-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Nh1yt4jX/0eXR1EZ1BgyqtsJvlKsvEDAqM1w0okj3EX8FLQGCKh1zgBeLiFWUXEZ iSRMy24bc2QrxAfxkIz+oQ== 0000950117-99-001716.txt : 19990816 0000950117-99-001716.hdr.sgml : 19990816 ACCESSION NUMBER: 0000950117-99-001716 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990813 FILER: COMPANY DATA: COMPANY CONFORMED NAME: STONE CONTAINER CORP CENTRAL INDEX KEY: 0000094610 STANDARD INDUSTRIAL CLASSIFICATION: PAPERBOARD MILLS [2631] IRS NUMBER: 362041256 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-03439 FILM NUMBER: 99688319 BUSINESS ADDRESS: STREET 1: 150 N MICHIGAN AVE CITY: CHICAGO STATE: IL ZIP: 60601 BUSINESS PHONE: 3123466600 MAIL ADDRESS: STREET 1: 18TH FL, CORPORATE ACCOUNTING STREET 2: 150 N MICHIGAN AVE CITY: CHICAGO STATE: IL ZIP: 60601 10-Q 1 STONE CONTAINER CORPORATION UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For Quarter Ended June 30, 1999 Commission File Number 1-3439 STONE CONTAINER CORPORATION ----------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 36-2041256 - ------------------------------- --------------------------------- (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization)
150 North Michigan Avenue, Chicago, Illinois 60601 -------------------------------------------------------- (Address of principal executive offices) (Zip Code) (312) 346-6600 --------------------------------------------------- (Registrant's telephone number, including area code) Not Applicable -------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- APPLICABLE ONLY TO CORPORATE ISSUERS: All outstanding shares of the Registrant's common stock are owned by Smurfit-Stone Container Corporation. PART I - FINANCIAL INFORMATION Item 1. Financial Statements STONE CONTAINER CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Three Months Ended Six Months Ended June 30, June 30, ---------------------- --------------------- Predecessor Predecessor ---------------------- --------------------- (In millions, except per share data) 1999 1998 1999 1998 - ----------------------------------- ------ ------- ------- ------- Net sales . . . . . . . . . . . . . . . . . . . . . . . $1,043 $ 1,235 $ 2,106 $ 2,461 Costs and expenses Cost of goods sold. . . . . . . . . . . . . . . . . 911 1,100 1,878 2,207 Selling and administrative expenses . . . . . . . . 100 118 206 230 ------ ------- ------- ------- Income from operations. . . . . . . . . . . . . . 32 17 22 24 Other income (expense) Interest expense, net . . . . . . . . . . . . . . . (85) (117) (179) (231) Equity income (loss) of affiliates . . . . . . . . 2 (33) 5 (36) Other, net . . . . . . . . . . . . . . . . . . . . 44 (58) 51 (54) ------ ------- ------- ------- Loss before income taxes and extraordinary.item . . (7) (191) (101) (297) Benefit from (provision for) income taxes . . . . . . . (5) 34 24 71 ------ ------- ------- ------- Loss before extraordinary item. . . . . . . . . . . (12) (157) (77) (226) Extraordinary Item Loss from early extinguishment of debt, net of income tax benefit of $1. . . . . . . . . . . . . . . . . (1) (1) ------ ------- ------- ------- Net loss. . . . . . . . . . . . . . . . . . . . . (13) (157) (78) (226) Preferred stock dividends . . . . . . . . . . . . . . . (2) (2) (4) (4) ------ ------- ------- ------- Net loss applicable to common shares . . . . . . $ (15) $ (159) $ (82) $ (230) ====== ======= ======= ======= Basic earnings per common share Net loss applicable to common shares. . . . . . . $ $ (1.59) $ $ (2.30) ------ ------- ------- ------- Weighted average shares outstanding . . . . . . . . . . 100 100 ====== ======= ======= ======= Diluted earnings per common share Net loss applicable to common shares. . . . . . . $ $ (1.59) $ $ (2.30) ====== ======= ======= ======= Weighted average shares outstanding . . . . . . . . . . 100 100 ====== ======= ======= =======
See notes to consolidated financial statements. 1 STONE CONTAINER CORPORATION CONSOLIDATED BALANCE SHEETS
June 30, December 31, (In millions, except share data) 1999 1998 - -------------------------------- ----------- ------------ (Unaudited) Assets Current assets Cash and cash equivalents. . . . . . . . . . . . . . . . . $ 116 $ 137 Receivables, less allowances of $75 in 1999 and 1998 . . . 538 462 Inventories Work-in-process and finished goods . . . . . . . . . . . 136 123 Materials and supplies . . . . . . . . . . . . . . . . . 333 422 -------- -------- 469 545 Refundable income taxes. . . . . . . . . . . . . . . . . . 2 Deferred income taxes. . . . . . . . . . . . . . . . . . . 38 38 Prepaid expenses and other current assets . . . . . . . . 100 119 -------- -------- Total current assets . . . . . . . . . . . . . . . . 1,263 1,301 Net property, plant and equipment . . . . . . . . . . . . . . 3,861 3,997 Timberland, less timber depletion. . . . . . . . . . . . . . . 18 15 Goodwill, less accumulated amortization of $41 in 1999 and $8 in 1998 . . . . . . . . . . . . . . . . 2,621 2,643 Investment in equity of non-consolidated affiliates. . . . . . 177 632 Other assets . . . . . . . . . . . . . . . . . . . . . . . . . 195 205 -------- -------- $ 8,135 $ 8,793 ======== ======== Liabilities and Stockholders' Equity Current liabilities Current maturities of long-term debt . . . . . . . . . . . $358 $ 161 Accounts payable . . . . . . . . . . . . . . . . . . . . . 354 270 Accrued compensation and payroll taxes . . . . . . . . . . 134 106 Interest payable . . . . . . . . . . . . . . . . . . . . . 87 98 Other current liabilities . . . . . . . . . . . . . . . . 153 178 -------- -------- Total current liabilities . . . . . . . . . . . . . . 1,086 813 Long-term debt, less current maturities . . . . . . . . . . . 3,108 3,902 Other long-term liabilities. . . . . . . . . . . . . . . . . . 720 734 Deferred income taxes . . . . . . . . . . . . . . . . . . . . 718 754 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). . . . . . . . . . . . . . . . (114) (36) Accumulated other comprehensive income (loss). . . . . . . (6) 3 --------- -------- Total stockholders' equity. . . . . . . . . . . . . . 2,503 2,590 ========= ======== $ 8,135 $ 8,793 ========= ========
See notes to consolidated financial statements. 2 STONE CONTAINER CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Predecessor ------------ Six Months Ended June 30, (In millions) 1999 1998 - --------------------------------------- -------- ------------ Cash flows from operating activities Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(78) $(226) Adjustments to reconcile net loss to net cash provided by (used for) operating activities: Extraordinary loss from early extinguishment of debt. . . . . . . 2 Depreciation and amortization . . . . . . . . . . . . . . . . . . 152 136 Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . (38) (83) Non-cash employee benefit expense . . . . . . . . . . . . . . . . 3 20 Foreign currency transaction (gains) losses . . . . . . . . . . . (6) 9 Equity (income) loss of affiliates. . . . . . . . . . . . . . . . (5) 36 Change in current assets and liabilities, net of effects from acquisitions and dispositions Receivables . . . . . . . . . . . . . . . . . . . . . . . . (97) 2 Inventories. . . . . . . . . . . . . . . . . . . . . . . . . 61 (17) Prepaid expenses and other current assets. . . . . . . . . . (2) (16) Accounts payable and other current liabilities . . . . . . . 111 (5) Interest payable . . . . . . . . . . . . . . . . . . . . . . (12) 5 Income taxes . . . . . . . . . . . . . . . . . . . . . . . . (3) (4) Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . (46) 66 ----- ----- Net cash provided by (used for) operating activities . . . . . . . 42 (77) ----- ----- Cash flows from investing activities Property additions . . . . . . . . . . . . . . . . . . . . . . . . (36) (68) Investments in and advances to affiliates, net . . . . . . . . . . (48) Proceeds from sales of assets and investments . . . . . . . . . . . 544 2 Other, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 ----- ----- Net cash provided by (used for) investing activities. . . . . . . . 508 (106) ----- ----- Cash flows from financing activities Borrowings under bank credit facility . . . . . . . . . . . . . . . 244 Payments of debt . . . . . . . . . . . . . . . . . . . . . . . . . (574) (65) Proceeds from issuance of common stock . . . . . . . . . . . . . . 2 ----- ----- Net cash provided by (used for) financing activities. . . . . . . . (574) 181 ----- ----- Effect of exchange rate changes on cash . . . . . . . . . . . . . . . . 3 (1) ----- ----- Decrease in cash and cash equivalents . . . . . . . . . . . . . . . . . (21) (3) Cash and cash equivalents Beginning of period . . . . . . . . . . . . . . . . . . . . . . . . 137 113 ----- ----- End of period . . . . . . . . . . . . . . . . . . . . . . . . . . . $116 $110 ===== =====
See notes to consolidated financial statements. 3 STONE CONTAINER CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Tabular amounts in millions, except per share data) 1. SIGNIFICANT ACCOUNTING POLICIES The accompanying consolidated financial statements and notes thereto, of Stone Container Corporation ("Stone" or the "Company") have been prepared in accordance with the instructions to Form 10-Q and reflect all adjustments which management believes necessary (which include only normal recurring accruals) to present fairly the financial position, results of operations and cash flows. These statements, however, do not include all information and footnotes necessary for a complete presentation of financial position, results of operations and cash flows in conformity with generally accepted accounting principles. Interim results may not necessarily be indicative of results which may be expected for any other interim period or for the year as a whole. These financial statements should be read in conjunction with the audited consolidated financial statements and footnotes included in the Company's Annual Report on Form 10-K for the year ended December 31, 1998, filed March 31, 1999, with the Securities Exchange Commission. 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, were pushed down and are reflected in the financial statements for the current year. The financial statements for periods ended June 30, 1998, were prepared using Stone's historical basis of accounting and are designated as "Predecessor". The comparability of operating results for the Predecessor period is affected by the purchase accounting adjustments. 2. RECLASSIFICATIONS Certain prior year amounts have been reclassified to conform with the current year presentation. 3. MERGER AND RESTRUCTURING 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 and are subject to adjustment when additional information concerning asset and liability valuations is finalized. In addition, the allocation may be impacted by changes in pre-acquisition contingencies, identified during the allocation period by the Company, relating to its investment in Florida Coast Paper Company L.L.C. The litigation related to Stone's purchase of the common stock of Stone Savannah River Pulp and Paper Corporation was settled in July 1999 for a cash payment of $30.6 million. Existing purchase accounting reserves will be adjusted to reflect the settlement. 4. OTHER, NET On January 21, 1999, the Company sold 16% (approximately 7.8 million shares) of its interest in Abitibi-Consolidated Inc., a Canadian-based manufacturer and marketer of publication paper ("Abitibi") for approximately $80 million. On April 23, 1999, the Company sold its remaining interest (approximately 41 million shares) to an outside third party for net proceeds of approximately $414 million. The proceeds have been applied to debt reduction. The Company recorded a $39 million gain during the second quarter of 1999. 4 On July 23, 1998, Stone Venepal (Celgar) Pulp, Inc. ("SVCPI"), a non-consolidated Canadian affiliate of the Company, filed for bankruptcy protection. The Company and its partners, after evaluating SVCPI's losses and cash flow under current market conditions, decided to end their relationship with SVCPI. As a result, the Company recorded a one-time write-off of $54 million during the second quarter of 1998. The lenders to SVCPI and any other SVCPI creditors do not have recourse against the Company. 5. NON-CONSOLIDATED AFFILIATES The Company has several non-consolidated affiliates that are engaged in paper and packaging operations in North America, South America, Europe and Asia. Investments in majority-owned affiliates where control does not exist and non majority-owned affiliates are accounted for under the equity method. The Company's significant non-consolidated affiliate at June 30, 1999, is Smurfit-MBI (formerly MacMillan Bathurst, Inc.), a Canadian corrugated container company, in which the Company owns a 50% interest, that had net sales of $98 million and $95 million for the three months, and $182 million and $177 million for the six months ended June 30, 1999 and 1998, respectively. Combined summarized financial information for all of the Company's non-consolidated affiliates that are accounted for under the equity method of accounting is presented below:
Three Months Ended Six Months Ended June 30, June 30, --------------------- ------------------ 1999 1998 1999 1998 -------- --------- ------- -------- Results of operations (a) Net sales.......................................$ 213 $ 1,062 $ 1,022 $ 2,112 Cost of sales.................................... 173 815 827 1,641 Income (loss) before income taxes, minority interest and extraordinary charges............. 1 (107) (65) (57) Net income (loss)................................ 1 (84) (49) (57)
(a) Includes results of operations for each of the Company's affiliates for the period it was accounted for under the equity method. 6. COMPREHENSIVE INCOME (LOSS) Comprehensive income (loss) is as follows:
Three Months Ended Six Months Ended June 30, June 30, ---------------------- ----------------- Predecessor Predecessor 1999 1998 1999 1998 ------ ------- ------ ------ Net loss . . . . . . . . . . . . . . . . . . . . $ (13) $(157) $ (78) $ (226) Other comprehensive income (loss), net of tax: Foreign currency translation . . . . . . . . 2 (44) (9) (41) ----- ------ ----- ------ Comprehensive loss. . . . . . . . . . . . . . . $ (11) $(201) $ (87) $ (267) ===== ===== ===== ======
5 7. 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 period:
Three Months Ended Six Months Ended June 30, 1998 June 30, 1998 ------------------ ---------------- NUMERATOR: Loss from operations................................... $ (157) $ (226) Less: Preferred stock dividends....................... (2) (4) ------ -------- Loss applicable to common stockholders................. $ (159) $ (230) ======= ======== DENOMINATOR: Denominator for basic earnings per share - weighted average shares.............................. 100 100 Denominator for diluted earnings per share - adjusted weighted average shares..................... 100 100 Basic earnings (loss) per share.......................... $ (1.59) $ (2.30) ======== ======== Diluted earnings (loss) per share........................ $ (1.59) $ (2.30) ======== ========
For the three and six month periods ended June 30, 1998, (1) convertible debt to acquire six million shares of common stock with an earnings effect of $1 million and $3 million, respectively, (2) exchangeable preferred stock to acquire three million shares of common stock with an earnings effect of $2 million and $4 million, respectively, and (3) options and warrants effects of .9 million shares and .4 million shares, respectively, are excluded from the diluted earnings per share computation because they are antidilutive. 8. BUSINESS SEGMENT INFORMATION The Company has three reportable segments: (1), Containerboard and Corrugated Containers, (2) Industrial Bags, and (3) International. The Containerboard and Corrugated Containers segment is highly integrated. It includes a system of mills and plants that produces a full line of containerboard that is converted into corrugated containers. Corrugated containers are used to transport such diverse products as home appliances, electric motors, small machinery, grocery products, produce, books, tobacco and furniture. The Industrial Bag segment converts kraft and specialty paper into multi-wall bags, consumer bags and intermediate bulk containers. These bags and containers are designed to ship and protect a wide range of industrial and consumer products including fertilizers, chemicals, concrete and pet and food products. The international segment is primarily composed of the Company's containerboard mills and corrugating facilities located in Europe and Central and South America. Other includes corporate related items which include income and expense not allocated to reportable segments, goodwill amortization, interest expense, the adjustment to record inventory at LIFO, and the elimination of intercompany profit. 6 A summary by business segment follows:
Container- Board & Corrugated Industrial Inter- Containers Bags National Other Total ------------- ------------- ------------- ------------- ------------- Three Months Ended June 30, 1999 ---- Revenues from external customers...................$ 778 $ 126 $ 139 $ $ 1,043 Intersegment revenues........... 39 39 Segment profit (loss)........... 45 7 6 (65) (7) Predecessor 1998 ---- Revenues from external customers...................$ 963 $ 123 $ 145 $ 4 $ 1,235 Intersegment revenues........... 49 49 Segment profit (loss)........... 32 9 7 (239) (191) Six Months Ended June 30, 1999 ---- Revenues from external customers...................$ 1,552 $ 257 $ 295 $ 2 $ 2,106 Intersegment revenues.......... 77 77 Segment profit (loss).......... 76 16 15 (208) (101) Predecessor 1998 ---- Revenues from external Customers...................$ 1,920 $ 246 $ 289 $ 6 $ 2,461 Intersegment revenues.......... 100 100 Segment profit (loss).......... 49 18 16 (380) (297)
9. 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. The Company faces potential liability for response costs at various sites with respect to which the Company has received notice that it may be a potentially responsible party ("PRP"), as well as contamination of certain Company-owned properties, 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. In determining the liability, the estimate takes into consideration the number of other PRP's at each site, the identity and financial condition of such parties and experience regarding similar matters. In April 1998, a suit was filed against Stone in Los Angeles Superior Court by Chesterfield Investments L.P. ("Chesterfield"), and D.P. Investments L.P. ("DPI"), alleging that Stone owes such parties approximately $120 million relating to Stone's purchase of common stock of Stone Savannah River Pulp and Paper Corporation ("SSR"). In 1991, Stone purchased the shares of common stock of SSR held by Chesterfield and DPI for approximately $6 million plus a contingent payment payable in March 1998 based upon the post-closing performance of the operations of SSR from 1991 through 1997. Stone concluded a settlement of the case with DPI, which had a 30% interest in the contingent payment, in 1998. Chesterfield continued to pursue the case as to the remaining 70% of the contingent payment, which was settled in July 1999 for a 7 cash payment of $30.6 million. Existing purchase accounting reserves will be adjusted to reflect the settlement. Stone is 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 Stone and Four M. The OPA requires that Stone 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 requires Stone 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. On April 2, 1999, FCPC and three related companies filed a Chapter 11 bankruptcy petition in United States Bankruptcy Court in Wilmington, Delaware. All of the obligations of FCPC and the related entities are non-recourse to the Company, and the bankruptcy filing has no effect on any of the indebtedness of the Company or any other subsidiaries of SSCC. On May 10, 1999, the Indenture Trustee with respect to the first mortgage notes of FCPC (the "FCPC Notes") commenced an adversary proceeding in the FCPC bankruptcy case against the Company and certain other parties, including two former officers of the Company, which has been stayed indefinitely by the Court. The complaint contains allegations that the Company violated the provisions of the OPA and a subordinated credit agreement with FCPC, breached certain fiduciary duties owed to the holders of the FCPC Notes, and negligently discharged certain additional duties owed to the holders of the FCPC Notes. While the Company believes that such allegations are without merit, it is unable to predict the likely outcome of this action or its impact on the FCPC bankruptcy proceeding at this time. 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. 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS RESULTS OF OPERATIONS As discussed in the Company's Annual Report filed on Form 10-K for the year ended December 31, 1998 (the "Stone 1998 10-K"), a wholly-owned subsidiary of SSCC merged with the Company as of November 18, 1998 and the Company became a wholly-owned subsidiary of SSCC. The comparability of operating results for the Predecessor period and the period encompassing push down accounting are affected by the purchase accounting adjustments.
(In millions) Three Months Ended Six Months Ended Ended June 30, June 30, ------------------- ----------------- 1999 1998 1999 1998 -------- -------- ------- ------- Net sales Containerboard and corrugated containers......... $ 778 $ 963 $ 1,552 $ 1,920 Industrial bag................................... 126 123 257 246 International.................................... 139 145 295 289 Other operations................................. 4 2 6 -------- -------- -------- -------- Total ........................................... $ 1,043 $ 1,235 $ 2,106 $ 2,461 ======== ======== ======== ======== Profit (loss) Containerboard and corrugated containers......... $ 45 $ 32 $ 76 $ 49 Industrial bag................................... 7 9 16 18 International ................................... 6 7 15 16 Other operations................................. 1 (1) 1 -------- -------- -------- -------- Total operations................................. $ 58 $ 49 $ 106 $ 84 Other, net....................................... (65) (240) (207) (381) --------- --------- --------- -------- Income (loss) from continuing operations before income taxes, extraordinary item and cumulative effect of accounting change.... $ (7) $ (191) $ (101) $ (297) ========= ========= ========= ========
For the three months ended June 30, 1999, net sales for the Company were $1,043 million, a decrease of 16% compared to the same period last year. As shown in the chart below, the decrease in net sales compared to last year was due to lower average sales prices for the Company's primary products, lower sales volume and the closure or sale of operating facilities. Operating profits of $58 million for the three months ended June 30, 1999 were $9 million higher than the comparable period last year. The effect of the lower sales prices on operating profits were offset by a number of factors, including lower fiber and board costs, reduced mill downtime and other improvements in operating performance of the Company's paper mills. Other, net includes corporate revenues and expenses and net interest expense. Other, net cost for the three months ended June 30, 1999 was lower than last year by $175 million due primarily to lower interest cost, reduction in administrative costs, a $39 million gain on the sale of the shares of Abitibi, an improvement in equity earnings of affiliates and a $54 million write-off in 1998 of the Company's interest in Stone Venepal (Celgar) Pulp, Inc. ("SVCPI"). Increases in LIFO expense, depreciation and amortization charges partially offset the improvements in Other, net cost. For the six months ended June 30, 1999, net sales for the Company were $2,106 million, a decrease of 14% compared to the same period last year. As shown in the chart below, the decrease in net sales compared to last year was due to lower average sales prices for the Company's primary products, lower sales volume and the closure or sale of operating facilities. Operating profits of $106 million for the six months ended June 30, 1999 were $22 million higher than the comparable period last year. The effect of the lower sales prices on operating profits were offset by a number of factors, including lower fiber and board costs, reduced mill downtime and other improvements in operating performance of the Company's paper mills. Other, net cost for the six months ended June 30, 1999 was lower than last year by $174 million due 9 primarily to lower interest cost, reduction in administrative costs, the gain on sale of the shares of Abitibi, an improvement in equity earnings of affiliates and the write-off of SVCPI. Increases in LIFO expense, depreciation and amortization charges partially offset the improvements in Other, net cost.
(In millions) Container- board & Increase (Decrease) Corrugated Industrial Inter- Other in Net Sales Due to: Containers Bag national Operations Total - ------------------- ---------- ---------- --------- ---------- ----- Three Months Ended June 30, 1999 Compared to 1998 - ------------------------------------------------- Sales price and product mix........ $ 1 $ 3 $ (10) $ (1) $ (7) Sales volume....................... (106) 11 (95) Closed or sold facilities.......... (80) (7) (3) (90) ----- ------ ------ ----- ---- Total increase (decrease)....... $ (185) $ 3 $ (6) $ (4) $ (192) ===== ====== ====== ===== ==== Six Months Ended June 30, 1999 Compared to 1998 - ----------------------------------------------- Sales price and product mix........ $ (76) $ 7 $ (4) $ (1) $ (74) Sales volume....................... (136) 4 18 (114) Closed or sold facilities.......... (156) (8) (3) (167) ---- ------ ----- ---- ---- Total increase (decrease)....... $ (368) $ 11 $ 6 $ (4) $ (355) ==== ====== ===== ==== ====
Containerboard and Corrugated Containers Segment - ------------------------------------------------ Net sales of $778 million for the three months ended June 30, 1999 decreased 19% compared to last year and profits increased by $13 million to $45 million. The decline in net sales was due primarily to the permanent closure of linerboard and pulp operations in December 1998 and the sale of the Company's newsprint operation located in Snowflake, AZ (the "Snowflake Mill") in October 1998. As a result of the mill closures, the Company's other paper mills were able to perform at higher operating rates, thereby improving their operating performance. Profits were also favorably impacted by lower board cost and improving sales prices for corrugated containers. Fiber cost began to move higher near the end of the second quarter of 1999, but was lower compared to last year. Cost of goods sold as a percent of net sales decreased to 86% for the three months ended June 30, 1999 compared to 89% for the same period last year due primarily to the shutdown of high cost mill operations and reduced downtime. Market conditions in the containerboard industry have improved in 1999 and, during the first quarter of 1999, the Company implemented price increases of $50 and $60 per ton for linerboard and medium, respectively. A second price increase was implemented in July, 1999 amounting to $40 per ton for liner and $70 per ton for medium, with a corresponding increase for corrugated containers effective August 1. On average, prices for linerboard and corrugated containers in the second quarter of 1999 were comparable to last year. Containerboard shipments for the second quarter of 1999 decreased 34% compared to last year due to the mill closures. Shipments of corrugated containers during the second quarter of 1999 declined approximately 1% compared to last year due in part to the closure of container plants. The average prices of kraft paper and pulp in the second quarter of 1999 increased 7% and 2%, respectively, compared to last year. Sales volumes for kraft and pulp declined 4% and 20%, respectively, compared to last year. The sales volume decrease for pulp was due primarily to mill closures. The Company's sales of wood products also declined compared to last year. Net sales of $1,552 million for the six months ended June 30, 1999 decreased 19% compared to last year and profits increased by $27 million to $76 million. The decline in net sales was due to lower average sales prices, lower sales volume for containerboard and the permanent closures mentioned above. Profits 10 improved due primarily to the improvement in performance of the Company's paper mills and lower external sales of containerboard. Fiber cost in 1999 declined compared to last year. Cost of goods sold as a percent of net sales decreased to 85% for the six months ended June 30, 1999 compared to 90% for the same period last year due primarily to the shutdown of high cost mill operations and reduced downtime. Linerboard prices for the year to date period were lower than last year by 4% and the average price of corrugated containers was lower by 4%. Containerboard shipments for the six months ended June 30, 1999, decreased 30% compared to last year due to the mill closures and shipments of corrugated containers increased approximately 2% compared to last year. The average prices of kraft paper and pulp for the six months ended June 30, 1999 decreased 5% and 4%, respectively, compared to last year. Sales volumes for kraft and pulp declined 1% and 13%, respectively, compared to last year. The sales volume decrease for pulp was due primarily to the mill closures. Industrial Bag Segment Net sales for the three months ended June 30, 1999 were $126 million, an increase of 2%, compared to last year and profit decreased $2 million to $7 million. The increase in net sales was due to higher average sales price and product mix. Cost of goods sold as a percent of net sales increased to 89% for the three months ended June 30, 1999 compared to 88% for the same period last year. Net sales for the six months ended June 30, 1999 were $257 million, an increase of 4%, compared to last year and profit decreased $2 million to $16 million. The increase in net sales was due to higher average sales price and product mix and higher sales volume. Cost of goods sold as a percent of net sales increased to 89% for the six months ended June 30, 1999 compared to 88% for the same period last year. International Segment Net sales for the three months ended June 30, 1999 were $139 million, a decrease of 4%, compared to last year and profit decreased $1 million to $6 million. The decrease in net sales was due to lower average sales prices and the sale of the Company's corrugated operations located in Australia. Exclusive of the Australia operations, shipments of corrugated containers increased 13% compared to the second quarter of last year. Cost of goods sold as a percent of net sales for the three months ended June 30, 1999 was 86%, unchanged from last year. Net sales for the six months ended June 30, 1999 were $295 million, an increase of 2%, compared to last year and profit decreased $1 million to $15 million. The increase in net sales was due to higher sales volume, which was partially offset by lower average sales prices and the sale of the Australia operations. Exclusive of the Australia operations, shipments of corrugated containers increased 8% compared to the first half of last year. Cost of goods sold as a percent of net sales decreased to 85% for the six months ended June 30, 1999 compared to 86% for the same period last year. Costs and Expenses The decreases in costs and expenses compared to last year in the Company's Consolidated Statements of Operations resulted from the shutdown of certain containerboard mill capacity, the sale of the Snowflake Mill, lower fiber costs and reduced overhead costs. Such decreases were partially offset by higher LIFO expense and higher depreciation and amortization charges encompassing push down accounting adjustments related to the Merger. The decreases in the Company's overall cost of goods sold as a percent of net sales for the three months ended June 30, from 89% in 1998 to 87% in 1999, and for the six months ended June 30 from 90% in 1998 to 89% in 1999, were due primarily to the shutdown of high cost mill operations and reductions in mill downtime. Selling and administrative expenses as a percent of net sales for the three months ended June 30, were 10% in each year, and for the six months ended June 30, increased from 9% in 1998 to 10% in 1999 due primarily to lower sales prices in 1999. 11 Interest expense for the three months and six months ended June 30, 1999 were lower than 1998 by $32 million and $52 million, respectively, due primarily to lower average debt levels outstanding and lower average interest rates in 1999 compared to 1998. The Company's share of earnings from affiliates reported under the equity method of accounting was $2 million for the three months ended June 30, 1999 compared to a loss of $33 million last year and for the six months ended June 30, 1999 equity earnings were $5 million compared to a loss of $36 million last year. In each case, the improvement was due to elimination of losses related to certain investments that were divested during 1998. Other income and expense, net for the three months and six months ended June 30, 1999 include a $39 million gain on the sale of Abitibi and foreign exchange gains of $6 million as compared to the same periods in 1998 which included a $54 million write-off of the Company's interest in SVCPI and foreign exchange losses of $8 million. The Company recorded an income tax benefit of $24 million on a pretax loss of $101 million for the six months ended June 30, 1999. The effective tax rate for the period differed from the Federal statutory tax rate due to several factors, the most significant of which were state income taxes and the effect of permanent differences from applying purchase accounting. RESTRUCTURING As explained in the Stone 1998 10-K, in connection with the Merger, certain operations of SSCC were restructured. The preliminary allocation of the cost to acquire the Company included an adjustment to fair value of property, plant and equipment associated with the permanent shutdown of certain facilities owned by the Company in 1998, liabilities for the termination of employees and liabilities for long-term commitments. Such exit liabilities amounted to $117 million, including (1) facility closure costs of $9 million, (2) severance related costs of $14 million, (3) lease commitments of $38 million and (4) other commitments of $56 million. The Company is continuing to evaluate all areas of its business in connection with its Merger integration, including the identification of corrugated container facilities that might be closed. In this regard, the Company has discontinued operations at two of its corrugated container facilities. As part of the Company's evaluation, exit liabilities have been increased by $4 million for the plant closures. Further adjustments to the cost to acquire the Company are expected in 1999 as management finalizes its plans. To date, through June 30, 1999, approximately $30 million (25%) of the exit liabilities were incurred, the majority of which related to severance and other commitments. The remaining cash expenditures will continue to be funded through operations, approximately 42% of which will be paid by the end of 1999, as originally planned. STATISTICAL DATA
(In thousands of tons, except as noted) Three Months Ended Six Months Ended June 30, June 30, ------------------ ----------------- 1998 1999 1998 1999 ------ ------ ------- ------ Mill production: Containerboard......................... 1,059 1,162 2,152 2,319 Kraft paper............................ 115 104 228 213 Market pulp............................ 145 279 292 472 Corrugated shipments (billion sq. ft.).... 15.7 15.8 31.0 30.9 Industrial bag shipments.................. 127 127 257 247
12 LIQUIDITY AND CAPITAL RESOURCES Net cash provided by operating activities for the six months ended June 30, 1999 of $42 million, proceeds from the sale of assets of $544 million and available cash of $21 million were used to fund property additions of $36 million and net debt payments of $574 million. The Company intends to sell or liquidate certain of its non-core businesses. On January 21, 1999, the Company sold 7.8 million shares of its interest in Abitibi for approximately $80 million, and on April 23, 1999, the Company sold its remaining interest in Abitibi for approximately $414 million and recorded a $39 million gain during the second quarter. Proceeds were applied to reduce the Company's debt. The proceeds were sufficient to prepay the entire outstanding balance of the Tranche B term loan and, in accordance with the Credit Agreement (as defined below), the revolving credit maturity date was extended from April 30, 2000 to December 31, 2000. The Company has a $210 million accounts receivable securitization program (the "Securitization Program") whereby certain trade accounts receivable are sold to Stone Receivables Corporation, a wholly owned, bankruptcy remote, limited purpose subsidiary. The accounts receivable purchases are financed through the issuance of $210 million in term loans with a final maturity of December 15, 2000. In December 1999, the Securitization Program will discontinue the purchase of additional trade accounts receivable and convert to a repayment program in March of 2000. Therefore, the $210 million Securitization Program is classified as a current maturity of long term debt. It is the Company's intention to refinance the Securitization Program in 1999 on terms and conditions similar to the existing program. The Company's bank credit agreement (the "Credit Agreement") 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 equity securities or incurrence of certain indebtedness. Any prepayments are allocated against the term loan amortization in inverse order of maturity. The obligations under the Credit Agreements are secured by a security interest in substantially all of the assets of the Company. 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. On January 22, 1999, the Company obtained a waiver from its bank group for non-compliance with 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 further ease certain quarterly financial covenant requirements for 1999. As mentioned above, the declaration of dividends by the Board of Directors is subject to, among other things, certain restrictive provisions contained in the Credit Agreement and certain note indentures. At June 30, 1999, the Company had accumulated dividend arrearages of $18 million related to its preferred stock. Based upon covenants in the Stone 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 minimum equity levels exceeding the minimum on December 31, 1998. 13 At June 30, 1999, the Company had $538 million of unused borrowing capacity under its Credit Agreement and $50 million of unused borrowing capacity under the Securitization Program. The Company believes that cash provided by operating activities, proceeds from asset divestitures and existing financing resources will be sufficient for the next several years to meet its obligations, including debt service and capital expenditures. YEAR 2000 The Year 2000 problem concerns the inability of computer systems and devices to properly recognize and process date-sensitive information when the year changes to 2000. The Company depends upon its information technology ("IT") and non-IT systems (used to run manufacturing equipment that contain embedded hardware or software that must handle dates) to conduct and manage the Company's business. The Company believes that, by replacing, repairing or upgrading the systems, the Year 2000 issue can be resolved without material operational difficulties. While it is difficult, at present, to fully quantify the overall cost of this work, the Company expects to spend approximately $11 million through 1999 to correct the Year 2000 problem, of which approximately $7 million has been incurred through June 30, 1999. A large portion of these costs relate to enhancements that will enable the Company to reduce or avoid costs and operate many of its production facilities more efficiently. Some of these projects have been accelerated in order to replace existing systems that cannot be brought into compliance by the year 2000. The Company has utilized both internal and external resources to evaluate the potential impact of the Year 2000 problem. The Company is funding its Year 2000 effort with cash from operations and borrowings under the Credit Agreements. The Company's Year 2000 Program Management Office is responsible for guiding and coordinating operating units in developing and executing their Year 2000 plans, enabling the Company to share knowledge and work across operating units, developing standard planning and formats for internal and external reporting, consistent customer and vendor communications and where appropriate, the development of contingency plans. The Company's Year 2000 program consists of the following seven phases: Phase 1: Planning/Awareness: The planning and awareness phase includes the identification of critical business processes and components. Phase 2: Inventory: During the inventory phase, Company personnel identified systems that could potentially have a Year 2000 problem and categorized the system as compliant, non-compliant, obsolete or unknown. Phase 3: Triage: In the triage phase, every system is assigned a business risk as high, medium, or low. Phase 4: Detailed Assessment: The detailed assessment provides for a planned schedule of remediation and estimated cost. Phase 5: Remediation: Remediation involves what corrective action to take if there is a Year 2000 problem, such as replacing, repairing or upgrading the system, and concludes with the execution of system test. Phase 6: Fallout: In the Fallout phase, the inventory will be kept up to date and no new Year 2000 problems will be introduced. Phase 7: Contingency Planning: The Company is developing contingency plans for the most reasonable worst case scenarios. The Company has completed the planning, inventory, triage, and detailed assessment of its IT systems and is taking corrective action and testing the new, upgraded or repaired systems. The Company identified two 14 high-risk IT systems, which are scheduled to be substantially completed by the end of the third quarter of 1999. The Company's operating facilities rely on control systems, which control and monitor production, power, emissions and safety. The inventory, triage and detailed assessment phases for all operating facilities were complete as of the end of the second quarter of 1999. The Company had retained a third party to assist with the verification and validation of these three phases. The Company expects to have substantially completed all phases of its Year 2000 program, for non-IT systems, by the end of the third quarter of 1999. At the end of the second quarter of 1999, 92% of the total inventoried systems were compliant. The Year 2000 Program Management Office has compiled a list of mission critical vendors. A mission critical vendor is a provider of goods or services without which a facility could not function. Each of the mission critical vendors was surveyed to insure that they are Year 2000 compliant or have a plan in place. Additional evaluation of those vendors, whose failure would have a substantial impact and/or have provided an inadequate response, is ongoing. This process is anticipated to be substantially complete by the end of the third quarter of 1999. The Company currently believes that it will be able to replace, repair or upgrade all of its IT and non-IT systems affected by the Year 2000 problem on a timely basis. In the event the Company does not complete its plan to bring systems into compliance before the year 2000, there could be severe disruption in the operation of its process control and other manufacturing systems, financial systems and administrative systems. Production problems and delayed product deliveries could result in a loss of customers. The production impact of a Year 2000 related failure varies significantly among the facilities and any such failure could cause manufacturing delays, possible environmental contamination or safety hazards. The most reasonably likely worst case scenario is the occurrence of a Year 2000 related failure at one or more of the Company's paper mills which, could include multiple paper machines. The Company has the capability to produce and ship products from multiple geographic locations should disruptions occur. Delays in invoicing customer shipments could cause a slowdown in cash receipts, which could affect the Company's ability to meet its financial obligations. To the extent customers experience Year 2000 problems that are not remediated on a timely basis, the Company may experience material fluctuations in the demand for its products. The amount of any potential liability and/or lost revenue cannot be reasonably estimated at this time; however, such amounts could be material. While the Company currently expects no material adverse consequences on its financial condition or results of operations due to Year 2000 issues, the Company's beliefs and expectations are based on certain assumptions that ultimately may prove to be inaccurate. Each of the Company's operating facilities is developing a specific contingency plan for their most reasonably likely worst case scenarios. These plans should be substantially complete by the end of the third quarter of 1999. The Company will also seek to take appropriate actions to mitigate the effects of the Company's or significant vendors' failure to remediate the Year 2000 problem in a timely manner, including increasing the inventory of critical raw materials and supplies, increasing finished goods inventories, switching to alternative energy sources, and making arrangements for alternate vendors. There is a risk that the Company's plans for achieving Year 2000 compliance may not be completed on time. However, failure to meet critical milestones being identified in the Company's plans would provide advance notice, and steps would be taken to prevent injuries to employees and others, and to prevent environmental contamination. Customers and suppliers would also receive advance notice allowing them to implement alternate plans. 15 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK For a discussion of certain market risks related to the Company, See Part II, Item 7A, "Quantitative and Qualitative Disclosures About Market Risk", in the Stone 1998 10-K. Foreign Currency Risk During the six months ended June 30, 1999 the exchange rates for the Canadian dollar and the German Mark strengthened/(weakened) against the U.S. dollar as follows: Rate at June 30, 1999 vs. December 31, 1998 Canadian dollar 3.8 % German Mark (13.4)% Average Rate for the six months ended June 30, 1999 vs. 1998 Canadian dollar (3.7)% German Mark ( .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 recognized foreign currency transaction gains of $6 million for the six months ended June 30, 1999 compared to a loss of $8 million for the same period last year. Interest Rate Risk The Company's earnings and cash flows are significantly affected by the amount of interest on its indebtedness. No significant change has occurred in the Company's exposure to such risk for the six months ended June 30, 1999. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS In April 1998, a suit was filed against Stone in Los Angeles Superior Court by Chesterfield Investments L.P. ("Chesterfield"), and D.P. Investments L.P. ("DPI"), alleging that Stone owed such parties approximately $120 million relating to Stone's purchase of common stock of Stone Savanna River Pulp and Paper Corporation ("SSR"). In 1991, Stone purchased the shares of common stock of SSR held by Chesterfield and DPI for approximately $6 million plus a contingent payment payable in March 1998 based upon the post-closing performance of the operations of SSR from 1991 through 1997. Stone concluded a settlement of the case with DPI, which had a 30% interest in the contingent payment, in 1998. Chesterfield continued to pursue the case as to the remaining 70% of the contingent payment, which was settled in July 1999 for a cash payment of $30.6 million. Existing purchase accounting reserves will be adjusted to reflect the settlement. In April 1999, Florida Coast Paper Company L.L.C. ("FCPC") and three related companies filed a Chapter 11 bankruptcy petition in United States Bankruptcy Court in Wilmington, Delaware. FCPC and the related entities are 50% owned by Stone. All of the obligations of FCPC and the related entities are non-recourse to Stone, and the bankruptcy filing has no effect on any of the indebtedness of Stone or any other subsidiaries of the Company. On May 10, 1999, the Indenture Trustee with respect to the first mortgage notes of FCPC (the "FCPC Notes") commenced an adversary proceeding in the FCPC bankruptcy case against Stone and certain other parties, including two former officers of Stone, which has been stayed indefinitely by the court. The complaint contains allegations that Stone violated the provisions of an output purchase agreement and a subordinated credit agreement with FCPC, breached certain fiduciary duties owed to the holders of the FCPC Notes, and negligently discharged certain additional duties owed to the holders of the FCPC Notes. While Stone believes that such allegations are without merit, it is unable to 16 predict the likely outcome of this action or its impact on the FCPC bankruptcy proceeding at this time. In May 1999, the Delaware Court of Chancery approved the terms of the settlement of the consolidated class action brought against Stone on behalf of the holders of its Series E Cumulative Exchangeable Preferred Stock, which has now become final. ITEM 2. CHANGES IN SECURITIES None ITEM 3. DEFAULTS UPON SENIOR SECURITIES None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Registrant's Annual Meeting of Stockholders was held on May 17, 1999. At the meeting, stockholders voted on (i) the election of three ordinary directors and (ii) the election of two preferred directors. Voting on each matter was as follows:
Votes Votes Withheld/ 1. Election of Ordinary Directors For Against Abstentions ----------- ------- ----------- Ray M. Curran 114,064,713 0 43,245 Leslie T. Lederer 114,064,200 0 43,245 Patrick J. Moore 114,060,600 0 43,245 2. Election of Preferred Directors David Gale 4,062,346 0 44,070 Mark A. Weissman 4,061,471 0 44,945
ITEM 5. OTHER INFORMATION None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a) The following exhibits are included in this Form 10-Q. 10.1 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. 27.1 Financial Data Schedule b) Reports on Form 8-K None 17 Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. STONE CONTAINER CORPORATION --------------------------- (Registrant) Date: August 13, 1999 /s/ Paul K. Kaufmann --------------- --------------------------- Paul K. Kaufmann Vice President and Corporate Controller (Principal Accounting Officer) 18 EX-10 2 EXHIBIT 10.1 SECOND AMENDMENT OF AMENDED AND RESTATED CREDIT AGREEMENT THIS SECOND AMENDMENT OF AMENDED AND RESTATED CREDIT AGREEMENT, dated as of June 30, 1999 (this "Amendment"), is by and among Stone Container Corporation, a Delaware corporation (the "Borrower"), the undersigned financial institutions, including Bankers Trust Company, in their capacities as lenders (collectively, the "Lenders," and each individually, a "Lender"), Bankers Trust Company, as agent (the "Agent") for the Lenders, and the undersigned financial institutions designated as such in their capacities as Co-Agents. RECITALS: A. The Borrower, Bank of America National Trust and Savings Association, The Bank of New York, The Bank of Nova Scotia, Credit Agricole Indosuez, The Chase Manhattan Bank, Dresdner Bank AG-New York and Grand Cayman Branches, The First National Bank of Chicago, The Long-Term Credit Bank of Japan, Ltd., NationsBank, N.A., The Sumitomo Bank, Ltd., Chicago Branch, and Toronto Dominion (Texas), Inc., as co-agents (collectively, the "Co-Agents," and each individually, a "Co-Agent"), the Agent and the Lenders are parties to that certain Amended and Restated Credit Agreement dated as of November 18, 1998, as amended (the "Credit Agreement"). B. The Borrower, the Agent and the Lenders desire to amend the Credit Agreement on the terms and conditions set forth herein. NOW, THEREFORE, in consideration of the premises and of the mutual covenants herein contained, the parties hereto agree as follows: SECTION 1. Defined Terms. Unless otherwise defined herein, all capitalized terms used herein shall have the meanings given them in the Credit Agreement. SECTION 2. Amendments to the Credit Agreement to Permit the Liability Management Transactions. The Credit Agreement is, as of the Effective Date (as defined below), hereby amended as follows: (a) The Definitional Appendix to the Credit Agreement is amended by adding thereto (in alphabetical order) the following defined term: "Liability Management Transactions" means the series of transactions described on Schedule 1.1(i) hereto. The Definitional Appendix is further amended by adding thereto a new penultimate paragraph to read as follows: The following terms are defined in Schedule 1.1(i) to the Credit Agreement: "Cameo Note" "SCC AMMI" "SCC RMMI" "Stone Newco" "Stone Newco Note" (b) Section 5.2.2 of the Credit Agreement is amended by deleting "Intentionally Omitted" from paragraph (y) thereof and substituting therefor the following: (i) intercompany loans evidenced by the Cameo Note and the Stone Newco Note pursuant to the Liability Management Transactions, provided that such notes are unsecured and otherwise in form and substance satisfactory to the Agent, and it being agreed that the Cameo Note and Stone Newco Note will not be required to be pledged to the Agent as Collateral; and (ii) intercompany loans made by the Borrower to SCC RMMI and SCC AMMI on a revolving credit basis pursuant to the Liability Management Transactions, provided that such loans are unsecured and incurred pursuant to a revolving credit agreement, notes and other documentation in form and substance satisfactory to the Agent and that such notes are delivered to the Agent and pledged by the Borrower to the Agent as Collateral pursuant to a Pledge Agreement. (c) Section 5.2.3 of the Credit Agreement is amended by deleting the word "and" after paragraph (h) thereof; by deleting the period at the end of paragraph (i) thereof and substituting a semicolon therefor; and by adding a new paragraph (j) and a new paragraph (k) thereto to read as follows: (j) the assumption by Stone Newco of the liabilities of the Borrower related to the Hodge, Louisiana mill and the assumption by SCC RMMI and SCC AMMI of post-retirement medical liabilities and active medical liabilities, respectively, of the Borrower, in each case pursuant to the Liability Management Transactions; and (k) pursuant to the Subsidiary Guarantees. (d) Section 5.2.7 of the Credit Agreement is amended by deleting the word "and" after paragraph (p) thereof; by deleting the period at the end of paragraph (q) thereof, substituting a semicolon therefor and adding the word "and" thereafter; and by adding a new paragraph (r) thereto to read as follows: -2- (r) the Borrower may (i) contribute the Cameo Note and the Stone Newco Note to SCC RMMI and SCC AMMI, respectively, pursuant to the Liability Management Transactions and (ii) make additional capital contributions to SCC RMMI and SCC AMMI pursuant to the stockholders' agreements contemplated by the Liability Management Transactions, provided that such stockholders' agreements are in form and substance satisfactory to the Agent. (e) Section 5.2.12 of the Credit Agreement is amended by adding the roman numeral "(i)" after the words "Notwithstanding the foregoing," in the last sentence thereof and adding at the end of such sentence a new clause (ii) to read as follows: and (ii) the Borrower may contribute the properties and assets (other than the real property and any IRB-secured property) of the Hodge, Louisiana mill, and may lease the real property and IRB-secured property of the Hodge, Louisiana mill on a long-term basis and for nominal consideration, to Stone Newco pursuant to the Liability Management Transactions (it being agreed that such contribution and lease may be made or consummated notwithstanding the provisions of any Security Agreement or any Mortgage), provided that (A) the stock of Stone Newco is delivered to the Agent and pledged to the Agent as Collateral pursuant to a Pledge Agreement, (B) Stone Newco executes and delivers to the Agent a Subsidiary Guarantee and a Security Agreement, and (C) such lease is in form and substance satisfactory to the Agent. (f) The Credit Agreement is further amended by adding a new Schedule 1.1(i) thereto in the form of Schedule 1.1(i) attached to this Amendment. SECTION 3. Other Amendments to the Credit Agreement. The Credit Agreement is, as of the Effective Date, hereby further amended as follows: (a) Section 2.12(a) of the Credit Agreement is amended by deleting from clause (iii) of the proviso to the first sentence thereof the parenthetical phrases "(or in any event later than thirty (30) days prior to the Revolver Termination Date)" and "(but in no event later than thirty (30) days prior to the Revolver Termination Date)". (b) Section 2.12 of the Credit Agreement is further amended by adding a new paragraph (m) at the end thereof to read as follows: (m) Cash Collateral. Not later than ninety (90) days prior to the Revolver Termination Date, the Borrower shall deposit in an account with the Agent, for the benefit of the Revolving Lenders, an amount in cash equal to the aggregate Stated Amount of all outstanding Letters of Credit as of such date having expiration dates later than the Revolver Termination Date. Such deposit shall be held by the Agent -3- as collateral for the payment and performance of the L/C Obligations arising from such Letters of Credit. The Agent shall have exclusive dominion and control, including the exclusive right of withdrawal, over such account. Other than any interest earned on the investment of such deposits in Permitted Investments, which investments shall be made at the option and sole discretion of the Agent, such deposits shall not bear interest. Interest or profits, if any, on such investments shall accumulate in such account. Monies in such account shall (i) automatically be applied by the Agent to reimburse the Facing Agent and BT for any drawing under any such Letter of Credit, (ii) be held for the satisfaction of the reimbursement obligations of the Borrower at such time and (iii) if an Event of Default shall occur and be continuing, be applied to satisfy the Obligations. From and after the ninetieth day prior to the Revolver Termination Date, it shall be a condition precedent (in addition to all other applicable conditions precedent) to the issuance or extension of any Letter of Credit, if such Letter of Credit would thereupon have an expiration date later than the Revolver Termination Date, that the Borrower shall have deposited cash collateral with the Agent in accordance with this Section 2.12(m) with respect to such Letter of Credit. (c) Section 9.12(d) of the Credit Agreement is amended by deleting from clause (i) of the first proviso to the first sentence thereof the words "of the assigning Lender". SECTION 4. Consent. From and after the Effective Date, the Borrower shall be permitted to prepay or purchase debt securities of the Borrower pursuant to Section 5.2.10(a)(ix) of the Credit Agreement without regard to the amount of the Discretionary Funds Basket and including any premium, but otherwise in accordance with Section 5.2.10(a)(ix), provided that: (a) the aggregate amount of such prepayments (including the payment of principal, premium, if any, and interest) and/or aggregate purchase price of such securities shall not exceed $100,000,000 in the aggregate; (b) the final stated maturity of any debt security prepaid or purchased shall not be later than April 1, 2002; and (c) no Event of Default or Unmatured Event of Default shall exist immediately prior to any such prepayment or purchase or shall result therefrom. All such prepayments and purchases shall be deemed to have been made pursuant to Section 5.2.10(a)(ix), including, without limitation, for purposes of any subsequent determination of the Discretionary Funds Basket at any time. SECTION 5. Conditions Precedent to Effectiveness of Amendment. This Amendment shall become effective upon the date (the "Effective Date") when each of the following conditions precedent has been satisfied: -4- (a) each of the Borrower, the Agent and the Required Lenders shall have executed and delivered this Amendment; and (b) Stone Snowflake shall have executed and delivered the Reaffirmation of Guaranty attached hereto. The consummation of the Liability Management Transactions (as described on Schedule 1.1(i) attached hereto) on or after the Effective Date shall be subject to receipt by the Agent of such additional Loan Documents, certificates, legal opinions and other documents as required by the Credit Agreement as amended hereby and as the Agent otherwise may reasonably request. SECTION 6. Representations and Warranties of the Borrower. The Borrower represents and warrants to the Lenders, the Co-Agents and the Agent as follows: (a) The representations and warranties contained in the Credit Agreement and the other Loan Documents are true and correct in all material respects at and as of the date hereof as though made on and as of the date hereof (except to the extent specifically made with regard to a particular date). (b) No Event of Default or Unmatured Event of Default has occurred and is continuing. (c) The execution, delivery and performance of this Amendment have been duly authorized by all necessary action on the part of the Borrower, and this Amendment has been duly executed and delivered by the Borrower and is a legal, valid and binding obligation of the Borrower enforceable against the Borrower in accordance with its terms, except as the enforcement thereof may be subject to the effect of any applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors' rights generally and general principles of equity (regardless of whether such enforcement is sought in a proceeding in equity or at law). (d) The execution, delivery and performance of this Amendment do not conflict with or result in a breach by the Borrower of any term of any material contract, loan agreement, indenture or other agreement or instrument to which the Borrower is a party or is subject. SECTION 7. References to and Effect on the Credit Agreement. (a) On and after the Effective Date each reference in the Credit Agreement to "this Agreement," "hereunder," "hereof," "herein," or words of like import, and each reference to the Credit Agreement in the Loan Documents and all other documents (the "Ancillary Documents") delivered in connection with the Credit Agreement, shall mean and be a reference to the Credit Agreement as amended hereby. -5- (b) Except as specifically amended and consented to above, the Credit Agreement, the Loan Documents and all other Ancillary Documents shall remain in full force and effect and are hereby ratified and confirmed. (c) The execution, delivery and effectiveness of this Amendment shall not operate as a waiver of any right, power or remedy of the Lenders, the Co-Agents or the Agent under the Credit Agreement, the Loan Documents or the Ancillary Documents. (d) The Borrower acknowledges and agrees that this Amendment constitutes a "Loan Document" for purposes of the Credit Agreement. SECTION 8. Execution in Counterparts. This Amendment maybe executed in counterparts, each of which when so executed and delivered shall be deemed to be an original and all of which taken together shall constitute but one and the same instrument. This Amendment shall be binding upon the respective parties hereto upon the execution and delivery of this Amendment by the Borrower, the Agent and the Required Lenders regardless of whether it has been executed and delivered by all of the Lenders. Delivery of an executed counterpart of a signature page of this Amendment by facsimile transmission shall be effective as delivery of a manually executed counterpart of this Amendment. SECTION 9. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY, AND BE CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO THE INTERNAL CONFLICTS OF LAWS PROVISIONS THEREOF. SECTION 10. Headings. Section headings in this Amendment are included herein for convenience of reference only and shall not constitute a part of this Amendment for any other purposes. SECTION 11. Successors and Assigns. This Amendment shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns. [Signature Pages Follow] -6- IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective officers thereunto duly authorized as of the date first above written. STONE CONTAINER CORPORATION By: /s/ Charles A. Hinrichs ------------------------ Name: Charles A. Hinrichs -------------------- Title: Vice President and Treasurer ---------------------------- -7- BANKERS TRUST COMPANY, in its individual capacity and as Agent By: /s/Robert R. Telesca -------------------- Name: Robert R. Telesca ------------------ Title: Assistant Vice President ------------------------ -8- REAFFIRMATION OF GUARANTY The undersigned acknowledges the foregoing Amendment with respect to the Credit Agreement referred to therein, consents to the amendments and consent set forth therein and hereby reaffirms its obligations under the Stone Snowflake Guaranty (as defined in the Credit Agreement). Dated as of June 30, 1999 STONE SNOWFLAKE NEWSPRINT COMPANY By: /s/Charles A. Hinrichs ---------------------- Name: Charles A. Hinrichs -------------------- Title: Vice President and Treasurer ---------------------------- -9- EX-27 3 EXHIBIT 27.1
5 1,000 0000094610 STONE CONTAINER CORPORATION 6-MOS DEC-31-1999 JAN-01-1999 JUN-30-1999 116 0 613 75 469 1,263 3,968 107 8,135 1,086 3,108 2,545 0 78 (120) 8,135 2,106 2,106 1,878 1,878 206 0 179 (101) 24 (77) 0 (1) 0 (78) .00 .00
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