33-45374).
4.2(a) Amended and Restated Credit Agreement dated as of November 18, 1998 among
the Company, the financial institutions signatory thereto and Bankers
Trust Company, as agent (incorporated by reference to Exhibit 15 to the
Company's Report on Form 8-A/A dated November 18, 1998).
4.2(b) First Amendment of Amended and Restated Credit Agreement dated as of
March 23, 1999, among the Company, the Financial Institutions signatory
thereto, and Bankers Trust Company, as agent (incorporated by reference
to Exhibit 4(b)(ii) to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1998).
4.2(c) Second Amendment of Amended and Restated Credit Agreement, dated as of
June 30, 1999, among the Company, the Financial Institutions signatory
thereto and Bankers Trust Company, as agent (incorporated by reference to
Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1999).
4.3 Indenture dated as of August 16, 1996 between Stone Container Finance
Company of Canada (the "Issuer"), the Company, as guarantor, and The Bank
of New York, as Trustee, relating to the Issuer's 11 1/2% Senior Notes
due 2006 (incorporated by reference to Exhibit 4(u) to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1996).
4.4 Indenture dated as of July 24, 1996 between the Company and The Bank of
New York, as Trustee, relating to the Rating Adjustable Senior Notes due
2016 (incorporated by reference to Exhibit 4.1 to the Company's
Registration Statement on Form S-4, Registration Number 333-12155).
58
4.5 First Supplemental Indenture dated July 24, 1996 between the Company and
The Bank of New York, as Trustee, relating to the Rating Adjustable
Senior Notes due 2016 (incorporated by reference to Exhibit 4.2 to the
Company's Registration Statement on Form S-4, Registration Number 333-
12155).
4.6 Indenture dated as of October 12, 1994 between the Company and Norwest
Bank Minnesota, N.A., as Trustee, relating to the 10 3/4 percent First
Mortgage Notes due October 1, 2002 (incorporated by reference to Exhibit
4(b) to the Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1994).
4.7 Indenture dated as of October 12, 1994 between the Company and The Bank
of New York, as Trustee, relating to the 11 1/2 percent Senior Notes due
October 1, 2004 (incorporated by reference to Exhibit 4(c) to the
Company's Quarterly Report on Form 10-Q for the quarter ended September
30, 1994).
4.8 Indenture dated as of February 15, 1992 between the Company and The Bank
of New York, as Trustee, relating to the Company's 6 3/4% Convertible
Subordinated Debentures due February 15, 2007 (incorporated by reference
to Exhibit 4(p) to the Company's Registration Statement on Form S-3,
Registration Number 33-45978).
4.9 First Supplemental Indenture dated as of November 18, 1998 among SSCC,
the Company and The Bank of New York, as Trustee, relating to the
Company's 6 3/4 percent Convertible Subordinated Debentures due February
15, 2007 (incorporated by reference to Exhibit 3 to the Company's Report
on Form 8-A/A dated November 18, 1998).
4.10 Senior Subordinated Indenture dated as of March 15, 1992 between the
Company and The Bank of New York, as Trustee (incorporated by reference
to Exhibit 4(a) to the Company's Registration Statement Form S-3,
Registration Number 33-46764).
4.11 First Supplemental Indenture dated as of May 28, 1997 between the
Company and The Bank of New York, as Trustee, relating to the Indenture
dated as of March 15, 1992 (incorporated by reference to Exhibit 4(l)(i)
to the Company's Current Report on Form 8-K dated May 28, 1997).
4.12 Indenture dated as of November 1, 1991 between the Company and The Bank
of New York, as Trustee, relating to the Company's Senior Debt Securities
(incorporated by reference to Exhibit 4(u) to the Company's Registration
Statement on Form S-3, Registration Number 33-45374).
4.13 First Supplemental Indenture dated as of June 23, 1993 between the
Company and The Bank of New York, as Trustee, relating to the Indenture
dated as of November 1, 1991 between the Company and The Bank of New
York, as Trustee (incorporated by reference to Exhibit 4(aa) to the
Company's Registration Statement on Form S-3, Registration Number 33-
66086).
4.14 Second Supplemental Indenture dated as of February 1, 1994 between the
Company and the Bank of New York, as Trustee, relating to the Indenture
dated as of November 1, 1991, as amended (incorporated by reference to
Exhibit 4.2 to the Company's Current Report on Form 8-K, dated January
24, 1994).
4.15 Guaranty dated October 7, 1983 between the Company and The Continental
Group, Inc. (incorporated by reference to Exhibit 4(h) to the Company's
Registration Statement on Form S-3, Registration Number 33-36218).
59
4.16 Amendment No. 1 to Guaranty, dated as of June 1, 1996, among
Continental Holdings, Inc., Continental Group, Inc. and the Company
(incorporated by reference to Exhibit 4(r) to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1996).
10.1* Stone Container Corporation Directors' Deferred Compensation Plan
(incorporated by reference to Exhibit 10(b) to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1997.
10.2* Stone Container Corporation 1982 Incentive Stock Option Plan
(incorporated by reference to Appendix A to the Prospectus included in
the Company's Form S-8 Registration Statement, Registration Number 2-
79221, effective September 27, 1982).
10.3(a)* Stone Container Corporation 1993 Stock Option Plan (incorporated by
reference to Appendix A to the Company's Proxy Statement dated as of
April 10, 1992).
10.3(b)* Amendment of the Stone 1993 Stock Option Plan (incorporated by
reference to Exhibit 10.2 to the Company's Quarterly Report on Form
10-Q for the Quarter ended September 30,1999).
10.4* Stone Container Corporation 1992 Long-Term Incentive Program
(incorporated by reference to Exhibit A to the Company's Proxy
Statement dated as of April 11, 1991).
10.5(a)* Stone Container Corporation 1995 Long-Term Incentive Plan
(incorporated by reference to Exhibit A to the Company's Proxy
Statement dated as of April 7, 1995).
10.5(b)* Amendment of the 1995 Long-Term Incentive Plan of Stone (incorporated
by reference to Exhibit 10.2 to the Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 1999).
10.6* JSC (U.S.) Management Incentive Plan (incorporated by reference to
Exhibit 10.10 to SSCC's Annual Report on Form 10-K for the fiscal year
ended December 31, 1995).
10.7(a)* SSCC 1998 Long Term Incentive Plan (incorporated by reference to
Exhibit 10.14 to SSCC's Annual Report on form 10-K for the fiscal year
ended December 31, 1998).
10.7(b)* First Amendment of the SSCC 1998 Long-Term Incentive Plan
(incorporated by reference to Exhibit 10.2 to SSCC's Quarterly Report
on Form 10-Q for the quarter ended September 30, 1999).
10.8(a) Pooling and Servicing Agreement, dated October 1, 1999 by and among
Stone Receivables Corporation, as Transferor, Stone, as Securer, and
The Chase Manhattan Bank, as Trustee (incorporated by reference to
Exhibit 10.1(a) to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1999).
10.8(b) Series 1999-1 Supplement, dated as of October 15, 1999, among Stone
Receivables Corporation, as Transferor, Stone as Servicer, and The
Chase Manhattan Bank, as Trustee, under the Pooling and Servicing
Agreement (incorporated by reference to Exhibit 10.1(b) to the
Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1999).
10.8(c) Series 1999-2 Supplement, dated as of October 15, 1999, among Stone
Receivables Corporation, as Transferor, Stone as Servicer, and The
Chase Manhattan Bank, as Trustee, under the Pooling and Servicing
Agreement (incorporated by reference to Exhibit 10.1(c) to the
Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1999).
60
10.8(d) Receivables Purchase Agreement, dated October 15, 1999, between Stone,
the Seller and Stone Receivables Corporation, the Purchaser
(incorporated by reference to Exhibit 10.1(d) to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1999).
10.9* Employment Agreement of Ray M. Curran (incorporated by reference to
Exhibit 10.27 to SSCC's Annual Report on Form 10-K for the fiscal year
ended December 31, 1999).
10.10* Employment Agreement of Patrick J. Moore (incorporated by reference to
Exhibit 10.28 to SSCC's Annual Report on Form 10-K for the fiscal year
ended December 31, 1999).
10.11 Pre-Merger agreement, dated as of February 23, 2000, among SSCC,
Stone, 3038727 Nova Scotia Company and St Laurent Paperboard Inc.
(incorporated by reference to Exhibit 99.2 to the Company's Current
Report on Form 8-K dated February 23, 2000).
16.1 Letter from PricewaterhouseCoopers LLP pursuant to Item 304 of
Regulation S-K (incorporated by reference to Exhibit 19 to the
Company's Current Report on Form 8-K dated November 18, 1998).
21.1 Subsidiaries of the Company.
24.1 Powers of Attorney.
27.1 Financial Data Schedule.
*Indicates a management contract or compensation plan or arrangement
(b) Report on Form 8-K.
There were no Form 8-K filings during the three months ended December 31, 1998.
Form 8-K dated February 23, 2000 was filed with the Securities and Exchange
Commission in connection with the agreement by the Company to acquire St.
Laurent Paperboard Inc. for approximately $1.4 billion.
61
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Date March 14, 2000 Stone Container Corporation
------------------------------------------
(Registrant)
BY /s/ Patrick J. Moore
------------------------------------------
Patrick J. Moore
Vice-President and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant in
the capacities and on the date indicated.
SIGNATURE TITLE DATE
--------- ----- ----
*
- -------------------------------------
Ray M. Curran President and Chief Executive Officer
and Director (Principal Executive Officer)
/s/ Patrick J. Moore Vice-President and Chief Financial March 14, 2000
- -------------------------------------
Patrick J. Moore Officer and Director (Principal Financial Officer)
/s/ Paul K. Kaufmann
- -------------------------------------
Paul K. Kaufmann Vice President and Corporate Controller March 14, 2000
(Principal Accounting Officer)
*
- -------------------------------------
David Gale Director
*
- -------------------------------------
Mark A. Weissman Director
* By /s/ Patrick J. Moore, Pursuant to Powers of Attorney filed as
-------------------------------
Patrick J. Moore a part of the Form 10-K
62
Report of Independent Accountants on
Financial Statement Schedule
To the Board of Directors of
Stone Container Corporation
Our audits of the consolidated financial statements referred to in our report
dated March 26,1998, appearing in the Annual Report on Form 10-K also included
an audit of the Financial Statement Schedule listed and appearing in Item 14(a)
of this Form 10-K. In our opinion, the Financial Statement Schedule presents
fairly, in all material respects, the information set forth therein for the year
ended December 31, 1997 when read in conjunction with the related consolidated
financial statements. We have not audited the consolidated financial statements
of Stone Container Corporation for any period subsequent to December 31, 1997.
/s/ PricewaterhouseCoopers LLP
- ------------------------------
PricewaterhouseCoopers LLP
Chicago, Illinois
March 26, 1998
63
STONE CONTAINER CORPORATION AND SUBSIDIARIES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(In millions)
Column A Column B Column C Column D Column E Column F
-------- -------- -------- -------- -------- --------
Additions
Balance at Charged to Balance at
beginning of Costs and end of
period Expenses Other Deductions period
Description ------ -------- ----- ---------- ------
- -----------
Allowance for doubtful accounts and
notes and sales returns and
allowances:
Year ended December 31, 1999.......... $ 61 $ $ (10)(a) $10 (b) $ 41
Period from November 19 to
December 31, 1998................... $ 61 $ $ $ $ 61
Predecessor
Period from January 1 to
November 18, 1998................. $ 14 $64 $ $17(b) $ 61
Year ended December 31, 1997.......... $ 10 $12 $ $ 8(b) $ 14
Exit liabilities:
Year ended December 31, 1999.......... $106 $ $106(c) $29(d) $183
Period from November 19 to
December 31, 1998................... $ $ $117(c) $11(d) $106
(a) Includes the effect of the accounts receivable securitization application
of SFAS No. 125.
(b) Uncollectible amounts written off, net of recoveries.
(c) Charges associated with exit activities and litigation settlements included
in the purchase price allocation.
(d) Charges against the exit liability reserves.
64