SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Quarterly period ended March 31, 1994
[ ] 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 or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
150 North Michigan Avenue, Chicago, Illinois 60601
(Address of principal executive offices) (Zip Code)
Registrant's telephone number: 312-346-6600
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the Registrant was required to file such reports), and (2) has
been subject to such filing requirement for the past 90 days.
Yes X No
Number of common shares outstanding as of April 29, 1994: 90,388,091
<PAGE>
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<TABLE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
STONE CONTAINER CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<CAPTION>
March 31, December 31,
(in millions) 1994* 1993
____________________________________________________ _______________________
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents........................... $ 179.1 $ 247.4
Accounts and notes receivable (less allowances of
$19.8 and $19.3).................................. 681.9 622.3
Inventories......................................... 695.5 719.4
Other.............................................. 204.4 164.1
____________________________________________________ _______________________
Total current assets.......................... 1,760.9 1,753.2
____________________________________________________ _______________________
Property, plant and equipment...................... 5,197.0 5,240.7
Accumulated depreciation and amortization.......... (1,901.7) (1,854.3)
_______________________
Property, plant and equipment--net............ 3,295.3 3,386.4
Timberlands........................................ 86.0 83.9
Goodwill........................................... 877.4 910.5
Other.............................................. 686.2 702.7
___________________________________________________ _______________________
Total assets....................................... $6,705.8 $6,836.7
========================
Liabilities and stockholders' equity
Current liabilities:
Current maturities of senior and subordinated
long-term debt................................... $ 17.0 $ 22.6
Current maturities of non-recourse debt of
consolidated affiliates.......................... 279.7 290.5
Accounts payable................................... 271.1 297.1
Income taxes....................................... 45.8 47.6
Accrued and other current liabilities.............. 303.0 285.7
___________________________________________________ _______________________
Total current liabilities..................... 916.6 943.5
___________________________________________________ _______________________
Senior long-term debt.............................. 2,265.9 2,338.0
Subordinated debt.................................. 1,159.6 1,257.8
Non-recourse debt of consolidated affiliates....... 659.8 672.6
Other long-term liabilities........................ 312.3 270.3
Deferred taxes..................................... 402.8 470.6
Redeemable preferred stock of consolidated
affiliate........................................ 42.3 42.3
Minority interest.................................. 223.0 234.5
Commitments and contingencies......................
Stockholders' equity:
Series E preferred stock........................ 115.0 115.0
Common stock (90.4 and 71.2 shares outstanding). 853.0 574.3
Retained earnings (accumulated deficit)......... (17.3) 101.6
Foreign currency translation adjustment......... (220.5) (179.0)
Unamortized expense of restricted stock plan.... (6.7) (4.8)
___________________________________________________ _______________________
Total stockholders' equity.................. 723.5 607.1
___________________________________________________ _______________________
Total liabilities and stockholders' equity......... $6,705.8 $6,836.7
=======================
<FN>
*Unaudited; subject to year-end audit
The accompanying notes are an integral part of these statements.
</TABLE>
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<TABLE>
STONE CONTAINER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
AND RETAINED EARNINGS
<CAPTION>
Three months ended
March 31,
(in millions except per share) 1994 1993
<S> <C> <C>
Net sales......................................... $1,290.8 $1,306.3
Operating costs and expenses:
Cost of products sold............................. 1,067.1 1,070.3
Selling, general and administrative expenses...... 133.5 136.0
Depreciation and amortization..................... 89.3 87.1
Equity loss from affiliates....................... 4.2 1.8
Other operating (income) expense--net............. (4.9) .6
__________________________________________________ _________ _________
__________________________________________________ 1,289.2 1,295.8
Income from operations............................ 1.6 10.5
Interest expense.................................. (113.5) (102.2)
Other, net........................................ (9.2) 2.8
__________________________________________________ _________ _________
Loss before income taxes, minority interest,
extraordinary loss and cumulative effects of
accounting changes.............................. (121.1) (88.9)
Credit for income taxes........................... (40.0) (26.8)
Minority interest................................. 2.2 (.6)
__________________________________________________ _________ _________
Loss before extraordinary loss and cumulative
effects of accounting changes................... (78.9) (62.7)
Extraordinary loss from early extinguishment of
debt (net of $9.8 income tax benefit)........... (16.8) --
Cumulative effect of change in accounting for
postemployment benefits (net of $9.5 income
tax benefit).................................... (14.2) --
Cumulative effect of change in accounting for
postretirement benefits (net of $23.3 income
tax benefit).................................... -- (39.5)
__________________________________________________ _________ _________
Net loss.......................................... (109.9) (102.2)
Preferred stock dividends......................... (2.0) (2.0)
__________________________________________________ _________ _________
Net loss applicable to common shares.............. $ (111.9) $ (104.2)
__________________________________________________ _________ __________
Retained earnings, beginning of period............ $ 101.6 $ 496.0
Net loss.......................................... (109.9) (102.2)
Cash dividends on preferred stock................. -- (2.0)
Unrealized loss on marketable equity security
(net of $4.9 income tax benefit)................ (9.0) --
__________________________________________________ _________ __________
Retained earnings (accumulated deficit), end
of period....................................... $ (17.3) $ 391.8
__________________________________________________ ========= ==========
Per share of common stock:
Loss before extraordinary loss and cumulative
effects of accounting changes................... $ (.99) $ (.91)
Extraordinary loss from early extinguishment of
debt............................................ (.21) --
Cumulative effect of change in accounting for
postemployment benefits......................... (.17) --
Cumulative effect of change in accounting for
postretirement benefits......................... -- (.56)
__________________________________________________ _________ __________
Net loss.......................................... $ (1.37) $ (1.47)
__________________________________________________ ========= ==========
Cash dividends.................................... $ -- $ --
========= ==========
Common shares and common share equivalents
outstanding (weighted average, in millions)..... 81.5 71.1
========= ==========
<FN>
Unaudited; subject to year-end audit
The accompanying notes are an integral part of these statements.
</TABLE>
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<TABLE>
STONE CONTAINER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
Three months ended
March 31,
(in millions) 1994 1993
<S> <C> <C>
Cash flows from operating activities:
Net loss....................................... $ (109.9) $ (102.2)
Adjustments to reconcile net loss to net cash
used in operating activities:
Extraordinary loss from early extinguishment
of debt.................................... 16.8 --
Cumulative effect of change in accounting for
postemployment benefits.................... 14.2 --
Cumulative effect of change in accounting for
postretirement benefits.................... -- 39.5
Depreciation and amortization................ 89.3 87.1
Deferred taxes............................... (43.2) (28.9)
Foreign currency transaction losses.......... 15.2 1.5
Other--net................................... (26.0) 7.9
Changes in current assets and liabilities-net
of adjustments for a divestiture:
Increase in accounts and notes
receivable--net.......................... (62.3) (40.3)
Decrease (increase) in inventories......... 15.7 (.3)
Increase in other current assets........... (18.8) (18.2)
Increase (decrease) in accounts payable and
other current liabilities................ (5.2) 19.1
_______________________________________________ __________ ___________
Net cash used in operating activities.......... (114.2) (34.8)
_______________________________________________ __________ ___________
Cash flows from financing activities:
Borrowings..................................... 721.2 94.0
Payments made on debt.......................... (897.1) (11.5)
Payments by consolidated affiliates on
non-recourse debt............................ (19.2) --
Proceeds from issuance of common stock, net.... 276.3 --
Funding of letter of credit.................... (22.3) --
Cash dividends................................. -- (2.0)
_______________________________________________ __________ ___________
Net cash provided by financing activities...... 58.9 80.5
_______________________________________________ __________ ___________
<PAGE>
Cash flows from investing activities:
Capital expenditures........................... (17.7) (29.4)
Proceeds from sales of assets.................. 7.5 2.0
Other--net..................................... (1.3) (11.4)
_______________________________________________ __________ ___________
Net cash used in investing activities.......... (11.5) (38.8)
_______________________________________________ __________ ___________
Effect of exchange rate changes on cash........ (1.5) --
_______________________________________________ __________ ___________
Net increase (decrease) in cash and cash
equivalents.................................. (68.3) 6.9
Cash and cash equivalents, beginning of period. 247.4 58.9
Cash and cash equivalents, end of period....... $ 179.1 $ 65.8
========== ===========
<FN>
See Note 11 regarding non-cash investing and financing activities and
supplemental cash flow information.
Unaudited; subject to year-end audit
The accompanying notes are an integral part of these statements.
</TABLE>
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STONE CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: Basis of Presentation
Pursuant to the rules and regulations of the Securities and Exchange
Commission for Form 10-Q, the financial statements, footnote
disclosures and other information normally included in the financial
statements prepared in accordance with generally accepted accounting
principles have been condensed. These financial statements, footnote
disclosures and other information should be read in conjunction with
the financial statements and the notes thereto included in Stone
Container Corporation's (the "Company's") latest Annual Report on Form
10-K. In the opinion of the Company, the accompanying unaudited
consolidated financial statements contain all adjustments necessary to
fairly present the Company's financial position as of March 31, 1994
and the results of operations and cash flows for the three month
periods ended March 31, 1994 and 1993.
NOTE 2: Restatements
Certain prior year amounts in the Company's Consolidated Statements of
Operations and Retained Earnings and Consolidated Statements of Cash
Flows have been restated to conform with the current year presentation.
NOTE 3: Adoption of New Accounting Standards
Effective January 1, 1994, the Company adopted Statement of Financial
Accounting Standards No. 112, "Employers' Accounting for Postemployment
Benefits" ("SFAS 112"), which requires accrual accounting for the
estimated costs of providing certain benefits to former or inactive
employees and the employees' beneficiaries and dependents after
employment but before retirement. Upon adoption of SFAS 112, the
Company recorded its catch-up obligation (approximately $24 million) by
recognizing a one-time, non-cash charge of $14.2 million, net of income
tax benefit, as a cumulative effect of an accounting change in its 1994
first quarter Statement of Operations and Retained Earnings.
In accordance with the provisions of Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities" ("SFAS 115"), the Company, at March 31,
1994 recorded a $9 million charge directly to stockholders' equity to
reflect an unrealized loss on an investment in an equity security, net
of income tax benefit. The aggregate fair value and carrying value of
the investment in the equity security at March 31, 1994 was
approximately $7 million and $20 million, respectively.
<PAGE>
NOTE 4: Mill Digester Rupture
On April 13, 1994 a digester ruptured at the Company's pulp and
paperboard mill in Panama City, Fla. The Company currently estimates
that the mill's linerboard production facilities will be shut down for
a total of approximately 23 weeks and bleached market pulp production
facilities will be shut down for a total of approximately 18 weeks.
These shutdowns will result in production outages of approximately
138,000 tons of linerboard and 107,000 tons of bleached market pulp.
Aside from deductibles, the Company expects insurance proceeds to cover
both property damage and business interruption claims.
NOTE 5: Financing Activities
On February 3, 1994, under the Company's $1 billion shelf registration,
the Company sold $710 million principal amount of 9-7/8 percent Senior
Notes due February 1, 2001 and 16.5 million shares of common stock for
an additional $251.6 million at $15.25 per common share. On February
17, 1993, the underwriters elected to exercise their option to sell an
additional 2.47 million shares of common stock for an additional $37.7
million, also at $15.25 per common share (collectively, with the
February 3, 1994 offering, the "Offerings"). The net proceeds from the
Offerings of approximately $962 million were used to (i) prepay
approximately $652 million of the 1995, 1996 and 1997 scheduled
amortization under the Company's bank credit agreements which includes
two term loan facilities, two revolving credit facilities and an
additional term loan (the "Credit Agreements") including the ratable
amortization payment under the revolving credit facilities which had
the effect of reducing the total commitments thereunder to
approximately $168 million; (ii) redeem the Company's 13-5/8 percent
Subordinated Notes due 1995 at a price equal to par, approximately $98
million principal amount, plus accrued interest to the redemption date;
(iii) repay approximately $136 million of the outstanding borrowings
under the Company's revolving credit facilities without reducing the
commitments thereunder; and (iv) provide liquidity in the form of cash.
The 9-7/8 percent Senior Notes are redeemable by the Company on and
after February 1, 1999. Interest is payable semi-annually on February
1 and August 1, commencing August 1, 1994.
In the first quarter of 1994, the Company wrote-off $16.8 million of
unamortized debt issuance costs, net of income tax benefit, as a result
of the debt prepayments mentioned above. Such write-off is reflected
as an extraordinary loss from the early extinguishment of debt in the
Company's Statement of Operations and Retained Earnings for the three
months ended March 31, 1994.
Due to the pendency of the litigation described in Part II, Item 3.
Legal Proceedings, the Company has postponed a previously disclosed
possible transaction related to the energy supply agreement at its
Florence, South Carolina mill.
NOTE 6: Credit Agreement Amendments/Liquidity Matters
The Company and its bank group have amended the Company's Credit
Agreements several times during the past three years. Such amendments
provided among other things, greater financial flexibility and/or
relief from certain financial covenants. In some instances, certain
restrictions and limitations applicable to the Credit Agreements were
tightened. There can be no assurance that future covenant relief will
not be required or, if such relief is requested by the Company, that it
will be obtained from the banks' lenders.
The most recent amendment, which was executed in February of 1994
and became effective upon the completion of the Offerings, as discussed
in Note 5, provided, among other things, for the following:
(i) Permitted the Company to apply up to $200 million of net
proceeds from the Offerings, which increased liquidity, as
repayment of borrowings under the revolving credit facilities
of the Credit Agreements without reducing the commitments
thereunder and to the extent no balance was outstanding under
the revolving credit facilities, permitted the Company to
retain the balance of such $200 million of proceeds in cash.
(ii) Permitted the Company to redeem the Company's 13-5/8
percent Subordinated Notes maturing on June 1, 1995
from the proceeds received from the Offerings at a
price equal to par, approximately $98 million principal
amount, plus accrued interest to the redemption date.
(iii) Amended the required levels of EBITDA, (as defined in
the Credit Agreements), for certain specified periods
to the following:
Periods EBITDA
For the three months ended March 31, 1994 $ 20 million
For the six months ended June 30, 1994 $ 55 million
For the nine months ended September 30, 1994 $111 million
For the twelve months ended December 31, 1994 $180 million
For the twelve months ended March 31, 1995 $226 million
The required level of EBITDA is scheduled to increase for each
rolling four quarter period thereafter until December 31, 1996,
when the EBITDA for the twelve months ended December 31, 1996 is
required to be $822 million.
(iv) Reset to zero as of January 1, 1994 the dividend pool
under the Credit Agreements which permits payment of
dividends on the Company's capital stock and modifies
the components used in calculating the ongoing balance
in the dividend pool. Effective January 1, 1994,
dividend payments on the Company's common stock and on
certain preferred stock issues cannot exceed the sum of
(i) 75 percent of the consolidated net income, (as
defined in the Credit Agreements), of the Company from
January 1, 1994 to the date of payment of such
dividends, minus (ii) 100 percent of the consolidated
net loss, (as defined in the Credit Agreements), of the
Company from January 1, 1994 to the date of payment of
such dividends, plus (iii) 100 percent of any net cash
proceeds from sales of common stock or certain
preferred stock of the Company from January 1, 1994 to
any date of payment of such dividends (excluding the
proceeds from the Offerings for which no dividend
credit was received by the Company). Additionally, the
restriction in the Credit Agreement with respect to
dividends on Series E Cumulative Convertible
Exchangeable Preferred Stock (the "Series E Cumulative
Preferred Stock") now mirrors the dividend restriction
in the Company's Senior Subordinated Indenture dated as
of March 15, 1992.
(v) Replaced the existing cross-default provisions relating
to obligations of $10 million or more of the Company's
separately financed subsidiaries, Seminole Kraft
Corporation ("Seminole") and Stone Savannah River Pulp
and Paper Corporation ("Stone Savannah River"), with
cross-acceleration provisions.
(vi) Replaced the current prohibition of investments in
Stone Venepal Consolidated Pulp Inc. with restrictions
substantially similar to the restrictions applicable to
the Company's subsidiaries, Stone Savannah River and
Seminole.
(vii) Maintains the monthly indebtedness ratio requirement,
as defined in the Credit Agreements, at no higher than:
81.5 percent as of the end of each month from December
31, 1993 and ending prior to March 31, 1995 and 81
percent as of the end of each month from March 31, 1995
and ending prior to June 30, 1995. The indebtedness
ratio requirement is scheduled to periodically decrease
thereafter (from 80 percent on June 30, 1995) until
February 28, 1997, when the ratio limitation is
required to be 68 percent.
(viii) Maintains the Consolidated Tangible Net Worth
requirement (CTNW), (as defined in the Credit
Agreements), at equal to or greater than 50 percent of
the highest CTNW for any quarter since the inception of
the Credit Agreements.
There can be no assurance that the Company will be able to achieve
and maintain compliance with the prescribed financial ratio tests or
other requirements of its Credit Agreements. Failure to achieve or
maintain compliance with such financial ratio tests or other
requirements under the Credit Agreements, in the absence of a waiver or
amendment, would result in an event of default and could lead to the
acceleration of the obligations under the Credit Agreements. The
Company has successfully sought and received waivers and amendments to
its Credit Agreements on various occasions since entering into the
Credit Agreements. If further waivers or amendments are requested by
the Company, there can be no assurance that the Company's bank lenders
will again grant such requests. The failure to obtain any such waivers
or amendments would reduce the Company's flexibility to respond to
adverse industry conditions and could have a material adverse effect on
the Company.
The Company has entered into separate output purchase agreements
with Seminole and Stone Savannah River which require the Company to
purchase Seminole's linerboard production at fixed prices until certain
production levels are met (which could be as early as June 30, 1994)
and Stone Savannah River's linerboard and market pulp production at
fixed prices until December 1994 and November 1995, respectively.
After such dates, the Company is required to purchase the respective
production at market prices for the remaining terms of these
agreements. While the fixed prices in effect at March 31, 1994 were
higher than market prices at such date, the price differentials have
not had, nor are they expected to have, a significant impact on the
Company's results of operations or financial position. However, at the
time that the fixed price provisions of the output purchase agreements
terminate, such subsidiaries may need to undertake additional measures
to meet their debt service requirements, including obtaining additional
sources of funds or liquidity, postponing or restructuring of debt
service payments or refinancing the indebtedness. In the event that
such measures are required and are not successful, and such
indebtedness is accelerated by the respective lenders to Stone Savannah
River or Seminole, the lenders to the Company under the Credit
Agreements and various other of its debt instruments would be entitled
to accelerate the indebtedness owed by the Company.
Due to industry conditions and interest costs as a result of the
Company's highly leveraged capital structure, the Company had incurred
net losses in each of the last three years and for the first quarter of
1994 and expects to incur a net loss for the second quarter of 1994.
Such net losses have significantly impaired the Company's liquidity and
available sources of liquidity and would continue to adversely affect
the Company until further significant product price improvement is
achieved.
The Company improved its liquidity and financial flexibility through
the completion of the Offerings in February of 1994. Notwithstanding
these improvements in the Company's liquidity and financial
flexibility, unless the Company achieves substantial price increases
beyond those realized during the 1994 first quarter, the Company will
continue to incur net losses and negative cash flows from operating
activities. Without such sustained substantial price increases, the
Company may exhaust all or substantially all of its cash resources and
borrowing availability under the existing revolving credit facilities.
In such event, the Company would be required to pursue other
alternatives to improve liquidity, including further cost reductions,
sales of assets, the deferral of certain capital expenditures,
obtaining additional sources of funds or liquidity or pursuing the
possible restructuring of its indebtedness. There can be no assurance
that such measures, if required, would generate the liquidity required
by the Company to operate its business and service its indebtedness.
As currently scheduled, beginning in 1996 and continuing thereafter,
the Company will be required to make significant amortization payments
on its existing indebtedness which would require the Company to raise
sufficient funds from operations or other sources or refinance or
restructure maturing indebtedness. No assurance can be given that the
Company will be able to generate or raise such funds.
NOTE 7: Inventories
Inventories are summarized as follows:
March 31, December 31,
(in millions) 1994 1993
__________________________________________ _________ ____________
Raw materials and supplies................ $ 310.4 $ 333.8
Paperstock*............................... 268.3 284.2
Work in process........................... 20.1 16.8
Finished products--converting facilities.. 111.5 99.5
__________________________________________ _________ ____________
710.3 734.3
Excess of current cost over LIFO inventory
value................................... (14.8) (14.9)
_________ ____________
Total inventories......................... $ 695.5 $ 719.4
========= ============
*Includes linerboard, corrugated medium, kraft paper, newsprint,
market pulp and groundwood paper.
At March 31, 1994 and December 31, 1993, the percentage of total
inventories costed by the LIFO, FIFO and average cost methods were as
follows:
March 31, December 31,
1994 1993
LIFO.................................. 41% 44%
FIFO.................................. 8% 6%
Average Costs......................... 51% 50%
<PAGE>
NOTE 8: Current Maturities of Long-Term Debt
Current maturities of long-term debt at March 31, 1994 and December 31,
1993 consisted of the following components:
March 31, December 31,
(in millions) 1994 1993
__________________________________________ _________ ____________
Senior debt............................... $ 17.0 $ 17.7
Subordinated debt......................... -- 4.9
Non-recourse debt of consolidated
affiliates.............................. 279.7 290.5
Total current maturities of long-term
debt.................................... $ 296.7 $ 313.1
========= ============
The Credit Agreements limit in certain specific circumstances any
further investments by the Company in Stone-Consolidated, Seminole and
Stone Savannah River. Stone Savannah River has incurred substantial
indebtedness in connection with project financing and is significantly
leveraged. As of March 31, 1994, Stone Savannah River had $391.7
million in outstanding indebtedness (including $258.0 million in
secured indebtedness owed to bank lenders). Emerging Issues Task Force
Issue No. 86-30, "Classification of Obligations When a Violation is
Waived by the Creditor," requires a company to reclassify long-term
debt as current when a covenant violation has occurred at the balance
sheet date or would have occurred absent a loan modification and it is
probable that the borrower will not be able to comply with the same
covenant at measurement dates that are within the next twelve months.
In November 1993, Stone Savannah River received a waiver of its fixed-
charges-coverage covenant requirement as of December 31, 1993 and March
31, 1994. Management has prepared projections that indicate that Stone
Savannah River will not be in compliance with this covenant as of June
30, 1994. Consequently, approximately $224.2 million and $237.9
million of Stone Savannah River debt that otherwise would have been
classified as long-term has been classified as current in the March 31,
1994 and December 31, 1993 consolidated balance sheets, respectively.
Stone Savannah River intends to seek, prior to June 10, 1994,
appropriate financial covenant waivers or amendments from its bank
group, although no assurance can be given that such waivers or
amendments will be obtained. Any such failure to obtain covenant
relief would result in a default under Stone Savannah River's credit
agreement and other indebtedness and, if any such indebtedness was
accelerated by the holders thereof, the lenders to the Company under
the Credit Agreements and various other of the Company's debt
instruments would be entitled to accelerate the indebtedness owed by
the Company.
NOTE 9: Summary Financial Information for Stone Southwest Corporation
Shown below is consolidated, summarized financial information for Stone
Southwest, Inc. (formerly known as Southwest Forest Industries, Inc.).
The summarized financial information for Stone Southwest, Inc. does not
include purchase accounting adjustments or the impact of the debt
incurred to finance the acquisition of Stone Southwest, Inc.:
Three months ended
March 31
______________________
(in millions) 1994 1993
_____________________________________________ _________ _________
Net sales.................................... $ 425.1 $ 437.7
Cost of products sold and depreciation....... 369.6 355.2
Income (loss) before cumulative effects of
accounting changes......................... (3.4) 5.6
Cumulative effect of change in accounting
for postemployment benefits
(net of $2.5 income tax benefit)........... (3.9) --
Cumulative effect of change in accounting
for postretirement benefits (net of $5.2
income tax benefit)........................ -- (8.3)
Net loss..................................... (7.4) (2.7)
March 31, December 31,
(in millions) 1994 1993
__________________________________________ _________ ____________
Current assets............................ $ 334.4 $ 360.9
Noncurrent assets*........................ 1,607.0 1,600.5
Current liabilities....................... 130.9 141.3
Noncurrent liabilities and obligations.... 393.5 395.8
*Includes $874.0 and $857.4 due from the Company at March 31, 1994 and
December 31, 1993, respectively.
<PAGE>
NOTE 10: Segment Information
Financial information by business segment is summarized as follows:
Three months ended
March 31, 1994 March 31, 1993
Income (loss)
before income
taxes, minority Income (loss)
interest, before income
extraordinary taxes, minority
loss and interest and
cumulative cumulative
effect of an effect of an
Total accounting Total accounting
(in millions) sales change sales change(a)
Paperboard and
paper
packaging...... $ 954.0 $ 52.5 $ 973.0 $ 62.4
White paper and
pulp........... 260.7 (38.3) 254.0 (43.8)
Other........... 88.6 11.7 92.7 13.6
Intersegment.... (12.5) -- (13.4) --
1,290.8 25.9 1,306.3 32.2
Interest
expense........ (113.5) (102.2)
Foreign currency
transaction
adjustments... (15.2) (1.5)
General
corporate and
miscellaneous
(net)......... (18.3) (17.4)
Total.......... $ 1,290.8 $ (121.1) $ 1,306.3 $ (88.9)
Financial information by geographic region is summarized as follows:
Three months ended
March 31, 1994 March 31, 1993
Income (loss)
before income
taxes, minority Income (loss)
interest, before income
extraordinary taxes, minority
loss and interest and
cumulative cumulative
effect of an effect of an
Total accounting Total accounting
(in millions) sales change sales change(a)
United States. $ 951.8 $ 39.4 $ 924.8 $ 45.2
Canada........ 206.6 (14.7) 191.0 (16.9)
Europe........ 141.4 1.2 198.8 3.9
1,299.8 25.9 1,314.6 32.2
Interest
expense..... (113.5) (102.2)
Foreign currency
transaction
adjustments. (15.2) (1.5)
General
corporate and
miscellaneous
(net)........ (18.3) (17.4)
Inter-area
eliminations. (9.0) -- (8.3) --
Total.......... $1,290.8 $ (121.1) $ 1,306.3 $ (88.9)
(a) Adjusted to conform to current financial statement presentation.
NOTE 11: Additional Cash Flow Statement Information
The Company's non-cash investing and financing activities and cash
payments for interest and income taxes were as follows:
Three months ended
March 31
(in millions) 1994 1993
Non-cash investing and financing activities:
Unrealized loss on an investment in an
equity security (net of income tax
benefit).................................... $ 9.0 $ --
Note receivable received from sale of
assets...................................... 1.3 --
Preferred stock dividends issued by a
consolidated affiliate...................... -- 1.4
Capital lease obligations incurred............ -- .2
Cash paid during the periods for:
Interest (net of capitalization).............. $ 98.8 $ 96.0
Income taxes (net of refunds)................. 3.0 5.8
<PAGE>
STONE CONTAINER CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Three months ended March 31,
1994 1993
Percent of Percent of
(dollars in millions) Amount net sales Amount net sales
Net sales................ $ 1,290.8 100.0% $ 1,306.3 100.0%
Cost of products sold.... 1,067.1 82.7 1,070.3 82.0
Selling, general and
administrative expenses. 133.5 10.3 136.0 10.4
Depreciation and
amortization............ 89.3 6.9 87.1 6.6
Equity loss from
affiliates............. 4.2 .3 1.8 .1
Other operating (income)
expense--net............ (4.9) (.3) .6 .1
Income from operations... 1.6 .1 10.5 .8
Interest expense......... (113.5) (8.8) (102.2) (7.8)
Other, net............... (9.2) (.7) 2.8 .2
Loss before income taxes,
minority interest,
extraordinary loss and
cumulative effects of
accounting changes...... (121.1) (9.4) (88.9) (6.8)
Credit for income taxes.. (40.0) (3.1) (26.8) (2.1)
Minority interest........ 2.2 .2 (.6) (.1)
Loss before extraordinary
loss and cumulative
effects of accounting
changes................. (78.9) (6.1) (62.7) (4.8)
Extraordinary loss from
early extinguishment of
debt (net of $9.8 income
tax benefit)............ (16.8) (1.3) -- --
Cumulative effect of change
in accounting for
postemployment benefits
(net of $9.5 income tax
benefit)................ (14.2) (1.1) -- --
Cumulative effect of change
in accounting for
postretirement benefits
(net of $23.3 income tax
benefit)................ -- -- (39.5) (3.0)
Net loss................. $ (109.9) (8.5) $ (102.2) (7.8)
The first quarter 1994 loss before the extraordinary loss from the
early extinguishment of debt and the cumulative effect of a change in
the accounting for postemployment benefits ("SFAS 112") was $78.9
million, or $.99 per share of common stock. The Company recorded an
extraordinary loss from the early extinguishment of debt of $16.8
million, net of income tax benefit, or $.21 per share of common stock
and a one-time, non-cash cumulative effect charge of $14.2 million, net
of income tax benefit, or $.17 per share of common stock from the
adoption of SFAS 112, resulting in a net loss for the 1994 first
quarter of $109.9 million, or $1.37 per share of common stock.
The first quarter 1993 loss before the cumulative effect of a change
in the accounting for postretirement benefits other than pensions was
$62.7 million, or $.91 per share of common stock. The adoption of
Statement of Financial Accounting Standards No. 106 "Accounting for
Postretirement Benefits Other than Pensions" ("SFAS 106"), resulted in
a one-time, non-cash cumulative effect charge of $39.5 million, net of
income tax benefit, or $.56 per share of common stock, resulting in a
net loss of $102.2 million or $1.47 per share of common stock for the
first quarter of 1993.
The increase in the loss before the extraordinary loss and the
cumulative effects of accounting changes primarily resulted from low
average selling prices for most of the Company products, a $13.7
million increase in foreign currency transaction losses and an increase
in interest expense, partially offset by an increase in the credit for
income taxes.
Paperboard and paper packaging:
Net sales for the three months ended March 31, 1994 for the paperboard
and paper packaging segment decreased 2.0 percent from the prior year
period. This decrease was due in part to the exclusion of sales for
the Company's European folding carton operations which in the early
part of 1993 was merged into a joint venture and accordingly is now
accounted for under the equity method of accounting. Sales from these
operations for the first quarter of 1993 were approximately $44
million. Excluding the effect of the folding carton operations, sales
for the first quarter of 1994 increased 2.7 percent over the prior year
period reflecting increased sales of paperboard and corrugated
containers which more than offset a sales decline for paper bags and
sacks. The sales increases for paperboard and corrugated containers
reflect higher sales volume which more than offset lower average
selling prices for the first quarter of 1994 compared to the first
quarter of 1993. The sales decrease for paper bags and sacks was
primarily attributable to lower average selling prices which offset an
increase in industrial bag sales volume. Kraft paper sales were
virtually unchanged from the prior year period.
Shipments of corrugated containers, including the Company's
proportional share of the shipments by its foreign affiliates, were
12.9 billion square feet in the first quarter of 1994 and 1993. The
1993 shipments include 49 percent of the shipments by its previously
owned non-consolidated affiliate Empaques de Carton Titan, S.A.
("Titan"). The Company sold its 49 percent equity interest in Titan in
December 1993. On a proforma basis, adjusted to exclude shipments from
Titan, the Company's shipments of corrugated containers for the first
three months of 1994 increased 482 million square feet, or 3.9 percent,
over the first quarter of 1993. Shipments of paper bags and sacks were
159 thousand tons for the three month periods ended March 31, 1994 and
1993.
Production of containerboard and kraft paper for the three months
ended March 31, 1994, including 100 percent of the production at
Seminole Kraft Corporation ("Seminole") and Stone Savannah River Pulp &
Paper Corporation ("Stone Savannah River"), was 1.29 million tons
compared to 1.21 million tons produced during the first quarter of
1993. On a proforma basis, adjusted to exclude the proportional share
of the 1993 production of Titan, production of containerboard and kraft
paper for the first quarter of 1994 increased 98 thousand tons, or 8.2
percent, over the first three months of 1993.
Operating income for the paperboard and paper packaging segment
decreased 15.9 percent for the three months ended March 31, 1994 as
compared to the corresponding 1993 period. The decrease was mainly
attributable to reduced operating margins primarily resulting from low
average selling prices for the Company's paperboard and paper packaging
products.
White paper and pulp:
First quarter 1994 net sales for the white paper and pulp segment
increased 2.6 percent as compared to the prior year period, primarily
due to a significant increase in market pulp sales. The sales increase
for market pulp was due primarily to increased sales volume. Higher
average selling prices also contributed to the increased market pulp
sales. Increased sales of newsprint for the first quarter of 1994 over
the prior year period, primarily resulting from volume increases, were
substantially offset by reduced sales of groundwood paper. The sales
decrease for groundwood paper primarily resulted from lower sales
volume.
Production of newsprint, market pulp and groundwood paper for the
three months ended March 31, 1994, including 100 percent of the
production at Stone-Consolidated Corporation and 25 percent of the
production at the Company's affiliated market pulp mill in British
Columbia, was 667 thousand tons compared with 638 thousands tons
produced during the comparable prior year period.
Operating losses for the white paper and pulp segment decreased 12.5
percent in the first quarter of 1994 from the corresponding 1993
period. This decrease is mainly attributable to improved operating
margins primarily resulting from the higher average selling prices for
market pulp.
<PAGE>
Other:
Net sales and operating income for the other segment decreased in the
first quarter of 1994 from the comparable prior year period as lower
sales volume for the Company's U.S. lumber and wood products more than
offset both increased sales volume and selling prices for the Company's
Canadian lumber and wood products. Shortages of timber available to be
harvested due to environmental concerns in the Pacific Northwest
continue to keep raw material costs high for this segment.
Financial Condition and Liquidity
The Company's working capital ratio was 1.9 to 1 at March 31, 1994 and
at December 31, 1993. The Company's long-term debt to total
capitalization ratio was 74.6 percent at March 31, 1994 and 75.9
percent at December 31, 1993. Capitalization, for purposes of this
ratio, includes long-term debt (which includes debt of certain
consolidated affiliates which is non-recourse to the Company), deferred
income taxes, redeemable preferred stock, minority interest and
stockholders' equity.
The Company and Stone Container (Canada) Inc. ("Stone-Canada"), a
wholly-owned subsidiary, have entered into bank credit agreements
(collectively, the "Credit Agreements") consisting of (i) two term-loan
facilities with outstanding borrowings in the aggregate of $467.5
million as of March 31, 1994, (ii) an additional term loan (the
"Additional Term Loan") with outstanding borrowings of $191.9 million
at March 31, 1994 and (iii) two revolving credit facilities with
aggregate commitments of $168 million and no outstanding borrowings at
March 31, 1994. The Company is the borrower under one of the term
loans, the Additional Term Loan and one of the revolving credit
facilities (collectively, the "U.S. Credit Agreement") and Stone-Canada
is the borrower under the other term loan and revolving credit
facility. At May 11, 1994, the Company had borrowing availability
under its revolving credit facilities of $167.2 million. The term
loans (other than the Additional Term Loan) and the revolving credit
facilities had weighted average interest rates for the 1994 first
quarter of 9.49 percent and 6.59 percent, respectively. The weighted
average interest rate on the Additional Term Loan was 6.50 percent for
the 1994 first quarter. The weighted average rates as reflected above
do not include the effects of the amortization of deferred debt
issuance costs.
The Credit Agreements contain covenants that include, among other
things, requirements to maintain certain financial tests and ratios
(including a minimum current ratio, an indebtedness ratio, a minimum
earnings before interest, taxes, depreciation and amortization test
("EBITDA") and a tangible net worth test) and certain restrictions and
limitations, including those on capital expenditures, changes in
control, payment of dividends, sales of assets, lease payments,
investments, additional borrowings mergers and purchases of stock and
assets. The Credit Agreements also contain cross-default provisions
relating to the non-recourse debt of its consolidated affiliate, Stone
Consolidated Corporation ("Stone-Consolidated"), and cross-acceleration
provisions relating to the non-recourse debt of the consolidated
affiliates, including Seminole and Stone Savannah River. Additionally,
the Credit Agreements provide for mandatory prepayments from sales of
certain assets, debt and equity financings and excess cash flows.
These prepayments along with voluntary prepayments are to be applied
ratably to reduce loan commitments under the Credit Agreements. The
indebtedness under the Credit Agreements is secured by a substantial
portion of the assets of the Company.
The Credit Agreements limit in certain specific circumstances any
further investments by the Company in Stone-Consolidated, Seminole and
Stone Savannah River. Stone Savannah River has incurred substantial
indebtedness in connection with project financing and is significantly
leveraged. As of March 31, 1994, Stone Savannah River had $391.7
million in outstanding indebtedness (including $258.0 million in
secured indebtedness owed to bank lenders). Emerging Issues Task Force
Issue No. 86-30, "Classification of Obligations when a Violation is
Waived by the Creditor," requires a company to reclassify long-term
debt as current when a covenant violation has occurred at the balance
sheet date or would have occurred absent a loan modification and it is
probable that the borrower will not be able to comply with the same
covenant at measurement dates that are within the next twelve months.
In November 1993, Stone Savannah River received a waiver of its fixed-
charges-coverage covenant requirement as of December 31, 1993 and March
31, 1994. Management has prepared projections that indicate that Stone
Savannah River will not be in compliance with this covenant as of June
30, 1994. Consequently, approximately $224.2 million and $237.9
million of Stone Savannah River debt that otherwise would have been
classified as long-term, has been classified as current in the March
31, 1994 and December 31, 1993 consolidated balance sheets,
respectively. Stone Savannah River intends to seek, prior to June 10,
1994 appropriate financial covenant waivers or amendments from its bank
group, although no assurance can be given that such waivers or
amendments will be obtained. Any such failure to obtain covenant
relief would result in a default under Stone Savannah River's credit
agreement and other indebtedness and, if any such indebtedness were
accelerated by the holders thereof, the lenders to the Company under
the Credit Agreements and various other of the Company's debt
instruments would be entitled to accelerate the indebtedness owed by
the Company.
The Company has entered into separate output purchase agreements
with each of these subsidiaries which require the Company to purchase
Seminole's linerboard production at fixed prices until certain
production levels are met (which could be as early as June 30, 1994)
and Stone Savannah River's linerboard and market pulp production at
fixed prices until December 1994 and November 1995, respectively.
After such dates, the Company is required to purchase the respective
production at market prices for the remaining terms of these
agreements. While the fixed prices in effect at March 31, 1994 were
higher than market prices at such date, the price differentials have
not had, nor are they expected to have, a significant impact on the
Company's results of operations or financial position. However, at the
time that the fixed price provisions of the output purchase agreements
terminate, such subsidiaries may need to undertake additional measures
to meet their debt service requirements, including obtaining additional
sources of funds or liquidity, postponing or restructuring of debt
service payments or refinancing the indebtedness. In the event that
such measures are required and are not successful, and such
indebtedness is accelerated by the respective lenders to Stone Savannah
River or Seminole, the lenders to the Company under the Credit
Agreements and various other of its debt instruments would be entitled
to accelerate the indebtedness owed by the Company.
There can be no assurance that the Company will be able to achieve
and maintain compliance with the prescribed financial ratio tests or
other requirements of its existing Credit Agreements. Failure to
achieve or maintain compliance with such financial ratio tests or other
requirements under the Credit Agreements, in the absence of a waiver or
amendment, would result in an event of default and could lead to the
acceleration of the obligations under the existing Credit Agreements.
The Company has successfully sought and received waivers and amendments
to its Credit Agreements on various occasions since entering into the
Credit Agreements. If further waivers or amendments are requested by
the Company, there can be no assurance that the Company's bank lenders
will again grant such requests. The failure to obtain any such waivers
or amendments would reduce the Company's flexibility to respond to
adverse industry conditions and could have a material adverse effect on
the Company.
For a description of the most recent amendment to the Company's
existing Credit Agreements which was enacted in February of 1994 and
became effective upon the completion of the Offerings, refer to Note 6:
Credit Agreement Amendments/Liquidity Matters.
The financial resources of certain of the Company's consolidated
affiliates are not available to the Company due to covenants applicable
to such affiliates and are also limited in availability by tax and
other considerations.
Operating activities:
Net cash used in operating activities was $114.2 million for the three
months ended March 31, 1994 compared with $34.8 million for the
comparable period of 1993. This decrease in cash flows resulted from
the increase in the first quarter 1994 loss (before the extraordinary
loss and the non-cash, cumulative effects of accounting changes)
compared with the prior year period along with an increase in debt fee
payments, an increase in the credit for deferred income taxes and the
effects of increases in accounts and notes receivable and decreases in
accounts payable and other current liabilities as compared to the
changes in the prior year period. These decreases were partially
offset by the favorable effect of a reduction in inventories as
compared to the increase in inventories during the prior year period.
<PAGE>
Financing activities:
On February 3, 1994, under the Company's $1 billion shelf registration,
the Company sold $710 million principal amount of 9-7/8 percent Senior
Notes due February 1, 2001 and 16.5 million shares of common stock for
an additional $251.6 million at $15.25 per common share. On February
17, 1993, the underwriters elected to exercise their option to sell an
additional 2.47 million shares of common stock for an additional $37.7
million, also at $15.25 per common share (collectively, with the
February 3, 1994 offering, the "Offerings"). The net proceeds from the
Offerings of approximately $962 million were used to (i) prepay
approximately $652 million of 1995, 1996 and 1997 scheduled
amortization under the Company's Credit Agreements, including the
ratable amortization payment under the revolving credit facilities
which had the effect of reducing the total commitments thereunder to
approximately $168 million; (ii) redeem the Company's 13-5/8 percent
Subordinated Notes due 1995 at a price equal to par, approximately $98
million principal amount, plus accrued interest to the redemption date;
(iii) repay approximately $136 million of the outstanding borrowings
under the Company's revolving credit facilities without reducing the
commitments thereunder; and (iv) provide liquidity in the form of cash.
The 9-7/8 percent senior notes are redeemable by the Company on and
after February 1, 1999. Interest is payable semi-annually on February
1 and August 1, commencing August 1, 1994.
As a result of the Offerings, the dividend pool under the Senior
Subordinated Indenture dated March 15, 1992 relating to the Company's
10-3/4 percent Senior Subordinated Notes due June 15, 1997, its 11
percent Senior Subordinated Notes due August 15, 1999 and its 10-3/4
percent Senior Subordinated Debenture due April 1, 2002 was replenished
from the sale of the common shares. On March 28, 1994, the Company's
Board of Directors declared both a regular quarterly cash dividend of
$.4375 per share and a cumulative cash dividend of $1.3125 per share on
the Company's $1.75 Series E Cumulative Convertible Exchangeable
Preferred Stock ("Series E Cumulative Preferred Stock"), both payable
May 16, 1994 to stockholders of record on April 15, 1994. The
cumulative cash dividend will fully satisfy all accumulated dividends
in arrears on the Series E Cumulative Preferred Stock. The dividend
pool does not currently enable the Company to pay further dividends on
the Series E Cumulative Preferred Stock.
Due to the pendency of the litigation described in Part II, Item 3.
Legal Proceedings, the Company has postponed a previously disclosed
possible transaction related to the energy supply agreement at its
Florence, South Carolina mill.
Investing activities:
Capital expenditures for the three month period ended March 31, 1994
totalled approximately $17.7 million (including capitalized interest of
approximately $.2 million).
<PAGE>
Outlook:
Due to industry conditions and interest costs as a result of the
Company's highly leveraged capital structure, the Company had incurred
net losses in each of the last three years and for the first quarter of
1994 and expects to incur a net loss for the second quarter of 1994.
Such net losses have significantly impaired the Company's liquidity and
available sources of liquidity and would continue to adversely affect
the Company until further significant product price improvement is
achieved.
The Company's containerboard and corrugated container product lines,
which represent a substantial portion of the Company's net sales, had
generally experienced pricing pressures during the past three years.
During the fourth quarter of 1993, the Company implemented a $25 per
ton price increase for containerboard and as a result of a further
strengthening in demand, began implementing additional price increases
of $30 per ton for linerboard and $40 per ton for corrugating medium
effective March 1, 1994. In April 1994, the Company announced a
further containerboard price increase of $40 per ton scheduled to be
effective June 1, 1994. Additionally, price increases for corrugated
containers, representing restoration of prices to prior levels realized
in 1993, were effected in the first quarter of 1994. As a follow-
through to the March 1, 1994 containerboard price increase, the Company
is in the process of implementing further price increases for
corrugated containers.
Also during the first quarter of 1994, the Company announced price
increases for both industrial and retail kraft paper and paper
products. In April 1994, the Company further announced a price
increase of $30 per ton for retail kraft paper effective June 1, 1994.
Pricing conditions for newsprint, groundwood paper and market pulp
have been volatile in recent years. Additions to industry-wide
capacity and declines in demand for such products during the past three
years led to supply/demand imbalances that have contributed to
depressed prices for these products. Average selling prices for
newsprint declined in the first quarter of 1994 and continue to remain
low. The Company began to implement a $48 per metric ton price
increase for newsprint effective March 1, 1994 in the eastern markets
of North America and a $41 per metric ton price increase in the western
markets of North America effective May 1, 1994. In April 1994, the
Company announced further newsprint price increases equivalent to $41
per metric ton in the eastern markets of North America and a $48 per
metric ton in the western markets of North America both effective
August 15, 1994. Additionally, the Company announced price increases
for specific grades of uncoated groundwood paper to take effect in July
1994.
<PAGE>
As a result of improvements in industry supply/demand
characteristics, the Company successfully implemented two price
increases for various grades of market pulp during the first quarter of
1994. The Company has announced further market pulp price increases to
be effective in May and June 1994.
Although supply/demand balances appear favorable in most of the
Company's core products, there can be no assurance that the above price
increases will be achieved or that prices can be maintained at the
present levels.
The Company improved its liquidity and financial flexibility through
the completion of the Offerings in February of 1994. Notwithstanding
these improvements in the Company's liquidity and financial
flexibility, unless the Company achieves substantial price increases
beyond those realized during the 1994 first quarter, the Company will
continue to incur net losses and negative cash flows from operating
activities. Without such sustained substantial price increases, the
Company may exhaust all or substantially all of its cash resources and
borrowing availability under the existing revolving credit facilities.
In such event, the Company would be required to pursue other
alternatives to improve liquidity, including further cost reductions,
sales of assets, the deferral of certain capital expenditures,
obtaining additional sources of funds or liquidity or pursuing the
possible restructuring of its indebtedness. There can be no assurance
that such measures, if required, would generate the liquidity required
by the Company to operate its business and service its indebtedness.
As currently scheduled, beginning in 1996 and continuing thereafter,
the Company will be required to make significant amortization payments
on its existing indebtedness which would require the Company to raise
sufficient funds from operations or other sources or refinance or
restructure maturing indebtedness. No assurance can be given that the
Company will be able to generate or raise such funds.
In December 1993, the U.S. Environmental Protection Agency ("EPA")
published draft rules, informally referred to as the "cluster rules",
which contain proposed revisions to effluent guidelines under the Clean
Water Act in conjunction with new regulations relating to discharge of
certain substances under the Clean Air Act. The final rules are
scheduled to be issued in late 1995, with a nominal compliance date of
1998. In connection with the rule making process, the Company is
considering and evaluating the potential impact of such proposed
regulations and the possible changes to the Company's planned capital
expenditures over the next several years. Based upon preliminary
estimates, the Company could, under the current proposals, be required
to make capital expenditures of $350-$450 million by 1998 and incur up
to $20 million annually of additional operating expenses. The
commencement of such expenditures would occur sometime in 1996. The
ultimate financial impact of the regulations cannot currently be
predicted and will depend on several factors, including changes in the
proposed regulations, new developments in control process technology,
possible mill reconfiguration and inflation. In order to establish the
above referenced range, the Company utilized assumptions least
favorable to the Company among the range of possible outcomes. The
estimate could change, depending on several factors, including, among
others, the ability of the Company and other pulp and paper
manufactures to convince the EPA that the proposed regulations are
unnecessarily complex, burdensome, and environmentally unjustified.
<PAGE>
PART II. OTHER INFORMATION
Item 3. Legal Proceedings
On April 20, 1994, Carolina Power & Light ("CP&L") commenced
proceedings against the Company before the Federal Energy Regulatory
Commission ("FERC") (the "FERC Proceeding") and in the United States
District Court for the Eastern District of North Carolina (the "Federal
Court Action"). Both proceedings relate to the Company's electric
cogeneration facility located at its Florence, South Carolina plant
(the "Facility") and the Company's Electric Power Purchase Agreement
(the "Agreement") with CP&L. Prior to the filing of the proceedings,
the Company and CP&L had been in discussions relating to a transaction
involving the Facility and the Agreement.
In the FERC Proceeding, CP&L alleges that the Facility lost its
qualifying facility ("QF") certification under the Public Utility
Regulatory Policy Act of 1978 on August 13, 1991, when the Agreement
pursuant to which CP&L purchases electricity generated by the Facility
was amended to reflect the Company's election under the Agreement to
switch to a "buy-all/sell-all mode of operation." As a result, CP&L
alleges the Company became a "public utility" subject to FERC
regulation under the Federal Power Act. CP&L has also requested FERC
to determine the just and reasonable rate for sales of electric energy
and capacity from the Facility since August 13, 1991 and to order the
Company refund any amounts paid in excess of that rate, plus interest
and penalties.
In the Federal Court Action, CP&L has requested declaratory
judgments that sales of electric energy and capacity under the
Agreement since August 13, 1991 are subject to a just and reasonable
rate to be determined by FERC and that the Agreement has been
terminated as a result of the Company's failure to maintain the
Facility's QF status and the invalidity of the Agreement's rate
provisions. CP&L has also sought damages for breach of contract and
for purchases in excess of the just and reasonable rate to be
determined by FERC.
The Company intends to contest these actions vigorously. Due to the
pendency of the litigation, the Company has postponed a previously
disclosed possible transaction related to the Facility and the
Agreement.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
1. A Report on Form 8-K dated January 3, 1994 was filed
reporting (i) under Item 2--Acquisition or Disposition
of Assets, that Stone-Consolidated Corporation, an
indirect Canadian subsidiary of the Company, sold in
Canada in an initial public offering both common stock
and convertible subordinated debentures and concurrently
sold in the United States senior secured notes and; (ii)
under Item 5--Other Events, that the Company and its
bank group entered into an Amended and Restated Credit
Agreement effective December 17, 1993 (the "Third
Restated Credit Agreement").
2. A Report on Form 8-K dated January 5, 1994 was filed
reporting under Item 5--Other Events, with respect to
certain amendments to the Credit Agreements and
disclosure relating to the Offerings, and other recent
developments.
3. A Report on Form 8-K dated January 24, 1994 was filed
reporting under Item 5--Other Events, that (i) the
Company issued a press release on February 3, 1994
announcing its financial results for the fourth quarter
of 1993 and for the year ended December 31, 1993 and the
recent developments concerning the Company's issuance of
common stock and senior unsecured notes and (ii) the
Company amended and received a waiver to its Credit
Agreements as of January 24, 1994.
4. A Report on Form 8-K dated April 19, 1994 was filed
reporting under Item 5--Other Events, certain
environmental capital expenditures and expenses which
could be required if and when the "cluster rules" are
finalized by the U.S. Environmental Protection Agency.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
STONE CONTAINER CORPORATION
By: Thomas P. Cutilletta
Thomas P. Cutilletta
Senior Vice President and
Corporate Controller
(Principal Accounting Officer)
Date: May 13, 1994
