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, 1998

( ) 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
11% Senior Subordinated Notes due August 15, 1999 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, 1999, for the Annual Meeting of
Stockholders to be held on May 17, 1999. Part III

STONE CONTAINER CORPORATION
Annual Report on Form 10-K
December 31, 1998

TABLE OF CONTENTS

PART I

Page
No.

Item 1. Business................................................................................ 4
Item 2 Properties.............................................................................. 8
Item 3. Legal Proceedings....................................................................... 9
Item 4. Submission of Matters to a Vote of Security Holders..................................... 13

PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters................... 13
Item 6. Selected Financial Data................................................................. 14
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations...
16
Item 7a. Quantitative and Qualitative Disclosures About Market Risk.............................. 28
Item 8. Financial Statements and Supplementary Data............................................. 30
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.................................................................... 65

PART III
Item 10. Directors and Executive Officers of the Registrant...................................... 65
Item 11. Executive Compensation.................................................................. 66
Item 12. Security Ownership of Certain Beneficial Owners and Management.......................... 66
Item 13. Certain Relationships and Related Transactions.......................................... 66

PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K......................... 66

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, as that term is defined in the Private Securities Reform Act
of 1995. This document contains certain forward-looking statements within the
meaning of Section 21E of the Securities Exchange Act of 1934, as amended, about
Stone Container Corporation. Although the Company 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 Asia, Europe, and Latin and
South 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 and
financial condition of Stone Container Corporation.

PART I

ITEM 1. BUSINESS

GENERAL

Pursuant to an Agreement and Plan of Merger dated as of May 10, 1998 (the
"Merger Agreement") by and among Stone Container Corporation, a Delaware
corporation (the "Company" or "Stone"), JSC Acquisition Corporation, a Delaware
Corporation ("JSC Acquisition"), and Jefferson Smurfit Corporation, a Delaware
corporation now known as Smurfit-Stone Container Corporation ("SSCC"), JSC
Acquisition was merged with and into the Company (the "Merger") on November 18,
1998 and the Company became a subsidiary of SSCC. As a result of the Merger,
each issued and outstanding share of common stock of the Company was converted
into the right to receive .99 shares of common stock of SSCC (the "SSCC Common
Stock") and each of the 100 issued and outstanding shares of common stock of JSC
Acquisition was converted into 1,100,000 shares of common stock, $.01 par value,
of the Company, the result of which was that SSCC became the owner of 100% of
the common stock of the Company. In addition, each issued and outstanding share
of Series E Cumulative Convertible Exchangeable Preferred Stock, $.01 par value,
of the Company remained outstanding and became convertible into the number of
shares of SSCC Common Stock that its holder would have received in the Merger
had such holder converted such shares of Preferred Stock immediately prior to
the effective time of the Merger.

The Company is a large, integrated producer of containerboard, corrugated
containers and other packaging products with extensive operations throughout
the United States, Canada, Europe, Central and South America, Australia and
Asia. The Company believes its high level of integration enhances its ability
to respond quickly and efficiently to customers and to fill orders on short
lead times. Stone operates in three business segments: (1) Containerboard and
Corrugated Containers; (2) Industrial Bags; and (3) International. For a
summary of revenues, profits, identifiable assets, capital expenditures,
depreciation and amortization for each of the Company's segments, see Note 17
"Business Segment Information" of the Notes to Consolidated Financial
Statements contained in Part II, Item 8, "Financial Statements and
Supplementary Data".

RECENT DIVESTITURES

In October 1998, the Company sold its newsprint operations to its
non-consolidated affiliate, Abitibi Consolidated, Inc., a Canada-based
manufacturer and marketer of publication papers ("Abitibi"), as part of its
strategy to exit the publication papers business. In July 1998, the Company
divested its interest in and terminated its joint venture relationship with
Stone Venepal (Celgar) Pulp, Inc. ("SVCPI"), a non-consolidated affiliate that
filed for bankruptcy protection. SVCPI owned and operated a market pulp mill in
Castlegar, British Columbia. Accordingly, the following discussion excludes the
results of these operations.

As of December 31, 1998, the Company owned approximately 25% of Abitibi. On
January 21, 1999 the Company sold 16% of its interest in Abitibi to a third
party such that the Company's ownership percentage was reduced to approximately
22%. The Company is holding its remaining interest in Abitibi for sale.

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 11 paper mills and 85 container plants located in
the United States and three paper mills located in Canada. Subsequent to the
Merger, on December 1, 1998, the Company closed one containerboard mill and
other pulp mill facilities. Production of these facilities are included in the
chart below through November 30, 1998. Total sales for the

Company's Containerboard and Corrugated Containers segment in 1998 were $3,905
million (including $189 million of inter-segment sales).

Production of the Company's containerboard mills and sales of its corrugated
container facilities for the last three years were:

1998 1997 1996
---- ---- ----

Tons produced (in thousands)
Containerboard...................................... 4,432 4,554 4,288
Kraft paper......................................... 457 436 439
Market pulp......................................... 639 780 770
Corrugated containers sold (in billion sq. ft.).......... 47.3 44.9 44.6

The Company's containerboard mills produce a full line of containerboard, which
for 1998 included 3,183,000 and 1,249,000 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 1998, the Company's U.S. and Canadian corrugated
container plants consumed 3,405,000 tons of containerboard, representing an
integration level of approximately 77%. In addition, 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 multi-color 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. The Company's
sales of corrugated containers in 1998 were $2,150 million.

Sales volumes shown above include the Company's proportionate share of the
operations of MacMillan Bathurst Inc. ("MBI"), a Canadian producer of corrugated
containers, and other affiliates reported on an equity ownership basis. The
Company and Jefferson Smurfit Group plc, a principal shareholder of SSCC, each
own a 50% interest in MBI.

The Company currently owns and operates two market pulp mills in North America.
These two mills have the capacity to produce approximately 581,000 tons of
market pulp annually and produced approximately 445,000 tons in 1998. The
Company offers its customers a product mix of bleached northern and southern
hardwood and bleached northern softwood pulp. Market pulp is sold to
manufacturers of paper products, including fine papers, photographic papers,
tissue and newsprint. The Company's sales of market pulp in 1998 were $266
million which includes the sales of pulp produced by the two mills at which the
Company has ceased pulp production.

The Company owns approximately 2,000 and 137,000 acres of private fee timberland
in the United States and Canada, respectively. The Company also owns land and
conducts forestry operations in Costa Rica and Venezuela. See Fiber Resources
below for a discussion of the Company's timber products.

INDUSTRIAL BAG SEGMENT

The Company produces multi-wall 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, salt and more. In
addition, the Company through its non-consolidated affiliate, S&G Packaging LLC
("S&G"), produces grocery bags which are sold primarily to supermarket chains.
The Company's 15 paper bag and industrial bag plants are located nationwide. The
Company believes it is the largest producer of grocery bags (through its
affiliate) and

industrial bags in the United States. In 1998, the Company's paper bag and
industrial bag plants consumed approximately 28% of the kraft paper produced by
its kraft paper mills. In addition to converting the kraft paper produced by its
mills, the Company is a net buyer of kraft paper from third parties. Industrial
bag shipments for 1998, 1997 and 1996 were 302,000, 297,000 and 277,000 tons,
respectively. The Company's sales of industrial bags in 1998 were $532 million.

INTERNATIONAL SEGMENT

The Company produces containerboard, boxboard and corrugated containers in
Europe, Central and South America, Australia and China. This segment includes 3
paper mills and 27 corrugated container plants. Production of the Company's
international mills and sales of its corrugated containers for the last three
years were:

1998 1997 1996
---- ---- ----

Tons produced (in thousands)
Containerboard....................................... 380 381 303
Boxboard............................................. 75 78 75
Corrugated containers sold (in billion sq. ft.)........... 11.7 10.8 8.5

In 1998, the corrugated container plants consumed 743,000 tons of
containerboard. Total International segment sales were $618 million in 1998.

FIBER RESOURCES
Wood fiber and recycled fiber are the principal raw materials used in the
manufacture of the Company's paper products. The Company intends to satisfy a
significant portion of its needs for wood and recycled fiber through SSCC's
operations. The Company's fiber requirements not satisfied internally are
purchased on the open market or under long-term contracts.

Wood fiber and recycled fiber are purchased in highly competitive, price
sensitive markets, which have historically exhibited price and demand
cyclicality. A decrease in the supply of wood fiber due to conservation
regulation has caused, and will likely continue to cause, higher wood fiber
costs in some of the regions in which the Company procures wood fiber.
Fluctuations in supply and demand for recycled fiber has from time to time
caused a tightness in the supply 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 marketing strategy for the Company's mills is to maximize sales of products
to manufacturers located within an economical shipping area. Converting plants
focus on both specialty products tailored to fit customers' needs and high
volume sales of commodity products. The Company also seeks to broaden the
customer base for each of its segments rather than to concentrate on only a few
accounts for each plant. These objectives have led to decentralization of
marketing efforts, such that each plant has its own sales force, and many have
product design engineers, who are in close contact with customers to respond to
their specific needs. National sales offices are also maintained 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.

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 dependent on the quality of
its products and its relationships with its customers, rather 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 important phase of its business is
dependent upon such intellectual property. The cost of the Company's research
and development for 1998, 1997 and 1996 was approximately $5 million, $8 million
and $9 million, respectively.

EMPLOYEES

The Company had approximately 23,000 employees at December 31, 1998, of whom
approximately 18,000 were employees of U.S. operations and the remainder were
employees of foreign operations. Of the domestic employees, approximately 12,000
employees (67%) 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 has in the past, 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 should require up to $180 million in capital
expenditures over the next two to four 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, although in the
opinion of management, such compliance will not adversely affect the Company's
competitive position. For the past three years, the Company has spent an average
of approximately $26 million annually on capital expenditures for environmental
purposes. The anticipated spending for such capital projects for fiscal 1999 is
approximately $100 million. A significant amount of the increased expenditures
in 1999 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.

ITEM 2. PROPERTIES

The Company maintains manufacturing facilities and sales offices throughout
North America, Europe, Central and South America, Australia and Asia. The
Company's facilities are properly maintained and equipped with machinery
suitable for their use. The Company's manufacturing facilities as of December
31, 1998 are summarized below:

Number of Facilities
-------------------------- State
Total Owned Leased Locations
----- ----- ------ ---------

UNITED STATES:
Paper mills ......................... 11 11 10
Corrugated container plants ......... 85 46 39 33
Folding carton plants ............... 1 1
Bag packaging plants ................ 15 8 7 13
Wood products plants ................ 1 1 1
--- --- ---
Subtotal ............................... 113 66 47 37

CANADA:
Paper mills ......................... 3 3 n/a
Other ............................... 1 1 n/a

EUROPE AND OTHER:
Paper mills ......................... 3 3 n/a
Corrugated container plants ......... 27 26 1 n/a
--- --- ---

TOTAL .................................. 147 99 48 n/a
--- --- ---
--- --- ---

The approximate annual tons of productive capacity, in thousands of short tons,
of the Company's paper mills at December 31, 1998 were:

Annual
Capacity
--------

UNITED STATES
Containerboard ............................ 4,092
Kraft paper ............................... 422
Market pulp ............................... 341
-----
Subtotal ................................ 4,855
CANADA
Containerboard ............................ 474
Market pulp ............................... 240
EUROPE AND OTHER
Containerboard ............................ 361
Recycled boxboard ......................... 78
-----
-----
TOTAL ......................................... 6,008
-----
-----

ITEM 3. LEGAL PROCEEDINGS

LITIGATION

In April 1998, a suit was filed against the Company in Los Angeles Superior
Court by Chesterfield Investments L.P. ("Chesterfield"), and D.P. Investments
L.P. ("DPI"), alleging that the Company owes such parties approximately $120
million relating the Company's purchase of common stock of Stone Savannah River
Pulp and Paper Corporation ("SSR"). In 1991, the Company 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. The Company has
concluded a settlement of the case with DPI, which had a 30% interest in the
contingent payment. Chesterfield is continuing to pursue the case as to the
remaining 70% of the contingent payment. The Company disputes Chesterfield's
calculation of the contingent payment, and is vigorously defending the
litigation. The case is currently set for trial in the second quarter of 1999.
The Company believes that existing reserves will be adequate to cover the amount
of any adverse judgement in this matter.

In May 1998, four putative class action complaints were filed against the
Company and the individual directors of the Company in the Delaware Court of
Chancery, which were consolidated into one action captioned as IN RE: STONE
CONTAINER SHAREHOLDERS LITIGATION. The complaint alleged, among other things,
that the directors of the Company breached their fiduciary duties to the
Company's shareholders in connection with the Merger by failing to undertake an
appropriate evaluation of the Company's net worth as a merger/acquisition
candidate, actively evaluate the proposed transaction with JSC and engage in an
auction with third parties in an attempt to obtain the best value for the
Company's shareholders. In August 1998, the parties entered into a memorandum of
understanding setting forth the terms of the proposed settlement of the matter,
subject to certain conditions, including the plaintiffs' counsel conducting
confirmatory discovery and approval by the Court of Chancery. In addition, the
defendants have agreed not to oppose an application by plaintiff's counsel to
the Chancery Court for fees and expenses in an amount not to exceed $650,000,
which would be paid by the Company.

In October 1998, two holders of the Company's Series E Cumulative Convertible
Exchangeable Preferred Stock (the "Series E Preferred") filed a complaint
against the Company in the Delaware Court of Chancery alleging that the Company
violated its Certificate of Incorporation by failing to call a meeting of Series
E Preferred stockholders for the purpose of electing two directors by those
stockholders. The plaintiffs also

alleged that in connection with the Merger, the Company sought to change the
rights of the holders of Series E Preferred without a two-thirds class vote of
such stockholders and that such stockholders should have been entitled to vote
with respect to the Merger. The plaintiffs' request for a preliminary injunction
was denied by the Court in November 1998. A separate complaint against the
Company was filed by a Series E Preferred stockholder purporting to constitute a
class action on behalf of all Series E Preferred stockholders. These actions
have been consolidated and now also include SSCC as a defendant. In March 1999,
the Company entered into a stipulation of settlement (the "Stipulation") with
the plaintiffs in furtherance of a prior memorandum of understanding to settle
these cases. As a result, the Company has designated two named individuals to
serve on the Board of Directors of the Company and agreed, among other things to
nominate and solicit proxies for their election by the holders of Series E
Preferred at the Company's Annual Meeting of Stockholders for so long as the
dividends on the Series E Preferred are more than six quarters in arrears. In
addition, the Stipulation contains an agreement by the Company not to oppose an
application by plaintiffs' counsel for fees or expenses in an amount not to
exceed $215,000, which would be paid by the Company. This settlement is subject
to court approval, and a hearing for such purpose has been scheduled in May
1999.

In June 1998, the Company, believing the allegations to be without merit and
without admitting liability, entered into a consent decree (the "Consent
Agreement") with the Federal Trade Commission (the "FTC"). In pertinent part,
the Consent Agreement requires the Company to cease and desist from "requesting,
suggesting, urging or advocating that any manufacturer or seller of linerboard
raise, fix, or stabilize prices or price levels..." and from "entering into, or
attempting to enter into ... any agreement ... to fix, raise, establish,
maintain Or stabilize prices or price levels ...". There were no monetary fines,
sanctions or damages imposed by the FTC in connection with the Consent
Agreement, however, the Company will be required to file certain reports on an
annual basis with the FTC to evidence its compliance with the Consent Agreement.
By its terms, the Consent Agreement has also become applicable to SSCC and its
other subsidiaries.

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
Company is the only named defendant, although the suits allege that other
unnamed firms participated in the purported restraints of trade, and
specifically allege, on information and belief, that JSC also participated. 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 believes it
has meritorious defenses and intends to vigorously defend itself.

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 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. Certain
creditors of FCPC have alleged that Stone and Four M are in default with respect
to their obligations under the OPA. The amount of Stone's liability under the
OPA, if any, is uncertain at this point, although Stone believes that existing
reserves will be adequate to cover the amount of any adverse judgment in this
matter. The failure of Stone, Four M and FCPC to resolve the outstanding
indebtedness of FCPC and the obligations of Stone and Four M under the OPA in
the near future will likely result in litigation regarding the OPA and/or a
bankruptcy proceeding being commenced by or against FCPC.

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 Regulations,
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 alleges 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 June 1998, DEP and the Company reached a settlement in principle
pursuant to which DEP will issue a full operating permit for the mills'
wastewater pretreatment facility and a compliance order requiring the
installation and continued operation of a hydrologic barrier system at two
locations on the mill site's perimeter. As part of the settlement, the parties
have also agreed to a stipulation dismissing the enforcement action with respect
to the groundwater contamination allegations.

In January 1996, the United States of America filed a suit against the Company
in the United States District Court for the District of Montana seeking
injunctive relief and an unspecified amount in civil penalties based on the
alleged failure of the Company to comply with certain provisions of the Clean
Air Act, its implementing regulations, and the Montana State Implementation Plan
at the Company's Missoula, MT mill. The complaint specifically alleged that the
Company exceeded the 20% opacity limitation for recovery boiler emissions;
failed to properly set the span on a recovery boiler continuous emissions
monitor; and violated limitations on venting of an air contaminant by improperly
venting non-condensable gasses. In May 1998, the Company, the United States
Department of Justice, EPA and other intervening parties entered into a consent
decree settling this case. In addition to, among other things, agreeing to
certain emissions limitations and monitoring and reporting requirements, the
Company paid a civil penalty of $312,500.

In September 1997, the Company received a Notice of Violation and a Compliance
Order from 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 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 EPA for information about past
capital projects at the mill. The Company is fully cooperating with these
requests and has provided significant information to EPA. EPA representatives
have advised the Company that its requests are part of a nationwide enforcement
review of industry's compliance with its New Source Review rules. The Clean Air
Act authorizes EPA to assess a penalty of $25,000 per day of each violation;
however, no penalties have yet been assessed. If EPA decides to commence an
enforcement action to assess penalties in this matter, the Company intends to
vigorously contest such action.

In April 1998, EPA issued a Notice of Violation ("NOV") to the Company alleging
violations of the particulate emission limits for the No. 6 boiler at the
Company's Coshocton, OH mill. In September 1998, EPA filed an administrative
complaint against the Company formalizing the allegations set forth in the NOV
and seeking a civil penalty in the amount of $102,400. The Company and EPA have
settled the matter, and the penalty in the final consent order was reduced to
$68,500.

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 or 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. Because the Company's relative
percentage of waste deposited at a majority of these sites is quite small,
management of the Company believes, based on current information, that its
probable liability under CERCLA and similar state laws, taken on a case by case
basis or in the aggregate, will not have a material adverse effect on its
financial condition or operations.

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. The Company believes that the Company's
potential liability for investigation or remediation for these sites, either
individually or in the aggregate, will not have a material adverse effect on its
financial condition or operations.

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, 1998.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

A Special Meeting of Stockholders was held on November 17, 1998 to approve the
Merger. At the meeting, the Stone stockholders voted (i) to approve and adopt
the Merger Agreement and (ii) to approve certain amendments to the Stone
restated certificate of incorporation as contemplated by the Merger. Voting on
each matter was as follows:

Votes Votes Withheld/
for Against Abstentions
---------------- --------------- ----------------

Approve and adopt the merger agreement.......... 89,385,100 168,636 313,307

Approve the amendments to restated
certificate of incorporation.................. 80,883,896 5,735,256 3,247,891

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

MARKET INFORMATION
At December 31, 1998 all of the Company's common stock was held by Smurfit-Stone
Container Corporation. There is no market for such stock.

DIVIDENDS

The Company did not pay dividends on its common stock during 1997 or 1998. The
declaration of dividends on such stock by the Board of Directors is subject to,
among other things, certain restrictive provisions contained in Stone's Credit
Agreement, Senior Note Indentures, Senior Subordinated Indenture and Restated
Certificate of Incorporation.

ITEM 6. SELECTED FINANCIAL DATA
(In millions, except per share and statistical data)

Predecessor (d)
----------------------------------------------------------------
PERIOD FROM PERIOD FROM
NOVEMBER 19 TO JANUARY 1 TO
DECEMBER 31, NOVEMBER 18,
1998 1998 1997 1996 1995(b) 1994
-------------- ----------------------------------------------------------------

SUMMARY OF OPERATIONS (A)
Net sales .................................... $ 480 $ 4,399 $ 4,849 $ 5,142 $ 7,351 $ 5,749

Income (loss) from operations ................ (15) (152) (89) 146 1,202 258
Income (loss) before extraordinary
item and cumulative effect of
accounting change ......................... (36) (749) (405) (122) 445 (129)
Net income (loss) ............................ (36) (749) (418) (126) 256 (205)

Basic earnings per share of common stock (e)
Income (loss) before extraordinary
item and cumulative effect of
accounting change ....................... (7.43) (4.16) (1.32) 4.64 (1.60)
Net income (loss) ......................... (7.43) (4.29) (1.35) 2.63 (2.46)

Weighted average shares outstanding .......... 102 99 99 94 88
Diluted earnings per share of common stock (e)
Income (loss) before extraordinary
item and cumulative effect of
accounting change........................ (7.43) (4.16) (1.32) 3.89 (1.60)
Net income (loss) ......................... (7.43) (4.29) (1.35) 2.24 (2.46)

Weighted average shares outstanding .......... 102 99 99 115 88

Cash dividends per common share .............. .60 .30

ITEM 6. SELECTED FINANCIAL DATA (CONT'D)
(In millions, except per share and statistical data)

Predecessor (d)
--------------------------------------------------------------------
PERIOD FROM PERIOD FROM
NOVEMBER 19 TO JANUARY 1 TO
DECEMBER 31, NOVEMBER 18,
1998 1998 1997 1996 1995(b) 1994
-------------- ------------ --------- ---------- ---------- ----------

OTHER FINANCIAL DATA (A)
Net cash provided by (used for)
operating activities ................. $ 12 $ (16) $ (259) $ 288 $ 962 $ 72
Net cash provided by (used for)
investing activities ................. (22) 35 (174) (342) (545) (235)
Net cash provided by (used for)
financing activities ................. (111) 128 438 128 (492) 23
Depreciation and amortization ........... 34 239 302 315 372 359
Capital investments and acquisitions .... 22 219 150 358 443 257
Working capital ......................... 488 507 672 981 785
Property, plant and equipment, net ...... 3,997 2,377 2,634 2,636 3,359
Total assets ............................ 8,793 5,824 6,354 6,399 7,005
Long-term debt, less current maturities . 3,902 3,935 3,951 3,885 4,432
Redeemable preferred stock .............. 78 115 115 115 115
Stockholders' equity .................... 2,590 277 795 1,005 648

STATISTICAL DATA (TONS IN THOUSANDS)
Containerboard and kraft production
(tons) (c) ........................... 604 4,664 5,371 5,030 5,008 5,211
Market pulp production (tons) (c) ....... 71 708 1,127 1,009 1,083 800
Publication papers production (tons) (c) 925 1,378 1,269 1,724 1,815
Corrugated shipments (billion sq. ft) (c) 6.2 52.7 55.7 53.1 53.0 54.1
Paper bag shipments (tons) (c) .......... 59 447 509 538 574 654
Number of employees ..................... 23,000 24,600 24,200 25,900 29,100

- -----------------------------------
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 period from November 19 to December 31, 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 74.6 percent to 46.6 percent 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. The
Company owned approximately 25 percent of the common stock of Abitibi as
of December 31, 1998.

(d) Certain prior year amounts have been restated to conform to current year
presentation.

(e) Subsequent to the Merger, earnings per share information is no longer
presented because the Company is a wholly-owned subsidiary of SSCC.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

GENERAL

Market conditions and demand for containerboard and corrugated containers, the
Company's primary products, are generally 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.

Containerboard market conditions have generally been weak since 1996 due
primarily to excess capacity within the industry. During this period, inventory
levels were high and many paper companies, including the Company, took economic
downtime at their mills in order to reduce inventories. Lost production
resulting from economic downtime for the industry overall in the second half of
1998 was approximately 1.5 million tons, or 8% of capacity. Linerboard prices
declined dramatically in 1996 and continued to fall in the first half of 1997,
dropping to $310 per ton in April 1997. Lower inventory levels and strengthening
demand in the second half of 1997 combined to increase prices to approximately
$390 per ton by December 1997. Linerboard prices were stable in the first half
of 1998 but declined during the second half of the year. The price for
linerboard at December 31, 1998 was approximately $340 per ton. Corrugated
container prices followed this same pricing trend during the past three years
with somewhat less fluctuation.

The outlook for containerboard and corrugated containers in late 1998 and early
1999 has improved substantially. The strength of December corrugated container
shipments and the amount of economic downtime taken at paper mills in the second
half of 1998 have resulted in a significant reduction in inventory levels. In
addition, several paper companies, including the Company, have announced mill
shutdowns approximating 6% of industry capacity. The shutdowns will improve the
balance between supply and demand. Based on these developments, the Company
implemented price increases for linerboard and medium of $50 per ton and $60 per
ton, respectively, in the first quarter of 1999.

Market conditions for market pulp have generally been weak since 1996. While
prices improved in 1997, they weakened again in 1998 as demand for market pulp
continued to fall. In early 1999, demand strengthened and prices have increased
slightly over 1998 levels.

Recycled fiber is an important raw material of the Company's recycled
paperboard mills. Supplies of recycled fiber can vary widely at times and are
highly dependent upon the demand of recycled paper mills. Because of the lower
demand created by the extensive economic downtime taken by containerboard
mills in recent years and particularly in 1998, the price of old corrugated
containers ("OCC") declined in 1998 to its lowest levels in five years.

RESULTS OF OPERATIONS

SEGMENT DATA
(In millions)

As previously discussed, 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. For purposes of the following discussion of results of operations, the
financial information for the Predecessor period has been combined with the
financial information for the period from November 19 to December 31, 1998.
The comparability of operating results for the Predecessor periods and the
period encompassing push down accounting are affected by the purchase accounting
adjustments.

1998 1997 1996
--------------------- ------------------- ------------------
Net Profit/ Net Profit/ Net Profit/
sales (loss) sales (loss) sales (loss)
------- ------ ------- ------ ------ ------

Containerboard and corrugated containers .. $ 3,716 $ 58 $ 3,740 $17 $3,900 $245
Industrial bag ............................ 532 43 510 39 623 47
International ............................. 618 30 588 27 609 20
Other operations .......................... 13 1 11 4 10 2
------- ------ ------- ------ ------ ------
Total operations ....................... $ 4,879 132 $ 4,849 87 $5,142 314
------- ------- ------
------- ------- ------
Other, net (1) ............................ (1,021) (692) (503)
------ ------ ------
------ ------ ------
Loss before income taxes,
minority interest and extraordinary item $ (889) $ (605) $ (189)
------ ------ ------
------ ------ ------

(1) Other, net includes corporate revenues and expenses, net interest expense,
and for 1998, write-down of investments and certain Merger related costs as
discussed below.

1998 COMPARED TO 1997

Net sales of $4,879 million increased $30 million or 1% compared to 1997 due
primarily to the Industrial Bag and International segments. Operating profits of
$132 million increased $45 million compared to 1997 due primarily to the
Containerboard and Corrugated Containers segment.

CONTAINERBOARD AND CORRUGATED CONTAINERS SEGMENT
Net sales of the Containerboard and Corrugated Containers segment decreased 1%
compared to 1997 to $3,716 million and segment profits increased $41 million
compared to 1997 to $58 million. The decrease in net sales was due to a number
of factors, including (1) de-consolidation of the Company's SVCPI affiliate
effective June 1997, (2) lower average prices for market pulp, (3) lower
volume for containerboard and (4) the sale of the Company's newsprint operation
located in Snowflake, AZ (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 a percent of net sales decreased from 93% in
1997 to 91% 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 BAG SEGMENT
Net sales of the Industrial Bag segment increased 4% compared to 1997 to $532
million and segment profits increased $4 million compared to 1997 to $43
million. The increase in net sales and profit were due primarily to Interstate
Packaging ("Interstate"), which became a consolidated subsidiary of the Company
in May 1998. Sales volume, excluding Interstate, 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 of the International segment increased 5% compared to 1997 to $618
million and segment profit increased $3 million compared to 1997 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 corresponding 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.

MERGER, RESTRUCTURING AND OTHER
On November 18, 1998, the Company merged with a wholly-owned subsidiary of SSCC
and became a wholly-owned subsidiary of SSCC. 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. The financial statements for periods before
November 18, 1998 were prepared using Stone's historical basis of accounting and
are designated as "Predecessor". The comparability of operating results before
and after the Merger are affected by the purchase accounting adjustments.

SSCC's cost to acquire the Company has been 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. Property, plant and equipment was recorded at
fair market value based upon preliminary appraisal results, and useful lives
averaging 17 years were assigned to the assets. The excess of cost over the fair
value assigned to the net assets acquired was recorded as goodwill and is being
amortized using the straight-line method over 40 years.

In connection with the Merger, operations of SSCC were restructured. 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 closure of a
Company containerboard and pulp mill, and other Company pulp mill facilities, or
approximately 800,000 tons of the Company's capacity, as well as the termination
costs for certain Company employees. 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 of the Company's
employees and the liabilities for long-term commitments were included in the
preliminary allocation of the cost to acquire the Company.

The Company closed the mill facilities on December 1 and, as of December 31,
1998, the Company had terminated approximately 750 employees. The Company
intends to either abandon or sell these facilities in the near future. Future
cash outlays for the restructuring are anticipated to be $38 million in 1999,
$15 million in 2000, $14 million in 2001, and $39 million thereafter. 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 close. Further adjustments to the cost to acquire the
Company are expected in 1999 as management finalizes its plans.

Prior to the Merger, during the 1998 Predecessor period, the Company recorded
pre-tax non-cash charges of $174 million for the write-down of certain
investments and assets. The write-downs included (1) $67 million related to the
Company's investment in SVCPI, which filed for bankruptcy in July, 1998; (2) $56
million related to its 50% ownership interest in Financiere Carton Papier
("FCP"), a privately held folding carton converting operation based in France,
which has experienced continuing operating losses; (3) $32 million related to
its 20% ownership interest in Venepal S.A.C.A. ("Venepal"), a publicly traded,
Venezuelan

based, manufacturer of paperboard and paper packaging products experiencing
continuing liquidity problems; and (4) $19 million related to wood products
operations to be exited.

In connection with the Merger, the Company recorded charges of $32 million in
the 1998 Predecessor period related to certain Merger transaction costs and
change in control payments.

The Company's 1998 results were adversely affected by its share of the results
of its non-consolidated affiliates. Losses from affiliates were $88 million for
the year ended December 31, 1998 versus losses of $71 million in 1997. This was
primarily the result of significant increases in foreign exchange transaction
losses recorded by Abitibi on foreign currency forward contracts.

INTEREST
Interest expense increased $11 million over 1997 primarily as a result of higher
average outstanding borrowings during the year.

INCOME TAXES
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 7 of the Company's Notes to the Consolidated
Financial Statements.

1997 COMPARED TO 1996

Net sales of $4,849 million decreased $293 million or 6% compared to 1996 due
primarily to the Containerboard and Corrugated Containers and Industrial Bag
segments and the impact of changes in foreign currency exchange rates. Operating
profits decreased $227 million compared to 1996 to $87 million due primarily to
the Containerboard and Corrugated Containers segment.

CONTAINERBOARD AND CORRUGATED CONTAINERS SEGMENT
Net sales of the Containerboard and Corrugated Containers segment decreased 4%
compared to 1996 to $3,740 million and segment profits decreased $228 million
compared to 1996 to $17 million. The decrease in sales and profits resulted
primarily from lower operating margins due mainly to a decrease in average
selling prices for containerboard and corrugated containers. In addition, the
Company's 1996 sales included approximately $72 million from certain wood
product operations, which were sold in October 1996.

Corrugated container prices decreased 10%, more than offsetting an increase in
sales volume of 1% and containerboard prices dropped 11%. Containerboard sales
volume increased 18%. Kraft paper sales volume increased compared to 1996 by 28%
and sales prices declined 6%. Cost of goods sold as a percent of net sales
increased from 88% in 1996 to 93% in 1997 due primarily to the lower sales
prices in 1997.

Market pulp sales increased in 1997 compared to 1996 as a result of a 9%
increase in sales volume and improved selling prices. Despite this improvement,
market pulp prices continued to remain at low levels. Effective June 26, 1997,
the Company sold half of its interest in SVCPI and began reporting SVCPI under
the equity method of accounting. Excluding SVCPI's sales, market pulp sales
increased 28% compared to 1996.

INDUSTRIAL BAG SEGMENT
Net sales of the Industrial Bag segment decreased 18% compared to 1996 to $510
million and segment profits decreased $8 million compared to 1996 to $39
million. The decrease in sales and profits resulted primarily from the
contribution of the Company's retail bag operations in July 1996 to S&G, a joint
venture with Gaylord Container Corporation ("Gaylord"). Gaylord contributed its
retail bag operations to the joint venture as well. Exclusive of the retail bag
operations, sales increased 1% and profits were unchanged compared to 1996.

INTERNATIONAL SEGMENT
Net sales of the International segment decreased 3% compared to 1996 to $588
million and segment profits increased $7 million compared to 1996 to $27
million. Sales and profits were negatively affected by changes in foreign
currency exchange rates, primarily in Germany, relative to the stronger U.S.
dollar in 1997. European corrugated container prices were lower in 1997 by 21%
compared to 1996 and containerboard prices were lower by 18%. Sales volumes for
corrugated containers and containerboard increased compared to 1996 by 18% and
15%, respectively

OTHER
Cost of products sold increased to 92% of net sales from 87% in 1996 mainly as a
result of these lower selling prices. Selling and administrative expenses as a
percent of net sales in 1997 decreased to 10% from 11% in the prior year.
Depreciation and amortization expense decreased $13 million primarily due to the
de-consolidation of SVCPI for the second half of 1997.

The Company's share of losses from affiliates reported under the equity method
of accounting was $71 million in 1997, which represents a $134 million decrease
from 1996 earnings from non-consolidated affiliates of $63 million.
Approximately $84 million of this decrease was attributable to a decrease in the

results of operations of Abitibi that primarily resulted from a substantial
decrease in average selling prices for newsprint. The equity loss from Abitibi
for 1997 was also unfavorably impacted by foreign exchange transaction losses
(approximately $16 million, net of tax) and by non-recurring merger related
restructuring charges (approximately $7 million, net of tax). The Company's
equity losses from non-consolidated affiliates for 1997 was also adversely
affected by its share of net losses incurred at SVCPI, FCPC and S & G, which
aggregated approximately $49 million.

INTEREST
Interest expense for 1997 was $441 million, an increase of $43 million compared
to 1996 due primarily to increased borrowings.

INCOME TAXES
The Company recorded an income tax benefit of $200 million on a pretax loss of
$605 million in 1997 as compared with a 1996 income tax benefit of $66 million
on a pretax loss of $189 million. The Company's effective income tax rates for
both years reflect the impact of non-deductible amortization of intangibles. For
information concerning the benefit from income taxes as well as information
regarding differences between effective tax rates and statutory rates, see Note
7 of the Company's Notes to the Consolidated Financial Statements.

LIQUIDITY AND CAPITAL RESOURCES

GENERAL
The Company completed the Merger on November 18, 1998 and each issued and
outstanding share of common stock of the Company was converted into the right to
receive .99 shares of common stock, $.01 par value, of SSCC. Subsequent to the
Merger the Company had 110 million shares of common stock authorized, issued and
outstanding. The Company also received $300 million on November 18, 1998 from
SSCC as a capital contribution. See Note 2 of the Company's Notes to
Consolidated Financial Statements.

Proceeds from the sale of the Snowflake Mill of $250 million, SSCC's capital
contribution of $300 million and borrowings under the Company's bank credit
facilities of $514 million were used primarily to fund cash used by operating
activities of $4 million, capital expenditures and investments in affiliates
totaling $241 million, net debt payments of $786 million and deferred debt
issuance costs of $13 million.

The Company intends to sell or liquidate additional assets, including its
interest in Abitibi and other non-core businesses. On January 21, 1999, the
Company sold 7.8 million shares of Abitibi to a third party for approximately
$80 million. The Company intends to sell its remaining interest in Abitibi later
in 1999 subject to market conditions. Proceeds from asset sales are required to
be used to pay down borrowings under the Credit Agreements.

FINANCING ACTIVITIES

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 $995 million at December 31, 1998 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 April 1, 2000
(collectively the "Credit Agreement").

In November 1998,in connection with the Merger, the Company amended and restated
the Credit Agreement to (i) extend the maturity date on the Tranche B $190
million Term Loan from October 1, 1999 to April 1, 2000, (ii) extend the
maturity date of the revolving credit facility from May 15, 1999 to April 1,
2000 or, in the event the Tranche B Term Loan is repaid on or before April 1,
2000, to December 31, 2000, (iii) permit the use of the net proceeds from the
sale of the newsprint and related assets at the Snowflake Mill facility to
repay a portion of the 11.875% Senior Notes due December 1, 1998, (iv) permit
the Merger, and (v) ease certain financial covenants.

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 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 the
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 ease certain financial
covenant requirements for 1999.

The Company's senior notes, aggregating $1,723 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 2.68%. The
Company's senior subordinated debentures (the "Senior Subordinated Debentures"),
aggregating $627 million, are redeemable as of December 31, 1998, in whole or in
part, at the option of the Company at par plus a weighted average premium of
2.56%. The indentures governing the Senior Notes and the Senior Subordinated
Debentures (the "Indentures") generally provide that in the event of a change in
control (as defined), the Company must, subject to certain exemptions, offer to
repurchase the Senior Notes and the Senior Subordinated Debentures at a price
equal to 101% of the principal amount thereof, together with accrued interest.
The Merger constituted such a change in control. The Company's obligation to
offer to repurchase the Senior Subordinated Debentures is subject to the
condition precedent that the Company has first either repaid its outstanding
bank debt or obtained the consent of its bank lenders to make such repurchase.
In the case of the Senior Notes, the Company is required to make an offer to
repurchase unless such a repurchase would constitute an event of default under
the Company's outstanding bank debt and the Company has neither repaid its bank
debt nor obtained the consent of its bank lenders to such repurchase. A
repurchase of the Senior Notes or the Senior Subordinated Debentures is
prohibited by the terms of the Credit Agreement. 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 Credit Agreement or alternative financing arrangements
which would cause the bank lenders to consent to the repurchase of the Senior
Notes or the Senior Subordinated Debentures. There can be no assurance that the
Company will be successful in obtaining such financing or consents or as to the
terms of any 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 Senior
Notes require the Company to semi-annually offer to purchase 10 percent 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 semi-annual 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 $3,096 million at December 31,
1998, however it was below the $1 billion minimum at September 30, June
30,and March 31 1998 and December 31, 1997. In April 1998, the Company
offered to repurchase 10% of the outstanding indebtedness under the Senior
Note Indentures. Approximately $1 million in 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 will return to
the original interest rate on April 1, 1999 due to the Company's Subordinated
Capital Base exceeding the minimum on December 31, 1998.

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 ($470 million) and 11% senior subordinated notes
($120 million) will be increased by 50 basis points per semi-annual 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 $2,590 million at December
31, 1998, however, it was below the $500 million minimum at September 30, June
30, March 31, 1998 and December 31, 1997. The interest rate on the 11% senior
subordinated notes was increased 50 basis points on August 15, 1998. Effective
February 15, 1999, the interest rate on the 10.75% senior subordinated
debentures was increased 50 basis points. The interest rate on all of the Senior
Subordinated Debentures will return to the original interest rate on April 1,
1999, due to Company's Net Worth exceeding the minimum at December 31, 1998.

On April 3, 1998, Stone Container GmbH, a German subsidiary of the Company,
entered into a loan facility agreement with Dresdner Bank AG for 90 million
German Marks at an interest rate equal to LIBOR plus 2%. The loan facility
expires April 30, 2005. The proceeds from the facility were applied against
amounts outstanding on term loans under the Credit Agreement.

On June 16, 1998, the Company issued a notice to redeem all of its outstanding
8-7/8% Convertible Senior Subordinated Notes due 2000 (the "Notes") on July 15,
1998 at a redemption price equal to 101% of the principal amount of each Note,
plus accrued interest. The $59 million of Notes were convertible into shares of
common stock at a conversion price of $11.55 per share. All of the Notes were
converted resulting in the issuance of 5,060,516 shares of common stock.

On July 15, 1998, the Company repaid its $150 million 12.625% Senior Notes at
maturity with borrowings under its revolving credit facility.

On December 1, 1998, the Company repaid its $240 million 11.875% Senior
Unsecured Notes at maturity, with borrowings under the Stone Credit Agreement
and proceeds from the sale of the Snowflake Mill.

The declaration of dividends by the Board of Directors is subject to, among
other things, certain restrictive provisions contained in the Stone 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, 1998, the dividend pool under the Senior Subordinated Indenture
(which contains the most restrictive dividend pool provision) had a deficit of
approximately $971 million and Net Worth (as defined) was $2,590 million. In the
event six quarterly dividends remain unpaid on the Preferred Stock, the holders
of the Preferred Stock have the right 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. At December 31, 1998 the
Company had accumulated dividend arrearages on the Preferred Stock of $14
million, which represents seven consecutive quarters for which dividends have
not been paid. On March 8, 1999, the Company's Board of Directors designated two
new members of the Board of Directors to represent holders of the Preferred
Stock, and will nominate these designees for election in such capacity at the
Company's 1999 Annual Meeting of Stockholders.

It is expected that the Company will continue to incur losses unless prices for
the Company's products substantially improve. In the event that operating cash
flows, proceeds from any asset sales, borrowing availability under its revolving
credit facilities or from other financing sources do not provide sufficient
liquidity for the Company to meet its obligations, including its debt service
requirements, the Company will be required to pursue other alternatives to repay
indebtedness and improve liquidity, including cost reductions, deferral of
certain discretionary capital expenditures and seeking amendments to its debt
agreements. No assurances can be given that such measures, if required, could be
implemented or would generate the liquidity required by the Company to operate
its business and service its obligations. Scheduled debt payments in 1999 and
2000 are $161 million and $774 million, respectively, with increasing amounts
thereafter. Capital expenditures for 1999 are expected to be approximately $115
million. As of December 31, 1998, the Company had $363 million of unused
borrowing capacity under its Credit Agreement.

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 problem 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 $25 million through fiscal 1999
to correct the Year 2000 problem, of which approximately $4 million has been
incurred through December 31, 1998. 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 is utilizing both internal and
external resources to evaluate the potential impact of the Year 2000 problem.

The Company plans to fund its Year 2000 effort with cash from operations and
borrowings under the revolving 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 will
identify systems that could potentially have a Year 2000 problem and
categorize 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 high-risk systems,
which are scheduled to be substantially completed by the end of the second
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 are expected to be
substantially completed by the first quarter of 1999. The Company retained a
third party to assist with the verification and validation these three phases.
The Company expects to have substantially completed all phases of its Year 2000
program by the end of the second quarter of 1999.

The Year 2000 Project Management Office is in the process of surveying each
vendor to insure that they are Year 2000 compliant or have a plan in place.
Vendor responses are due to be received by the end of the first quarter of 1999.
The Company has also 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. Where appropriate, Company representatives will conduct an
in-depth investigation of a mission critical vendor's ability to be Year 2000
compliant.

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 on one or more of the Company's
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 are expected to be complete for both IT
systems and non-IT systems by the end of the second 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.

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 regulations. Capital expenditures for
environmental control equipment and facilities were approximately $24 million in
1997 and $8 million in 1998. The Company anticipates that environmental capital
expenditures will approximate $100 million in 1999. The majority of the 1999
expenditures 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 wastewaters under the Clean Water Act more
stringent and imposed 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 will be required to make capital
expenditures of up to approximately $180 million from 1999 through 2002 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 injunctive
and/or monetary relief is 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 sites and CERCLA sites were not
material to the Company's liquidity during 1998. 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.

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 47% 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
preliminary 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 March 1998, the American Institute of Certified Public Accounts issued
Statement of Position ("SOP") 98-1, "Accounting for Computer Software Developed
For or Obtained For Internal Use" which requires that certain costs incurred in
connection with developing or obtaining software for internal use must be
capitalized. Cost for such work performed internally by Company employees is
currently expensed as incurred. SOP 98-1 is effective beginning on January 1,
1999. The Company does not expect that the adoption of SOP 98-1 will have a
material effect on its future earnings or financial position.

In 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Investments 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, 1999. The Company has not assessed what the impact of SFAS No. 133
will be on the Company's future earnings or financial position.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

FOREIGN CURRENCY RISK

A significant portion of the Company's operations is located outside of the
United States. Accordingly, movements in exchange rates and translation effects
may have a significant impact on the financial conditions 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 $1,070 million at December 31, 1998. The potential loss in fair
value resulting from a hypothetical 10% adverse change in foreign currency
exchange rates would be approximately $107 million at December 31, 1998. Any
loss in fair value would be reflected as a cumulative translation adjustment in
Accumulated Other Comprehensive Income and would not impact net income of the
Company.

In 1998, 1997,and 1996, 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, 1998 1997 1996
- ----------------------- ---- ---- ----

Canadian dollar.............. (7.1)% (1.5)% Even
German Mark.................. (1.4) (15.3) (5.1)

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 losses of $21 million in 1998 and
$11 million in 1997 that have been recorded in Other, net. Additionally, the
Company's non-consolidated Canadian affiliate Abitibi is subject to foreign
exchange exposures which arise from its foreign currency sales, international
operations and U.S. dollar denominated debt. Abitibi partially manages its
foreign exchange exposure with a program of foreign exchange forward contracts
with major banks as counterparties for periods up to 5 years. Included in equity
income (loss) from affiliates is the Company's share of losses of approximately
$47 million and $16 million, net of tax, in 1998 and 1997, respectively,
resulting from adjusting outstanding contracts to fair market value and
recording exchange losses on U.S. dollar debt.

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 were not material to
the consolidated financial position of the Company at December 31, 1998.

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 5 to the consolidated
financial statements. The Company also enters into foreign currency exchange
agreements, the amount of which was not material to the consolidated financial
position of the Company at December 31, 1998.

SHORT AND LONG-TERM DEBT
OUTSTANDING AS OF DECEMBER 31, 1998
(IN U.S. $ MILLIONS) 1999 2000 2001 2002 2003 THEREAFTER TOTAL FAIR VALUE
- ----------------------------------------------------------------------------------------------------------------------------

U.S. bank term loans and revolver - $9 $534 $7 $7 $599 $ $1,156 $1,146
8.9% average interest rate
U.S. accounts receivable term debt - 210 210 210
6.0% average interest rate
U.S. senior and senior subordinated notes- 130 9 578 981 4 648 2,350 2,387
11.0% average interest rate
U.S. industrial revenue bonds - 1 3 13 13 14 194 238 238
7.9% average interest rate
German Mark bank term loans - 14 12 15 15 10 13 79 79
5.9% average interest rate
Other - U.S. 2 2 3 1 0 0 8 8
Other - Foreign 5 4 3 2 3 5 22 22
--------------------------------------------------------------------------
Total debt $161 $774 $619 $1,019 $630 $860 $4,063 $4,090
--------------------------------------------------------------------------
--------------------------------------------------------------------------

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

PAGE NO.
--------

INDEX TO FINANCIAL STATEMENTS
Management's Responsibility for the Financial Statements....................... 31
Reports of Independent Auditors................................................ 32-33
Consolidated Balance Sheets.................................................... 34
Consolidated Statements of Operations.......................................... 35
Consolidated Statements of Stockholders' Equity................................ 36-37
Consolidated Statements of Cash Flows.......................................... 38
Notes to the consolidated financial statements................................. 39

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 72
Valuation and Qualifying Accounts and Reserves (Schedule II)................ 73

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.

MANAGEMENT'S RESPONSIBILITY FOR THE 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 generally accepted accounting principles 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.

ROGER W. STONE
President and Chief Executive Officer
(Chief Executive Officer)

PAUL K. KAUFMANN
Vice President and Corporate Controller
(Principal Accounting Officer)

Report of Independent Auditors

Board of Directors
Stone Container Corporation

We have audited the accompanying consolidated balance sheet of Stone
Container Corporation as of December 31, 1998 and the related consolidated
statements of operations, stockholders' equity and cash flows for the
period from November 19 to December 31, 1998 and the period from January
1 to November 18, 1998 (Predecessor). Our audit also included the
financial statement schedule listed in the Index at Item 14(a) for the
period from November 19 to December 31 and January 1 to November 18,
1998 (Predecessor). 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 audit.

We conducted our audit in accordance with generally accepted auditing
standards. 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 audit
provides a reasonable basis for our opinion.

In our opinion, the 1998 financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Stone Container Corporation at December 31, 1998 and the consolidated
results of its operations and its cash flows for the period from November
19 to December 31, 1998 and the period from January 1 to November 18, 1998
(Predecessor) in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule
for the period from November 19 to December 31, 1998 and January 1
to November 18, 1998 (Predecessor), when considered in relation to the
basic financial statements taken as a whole, present fairly, in all
material respects, the information set forth therein.

St. Louis, Missouri
February 11, 1999
except for Note 5, as to which the date is March 23, 1999

Report of Independent Accountants

To the Board of Directors
And Stockholders of
Stone Container Corporation

In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of cash flows and of stockholders' equity
present fairly, in all material respects, the financial position of Stone
Container Corporation and its subsidiaries at December 31, 1997 and the results
of their operations and their cash flows for each of the two years in the period
ended December 31, 1997, in conformity with generally accepted accounting
principles. 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 audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards 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 audits provide 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.

PricewaterhouseCoopers LLP

Chicago, Illinois
March 26, 1998

STONE CONTAINER CORPORATION
CONSOLIDATED BALANCE SHEETS

December 31, (IN MILLIONS, EXCEPT SHARE DATA) Predecessor
1998 1997
- ---------------------------------------------------------------------------------------------------------------

ASSETS
Current assets
Cash and cash equivalents ................................................... $ 137 $ 113
Accounts and notes receivable, less allowances of $75 in 1998 and $28 in 1997 462 653
Inventories
Work-in-process and finished goods ........................................ 134 115
Materials and supplies .................................................... 422 601
------- -------
556 716
Deferred income taxes ....................................................... 38 24
Prepaid expenses and other current assets ................................... 108 90
------- -------
Total current assets ...................................................... 1,301 1,596
Net property, plant and equipment .............................................. 3,997 2,377
Timberland, less timber depletion .............................................. 15 50
Goodwill, less accumulated amortization of $8 in 1998 and $131 in 1997 ......... 2,643 444
Investment in equity of non-consolidated affiliates ............................ 632 878
Other assets ................................................................... 205 479
------- -------
$ 8,793 $ 5,824
------- -------
------- -------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current maturities of long-term debt ........................................ $ 161 $ 416
Accounts payable ............................................................ 270 328
Accrued compensation and payroll taxes ...................................... 99 91
Interest payable ............................................................ 98 104
Other current liabilities ................................................... 185 150
------- -------
Total current liabilities ................................................. 813 1,089
Long-term debt, less current maturities ........................................ 3,902 3,935
Other long-term liabilities .................................................... 734 307
Deferred income taxes .......................................................... 754 216

Stockholders' equity
Series E preferred stock, par value $.01 per share; 10,000,000 shares
authorized; 4,599,300 issued and outstanding in 1998 and 1997 ............. 78 115
Common stock, par value $.01 per share; 110,000,000 shares authorized, issued
and outstanding in 1998; and 200,000,000 authorized, 99,324,328 issued and
outstanding in 1997 ........................................................ 2,545 966
Retained earnings (deficit) ................................................. (36) (472)
Accumulated other comprehensive income (loss) ............................... 3 (332)
------- -------
Total stockholders' equity ................................................ 2,590 277
------- -------
$ 8,793 $ 5,824
------- -------
------- -------

See notes to consolidated financial statements.

STONE CONTAINER CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS

PREDECESSOR
-----------------------------------------------
Period from Period from
November 19 to January 1 to Year Ended December 31,
December 31, November 18, ---------------------------
(IN MILLIONS, EXCEPT PER SHARE DATA) 1998 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------

Net sales .............................................. $ 480 $ 4,399 $ 4,849 $ 5,142
Costs and expenses
Cost of goods sold .................................. 443 4,015 4,457 4,480
Selling and administrative expenses ................. 52 536 481 516
----- ------- ------- --------
Income (loss) from operations .................... (15) (152) (89) 146
Other income (expense)
Interest expense, net ............................... (45) (407) (441) (398)
Equity income (loss) of affiliates .................. 4 (92) (71) 63
Other, net .......................................... 4 (186) (4)
----- ------- ------- --------
Loss before income taxes, minority interest and
extraordinary item ............................ (52) (837) (605) (189)
Benefit from income taxes .............................. 16 88 200 66
Minority interest ...................................... 1
----- ------- ------- --------
Loss before extraordinary item ...................... (36) (749) (405) (122)
Extraordinary item
Loss from early extinguishment of debt, net of income
tax benefit of $7 in 1997 and $2 in 1996 ......... (13) (4)
----- ------- ------- --------
Net loss ......................................... (36) (749) (418) (126)
Preferred stock dividends .............................. (1) (7) (8) (8)
----- ------- ------- --------

Net loss applicable to common shares ............. $ (37) $ (756) $ (426) $ (134)
----- ------- ------- --------
----- ------- ------- --------
Basic earnings per common share
Loss before extraordinary item ...................... $ (7.43) $ (4.16) $ (1.32)
Extraordinary item .................................. (.13) (.03)

----- ------- ------- --------
Net loss ......................................... $ (7.43) $ (4.29) $ (1.35)
----- ------- ------- --------
----- ------- ------- --------
Weighted average shares outstanding ................. 102 99 99
----- ------- ------- --------
----- ------- ------- --------
Diluted earnings per common share
Loss before extraordinary item ...................... $ (7.43) $ (4.16) $ (1.32)
Extraordinary item .................................. (.13) (.03)
----- ------- ------- --------
Net loss ......................................... $ (7.43) $ (4.29) $ (1.35)
----- ------- ------- --------
----- ------- ------- --------
Weighted average shares outstanding ................. 102 99 99
----- ------- ------- --------
----- ------- ------- --------

See notes to consolidated financial statements.

STONE CONTAINER CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

Stockholders' Equity
-------------------------------------------------------------
Number of Shares Accumulated
-------------------- Retained Other
Preferred Common Preferred Common Earnings Comprehensive
(IN MILLIONS) Stock Stock Stock Stock (Deficit) Income (Loss) Total
- ------------------------------------------------------------------------------------------------------------------------------------

PREDECESSOR
BALANCE AT JANUARY 1, 1996 ................ 5 99 $ 115 $ 953 $ 138 $(201) $ 1,005
Comprehensive income (loss)
Net loss ............................... (126) (126)
Other comprehensive income (loss),
net of tax
Decrease in minimum pension liability 2 2
Foreign currency translation
adjustment ......................... (22) (22)
------- ------- ------- ------- ------- ------- ------
Comprehensive income (loss) ........ (126) (20) (146)
Amortization of restricted stock plan...... 2 2
Debt conversions to common stock .......... 1 1
Exercise of stock options ................. 1 1
Preferred stock dividends
($1.75 per share) ...................... (8) (8)
Common stock dividends
($0.60 per share) ...................... (59) (59)
------- ------- ------- ------- ------- ------- ------
BALANCE AT DECEMBER 31, 1996 .............. 5 99 115 955 (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 11
Exercise of stock options..................
Preferred stock dividends..................
($0.4375 per share) ..................... (2) (2)
------- ------- ------- ------- ------- ------- ------
BALANCE AT DECEMBER 31, 1997 .............. 5 99 115 966 (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 ........... 5 59 59
Exercise of stock options and issuance of
common stock under deferred benefit plan 1 8 8
------- ------- ------- ------- ------- ------- ------
BALANCE AT NOVEMBER 18, 1998 .............. 5 105 $ 115 $1,033 $(1,221) $(429) $ (502)
------- ------- ------- ------- ------- ------- ------

STONE CONTAINER CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

Stockholders' Equity
------------------------------------------------------
Number of Shares Accumulated
------------------ Retained Other
Preferred Common Preferred Common Earnings Comprehensive
(IN MILLIONS) Stock Stock Stock Stock (Deficit) Income (Loss) Total
- -----------------------------------------------------------------------------------------------------------------------------------

BALANCE AT NOVEMBER 18, 1998.................... 5 105 $ 115 $ 1,033 $(1,221) $(429) $(502)
Effect of Merger
Retire predecessor common equity ............. (105) (1,033) 1,221 429 617
Excess of purchase price over
common stock ............................... (37) 2,245 2,208
Issuance of common stock .................... 110
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 .................. 300 300
------ ------ ------ ------ ------ ------ -------
BALANCE AT DECEMBER 31, 1998 .................... 5 110 $ 78 $ 2,545 $ (36) $ 3 $2,590
------ ------ ------ ------ ------ ------ -------
------ ------ ------ ------ ------ ------ -------

See notes to consolidated financial statements

STONE CONTAINER CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

PREDECESSOR
---------------------------------------
Period from Period from
November 19 to January 1 to Year Ended December 31,
December 31, November 18, -----------------------
(IN MILLIONS) 1998 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------------

CASH FLOWS FROM OPERATING ACTIVITIES
Net loss .............................................. $ (36) $(749) $(418) $(126)
Adjustments to reconcile net loss to net cash
provided by (used for) operating activities:
Extraordinary loss from early extinguishment of debt 13 4
Depreciation and amortization ...................... 34 239 302 315
Deferred income taxes .............................. (21) (106) (217) (88)
Foreign currency transaction (gains) losses ........ (4) 24 11
Equity (income) loss of affiliates ................. (4) 92 71 (63)
Write-down of investments in non-consolidated
affiliates ...................................... 155
Gain on sale of the Snowflake Mill ................. (37)
Change in current assets and liabilities, net of
effects from acquisitions and dispositions
Receivables ..................................... 77 65 (131) 185
Inventories ..................................... 111 3 (51)
Other current assets ............................ (12) 22 4 15
Accounts payable and other current liabilities .. (24) 10 18 56
Other, net ......................................... 2 158 85 41
----- ----- ----- -----
Net cash provided by (used for) operating activities .. 12 (16) (259) 288
----- ----- ----- -----
CASH FLOWS FROM INVESTING ACTIVITIES
Property additions .................................... (22) (145) (137) (251)
Investments in and advances to affiliates, net ........ (74) (13) (147)
Proceeds from sales of assets ......................... 252 7 53
Other, net ............................................ 2 (31) 3
----- ----- ----- -----
Net cash provided by (used for) investing activities .. (22) 35 (174) (342)
----- ----- ----- -----
CASH FLOWS FROM FINANCING ACTIVITIES
Debt repayments ....................................... (463) (323) (492) (395)
Borrowings ............................................ 61 453 950 606
Deferred debt issuance costs .......................... (9) (4) (18) (16)
Capital contribution from SSCC ........................ 300
Proceeds from issuance of common stock ................ 2
Cash dividends ........................................ (2) (67)
----- ----- ----- -----
Net cash provided by (used for) financing activities .. (111) 128 438 128
----- ----- ----- -----
Effect of exchange rate changes on cash ............... (2) (5) (2)
----- ----- ----- -----
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ............ (121) 145 72
Cash and cash equivalents
Beginning of period ................................... 258 113 113 41
----- ----- ----- -----
End of period ......................................... $ 137 $ 258 $ 113 $ 113
----- ----- ----- -----
----- ----- ----- -----

See notes to consolidated financial statements.

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 period from November 19 to December
31, 1998 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 and $40 million are pledged at December 31,
1998 and 1997, respectively, as collateral for obligations associated with the
accounts receivable securitization program (See Note 5).

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. The
primary methods used to determine inventory costs are the last-in-first-out
("LIFO") method and the average cost method. Inventories costed by the LIFO,
first-in-first-out ("FIFO") and average cost methods represented
approximately 47%, 6% and 47%, respectively, of total inventories at December
31, 1998 and approximately 36%, 7% and 57%, respectively, of total
inventories at December 31, 1997. FIFO costs (which approximate replacement
costs) exceeded the LIFO value by $20 million at December 31, 1997. 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 preliminary appraisal results,
property, plant and equipment were recorded at fair market value on the date of
the Merger, and useful lives averaging 17 years were assigned to the assets (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.

TIMBERLAND, LESS TIMBER DEPLETION: Timberland is stated at cost less accumulated
cost of timber harvested. The Company amortizes its private fee timber costs
over the estimated total timber that will be available during the estimated
growth cycle. Cost of non-fee timber harvested is determined on the basis of
timber removal rates and the estimated volume of recoverable timber.

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 Statement of Financial Accounting
Standards ("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 7).

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.

The Company is exposed to the effect of foreign exchange rate fluctuations due
to its foreign operations. The Company's non-consolidated equity affiliate,
Abitibi-Consolidated, Inc. ("Abitibi") purchases foreign currency forward
contracts to minimize the effect of fluctuating foreign currencies on its
reported income, generally over the ensuing 60 months. The forward contracts do
not qualify as hedges for financial reporting purposes and accordingly are
carried in the financial statements of the equity investee at the current
forward foreign rates, with the changes in forward rates reflected directly in
income.

EARNINGS PER COMMON SHARE: Effective December 31, 1997, the Company adopted SFAS
No. 128 "Earnings per Share." SFAS No. 128 replaced the calculation of primary
and fully diluted earnings per share with basic and diluted earnings per share.
As required, all prior-period earnings per share data presented have been
restated.

Basic earnings per share is computed by dividing income available to common
shareholders by the weighted average number of shares outstanding. Diluted
earnings per share is computed to show, on a pro forma basis, per share earnings
available to common shareholders assuming the exercise or conversion of all
dilutive securities that are exercisable or convertible into common stock (See
Note 12).

Subsequent to the Merger, earnings per share information is no longer presented
because the Company is a wholly-owned subsidiary of SSCC.

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 10).

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 1998 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.

PROSPECTIVE ACCOUNTING PRONOUNCEMENTS: SOP 98-1, "Accounting for Computer
Software Developed or Obtained For Internal Use" was issued in March 1998. 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 Company does not anticipate
that the adoption of SOP 98-1 will have a material effect on its 1999 financial
statements.

In 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Investments 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, 1999. The Company has not assessed what the
impact of SFAS No. 133 will be on the Company's future earnings or 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 has been 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. and the
resolution of litigation related to the Company's purchase of common stock of
Stone Savannah River Pulp and Paper Corporation ("SSR") (See Note 16). This
preliminary allocation resulted in acquired goodwill of approximately $2,650
million, which is being amortized on a straight-line basis over 40 years.

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 mill facilities were
shut down on December 1, 1998 and in the near future the Company will abandon or
sell these facilities. 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 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. The following
is a summary of the exit liabilities recorded in the preliminary allocation of
the purchase price:

Balance at
Opening December 31,
Balance Activity 1998
------- -------- -----------

Severance ........ $ 14 $ (4) $ 10
Lease commitments 38 (1) 37
Other commitments 56 (6) 50
Mill closure costs 9 9
----- ----- ----
$ 117 $ (11) $106
----- ----- ----
----- ----- ----

Future cash outlays under the restructuring are anticipated to be $38 million in
1999, $15 million in 2000, $14 million in 2001, and $39 million thereafter. 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. Further adjustments to the cost to acquire the
Company are expected in 1999 as management finalizes its plans.

3. NET PROPERTY, PLANT AND EQUIPMENT

Net property, plant and equipment at December 31 is summarized as follows:

Predecessor
1998 1997
- -------------------------------------------------------------------------------

Land ......................................... $ 84 $ 129
Buildings and leasehold improvements ......... 499 656
Machinery, fixtures and equipment ............ 3,336 3,974
Construction in progress ..................... 105 98
------ ------
4,024 4,857
Less accumulated depreciation and amortization 27 2,480
------ ------
Net property, plant and equipment ....... $3,997 $2,377
------ ------
------ ------

Depreciation expense was $26 million for the period from November 19 to December
31, 1998, $212 million for the period from January 1 to November 18, 1998, $260
million in 1997 and $260 million in 1996. Property, plant and equipment includes
capitalized leases of $14 million and $18 million and related accumulated
amortization of $.2 million and $4 million at December 31, 1998 and 1997,
respectively.

4. 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.

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 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 accounts 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. On January 21,
1999, the Company sold 16% of its interest in Abitibi to a third party such
that the Company's ownership percentage was reduced to approximately 22%. The
Company is holding its remaining interest in Abitibi with a carrying value of
$452 million at December 31, 1998 for sale.

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.

As of December 31, 1998, the carrying value of non-consolidated affiliates is
$115 million lower than the underlying equity interest owned by the Company
which represents the adjustments to fair value which were made in the allocation
of the Merger purchase price.

The Company's significant non-consolidated affiliates at December 31, 1998 are
MacMillian Bathurst, Inc. ("MBI"), a Canadian corrugated container company, in
which the Company owns a 50% interest, that had sales of $351 million in 1998
and Abitibi, which had sales of $2,313 million in 1998. 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:

Period from Period from
November 19 to January 1 to Year Ended
December 31, November 18, December 31,
1998 1998 1997
- ----------------------------------------------------------------------------------------------------------------

Results of operations (a)
Net sales.................................................. $ 380 $ 3,219 $ 4,073
Cost of sales.............................................. 351 2,528 2,990
Loss before income taxes, minority interest and
extraordinary charges.................................... (56) (312) (165)
Net loss................................................... (43) (261) (176)

December 31,
----------------------------------
1998 1997
- --------------------------------------------------------------------------------------------------

Financial position:
Current assets............................................. $ 960 $ 1,297
Noncurrent assets.......................................... 4,224 5,316
Current liabilities........................................ 773 1,010
Noncurrent liabilities..................................... 1,972 2,618
Stockholders' equity....................................... 2,439 2,985

(a) Includes results of operations for each of the Company's affiliates for the
period it was accounted for under the equity method.

5. LONG-TERM DEBT

Long-term debt as of December 31 is as follows:

Predecessor
1998 1997
------------------------

BANK CREDIT FACILITIES

Tranche B Term Loan (8.8% weighted average variable rate),
Payable in various installments through April 1, 2000 ......................................... $ 368 $ 372
Tranche C Term Loan (9.0% weighted average variable rate),
Payable in various installments through October 1, 2003 ....................................... 194 196
Tranche D Term Loan (9.0% weighted average variable rate),
Payable in various installments through October 1, 2003 ....................................... 185 187
Tranche E Term Loan (9.0% weighted average variable rate),
Payable in various installments through October 1, 2003 ....................................... 248 299
Revolving credit facility (8.5% weighted average rate), due April 1, 2000 ....................... 161 20
Europa Carton AG (a wholly-owned German subsidiary) term loan, denominated in German
DMs, payable in March 2005 ................................................................... 49
4.98% to 7.96% term loans, denominated in foreign currencies, payable in varying amounts
through 2004 ................................................................................. 30 31
-------- -------
1,235 1,105

ACCOUNTS RECEIVABLE SECURITIZATION PROGRAM BORROWINGS
Accounts receivable securitization program term loans (6.2% weighted average rate), due
December 15, 2000 ............................................................................ 210 210

SENIOR NOTES
10.75% first mortgage notes, due October 1, 2002 (plus (less) unamortized
premium (discount) of $18 and ($2)) ......................................................... 518 498
8.45% mortgage notes, payable in monthly installments through August 1, 2007 and
$69 on September 1, 2007 ..................................................................... 82 83
9.875% unsecured senior notes, due February 1, 2001 (plus unamortized premium
of $7 at December 31, 1998) ................................................................. 578 574
11.5% unsecured senior notes, due October 1, 2004 (plus (less) unamortized
premium (discount) of $12 and ($1) ) ......................................................... 212 199
11.5% unsecured senior notes, due August 15, 2006 (plus unamortized premium of $6 at
December 31, 1998) .......................................................................... 206 200
12.58% rating adjustable unsecured senior notes, due August 1, 2016 (plus
unamortized premium of $2 at December 31, 1998) .............................................. 127 125
12.625% senior notes, due July 15, 1998 ......................................................... 150
11.875% senior notes, due December 1, 1998 ...................................................... 240
-------- -------
1,723 2,069

OTHER DEBT
Fixed rate 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 (less unamortized discount of $5 at December 31, 1997) 2027 (less
unamortized discount of nil and $5 million) .................................................. 238 236
Other (including obligations under capitalized leases of $7 and $9) ............................. 30 34
-------- -------
268 270

SUBORDINATED DEBT
10.75% senior subordinated debentures and 1.5% supplemental interest certificates,
due on April 1, 2002 (less unamortized discount of $5 at December 31, 1998) .................. 270 275
10.75% senior subordinated debentures, due April 1, 2002 (less unamortized debt discount of $1 at
December 31, 1997) ........................................................................... 200 199
11.0% senior subordinated notes, due August 15, 1999 (plus unamortized premium of $1 at
December 31, 1998) ........................................................................... 120 119
8.875% convertible senior subordinated notes (convertible at $11.55 per share), due July 15, 2000 59

6.75% convertible subordinated debentures (convertible at $34.28 per share), due
February 15, 2007 (less unamortized discount of $8 at December 31, 1998) ..................... 37 45
-------- -------
627 697
-------- -------

Total debt ...................................................................................... 4,063 4,351
Less current maturities ......................................................................... (161) (416)
-------- -------
Long-term debt .................................................................................. $ 3,902 $ 3,935
-------- -------
-------- -------

The amounts of total debt outstanding at December 31, 1998 maturing during the
next five years are as follows:

1999...................................... $ 161
2000...................................... 774
2001...................................... 619
2002...................................... 1,019
2003...................................... 630
Thereafter................................ 860

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 $995 million at December 31, 1998 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 April 1, 2000
(collectively the "Credit Agreement"). The Company pays a .5% commitment fee on
the unused portions of its revolving credit facility. At December 31, 1998, the
unused portion of this facility, after giving consideration to outstanding
letters of credit, was $363 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.

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, 1998, borrowings and accrued interest outstanding under the
Credit Agreement were secured by a security interest in substantially all of the
assets of the Company, with the exception of cash, cash equivalents and certain
trade receivables, 65% of the stock of its Canadian subsidiary and all of the
shares of Abitibi owned by Stone.

On April 3, 1998, Stone Container GmbH, a German subsidiary of the Company,
entered into a loan facility agreement for 90 million German Marks at an
interest rate equal to LIBOR plus 2%. The loan facility expires April 30, 2005.
The proceeds from the facility were applied against amounts outstanding on the
Company's term loans under its Credit Agreement.

ACCOUNTS RECEIVABLE SECURITIZATION PROGRAM BORROWINGS
The Company has a $210 million accounts receivable securitization program (the
"Securitization Program") whereby certain eligible 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. Under the Securitization
Program, Stone Receivables Corporation has granted a security interest in cash,
cash equivalents and trade accounts receivable. At December 31, 1998, $228
million of the Company's trade accounts receivable are pledged as collateral
under the program.

SENIOR NOTES
The Company's senior notes (the "Senior Notes"), aggregating $1,723 million, are
redeemable in whole or in part at the option of the Company at various dates
beginning February 1999, at par plus a weighted average premium of 2.68%. The
Merger constituted a "Change of Control" under the Senior Notes and the
Company's $627 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 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 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 $3,096 million at December 31, 1998;
however, it was below the $1 billion minimum at September 30, June 30, and March
31, 1998 and December 31, 1997. 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 rates 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
will return to the original interest rate on April 1, 1999 due to the Company's
Subordinated Capital Base exceeding the minimum on December 31, 1998.

On December 1, 1998, the Company repaid its $240 million 11.875% Senior
Unsecured Notes at maturity, with borrowings under its revolving credit facility
and proceeds from the sale of the Snowflake Mill assets (See Note 13).

On July 15, 1998, the Company repaid its $150 million 12.625% Senior Notes at
maturity with borrowings under its revolving credit facility.

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
assets at 37 of the Company's corrugated container plants.

SUBORDINATED DEBT
The Company's Senior Subordinated Debentures, aggregating $627 million, are
redeemable as of December 31, 1998, in whole or in part at the option of the
Company at par plus a weighted average premium of 2.56%.

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 ($470 million) and 11.0% senior subordinated
debentures ($120 million) 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 $2,590 million at December 31, 1998,
however, it was below the $500 million minimum at September 30, June 30 and
March 31, 1998 and December 31, 1997. 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 will return
to the original interest rate on April 1, 1999, due to the Company's Net Worth
exceeding the minimum at December 31, 1998.

On June 16, 1998, the Company issued a notice to redeem all of its outstanding
8.875% Convertible Senior Subordinated Notes due 2000 (the "Notes") on July 15,
1998 at a redemption price equal to 101% of the principal amount of each Note,
plus accrued interest. The $59 million of Notes were convertible into shares of
common stock at a conversion price of $11.55 per share. All of the Notes were
converted in July (prior to the redemption date), resulting in the issuance of
5,060,516 shares of common stock.

OTHER
Interest cost capitalized on construction projects was nil for the period from
November 19 to December 31, 1998, $2 million for the period from January 1 to
November 18, 1998, $3 million in 1997 and $12 million in 1996. Interest payments
on all debt instruments were $22 million for the period from November 19
to December 31, 1998, $424 million for the period from January 1 to November 18,
1998, $424 million in 1997 and $395 million in 1996.

6. 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
are reflected below:

1999.......................................................... $ 85
2000.......................................................... 70
2001.......................................................... 58
2002.......................................................... 48
2003.......................................................... 40
Thereafter.................................................... 132
-----
Total minimum lease payments................................ $ 433
-----
-----

Net rental expense for operating leases, including leases having a duration of
less than one year, was approximately $15 million for the period from November
19 to December 31, 1998, $106 million for the period from January 1 to November
18, 1998, $114 million in 1997 and $108 million in 1996.

7. INCOME TAXES

Significant components of the Company's deferred tax assets and liabilities at
December 31 are as follows:

Predecessor
1998 1997
- -----------------------------------------------------------------------------------------------------------

Deferred tax liabilities:
Property, plant and equipment and timberland ........................... $(1,287) $(588)
Prepaid pension costs .................................................. (11) (3)
Other .................................................................. (67) (46)
------- -----
Total deferred tax liability ......................................... (1,365) (637)
------- -----
Deferred tax assets:
Net operating loss, alternative minimum tax and tax credit carryforwards 456 367
Employee benefit plans ................................................. 50 38
Minimum pension liability .............................................. 86 20
Deferred gain .......................................................... 23 20
Purchase accounting liabilities ........................................ 103
Deferred debt issuance costs ........................................... 52
Other .................................................................. 77 48
------- -----
Total deferred tax assets ............................................ 847 493
Valuation allowance for deferred tax assets ............................ (198) (37)
------- -----

Net deferred tax asset ............................................... 649 456
------- -----

Net deferred tax liability ........................................... $ (716) $(181)
------- -----
------- -----

At December 31, 1998, the Company had approximately $1,055 million of net
operating loss carryforwards for U. S. Federal income tax purposes that expire
from the years 2009 to 2018, with a tax value of $369 million. A valuation
allowance of $153 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 $63 million, which expire from 1999 through 2018. A
valuation allowance of $45 million has been established for a portion of these
deferred tax assets. The Company had approximately $24 million of alternative
minimum tax credit carryforwards for U.S. federal tax purposes, which are
available, indefinitely.

Benefit from (provision for) income taxes from loss before income taxes,
minority interest and extraordinary item is as follows:

Predecessor
-------------------------------------
Period from Period from Year ended December 31,
November 19 to January 1 to -----------------------
December 31, November 18, 1997 1996
1998 1998
- -----------------------------------------------------------------------------------------

Current
Federal .................... $ $ $ 4 $ (2)
Foreign .................... (5) (18) (21) (20)
---- ----- ----- ----
Total current (expense) .... (5) (18) (17) (22)

Deferred
Federal .................... 15 121 166 64
State ...................... 3 (34) 30 13
Foreign .................... 3 19 21 11
---- ----- ----- ----
Total deferred benefit ..... 21 106 217 88
---- ----- ----- ----
---- ----- ----- ----
Total benefit from income taxes $ 16 $ 88 $ 200 $ 66
---- ----- ----- ----
---- ----- ----- ----

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,
minority interest and extraordinary item is as follows:

Predecessor
-------------------------------------------------
Period from Period from Year ended December 31,
November 19 to January 1 to -----------------------
December 31, November 18, 1997 1996
1998 1998
- -------------------------------------------------------------------------------------------------------------------------

U.S. federal income tax benefit at federal
statutory rate ................................... $ 18 $ 293 $ 212 $ 66
Effect of valuation allowances on deferred
tax assets, net of federal benefit ............ (151) (9) (10)
Unutilized capital loss ............................. (36) (4)
Permanently non-deductible expenses ................. (3) (7) (8) (8)
Equity (earnings) losses of affiliates, net of tax . (30) (19) 19

State income taxes, net of federal income tax effect 2 22 19 8

Minimum taxes-foreign jurisdictions ................. (4) (4) (5)
Other-net ........................................... (1) 1 9
----- ----- ----- ----
Total benefit from income taxes ..................... $ 16 $ 88 $ 200 $ 66
----- ----- ----- ----
----- ----- ----- ----

The components of the income (loss) before income taxes, minority interest, and
extraordinary item are as follows:

Predecessor
-----------------------------------------
Period from Period from
November 19 to January 1 to Year ended December 31,
December 31, November 18, -----------------------
1998 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------

United States ............................... $(54) $(405) $(521) $(208)
Foreign ..................................... 2 (432) (84) 19
---- ----- ----- -----
Income (loss) before income
Taxes, minority interest and extraordinary
item ..................................... $(52) $(837) $(605) $(189)
---- ----- ----- -----
---- ----- ----- -----

The Company made income tax payments of $6 million for the period from November
19 to December 31, 1998, $27 million for the period from January 1 to November
18, 1998, $13 million in 1997 and $35 million in 1996.

8. EMPLOYEE BENEFIT PLANS

DEFINED BENEFIT PLANS
The Company sponsors noncontributory defined benefit pension plans covering
substantially all employees. Approximately 19% of pension plan assets at
December 31, 1998, are invested in cash equivalents or debt securities and 81%
are invested in equity securities. Equity securities at December 31, 1998
include 255,687 shares of SSCC common stock with a market value of approximately
$4 million.

As a result of the Merger, the Company recorded previously unrecognized
actuarial gains and losses and prior service cost in its purchase price
allocation. On December 31, 1998, the defined benefit plans of the Company
were merged with the defined benefit plans of SSCC. As a result of this plan
merger, the plan assets of the Company will be available to meet the funding
requirements of all plans. Plan asset information provided below reflects the
plan assets of the Company prior to the effect of this plan merger.

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% to 9% at December 31, 1998, decreasing to
the ultimate rate of 5%. The effect of a 1% increase in the assumed health
care cost trend rate would increase the APBO as of December 31, 1998 by
$7 million and would have an immaterial effect on the annual net periodic
postretirement benefit cost for 1998.

The following provides a reconciliation of benefit obligations, plan assets, and
funded status of the plans:

Defined Benefits Plans Postretirement Plans
--------------------------- ---------------------------
Predecessor Predecessor
1998 1997 1998 1997
--------------------------- ---------------------------

CHANGE IN BENEFIT OBLIGATION:
Benefit obligation at January 1 ......... $ 708 $ 621 $ 72 $ 65
Service cost ............................ 21 19 1 1
Interest cost ........................... 49 47 5 5
Amendments .............................. 1 2
Actuarial loss .......................... 35 72 2 8
Benefits paid ........................... (32) (32) (6) (6)
Foreign currency rate changes ........... (4) (21) (1) (1)
----- ----- ---- ----
Benefits obligation at December 31 ...... $ 778 $ 708 $ 73 $ 72
----- ----- ---- ----

CHANGE IN PLAN ASSETS:
Fair value of plan assets at January 1 .. $ 468 $ 397 $ $
Actual return on plan assets ............ 56 74
Employer contributions .................. 24 35
Plan participants' contributions ........ 1
Benefits paid ........................... (32) (32)
Foreign currency rate changes ........... (12) (7)
----- ----- ---- ----
Fair value of plan assets at December 31 $ 504 $ 468 $ $
----- ----- ---- ----

Over (under) funded status .............. (274) (240) $(73) $(72)
Unrecognized actuarial (gain) loss ...... (29) 137
Unrecognized prior service cost ......... 23
----- ----- ---- ----
Net amount recognized ................... $(303) $ (80) $(73) $(72)
----- ----- ---- ----
----- ----- ---- ----
AMOUNTS RECOGNIZED IN THE BALANCE SHEETS:
Accrued pension liability ............... $(303) $(146) $(73) $(72)
Intangible asset ........................ 15
Other long-term assets .................. 20
Accumulated other comprehensive income... 31
----- ----- ---- ----
Net amount recognized ................... $(303) $ (80) $(73) $(72)
----- ----- ---- ----
----- ----- ---- ----

The weighted-average assumptions used in the accounting for the defined benefit
plans and postretirement plans were:

Defined Benefit Plans Postretirement Plans
---------------------------- --------------------------
1998 1997 1998 1997
---------------------------- --------------------------

Weighted discount rate:
U.S. plans........................... 7.00% 7.00% 7.00% 7.00%
Foreign plans........................ 6.00-7.00% 7.25% 7.00% 7.25%
Rate of compensation increase........... 3.00-3.75% 4.00% N/A N/A
Expected return on plan assets.......... 9.50% 11.00% N/A N/A

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 Year ended December 31,
December 31, November 18, -----------------------
1998 1998 1997 1996
- ----------------------------------------------------------------------------------------

Service cost ................. $ 2 $ 19 $ 19 $ 18
Interest cost ................ 6 43 47 43
Expected return on plan assets (5) (44) (43) (39)
Net amortization and deferral 9 10 11
Multi-employer plans ......... 5 5 5
--- ---- ---- ----
Net periodic benefit cost .... $ 3 $ 32 $ 38 $ 38
--- ---- ---- ----
--- ---- ---- ----

POSTRETIREMENT PLANS

Service cost ................. $ $1 $1 $1
Interest cost ................ 1 4 5 5
Net amortization and deferral 1
Multi-employer plans ......... 1
-- -- -- --
Net periodic benefit cost .... $1 $6 $7 $6
-- -- -- --
-- -- -- --

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 $601 million, $534 million and $335 million,
respectively, as of December 31, 1998 and $516 million, $458 million and $297
million as of December 31, 1997.

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 $5
million in 1998, and an immaterial amount in 1997 and 1996.

9. PREFERRED STOCK

At December 31, 1998, the Company had 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.

The Company paid cash dividends of $.4375 per share on the Preferred Stock in
1997 and $1.75 per share in 1996. No cash dividends were paid in 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, 1998, the
dividend pool under the Senior Subordinated Indenture (which contains the most
restrictive dividend pool provision) had a deficit of approximately $971 million
and Net Worth (as defined) was $2.6 billion. Because more than six 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. At December 31, 1998, the Company
had accumulated dividend arrearages on the Preferred Stock of $14 million.

10. 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.

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:

1998 1997 1996
---------------------------------------------

Expected option life (years) ........... 7 7 6
Risk-free weighted average interest rate 5.6% 6.6% 5.5%
Stock price volatility ................. 50% 51% 47%
Dividend yield ......................... 0.0% 4.2% 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.

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 pro
forma information is as follows:

Predecessor
-----------------------------------------------------
Period from
January 1 to Year ended December 31,
November 18, -----------------------------
1998 1997 1996
-----------------------------------------------------

AS REPORTED
Net income (loss) ............... $ (749) $ (418) $ (126)
Basic earnings (loss) per share . (7.43) (4.29) (1.35)
Diluted earnings (loss) per share (7.43) (4.29) (1.35)

PRO FORMA
Net income (loss) ............... $ (753) $ (423) $ (130)
Basic earnings (loss) per share . (7.46) (4.34) (1.39)
Diluted earnings (loss) per share (7.46) (4.34) (1.39)

The weighted average fair values of options granted during 1998, 1997 and 1996
were $6.93, $5.59 and $4.81 per share, respectively.

Additional information relating to the Plans is as follows:

Shares Under Option Weighted Average
Option Price Range Exercise Price
------------------------------------------------------------

Outstanding at January 1, 1996 . 1,896,962 $13.38-29.29 $ 19.23

Granted ..................... 1,980,721 13.38 13.38
Exercised ................... (30,000) 13.38 13.38
Canceled .................... (97,147) 13.38-29.29 19.48
--------- ------------- --------------
Outstanding at December 31, 1996 3,750,536 $ 13.38-29.29 $ 19.23

Granted ..................... 1,296,706 14.00 14.00
Exercised ................... (12,500) 13.38 13.38
Canceled .................... (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
Canceled .................... (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 and 1996 were 1,599,482
and 1,003,890, respectively.

11. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

Accumulated other comprehensive income (loss) is as follows:

Foreign Accumulated
Currency Minimum Other
Translation Pension Comprehensive
Adjustment Liability Income (Loss)
----------------------------------------------------

Predecessor:
Balance at January 1, 1996 .. $(157) $(44) $(201)
Current period change ... (22) 2 (20)
------ ------ ------
Balance at December 31, 1996 (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
------ ------ ------
------ ------ ------

12. 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:

Period from
January 1 to Year ended December 31,
November 18, --------------------------
1998 1997 1996
-------------------------------------------

Numerator:
Loss from continuing operations before extraordinary item $ (749) $ (405) $ (122)
Less: Preferred stock dividends ........................ (7) (8) (8)
------ ------ ------
Loss applicable to common stockholders .................. $ (756) $ (413) $ (130)
------ ------ ------
Denominator:
Denominator for basic earnings per share -
Weighted average shares .............................. 102 99 99
Denominator for diluted earnings per share -
Adjusted weighted average shares ..................... 102 99 99
------ ------ ------

Basic earnings (loss) per share before extraordinary item .. $(7.43) $(4.16) $(1.32)
------ ------ ------

Diluted earnings (loss) per share before extraordinary item $(7.43) $(4.16) $(1.32)
------ ------ ------
------ ------ ------

Convertible debt to acquire four million shares of common stock with an
earnings effect of $3 million, and exchangable 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.

Convertible debt to acquire six million shares of common stock with an
earnings effect of $5 million, and exchangeable preferred stock to acquire
four million shares of common stock with an earnings effect of $8 million
are excluded from the diluted earnings per share computation in 1997 and
1996 because they are antidilutive. Options to purchase .2 million shares of
common stock under the treasury stock method are excluded from the diluted
earnings per share computation in 1996 because they are antidilutive.

13. 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 will operate on behalf of the Company pursuant to
an operating agreement entered into as part of the sale. Payments made to
Abitibi under the operating agreement were $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.

After November 18, 1998, the Company sold and purchased containerboard at market
prices from Jefferson Smurfit Corporation (U.S.), a subsidiary of SSCC, as
follows:

Product sales........................................................... $ 8
Product and raw material purchases...................................... 14
Receivables at December 31.............................................. 4
Payables at December 31................................................. 8

The Company paid a commission fee to Abitibi pursuant to a sales agency
agreement expiring December 31, 2004 and paid fees for services rendered by
Abitibi. The Company also received commissions and management fees from SVCPI
for services rendered.

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 Year ended December 31,
December 31, November 18, -----------------------
1998 1998 1997 1996
--------------- -----------------------------------------

Product sales .................... $ 24 $220 $206 $249
Product and raw material purchases 113 103 66
Receivables at December 31 ....... 65 60 50
Payables at December 31 .......... 5 4
Commissions for services rendered 2 1
Fees payable for services received 10 11 11

The Company had outstanding loans and interest receivable from non-consolidated
affiliates of approximately $5 million and $108 million at December 31, 1998 and
1997, respectively.

14. FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying values and fair values of the Company's financial instruments at
December 31 are as follows:

Predecessor
1998 1997
------------------------------- ------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------------- ------------ ----------- -----------

Cash and cash equivalents ................. $ 137 $ 137 $ 113 $ 113
Notes receivable and long-term investments 22 22 117 109
Long-term debt including current maturities 4,063 4,090 4,351 4,416
Interest rate swaps in payable position ... (4)

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 is party to an interest rate swap contract which expires in February
1999. The swap contract has 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
agrees 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.

The following table indicates the weighted average receive rate and pay rate
relating to the interest rate swaps outstanding at December 31, 1998 and 1997:

1998 1997
---------------------

Interest rate swap notional amount................................. $ $ 150
Average receive rate (fixed by contract terms)................... 5.7%
Average pay rate................................................. 5.7%
Interest rate swap notional amount................................. $ 100 $ 100
Average receive rate (fixed by contract terms)................... 5.6% 5.6%
Average pay rate................................................. 5.6% 5.8%

15. OTHER, NET:

The major components of other, net are as follows:

Predecessor
----------------------------------------
Period from Period from
November 19 to January 1 to Year ended December 31,
December 31, November 18, -----------------------
1998 1998 1997 1996
-----------------------------------------------------------

Foreign currency transaction gains (losses)................. $ 4 $ (24) $ (11) $ (1)
Gains (losses) on sales of investments or assets............ 37 1 (5)
Write-down of investments in non-consolidated affiliates.... (155)
Merger related and change of control expenses............... (32)
Other....................................................... (12) 6 6
----- ----------- -------- -------
Total other, net............................................ $ 4 $ (186) $ (4) $
----- ----------- -------- -------
----- ----------- -------- -------

16. 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.

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 PRPs at
each site, the identity and financial condition of such parties and experience
regarding similar matters.

In April 1998, a suit was filed against the Company in Los Angeles Superior
Court by Chesterfield Investments L.P. ("Chesterfield"), and D.P. Investments
L.P. ("DPI"), alleging that the Company owes such parties approximately $120
million relating to the Company's purchase of common stock of Stone Savannah
River Pulp and Paper Corporation ("SSR"). In 1991, the Company 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. The
Company has concluded a settlement of the case with DPI, which had a 30%
interest in the contingent payment. Chesterfield is continuing to pursue the
case as to the remaining 70% of the contingent payment. The Company disputes
Chesterfield's calculation of the contingent payment, and is vigorously
defending the litigation. The case is currently set for trial in the second
quarter of 1999. The Company believes that existing reserves are adequate and
that the resolution of this matter will not have a significant impact on the
Company's financial condition or results of operations.

The Company 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 the Company and Four M. The OPA requires that the
Company and Four M each purchase one half of the linerboard produced at FCPC's
mill in Port St. Joe, Florida (the "FCPC Mill") at a minimum price sufficient to
cover certain obligations of FCPC. The OPA also requires 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. Certain creditors of FCPC have alleged that the Company and Four M are in
default with respect to their obligations under the OPA. The Company's ultimate
liability under the OPA is uncertain at this time, although the Company believes
that existing reserves are adequate to cover the amount of any adverse judgment
in this matter.

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.

17. 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 1997 and 1996 has been restated
from the prior year's presentation in order to conform to the 1998 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 and interest expense), the adjustment
to record inventory at LIFO, and the elimination of intercompany assets and
intercompany profit.

A summary by business segment follows:

CONTAINERBOARD
& CORRUGATED INDUSTRIAL
CONTAINERS BAGS INTERNATIONAL OTHER TOTAL
- --------------------------------------------------------------------------------------------------------------------------

PERIOD FROM NOVEMBER 19 TO DECEMBER 31, 1998
Revenues from external customers....................... $ 351 $ 59 $ 69 $ 1 $ 480
Intersegment revenues.................................. 18 18
Depreciation and amortization.......................... 15 1 3 15 34
Segment profit (loss).................................. 10 4 1 (67) (52)
Segment assets......................................... 4,355 217 626 3,595 8,793
Expenditures for long-lived assets..................... 13 1 8 22

PERIOD FROM JANUARY 1 TO NOVEMBER 18, 1998 - PREDECESSOR
- --------------------------------------------------------
Revenues from external customers....................... 3,365 473 549 12 4,399
Intersegment revenues.................................. 171 1 172
Depreciation and amortization.......................... 153 5 25 56 239
Segment profit (loss).................................. 48 39 29 (953) (837)
Expenditures for long-lived assets..................... 109 6 30 145

YEAR ENDED DECEMBER 31, 1997 - PREDECESSOR
- ---------------------------------------------------------
Revenues from external customers....................... 3,740 510 588 11 4,849
Intersegment revenues.................................. 53 53
Depreciation and amortization.......................... 189 5 31 77 302
Segment profit (loss).................................. 17 39 27 (688) (605)
Segment assets......................................... 3,422 203 548 1,651 5,824
Expenditures for long-lived assets..................... 109 6 22 137

YEAR ENDED DECEMBER 31, 1996 - PREDECESSOR
- ---------------------------------------------------------
Revenues from external customers....................... 3,900 623 609 10 5,142
Intersegment revenues.................................. 35 35
Depreciation and amortization.......................... 185 7 32 91 315
Segment profit (loss).................................. 245 47 20 (501) (189)
Segment assets......................................... 3,432 201 557 2,164 6,354
Expenditures for long-lived assets..................... 210 15 26 251

The following table presents net sales to external customers by country:

Predecessor
----------------------------------------------
Period from Period from Year ended December 31,
November 19 to January 1 to ---------------------------
December 31, 1998 November 18, 1998 1997 1996
-------------------------------------------------------------------------

United States................ $ 361 $ 3,702 $ 3,969 $ 4,223
Canada....................... 17 181 292 310
Europe and other............. 69 549 588 609
--------------- --------------- ----------- -----------
Total........................ $ 447 $ 4,432 $ 4,849 $ 5,142
--------------- --------------- ----------- -----------
--------------- --------------- ----------- -----------

The following table presents long-lived assets by country at December 31,:

Predecessor
--------------------------
1998 1997 1996
---------------------------------------

United States....................... $ 3,213 $ 1,751 $ 1,837
Canada.............................. 324 374 449
Europe and other.................... 475 302 382
---------------------------------------
4,012 2,427 2,668
Goodwill............................ 2,643 444 486
---------------------------------------
Total............................... $ 6,655 $ 2,871 $ 3,154
---------- ---------- -----------
---------- ---------- -----------

The Company's export sales from the United States were approximately $448
million for 1998, $548 million for 1997 and $470 million for 1996.

18. SUMMARY OF QUARTERLY DATA (UNAUDITED)

The following table summarizes quarterly financial data for 1998 and 1997. Per
share information is for the Predecessor period only.

Predecessor
----------------------------------------------------------
Fourth Quarter
-------------------------------------
Period from Period from
October 1 to November 19 to
First Second Third November 18, December 31,
Quarter Quarter Quarter 1998 1998
---------------------------------------------------------- ------------------

1998
Net sales......................................... $ 1,265 $ 1,274 $ 1,218 $ 642 $ 480
Gross profit...................................... 128 145 103 8 37
Loss before extraordinary charges................. (69) (156) (276) (248) (36)
Net loss.......................................... (69) (156) (276) (248) (36)

Per share of common stock (basic and diluted):
Loss before extraordinary charges................. (.71) (1.59) (2.66) (2.37)

First Second Third Fourth
Quarter Quarter Quarter Quarter
----------------------------------------------------------

1997
Net sales......................................... $ 1,181 $ 1,200 $ 1,183 $ 1,285
Gross profit...................................... 94 81 90 127
Loss before extraordinary charges................. (97) (107) (99) (102)
Net loss.......................................... (97) (120) (99) (102)

Per share of common stock (basic and diluted):
Loss before extraordinary charges................. (.99) (1.10) (1.01) (1.04)

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

Information relating to the Company's Directors is incorporated herein by
reference to the Proxy Statement to be filed on or before April 30, 1999, for
the Annual Meeting of Stockholders scheduled May 17, 1999 (the "Stone Proxy
Statement"), under the captions "Election of Directors-Nominees for Directors,"
"Information as to Directors" and "Certain Transactions."

EXECUTIVE OFFICERS:

PETER F. DAGES, born December 13, 1950, was appointed Vice President and General
Manager - Corrugated Container Division as of 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, was appointed Vice President and General
Manager - Specialty Packaging Division of SSCC in November 1998. Mr. Duncan was
Vice President and General Manager - Industrial Packaging Division of JSC from
October 1996 to November 1998. He was Vice President and General Manager,
Converting Operations - Industrial Packaging Division of JSC from April 1994 to
October 1996 and served as General Manager, Converting Operations - Industrial
Packaging Division of JSC from February 1993 to April 1994. Prior to that, he
was President and Chief Executive Officer of Sequoia Pacific Systems, an
affiliate of Jefferson Smurfit Group plc, that he joined in August 1989.

MICHAEL F. HARRINGTON, born August 6, 1940, has been Vice President - Employee
Relations of JSC 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 5 years.

CHARLES A. HINRICHS, born December 3, 1953, has been Vice President and
Treasurer of JSC since April 1995. Prior to joining the Company, he was employed
by 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 of SSCC since November 1998. Prior to that he was Senior Counsel and
Assistant Secretary of JSC from January 1993 until November 1998.

GORDON L. JONES, born November 7, 1949, has been Vice President and General
Manager Containerboard Marketing Division of SSCC since November 1998. He was
Senior Vice President and General Manager of the Corrugated Container Division
of the Company from April 1997 to November 1998. From June 1993 to April 1997
Mr. Jones was Vice President and General Manager - Worldwide Market Pulp Sales
and Export Containerboard and Kraft Paper Sales and President of Stone Container
International and Division Vice President of Containerboard and Kraft Paper
Marketing of the Company from January 1991 to June 1993.

PAUL K. KAUFMANN, born May 11, 1954, was named Vice President and Corporate
Controller of JSC in May, 1998. He was Corporate Controller from March 1998 to
May 1998. Prior to that he was Division Controller for the Containerboard Mill
Division of JSC from November 1993 until March 1998.

JAY D. LAMB, born September 25, 1947, was appointed Vice President and General
Manager of Smurfit Newsprint Corporation, a subsidiary of SSCC ("SNC") in 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 that company in 1970.

F. SCOTT MACFARLANE, born January 17, 1946, has been Vice President and General
Manager - Folding Carton and Boxboard Mill Division of JSC since November 1995.
He served as Vice President and General Manager of the Folding Carton Division
of JSC from December 1993 to November 1995. Prior to that, he held various
managerial positions within the Folding Carton Division since joining JSC in
1971.

TIMOTHY MCKENNA, born March 25, 1948, was named Vice President - Investor
Relations and Communications of JSC in July 1997. He joined JSC in October 1995
as Director of Investor Relations and Communications. Prior to joining JSC, he
was employed by Union Camp Corporation for 14 years where most recently he was
Director of Investor Relations.

THOMAS A. PAGANO, born January 21, 1947, was named Vice President - Planning of
JSC in May 1996. He was Director of Corporate Planning of JSC from September
1995 to May 1996. Prior to that, Mr. Pagano held various managerial positions
within JSC's Container Division, 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 of SSCC since November 1998. He was
Vice President and General Manager - Industrial 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 JSC in 1987.

WILLIAM N. WANDMACHER, born September 12, 1942, has been Vice President and
General Manager - Containerboard Mill Division of JSC 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 JSC 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 Stone Proxy Statement, and is incorporated herein
by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

All of the outstanding Stone Common Stock is owned by SSCC. Additional
information required in response to this item is set forth under the caption
"Principal Stockholders" in the Stone 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 Stone Proxy Statement and is incorporated herein
by reference.

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(A) DOCUMENTS FILED AS PART OF THIS REPORT

(1) and (2) The list of Financial Statements and Financial Statement Schedules
required by this item is included in Item 8.

(3) Exhibits. The exhibits required to be filed by Item 601 of Regulation S-K
are listed under the caption "Exhibits" in Item 14(c).

(B) REPORTS ON FORM 8-K

A Report on Form 8-K dated October 21, 1998 was filed under Item 5 - Other
Events and Item 7 - Exhibits.
A Report on Form 8-K dated November 5, 1998 was filed under Item 5 - Other
Events and Item 7 - Exhibits.
A Report on Form 8-K dated November 17, 1998 was filed under Item 5 - Other
Events and Item 7 Exhibits.
A Report on Form 8-K dated November 18, 1998 was filed under Item 1 Changes in
Control of Registrant, Item 4 Changes in Registrant's Certifying Accountant and
Item 7 - Exhibits.
A Report on Form 8-K dated December 1, 1998 was filed under Item 5 - Other
Events and Item 7 - Exhibits.

2(a) Agreement and Plan of Merger dated as of May 10, 1998, as amended,
among SSCC, the Company and JSC Acquisition (incorporated by reference
to Exhibit 2.1 to the Company's Current Report Form 8-K dated May 10,
1998).
2(b) Certificate of Merger, effecting the Merger and amending the Restated
Certificate of Incorporation of the Company (incorporated by reference
to Exhibit 7 to the Company's Report on Form 8-A/A dated November 18,
1998).

3(a) 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(b) 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(c) Second Amended and Restated By-laws of the Company effective as of
March 9, 1999.

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(a) 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(b)(i) 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(b)(ii) 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.

4(c) 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(d) 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).

4(e) 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(f) 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(g) 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(h) 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(i) 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(j) 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(k) 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(l) 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(m) 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(n) 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(o) Master Trust Indenture and Security Agreement dated as of March 14,
1995, among Stone Receivables Corporation, the Company, as Servicer,
Marine Midland Bank, as Trustee, and Bankers Trust Company, as
Administrative Agent, relating to the accounts receivable
securitization program (incorporated by reference to Exhibit 4(o) to
the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1995).

4(p) Series 1995-1 Supplement dated as of March 14, 1995 to the Master Trust
Indenture and Security Agreement dated as of March 14, 1995, among
Stone Receivables Corporation, the Company, as Servicer, Marine Midland
Bank, as Trustee, and Bankers Trust Company, as Administrative Agent,

relating to the accounts receivable securitization program
(incorporated by reference to Exhibit 4(p) to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1995).

4(q) 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).

4(r) 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(a)* Management Incentive 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, 1980).

10(b)* 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(c)* 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(d)* 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(e)* Stone Container Corporation Deferred Income Savings Plan, as amended
(incorporated by reference to Exhibit 4.3 to the Company's Form S-8
Registration Statement, Registration Number 333-42087).

10(f)* 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(g)* 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(h)* Stone Container Corporation 1995 Key Executive Officer Short-term
Incentive Plan (incorporated by reference to Exhibit B to the Company's
Proxy Statement dated as of April 7, 1995).

10(i)* Form of Severance Agreement dated July 22, 1996, entered into between
the Company and Roger W. Stone (incorporated by reference to Exhibit
(10(j) to the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1996).

10(j)* Form of Severance Agreement dated July 22, 1996, entered into between
the Company and John D. Bence, Thomas W. Cadden, Matthew S. Kaplan and
Randolph C. Read (incorporated by reference to Exhibit 10(k) to the
Company's Annual Report on Form 10-K for the fiscal year ended December
31, 1996).

10(k)* JSC (U.S.) Deferred Compensation Plan as amended (incorporated by
reference to Exhibit 10.7 to SSCC's Annual Report on Form 10-K for the
fiscal year ended December 31, 1996).

10(l)* 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(m)* Jefferson Smurfit Corporation Amended and Restated 1992 Stock Option
Plan dated as of May 1, 1997 (incorporated by reference to Exhibit
10.10 to SSCC's Annual Report on Form 10-K for the fiscal year ended
December 31, 1997).

10(n)* 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(o)* Form of Employment Agreement dated November 18, 1998, entered into
between SSCC and Harold D. Wright (incorporated by reference to Exhibit
10.27 to SSCC's Annual Report on Form 10-K for the fiscal year ended
December 31, 1998).

16 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 Subsidiaries of the Company.

24 Powers of Attorney.

27 Financial Data Schedule.

- -------------------
*Indicates a management contract or compensation plan or arrangement

(D) SEPARATE FINANCIAL STATEMENTS OF AFFILIATES

Abitibi Consolidated Inc., an approximate 25 percent owned affiliate of the
Company, qualified as a significant subsidiary under Rule 3-09 of Regulation S-x
in 1997 and 1996. The December 31, 1998 separate financial statements of
Abitibi-Consolidated Inc., a foreign business, will be filed as an amendment to
this Report, as required, on or before June 30, 1999.

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 31, 1999 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

*
- --------------------
Roger W. Stone President and Chief Executive Officer
And Director (Principal Executive Officer)

*
- --------------------
Ray M. Curran Executive Vice President and Deputy Chief
Executive Officer and Director

/s/ Patrick J. Moore
- -------------------- Vice-President and Chief Financial March 31, 1999
Patrick J. Moore Officer and Director (Principal Financial Officer)

/s/ Paul K. Kaufmann
- --------------------
Paul K. Kaufmann Vice President and Corporate Controller March 31, 1999
(Principal Accounting Officer)

*
- --------------------
David Gale Director

*
- --------------------
Mark A. Weissman Director

* By /S/ PATRICK J. MOORE Pursuant to Powers of Attorney filed as
-------------------- a part of the Form 10-K
Patrick J. Moore

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 this Annual Report on Form 10-K also included
an audit of the Financial Statement Schedule listed and appearing in Item 14(a)2
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
years ended December 31, 1997 and 1996 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.

PricewaterhouseCoopers LLP

Chicago, Illinois
March 26, 1998

STONE CONTAINER CORPORATION
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 costs and end of
Description of period expenses Other Deductions period
- --------------------------------------------------- ------------- ------------- ------------ ------------- -------------

ALLOWANCE FOR DOUBTFUL ACCOUNTS AND NOTES AND
SALES RETURNS AND ALLOWANCES:
Period from November 19 to
December 31, 1998........................ $ 75 $ $ $ $ 75
Predecessor
Period from January 1 to
November 18, 1998......................... $ 28 $ 64 $ $ 17(a) $ 75
Year ended December 31, 1997.................. $ 24 $ 12 $ $ 8(a) $ 28
Year ended December 31, 1996.................. $ 22 $ 15 $ $ 13(a) $ 24

RESTRUCTURING OF OPERATIONS:

Period from November 19 to December 31, 1998 $ $ $ 117(b) $ 11(c) $ 106

(a) Uncollectible amounts written off, net of recoveries.
(b) Restructuring charges associated with exit activities included in the
purchase price allocation of Stone.
(c) Charges against the restructuring reserves.