<PAGE>
$700,000,000
[LOGO]
STONE CONTAINER CORPORATION
$500,000,000
10 3/4% FIRST MORTGAGE NOTES DUE 2002
$200,000,000
11 1/2% SENIOR NOTES DUE 2004
Interest on the 10 3/4% First Mortgage Notes due October 1, 2002 (the "First
Mortgage Notes") is payable semi-annually on April 1 and October 1 of each year,
commencing April 1, 1995. Interest on the 11 1/2% Senior Notes due October 1,
2004 (the "Senior Notes") is payable semi-annually on April 1 and October 1 of
each year, commencing April 1, 1995. The First Mortgage Notes and the Senior
Notes are collectively referred to herein as the "Notes." The First Mortgage
Notes may not be redeemed by Stone Container Corporation (the "Company") prior
to October 1, 1999 and are redeemable thereafter at the redemption prices set
forth herein. The Senior Notes may not be redeemed by the Company prior to
October 1, 1999 and are redeemable thereafter at the redemption prices set forth
herein. The Notes do not provide for any sinking fund. Upon a Change of Control
(as defined), and upon the satisfaction of certain conditions, the Company will
be required to offer to repurchase the outstanding Notes at a price equal to
101% of the aggregate principal amount of such Notes, plus accrued and unpaid
interest to the date of repurchase. See "Description of Notes -- Change of
Control."
The First Mortgage Notes will be senior secured obligations of the Company and
the Senior Notes will be senior unsecured obligations of the Company. The First
Mortgage Notes will be secured by a first ranking lien on four of the Company's
containerboard mills. The Notes will rank PARI PASSU in right of payment with
each other and all other Senior Indebtedness (as defined) of the Company. The
Notes will be senior in right of payment to all Subordinated Indebtedness (as
defined) of the Company. See "Description of Notes -- Ranking." The net proceeds
to the Company from the issuance and sale of the Notes offered hereby (the
"Offering") will be used to repay indebtedness and for general corporate
purposes. See "Use of Proceeds." The issuance and sale of the Notes in the
Offering will occur concurrently with certain related transactions and the
closing by the Company of a new senior secured credit agreement (the "Credit
Agreement"), each of which is conditioned upon the successful completion of the
other. The Credit Agreement is comprised of a $400 million term loan and a $450
million revolving credit facility. The revolving credit facility borrowing
availability will be reduced by any letter of credit commitments, of which
approximately $61 million will be outstanding at closing, and approximately $61
million which the Company will borrow at closing. Borrowings under the Credit
Agreement will constitute Senior Indebtedness and will be secured by a
significant portion of the assets of the Company. See "Credit Agreement."
Application will be made to list the First Mortgage Notes and the Senior Notes
on the New York Stock Exchange.
SEE "RISK FACTORS" FOR A DISCUSSION OF CERTAIN RISK FACTORS THAT SHOULD BE
CONSIDERED IN CONNECTION WITH THIS OFFERING.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC(1) DISCOUNT COMPANY(1)(2)
<S> <C> <C> <C>
Per First Mortgage Note..................................................... 99.353% 2.250% 97.103%
Total....................................................................... $ 496,765,000 $ 11,250,000 $ 485,515,000
Per Senior Note............................................................. 99.282% 2.500% 96.782%
Total....................................................................... $ 198,564,000 $ 5,000,000 $ 193,564,000
- ----------------------------------------------------------------------------------------------------------------
<FN>
(1) Plus accrued interest, if any, from date of issuance.
(2) Before deduction of expenses of the Offering payable by the Company
estimated at $2.9 million.
</TABLE>
The First Mortgage Notes and the Senior Notes are offered subject to receipt and
acceptance by the Underwriters, to prior sale and to the Underwriters' right to
reject any order in whole or in part and to withdraw, cancel or modify the offer
without notice. It is expected that delivery of the First Mortgage Notes and the
Senior Notes will be made at the office of Salomon Brothers Inc, Seven World
Trade Center, New York, New York, or through the facilities of The Depository
Trust Company, on or about October 12, 1994.
SALOMON BROTHERS INC
BT SECURITIES CORPORATION
MORGAN STANLEY & CO.
INCORPORATED
KIDDER, PEABODY P CO.
INCORPORATED
BEAR, STEARNS & CO. INC.
The date of this Prospectus is September 29, 1994.
<PAGE>
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY EFFECT TRANSACTIONS WHICH
STABILIZE OR MAINTAIN THE MARKET PRICE OF THE FIRST MORTGAGE NOTES AND/ OR THE
SENIOR NOTES AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
2
<PAGE>
PROSPECTUS SUMMARY
THIS SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE DETAILED INFORMATION AND
FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO, APPEARING ELSEWHERE IN THIS
PROSPECTUS. PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE FACTORS SET
FORTH HEREIN UNDER THE CAPTION "RISK FACTORS." CERTAIN CAPITALIZED TERMS USED
HEREIN ARE DEFINED ELSEWHERE IN THIS PROSPECTUS. AS USED HEREIN, THE TERM
"COMPANY" INCLUDES STONE CONTAINER CORPORATION, ITS SUBSIDIARIES AND ITS
AFFILIATES, EXCEPT AS THE CONTEXT OTHERWISE MAY REQUIRE.
THE COMPANY
The Company is a major international pulp and paper company engaged
principally in the production and sale of paper, packaging products, and market
pulp. The Company believes that it is the world's largest producer of unbleached
containerboard and kraft paper and the world's largest converter of those
products into corrugated containers and paper sacks and bags. The Company also
believes that it is one of the world's largest paper companies in terms of
annual tonnage, having produced approximately 7.5 million total tons of paper
and pulp in each of 1993 and 1992. The Company produced approximately 4.9
million and 5.0 million tons of unbleached containerboard and kraft paper in
1993 and 1992, respectively, which accounted for approximately 66% of its total
tonnage produced for both 1993 and 1992. The Company had net sales of
approximately $5.1 billion and $5.5 billion in 1993 and 1992, respectively. The
Company owns or has an interest in 135 manufacturing facilities in the United
States, 26 in Canada, 15 in Germany, six in France, two in Belgium and one in
each of the United Kingdom and the Netherlands. The facilities include 23 mills.
The Company also maintains sales offices in the United States, Canada, the
United Kingdom, Germany, Belgium, France, Mexico, China and Japan, has a
forestry operation in Costa Rica and has a joint venture relationship in
Venezuela.
PAPERBOARD AND PAPER PACKAGING
The Company believes that its integrated unbleached paperboard and paper
packaging system is the largest in the world with 16 mills and 136 converting
plants located throughout the United States and Canada and in Europe. The major
products in this business are containerboard and corrugated containers, which
are primarily sold to a broad range of manufacturers of consumable and durable
goods; kraft paper and paper bags and sacks, which are primarily sold to
supermarket chains, retailers of consumer products and, in the case of multiwall
shipping sacks, to the agricultural, chemical and cement industries; and
boxboard and folding cartons, which are sold to manufacturers of consumable
goods and other box manufacturers. The unbleached packaging business of the
Company has an annual capacity of approximately 5.3 million tons and is more
than 80% integrated. In 1993, total sales for the paperboard and paper packaging
business of the Company were approximately $3.8 billion, or approximately 75% of
total consolidated sales.
WHITE PAPER AND PULP
The Company believes that, together with its 75% owned consolidated
subsidiary, Stone-Consolidated Corporation ("Stone-Consolidated"), it is the
largest producer of uncoated groundwood paper in North America and the fourth
largest producer of newsprint in North America. Stone-Consolidated, a Canadian
corporation, owns all of the Canadian and United Kingdom newsprint and uncoated
groundwood paper assets of the Company. Stone-Consolidated owns three newsprint
mills (two in Canada and one in the United Kingdom) and two uncoated groundwood
paper mills in Canada. The newsprint production of the Company's linerboard and
newsprint mill in Snowflake, Arizona is marketed by Stone-Consolidated on a
commission basis. The Company and Stone-Consolidated have the capacity to
produce 1.4 million tons of newsprint and 500,000 tons of uncoated groundwood
paper annually. Newsprint is marketed to newspaper publishers and commercial
printers. Uncoated groundwood paper is sold for use primarily in newspaper
inserts, retail store advertising fliers, magazines, telephone directories and
as computer paper.
The Company believes it is a major market producer in the production of
market pulp in North America. The Company owns and operates five market pulp
mills in North America, including the Castlegar, British Columbia mill in which
the Company has a 25% interest (the "Celgar mill"). These mills
3
<PAGE>
have the capacity to produce 1.5 million tons of market pulp annually. The
geographic diversity of the Company's mills enables the Company to offer 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.
In 1993, total sales for the white paper and pulp business of the Company
(which includes Stone-Consolidated sales) were approximately $965 million, or
approximately 19% of total consolidated sales.
PRODUCT PRICING AND INDUSTRY TRENDS
The markets for products sold by the Company are highly competitive and are
also sensitive to changes in industry capacity and cyclical changes in the
economy, both of which can significantly impact selling prices and thereby the
Company's profitability. From 1990 through the third quarter of 1993, the
Company experienced substantial declines in the pricing of most of its products.
Market conditions have improved since October 1993, which have allowed the
Company to increase prices for most of its products. While prices for most of
the Company's products are approaching the historical high prices achieved
during the peak of the last industry cycle, the Company's production costs
(including labor, fiber and energy), as well as its interest expense, have also
significantly increased since the last pricing peak in the industry, increasing
pressure on the Company's net margins for its products.
The Company's containerboard and corrugated container product lines, which
represent a substantial portion of the Company's net sales, generally
experienced declining product prices from 1990 through the third quarter of
1993. Since October 1, 1993, the Company has increased the price of linerboard
in the fourth quarter of 1993 and the first quarter and third quarter of 1994 by
$25 per ton, $30 per ton and $40 per ton, respectively. Prices for corrugating
medium also increased by $25 per ton, $40 per ton and $50 per ton in the
corresponding periods. In addition, in the first half of 1994, the Company
implemented corrugated container price increases and began implementing on July
25, 1994, a 9.5% price increase for corrugated containers. Historically,
suppliers, including the Company, have taken up to 90 days to pass increased
linerboard and corrugating medium prices through to corrugated container
customers. The Company converts more than 80% of its linerboard and corrugating
medium products into corrugated containers, making the achievement of price
increases for corrugated containers essential for the Company to realize
substantial financial benefit from linerboard and corrugating medium price
increases. On August 5, 1994, the Company announced to its customers an
additional price increase of $40 per ton for linerboard and $50 per ton for
corrugating medium effective for the fourth quarter of 1994. While there can be
no assurance that these price increases will be implemented or that prices will
continue to increase or even be maintained at present levels, the Company
believes that the supply/ demand characteristics for linerboard, corrugating
medium and corrugated containers have improved which could allow for further
price increases for these product lines.
According to industry publications, immediately preceding the price increase
effective October 1, 1993, the reported transaction price for 42 lb. kraft
linerboard, the base grade of linerboard, was $300 per ton and as of August 1,
1994, the reported transaction price for this base grade was $385-$395 per ton.
According to industry publications, the reported transaction price for
corrugating medium immediately preceding October 1, 1993 was $280 per ton and
$375-$385 per ton as of August 1, 1994.
The Company has also implemented price increases in kraft paper and kraft
paper converted products. The Company increased prices for retail bags and sacks
by 8% on each of April 1, May 1, and July 1, 1994 and announced and began
implementing a further price increase of 10% effective September 1, 1994. In
addition, the Company has announced and began implementing on August 1, 1994 a
$50 per ton (approximately 8.6%) price increase for kraft paper.
Pricing for market pulp has improved substantially in 1994. The Company has
increased prices for various grades of market pulp by up to $260 per metric
tonne since November 1993. According to industry publications, the reported
transaction price for southern bleached hardwood kraft ("SBHK") was $370 per
metric tonne as of the third quarter of 1993 and $500-570 per metric tonne as of
the second
4
<PAGE>
quarter of 1994. On July 1, 1994 the Company implemented a further price
increase of $70 per metric tonne (approximately 12.2%). The Company has
announced a further price increase of $70 per metric tonne to be implemented in
the fourth quarter.
After further declines in the first quarter of 1994, pricing for newsprint
has also recently improved. The Company increased newsprint prices in the second
quarter of 1994 by $48 per metric tonne in the eastern markets of North America
and $41 per metric tonne in the western markets of North America and $41 per
metric tonne in the eastern markets of North America and $48 per metric tonne in
the western markets of North America in the third quarter of 1994. According to
industry publications, the reported transaction price for newsprint in the
eastern markets of North America was $411 per metric tonne as of March 1, 1993
and $470 per metric tonne as of August 1, 1994. To date, uncoated groundwood
papers have not achieved significant price increases. However, a further price
increase of approximately $48 per metric tonne has been announced for the fourth
quarter of 1994.
Although supply/demand balances appear favorable for most of the Company's
products, there can be no assurance that announced price increases will be
achieved or that prices can be maintained at present levels.
The price of recycled fiber, one of the principal raw materials in the
manufacture of certain of the Company's products, has increased substantially in
1994. The historically cyclical markets for wood fiber and recycled fiber are
highly competitive, and as the demand for the Company's products rises, the
demand for and cost of fiber, particularly recycled fiber, may further increase.
See "Risk Factors -- Cyclicality and Pricing; Fiber Supply and Pricing."
FINANCIAL STRATEGY
In 1993, the Company adopted a financial plan designed to increase the
Company's liquidity and improve its financial flexibility, by prepaying the near
term scheduled amortizations under its bank credit agreements (the "1989 Credit
Agreement"). The financial plan was implemented in response to continuing net
losses resulting from depressed sales prices for the Company's products and the
Company's highly leveraged capital structure and related interest expense
associated with indebtedness incurred to finance the acquisition of
Consolidated-Bathurst Inc. (a Canadian corporation, renamed Stone Container
(Canada) Inc. ("Stone Canada")). In 1993, as part of the financial plan, the
Company satisfied its remaining 1993 and 1994 scheduled amortization obligations
under the 1989 Credit Agreement and repaid outstanding borrowings (a portion of
which could subsequently be reborrowed) under the revolving credit facility
portion of the 1989 Credit Agreement with the proceeds from (i) the sale of $400
million aggregate principal amount of additional Company indebtedness, (ii) the
public offering in Canada of approximately 25% of the common stock (Cdn. $231
million) of Stone-Consolidated and the contemporaneous sale by
Stone-Consolidated of Cdn. $231 million principal amount of convertible
subordinated debentures in Canada and $225 million principal amount of senior
secured notes in the U.S., and (iii) the sale of approximately $125 million of
assets. In February 1994, the Company sold $710 million principal amount of
9 7/8% Senior Notes due 2001 and approximately 19 million shares of its common
stock for gross proceeds of approximately $289 million from the sale of such
common stock (the "February 1994 Offerings"). The Company used the $962 million
of net proceeds from the February 1994 Offerings to (i) prepay scheduled
amortizations under the 1989 Credit Agreement for all of 1995 and a portion of
1996 and 1997, (ii) fully redeem the principal amount of the Company's 13 5/8%
Subordinated Notes due 1995, and (iii) repay outstanding borrowings under the
revolving credit facility portion of the 1989 Credit Agreement, a portion of
which remained available for reborrowing thereunder.
The Company, as part of its financial plan, is evaluating certain
alternatives for the disposition and monetization of its non-core assets
including the U.S. wood products business. As an initial step in achieving this
objective, the Company on September 27, 1994, announced the closure of three
facilities of the wood products business in the Pacific Northwest. The
operations of the closed facilities will be consolidated with other wood product
operations of the Company in the Northwest, while the Company
5
<PAGE>
will dispose of excess assets including inventory as soon as practicable in an
orderly liquidation. The impact of such closure and sale of assets on the
Company's 3rd Quarter results has not yet been fully determined but is not
expected to have a material effect on the Company.
The Company is continuing to pursue its financial strategy of increasing the
Company's liquidity and improving its financial flexibility. Concurrently with
the closing of this Offering, the Company will (i) repay all of the outstanding
indebtedness and commitments under and terminate the 1989 Credit Agreement, (ii)
enter into the Credit Agreement and (iii) repay the outstanding borrowings under
the credit agreement of Stone Savannah River Pulp & Paper Corporation ("Savannah
River") and, on or prior to December 30, 1994, redeem the outstanding senior
subordinated notes and Series A preferred stock of Savannah River, each of which
(other than the redemptions) is conditioned upon the successful completion of
the other transactions (collectively, the "Related Transactions"). The Credit
Agreement will consist of a $400 million secured term loan and a $450 million
secured revolving credit facility. The revolving credit facility borrowing
availability will be reduced by any letter of credit commitments, of which
approximately $61 million will be outstanding at closing, and approximately $61
million which the Company will borrow at closing. Savannah River is currently a
93% owned subsidiary of the Company. On or prior to the closing of the Offering,
the Company will (i) repay all of the indebtedness outstanding under and
terminate Savannah River's bank credit agreement (the "Savannah River Credit
Agreement"), (ii) give notice of redemption to, and deposit the redemption price
with, the trustee of the $130 million principal amount of Savannah River's
14 1/8% Senior Subordinated Notes due 2000 (the "Savannah River Notes"), which
shall be redeemed on or prior to December 30, 1994, and (iii) purchase the
72,346 outstanding shares of common stock of Savannah River not owned by the
Company pursuant to a merger of a wholly owned subsidiary of the Company and
Savannah River. On or before December 30, 1994, the Company will also cause the
425,243 outstanding shares of Series A Cumulative Redeemable Exchangeable
Preferred Stock of Savannah River (the "Savannah River Preferred") not owned by
the Company to be redeemed. The completion of this Offering, together with the
Related Transactions, will extend the scheduled amortization obligations and
final maturities of more than $1 billion of the Company's indebtedness, improve
the Company's liquidity by replacing its current $166 million revolving credit
facility commitments with $450 million of revolving credit commitments (of which
borrowing availability will be reduced by any letter of credit commitments, of
which approximately $61 million will be outstanding at closing, and
approximately $61 million of borrowings thereunder which will be borrowed at
closing) and improve the Company's financial flexibility through entering into
the Credit Agreement.
The Company will incur a charge for the write-off of previously unamortized
debt issuance costs, related to the debt being repaid (approximately $45
million, net of income tax benefit) upon the completion of the Offering and
Related Transactions. This non-cash charge will be recorded as an extraordinary
loss from the early extinguishment of debt in the Company's Consolidated
Statements of Operations and Retained Earnings (Accumulated Deficit).
6
<PAGE>
The sources and uses of funds in connection with the Offering and the
Related Transactions are estimated to be as follows:
<TABLE>
<CAPTION>
(IN
MILLIONS)
<S> <C>
Sources:
First Mortgage Notes.......................................................... $ 485.5
Senior Notes.................................................................. 193.6
Credit Agreement
Term Loan................................................................... 400.0
Revolving Credit Facility(1)................................................ 61.0
Other(2)...................................................................... 34.8
------------
Total:.......................................................................... $ 1,174.9
------------
------------
Uses:
Repayment of 1989 Credit Agreement borrowings................................. $ 718.5
Repayment of Savannah River Credit Agreement borrowings....................... 226.4
Redemption of Savannah River Notes............................................ 146.7
Redemption of Savannah River Preferred........................................ 50.6
Repurchase of Savannah River Common Stock..................................... 2.2
General corporate purposes(3)................................................. 30.5
------------
Total:.......................................................................... $ 1,174.9
------------
------------
<FN>
- ------------------------
(1) Commitment of $450 million (of which borrowing availability will be reduced
by any letter of credit commitments, of which approximately $61 million
will be outstanding at closing and approximately $61 million of borrowings
thereunder which will be borrowed at closing).
(2) Cash escrow relating to letters of credit released due to the repayment of
the 1989 Credit Agreement.
(3) Includes payment of fees and expenses relating to the Credit Agreement,
which are estimated to total $27.6 million and expenses relating to the
Offering (other than the Underwriters' discount) estimated to total $2.9
million.
</TABLE>
7
<PAGE>
THE OFFERING OF NOTES
<TABLE>
<S> <C>
Securities Offered................ $500 million principal amount of 10 3/4% First Mortgage
Notes due 2002 (the "First Mortgage Notes").
$200 million principal amount of 11 1/2% Senior Notes
due 2004 (the "Senior Notes") (the Senior Notes and the
First Mortgage Notes being collectively referred to as
the "Notes").
The First Mortgage Notes will be issued pursuant to an
indenture dated as of October 12, 1994 (the "First
Mortgage Note Indenture") between the Company and
Norwest Bank Minnesota, N.A., as trustee (the "First
Mortgage Note Trustee"), and the Senior Notes will be
issued pursuant to an indenture dated as of October 12,
1994 (the "Senior Note Indenture") between the Company
and The Bank of New York, as trustee (the "Senior Note
Trustee"). The First Mortgage Note Indenture and the
Senior Note Indenture will be substantially identical,
except for provisions, including certain covenants, with
respect to the Collateral (as defined) securing the
First Mortgage Notes, and are collectively referred to
herein as the "Indentures."
Interest Payment Dates............ Interest on the First Mortgage Notes will be payable
semi-annually on April 1 and October 1, commencing April
1, 1995.
Interest on the Senior Notes will be payable
semi-annually on April 1 and October 1, commencing April
1, 1995.
Optional Redemption............... The First Mortgage Notes are redeemable at the option of
the Company, in whole or from time to time in part, on
and after October 1, 1999, at the redemption prices set
forth herein, together with accrued and unpaid interest.
See "Description of Notes -- Optional Redemption."
The Senior Notes are redeemable at the option of the
Company, in whole or from time to time in part, on and
after October 1, 1999, at the redemption prices set
forth herein, together with accrued and unpaid interest.
See "Description of Notes -- Optional Redemption."
Change of Control................. Upon the occurrence of a Change of Control (as defined)
the Company is required to offer to repurchase each
holder's Notes at a purchase price equal to 101% of the
aggregate principal amount thereof plus accrued and
unpaid interest, if any, to the date of repurchase. If
such repurchase would constitute an event of default
under Specified Bank Debt (as defined), then, prior to
making such repurchase offer, the Company is required to
(i) repay in full in cash such Specified Bank Debt or
(ii) obtain the requisite consent of lenders of such
Specified Bank Debt to permit the repurchase of Notes
without giving rise to an event of default under such
Specified Bank Debt. Such Change of Control provisions
in and of themselves may not afford holders of the Notes
protection in the event of a highly leveraged
transaction, reorganization, restructuring, merger or
similar transaction involving the Company that may
adversely affect such holders if such transaction is not
the type of transaction included within the definition
of Change of Control. A transaction involving specified
Stone family members or
</TABLE>
8
<PAGE>
<TABLE>
<S> <C>
their affiliates will result in a Change of Control only
if it is the type of transaction specified by such
definition. See "Description of Notes -- Change of
Control." There can be no assurance that the Company
would have sufficient funds to pay the required purchase
price for all Notes tendered by the holders thereof in
the event of a Change of Control. Neither the Board of
Directors of the Company nor the respective trustees
under the Indentures relating to the Notes may waive the
Change of Control provisions.
Ranking........................... The Notes will rank PARI PASSU in right of payment with
all existing and future Senior Indebtedness (as defined)
of the Company and senior in right of payment and in
rights upon liquidation to all existing and future
Subordinated Indebtedness (as defined) of the Company.
Obligations of the Company's subsidiaries, however, will
represent prior claims with respect to the assets and
earnings of such subsidiaries. Borrowings under the
Credit Agreement will constitute Senior Indebtedness and
will be secured by a significant portion of the
Company's assets. The First Mortgage Notes will be
secured by certain other assets of the Company as
described herein. See "Description of Notes -- Ranking."
Limitation on Future Liens........ FIRST MORTGAGE NOTES AND SENIOR NOTES. If the Company or
any Subsidiary (as defined) shall create or permit the
existence of any Lien (as defined) other than Permitted
Liens (as defined) upon any of its respective assets as
security for (i) any Indebtedness (as defined) or other
obligation of the Company that ranks PARI PASSU with the
Notes or any Indebtedness or other obligation of a
Subsidiary of the Company, the Company will secure or
will cause such Subsidiary to guarantee and secure the
outstanding Notes equally and ratably with such
Indebtedness or other obligation or (ii) any
Subordinated Indebtedness (as defined), the Company will
secure the outstanding Notes prior to such Subordinated
Indebtedness; PROVIDED, HOWEVER, that the foregoing
shall not apply to certain specified Liens, including
Liens to secure any Indebtedness under the Credit
Agreement which Indebtedness will be secured by Liens on
a significant portion of the assets of the Company and
Liens in favor of the First Mortgage Notes described
herein.
FIRST MORTGAGE NOTES. Under the terms of the First
Mortgage Note Indenture, the Company will not, and will
not permit any of its Subsidiaries to, directly or
indirectly, (i) incur or suffer to exist any Lien upon
any of the Collateral other than Permitted Collateral
Liens (as defined), (ii) take any action or omit to take
any action with respect to the Collateral that might or
would have the result of adversely affecting, impairing
or failing to maintain without interruption the security
interests in the Collateral under the First Mortgage
Note Indenture or the Security Documents (as defined),
or (iii) grant any interest whatsoever (other than
Permitted Collateral Liens) in any of the Collateral to
any other Person (other than the Company or the First
Mortgage Note Trustee) or suffer to exist any such
interest.
</TABLE>
9
<PAGE>
<TABLE>
<S> <C>
Limitation on Future Guaranties... The Company will not guarantee the Indebtedness of any
Subsidiary and will not permit any Subsidiary or
Seminole Kraft Corporation ("Seminole") to guarantee (i)
any Indebtedness of the Company that ranks PARI PASSU
with the Notes, (ii) any Indebtedness of a Subsidiary of
the Company or (iii) any Subordinated Indebtedness;
PROVIDED, HOWEVER, that the foregoing shall not apply to
certain specified guaranties, including guaranties in a
principal amount up to the principal amount outstanding
or committed under the 1989 Credit Agreement as of
November 1, 1991, plus $250 million, less the proceeds
from the sale of Indebtedness under the 1991 Indenture
(as defined) issued from time to time that are applied
to repay Indebtedness under the Credit Agreements (as
defined) as refinanced or extended from time to time
(which would include Indebtedness under the new Credit
Agreement).
For further information on ranking, limitations on Liens
and limitations on guaranties, see "Description of Notes
-- Certain Covenants -- Limitation on Future Liens and
Guaranties." For further information on the collateral
securing the borrowings under the Credit Agreement, see
"Credit Agreement -- Security."
Collateral Asset Disposition...... FIRST MORTGAGE NOTES. Pursuant to the First Mortgage
Note Indenture, within 360 days following the
consummation of a Collateral Asset Disposition (as
defined) or the receipt of proceeds from a Collateral
Loss Event (as defined), the Company will apply the net
proceeds therefrom (i) to an investment in specified
replacement Collateral; (ii) in the case of a Collateral
Loss Event, to Restore (as defined) the relevant
Collateral and/or (iii) subject to the receipt of
certain minimum proceeds, to make an offer to repurchase
First Mortgage Notes at 100% of the principal amount
thereof plus accrued interest thereon to the date of
purchase. See "Description of Notes -- Additional First
Mortgage Note Covenants -- Limitation on Collateral As-
set Dispositions."
Certain Other Covenants........... Each of the Indentures, among other things, (i)
proscribes the use of certain proceeds of certain Asset
Dispositions (as defined) by the Company or its
Restricted Subsidiaries (as defined), (ii) restricts the
ability of the Company and its Subsidiaries, subject to
certain exceptions, to pay dividends or make
distributions with respect to shares of the Company's
Capital Stock (as defined) or acquire or retire Capital
Stock of the Company, (iii) subject to certain
significant exceptions, restricts the ability of the
Company and its Restricted Subsidiaries to create, incur
or guarantee Indebtedness and (iv) requires the Company
to make certain offers to repurchase Debt Securities (as
defined) in the event that the Company's Subordinated
Capital Base (as defined) is less than a specified
level. See "Description of Notes -- Certain Covenants."
</TABLE>
10
<PAGE>
<TABLE>
<S> <C>
Use of Proceeds................... The net proceeds of this Offering, together with
borrowings under the Credit Agreement, will be used to
(i) repay all of the outstanding indebtedness under and
terminate the 1989 Credit Agreement, (ii) repay all of
the outstanding indebtedness under and terminate the
Savannah River Credit Agreement and redeem the Savannah
River Notes, (iii) purchase the 72,346 outstanding
shares of Savannah River common stock not owned by the
Company and (iv) redeem or otherwise acquire the 425,243
outstanding shares of Savannah River Preferred not owned
by the Company. See "Use of Proceeds."
</TABLE>
COLLATERAL FOR THE FIRST MORTGAGE NOTES
The First Mortgage Notes will be initially secured by a first ranking lien
on four mills owned by the Company described below.
<TABLE>
<CAPTION>
NUMBER OF
ANNUAL PRODUCTION PAPER
MILL LOCATION CAPACITY IN 1993 MACHINES TYPE OF MILL
- ---------------------------------------------------------------- -------- ---------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Missoula, Montana....................................... 702.9 654.3 3 Linerboard
Ontonagon, Michigan..................................... 262.8 248.4 2 Medium
Uncasville, Connecticut................................. 165.1 158.5 1 Medium
York, Pennsylvania...................................... 110.2 110.0 2 Medium
</TABLE>
See "The Collateral Under the First Mortgage Note Indenture."
11
<PAGE>
SUMMARY FINANCIAL DATA
The following summary Statement of Operations and Balance Sheet Data for the
five years ended December 31, 1993 has been derived from, and should be read in
conjunction with, the related audited consolidated financial statements and
accompanying notes of the Company. The audit report relating to the Company's
1993 consolidated financial statements contains an explanatory paragraph
referring to certain liquidity matters discussed in Notes 11 and 18 to the
Company's 1993 consolidated financial statements included elsewhere in this
Prospectus. The selected financial data for the six months ended June 30, 1994
and June 30, 1993 have been derived from the unaudited consolidated financial
statements for the quarters ended June 30, 1994 and 1993 included elsewhere in
this Prospectus. The summary financial data do not purport to be indicative of
the Company's future results of operations or financial position.
<TABLE>
<CAPTION>
SIX MONTHS YEAR ENDED
ENDED JUNE 30, DECEMBER 31,
---------------------------- ----------------------------------------------------------------------------
1994 1993 1993 1992(A) 1991 1990 1989(B)
------------ ------------ ------------ ------------ ------------ ------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA AND RATIOS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF
OPERATIONS
DATA:
Net sales..... $ 2,645,150 $ 2,573,909 $ 5,059,579 $ 5,520,655 $ 5,384,291 $ 5,755,858 $ 5,329,716
Cost of
products
sold......... 2,183,989 2,120,535 4,223,444 4,473,746 4,287,212(c) 4,421,930 3,893,842
Selling,
general and
administrative
expenses..... 270,462 267,325 512,174 543,519 522,780 495,499 474,438
Depreciation
and
amortization... 177,749 175,907 346,811 329,234(c) 273,534(c) 257,041 237,047
Income (loss)
before
interest
expense,
income taxes,
minority
interest,
extraordinary
loss and
cumulative
effects of
accounting
changes...... 32,504 6,746 (36,598) 162,107 385,113 615,736 826,542
Interest
expense...... 224,259 204,055 426,726 386,122 397,357 421,667 344,693
Income (loss)
before income
taxes,
minority
interest,
extraordinary
loss and
cumulative
effects of
accounting
changes...... (191,755) (197,309) (463,324) (224,015) (12,244) 194,069 481,849
Extraordinary
loss from
early
extinguishment
of debt (net
of income tax
benefit)..... (16,782) -- -- -- -- -- --
Cumulative
effect of
change in
accounting
for post-
employment
benefits (net
of income tax
benefit)..... (14,189) -- -- -- -- -- --
Cumulative
effect of
change in
accounting
for post-
retirement
benefits (net
of income tax
benefit)..... -- (39,544) (39,544) -- -- -- --
Cumulative
effect of
change in
accounting
for income
taxes........ -- -- -- (99,527) -- -- --
Net income
(loss)....... (160,648) (173,780) (358,729) (269,437) (49,149) 95,420 285,828
Income (loss)
per common
share before
extraordi-
nary loss and
cumulative
effects of
accounting
changes...... (1.55) (1.94) (4.59) (2.49)(d) (.78)(d) 1.56(d) 4.67(d)
Net income
(loss) per
common
share........ (1.92) (2.50) (5.15) (3.89)(d) (.78)(d) 1.56(d) 4.67(d)
Ratio of
earnings to
fixed
charges...... (e) (e) (e) (e) (e) 1.2 2.0
Dividends paid
per common
share (d).... -- -- -- $ 0.35 $ 0.71 $ 0.71 $ 0.70
Average common
shares
outstanding... 85,960 71,150 71,163 70,987(d) 63,207(d) 61,257(d) 61,223(d)
BALANCE SHEET
DATA (AT END OF
PERIOD):
Working
capital...... $ 823,904 $ 121,626 $ 809,504 $ 756,964 $ 770,457 $ 439,502 $ 614,433
Property,
plant and
equipment --
net.......... 3,281,898 3,499,603 3,386,395 3,703,248 3,520,178 3,364,005 2,977,860
Goodwill...... 875,855 945,859 910,534 983,499 1,126,100 1,160,516 1,089,817
Total
assets....... 6,688,380 6,829,103 6,836,661 7,026,973 6,902,852 6,689,989 6,253,708
Long-term
debt......... 4,094,238(f) 3,586,569(f) 4,268,277(f) 4,104,982(f) 4,046,379(f) 3,680,513(f) 3,536,911(f)
Stockholders'
equity....... 691,990 896,274 607,019 1,102,691 1,537,543 1,460,487 1,347,624
OTHER DATA:
Net cash
provided by
(used in)
operating
activities... $ (98,251) $ (1,990) $ (212,685) $ 85,557 $ 210,498 $ 451,579(c) $ 315,196(c)
Capital
expenditures... 66,258(g) 63,497(g) 149,739(g) 281,446(g) 430,131(g) 551,986(g) 501,723(g)
Paperboard,
paper and
market pulp:
Produced
(thousand
tons)...... 3,892 3,698 7,475 7,517 7,365 7,447 6,772
Converted
(thousand
tons)...... 2,185 2,169 4,354 4,373 4,228 4,241 3,930
Corrugated
shipments
(billion sq.
ft.)......... 26.2 26.2 52.48 51.67 49.18 47.16 41.56
<FN>
- ----------------------------------------
(a) Restated to reflect the adoption of Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" retroactive to January 1,
1992.
(b) The Company acquired Stone Canada in 1989.
(c) Adjusted to conform with the current financial statement presentation.
(d) Amounts per common share and average common shares outstanding have been
adjusted to reflect a 2% Common Stock dividend issued September 15, 1992.
(e) The Company's earnings for the six months ended June 30, 1994 and 1993 and
the years ended December 31, 1993, 1992 and 1991 were insufficient to cover
fixed charges by $193.1 million and $203.2 million and $466.5 million,
$270.1 million and $94.6 million, respectively.
(f) Includes approximately $657.0 million and $551.8 million as of June 30,
1994 and 1993, respectively, and $672.6 million, $574.8 million, $573.3
million, $471.2 million and $267.2 million as of December 31, 1993, 1992,
1991, 1990 and 1989, respectively, of long-term debt of certain
consolidated subsidiaries that is non-recourse to the parent.
(g) Includes approximately $5.0 million and $7.3 million for the six months
ended June 30, 1994 and 1993, respectively, and $14.6 million, $79.1
million, $219.8 million, $245.2 million and $36.8 million for 1993, 1992,
1991, 1990 and 1989, respectively, of expenditures financed through project
financings.
</TABLE>
12
<PAGE>
RISK FACTORS
BEFORE INVESTING, PROSPECTIVE PURCHASERS OF THE NOTES SHOULD CAREFULLY
CONSIDER THE RISK FACTORS SET FORTH BELOW AND THE OTHER INFORMATION INCLUDED
ELSEWHERE IN THIS PROSPECTUS.
SIGNIFICANT LEVERAGE AND DEBT SERVICE REQUIREMENTS
Since July 1993, the Company has issued more than $1.1 billion of debt
securities, the proceeds from which were used to refinance indebtedness,
including the repayment of revolving credit facilities (which were subsequently
reborrowed), and to fund working capital needs due to continued losses.
Therefore, the Company remains significantly leveraged and will continue to be
significantly leveraged after completion of the Offering and the Related
Transactions. The Company's long-term debt to total capitalization ratio was
75.3% at June 30, 1994. On a pro forma basis, after giving effect to (i) the
Offering and the use of the estimated net proceeds therefrom, together with
borrowings under the Credit Agreement and (ii) the consummation of the Related
Transactions, such ratio at June 30, 1994 would have been approximately 78.4%.
Capitalization, for purposes of this ratio, includes long-term debt, deferred
income taxes, redeemable preferred stock, minority interests and stockholders'
equity. Giving effect to the Offering and the Related Transactions, the amounts
of long-term debt (excluding capitalized lease obligations) outstanding at June
30, 1994 maturing through 2000 and thereafter are as follows:
<TABLE>
<CAPTION>
THE COMPANY
NON-RECOURSE EXCLUDING
CONSOLIDATED INDEBTEDNESS OF SEMINOLE AND
(IN MILLIONS) TOTAL CERTAIN SUBSIDIARIES(1) STONE-CONSOLIDATED
---------------------- ------------ -------------------------- -------------------
<S> <C> <C> <C>
Remainder of 1994................................... $ 19.8 $ 13.1 $ 6.7
1995................................................ 274.1(2) 21.8 252.3(2)
1996................................................ 47.5 27.7 19.8
1997................................................ 254.6 22.6 232.0
1998................................................ 485.5 20.5 465.0
1999................................................ 471.6(3) 21.6 450.0(3)
2000................................................ 716.1 255.2 460.9
Thereafter.......................................... 2,157.3 167.2 1,990.1
<FN>
- ------------------------------
(1) Includes indebtedness of Seminole and Stone-Consolidated. See "-- Credit
Agreement Restrictions."
(2) The 1995 maturities currently include approximately $232.0 million
outstanding under Stone Financial Corporation's and Stone Fin II
Receivables Corporation's revolving credit facilities at June 30, 1994,
which the Company intends to refinance. The Company is currently planning a
transaction to refinance these two existing receivables programs
contemplated to approximate up to $300 million of receivables financing,
which would be scheduled to mature in 1999. The proposed refinancing is
subject to execution of definitive documentation and the public offering of
notes by a newly created financial corporation to provide funding for such
receivables financing, and there can be no assurance that such transactions
will be consummated.
(3) The revolving credit facility under the Credit Agreement will mature in
May, 1999 and the letter of credit relating to certain industrial revenue
bonds in Florence County, South Carolina (the "Florence Letter of Credit"),
currently in the amount of approximately $61 million, will expire in May,
1999. This amount does not account for any borrowings which may be
outstanding under the revolving credit facility of the Credit Agreement as
of its expiration.
</TABLE>
In order to meet its amortization obligations for 1996 and subsequent years
(assuming successful refinancing of the two existing receivables programs), the
Company will be required to raise sufficient funds from operations and/or other
sources and/or refinance or restructure maturing indebtedness. No assurance can
be given that the Company will be successful in doing so.
In addition to these amortization obligations, the Company will continue to
incur substantial ongoing interest expense relating to its indebtedness. The
Company's income before interest expense, income taxes, extraordinary loss and
cumulative effects of accounting changes was insufficient to cover interest
expense for the six months ended June 30, 1994 and June 30, 1993 by $189.7
million and $198.9 million respectively, and for the years ended December 31,
1993 and 1992 by $466.9 million and $229.3 million, respectively, and will be
insufficient for the year 1994. The Company's net interest expense will increase
as a result of this Offering and the Related Transactions, as the estimated net
proceeds of the Offering and borrowings under the Credit Agreement will be used
in part to (i) repay all of
13
<PAGE>
the outstanding borrowings under the 1989 Credit Agreement and the Savannah
River Credit Agreement, which borrowings currently bear interest at lower rates
than expected interest rates for the Notes, and (ii) purchase the shares of
common stock of Savannah River not owned by the Company and redeem the shares of
Savannah River Preferred not owned by the Company. See "Use of Proceeds."
Furthermore, even though the Company has repaid amounts borrowed under its 1989
Credit Agreement, borrowings under the Credit Agreement will still bear interest
calculated based upon a floating rate of interest, and the Company's cost of
borrowing under the Credit Agreement will fluctuate as these underlying base
rates of interest change. See "Credit Agreement."
The Company will incur a charge for the write-off of previously unamortized
debt issuance costs, related to the debt being repaid (approximately $45
million, net of income tax benefit) upon the completion of the Offering and
Related Transactions. This non-cash charge will be recorded as an extraordinary
loss from the early extinguishment of debt in the Company's Consolidated
Statements of Operations and Retained Earnings (Accumulated Deficit).
The Company will continue to require access to significant funds, whether
from operating cash flows, revolving credit facilities or other sources of
liquidity, such as additional asset sales, to meet its debt service requirements
in the future. Moreover, the restrictive terms of certain indebtedness of
Seminole and Stone-Consolidated (which owns all of the Canadian and United
Kingdom newsprint and uncoated groundwood assets of the Company) will not permit
Seminole or Stone-Consolidated to provide funds to the Company (whether by
dividend, loan or otherwise) including from cash generated from operations, if
any, to fund the Company's obligations, including its payment obligations with
respect to the Notes, until certain financial covenants contained in such debt
instruments of these companies have been met. Such financial covenants have not
been satisfied to date and are not likely to be satisfied in 1994. There can be
no assurances that such financial covenants will be met in the future.
CYCLICALITY AND PRICING; FIBER SUPPLY AND PRICING
The markets for paper, packaging products and market pulp sold by the
Company are highly competitive, and are sensitive to changes in industry
capacity and cyclical changes in the economy, both of which can significantly
impact selling prices and thereby the Company's profitability. From 1990 through
the third quarter of 1993, the Company experienced substantial declines in the
pricing of most of its products. Market conditions have improved since October
1993, which have allowed the Company to increase prices for most of its
products. While prices for most of the Company's products are approaching the
historical high prices achieved during the peak of the last industry cycle, the
Company's production costs (including labor, fiber and energy), as well as its
interest expense, have also significantly increased since the last pricing peak
in the industry, increasing pressure on the Company's net margins for its
products.
In addition, since the Company is more than 80% integrated in the production
of corrugated containers, price increases for corrugated containers, which
typically occur up to 90 days after linerboard and corrugated medium price
increases and accordingly have not to date fully reflected the price increases
for linerboard and corrugating medium, are essential for the Company to obtain
substantial financial benefits from price increases in the Company's linerboard
and corrugated medium product lines.
Although supply/demand balances appear favorable for most of the Company's
products, there can be no assurance that announced price increases will be
achieved, that linerboard and corrugating medium price increases will be fully
passed through to corrugated container customers or that prices can be
maintained at present levels.
Wood fiber and recycled fiber, the principal raw materials in the
manufacture of the Company's products, are purchased in highly competitive,
price sensitive markets. These raw materials have historically exhibited price
and demand cyclicality. In addition, the supply and price of wood fiber, in
particular, is dependent upon a variety of factors over which the Company has no
control, including
14
<PAGE>
environmental and conservation regulations, natural disasters, such as forest
fires and hurricanes, and weather. In addition, recent increased demand for the
Company's products has resulted in greater demand for raw materials which has
recently translated into higher raw material prices.
The Company purchases or cuts a variety of species of timber from which the
Company utilizes wood fiber depending upon the product being manufactured and
each mill's geographic location. Despite this diversification, wood fiber prices
have increased substantially in 1994. A decrease in the supply of wood fiber,
particularly in the Pacific Northwest and the southeastern United States due to
environmental considerations, has caused, and will likely continue to cause,
higher wood fiber costs in those regions. In addition, the increase in demand
for products manufactured in whole or in part from recycled fiber has caused a
shortage of recycled fiber, particularly old corrugated containers ("OCC") used
in the manufacture of premium priced recycled containerboard and related
products. The Company's paperboard and paper packaging products use a large
volume of recycled fiber. In 1993, the Company processed approximately 1.9
million tons of recycled fiber. The Company used approximately 1.25 million tons
of OCC in its products in 1993. The Company believes that the cost of OCC has
risen from $55 per ton at June 30, 1993 to $110 per ton as of September 1, 1994.
While the Company has not experienced any significant difficulty in obtaining
wood fiber and recycled fiber in economic proximity to its mills, there can be
no assurances that this will continue to be the case for any or all of its
mills. In addition, there can be no assurance that all or any part of increased
fiber costs can be passed along to consumers of the Company's products directly
or in a timely manner.
RECENT LOSSES; NET CASH USED IN OPERATING ACTIVITIES
Due to industry conditions during the past few years and due principally to
depressed product prices and significant interest costs attributable to the
Company's highly leveraged capital structure, the Company incurred net losses in
each of the last three years and for the first half of 1994 and expects to incur
a net loss for the 1994 fiscal year. The net loss for the second quarter of 1994
was $50.8 million, or $.58 per common share, compared to the net loss of $71.6
million, or $1.03 per common share, for the second quarter of 1993.
For the first six months of 1994, the loss was $129.7 million, or $1.55 per
common share, before the extraordinary loss on the early extinguishment of debt
and the cumulative effect of a change in accounting for post-employment benefits
("SFAS 112"). Including the extraordinary loss and the cumulative effect of SFAS
112, the Company reported a net loss of $160.7 million, or $1.92 per common
share, for the first six months of 1994.
For the first six months of 1993, the Company's loss was $134.3 million, or
$1.94 per common share, before the cumulative effect of a change in accounting
for post-retirement benefits other than pensions (SFAS 106). The adoption of
SFAS 106, effective January 1, 1993, resulted in a one-time non-cash cumulative
charge of $39.5 million net of income taxes, or $.56 per common share, resulting
in a net loss of $173.8 million, or $2.50 per common share, for the first six
months of 1993.
The second-quarter and first-half losses were increased by significantly
higher costs of recycled fiber for the Company's North American paper mills.
Costs of OCC, the primary source of recycled fiber for containerboard, were
approximately $20 million higher in the second quarter 1994 compared to the
second quarter 1993, and approximately $18 million higher in the second quarter
1994 compared to the first quarter 1994.
Income from operations for the second quarter 1994 includes a gain from an
involuntary conversion relating to a digester rupture at the Company's Panama
City, Florida, pulp and paperboard mill. This $22 million pre-tax gain reflects
the expected net proceeds from the property damage claim in excess of the
carrying value of the assets destroyed or damaged. The operations of the Panama
City mill were shut down until August 19 and September 8, 1994, when the mill
started up its pulp and linerboard operations, respectively.
For the year 1993, the Company incurred a loss (before the cumulative effect
of an accounting change) of $319.2 million, or $4.59 per common share, and
(after the cumulative effect of such change) a
15
<PAGE>
net loss of $358.7 million or $5.15 per common share. For the year 1992, the
loss (before the cumulative effect of an accounting change), was $169.9 million,
or $2.49 per common share and (after the cumulative effect of such change) a net
loss of $269.4 million or $3.89 per common share.
The Company's continued net losses have significantly impaired its liquidity
and available sources of liquidity. Net cash used in operating activities
totalled $98.3 million for the six months ended June 30, 1994 compared with $2.0
million for the same period in 1993 and totalled $213 million for the year ended
December 31, 1993, while net cash provided by operating activities totalled $86
million for the year ended December 31, 1992. See "Selected Consolidated
Financial Data."
Notwithstanding the improvements in the Company's liquidity and financial
flexibility which will result from the Offering and the execution and delivery
of the new Credit Agreement, unless the Company achieves and maintains increased
selling prices beyond current levels, the Company will continue to incur net
losses and will not generate sufficient cash flows to meet fully the Company's
debt service requirements in the future. Without such 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, additional sales of assets, the deferral of
certain capital expenditures, obtaining additional sources of funds or liquidity
and/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. Beginning
in 1996 (assuming successful refinancing of the two existing receivables
programs) and continuing thereafter, the Company will be required to make
significant amortization payments on its existing indebtedness which will
require the Company to raise sufficient funds from operations and/or other
sources and/or refinance or restructure maturing indebtedness. No assurance can
be given that the Company will be successful in doing so.
CREDIT AGREEMENT RESTRICTIONS
All indebtedness under the Credit Agreement will be secured by a significant
portion of the assets of the Company. The Credit Agreement is expected to
contain covenants that include, among other things, requirements to maintain
certain financial tests and ratios (including an indebtedness ratio and a
minimum interest coverage ratio) and certain restrictions and limitations,
including those on capital expenditures, changes in control, payment of
dividends, sales of assets, lease payments, investments, additional
indebtedness, liens, repurchases or prepayment of certain indebtedness,
guarantees of indebtedness, mergers and purchases of stock and assets. The
Credit Agreement is also expected to contain cross default provisions to the
indebtedness of $10 million or more of the Company and certain subsidiaries, as
well as cross-acceleration provisions to the non-recourse debt of $10 million or
more of Stone-Consolidated, Seminole and Stone Venepal (Celgar) Pulp Inc.
("SVCP"), through which the Company indirectly owns a 25% interest in the Celgar
mill. Additionally, the term loan portion of the Credit Agreement will provide
for mandatory prepayments from sales of certain assets (other than the
Collateral and the collateral pledged under the Credit Agreement ("Bank
Collateral")), certain debt financings and excess cash flows. All mandatory and
voluntary prepayments will be allocated against the term loan amortizations in
inverse order of maturity. Amortization amounts under the term loan will be 0.5%
of principal amount on each April 1 and October 1 for the period from April 1,
1995 through April 1, 1999, 47.5% on October 1, 1999 and 48.0% on April 1, 2000.
In addition, mandatory prepayments from sales of Bank Collateral (unless
substitute collateral has been provided) will be allocated pro rata between the
term loan (in inverse order of maturities) and the revolving credit facility,
and, to the extent applied to repay the revolving credit facility, will
permanently reduce loan commitments thereunder.
The Credit Agreement limits, except in certain specific circumstances, any
further investments by the Company in Stone-Consolidated, Seminole and SVCP. As
of June 30, 1994, Seminole had $153.1 million in outstanding indebtedness
(including $115.1 million in secured indebtedness owed to lenders under its
credit agreement) and is significantly leveraged. Pursuant to an output purchase
agreement entered into in 1986 with Seminole, the Company is obligated to
purchase and Seminole is
16
<PAGE>
obligated to sell all of Seminole's linerboard production. Seminole produces
100% recycled linerboard and is dependent upon an adequate supply of recycled
fiber, in particular OCC. Under the agreement, the Company paid fixed prices for
linerboard, which generally exceeded market prices, until June 3, 1994.
Thereafter, the Company is only obligated to pay market prices for the remainder
of the agreement. Because market prices for linerboard are currently less than
the fixed prices previously in effect under the output purchase agreement and
due to recent significant increases in the cost of recycled fiber, it is
anticipated that Seminole will not comply with certain financial covenants at
September 30, 1994. Seminole's lenders under its credit agreement have agreed to
grant waivers and amendments with respect to such covenants for periods up to
and including June 30, 1995. Furthermore, in the event that management
determines that it is probable that Seminole will not be able to comply with any
covenant contained in the Seminole credit agreement within twelve months after
the waiver of a violation of such covenant, then the debt under the Seminole
credit agreement would be reclassified as short-term debt under the provisions
of Emerging Issues Task Forces Issue No. 86-30 "Classification of Obligations
When a Violation is Waived By the Creditor." There can be no assurance that
Seminole will not require additional waivers in the future. Depending upon the
level of market prices and the cost and supply of OCC, Seminole may need to
undertake additional measures to meet its debt service requirements and its
financial covenants 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 not
successful, and such indebtedness is accelerated by the respective lenders to
Seminole, the lenders to the Company under the Credit Agreement and various
other of its debt instruments would be entitled to accelerate the indebtedness
owed by the Company. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Financial Condition and Liquidity."
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 the Credit Agreement. Failure to achieve or maintain compliance
with such financial ratio tests or other requirements under the Credit
Agreement, 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
Agreement. While the Company has successfully sought and received waivers and
amendments under its 1989 Credit Agreement on various occasions, if waivers or
amendments are requested by the Company under the Credit Agreement, there can be
no assurance that the new lenders under the Credit Agreement will grant requests
if required by the Company. The failure to obtain any waivers or amendments from
the lenders under the Credit Agreement could reduce the Company's flexibility to
respond to adverse industry conditions and could have a material adverse effect
on the Company. See "Credit Agreement -- Covenants."
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 in
the past made significant capital expenditures to comply with water, air and
solid and hazardous waste regulations and expects to make significant
expenditures in the future. Capital expenditures for environmental control
equipment and facilities were approximately $29.7 million in 1993 and the
Company anticipates that 1994 and 1995 environmental capital expenditures will
approximate $78 million and $114 million, respectively (not including any
expenditures required under the proposed "cluster rules" described below).
Included in these amounts are capital expenditures for Stone-Consolidated which
were approximately $6.7 million in 1993 and are anticipated to approximate $43
million in 1994 and $82 million in 1995. 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, the Company anticipates that these costs will increase
when final "cluster rules" are adopted and as further environmental regulations
are imposed on the Company.
In December 1993, the U.S. Environmental Protection Agency (the "EPA")
issued a proposed rule affecting the pulp and paper industry. These proposed
regulations, informally known as the "cluster
17
<PAGE>
rules," would make more stringent requirements for discharge of wastewaters
under the Clean Water Act and would impose new requirements on air omissions
under the Clean Air Act. Pulp and paper manufacturers (including the Company)
have submitted extensive comments to the EPA on the proposed regulations in
support of the position that requirements under the proposed regulations are
unnecessarily complex, burdensome and environmentally unjustified. The EPA has
indicated that it may reopen the comment period on the proposed regulations to
allow review and comment on new data that the industry will submit to the agency
on the industry's air toxic emissions. It cannot be predicted at this time
whether the EPA will modify the requirements in the final regulations which are
scheduled to be issued in 1996, with compliance required within three years from
such date. The Company is considering and evaluating the potential impact of the
rules, as proposed, on its operations and capital expenditures over the next
several years. Preliminary estimates indicate that the Company could be required
to make capital expenditures of $350-$450 million during the period of 1996
through 1998 in order to meet the requirements of the rules, as proposed. In
addition, annual operating expenses would increase by as much as $20 million
beginning in 1998. The ultimate financial impact of the regulations cannot be
accurately estimated at this time but will be affected by several factors,
including the actual requirements imposed under the final rule, advancements in
control process technologies, possible reconfiguration of mills and inflation.
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 potentially
responsible party ("PRP") at a number of sites which are the subject of remedial
activity under the federal Comprehensive Environmental Response, Compensation
and Liability Act of 1980 ("CERCLA" or "Superfund") or comparable state laws.
Although the Company is subject to joint and several liability imposed under
Superfund, at most of the multi-PRP sites there are organized groups of PRPs and
costs are being shared among PRPs. Future environmental regulations, including
the final "cluster rules," 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. For further information, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations
Financial Condition and Liquidity -- Environmental Issues."
RANKING
The First Mortgage Notes will be senior secured obligations of the Company
and the Senior Notes will be senior unsecured obligations of the Company. The
First Mortgage Notes and the Senior Notes will rank PARI PASSU in right of
payment with each other and with all existing and future Senior Indebtedness of
the Company, including the indebtedness under the Credit Agreement and the
Company's $240 million principal amount of 11 7/8% Senior Notes due 1998, $150
million principal amount of 12 5/8% Senior Notes due 1998 and $710 million
principal amount of 9 7/8% Senior Notes due 2001. The payment of the principal
of, interest on and any other amounts due on Subordinated Indebtedness will be
subordinated in right of payment to the prior payment in full of the Notes. As
of June 30, 1994, the total amount of outstanding Senior Indebtedness was
approximately $2.3 billion (which amount does not reflect the effects of the
Offering or the Related Transactions).
Obligations of the Company's subsidiaries will represent prior claims with
respect to assets and earnings of such subsidiaries. Thus, the Notes will be
structurally subordinated to all current and future indebtedness of the
Company's subsidiaries, including trade payables.
A significant portion of the Company's assets will secure borrowings
outstanding under the Credit Agreement. See "Credit Agreement -- Security." The
First Mortgage Notes are also secured obligations of the Company. See
"Description of Notes -- Additional First Mortgage Note Indenture Definitions --
Collateral." In the event of the Company's insolvency or liquidation, the claims
of the lenders under the Credit Agreement would have to be satisfied out of the
Bank Collateral securing borrowings under the Credit Agreement before any such
assets would be available to pay claims of holders of the Notes. Similarly, the
holders of First Mortgage Notes would have to be satisfied out of the Collateral
under the First Mortgage Note Indenture and Security Documents (as defined)
before any such assets would be
18
<PAGE>
available to pay claims of holders of the Senior Notes. If the lenders under the
Credit Agreement and/or the First Mortgage Note Trustee under the First Mortgage
Note Indenture and the Security Documents should foreclose on their respective
collateral, no assurance can be given that there will be sufficient assets
available in the Company to pay amounts due on the First Mortgage Notes or the
Senior Notes, respectively. See "Description of Notes -- Ranking."
Pursuant to the Company's receivables financing programs (excluding
Stone-Consolidated's program), at June 30, 1994, approximately $232 million was
outstanding under Stone Financial Corporation's and Stone Fin II Receivables
Corporation's revolving credit facilities. The Company is currently planning a
transaction to refinance these two existing receivables programs contemplated to
approximate $300 million of receivables financing which would be scheduled to
mature in 1999. The proposed refinancing is subject to execution of definitive
documentation and the public offering of notes by a newly created financial
corporation to provide funding for such receivables financing, and there can be
no assurance that it will be consummated.
FIRST MORTGAGE NOTE HOLDERS MAY RECEIVE
LESS THAN THEIR INVESTMENT UPON LIQUIDATION
No assurance can be given that the proceeds of a sale of the Collateral
securing the First Mortgage Notes would be sufficient to repay all of the First
Mortgage Notes upon acceleration. The aggregate appraised value as of September
1, 1994 of the four mills pledged as collateral securing the First Mortgage
Notes (the "Collateral Mills") as estimated by American Appraisal Associates,
Inc. (the "Consultant") is $695,000,000. The amount that might be realized from
the sale of the Collateral Mills may be materially less than its appraised
value. The appraisal is only the Consultant's estimate or opinion of the value
of the Collateral Mills and cannot be relied upon as a precise measure of its
value or worth or as an assurance that a buyer willing and able to buy the
Collateral Mills existed at the date of such appraisal or will exist at the time
of sale of the Collateral Mills. The Collateral Mills are valued in the
appraisal on the assumption that the assets comprising them would, upon sale,
remain at their present locations as part of the current operations. Currently,
the products manufactured at the Collateral Mills are utilized by the Company in
the production of corrugated containers at other facilities of the Company which
will be pledged to secure the indebtedness under the Credit Agreement. The
amount that the First Mortgage Note Trustee could obtain in connection with the
liquidation of the Collateral Mills could be less than would be obtained for the
Collateral Mills if they were sold together with facilities of the Company which
currently use their production. In addition, the appraisal reflects the
Consultant's estimate or opinion of the value of the Collateral Mills as of the
date of the appraisal and assumes that a sale would not be made under distress
conditions. Accordingly, the actual amount realized from a sale of the
Collateral Mills could be significantly reduced by adverse changes in market
conditions, the condition of the Collateral Mills or other factors affecting the
resale value of the Collateral Mills between the date of the appraisal and the
estimates, as the case may be, and such sale or if such sale took place under
distress conditions. See "The Collateral Under the First Mortgage Note Indenture
- -- Appraisal." Moreover, the value of the Collateral Mills, and the First
Mortgage Note Trustee's ability to foreclose upon and sell the Collateral Mills,
could be affected by environmental conditions existing at any of the Collateral
Mills, as well as capital expenditures required to comply with existing and
future environmental regulations. See "-- Environmental Matters" and "The
Collateral Under the First Mortgage Note Indenture -- Environmental
Considerations."
If the net proceeds received from the sale of the Collateral Mills (after
payment of any expenses of the sale and repayment of indebtedness secured by
Permitted Collateral Liens (see "Description of the Notes -- Additional First
Mortgage Note Indenture Definitions -- Permitted Collateral Liens") or other
liens on the Collateral Mills which might, in either case, have priority under
applicable law to the lien on the Collateral Mills in favor of the First
Mortgage Note Trustee) were insufficient to pay all amounts due on the First
Mortgage Notes, then holders of the First Mortgage Notes would (to the extent of
such insufficiency) only have an unsecured claim against any remaining
unencumbered assets of the Company (subject, in the case of subsidiaries of the
Company, to the claims of holders of indebtedness of each subsidiary). As a
result, there is a risk that holders of the First Mortgage Notes will receive
less than
19
<PAGE>
their investment upon any liquidation of the Company. Furthermore, the ability
of the First Mortgage Note Trustee to cause the Collateral Mills to be sold will
be delayed if the Company is the subject of any bankruptcy or receivership
proceedings. See "The Collateral under the First Mortgage Note Indenture --
Bankruptcy Considerations."
FUTURE ACCESS TO THE CAPITAL MARKETS
Giving effect to the Offering, the Company will have sold debt securities on
a number of occasions since July 1993 for total proceeds of approximately $1.8
billion and in February 1994 sold equity securities for total proceeds of
approximately $290 million. The recent issuance of a substantial amount of
securities may make it difficult, at least in the near future, for the Company
to access the capital markets for further financings and therefore may limit the
Company's sources for future liquidity.
LIMITED MARKET FOR NOTES
The Company will apply to list both the First Mortgage Notes and the Senior
Notes on the New York Stock Exchange. Nonetheless, it is likely that the First
Mortgage Notes and the Senior Notes will each have a limited trading market.
Certain of the Underwriters have indicated an intention initially to make a
market in the First Mortgage Notes and/or the Senior Notes as permitted by
applicable laws and regulations. No Underwriter, however, is obligated to make a
market in the First Mortgage Notes and/or the Senior Notes and any such market
making could be discontinued at any time at the sole discretion of such
Underwriter.
20
<PAGE>
COMPANY PROFILE
The following is the current profile of the Company's products, markets,
industry position, manufacturing facilities and 1993 production and shipment
figures:
<TABLE>
<CAPTION>
MANUFACTURING 1993 PRODUCTION &
MARKETS INDUSTRY POSITION FACILITIES SHIPMENTS
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C>
PAPERBOARD AND CONTAINERBOARD A broad range of Industry leader Production at 16 4.388 million
PAPER PACKAGING AND CORRUGATED manufacturers of mills short tons of
CONTAINERS consumable and containerboard
durable goods and Converting at 111 produced
other plants
manufacturers of 52.5 billion
corrugated square feet of
containers. corrugated
containers
shipped
KRAFT PAPER AND Supermarket Industry leader Production at 5 500 thousand
BAGS AND SACKS chains and other mills short tons of
retailers of kraft paper
consumable Converting at 18 produced
products. plants
Industrial and 613 thousand
consumer bags short tons of
sold to the food, paper bags and
agricultural, sacks shipped
chemical and
cement
industries, among
others.
BOXBOARD, FOLDING Manufacturers of A major position Production at 2 81 thousand short
CARTONS AND OTHER consumable goods, in Europe; a mills tons of boxboard
especially food, nominal position and other
beverage and in North America paperboard
tobacco products, produced
and other box Converting at 10
manufacturers. plants 92 thousand short
tons of folding
cartons and
partitions
shipped
WHITE PAPER AND NEWSPRINT Newspaper A major position Production at 5 1.312 million
PULP publishers and mills short tons
commercial produced
printers.
UNCOATED Producers of A major position Production at 2 461 thousand
GROUNDWOOD PAPER advertising mills short tons
materials, produced
magazines,
telephone
directories and
computer papers.
MARKET PULP Manufacturers of A major position Production at 6 733 thousand
paper products, mills short tons
including fine produced
papers,
photographic
papers, tissue
and newsprint.
WOOD PRODUCTS LUMBER, PLYWOOD Construction and A moderate Production at 17 581 million board
AND VENEER furniture position in North mills feet of lumber
industries. America produced
425 million
square feet of
plywood and
veneer produced
</TABLE>
21
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the Offering, together with borrowings
under the Credit Agreement, will be used to (i) repay all of the outstanding
indebtedness under and terminate the 1989 Credit Agreement, (ii) repay all of
the outstanding indebtedness under and terminate the Savannah River Credit
Agreement and redeem the Savannah River Notes, (iii) purchase the 72,346
outstanding shares of Savannah River common stock not owned by the Company, (iv)
redeem the 425,243 outstanding shares of Savannah River Preferred not owned by
the Company, and (v) for general corporate purposes.
The sources and uses of funds in connection with the Offering and the
Related Transactions are estimated to be as follows:
<TABLE>
<CAPTION>
(IN MILLIONS)
<S> <C>
Sources:
First Mortgage Notes......................................................... $ 485.5
Senior Notes................................................................. 193.6
Credit Agreement
Term Loan.................................................................. 400.0
Revolving Credit Facility(1)............................................... 61.0
Other(2)..................................................................... 34.8
-------------
Total:......................................................................... $ 1,174.9
-------------
-------------
Uses:
Repayment of 1989 Credit Agreement borrowings................................ $ 718.5
Repayment of Savannah River Credit Agreement borrowings...................... 226.4
Redemption of Savannah River Notes........................................... 146.7
Redemption of Savannah River Preferred....................................... 50.6
Repurchase of Savannah River Common Stock.................................... 2.2
General corporate purposes(3)................................................ 30.5
-------------
Total:......................................................................... $ 1,174.9
-------------
-------------
<FN>
- ------------------------
(1) Commitment of $450 million (of which borrowing availability will be reduced
by any letter of credit commitments, of which approximately $61 million
will be outstanding at closing, and approximately $61 million of borrowings
thereunder which will be borrowed at closing).
(2) Cash escrow relating to letters of credit released due to the repayment of
the 1989 Credit Agreement.
(3) Includes payment of fees and expenses relating to the Credit Agreement,
which are estimated to total $27.6 million and expenses relating to the
Offering (other than the Underwriters' discount) estimated to total $2.9
million.
</TABLE>
The 1989 Credit Agreement, which will be fully repaid with the proceeds from
the Offering and borrowings under the Credit Agreement, consists of two term
loan facilities, an additional term loan (the "Additional Term Loan") and two
revolving credit facilities. The final scheduled amortization payment with
respect to the term loan facilities and the Additional Term Loan are each due
March 1, 1997 and each of the revolving credit facilities matures on March 1,
1997.
The term loans (other than the Additional Term Loan) and the revolving
credit facilities under the 1989 Credit Agreement had weighted average interest
rates for the first six months of 1994 of 9.3% and 6.7%, respectively, and for
the year ended December 31, 1993 of 8.3% and 5.7%, respectively. The weighted
average interest rate on the Additional Term Loan was 6.8% for the first six
months of 1994 and 6.3% for the year ended December 31, 1993.
The Savannah River Credit Agreement consists of a term loan (of which $249.5
million was outstanding as of June 30, 1994) and a revolving credit facility (of
which no amount was outstanding as of June 30, 1994). The term loan requires
monthly amortization payments, and all outstanding loan amounts under the
Savannah River Credit Agreement are due on December 1, 1998. The weighted
average interest rate on the outstanding borrowings under the Savannah River
Credit Agreement were 7.0% and 8.4% for the first six months of 1994 and for the
year ended December 31, 1993, respectively.
The Savannah River Notes bear interest at 14 1/8% and mature December 15,
2000.
22
<PAGE>
CAPITALIZATION
The following table sets forth a summary of the short-term debt and
capitalization of the Company, on a consolidated basis at June 30, 1994, and as
adjusted to give effect to the Offering and the application of the estimated net
proceeds therefrom, and the Related Transactions.
<TABLE>
<CAPTION>
JUNE 30, 1994
------------------------------------
AS ADJUSTED FOR THE
OFFERING AND THE
ACTUAL RELATED TRANSACTIONS
------------ ---------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Short-term debt:
Current maturities of senior and subordinated long-term debt............... $ 18,057 $ 22,057(a)
Current maturities of debt of consolidated subsidiaries
(non-recourse to parent).................................................. 271,320 21,781(b)
------------ -----------
Total short-term debt.................................................. $ 289,377 $ 43,838
------------ -----------
------------ -----------
Long-term debt:
Senior debt:
1989 Credit Agreement (other than revolving credit facilities)............. $ 650,509 $ -- (c)
Credit Agreement (other than revolving credit facilities).................. -- 400,000
Revolving credit facilities................................................ 20,212 21,980(d)(e)
12 5/8% Senior Notes due July 15, 1998..................................... 150,000 150,000
11 7/8% Senior Notes due December 1, 1998.................................. 238,984 238,984
9 7/8% Senior Notes due February 1, 2001................................... 710,000 710,000
10 3/4% First Mortgage Notes due 2002...................................... -- 496,765
11 1/2% Senior Notes due 2004.............................................. -- 198,564
4% - 11 5/8% fixed rate debt and other variable rate debt (including
capitalized lease obligations)............................................ 293,970 293,970
Obligations under accounts receivable securitization programs.............. 232,000 232,000
Less: Current maturities..................................................... (18,057) (22,057)(a)
------------ -----------
Total senior long-term debt................................................ 2,277,618 2,720,206
------------ -----------
Subordinated debt:
10 3/4% Senior Subordinated Notes due June 15, 1997........................ 150,000 150,000
11% Senior Subordinated Notes due August 15, 1999.......................... 125,000 125,000
11 1/2% Senior Subordinated Notes due September 1, 1999.................... 230,000 230,000
10 3/4% Senior Subordinated Debentures due April 1, 2002................... 199,146 199,146
8 7/8% Convertible Senior Subordinated Notes due July 15, 2000............. 248,558 248,558
12 1/8% Subordinated Debentures due September 15, 2001(f).................. 91,902 91,902
6 3/4% Convertible Subordinated Debentures due February 15, 2007........... 115,000 115,000
Less: Current maturities..................................................... 0 0
------------ -----------
Total subordinated long-term debt.......................................... 1,159,606 1,159,606
------------ -----------
Debt of consolidated subsidiaries (non-recourse to parent)................... 928,334 549,724(g)
Less: Current maturities..................................................... (271,320) (21,781)(b)
------------ -----------
Total long-term debt of consolidated subsidiaries (non-recourse to
parent)................................................................... 657,014 527,943
------------ -----------
Total long-term debt....................................................... 4,094,238 4,407,755
------------ -----------
Redeemable preferred stock of consolidated affiliate......................... 42,314 -- (h)
------------ -----------
Stockholders' equity:
$1.75 Series E Cumulative Convertible Exchangeable Preferred Stock
(4,600,000 shares, $25 per share liquidation preference).................. 114,983 114,983
Common Stock............................................................... 853,035 849,035(i)
Accumulated deficit........................................................ (72,753) (120,933)(j)
Foreign currency translation adjustment.................................... (197,385) (197,385)
Unamortized expense of restricted stock plan............................... (5,890) (5,890)
------------ -----------
Total stockholders' equity............................................. 691,990 639,810
------------ -----------
Total capitalization................................................... 4,828,542 5,047,565
------------ -----------
Total short-term debt and capitalization............................... $ 5,117,919 $ 5,091,403
------------ -----------
------------ -----------
<FN>
- --------------------------
(a) Reflects an additional $4.0 million associated with borrowings due under
the Credit Agreement.
(b) Reflects the repayment of $249.5 million of borrowings under the Savannah
River Credit Agreement.
(c) Reflects the repayment of $650.5 million of term loan borrowings under the
1989 Credit Agreement.
</TABLE>
23
<PAGE>
<TABLE>
<S> <C>
(d) Reflects the repayment of outstanding borrowings of $20.2 million under the
revolving credit facility of the 1989 Credit Agreement.
(e) Reflects initial borrowings of $22.0 million under the revolving credit
facility under the Credit Agreement. These borrowings are net of $34.1
million of cash escrow released due to the repayment of the 1989 Credit
Agreement and $7.7 million of Savannah River's cash balance at June 30,
1994.
(f) Obligations of Stone-Southwest, Inc., a wholly owned subsidiary of the
Company.
(g) Reflects the repayment of $249.5 million of borrowings under the Savannah
River Credit Agreement as described in Note (b) and the $129.1 million
repayment of the Savannah River Notes.
(h) Reflects the redemption of the Savannah River Preferred not owned by the
Company, which will occur on or before December 30, 1994.
(i) Reflects a charge to common stock of $4.0 million associated with the
redemption of the Savannah River Preferred not owned by the Company, which
will occur on or before December 30, 1994.
(j) Reflects an extraordinary loss from the early extinguishment of debt of
$48.1 million, net of income tax benefit, pertaining to the write-off of
unamortized deferred debt issuance costs related to the debt being repaid
in Notes (b), (c), (d) and (g), and costs associated with the redemption of
the Savannah River Notes.
</TABLE>
24
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected Statement of Operations and Balance Sheet Data for
the five years ended December 31, 1993 has been derived from, and should be read
in conjunction with, the related audited consolidated financial statements and
accompanying notes of the Company. The audit report relating to the Company's
1993 consolidated financial statements contains an explanatory paragraph
referring to certain liquidity matters discussed in Notes 11 and 18 to the
Company's 1993 consolidated financial statements included elsewhere in this
Prospectus. The selected financial data for the six months ended June 30, 1994
and June 30, 1993 have been derived from the unaudited consolidated financial
statements for the quarters ended June 30, 1994 and 1993 included elsewhere in
this Prospectus. The summary financial data do not purport to be indicative of
the Company's future results of operations or financial position.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30, YEAR ENDED DECEMBER 31,
---------------------------- ----------------------------------------------------------------------------
1994 1993 1993 1992(A) 1991 1990 1989(B)
------------ ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA AND RATIOS)
STATEMENT OF
OPERATIONS
DATA:
Net sales..... $ 2,645,150 $ 2,573,909 $ 5,059,579 $ 5,520,655 $ 5,384,291 $ 5,755,858 $ 5,329,716
Cost of
products
sold......... 2,183,989 2,120,535 4,223,444 4,473,746 4,287,212(c) 4,421,930 3,893,842
Selling,
general and
administrative
expenses..... 270,462 267,325 512,174 543,519 522,780 495,499 474,438
Depreciation
and
amortization... 177,749 175,907 346,811 329,234(c) 273,534(c) 257,041 237,047
Income (loss)
before
interest
expense,
income taxes,
minority
interest,
extraordinary
loss and
cumulative
effects of
accounting
changes...... 32,504 6,746 (36,598) 162,107 385,113 615,736 826,542
Interest
expense...... 224,259 204,055 426,726 386,122 397,357 421,667 344,693
Income (loss)
before income
taxes,
minority
interest,
extraordinary
loss and
cumulative
effects of
accounting
changes...... (191,755) (197,309) (463,324) (224,015) (12,244) 194,069 481,849
Extraordinary
loss from
early
extinguishment
of debt (net
of income tax
benefit)..... (16,782) -- -- -- -- -- --
Cumulative
effect of
change in
accounting
for
postemployment
benefits (net
of income tax
benefit)..... (14,189) -- -- -- -- -- --
Cumulative
effect of
change in
accounting
for
post-retirement
benefits (net
of income tax
benefit)..... -- (39,544) (39,544) -- -- -- --
Cumulative
effect of
change in
accounting
for income
taxes........ -- -- -- (99,527) -- -- --
Net income
(loss)....... (160,648) (173,780) (358,729) (269,437) (49,149) 95,420 285,828
Income (loss)
per common
share before
extraordinary
loss and
cumulative
effects of
accounting
changes...... (1.55) (1.94) (4.59) (2.49)(d) (.78)(d) 1.56(d) 4.67(d)
Net income
(loss) per
common
share........ (1.92) (2.50) (5.15) (3.89)(d) (.78)(d) 1.56(d) 4.67(d)
Ratio of
earnings to
fixed
charges...... (e) (e) (e) (e) (e) 1.2 2.0
Dividends paid
per common
share (d).... -- -- -- $ 0.35 $ 0.71 $ 0.71 $ 0.70
Average common
shares
outstanding.. 85,960 71,150 71,163 70,987(d) 63,207(d) 61,257(d) 61,223(d)
BALANCE SHEET
DATA (AT END OF
PERIOD):
Working
capital...... $ 823,904 $ 121,626 $ 809,504 $ 756,964 $ 770,457 $ 439,502 $ 614,433
Property,
plant and
equipment --
net.......... 3,281,898 3,499,603 3,386,395 3,703,248 3,520,178 3,364,005 2,977,860
Goodwill...... 875,855 945,859 910,534 983,499 1,126,100 1,160,516 1,089,817
Total
assets....... 6,688,380 6,829,103 6,836,661 7,026,973 6,902,852 6,689,989 6,253,708
Long-term
debt......... 4,094,238(f) 3,586,569(f) 4,268,277(f) 4,104,982(f) 4,046,379(f) 3,680,513(f) 3,536,911(f)
Stockholders'
equity....... 691,990 896,274 607,019 1,102,691 1,537,543 1,460,487 1,347,624
OTHER DATA:
Net cash
provided by
(used in)
operating
activities... $ (98,251) $ (1,990) $ (212,685) $ 85,557 $ 210,498 $ 451,579(c) $ 315,196(c)
Capital
expenditures... 66,258(g) 63,497(g) 149,739(g) 281,446(g) 430,131(g) 551,986(g) 501,723(g)
Paperboard,
paper and
market pulp:
Produced
(thousand
tons)...... 3,892 3,698 7,475 7,517 7,365 7,447 6,772
Converted
(thousand
tons)...... 2,185 2,169 4,354 4,373 4,228 4,241 3,930
Corrugated
shipments
(billion sq.
ft.)......... 26.2 26.2 52.48 51.67 49.18 47.16 41.56
<FN>
- ----------------------------------
(a) Restated to reflect the adoption of Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" retroactive to January 1,
1992.
(b) The Company acquired Stone Canada in 1989.
(c) Adjusted to conform with the current financial statement presentation.
(d) Amounts per common share and average common shares outstanding have been
adjusted to reflect a 2% Common Stock dividend issued September 15, 1992.
(e) The Company's earnings for the six months ended June 30, 1994 and 1993 and
the years ended December 31, 1993, 1992 and 1991 were insufficient to cover
fixed charges by $193.1 million and $203.2 million and $466.5 million,
$270.1 million and $94.6 million, respectively.
(f) Includes approximately $657.0 million and $551.8 million as of June 30,
1994 and 1993, respectively, and $672.6 million, $574.8 million, $573.3
million, $471.2 million and $267.2 million as of December 31, 1993, 1992,
1991 and 1990 and 1989, respectively, of long-term debt of certain
consolidated subsidiaries that is non-recourse to the parent.
(g) Includes approximately $5.0 million and $7.3 million for the six months
ended June 30, 1994 and 1993, respectively, and $14.6 million, $79.1
million, $219.8 million, $245.2 million and $36.8 million for 1993, 1992,
1991, 1990 and 1989, respectively, of expenditures financed through project
financings.
</TABLE>
25
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
audited consolidated financial statements of the Company and the notes thereto
included elsewhere in this Prospectus.
GENERAL
The Company's major products are containerboard and corrugated containers,
newsprint and market pulp. The markets for these products are highly competitive
and sensitive to changes in industry capacity and cyclical changes in the
economy, both of which can significantly impact selling prices and the Company's
profitability. From 1990 through the third quarter of 1993, the Company
experienced substantial declines in the pricing of most of its products. Market
conditions have improved since October 1993, which has allowed the Company to
increase prices for most of its products. While prices for the Company's
products are approaching the historical high prices achieved during the peak of
the last industry cycle, the Company's production costs (including labor, fiber
and energy), as well as its interest expense, have also significantly increased
since the last pricing peak in the industry, increasing pressure on the
Company's net margins for its products. In recent years, price changes have had
a greater impact on the Company's sales and profitability than changes in sales
volume. The Company believes that near term market conditions may permit the
Company to realize further improved product pricing for most of its product
lines. However, there is no assurance any such price increases will be achieved
or that current prices can be maintained. See "Financial Condition and Liquidity
- -- Outlook."
Due to industry conditions during the past few years and due principally to
depressed product prices and significant interest costs attributable to its
highly leveraged capital structure, the Company incurred net losses in each of
the last three years and for the first half of 1994 and expects to incur a net
loss for the 1994 fiscal year. Such net losses have significantly impaired the
Company's liquidity and available sources of liquidity and will continue to
adversely affect the Company. Unless the Company achieves and maintains
increased selling prices beyond current levels, the Company will continue to
incur net losses and will not generate sufficient cash flows to meet fully the
Company's debt service requirements in the future. See "Financial Condition and
Liquidity" for further details.
26
<PAGE>
RESULTS OF OPERATIONS
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1994 COMPARED WITH THREE MONTHS AND
SIX MONTHS ENDED JUNE 30, 1993
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
---------------------------------------------
1994 1993
--------------------- ---------------------
PERCENT PERCENT
OF OF
(DOLLARS IN MILLIONS) AMOUNT NET SALES AMOUNT NET SALES
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales....................................................................... $ 1,354.3 100.0% $ 1,267.6 100.0%
Cost of products sold........................................................... 1,116.9 82.5 1,050.3 82.9
Selling, general and administrative expenses.................................... 136.9 10.1 131.3 10.4
Depreciation and amortization................................................... 88.5 6.5 88.8 7.0
Equity loss from affiliates..................................................... 1.5 .1 1.7 .1
Other net operating (income) expense............................................ (28.5) (2.1) 2.3 .1
--------- --------- --------- ---------
Income (loss) from operations................................................... 39.0 2.9 (6.8) (.5)
Interest expense................................................................ (110.7) (8.2) (101.8) (8.0)
Other, net...................................................................... 1.0 .1 .3 --
--------- --------- --------- ---------
Loss before income taxes, minority interest, extraordinary loss and cumulative
effects of accounting changes.................................................. (70.7) (5.2) (108.3) (8.5)
Credit for income taxes......................................................... (20.0) (1.4) (37.7) (3.0)
Minority interest............................................................... (.1) -- (1.0) (.1)
--------- --------- --------- ---------
Loss before extraordinary loss and cumulative effects of accounting changes..... (50.8) (3.8) (71.6) (5.6)
Extraordinary loss from early extinguishment of debt............................ -- -- -- --
Cumulative effect of change in accounting for postemployment benefits........... -- -- -- --
Cumulative effect of change in accounting for postretirement benefits........... -- -- -- --
--------- --------- --------- ---------
Net loss........................................................................ $ (50.8) (3.8) $ (71.6) (5.6)
--------- --------- --------- ---------
--------- --------- --------- ---------
<CAPTION>
SIX MONTHS ENDED JUNE 30,
---------------------------------------------
1994 1993
--------------------- ---------------------
PERCENT PERCENT
OF OF
(DOLLARS IN MILLIONS) AMOUNT NET SALES AMOUNT NET SALES
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales....................................................................... $ 2,645.1 100.0% $ 2,573.9 100.0%
Cost of products sold........................................................... 2,184.0 82.6 2,120.5 82.5
Selling, general and administrative expenses.................................... 270.5 10.2 267.3 10.4
Depreciation and amortization................................................... 177.7 6.7 175.9 6.8
Equity loss from affiliates..................................................... 5.7 .2 3.6 .1
Other net operating (income) expense............................................ (33.4) (1.2) 2.9 .1
--------- --------- --------- ---------
Income from operations.......................................................... 40.6 1.5 3.7 .1
Interest expense................................................................ (224.3) (8.5) (204.1) (7.9)
Other, net...................................................................... (8.1) (.3) 3.1 .1
--------- --------- --------- ---------
Loss before income taxes, minority interest, extraordinary loss and cumulative
effects of accounting changes.................................................. (191.8) (7.3) (197.3) (7.7)
Credit for income taxes......................................................... (60.0) (2.3) (64.6) (2.5)
Minority interest............................................................... 2.1 .1 (1.6) --
--------- --------- --------- ---------
Loss before extraordinary loss and cumulative effects of accounting changes..... (129.7) (4.9) (134.3) (5.2)
Extraordinary loss from early extinguishment of debt (net of $9.8 income tax
benefit)....................................................................... (16.8) (.7) -- --
Cumulative effect of change in accounting for postemployment benefits (net of
$9.5 income tax benefit)....................................................... (14.2) (.5) -- --
Cumulative effect of change in accounting for postretirement benefits (net of
$23.3 income tax benefit)...................................................... -- -- (39.5) (1.5)
--------- --------- --------- ---------
Net loss........................................................................ $ (160.7) (6.1) $ (173.8) (6.7)
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
27
<PAGE>
The net loss for the second quarter of 1994 was $50.8 million or $.58 per
share of common stock, compared to a net loss of $71.6 million or $1.03 per
share of common stock for the second quarter of 1993.
For the six months ended June 30, 1994, the 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 $129.7 million,
or $1.55 per share of common stock. The Company recorded in the 1994 first
quarter an extraordinary loss from the early extinguishment of debt of $16.8
million, net of income tax benefit, or $.20 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 six months ended June 30, 1994 of $160.7
million, or $1.92 per share of common stock. For the six months ended June 30,
1993, the loss before the cumulative effect of a change in the accounting for
postretirement benefits other than pensions ("SFAS 106") was $134.3 million, or
$1.94 per share of common stock. The adoption of 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 $173.8
million or $2.50 per share of common stock.
Income from operations increased $45.8 million and $36.9 million for the
three months and six months ended June 30, 1994, respectively, over the
comparable prior year periods. These increases primarily reflect improved
product pricing, particularly for market pulp, and a $22 million pretax
involuntary conversion gain associated with a digester rupture at the Company's
Panama City, Florida pulp and paperboard mill which more than offset an increase
in recycled fiber costs of approximately $20 million and $24 million for the
three and six months ended June 30, 1994. Substantially offsetting the
improvement in operating earnings for these periods, however, were higher
interest expense and a decrease in the credit for income taxes. Additionally,
the first half of 1994 reflected a $10.7 million increase in foreign currency
transaction losses which further offset the improved operating earnings for the
six months ended June 30, 1994 over the first half of 1993.
PAPERBOARD AND PAPER PACKAGING:
Net sales for the three and six months ended June 30, 1994 for the
paperboard and paper packaging segment increased 3.4% and 0.7%, respectively,
over the comparable prior year periods. Net sales for 1993 included sales for
the Company's European folding carton operations, which in the early part of
1993 were merged into a joint venture and, accordingly, are now accounted for
under the equity method of accounting. Sales from these operations were
approximately $16 million and $60 million for the second quarter and first six
months of 1993. Excluding the effect of the folding carton operations, sales for
the second quarter and first six months of 1994 increased 5.1% and 3.9%,
respectively, from the prior year periods reflecting increased sales of
paperboard, corrugated containers and paper bags and sacks. The sales increases
for paperboard and paper bags and sacks reflect higher sales volumes which more
than offset lower average selling prices. The sales increases for corrugated
containers reflect higher average selling prices, particularly during the 1994
second quarter, and increased sales volume. Kraft paper sales were virtually
unchanged from the prior year periods.
Shipments of corrugated containers, including the Company's proportional
share of the shipments by its foreign affiliates, were 13.3 billion square feet
for both the second quarter of 1994 and 1993. For the first six months of 1994
and 1993, the Company shipped 26.2 billion square feet of corrugated containers.
The 1993 shipments include 49% of the shipments by its previously owned
non-consolidated affiliate Empaques de Carton Titan, S.A. ("Titan"). The Company
sold its 49% equity interest in Titan in December 1993. Excluding shipments from
Titan, the Company's shipments of corrugated containers for the second quarter
and first six months of 1994 increased 472 million square feet, or 3.7% and 954
million square feet, or 3.8%, respectively, over the comparable 1993 periods.
Shipments of paper bags and sacks were 163 thousand tons and 322 thousand tons
for the three and six month periods ended June 30, 1994, respectively, compared
with 144 thousand tons and 303 thousand tons shipped during the comparable 1993
periods.
28
<PAGE>
Production of containerboard and kraft paper for the three and six month
periods ended June 30, 1994, including 100% of the production at Seminole and
Savannah River, was 1.29 million tons and 2.58 million tons, respectively,
compared to 1.21 million tons and 2.41 million tons produced during the
comparable prior year periods. Excluding the proportional share of the 1993
production of Titan, production of containerboard and kraft paper for the three
and six month periods ended June 30, 1994, increased 100 thousand tons or 8.4%
and 198 thousand tons, or 8.3%, respectively compared to the prior year periods.
Operating income for the paperboard and paper packaging segment increased
2.1% for the three months ended June 30, 1994 and decreased 7.7% for the six
months ended June 30, 1994, as compared to the corresponding 1993 periods.
Operating income for the second quarter and first half of 1994 include a pretax
gain of approximately $11.0 million which represents the segment's portion of
the previously mentioned involuntary conversion gain relating to a digester
rupture at the Company's Panama City, Florida pulp and paperboard mill.
Excluding this gain, operating income for the second quarter and first half of
1994 would have decreased approximately 19% and 17%, respectively. These
decreases were mainly attributable to reduced operating margins primarily
resulting from low average selling prices for the Company's paperboard and paper
packaging products and higher recycled fiber costs.
WHITE PAPER AND PULP:
Net sales for the second quarter and first half of 1994 for the white paper
and pulp segment increased 15.5% and 8.9%, respectively, compared to the prior
year periods, primarily due to a significant increase in market pulp sales.
Increased sales of newsprint, particularly during the second quarter of 1994
also contributed to the sales increases for this segment. The sales increases
for market pulp mainly resulted from significantly higher average selling
prices, particularly during the second quarter of 1994. Additionally, while 1994
second quarter market pulp sales volume was virtually unchanged from that of the
corresponding prior year period, the significant volume increase for the first
quarter of 1994 contributed to the increased market pulp sales for the first
half of 1994 over the comparable 1993 period. The sales increases for newsprint
for the second quarter and first half of 1994 over the comparable 1993 periods
primarily resulted from increased sales volume.
Production of newsprint, market pulp and groundwood paper for the three and
six month periods ended June 30, 1994, including 100% of the production at
Stone-Consolidated Corporation, the Company's 75% owned Canadian subsidiary, and
25% of the production at the Company's Celgar mill in British Columbia, was 600
thousand tons and 1.27 million tons, respectively, compared with 607 thousand
tons and 1.25 million tons produced during the comparable prior year periods.
Operating losses for the second quarter and first half of 1994 for the white
paper and pulp segment decreased 81.6% and 46.7%, respectively, from the
previous year periods. These decreases are mainly attributable to improved
operating margins primarily resulting from the higher average selling prices for
market pulp and a pre-tax gain of approximately $11 million which represents the
segment's portion of the previously mentioned involuntary conversion gain
relating to a digester rupture at the Company's Panama City, Florida pulp and
paperboard mill.
OTHER:
Net sales for the second quarter and first half of 1994 for the other
segment increased over the comparable 1993 periods primarily as a result of
increased sales volume and higher average selling prices for the Company's
Canadian lumber and wood products. The increase in operating income for the
second quarter and first half of 1994 over the 1993 periods mainly reflect a
gain from the sale of certain non-core assets. 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.
29
<PAGE>
Comparative Results of Operations
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------
1993 1992 1991
------------------------ ------------------------ ------------------------
PERCENT PERCENT PERCENT
OF NET OF NET OF NET
AMOUNT SALES AMOUNT SALES AMOUNT SALES
----------- ----------- ----------- ----------- ----------- -----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Net sales............................................ $ 5,060 100.0% $ 5,521 100.0% $ 5,384 100.0%
Cost of products sold................................ 4,223 83.5 4,474 81.0 4,287 79.6
Selling, general and administrative expenses......... 512 10.1 544 9.9 523 9.7
Depreciation and amortization........................ 347 6.9 329 6.0 273 5.1
Equity (income) loss from affiliates................. 12 .2 5 .1 (1)
Other net operating (income) expense................. 5 .1 13 .2 (63) (1.2)
----------- ----------- ----------- ----------- ----------- -----------
Income (loss) from operations........................ (39) (.8) 156 2.8 365 6.8
Interest expense..................................... (427) (8.4) (386) (6.9) (397) (7.4)
Other, net........................................... (1) -- 1 -- 14 .3
----------- ----------- ----------- ----------- ----------- -----------
Loss before income taxes and cumulative effects of
accounting changes.................................. (467) (9.2) (229) (4.1) (18) (.3)
Provision (credit) for income taxes.................. (148) (2.9) (59) (1.0) 31 .6
----------- ----------- ----------- ----------- ----------- -----------
Loss before cumulative effects of accounting
changes............................................. (319) (6.3) (170) (3.1) (49) (.9)
Cumulative effect of change in accounting for
postretirement benefits............................. (40) (.8) -- -- -- --
Cumulative effect of change in accounting for income
taxes............................................... -- -- (99) (1.8) -- --
----------- ----------- ----------- ----------- ----------- -----------
Net loss............................................. $ (359) (7.1) $ (269) (4.9) $ (49) (.9)
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
</TABLE>
YEAR ENDED DECEMBER 31, 1993 COMPARED WITH YEAR ENDED DECEMBER 31, 1992
Net sales for 1993 were $5.1 billion, a decrease of 8.4% from 1992 net sales
of $5.5 billion. Net sales decreased as a result of both reduced sales volume
and lower average selling prices for most of the Company's products. In 1993,
the Company incurred a loss before the cumulative effect of a change in the
accounting for postretirement benefits other than pensions of $319 million, or
$4.59 per common share. The Company adopted SFAS 106 effective January 1, 1993,
and recorded a one-time, non-cash cumulative effect charge of $39.5 million net
of income taxes or $.56 per common share, resulting in a net loss of $359
million or $5.15 per common share. In 1992, the Company incurred a loss before
the cumulative effect of a change in the accounting for income taxes of $170
million, or $2.49 per common share. The adoption of Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"),
effective January 1, 1992, required a one-time, non-cash cumulative effect
charge of $99.5 million, or $1.40 per common share, resulting in a net loss of
$269 million or $3.89 per common share. The increase in the loss before the
cumulative effects of accounting changes primarily resulted from lower average
selling prices for most of the Company's products.
The 1993 results included a $35.4 million pretax gain from the sale of the
Company's 49% equity interest in Titan and the favorable effect of a reduction
in an accrual relating to a change in the Company's vacation pay policy. The
earnings impact of these non-recurring items was partially offset by the
writedown of the carrying values of certain Company assets. The 1993 results
also reflect both an increase in interest expense, primarily associated with a
reduction in capitalized interest caused by completion of capital projects, and
foreign currency transaction losses of $11.8 million. The 1992 results included
foreign currency transaction losses of $15.0 million and an $8.8 million pretax
charge relating to the writedown of investments. The Company recorded an income
tax benefit of $147.7 million in 1993 as compared with an income tax benefit of
$59.4 million in 1992. The increase in the income tax benefit primarily reflects
the tax effect associated with the increased pretax loss for 1993 over 1992.
Additionally, deferred income taxes were provided for the retroactive increase
in the U.S. federal income tax rate, which was more than offset by the effects
of an enacted decrease in German and Canadian income tax rates. The Company's
effective income tax rates for both years reflect the impact of non-deductible
depreciation and amortization.
30
<PAGE>
Segment Data
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------------
1993 1992
------------------------- -------------------------
INCOME (LOSS) INCOME (LOSS)
BEFORE INCOME BEFORE INCOME
TAXES AND TAXES AND 1991
CUMULATIVE CUMULATIVE -------------------------
EFFECT OF AN EFFECT OF AN INCOME (LOSS)
ACCOUNTING ACCOUNTING BEFORE INCOME
NET SALES CHANGE NET SALES CHANGE NET SALES TAXES
--------- ------------- --------- ------------- --------- -------------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Paperboard and paper
packaging.......... $3,810 $ 206 $4,186 $ 322 $4,038 $ 356
White paper and
pulp............... 965 (194) 1,078 (87) 1,116 84
Other............... 331 37 303 12 275 (6)
Intersegment........ (46) -- (46) -- (45) --
--------- ------ --------- ------ --------- ------
5,060 49 5,521 247 5,384 434
Interest expense.... (427) (386) (398)
Foreign currency
transaction gains
(losses)........... (12) (15) 5
General corporate
and miscellaneous
(net).............. (77) (75) (59)
--------- ------ --------- ------ --------- ------
Total........... $5,060 $(467) $5,521 $(229) $5,384 $ (18)
--------- ------ --------- ------ --------- ------
--------- ------ --------- ------ --------- ------
</TABLE>
Segment and Product Line Sales Data
<TABLE>
<CAPTION>
NET SALES PERCENTAGE CHANGE
---------------------- -------------------------------------
YEAR ENDED DECEMBER 1993 VS 1992 1992 VS 1991
31, ----------------- -----------------
---------------------- SALES SALES SALES SALES
1993 1992 1991 REVENUE VOLUME REVENUE VOLUME
------ ------ ------ ------- ------- ------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
Paperboard and paper
packaging:
Corrugated
containers....... $2,155 $2,234 $2,094 (3.5)% 1.4% 6.7% 4.1%
Paperboard and
kraft paper...... 901 1,032 996 (12.7) (5.1) 3.6 1.3
Paper bags and
sacks............ 579 634 677 (8.7) (11.0) (6.4) (6.3)
Folding cartons... 60 178 166 (66.3) nm 7.2 .1
Other............. 115 108 105 6.5 nm 2.9 nm
------ ------ ------
Total
paperboard
and paper
packaging.... 3,810 4,186 4,038 (9.0) nm 3.7 nm
------ ------ ------
White paper and
pulp:
Newsprint......... 527 538 660 (2.0) .8 (18.5) (2.5)
Market pulp....... 187 312 229 (40.0) (8.4) 36.2 30.3
Groundwood
paper............ 243 219 227 11.0 19.4 (3.5) 9.8
Other............. 8 9 -- (11.1) nm nm nm
------ ------ ------
Total white
paper and
pulp......... 965 1,078 1,116 (10.5) nm (3.4) nm
------ ------ ------
Other............... 331 303 275 9.2 nm 10.2 nm
Intersegment........ (46) (46) (45) -- nm 2.2 nm
------ ------ ------
Total net
sales........ $5,060 $5,521 $5,384 (8.4) nm 2.5 nm
------ ------ ------
------ ------ ------
<FN>
- ------------------------------
nm = not meaningful
</TABLE>
PAPERBOARD AND PAPER PACKAGING:
The 1993 net sales for the paperboard and paper packaging segment decreased
9.0% compared to 1992. 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 were merged into a joint venture and accordingly are now accounted for
under the equity method of accounting. Sales from these operations were
approximately $178 million in 1992. Sales for 1993 were approximately $60
million prior to the merger in May 1993. Excluding the effect of the folding
carton operations, 1993 net sales for the paperboard and paper packaging segment
decreased 6.4%.
31
<PAGE>
Net sales of corrugated containers decreased 3.5% from 1992 primarily due to
lower average selling prices in 1993 which more than offset a slight increase in
sales volume. Net sales of paperboard decreased 11.9% from 1992 as a result of
significantly lower average selling prices and declines in sales volume. Net
sales of kraft paper decreased 28.0% from 1992, primarily due to reduced sales
volume.
Net sales for paper bags and sacks decreased from 1992 primarily due to
lower sales volume and a decrease in average selling prices for retail paper
bags which more than offset a modest increase in average selling prices for
industrial paper bags.
Operating income for the paperboard and paper packaging segment for 1993
decreased 35.9% from 1992 due to significantly lower operating margins,
primarily resulting from the lower average selling prices for corrugated
containers and containerboard. Operating income for this segment includes the
previously mentioned $35.4 million pretax gain from the sale of Titan and a
favorable effect of a reduction in an accrual resulting from a change in the
Company's vacation policy. The earnings impact from these non-recurring items
was partially offset by the writedowns of the carrying values of certain Company
assets.
WHITE PAPER AND PULP:
The 1993 net sales for the white paper and pulp segment decreased 10.5%, as
a significant sales decline for market pulp more than offset a sales increase
for uncoated groundwood paper. The sales decline for market pulp was primarily
attributable to significantly lower average selling prices which deteriorated
further in 1993 from the low average selling prices of 1992. Reduced sales
volume in 1993 also contributed to the lower market pulp sales. Newsprint sales
declined slightly in 1993 compared to 1992, primarily as a result of unfavorable
foreign exchange translation effects attributable to the stronger U.S. dollar,
which more than offset the benefits of higher average selling prices and a
slight volume increase. Net sales for groundwood paper increased 11%, primarily
as a result of significant volume increases which more than offset the effects
of slightly lower average selling prices.
The operating loss for the white paper and pulp segment for 1993 increased
significantly over 1992 due to reduced operating margins primarily resulting
from the significantly lower average selling prices for market pulp. Slightly
lower average selling prices for groundwood paper also contributed to the
reduced earnings, although to a much lesser extent. While average selling prices
for newsprint in 1993 improved over the depressed levels of 1992 (although such
prices declined in the fourth quarter of 1993 and in the first quarter of 1994),
and certain cost reductions have been implemented, the margins associated with
such improvements have only partially offset the effects of the lower average
selling prices for market pulp and groundwood paper.
OTHER:
Net sales and operating income for the other segment increased over 1992
mainly due to improved demand and a reduced supply of timber available to the
U.S. building industry. This resulted in increased sales volume and the
realization of higher average selling prices for certain of the Company's lumber
and wood products. However, shortages of timber available to be harvested due to
environmental concerns in the Pacific Northwest continue to keep raw material
costs high.
YEAR ENDED DECEMBER 31, 1992 COMPARED WITH YEAR ENDED DECEMBER 31, 1991
Net sales for 1992 were $5.5 billion, an increase of 2.5% over 1991 net
sales of $5.4 billion. Net sales rose primarily as a result of increased sales
volume, most of which was offset by reduced average selling prices for certain
of the Company's products. In 1992, the Company incurred a loss before the
cumulative effect of a change in accounting for income taxes of $170 million, or
$2.49 per common share, compared to a loss of $49 million, or $.78 per common
share in 1991. The Company adopted SFAS 109, effective January 1, 1992, and
recorded a one-time, non-cash cumulative effect charge of $99.5 million or $1.40
per common share. All per share amounts have been adjusted to reflect a 2%
common stock dividend issued September 15, 1992. The increase in the loss before
the cumulative effect of a change in
32
<PAGE>
accounting for income taxes primarily resulted from lower average selling prices
for newsprint and groundwood paper in 1992 as compared with 1991. Additionally,
continued low average selling prices for the majority of the Company's other
products contributed to the net loss for 1992.
The 1992 results include foreign currency transaction losses of $15.0
million and an $8.8 million pretax charge relating to the writedown of
investments. The 1991 results included non-recurring pretax gains of $59.3
million and foreign currency transaction gains of $4.9 million. The Company
recorded an income tax benefit of $59.4 million in 1992 as compared with a $31.1
million income tax expense in 1991. This change primarily reflects the tax
effect associated with the increased pretax loss for 1992 over 1991. The
Company's effective income tax rates for both years reflect the impact of
non-deductible depreciation and amortization, together with taxes payable by
certain foreign subsidiaries at rates in excess of the U.S. statutory rate.
PAPERBOARD AND PAPER PACKAGING:
The 1992 net sales for the paperboard and paper packaging segment increased
3.7% as sales increases for corrugated containers, paperboard and folding
cartons more than offset sales declines for kraft paper and paper bags and
sacks.
Net sales of corrugated containers increased 6.7% over 1991, primarily as a
result of increased sales volume. Additionally, slightly higher average selling
prices in 1992 contributed to this increase. However, such selling prices
continued to remain at unsatisfactory levels.
Net sales of paperboard increased over 1991 mainly as a result of modestly
higher average selling prices. Such 1992 average paperboard selling prices were
still, however, at unsatisfactory levels. Slight volume increases also
contributed to the improved paperboard sales for 1992. Net sales of kraft paper
decreased 9.3% from 1991, primarily due to reduced sales volume.
Net sales of paper bags and sacks decreased from 1991 primarily due to lower
sales volume and a decrease in average selling prices for retail paper bags.
Operating income for the paperboard and paper packaging segment for 1992
decreased 9.5%, primarily as a result of the inclusion, in 1991, of a
non-recurring pretax gain of $17.5 million from an involuntary conversion
relating to a boiler explosion at the Company's Missoula, Montana linerboard
mill. Excluding this 1991 non-recurring item, 1992 operating income for this
segment would have decreased by 4.8%. This decrease is mainly attributable to
reduced operating margins resulting from continued low average selling prices
for the Company's paperboard and paper packaging products.
WHITE PAPER AND PULP:
The 1992 net sales for the white paper and pulp segment decreased 3.4%, as
significant sales decreases for newsprint more than offset a significant sales
increase for market pulp. The significant decrease in newsprint sales resulted
primarily from lower average selling prices. Additionally, reduced volume
associated with market-related downtime contributed to the lower sales of
newsprint. Net sales for groundwood paper decreased slightly as lower average
selling prices more than offset volume increases for this product. The increase
in 1992 market pulp sales mainly resulted from volume increases associated with
sales generated from the Savannah River mill, which commenced market pulp
operations in the fourth quarter of 1991. Furthermore, while market pulp selling
prices declined significantly in the fourth quarter of 1992, the Company
realized modestly higher average selling prices for this product in 1992, as
compared with the even more depressed average selling prices of 1991.
Operating income for the white paper and pulp segment for 1992 decreased
significantly from 1991, primarily due to reduced operating margins resulting
from the significantly lower average selling prices for newsprint and groundwood
paper. The 1991 results included a non-recurring pretax gain of $41.8 million
resulting from the settlement and termination of a Canadian supply contract.
OTHER:
Net sales and operating income for the other segment increased over 1991
mainly due to improved demand and a tighter supply of timber available to the
U.S. building industry. This resulted in increased
33
<PAGE>
sales volume and the realization of higher average selling prices for certain of
the Company's lumber and wood products. However, shortages of timber due to
environmental concerns in the Pacific Northwest continued to keep raw material
costs high.
FINANCIAL CONDITION AND LIQUIDITY
The Company's working capital ratio was 1.9 to 1 at June 30, 1994 and at
December 31, 1993 and 1.8 to 1 at December 31, 1992. The Company's long-term
debt to total capitalization ratio was 75.3% at June 30, 1994, 75.9% at December
31, 1993 and 69.2% at December 31, 1992. 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's primary capital requirements consist of debt service and
capital expenditures, including capital investment for compliance with certain
environmental legislation requirements and ongoing maintenance expenditures and
improvements. After giving effect to the Offering and the Related Transactions,
the Company will continue to be highly leveraged. Other than the 1995 maturities
of Stone Financial Corporation and Stone Fin II Receivables Corporation (which
the Company currently plans to refinance), there will be no significant debt
amortization obligations until June 1997. However, the Company will continue to
incur substantial ongoing interest expense. The Company spent $149.7 million on
capital expenditures in 1993 and expects to spend approximately $190 million in
1994.
The Company intends to repay its outstanding indebtedness under and
terminate the 1989 Credit Agreement with the net proceeds of this Offering and
borrowings under the Credit Agreement. The Credit Agreement will consist of a
$400 million term loan and a $450 million revolving credit facility. The
revolving credit facility borrowing availability will be reduced by any letter
of credit commitments, of which approximately $61 million will be outstanding at
closing, and less approximately $ million which the Company will borrow at
closing. All indebtedness under the Credit Agreement will be secured by a
significant portion of the assets of the Company. The Credit Agreement is
expected to contain covenants that include, among other things, requirements to
maintain certain financial tests and ratios (including an indebtedness ratio and
a minimum interest coverage ratio) and certain restrictions and limitations,
including those on capital expenditures, changes in control, payment of
dividends, sales of assets, lease payments, investments, additional borrowings,
liens, repurchases or prepayment of certain indebtedness, guarantees of
indebtedness, mergers and purchases of stock and assets. The Credit Agreement is
also expected to contain cross-default provisions to the indebtedness of $10
million or more of the Company and certain subsidiaries, as well as
cross-acceleration provisions to the non-recourse debt of $10 million or more of
Stone-Consolidated, Seminole and SVCP. Additionally, the term loan portion of
the Credit Agreement will provide for mandatory prepayments from sales of
certain assets (other than the Collateral and the Bank Collateral pledged under
the Credit Agreement), certain debt financings and excess cash flows. All
mandatory and voluntary prepayments will be allocated against the term loan
amortizations in inverse order of maturity. Amortization amounts under the term
loan will be 0.5% of principal amount on each April 1 and October 1 for the
period from April 1, 1995 through April 1, 1999, 47.5% on October 1, 1999 and
48.0% on April 1, 2000. In addition, mandatory prepayments from sales of Bank
Collateral (unless substitute collateral has been provided) will be allocated
pro rata between the term loan and the revolving credit facility, and, to the
extent applied to repay the revolving credit facility, will permanently reduce
loan commitments thereunder.
The Credit Agreement limits, except in certain specific circumstances, any
further investments by the Company in Stone-Consolidated, Seminole and SVCP. As
of June 30, 1994, Seminole had $153.1 million in outstanding indebtedness
(including $115.1 million in secured indebtedness owed to bank lenders) and is
significantly leveraged. Pursuant to an output purchase agreement entered into
in 1986 with Seminole, the Company is obligated to purchase and Seminole is
obligated to sell all of Seminole's linerboard production. Seminole produces
100% recycled linerboard and is dependent upon an adequate supply of recycled
fiber, in particular OCC. Under the agreement, the Company paid fixed prices for
linerboard, which generally exceeded market prices, until June 3, 1994.
Thereafter, the
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<PAGE>
Company is only obligated to pay market prices for the remainder of the
agreement. Because market prices for linerboard are currently less than the
fixed prices previously in effect under the output purchase agreement and due to
recent significant increases in the cost of recycled fiber, it is anticipated
that Seminole will not comply with certain financial covenants at September 30,
1994. Seminole's lenders under its credit agreement have agreed to grant waivers
and amendments with respect to such covenants for periods up to and including
June 30, 1995. There can be no assurance that the lenders will grant such
waivers or that Seminole will not require additional waivers in the future.
Furthermore, in the event that management determines that it is probable that
Seminole will not be able to comply with any covenant contained in the Seminole
credit agreement within twelve months after the waiver of a violation of such
covenant, then the debt under the Seminole credit agreement would be
reclassified as short-term debt under the provisions of Emerging Issues Task
Forces Issue No. 86-30 "Classification of Obligations When a Violation is Waived
By the Creditor." Depending upon the level of market prices and the cost and
supply of OCC, Seminole may need to undertake additional measures to meet its
debt service requirements (including covenants), 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 not successful, and such indebtedness is accelerated by the
respective lenders to Seminole, the lenders to the Company under the Credit
Agreement 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 the Credit Agreement. Failure to achieve or maintain compliance
with such financial ratio tests or other requirements under the Credit
Agreement, 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
Agreement. While the Company has successfully sought and received waivers and
amendments under its 1989 Credit Agreement on various occasions, if waivers or
amendments are requested by the Company under the Credit Agreement, there can be
no assurance that the new lenders under the Credit Agreement will 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. See "Credit Agreement -- Covenants."
OUTLOOK:
Due to industry conditions during the past few years and due principally to
depressed product prices and significant interest costs attributable to the
Company's highly leveraged capital structure, the Company incurred net losses in
each of the last three years and for the first half of 1994 and expects to incur
a net loss for the 1994 fiscal year. Such net losses have significantly impaired
the Company's liquidity and available sources of liquidity and will continue to
adversely affect the Company. Unless the Company achieves and maintains price
increases with respect to paperboard and paper packaging products and
significant sustained price increases for white paper and pulp products, the
Company will continue to incur net losses and will not generate sufficient cash
flows to meet fully the Company's debt service requirements in the future.
The Company's containerboard and corrugated container product lines, which
represent a substantial portion of the Company's net sales, generally
experienced declining product prices from 1990 through the third quarter of
1993. Since October 1, 1993, the Company has increased the price of linerboard
in the fourth quarter of 1993 and the first quarter and third quarter of 1994 by
$25 per ton, $30 per ton and $40 per ton, respectively. Prices for corrugating
medium also increased by $25 per ton, $40 per ton and $50 per ton in the
corresponding periods. In addition, in the first half of 1994, the Company
implemented corrugated container price increases and began implementing on July
25, 1994 a 9.5% price increase for corrugated containers. Historically,
suppliers, including the Company, have taken up to 90 days to pass increased
linerboard and corrugating medium prices through to corrugated container
customers. The Company converts more than 80% of its linerboard and corrugating
medium production into corrugated containers, making the achievement of price
increases for corrugated
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containers essential for the Company to realize substantial financial benefit
from linerboard and corrugating medium price increases. On August 5, 1994, the
Company announced to its customers an additional price increase of $40 per ton
for linerboard and $50 per ton for corrugating medium effective for the fourth
quarter of 1994. While there can be no assurance that prices will continue to
increase or even be maintained at present levels, the Company believes that the
supply/demand characteristics for linerboard, corrugating medium and corrugated
containers have improved which could allow for further price increases for these
product lines.
According to industry publications, immediately preceding the price increase
effective October 1, 1993, the reported transaction price for 42 lb. kraft
linerboard, the base grade of linerboard, was $300 per ton and as of August 1,
1994, the reported transaction price for this base grade was $385-$395 per ton.
According to industry publications, the reported transaction price for
corrugating medium immediately preceding October 1, 1993 was $280 per ton and
$375-$385 per ton as of August 1, 1994.
The Company has also implemented price increase in kraft paper and kraft
converted products. The Company increased prices for retail bags and sacks by 8%
on each of April 1, May 1 and July 1, 1994 and announced and began implementing
a further price increase of 10% effective September 1, 1994. In addition, the
Company has announced and began implementing on August 1, 1994 a $50 per ton
(approximately 8.6%) price increase for kraft paper.
Pricing conditions for market pulp, newsprint and uncoated groundwood paper
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. In 1994, however, pricing for market pulp has improved substantially.
The Company has increased prices for various grades of market pulp by up to $260
per metric tonne since November 1993. According to industry publications, the
reported transaction price for SBHK was $370 per metric tonne as of the third
quarter of 1993 and $500-570 per metric tonne as of the second quarter of 1994.
On July 1, 1994, the Company implemented a further price increase of $70 per
metric tonne (approximately 12.2%). The Company has announced a further price
increase of $70 per metric tonne to be implemented in the fourth quarter. After
further declines in the first quarter of 1994, pricing for newsprint has also
recently improved. The Company increased newsprint prices in the second quarter
of 1994 by $48 per metric tonne in the eastern markets of North America and $41
per metric tonne in the western markets in North America and $41 per metric ton
in the eastern markets of North America and $48 per metric tonne in the western
markets of North America in the third quarter of 1994. According to industry
publications, the reported transaction price for newsprint in the eastern
markets of North America was $411 per metric tonne as of March 1, 1993 and $470
per metric tonne as of August 1, 1994. The benefit to the Company's cash flows
from such partial price recovery in newsprint is limited, however, because
Stone-Consolidated owns all of the Canadian and United Kingdom newsprint and
uncoated groundwood assets of the Company and the restrictive terms of
Stone-Consolidated's indebtedness will not permit Stone-Consolidated to provide
funds to the Company (whether by dividend, loan or otherwise) including from
cash generated from operations, if any, until certain financial covenants have
been satisfied. Such financial covenants have not been satisfied to date and are
not likely to be satisfied in 1994. There can be no assurances that such
financial covenants will be met in the future. To date, uncoated groundwood
papers have not achieved significant price increases. However, a further price
increase of approximately $48 per metric tonne has been announced for the fourth
quarter of 1994. While other producers have announced similar price increases
for market pulp and newsprint, there can be no assurance that such price
increases will be achieved as scheduled.
Although supply/demand balances appear favorable for most of the Company's
products, there can be no assurance that the above price increases will be
achieved or that prices can be maintained at the present levels.
Wood fiber and recycled fiber, the principal raw materials in the
manufacture of the Company's products, are purchased in highly competitive,
price sensitive markets. These raw materials have historically exhibited price
and demand cyclicality. In addition, the supply and price of wood fiber, in
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<PAGE>
particular, is dependent upon a variety of factors over which the Company has no
control, including environmental and conservation regulations, natural
disasters, such as forest fires and hurricanes, and weather. In addition, recent
increased demand for the Company's products has resulted in greater demand for
raw materials which has recently translated into higher raw material prices.
The Company purchases or cuts a variety of species of timber from which the
Company utilizes wood fiber depending upon the product being manufactured and
each mill's geographic location. Despite this diversification, wood fiber prices
have increased substantially in 1994. A decrease in the supply of wood fiber,
particularly in the Pacific Northwest and the southeastern United States due to
environmental considerations, has caused, and will likely continue to cause,
higher wood fiber costs in those regions. In addition, the increase in demand
for products manufactured in whole or in part from recycled fiber has caused a
shortage of recycled fiber, particularly OCC used in the manufacture of premium
priced recycled containerboard and related products. The Company's paperboard
and paper packaging products use a large volume of recycled fiber. In 1993, the
Company processed approximately 1.9 million tons of recycled fiber. The Company
used approximately 1.25 million tons of OCC in its products in 1993. The Company
believes that the cost of OCC has risen from $55 per ton at June 30, 1993 to
$110 per ton as of September 1, 1994. While the Company has not experienced any
significant difficulty in obtaining wood fiber and recycled fiber in economic
proximity to its mills, there can be no assurances that this will continue to be
the case for any or all of its mills. In addition, there can be no assurance
that all or any part of increased fiber costs can be passed along to consumers
of the Company's products directly or in a timely manner.
Notwithstanding the improvements in the Company's liquidity and financial
flexibility which will result from the Offering and the execution and delivery
of the Credit Agreement, unless the Company achieves and maintains increased
selling prices beyond current levels, the Company will continue to incur net
losses and will not generate sufficient cash flows to meet fully the Company's
debt service requirements in the future. Without such 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, additional sales of assets, the deferral of
certain capital expenditures, obtaining additional sources of funds and/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 (assuming successful refinancing of the
two existing receivables programs) 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 and/or other sources and/or refinance or restructure maturing
indebtedness. No assurance can be given that the Company will be successful in
doing so.
The Company will incur a charge for the write-off of previously unamortized
debt issuance costs, related to the debt being repaid, (approximately $45
million, net of income tax benefit) upon completion of the Offering and Related
Transactions. This non-cash charge will be recorded as an extraordinary loss
from the early extinguishment of debt in the Company's Consolidated Statements
of Operations and Retained Earnings (Accumulated Deficit).
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<PAGE>
CASH FLOWS FROM OPERATIONS:
The following table shows, for the first six months of 1993 and 1994 and for
the last three years, the net cash provided by (used in) operating activities:
<TABLE>
<CAPTION>
YEAR
SIX MONTHS ENDED
ENDED DECEMBER
JUNE 30, 31,
---------------- -------
1994 1993 1993 1992 1991
------ ------ ------- ------- ------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Net loss...................... $ (161) $ (174) $ (359) $ (269) $ (49)
Extraordinary loss from early
extinguishment of debt...... 17 -- -- -- --
Cumulative effect of change in
postemployment benefits..... 14 -- -- -- --
Cumulative effect of change in
accounting for
postretirement benefits..... -- 39 39 -- --
Cumulative effect of change in
accounting for income
taxes....................... -- -- -- 99 --
Depreciation and
amortization................ 178 176 347 329 274
Deferred taxes................ (64) (60) (134) (67) 22
Payment on settlement of
interest rate swaps......... -- -- (33) -- --
Decrease (increase) in
accounts and notes
receivable -- net........... (81) (3) 45 (67) 33
Decrease (increase) in
inventories................. 57 3 29 11 (60)
Decrease (increase) in other
current assets.............. (37) (9) (9) 9 (75)
Increase (decrease) in
accounts payable and other
current liabilities......... 21 26 (60) (35) 59
Other......................... (42) -- (78)(a) 76(b) 7
------ ------ ------- ------- ------
Net cash provided by (used in)
operating activities........ $ (98) $ (2) $ (213) $ 86 $ 211
------ ------ ------- ------- ------
------ ------ ------- ------- ------
<FN>
- ------------------------
(a) Includes debt issuance costs of $84 million and an adjustment to remove the
effect of a $35 million gain from the sale of the Company's 49% equity
interest in Titan, partially offset by adjustments to remove the effects of
amortization of deferred debt issuance costs and a non-cash charge of $19
million pertaining to the writedown of certain decommissioned assets.
(b) Includes $54 million of cash received from the sale of an energy contract
in October 1992.
</TABLE>
The results of operations for the first six months of 1994 and 1993 and the
years 1991 through 1993 have had a significant adverse impact on the Company's
cash flow. Borrowings in the first six months of 1994 and 1993 and the years
1991, 1992 and 1993 have increased to meet cash flow needs.
During 1993 and in the first six months of 1994, the Company entered into
various financing and investing activities designed to provide liquidity and
enhance financial flexibility. See "Financing activities" and "Investing
activities."
The decrease in cash flows for the first six months of 1994 compared to the
first six months of 1993 resulted primarily from an increase in debt issuance
cost payments and the effects of increases in accounts and notes receivable and
other current assets. These decreases were partially offset by the favorable
effect of a significant reduction in inventories and a modest decrease in the
loss (before the extraordinary loss and the non-cash, cumulative effects of
accounting changes) for the first six months of 1994 compared to the prior year
period.
The 1993 decrease in accounts and notes receivable reflects the timing of
receivable collections, lower average selling prices for a majority of the
Company's products and the writedown of certain
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<PAGE>
receivables to net realizable value. The increase in accounts and notes
receivable for 1992 reflect an increase in sales volume for certain of the
Company's products during the latter part of 1992 over 1991 and the timing of
receivable collections resulting from the continued slow recovery of the
economy.
Inventories decreased in 1993 due primarily to a reduction in certain
paperstock and newsprint levels, partially attributable to market related
downtime. The decrease in inventories for 1992 resulted mainly from reductions
in certain paperstock levels due to increased sales volume during the latter
part of 1992 and market-related downtime.
The 1992 decrease in other current assets resulted mainly from the
collection of $43 million of cash related to the 1991 settlement and termination
of a Canadian supply contract.
The decreases in accounts payable and other current liabilities for 1993 and
1992 were due primarily to the timing of payments.
FINANCING ACTIVITIES:
On February 10, 1994, under the Company's $1 billion shelf registration, the
Company sold $710 million principal amount of 9 7/8% 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 in the February 1994 Offerings, which included the
exercise by the underwriters of 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. The net proceeds from the February 1994 Offerings of approximately
$962 million were used to (i) prepay approximately $652 million of 1995, 1996
and 1997 required amortization under the Company's 1989 Credit Agreement,
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% 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 following summarizes the Company's significant financing activities in
1993:
- During 1993, outstanding borrowings under the Company's revolving credit
facilities increased approximately $6.8 million. The net increase takes
into account the financial transactions discussed below and those
transactions discussed in the "Investing activities" section following.
Borrowings and payments made on debt as presented in the Statement of Cash
Flows does not take into account certain repayments and subsequent
reborrowings under the revolving credit facilities which occurred as a
result of these transactions.
- In December 1993, Stone-Consolidated acquired the newsprint and uncoated
groundwood papers business of Stone Canada and sold $346.5 million of
units in an initial public offering comprised of both common stock and
convertible subordinated debentures (the "Units Offering"). Each unit was
priced at $2,100 and consisted of 100 shares of common stock at $10.50 per
share and $1,050 principal amount of convertible subordinated debentures.
The convertible subordinated debentures mature December 31, 2003, bear
interest at an annual rate of 8% and are convertible beginning June 30,
1994, into 6.211 shares of common stock for each Canadian $100 principal
amount, representing a conversion price of $12.08 per share. Concurrently
with the initial public offering, Stone-Consolidated sold $225 million of
senior secured notes in a public offering in the United States. The senior
secured notes mature December 15, 2000 and bear interest at an annual rate
of 10.25%. As a result of the Units Offering, 16.5 million shares of
common stock, representing 25.4% of the total shares outstanding of
Stone-Consolidated, were sold to the public, resulting in the recording in
the Company's Consolidated Balance Sheet of a minority interest liability
of $236.7 million. The Company used approximately $373 million of the net
proceeds from the sale of the Stone-Consolidated securities for repayment
of commitments under its 1989 Credit Agreement and the remainder for
general corporate purposes. As a result of the Units Offering, the Company
recorded a charge of $74.4 million to common stock related to the excess
carrying value per common share over the offering price per common share
associated with the shares issued.
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<PAGE>
- In December 1993, the Company sold two of its short-line railroads in a
transaction in which the Company has guaranteed to contract minimum
railroad services which will provide freight revenues to the railroads
over a 10 year period. The transaction has been accounted for as a
financing and accordingly, had no impact on the Company's 1993 net loss.
The Company received proceeds of approximately $28 million, of which
approximately $19 million was used to repay commitments under the 1989
Credit Agreement.
- In the fourth quarter of 1993, the Company sold, prior to their expiration
date, certain of the U.S. dollar denominated interest rate and cross
currency swaps associated with the 1989 Credit Agreement borrowings of
Stone-Canada. The net proceeds totaled approximately $34.9 million, the
substantial portion of which was used to repay borrowings under the
revolving credit facilities of the 1989 Credit Agreement. The sale of the
swaps resulted in a deferred loss which will be amortized over the
remaining life of the underlying obligation.
- In July 1993, the Company sold $150 million principal amount of 12 5/8%
Senior Notes due July 15, 1998 and, in a private transaction, sold $250
million principal amount of 8 7/8% Convertible Senior Subordinated Notes
due July 15, 2000. The Company filed a shelf registration statement
declared effective August 13, 1993 registering the 8 7/8% Convertible
Senior Subordinated Notes for resale by the holders thereof. The net
proceeds of approximately $386 million received from the sales of these
notes were used by the Company to repay borrowings without reducing
commitments under the revolving credit facilities of its 1989 Credit
Agreement, thereby restoring borrowing availability thereunder.
INVESTING ACTIVITIES:
Capital expenditures for the six months ended June 30, 1994 totalled
approximately $66.2 million.
The following summarizes the Company's significant 1993 investing
activities:
- The Company sold its 49% equity interest in Titan. The net proceeds were
used to repay commitments under the 1989 Credit Agreement and for
repayment of borrowings under its revolving credit facilities without
reducing commitments thereunder.
- During 1993, the Company increased its ownership in the common stock of
Savannah River from 90.2% to 92.8% through the purchase of an additional
6,152 common shares and through the receipt of Series D Preferred Stock as
a dividend in kind on Savannah River's Series B Preferred Stock and the
election of its right to convert the Series D Preferred Stock into 198,438
common shares.
- On May 6, 1993, the Company's wholly owned German subsidiary, Europa
Carton A.G., ("Europa Carton"), completed a joint venture with Financiere
Carton Papier ("FCP"), a French company, to merge the folding carton
operations of Europa Carton with those of FCP ("FCP Group"). Under the
joint venture, FCP Group is owned equally by Europa Carton and the
shareholders of FCP immediately prior to the merger. The Company's
investment in this joint venture is being accounted for under the equity
method of accounting.
- Capital expenditures for 1993 totaled approximately $150 million
(including capitalized interest of approximately $9 million), of which
approximately $15 million was funded from existing project financings. The
Company's capital expenditures for 1994 are budgeted at approximately $190
million.
ENVIRONMENTAL ISSUES:
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 in
the past made significant capital expenditures to comply with water, air and
solid and hazardous waste regulations and expects to make significant
expenditures in the future. Capital expenditures for environmental control
equipment and facilities were approximately $29.7 million in 1993 and the
Company anticipates that 1994 and 1995 environmental capital expenditures will
approximate $78 million and $114 million, respectively (not including any
expenditures required under the proposed "cluster rules" described below).
Included in these amounts are capital expenditures for
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<PAGE>
Stone-Consolidated which were approximately $6.7 million in 1993 and are
anticipated to approximate $43 million in 1994 and $82 million in 1995. 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, the Company anticipates
that these costs will increase when final "cluster rules" are adopted and as
other environmental regulations become more stringent. Environmental control
expenditures include projects which, in addition to meeting environmental
concerns, 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 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.
In December 1993, the EPA issued a proposed rule affecting the pulp and
paper industry. These proposed regulations, informally known as the "cluster
rules," would make more stringent requirements for discharge of wastewaters
under the Clean Water Act and would impose new requirements on air omissions
under the Clean Air Act. Pulp and paper manufacturers (including the Company)
have submitted extensive comments to the EPA on the proposed regulations in
support of the position that requirements under the proposed regulations are
unnecessarily complex, burdensome and environmentally unjustified. The EPA has
indicated that it may reopen the comment period on the proposed regulations to
allow review and comment on new data that the industry will submit to the agency
on the industry's air toxics emissions. It can not be predicted at this time
whether the EPA will modify the requirements in the final regulations which are
scheduled to be issued in 1996, with compliance required within three years from
such date. The Company is considering and evaluating the potential impact of the
rules, as proposed, on its operations and capital expenditures over the next
several years. Preliminary estimates indicate that the Company could be required
to make capital expenditures of $350-$450 million during the period of 1996
through 1998 in order to meet the requirements of the rules, as proposed. In
addition, annual operating expenses would increase by as much as $20 million
beginning in 1998. The ultimate financial impact of the regulations cannot be
accurately estimated at this time but will be affected by several factors,
including the actual requirements imposed under the final rule, advancements in
control process technologies, possible reconfiguration of mills and inflation.
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 Superfund, at most of the multi-PRP sites there are
organized groups of PRPs and costs are being shared among PRPs. Future
environmental regulations, including the final "cluster rules," 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.
ACCOUNTING STANDARDS CHANGES
In November 1992, the Financial Accounting Standards Board issued 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 (Accumulated Deficit).
41
<PAGE>
BUSINESS
GENERAL
The Company is a major international pulp and paper company engaged
principally in the production and sale of paper, packaging products, and market
pulp. The Company believes that it is the world's largest producer of unbleached
containerboard and kraft paper and the world's largest converter of those
products into corrugated containers and paper bags and sacks. The Company also
believes that it is one of the world's largest paper companies in terms of
annual tonnage, having produced approximately 7.5 million total tons of paper
and pulp in each of 1993 and 1992. The Company produced approximately 4.9
million and 5.0 million tons of unbleached containerboard and kraft paper in
1993 and 1992, respectively, which accounted for approximately 66% of its total
tonnage produced for both 1993 and 1992. The Company had net sales of
approximately $5.1 billion and $5.5 billion in 1993 and 1992, respectively.
The Company owns or has an interest in 135 manufacturing facilities in the
United States, 26 in Canada, 15 in Germany, six in France, two in Belgium and
one in each of the United Kingdom and the Netherlands. The facilities include 23
mills. The Company also maintains sales offices in the United States, Canada,
the United Kingdom, Germany, Belgium, France, Mexico, China and Japan, has a
forestry operation in Costa Rica and has a joint venture relationship in
Venezuela.
The Company is incorporated in Delaware and its Common Stock is listed on
the New York Stock Exchange. The Company's executive offices are located at 150
North Michigan Avenue, Chicago, Illinois 60601; telephone number (312) 346-6600.
PRODUCT PRICING AND INDUSTRY TRENDS
The markets for products sold by the Company are highly competitive and are
also sensitive to changes in industry capacity and cyclical changes in the
economy, both of which can significantly impact selling prices and thereby the
Company's profitability. From 1990 through the third quarter of 1993, the
Company experienced substantial declines in the pricing of most of its products.
Market conditions have improved since October 1993, which have allowed the
Company to increase prices for most of its products. While prices for most of
the Company's products are approaching the historical high prices which were
achieved during the peak of the last industry cycle, the Company's production
costs (including labor, fiber and energy), as well as its interest expense, have
also significantly increased since the last pricing peak in the industry,
increasing pressure on the Company's net margins for its products.
The Company's containerboard and corrugated container product lines, which
represent a substantial portion of the Company's net sales, generally
experienced declining product prices from 1990 through the third quarter of
1993. Since October 1, 1993, the Company has increased the price of linerboard
in the fourth quarter of 1993 and the first quarter and third quarter of 1994 by
$25 per ton, $30 per ton and $40 per ton, respectively. Prices for corrugating
medium also increased by $25 per ton, $40 per ton and $50 per ton in the
corresponding periods. In addition, in the first half of 1994, the Company
implemented corrugated container price increases and began implementing on July
25, 1994 a 9.5% price increase for corrugated containers effective July 25,
1994. Historically, suppliers, including the Company, have taken up to 90 days
to pass increased linerboard and corrugating medium prices through to corrugated
container customers. The Company converts more than 80% of its linerboard and
corrugating medium products into corrugated containers, making the achievement
of price increases for corrugated containers essential for the Company to
realize substantial financial benefit from linerboard and corrugating medium
price increases. On August 5, 1994, the Company announced to its customers an
additional price increase of $40 per ton for linerboard and $50 per ton for
corrugating medium effective for the fourth quarter of 1994. While there can be
no assurance that price increases will be implemented or that prices will
continue to increase or even be maintained at present levels, the Company
believes that the supply/demand characteristics for linerboard, corrugating
medium and corrugated containers have improved which could allow for further
price increases for these product lines.
42
<PAGE>
According to industry publications, immediately preceding the price increase
effective October 1, 1993, the reported transaction price for 42 lb. kraft
linerboard, the base grade of linerboard, was $300 per ton and as of August 1,
1994, the reported transaction price for this base grade was $385-395 per ton.
According to industry publications, the reported price for corrugating medium
immediately preceding October 1, 1993 was $280 per ton and $375-$385 per ton as
of August 1, 1994.
The Company has also implemented price increases in kraft paper and kraft
paper converted products. The Company increased prices for retail bags and sacks
by 8% on each of April 1, May 1 and July 1, 1994 and announced and began
implementing a further price increase of 10% effective September 1, 1994. In
addition, the Company has announced and began implementing on August 1, 1994 a
$50 per ton (approximately 8.6%) price increase for kraft paper.
Pricing for market pulp has also improved substantially in 1994. The Company
has increased prices for various grades of market pulp by up to $260 per metric
tonne since November 1993. According to industry publications, the reported
transaction price for SBHK was $370 per metric tonne as of the third quarter of
1993 and $500-570 per metric tonne as of the second quarter of 1994. On July 1,
1994, the Company implemented a further price increase of $70 per metric tonne
(approximately 12.2%). The Company has announced a further price increase of $70
per metric tonne to be implemented in the fourth quarter.
After further declines in the first quarter of 1994, pricing for newsprint
has also recently improved. The Company increased newsprint prices in the second
quarter of 1994 by $48 per metric tonne in the eastern markets of North America
and $41 per metric tonne in the western markets of North America and of $41 per
metric tonne in the eastern markets of North America and $48 per metric tonne in
the western markets of North America in the third quarter of 1994. According to
industry publications, the reported transaction price for newsprint in the
eastern markets of North America was $411 per metric tonne as of March 1, 1993
and $470 per metric tonne as of August 1, 1994. To date, uncoated groundwood
papers have not achieved significant price increases. However, a further price
increase of approximately $48 per metric tonne has been announced for the fourth
quarter of 1994.
Although supply/demand balances appear favorable for most of the Company's
products, there can be no assurance that announced price increases will be
achieved or that prices can be maintained at present levels.
Wood fiber and recycled fiber, the principal raw materials in the
manufacture of the Company's products, are purchased in highly competitive,
price sensitive markets. These raw materials have historically exhibited price
and demand cyclicality. In addition, the supply and price of wood fiber, in
particular, is dependent upon a variety of factors over which the Company has no
control, including environmental and conservation regulations, natural
disasters, such as forest fires and hurricanes, and weather. In addition, recent
increased demand for the Company's products has resulted in greater demand for
raw materials which has recently translated into higher raw material prices.
The Company purchases or cuts a variety of species of timber from which the
Company utilizes wood fiber depending upon the product being manufactured and
each mill's geographic location. Despite this diversification, wood fiber prices
have increased substantially in 1994. A decrease in the supply of wood fiber,
particularly in the Pacific Northwest and the southeastern United States due to
environmental considerations, has caused, and will likely continue to cause,
higher wood fiber costs in those regions. In addition, the increase in demand
for products manufactured in whole or in part from recycled fiber has caused a
shortage of recycled fiber, particularly OCC used in the manufacture of premium
priced recycled containerboard and related products. The Company's paperboard
and paper packaging products use a large volume of recycled fiber. In 1993, the
Company processed approximately 1.9 million tons of recycled fiber. The Company
used approximately 1.25 million tons of OCC in its products in 1993. The Company
believes that the cost of OCC has risen from $55 per ton at June 30, 1993 to
$110 per ton as of September 1, 1994. While the Company has not experienced any
significant difficulty in obtaining wood fiber and recycled fiber in economic
proximity to its mills, there can be no
43
<PAGE>
assurances that this will continue to be the case for any or all of its mills.
In addition, there can be no assurance that all or any part of increased fiber
costs can be passed along to consumers of the Company's products directly or in
a timely manner.
FINANCIAL STRATEGY
In 1993, the Company adopted a financial plan designed to increase the
Company's liquidity and improve its financial flexibility by prepaying the near
term scheduled amortizations under the 1989 Credit Agreement. The financial plan
was implemented in response to continuing net losses resulting from depressed
sales prices for the Company's products and the Company's highly leveraged
capital structure and related interest expense associated with indebtedness
incurred to finance the acquisition of Stone Canada. In 1993, as part of the
financial plan, the Company satisfied its remaining 1993 and 1994 scheduled
amortization obligations under the 1989 Credit Agreement and repaid outstanding
borrowings (a portion of which could subsequently be reborrowed) under the
revolving credit facility portion of the 1989 Credit Agreement with the proceeds
from (i) the sale of $400 million aggregate principal amount of additional
Company indebtedness, (ii) the public offering in Canada of approximately 25% of
the common stock (Cdn. $231 million) of Stone-Consolidated and the
contemporaneous sale by Stone-Consolidated of Cdn. $231 million principal amount
of convertible subordinated debentures in Canada and $225 million principal
amount of senior secured notes in the U.S., and (iii) the sale of approximately
$125 million of assets. In February 1994, the Company sold $710 million
principal amount of 9 7/8% Senior Notes due 2001 and approximately 19 million
shares of its common stock for gross proceeds of approximately $289 million from
the sale of such common stock in the February 1994 Offerings. The Company used
the $962 million of net proceeds from the February 1994 Offerings to (i) prepay
scheduled amortizations under the 1989 Credit Agreement for all of 1995 and a
portion of 1996 and 1997, (ii) fully redeem the principal amount of the
Company's 13 5/8% Subordinated Notes due 1995, and (iii) repay outstanding
borrowings under the revolving credit facility portion of the 1989 Credit
Agreement, a portion of which remained available for reborrowing thereunder.
The Company, as part of its financial plan, is evaluating certain
alternatives for the disposition and monetization of its non-core assets
including the U.S. wood products business. As an initial step in achieving this
objective, the Company on September 27, 1994, announced the closure of three
facilities of the wood products business in the Pacific Northwest. The
operations of the closed facilities will be consolidated with other wood product
operations of the Company in the Northwest, while the Company will dispose of
excess assets including inventory as soon as practicable in an orderly
liquidation. The impact of such closure and sale of assets on the Company's 3rd
Quarter results has not yet been fully determined but is not expected to have a
material effect on the Company.
The Company is continuing to pursue its financial strategy of increasing the
Company's liquidity and improving its financial flexibility. Concurrently with
the closing of this Offering, the Company will (i) repay all of the outstanding
indebtedness and commitments under and terminate the 1989 Credit Agreement, (ii)
enter into the Credit Agreement and (iii) repay the outstanding borrowings under
the Savannah River Credit Agreement and, on or prior to December 30, 1994,
redeem the outstanding Savannah River Notes and the Savannah River Preferred,
each of which (other than the redemptions) is conditioned upon the successful
completion of the other transactions (collectively, the "Related Transactions").
The Credit Agreement will consist of a $400 million secured term loan and a $450
million revolving credit facility. The revolving credit facility borrowing
availability will be reduced by any letter of credit commitments, of which
approximately $61 million will be outstanding at closing and less approximately
$ million which the Company will borrow at closing. On or prior to the closing
of the Offering, the Company will (i) repay indebtedness outstanding under and
terminate the Savannah River Credit Agreement, (ii) give notice of redemption
to, and deposit the redemption price with, the trustee of the $130 million
principal amount of Savannah River Notes, which shall be redeemed on or prior to
December 30, 1994, and (iii) purchase the 72,346 outstanding shares of common
stock of Savannah River not owned by the Company pursuant to a merger of a
wholly owned subsidiary of the Company and Savannah River and (iv) on or before
December 30, 1994, the Company will also cause the 425,243 outstanding shares of
Savannah River Preferred not owned by the Company to be redeemed. The
44
<PAGE>
completion of this Offering, together with the Related Transactions, will extend
the scheduled amortization obligations and final maturities of more than $1
billion of the Company's indebtedness, improve the Company's liquidity by
replacing its current $166 million revolving credit facility commitments with
$450 million of revolving credit commitments (of which borrowing availability
will be reduced by any letter of credit commitments, of which approximately $61
million will be outstanding at closing, and less approximately $61 million of
borrowings thereunder which will be borrowed at closing) and improve the
Company's financial flexibility through entering into the Credit Agreement.
The Company will incur a charge for the write-off of previously unamortized
debt issuance costs, related to the debt being repaid (approximately $45
million, net of income tax benefit) upon the completion of the Offering and
Related Transactions. This non-cash charge will be recorded as an extraordinary
loss from the early extinguishment of debt in the Company's Consolidated
Statements of Operations and Retained Earnings (Accumulated Deficit).
OPERATIONS
The following table presents actual annual mill production capacity of the
Company at December 31, 1993 and at December 31, 1992:
<TABLE>
<CAPTION>
PAPERBOARD AND
PAPER WHITE PAPER
PACKAGING AND PULP TOTAL
-------------- -------------- --------------
1993 1992 1993 1992 1993 1992
------ ------ ------ ------ ------ ------
(IN THOUSANDS OF SHORT TONS)(A)
<S> <C> <C> <C> <C> <C> <C>
United States.............................................. 4,583 4,572 853 847 5,436 5,419
Canada..................................................... 429 436 2,176 1,783 2,605 2,219
Europe..................................................... 314 310 307 306 621 616
Other...................................................... -- 58 -- -- -- 58
------ ------ ------ ------ ------ ------
5,326 5,376 3,336 2,936 8,662 8,312
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
<FN>
- ------------------------
(a) Includes 25% of production capacity of the Celgar mill, 49% of the Titan
mill at December 31, 1992 and 100% of Seminole and Savannah River mills and
100% of Stone-Consolidated.
</TABLE>
PAPERBOARD AND PAPER PACKAGING
The Company believes that its integrated unbleached paperboard and paper
packaging business is the largest in the world with 16 mills and 136 converting
plants located throughout the United States and Canada and in Europe. The major
products in this business are containerboard and corrugated containers, which
are primarily sold to a broad range of manufacturers of consumable and durable
goods; kraft paper and paper bags and sacks, which are primarily sold to
supermarket chains, retailers of consumer products and, in the case of multiwall
shipping sacks, to the agricultural, chemical and cement industries; and
boxboard and folding cartons, which are sold to manufacturers of consumable
goods and other box manufacturers. The unbleached packaging business of the
Company has an annual capacity of approximately 5.3 million tons and is more
than 80% integrated. In 1993, total sales for the paperboard and paper packaging
business of the Company were approximately $3.8 billion, or approximately 75% of
total consolidated sales.
The paperboard and packaging business requires a large volume of recycled
fiber for its paperboard and paper packaging business. In 1993, the Company
processed 1.25 million tons of recycled fiber. Recycled fiber is obtained from a
variety of sources through Paper Recycling International L.P. ("PRI"), a fifty
percent-owned joint venture. PRI is paid a fee by the Company for procuring
recycled fiber. See "Fiber Supply."
CONTAINERBOARD AND CORRUGATED SHIPPING CONTAINERS. The Company believes it
is the world's largest producer of containerboard, of which more than 80% is
converted by the Company into corrugated shipping containers. The Company's
total sales of corrugated shipping containers in 1993 were $2.2 billion.
45
<PAGE>
The Company's mills produce containerboard, including unbleached kraft
linerboard, recycled linerboard, medium and paper. Containerboard tons produced
and converted for the last three years were:
<TABLE>
<CAPTION>
1993 1992 1991
-------- -------- --------
(SHORT TONS IN THOUSANDS)
<S> <C> <C> <C>
Containerboard
Production................................................. 4,388.1 4,424.4 4,330.9
Converted.................................................. 3,709.5 3,649.5 3,488.1
</TABLE>
Containerboard is produced at the Company's mills located in Snowflake,
Arizona; Jacksonville, Florida; Panama City, Florida; Port Wentworth, Georgia;
Hoya, Germany; Hodge, Louisiana; Missoula, Montana; New Richmond (Chaleurs),
Quebec; Florence, South Carolina and Hopewell, Virginia. Corrugating medium is
produced at the Company's mills located in Uncasville, Connecticut; Hoya,
Germany; Viersen, Germany; Hodge, Louisiana; Ontonagon, Michigan; Bathurst, New
Brunswick; Coshocton, Ohio and York, Pennsylvania. The Jacksonville, Florida
linerboard mill is owned by Seminole, a 99% owned subsidiary of the Company.
Seminole is not expected to be permitted to provide funds to the Company from
its cash generated from operations, if any, because of restrictions in the terms
of certain of Seminole's debt instruments.
The Company's containerboard and corrugated container operations are more
than 80% integrated and the Company believes this integration enhances its
ability to respond quickly and efficiently to customers and to fill orders on
short lead times. The Company believes it is the largest producer of corrugated
shipping containers in the U.S., with more than 100 board converting operations.
Corrugated shipping containers, manufactured from containerboard in converting
plants, 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. The Company stresses the value-added
aspects of its corrugated containers, such as labeling and multi-color graphics,
to differentiate its products and respond to customer requirements. The
Company's container plants serve local customers and large national accounts and
are located in the United States, Belgium, Canada, France and Germany, generally
in or near large metropolitan areas. Corrugated shipping containers sales volume
for 1993, 1992 and 1991 were 52.5, 51.7, and 49.2 billion square feet
respectively.
KRAFT PAPER AND BAGS AND SACKS. The Company also has a highly integrated
kraft paper and converted product operation and is a net buyer of kraft paper
from third parties. The Company operates 20 kraft and paper converting
facilities, which shipped approximately 613 thousand tons and 689 thousand tons
of paper bags and sacks nationwide in 1993 and 1992, respectively. The Company
believes it is among the largest producers of grocery bags and sacks. Kraft
paper volume produced and converted for the last three years was:
<TABLE>
<CAPTION>
1993 1992 1991
----- ----- -----
(TONS IN THOUSANDS)
<S> <C> <C> <C>
Kraft Paper
Production....................................................... 499.8 563.2 534.8
Converted........................................................ 644.7 723.9 739.7
</TABLE>
The Company produces kraft paper and recycled paper for conversion into bags
and sacks at its mills in Snowflake, Arizona; Hodge, Louisiana; Florence, South
Carolina; and the Seminole mill in Jacksonville, Florida.
Grocery bags and sacks are sold primarily to supermarket chains and
merchandise bags are sold to retailers of consumer products. Multiwall shipping
sacks, considered a premium product, are sold to the agricultural, chemical and
cement industries, among other industries. The Company's total sales of bags and
sacks in 1993 were $579.3 million. Sales volumes for bags and sacks for 1993,
1992 and 1991 were 612.9, 688.6, and 734.6 thousand tons respectively.
46
<PAGE>
WHITE PAPER AND PULP:
The Company believes that, together with its 75% owned (60.1% on a fully
diluted basis) consolidated subsidiary, Stone-Consolidated, it is the largest
producer of uncoated groundwood paper in North America and the fourth largest
producer of newsprint in North America. Stone-Consolidated, a Canadian
corporation and a consolidated subsidiary of the Company, owns all of the
Canadian and United Kingdom newsprint and uncoated groundwood paper assets of
the Company. The restrictive terms of Stone-Consolidated's indebtedness at this
time are unlikely to permit Stone-Consolidated to provide funds to the Company
from its excess cash flow, if any. Stone-Consolidated owns three newsprint mills
(two in Canada and one in the United Kingdom) and two uncoated groundwood paper
mills in Canada. The Company owns a newsprint mill in Snowflake, Arizona, the
production of which is marketed by Stone-Consolidated on a commission basis. The
Company and Stone-Consolidated have the capacity to produce 1.4 million tons of
newsprint and 500,000 tons of uncoated groundwood paper annually. Newsprint is
marketed to newspaper publishers and commercial printers. Uncoated groundwood
paper is sold for use primarily in newspaper inserts, retail store advertising
fliers, magazines, telephone directories and as computer paper.
The Company believes it has a major market position in North America in the
production of market pulp. The Company owns and operates five market pulp mills
in North America, including the Celgar mill in Castlegar, British Columbia in
which the Company has a 25% interest. These mills have the capacity to produce
1.5 million tons of market pulp annually and produced 733.2 thousand tons in
1993 (including 25% of the production at the Celgar mill). The geographic
diversity of the Company's mills enables the Company to offer its customers a
product mix of bleached northern hardwood and bleached southern softwood pulp.
Market pulp is sold to manufacturer of paper products, including fine papers,
photographic papers, tissue and newsprint.
In 1993, total sales for the white paper and pulp business of the Company
(which includes Stone-Consolidated sales) were approximately $965 million, or
approximately 19% of total consolidated sales.
NEWSPRINT. Stone-Consolidated owns and operates two fully integrated
newsprint mills located in Shawinigan (Belgo mill) and Ville de La Baie (Port
Alfred mill), Quebec and a third newsprint mill located in Ellesmere Port
(Bridgewater mill), United Kingdom. The Company owns and operates a fully
integrated newsprint mill in Snowflake, Arizona. Smaller quantities of newsprint
are also produced on other machines located at the Grand-Mere (Laurentide) and
Trois-Rivieres (Wayagamack) mills. In 1993, the Company produced approximately
1.3 million tons of newsprint. The Company's revenues from the sale of newsprint
in 1993 (including 100% of Stone-Consolidated) were approximately $526.9
million. Newsprint is primarily purchased by newspaper publishers and commercial
printers.
The newsprint produced by the Company contain a significant percentage of
recycled fibre from deinked pulp using flotation de-inking technology ("FDI")
technology. Management believes that the ability to produce newsprint with
recycled content has become an important competitive factor. Management
anticipates that the demand for newsprint with recycled content will continue to
grow as a result of further legislative activity and customer preferences,
although at a slower rate than in recent years. While an increasing number of
producers are gaining the ability to supply newsprint with recycled content,
management believes its deinking facilities and the relative proximity of the
mills to reliable sources of waste paper from urban centers will give the
Company a competitive advantage with customers who demand newsprint with
recycled content, although there can be no assurances that the Company will be
able to maintain such a competitive advantage.
UNCOATED GROUNDWOOD PAPERS. The Company's principal uncoated groundwood
paper production facilities include five paper machines located at the
Grand-Mere (Laurentide) and Trois-Rivieres (Wayagamack), Quebec mills; smaller
quantities of uncoated groundwood papers are also produced on other machines
located at the Ellesmere Port (Bridgewater) and Shawinigan (Belgo) mills. The
Company produced approximately 461.0 thousand tons of uncoated groundwood papers
in 1993. All uncoated groundwood production facilities are owned by
Stone-Consolidated. The Company's net capacity increased in both 1991 and 1992
as a result of the introduction and ramping up of a new paper machine
47
<PAGE>
at the Laurentide mill. The Company had revenues from the sale of uncoated
groundwood papers of approximately $243.3 million in 1993. The Company's
operating margins on the sale of uncoated groundwood papers are significantly
higher than for newsprint.
In 1993, the Company produced approximately 461,000 tons of uncoated
groundwood papers. Uncoated groundwood papers are manufactured using production
processes similar to those used for newsprint but are generally of higher
quality and command higher prices and higher operating margins.
The principal grades of uncoated groundwood papers manufactured and sold by
the Company are directory papers, rotogravure and offset papers used in
newspaper inserts, retail store advertising fliers, Sunday magazines and other
periodicals, bulky book papers used for mass circulation paperback novels and
form papers for use in the manufacture of computer printout and other business
forms. During 1993, the Company's production of uncoated groundwood papers
consisted of 69% rotogravure and offset papers, 21% directory papers, 8% bulky
book papers and 2% forms papers. Major customers for rotogravure and offset
papers include major retailers, publishers of Sunday magazines and other
periodicals and major commercial printers. Major customers for directory papers
include telephone companies and independent publishers of telephone directories
and large commercial printers.
MARKET PULP. The Company owns and operates five market pulp mills in North
America including mill operations in Panama City, Florida; Port Wentworth,
Georgia; Bathurst, New Brunswick; Portage-du-Fort, Quebec and Trois-Rivieres,
Quebec and at its 25% owned operation in Castlegar, British Columbia. Total
sales of market pulp (including 25% of the Celgar mill) approximated $187.3
million in 1993.
The Company has invested substantial sums to increase the production
capacity of market pulp. In 1992, the addition of market pulp capacity was
completed at the Company's Port Wentworth mill. The cost of the project was
approximately $425 million. In addition, the Celgar mill was completely rebuilt
and approximately doubled in capacity at a cost of approximately Cdn.$693
million.
FIBER SUPPLY:
Wood fiber, particularly from wood chips, and waste paper constitute the
basic raw materials for linerboard, corrugating medium, unbleached kraft paper,
newsprint, uncoated groundwood paper and market pulp. Wood fiber resources are
available within economic proximity of the mills and the Company has not
experienced any significant difficulty in obtaining such resources, although
environmental concerns in the Pacific Northwest (including the designation of
the spotted owl as a threatened species) have reduced the supply of wood in that
region. Consistent with its strategy to obtain long-term wood fiber sources
without the costs associated with land ownership, the Company sold approximately
329 thousand acres of timberland during the years 1988 through 1992. This
acreage had been owned by Southwest Forest Industries, Inc., now named Stone
Southwest, Inc., which was acquired by the Company in 1987. At December 31,
1993, the Company had approximately 11 thousand and 339 thousand acres of
private fee timberland in the United States and Canada, respectively. The
Company assists certain landowners in the southeastern United States in managing
approximately 2.0 million acres of timberland.
Recycled fiber, one of the Company's principal raw material components along
with wood fiber, must be purchased in a price sensitive market. The Company
believes that the demand for recycled fiber will increase and expects that the
cost of purchasing recycled fiber will also increase as a result of increased
demand and market conditions. As a result of the recognition of greater recycled
fiber utilization in the United States, the Company and WMX Technologies, Inc.
(formerly Waste Management Corporation) have formed PRI, which assists the
Company in the procurement of waste fiber.
MARKETS AND COMPETITION
The major markets in which the Company sells its principal products are
highly competitive. Its products compete with similar products manufactured by
others and, in some instances, with products manufactured from other materials.
Areas of competition include price, innovation, quality and service.
48
<PAGE>
The Company's products and the raw materials needed to manufacture those
products have historically exhibited price and demand cyclicality. Cyclical
economic factors such as growth in the economy generally, interest rates,
unemployment levels and fluctuations in currency exchange rates have had a
significant impact on prices and sales of the Company's products. The
availability and cost of wood fiber, including wood chips, and waste paper may
be subject to substantial variation, depending upon economic, political and
conservation considerations.
The Company's business is not dependent upon a single customer or upon a
small number of major customers. The loss of any one customer would not have a
material adverse effect on the Company.
Backlogs are not a significant factor in the industry in which the Company
operates; most orders placed with the Company are for delivery within 60 days or
less.
The Company owns patents, licenses, trademarks and tradenames on products.
The loss of any patent, license, trademark and tradename would not have a
material adverse effect on the Company's operations.
EMPLOYEES
As of December 31, 1993, the Company had approximately 29,000 employees, of
whom approximately 21,100 were employees of U.S. operations and the remainder
were employees of foreign operations. Of those in the United States,
approximately 12,300 are union employees.
LEGAL PROCEEDINGS
On October 27, 1992, the Florida Department of Environmental Regulation
("DER") filed a civil complaint in the Fourteenth Judicial Circuit Court of Bay
County, Florida 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, Florida pulp and paper
mill site. In addition, the complaint alleges operation of a solid waste
facility without a permit and discrepancies in hazardous waste shipping
manifests. Because of uncertainties in the interpretation and application for
DER's rules, it is premature to assess the Company's potential liability, if
any, in the event of an adverse ruling. At the parties' request, the case has
been placed in abeyance pending the conclusion of a related administrative
proceeding petitioned by the Company following DER's proposal to deny the
Company a permit renewal to continue operating its wastewater pretreatment
facility at the mill site. The administrative proceeding has been 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. As of July 19,
1994, the hearing officer had postponed the administrative hearing pending
settlement negotiations between the parties. The Company intends to vigorously
assert its entitlement to the permit renewal and to defend against the
groundwater contamination and unpermitted facility allegations.
In November 1990, the EPA announced its decision to list two bodies of water
in Arizona, Dry Lake and Twin Lakes, as "waters of the United States" impacted
by toxic pollutant discharges under Section 304(l) of the federal Clean Water
Act. These bodies of water have been used by the Company's Snowflake, Arizona
pulp and paper mill for the evaporation of its process wastewater. The EPA is
preparing a draft consent decree to resolve the alleged past unpermitted
discharges which will include the EPA's proposal that the Company pay civil
penalties in the amount of $900,000. The Company has vigorously disputed the
application of the Clean Water Act to these two privately owned evaporation
ponds. The Company has begun implementation of a plan to use its wastewater to
irrigate a biomass plantation and discontinue using Dry Lake to evaporate
wastewater. It is premature to predict the amount of penalties that will
eventually be assessed.
By letter dated January 4, 1994, the Company received a notice of violation
from the Water Management Division of the EPA, Region 9 alleging violations of
discharge limits and monitoring
49
<PAGE>
requirements of the applicable NPDES permit at the Company's Flagstaff, Arizona
sawmill during the period from January 1990 through December 1992. The Company
and the EPA have reached a settlement in principle under which the Company will
pay penalties of $98,000.
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" on
August 13, 1991 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 to refund any amounts paid in excess of that rate, plus
interest and penalties.
In its answer filed with the FERC on June 2, 1994, the Company stated that
its power sales to CP&L fully complied with the FERC's regulations. The Company
also requested the FERC to waive compliance with any applicable FERC regulations
in the event that the FERC should determine, contrary to the Company's position,
that the Company has not complied with the FERC's regulations in any respect.
CP&L has also filed several other pleadings to which the Company has responded.
If the FERC were to determine that the Company had become a "public utility,"
the Company's issuance of securities and incurrence of debt after the date that
it became a "public utility" could be subject to the jurisdiction and approval
of the FERC unless the FERC granted a waiver. In the absence of such a waiver,
certain other activities and contracts of the Company after such date could also
be subject to additional federal and state regulatory requirements, and defaults
might be created under certain existing agreements. Based on past administrative
practice of the FERC in granting waivers of certain other regulations, the
Company believes that it is likely that such a waiver would be granted by the
FERC in the event that such a waiver became necessary. However, the FERC
Proceeding is in its preliminary stages and no assurance can be provided as to
the timing of the FERC's decision or the outcome.
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. On June 9, 1994, the
Company moved to dismiss CP&L's Federal Court Action on the principal grounds
that any proceedings in the United States District Court are premature unless
and until the FERC Proceeding is finally resolved.
The Company intends to contest these actions vigorously. Due to the pendency
of the litigation, a planned transaction involving a favorable energy contract
related to the Facility and the Agreement did not occur.
On April 13, 1994, a digester vessel ruptured at the Company's pulp and
paperboard mill in Panama City, Florida resulting in the deaths of three
employees and injuries to other employees and causing extensive damage to
certain of the facility's assets. The occurrence has been investigated by the
Occupational Safety and Health Administration ("OSHA"). On August 4, 1994, OSHA
held a closing conference with the Company to discuss OSHA's preliminary
findings. Even though the findings have not been finalized, OSHA has disclosed
that certain "apparent" violations of OSHA standards have been found. The
category of each apparent violation has not yet been determined. The Company has
not yet
50
<PAGE>
fully reviewed the apparent violations. The Company believes it will not receive
the final determination of any violations until mid-September. Upon final review
of such final determinations, the Company will decide whether to contest OSHA's
claims. In addition, on August 29, 1994, OSHA informed the Company that it was
being cited for violations connected with the start-up of operations at the
Panama City mill. These violations are not related to the expected final
determinations mentioned above. The Company intends to vigorously defend the
imposition of penalties relating to these violations.
On July 14, 1994, the European Commission ("EC") imposed fines on a group of
19 manufacturers of carton-board, a product used to manufacture folding cartons,
in the aggregate amount of $164.8 million. The Company's German subsidiary,
Europa Carton AG, ("Europa Carton"), was fined $2.5 million. The fines were a
result of alleged price fixing activities by these manufacturers. At this time,
the Company believes that Europa Carton did not participate in the alleged price
fixing scheme and the Company is considering an appeal of its fine and is
awaiting formal notification from the EC of its reason for imposing the fine on
Europa Carton. While Europa Carton is a member of the association implicated by
the EC and did implement price increases which were generally implemented by
members of the association, Europa Carton is not a large manufacturer of this
product and is not represented on the council of the association.
The Company is involved in contractual disputes, administrative and legal
proceedings and investigations of various types. Although any litigation,
proceeding or investigation has an element of uncertainty, the Company believes
that the outcome of any proceeding, lawsuit or claim which is pending or
threatened, or all of them combined, would not have a material adverse effect on
its consolidated financial position or results of operations.
For additional information relating to the Company see "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Results of Operations," "-- Investing Activities" and "-- Environmental Issues"
and the Notes to the Consolidated Financial Statements, "Note 2 -- Subsequent
Events," pages F-22 - F-23, "Note 3 -- Acquisitions/Mergers/Dispositions," page
F-23, "Note 4 -- Public Offering of Subsidiary Stock," page F-24, "Note 16 --
Related Party Transactions," pages F-45 - F-46 and "Note 19 -- Segment
Information," pages F-49 - F-52.
51
<PAGE>
PROPERTIES
The Company, including its subsidiaries and affiliates, maintains
manufacturing facilities and sales offices throughout North America, continental
Europe and the United Kingdom, as well as sales offices in Japan and China. A
listing of such worldwide facilities as of December 31, 1993 is provided on
pages 52-53 of this Prospectus.
The approximate annual production capacity of the Company's mills is
summarized in the following table:
<TABLE>
<CAPTION>
PAPERBOARD
AND PAPER WHITE PAPER
PACKAGING AND PULP TOTAL
------------ ------------ ------------
DECEMBER 31,
----------------------------------------
1993 1992 1993 1992 1993 1992
----- ----- ----- ----- ----- -----
(IN THOUSANDS OF SHORT TONS)
<S> <C> <C> <C> <C> <C> <C>
United States (1).......................................... 4,583 4,572 853 847 5,436 5,419
Canada (2)(3).............................................. 429 436 2,176 1,783 2,605 2,219
Europe (3)................................................. 314 310 307 306 621 616
Other (4).................................................. -- 58 -- -- -- 58
----- ----- ----- ----- ----- -----
5,326 5,376 3,336 2,936 8,662 8,312
----- ----- ----- ----- ----- -----
----- ----- ----- ----- ----- -----
<FN>
- ------------------------
(1) Includes 100% of Seminole and Savannah River mills.
(2) Includes 25% of the Celgar mill.
(3) Includes 100% of Stone-Consolidated.
(4) Includes 49% of the Titan mill at December 31, 1992.
</TABLE>
All mills and converting facilities are owned, or partially owned through
investments in other companies, by the Company, except for 45 converting plants
in the United States, which are leased.
The Company owns certain properties that have been mortgaged or otherwise
encumbered. These properties include 12 paper mills, 9 bag plants and 45
corrugated container plants, including those subject to a leasehold mortgage.
The Company's properties and facilities are properly equipped with machinery
suitable for their use. Such facilities and related equipment are well
maintained and adequate for the Company's current operations.
For additional information relating to the Company's properties for the year
ended December 31, 1993 see the Notes to the Consolidated Financial Statements,
"Note 3 -- Acquisitions/Mergers/Dispositions," page F-23, "Note 4 -- Public
Offering of Subsidiary Stock," page F-24, "Note 10 -- Long-term Debt," pages
F-32 - F-40 and "Note 13 -- Long-term Leases," pages F-41 - F-42.
52
<PAGE>
WORLDWIDE FACILITIES
UNITED STATES
ALABAMA
Birmingham-
ARIZONA
EagarV
Glendale-
Phoenixt
SnowflakeZ
SnowflakeZ
THE APACHE
RAILWAY
COMPANY
ARKANSAS
Jacksonvillet
(LITTLE ROCK)
Little Rock-
Rogers-
CALIFORNIA
City of Industry-
(LOS ANGELES)
Fullerton-
Los Angelest
Salinas-
San Jose-
Santa Fe Springs--
COLORADO
Denver-
South ForkV
CONNECTICUT
Portland-
Torrington-
UncasvilleZ
FLORIDA
Cantonmentt
(PENSACOLA)
GracevilleV
JacksonvilleZ
Panama CityZ
Yuleet
Orlando-
PACKAGING SYSTEMS
Jacksonville-
PREPRINT
GEORGIA
Atlanta---
Port WentworthZ
AtlantaZ
TECHNOLOGY AND
ENGINEERING CENTER
ILLINOIS
Bedford Park-
(CHICAGO)
Bloomington-
Cameo-
(CHICAGO)
Danville-
*Herrin-
Joliet-
Naperville-
(CHICAGO)
North Chicago-
Plainfieldt
Quincyt
*Ziont
Burr RidgeZ
TECHNOLOGY AND
ENGINEERING CENTER
Oakbrook-
MARKETING AND
TECHNICAL CENTER
INDIANA
Columbus-
Indianapolis-
Mishawaka-
South Bend-
IOWA
Des Moines-t
Keokuk-
Sioux City-
KANSAS
Kansas City-
KENTUCKY
Louisville-t
LOUISIANA
Arcadiat
HodgetZ
New Orleans-
MARYLAND
Savaget
(BALTIMORE)
MASSACHUSETTS
Mansfield-
Westfield-
MICHIGAN
Detroit-
Grand Rapidst
OntonagonZ
Melvindale-
(DETROIT)
MINNESOTA
Minneapolis-
Rochester-
St. Cloud-
St. Paul-
Minneapolis-
PREPRINT
MISSISSIPPI
Jackson-
Tupelo--
MISSOURI
Blue Springs-
Kansas Cityt
Liberty-
(KANSAS CITY)
Springfield-
St. Joseph-
St. Louis-
MONTANA
MissoulaZ
NEBRASKA
Omaha-
NEW JERSEY
Elizabetht
Teterboro-
NEW MEXICO
ReserveV
NEW YORK
Buffalo-
NORTH CAROLINA
Charlotte-
Lexington-
Raleigh-
NORTH DAKOTA
Fargo-
OHIO
Cincinnati-
CoshoctonZ
Jefferson-
Mansfield-
Marietta-
New Philadelphiat
OKLAHOMA
Oklahoma City-
Sand Springs-
(TULSA)
OREGON
Grants PassV
MedfordV
White CityV
PENNSYLVANIA
Philadelphia--
Williamsport-
YorkZ
SOUTH CAROLINA
Columbia-V
FlorenceZ
Fountain Inn-
OrangeburgV
SOUTH DAKOTA
Sioux Falls-
TENNESSEE
Chattanooga-
Collierville-
(MEMPHIS)
Nashville-
53
<PAGE>
WORLDWIDE FACILITIES
TEXAS
Dallas-
El Paso--.
Grand Prairie-
(DALLAS)
Houston-
Temple-
Tyler-
UTAH
Salt Lake Cityt
Salt Lake Cityt
BAG PACKAGING SYSTEMS
VIRGINIA
HopewellZ
Martinsville-
Richmond--t
WEST VIRGINIA
Wellsburgt
WISCONSIN
Beloit-
Germantown-
(MILWAUKEE)
Nennah-
CANADA
ALBERTA
*Calgary-
*Edmonton-
BRITISH COLUMBIA
*CastlegarZ
*New Westminster-
MANITOBA
*Winnipeg-
NEW BRUNSWICK
BathurstZV
*Saint John-
NOVA SCOTIA
*Dartmouth-
ONTARIO
*Etobicoke-
*Guelph-
*Pembroke-
*Rexdale-
*Whitby-
QUEBEC
ChibougamauV
Grand-MereZ
La BaieZ
Portage-du-FortZ
RobervalV
Saint-FulgenceV
*Saint-Laurent-
ShawiniganZ
Trois-RivieresZ
*Ville Monte-Royal-
RESEARCH CENTER
SASKATCHEWAN
*Regina-
GERMANY
*Augsburg.
*Bremen.
Dusseldorf-
*Frankfurt.
Germersheim-
Hamburg-
*Heppenheim.
HoyaZ
Julich-
Lauenburg-
Lubbecke-
Neuburg-
Platting-
ViersenZ
Waren-
HAMBURG
INSTITUTE FOR
PACKAGE AND
CORPORATE DESIGN
UNITED
KINGDOM
Ellesmere PortZ
NETHERLANDS
*Sneek.
BELGIUM
Ghlin-
Grand-Bigard-
FRANCE
*Bordeaux.
*Cholet.
Molieres-Sur-Ceze-
Nimes-
*Soissons.
*Strasbourg.
COSTA RICA
Palmar NorteV
San JoseV
ADMINISTRATIVE
OFFICE
VENEZUELA
*Puerto OrdazV
ADMINISTRATIVE OFFICE
CORPORATE HEADQUARTERS
Chicago, Illinois
FAR EAST OFFICES
Beijing, China
Tokyo, Japan
STONE CONTAINER
JAPAN COMPANY,
LTD.
<TABLE>
<C> <S>
- Corrugated Container
Z Paperboard/Paper/Pulp
t Bag
V Forest Products
. Folding Carton
*affiliates
</TABLE>
54
<PAGE>
MANAGEMENT
INFORMATION AS TO DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the directors of the Company and their
beneficial ownership of Common Stock as of March 1, 1994.
<TABLE>
<CAPTION>
NUMBER OF
SHARES OF
YEAR FIRST COMMON STOCK
ELECTED A BENEFICIALLY PERCENT OF COMMON
NAME PRINCIPAL OCCUPATION DIRECTOR OWNED(C) STOCK OUTSTANDING
- --------------------------- -------------------------------------------- ----------- ------------ -----------------
<S> <C> <C> <C> <C>
Richard A. Giesen*++ Chairman of the Board & Chief Executive 1974 12,717 (a)
Officer of Continere Corporation
James J. Glasser++ Chairman of the Board, President and Chief 1986 10,200 (a)
Executive Officer of GATX Corporation
George D. Kennedy+# Chairman of the Board of Mallinckrodt Group 1989 1,020 (a)
Inc. formerly IMCERA Group Inc.
Howard C. Miller, Jr.*+ Consultant 1981 2,066 (a)
John D. Nichols+# Chairman of the Board and Chief Executive 1989 2,040 (a)
Officer of Illinois Tool Works Inc.
Jerry K. Pearlman*+++ Chairman of the Board and Chief Executive 1984 3,672 (a)
Officer of Zenith Electronics Corporation
Richard J. Raskin Attorney 1983 575,448 (a)(b)
Alan Stone* Senior Vice President 1969 1,062,143 1.2 %(b)
Avery J. Stone President of IDC Management 1969 906,415 1.0 %(b)
Ira N. Stone Senior Vice President 1969 1,004,296 1.1 %(b)
James H. Stone* President of Stone Management Corporation 1969 563,377 (a)(b)
Roger W. Stone* Chairman of the Board, President and Chief 1969 1,715,127 1.9 %(b)
Executive Officer
<FN>
- ------------------------
* Member of the Executive Committee
+ Member of the Audit Committee
++ Member of the Compensation Committee
# Member of the Nominating Committee
(a) Does not exceed one percent (1%) of the outstanding stock.
(b) There is included in the stock beneficially owned in the foregoing table,
Common Stock owned by spouses and associates, except those associates
separately listed in the table, beneficial ownership of which is
disclaimed. See footnote (b) under "Security Ownership by Certain
Beneficial Owners and Management -- Security Ownership by Management".
(c) Each person has sole voting and investment power with respect to the shares
listed.
</TABLE>
55
<PAGE>
The following information indicates the principal occupation and employment
for the directors and executive officers for the last five years, unless
otherwise indicated.
DIRECTORS:
RICHARD A. GIESEN, born October 7, 1929, is Chairman of the Board and Chief
Executive Officer of Continere Corporation, a packaging distribution company.
Mr. Giesen is a director of GATX Corporation and Continere Corporation.
JAMES J. GLASSER, born June 5, 1934, is Chairman of the Board, President and
Chief Executive Officer of GATX Corporation, a leasing and financial services
company. Mr. Glasser is a director of General American Transportation
Corporation, GATX Leasing Corporation, The B.F. Goodrich Company, Harris
Bankcorp, Inc., Harris Trust & Savings Bank, and Bank of Montreal.
GEORGE D. KENNEDY, born May 30, 1926, is Chairman of the Board of
Mallinckrodt Group Inc. formerly IMCERA Group Inc., a diversified health care
company. Mr. Kennedy is a director of Illinois Tool Works Inc., Kemper
Corporation, Kemper National Insurance Co., Brunswick Corporation, American
National Can Corporation, Scottsman Industries, Inc., and Medical Care America,
Inc.
HOWARD C. MILLER, JR., born September 2, 1926, is a consultant in private
practice, consulting in general business matters. Mr. Miller is a director of
Automobile Protection Corporation.
JOHN D. NICHOLS, born September 20, 1930, is Chairman of the Board and Chief
Executive Officer of Illinois Tool Works Inc., a diversified manufacturing
company. Mr. Nichols is a director of Philip Morris Companies, Inc., Household
International, Inc. and Rockwell International Corporation.
JERRY K. PEARLMAN, born March 27, 1939, is Chairman of the Board and Chief
Executive Officer of Zenith Electronics Corporation, a manufacturer of consumer
electronics and cable television products. Mr. Pearlman is a director of First
Chicago Corporation and The First National Bank of Chicago.
RICHARD J. RASKIN, born April 4, 1945, is an attorney in private practice
with the law firm of Richard J. Raskin, Attorney at Law. See Footnote (b) under
"Security Ownership by Certain Beneficial Owners and Management -- Security
Ownership by Management".
ALAN STONE, born February 5, 1928, Senior Vice President, Purchasing; is
responsible for corporate purchasing. See Footnote (b) under "Security Ownership
by Certain Beneficial Owners and Management -- Security Ownership by
Management".
AVERY J. STONE, born November 7, 1932, is President of IDC Management Co., a
management and investment company. See Footnote (b) under "Security Ownership by
Certain Beneficial Owners and Management -- Security Ownership by Management".
IRA N. STONE, born February 4, 1932, Senior Vice President since 1991, is
responsible for Corporate Marketing, Communication and Public Affairs. See
Footnote (b) under "Security Ownership by Certain Beneficial Owners and
Management -- Security Ownership by Management".
JAMES H. STONE, born March 4, 1939, is President of Stone Management
Corporation, a management consulting firm (not affiliated with the Company). Mr.
Stone is a director of Fullerton Metals Company. See Footnote (b) under
"Security Ownership by Certain Beneficial Owners and Management -- Security
Ownership by Management".
ROGER W. STONE, born February 16, 1935, is Chairman of the Board, President
and Chief Executive Officer. Mr. Stone is a director of First Chicago
Corporation, The First National Bank of Chicago, Continere Corporation,
McDonald's Corporation, Morton International, Inc., Stone-Consolidated
Corporation, and Option Care, Inc. See Footnote (b) under "Security Ownership by
Certain Beneficial Owners and Management -- Security Ownership by Management".
56
<PAGE>
OTHER EXECUTIVE OFFICERS:
ARNOLD F. BROOKSTONE, born April 8, 1930, Executive Vice President, Chief
Financial and Planning Officer since 1991. Previously, Mr. Brookstone was Senior
Vice President, Chief Financial and Planning Officer. Mr. Brookstone is a
director of Stone-Consolidated Corporation, Continere Corporation, Donnelly
Corporation, MFRI, Inc., and Rembrandt Funds.
JAMES DOUGHAN, born November 9, 1933, President and Chief Executive Officer
of Stone-Consolidated Corporation since 1993. Previously, Mr. Doughan was
Executive Vice President, Containerboard and Paper and Pulp Marketing and Sales.
Mr. Doughan is a director of Stone-Consolidated Corporation.
MORTY ROSENKRANZ, born February 21, 1928, Executive Vice President,
Administration since 1993. Previously, Mr. Rosenkranz was Executive Vice
President North American Integrated Packaging.
JOHN D. BENCE, born June 18, 1932, Senior Vice President, European Packaging
Operations, joined the Company in December 1988 and was elected Vice President
in March 1989 and Senior Vice President in January 1991.
THOMAS W. CADDEN, SR., born September 4, 1933, Senior Vice President and
General Manager Industrial and Retail Packaging since 1993. Previously, Mr.
Cadden was Senior Vice President and General Manager of the Corrugated Container
Division.
THOMAS P. CUTILLETTA, born July 5, 1943, Senior Vice President and Corporate
Controller, is the Company's Chief Accounting Officer. Mr. Cutilletta was
elected Senior Vice President in January 1991.
HAROLD E. GREGG, born May 17, 1929, Senior Vice President since 1993 working
on special projects for the Chairman of the Board. Previously Mr. Gregg was
Senior Vice President Marketing and Corporate Sales.
GERALD M. FREEMAN, born April 18, 1937, Senior Vice President and General
Manager, Forest Products Division since 1987, is responsible for the operations
of that division.
JAMES B. HEIDER, born July 27, 1943, Senior Vice President and General
Manager, Containerboard and Paper Division since December, 1988.
MATTHEW S. KAPLAN, born March 13, 1957, Senior Vice President and General
Manager, Corrugated Container Division, since June, 1993. Previously, Mr. Kaplan
was Vice President and General Manager, Retail Bag Division. Mr. Kaplan is the
son-in-law of Roger W. Stone.
WILLIAM J. KLAISLE, born September 13, 1941, Vice President Corporate
Development since April 1993. Previously, Mr. Klaisle was Vice President,
Corporate Marketing and Communications.
LESLIE T. LEDERER, born July 20, 1948, Vice President, Secretary and Counsel
since 1987.
MICHAEL B. WHEELER, born February 15, 1945, Vice President since 1984 and
Treasurer and Assistant Secretary since 1981.
MEETINGS AND COMMITTEES OF DIRECTORS
The Audit Committee of the Board meets, as necessary, to receive and review
the results of the audits of the Company's books and records performed by the
independent auditors, to review matters relating to internal auditing,
accounting policies, procedures and adjustments, and to participate in the
selection of independent auditors for the following year.
The Compensation Committee of the Board meets, as necessary, to review the
Company's programs for the development of management personnel and to consider
recommendations and proposals to be made to the Board on directors' fees and
management compensation.
The Nominating Committee of the Board meets, as necessary, to seek out,
review the qualifications of, and propose to the Board, nominees for election as
directors. The Company's By-Laws provide, in general, that any stockholder
entitled to vote in the election of directors generally may nominate one or more
persons for election as directors at a meeting of stockholders at which
directors are to be elected
57
<PAGE>
only if written notice of such stockholder's intent to make such nomination has
been received by the Secretary of the Company not less than 60 nor more than 90
days prior to such meeting. The By-Laws further specify the requirements of such
notice.
The Executive Committee of the Board exercises the power and authority of
the Board of Directors as may be necessary during intervals between meetings of
the Board of Directors, subject to such limitations as are provided by law, the
Company's By-Laws or resolutions of the Board of Directors.
Non-employee directors receive an annual retainer of $25,000 for their
services plus $1,000 per meeting for attendance at Board and Board Committee
meetings. In addition, the Chairman of the Audit Committee and the Chairman of
the Compensation Committee receive an additional $3,000 per year retainer. Under
the Company's unfunded deferred director fee plans, a director may elect to
defer payment of his director's fees so that payment would be made in ten equal
annual installments commencing in the year following the director's retirement
from the Board of Directors plus earnings on the deferred amounts. In addition,
it is the policy of the Company to appoint a director with ten or more years
service as a director to be a consultant to the Company for a period of five
years after retirement from the Board, at an annual fee based upon the
director's retainer in effect at the date of retirement.
CERTAIN TRANSACTIONS
During 1984, the Company loaned to Mr. James Doughan, President & Chief
Executive Officer of Stone-Consolidated the amount of $347,250 in connection
with Mr. Doughan's relocation to Chicago upon his assuming his duties with the
Company. Mr. Doughan subsequently repaid a portion of such loan; the outstanding
balance as of March 1, 1994 was $275,000. During 1988, the Company made a loan
to Mr. James B. Heider, Senior Vice President and General Manager,
Containerboard and Paper Division, in the amount of $320,000 in connection with
his move to Chicago. Mr. Heider has subsequently repaid a portion of such loan;
the outstanding balance as of March 1, 1994 was $250,000. Such loans bear no
interest and are repayable on demand by the Company. The interest rate imputed
on such loans was 4.98% during 1993.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Roger W. Stone, Chairman of the Board, President and Chief Executive Officer
of the Company, serves as a director of Continere Corporation, whose Chairman
and Chief Executive Officer, Richard A. Giesen, serves on the Compensation
Committee of the Company.
58
<PAGE>
SECURITY OWNERSHIP BY CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
SECURITY OWNERSHIP BY CERTAIN BENEFICIAL OWNERS
As of February 14, 1994, the following persons were known to the Company to
own beneficially more than 5% of the outstanding Common Stock of the Company:
<TABLE>
<CAPTION>
NUMBER OF SHARES OF
COMMON STOCK PERCENT OF COMMON
NAME AND ADDRESS BENEFICIALLY OWNED(1) STOCK OUTSTANDING
- ------------------------------------------------------------------ ----------------------- ---------------------
<S> <C> <C>
FMR Corp.......................................................... 10,184,373(2) 11.58%
82 Devonshire Street
Boston, MA 02109-3614
Sanford C. Bernstein & Co., Inc................................... 6,337,584 7.2 %
767 Fifth Avenue
New York, NY 10153
Reliance Financial Services Corp.................................. 4,761,904(3) 5.4 %
Park Avenue Plaza
55 East 52nd Street
New York, NY 10055
<FN>
- ------------------------
(1) Information with respect to beneficial ownership is based upon information
furnished by each owner.
(2) Includes (i) 5,350,817 shares resulting from the assumed conversion of
$61,802,000 principal amount of the Company's 8 7/8% Convertible Senior
Subordinated Notes due 2000, (ii) 7,949 shares resulting from the assumed
conversion of shares of the Company's $1.75 Series E Cumulative Convertible
Exchangeable Preferred Stock and (iii) 60,694 shares resulting from the
assumed conversion of $2,060,000 principal amount of the Company's 6.75%
Convertible Subordinated Debentures.
(3) All 4,761,904 shares are based upon the assumed conversion of the Company's
8 7/8% Convertible Senior Subordinated Notes due 2000.
</TABLE>
SECURITY OWNERSHIP BY MANAGEMENT
As of March 1, 1994, each of the executive officers named in the Summary
Compensation Table below, individually, and all directors and executive officers
as a group, beneficially owned the following shares of Common Stock of the
Company:
<TABLE>
<CAPTION>
NUMBER OF
SHARES
OF COMMON STOCK PERCENT OF
BENEFICIALLY COMMON STOCK
NAME OWNED OUTSTANDING
- ----------------------------------- --------------- -------------
<S> <C> <C>
Arnold F. Brookstone............... 112,400 (a)
James Doughan...................... 49,296 (a)
James B. Heider.................... 44,795 (a)
Morty Rosenkranz................... 68,168 (a)
Roger W. Stone..................... 1,715,127 1.9%(b)
All directors and executive
officers as a group............... 11,203,767 12.4%(b)
<FN>
- ------------------------
(a) Does not exceed one percent (1%) of the outstanding stock.
(b) The shares of Common Stock owned by all directors and executive officers as
a group include those of Jerome H. Stone and Marvin N. Stone, each of whom
is a Founding Director and as such is, pursuant to the Company's By-Laws,
entitled to attend and participate at meetings of directors but has no
vote. Jerome H. Stone, Marvin N. Stone and Norman H. Stone (deceased) are
brothers. Alan Stone and Ira N. Stone are sons of Norman H. Stone. Avery J.
Stone and Roger W. Stone are sons of Marvin N. Stone. James H. Stone is the
son and Richard J. Raskin is the son-in-law of Jerome H.
</TABLE>
59
<PAGE>
<TABLE>
<S> <C>
Stone. Matthew S. Kaplan is the son-in-law of Roger W. Stone. The members
of the Stone family own an aggregate (but not as a group) of approximately
13,000,000 shares of Common Stock (approximately 15% of the outstanding
shares).
</TABLE>
EXECUTIVE COMPENSATION
The following table sets forth the compensation paid to, as well as the
value of stock awards earned by, the Company's Chief Executive Officer and the
Company's four other most highly compensated executive officers during the past
three fiscal years.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
ANNUAL COMPENSATION --------------------------------------
--------------------------------- RESTRICTED STOCK LONG-TERM INCENTIVE
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS AWARDS(1)(2) PLAN PAYOUTS(3)
- ----------------------------------------- --------- ----------- --------- ---------------- --------------------
<S> <C> <C> <C> <C> <C>
Roger W. Stone .......................... 1993 $ 730,000 -- $ 395,604 -0-
Chairman, President 1992 730,000 -- 389,360 172,150
Chief Executive Officer 1991 730,000 -- 381,547 177,000
Morty Rosenkranz ........................ 1993 410,000 -- 156,545 -0-
Executive Vice President 1992 391,250 -- 154,836 65,340
1991 363,250 -- 150,121 69,000
James Doughan ........................... 1993 373,000 -- 131,000 -0-
Executive Vice President 1992 358,000 -- 118,856 65,340
1991 341,750 -- 114,276 69,000
Arnold F. Brookstone .................... 1993 310,000 -- 113,004 -0-
Executive Vice President 1992 295,000 -- 104,295 61,270
1991 280,250 -- 99,774 69,000
James B. Heider ......................... 1993 275,000 -- 87,770 -0-
Senior Vice President 1992 253,250 -- 87,210 25,300
1991 225,500 -- 76,751 29,850
<FN>
- ------------------------
(1) Stock awards made under the Long-Term Incentive Plan do not vest until the
fifth anniversary of the award.
(2) Dividends on shares of restricted stock are paid at the same time and at
the same rate as dividends on all other shares of the Company's Common
Stock. The aggregate number as of December 31, 1993 and value as of the
date of the grant of each named executive's restricted stock holdings are
as follows: Mr. Stone, 119,081 shares, $2,332,807.25; Mr. Rosenkranz,
36,550 shares, $729,229.00; Mr. Doughan, 29,120 shares $598,140.25; Mr.
Brookstone, 24,671 shares, $510,369.75; Mr. Heider, 20,458 shares,
$370,071.50.
(3) Cash payouts under the Long-Term Incentive Plan reflected in this column
are on account of awards made and earned over the preceding five year
period.
</TABLE>
60
<PAGE>
LONG TERM INCENTIVE PLAN -- AWARDS IN LAST FISCAL YEAR
The following table sets forth the long-term incentive plan performance unit
awards made to each of the named executives in 1993.
<TABLE>
<CAPTION>
PERFORMANCE OR ESTIMATED FUTURE PAYOUTS UNDER
OTHER PERIOD NON-STOCK PRICE BASED PLANS(1)
UNTIL -----------------------------------
NUMBER OF MATURATION OR THRESHOLD TARGET MAXIMUM
NAME UNITS PAYOUT ($) ($) ($)
- ------------------------------------------------- ----------- --------------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C>
Roger W. Stone................................... 3956 5 years 197,800 395,600 593,400
Morty Rosenkranz................................. 1566 5 years 78,300 156,600 234,900
James Doughan.................................... 1197 5 years 59,850 119,700 179,550
Arnold F. Brookstone............................. 1048 5 years 52,400 104,800 157,200
James B. Heider.................................. 878 5 years 43,900 87,800 131,700
<FN>
- ------------------------
(1) Cash payout under the Company's Long-Term Incentive Plan.
</TABLE>
In addition to the restricted stock awards reflected in the Summary
Compensation Table, the Company's Long-Term Incentive Plan provides for
incentive awards to each named executive officer, in the form of performance
units, based upon the long-term performance of the Company. Such awards may be
earned upon the expiration of the five year period after the date of award to
the extent that the Company has achieved the designated performance goals for
such five-year performance cycle. Awards are granted each year based upon each
participant's level of responsibility and average salary mid-point level
projected as of the end of each five year performance cycle with awards ranging
from 40% to 100% of such salary mid-point. Performance unit awards are payable
in cash, if earned, upon the completion of each five year performance cycle. The
targeted performance goal for each performance cycle is realization by the
Company of a designated average corporate return on beginning equity. Cash
payments (from 0% to 150% of the performance unit award) are then determined by
the degree to which the Company attains or exceeds the targeted goal, ranging
from a minimum of 88% to a maximum of 133% of such goal. No cash payments will
be made if the Company does not achieve at least 88% of such goal. For example,
the cash payment, if any, to be paid to a participant under the plan will be in
an amount equal to (i) 100% of the value of the performance unit at the time of
its award if the Company attains the targeted goal at the end of the performance
cycle; (ii) 150% of such value if the Company attains 133% of such targeted
goal; (iii) 50% of such value if the Company attains 88% of such targeted goal,
or (iv) nothing, if the Company does not attain 88% of its targeted goal.
SALARIED EMPLOYEES RETIREMENT PLAN:
The Stone Container Corporation Salaried Employees Retirement Plan provides
for the payment of a monthly pension to retiring salaried employees equal to the
larger of (a) 1.67% of his or her average monthly compensation based on the
highest 60 consecutive months compensation (within the last 180 months) for each
year of service to a maximum of 30 years service, reduced by 3/4 of 1% of the
employee's covered compensation under social security or (b) 1% of such average
monthly compensation (not greater than $900) for each year of service. This
benefit is then reduced, if applicable, by the monthly retirement income that
could be provided on an actuarial equivalent basis from the employee's
participation in certain previously sponsored retirement plans of the Company.
Employees become vested for retirement income benefits after completion of 5
years of service or, if earlier, upon reaching age 65. The payment or accrual in
respect of any specified person is not and cannot readily be separately or
individually calculated by the actuaries for this defined benefit plan. Upon the
recommendation of the independent actuaries, the Company did not make a cash
contribution to the Plan for the year 1993. The following table shows the
estimated annual benefits payable upon retirement to persons in specified
remuneration and years-of-service classifications.
61
<PAGE>
PENSION PLAN TABLE
ILLUSTRATIVE PROJECTED ANNUAL RETIREMENT BENEFIT
FOR SELECTED REMUNERATION AND YEARS OF SERVICE CLASSIFICATIONS (A)
<TABLE>
<CAPTION>
YEARS OF SERVICE AT RETIREMENT
---------------------------------------------------------------
REMUNERATION (B) 15 20 25 30 35
- ---------------------------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
$ 100,000................... $ 25,050 33,400 41,750 50,100 50,100
150,000................... 37,575 50,100 62,625 75,150 75,150
200,000................... 50,100 66,800 83,500 100,200 100,200
250,000................... 62,625 83,500 104,375 125,250 125,250
300,000................... 75,150 100,200 125,250 150,300 150,300
400,000................... 100,200 133,600 167,000 200,400 200,400
600,000................... 150,300 200,400 250,500 300,600 300,600
800,000................... 200,400 267,200 334,000 400,800 400,800
1,000,000.................. 250,500 334,000 417,500 501,000 501,000
<FN>
- ------------------------
(a) Benefit shown would be reduced by 3/4 of 1% of the retiree's covered
compensation under social security while employed by the Company, as
defined in the Plan, and would be limited to the extent required by the
provisions of the Internal Revenue Code of 1986. Under federal law, an
employee's benefits under a qualified pension plan such as the Stone
Container Corporation Salaried Employees Retirement Plan are limited to
certain maximum amounts. The Company maintains the Stone Container
Corporation Excess Benefit Plan, which supplements the benefits of any
participant in the qualified pension plan by direct payment of a lump sum
or by an annuity, on an unfunded basis, of the amount by which any
participant's benefits under the pension plan are limited by law. The table
illustrates the amount of annual pension without regard to such limitations
for an employee retiring in 1994 calculated on a single life annuity basis.
(b) In estimating the annual benefit it is assumed that the five year average
monthly compensation is equal to 1993 earnings.
</TABLE>
The base compensation covered by the Plan includes salary and any bonus
earned. Since no bonuses were paid to the individuals named in the summary
compensation table for the years 1991, 1992 and 1993, the base compensation
covered by the Plan for those years is equal to the amounts set forth in the
Salary column of that table. The years of service as of January 1, 1994 for such
individuals are: 37.4 for Mr. Stone, 29.9 for Mr. Rosenkranz, 9.9 for Mr.
Doughan, 28.7 for Mr. Brookstone and 13.2 for Mr. Heider.
Mr. James Doughan, Executive Vice President of the Company, has entered into
an agreement with the Company whereby the Company has agreed to pay Mr. Doughan
a supplemental retirement benefit commencing when Mr. Doughan attains age 65.
The supplemental retirement benefit is computed by taking the difference between
$12,500 per month and the amount Mr. Doughan will receive from the Stone
Container Corporation Salaried Employees Retirement Plan and, if applicable, the
Stone Container Corporation Excess Benefit Plan at age 65. Such supplemental
monthly benefit will be payable to Mr. Doughan only in the event Mr. Doughan is
either an employee of the Company at age 65 or becomes disabled while employed.
In the event Mr. Doughan dies either while an employee of Stone or after
commencement of such supplemental monthly benefit, his surviving spouse will
receive 50% of such supplemental monthly benefit for the remainder of her life.
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN CONTROL
ARRANGEMENTS
The Board of Directors has authorized management to execute continuity
contracts for corporate and divisional officers (other than Roger W. Stone) who,
with certain exceptions, have been employed by the Company for at least five
years, providing for continuation of salary, bonus (based upon the average bonus
for the last three calendar years) and certain fringe benefits, in the event of
involuntary termination of employment after a change in control, as defined in
such continuity contracts, of the Company.
62
<PAGE>
Payments under these contracts would continue until the earliest of three years
from the date of such officer's involuntary termination, age 70, death,
disability or an offer of comparable employment. The Company has entered into
such contracts with each of the individuals named in the Summary Compensation
Table other than Mr. Stone. The amount of such payments to be received by the
individuals named in the Summary Compensation Table is dependent upon whether
such individual obtains employment elsewhere. Any amounts received by such
individual from other employment will offset the payment made pursuant to these
contracts.
The Company entered into consulting agreements in 1974 with each of Messrs.
Jerome H. Stone, Marvin N. Stone and Norman H. Stone (deceased), under which
each serves or was to serve as a consultant to the Company for a fee of $80,000
per annum during his lifetime and, should he die leaving a widow, $40,000 per
annum to such widow during her lifetime. Mr. Norman H. Stone died during 1985
and his widow receives the specified payments. The consulting fees are in
addition to the retirement benefits previously noted.
63
<PAGE>
CREDIT AGREEMENT
Concurrently with the closing of this Offering, it is contemplated that the
Company will repay the outstanding indebtedness under and terminate its existing
1989 Credit Agreement and enter into the Credit Agreement. The Credit Agreement
will consist of a $400 million senior secured term loan and a $450 million
senior secured revolving credit facility. The revolving credit facility
borrowing availability will be reduced by any letter of credit commitments, and
approximately $61 million which the Company will borrow at closing. Availability
under the revolving credit facility will also be reduced by the approximately
$61 million outstanding letters of credit (the "Florence Letter of Credit")
securing the variable rate demand industrial revenue bonds issued by Florence
County, South Carolina relating to the Company's linerboard mill located in
Florence County. Up to $50 million of the revolving credit facility will be
available as a letter of credit sub-facility (other than the Florence Letter of
Credit). Any letters of credit issued under the sub-facility will reduce
borrowing availability under the revolving credit facility. In addition, Bankers
Trust Company will provide a swingline sub-facility under which the Company may
make borrowings of up to $25 million. Swingline loans will reduce availability
under the revolving credit facility on a dollar-for-dollar basis.
The Credit Agreement is expected generally to include terms, conditions,
representations and warranties, covenants, indemnities and events of default and
other provisions which are customary in such agreements. The following is a
summary of certain of the principal terms expected to be included in the Credit
Agreement. The terms and conditions of the Credit Agreement are subject to
negotiation, commitments from a lending group, the execution of definitive
documentation and closing (which is conditional upon the successful closing of
this Offering and the Related Transactions).
MATURITIES AND MANDATORY PREPAYMENTS
The term loan under the Credit Agreement will mature on April 1, 2000.
Amounts outstanding under the term loan will amortize on a semi-annual basis
(April 1 and October 1) based upon the applicable percentage of the initial
principal amount of the term loan. Amortization amounts will be .5% of principal
amount for the period from April 1, 1995 through April 1, 1999, 47.5% on October
1, 1999 and 48.0% on April 1, 2000. The revolving credit facility will mature on
May 15, 1999 and the Florence Letter of Credit will also expire May 15, 1999.
Mandatory prepayments will be required under the term loan portion of the
Credit Agreement as follows: (i) 50% (subject to performance-related step downs
to 25%) of Excess Cash Flow (as defined in the Credit Agreement) (excluding the
first $50 million of Excess Cash Flow in each fiscal year); (ii) 100% of the net
proceeds of (a) the issuance or incurrence of additional indebtedness (excluding
certain specified refinancings and $200 million (the "Debt Basket") of other
debt), and (b) certain non-ordinary course asset sales (excluding $200 million
(the "Asset Basket") of proceeds from such sales (other than sales of Collateral
or collateral under the Credit Agreement pledged to the lenders under the Credit
Agreement (the "Bank Collateral")), in each case for which substitute collateral
is not provided). All mandatory prepayments (except mandatory redemptions
related to sales of Bank Collateral) will be allocated entirely against the term
loan amortizations in inverse order of maturity. In addition, mandatory
prepayments from sales of Bank Collateral (unless substitute collateral has been
provided) will be allocated pro rata between the term loan (and applied in
inverse order of maturity) and the revolving credit facility, and, in the case
of the revolving credit facility, will result in a corresponding permanent
commitment reduction.
At the Company's request, the holders of loans under the term loan, voting
individually, may waive their individual right to any mandatory prepayment (and,
if lenders representing a majority of the outstanding principal of the term loan
waive such prepayment, then all holders will have been deemed to waive
prepayment), in which case the amounts otherwise payable to such holders (or all
of them) may be retained by the Company. The cash flow in excess of the required
mandatory repayment, the net proceeds from the Debt Basket, the net proceeds
from the Asset Basket, and waived prepayment obligations may be used for (i)
general corporate purposes, (ii) capital expenditures, acquisitions or
64
<PAGE>
investments in excess of annual limitations (without reducing permitted basket
amounts (except that Debt Basket amounts may not be used for this purpose)) and
(iii) prepayment of publicly issued debt securities ("Permitted Uses").
The Company will also be permitted to voluntarily reduce the unutilized
portion of the revolving credit facility and voluntarily prepay the term loan,
with voluntary term loan prepayments to be applied against amortizations in
inverse order of maturity.
INTEREST RATES
The Credit Agreement permits the Company to choose among various interest
rate options for the revolving credit facility and the term loan and to specify
the interest rate period to which the interest rate options are to apply,
subject to certain parameters. The applicable interest rates will be: (i) under
the revolving credit facility (a) the higher of Bankers Trust Company's prime
rate and the Federal Funds Effective Rate plus 1/2 of 1% (the alternative base
rate ("ABR")) plus 1 5/8% per annum or (b) the London Interbank Offered Rate
("LIBOR"), as adjusted ("Adjusted LIBOR"), plus 2 5/8% per annum; (ii) under the
swingline loan, ABR plus 1 5/8% per annum and (iii) under the term loan, ABR
plus 2 1/8% per annum or Adjusted LIBOR plus 3 1/8% per annum. Upon achievement
of specified indebtedness ratios and cash flow coverage ratios or other
performance related tests, the interest rate margins for the revolving credit
facility (including the swingline sub-facility) will be reduced. Additionally,
the Company pays a 1/2% commitment fee on the unused portions of the revolving
credit facilities but without giving effect to reductions in availability for
swingline loans, letters of credit outstanding or for the Florence Letter of
Credit. The Company will pay a fee on the outstanding letters of credit issued
under the revolving credit facility at a rate equal to the greater of (i) the
spread over Adjusted LIBOR applicable to the revolving credit facility MINUS
1/2% and (ii) 1%.
SECURITY
All indebtedness under the Credit Agreement will be secured by a significant
portion of the assets of the Company. Loans and letters of credit (other than
the Florence Letter of Credit) under the Credit Agreement will be secured by a
mortgage on the following mills and box plants owned or leased by the Company or
its subsidiaries, as well as liens on the machinery, equipment and inventory
located at each mill or box plant:
<TABLE>
<CAPTION>
PAPER MILLS: BOX PLANTS:
- --------------------------------- ----------------------------
<S> <C>
Snowflake, Arizona 48 Owned Box Plants
Panama City, Florida 34 Leased Box Plants(1)
Port Wentworth, Georgia
Florence, South Carolina
Hopewell, Virginia
Hodge, Louisiana Coshocton, Ohio
<FN>
- ------------------------
(1) Subject to receipt of requisite landlord consents.
</TABLE>
COVENANTS
The Credit Agreement is expected to contain covenants that include, among
other things, requirements to maintain certain financial tests and ratios
(including an indebtedness ratio and a minimum interest coverage ratio) and
certain restrictions and limitations, including those on capital expenditures,
changes in control, payment of dividends, sales of assets, lease payments,
investments (including investments in Stone-Consolidated, Seminole and SVCP),
additional borrowings, liens, repurchases or prepayment of certain indebtedness,
guarantees of indebtedness, mergers and purchases of stock and assets.
65
<PAGE>
INDEBTEDNESS RATIO
The Company will be required to have an indebtedness ratio (ratio of total
consolidated indebtedness to consolidated net worth plus total consolidated
indebtedness, as such terms are defined in the Credit Agreement) not exceeding
the following amounts as of the end of each fiscal quarter ending on a date as
indicated below:
<TABLE>
<CAPTION>
FISCAL QUARTER RATIO
- --------------------------------------------------------------- ---------
<S> <C>
December 31, 1994 through March 31, 1996....................... .85 to 1
June 30, 1996 through September 30, 1996....................... .80 to 1
December 31, 1996 through September 30, 1997................... .77 to 1
December 31, 1997 through September 30, 1998................... .72 to 1
December 31, 1998 through September 30, 1999................... .67 to 1
December 31, 1999 and thereafter............................... .62 to 1
</TABLE>
At June 30, 1994, the Company's actual indebtedness ratio (as defined) was
81.0%.
INTEREST COVERAGE RATIO
The Company will be required to have an interest coverage ratio (ratio of
earnings before interest, taxes, depreciation and amortization to interest
expense) of at least the following ratios at the end of each fiscal quarter,
calculated for the most recent four fiscal quarters (or if four fiscal quarters
have not been completed since the date thereof, then the number of fiscal
quarters that have been completed since the date thereof) as indicated below:
<TABLE>
<CAPTION>
DATE RATIO
- ------------------------------------------------------------- -----------
<S> <C>
December 31, 1994............................................ 1.00 to 1
March 31, 1995............................................... 1.15 to 1
June 30, 1995................................................ 1.25 to 1
September 30, 1995........................................... 1.35 to 1
December 31, 1995............................................ 1.50 to 1
March 31, 1996............................................... 1.65 to 1
June 30, 1996................................................ 1.75 to 1
September 30, 1996........................................... 1.85 to 1
December 31, 1996............................................ 2.00 to 1
March 31, 1997............................................... 2.25 to 1
June 30, 1997................................................ 2.25 to 1
September 30, 1997 and thereafter............................ 2.50 to 1
</TABLE>
For the three months ended June 30, 1994, the Company's actual interest
coverage ratio was .78 to 1.
RESTRICTIONS ON INVESTMENTS IN SUBSIDIARIES AND GUARANTEES; CROSS-DEFAULTS
The Credit Agreement contains restrictions on investments in
Stone-Consolidated, Seminole and SVCP. The Company is also not permitted to
guarantee the indebtedness of Stone-Consolidated, Seminole or SVCP and there are
restrictions on other guarantees. There are also restrictions on transactions
with affiliates which are not wholly owned subsidiaries. Any event of default or
default with respect to the Company's or a Subsidiary's (as defined in the
Credit Agreement) indebtedness for money borrowed having an aggregate principal
amount of $10 million or more constitutes an event of default under the Credit
Agreements. Any acceleration of any indebtedness having an aggregate principal
amount of $10 million or more of Stone-Consolidated, SVCP or Seminole also
constitutes an event of default under the Credit Agreement.
RESTRICTIONS ON DIVIDENDS
The Credit Agreement provides that the Company's dividend payments,
distributions or purchases of any class of capital stock of the Company and its
subsidiaries cannot exceed the sum of (A) an amount equal to (i) 75% of the
consolidated net income (as defined by the Credit Agreement) of the
66
<PAGE>
Company from October 1, 1994 to the date of payment of such dividends, minus
(ii) 100% of the consolidated net loss (as defined by the Credit Agreement) of
the Company from October 1, 1994 to the date of payment of such dividend plus
(iii) 100% of any net cash proceeds from sales of common stock or certain
preferred stock of the Company from the closing date to the date of payment of
such dividends, minus (iv) the total of certain permitted investments and
permitted capital expenditures, which the Company will be permitted to make in
lieu of dividends the Company would be permitted to pay pursuant to this
dividend formula. Consolidated Net Income will not include the charge to
earnings related to the Offering or the Related Transactions or to charges to
earnings for unamortized fees relating to the early extinguishment of debt. In
addition, the Credit Agreement permits the Company to pay dividends on its
preferred stock outstanding on the date of the Credit Agreement to the extent
permitted by the Company's senior subordinated indenture dated as of March 15,
1992.
RESTRICTIONS ON INCURRENCE OF INDEBTEDNESS
The Credit Agreement restricts the incurrence of additional indebtedness,
subject to certain exceptions (including the refinancing of existing
indebtedness). The Credit Agreement permits the Company to undertake accounts
receivable securitization financings of up to $500 million as well as the
incurrence of the Debt Basket amounts.
67
<PAGE>
DESCRIPTION OF NOTES
The Senior Notes will be issued under an Indenture dated as of October 12,
1994 (the "Senior Note Indenture"), between the Company and The Bank of New
York, as trustee (the "Senior Note Trustee"). The First Mortgage Notes will be
issued under an Indenture dated as of October 12, 1994 (the "First Mortgage Note
Indenture") to be entered into by the Company and Norwest Bank Minnesota,
National Association, as trustee (the "First Mortgage Note Trustee"). The Senior
Notes and First Mortgage Notes are collectively referred to herein as the
"Notes," the Senior Note Indenture and the First Mortgage Note Indenture are
referred to herein individually as an "Indenture" and, collectively, as the
"Indentures" and the Senior Note Trustee and the First Mortgage Note Trustee are
referred to herein individually as the "Trustee" and, collectively, as the
"Trustees."
The following summaries of certain provisions of the First Mortgage Notes
and the Senior Notes and the First Mortgage Note Indenture and the Senior Note
Indenture do not purport to be complete and are subject to, and are qualified in
their entirety by express reference to, all the provisions of the First Mortgage
Note Indenture and the Senior Note Indenture, including the definitions therein
of certain terms. A copy of each of the First Mortgage Note Indenture and the
Senior Note Indenture is filed as an exhibit to the Registration Statement of
which this Prospectus is a part. Certain capitalized terms herein are defined in
the applicable Indenture.
GENERAL
The Senior Note Indenture limits the aggregate principal amount of Senior
Notes which may be issued thereunder to $200 million. The First Mortgage Note
Indenture limits the principal amount of First Mortgage Notes issuable
thereunder to $500 million.
The Senior Notes will be unsecured obligations of the Company.
The First Mortgage Notes will be secured by the Collateral. See "--
Additional First Mortgage Note Indenture Definitions -- Collateral."
The principal of, and any premium or interest on, the Notes will be payable,
and the Notes will be exchangeable and transfers thereof will be registrable, at
the respective Place of Payment set forth in the applicable Indenture, provided
that, at the option of the Company, payment of interest may be made by check
mailed to the address of the person entitled thereto as it appears in the
Register relating to such Notes.
The Notes will be issued in United States dollars in fully registered form,
without coupons, in denominations of $1,000 or any integral multiple thereof. No
service charge will be made for any transfer or exchange of the Notes, but the
Company may require payment of a sum sufficient to cover any tax or other
governmental charge payable in connection therewith.
With respect to any Deficiency Offer, First Mortgage Note Offer, Change of
Control Offer, Asset Disposition Offer or optional redemption of the Notes, the
Company shall comply with the requirements of Section 14(e) and Rule 14e-1 under
the Exchange Act, as applicable.
RANKING
The Notes will rank PARI PASSU in right of payment with all existing and
future Senior Indebtedness (as defined) of the Company and senior in right of
payment and rights upon liquidation to all existing and future Subordinated
Indebtedness of the Company. After giving effect to the Offering and the Related
Transactions, the total outstanding Senior Indebtedness of the Company is
expected to be approximately $2.8 billion.
A significant portion of the Company's assets will secure borrowings
outstanding under the Credit Agreement. See "Credit Agreement -- Security."
Likewise, the First Mortgage Notes are secured obligations of the Company. In
the event of the Company's insolvency or liquidation, the claims of the lenders
under the Credit Agreement would have to be satisfied out of the collateral
securing the Credit Agreement before any such assets would be available to pay
claims of holders of the Notes. Similarly,
68
<PAGE>
the holders of First Mortgage Notes would have to be satisfied out of the
Collateral under the First Mortgage Note Indenture before any such assets would
be available to pay claims of holders of the Senior Notes. If the lenders under
the Credit Agreement and/or the First Mortgage Note Trustee under the First
Mortgage Note Indenture should foreclose on their respective collateral, no
assurance can be given that there will be sufficient assets available in the
Company to pay amounts due on the First Mortgage Notes or the Senior Notes,
respectively.
The Notes are obligations exclusively of the Company. Because certain of the
operations of the Company are currently conducted by subsidiaries (primarily
Stone Canada and its subsidiaries, including Stone-Consolidated, and Seminole),
the Company's cash flow and consequent ability to service debt, including the
Notes, are dependent, in part, upon the earnings of its subsidiaries and the
distribution of those earnings or upon loans or other payments of funds by those
subsidiaries to the Company. The subsidiaries of the Company are separate and
distinct legal entities and have no obligation, contingent or otherwise, to pay
any amount due pursuant to the Notes or to make any funds available therefor,
whether by dividends, loans or other payments. In addition, the payment of
dividends and the making of loans and advances to the Company by its
subsidiaries may be subject to statutory or contractual restrictions (as well as
potential foreign tax withholding under certain circumstances), are contingent
upon the earnings of those subsidiaries and are subject to various business
considerations. See "Risk Factors -- Credit Agreement Restrictions."
Any right of the Company to receive assets of any of its subsidiaries upon
their liquidation or reorganization (and the consequent right of the holders of
the Notes to participate in the distribution of or proceeds from those assets)
will be structurally subordinated to the claims of such subsidiary's creditors
(including trade creditors and holders of debt issued by such subsidiary),
except to the extent that the Company is itself recognized as a creditor of such
subsidiary, in which case the claims of the Company would still be subordinate
to any security interests in the assets of such subsidiary and any indebtedness
of such subsidiary senior to that held by the Company.
PARTICULAR TERMS OF THE FIRST MORTGAGE NOTES
The First Mortgage Notes will mature on October 1, 2002.The First Mortgage
Notes are not redeemable at the option of the Company prior to October 1, 1999.
Thereafter, the First Mortgage Notes may be redeemed at the option of the
Company, in whole or in part from time to time, on not less than 30 days, nor
more than 45 days, prior notice, mailed by first class mail to the First
Mortgage Note holders' last addresses as they shall appear in the Register, at
the following prices (expressed as percentages of the principal amount of the
First Mortgage Notes), if redeemed during the twelve months beginning October 1
of the year indicated below, in each case together with interest accrued to the
Redemption Date:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
- -------------------------------------------------------------------------------- ------------
<S> <C>
1999............................................................................ 103.07%
2000............................................................................ 101.54%
2001 and thereafter............................................................. 100.00%
</TABLE>
Selection of First Mortgage Notes for redemption will be made by the First
Mortgage Note Trustee, upon notice, substantially pro rata. The First Mortgage
Note Indenture provides that, if any First Mortgage Note is to be redeemed in
part only, the notice which relates to the redemption of such First Mortgage
Note shall state the portion of the principal amount to be redeemed, and shall
state that on or after the Redemption Date, upon surrender of such First
Mortgage Note, a new First Mortgage Note or First Mortgage Notes in principal
amount equal to the unredeemed portion thereof will be issued.
The First Mortgage Notes will bear interest at the rate per annum shown on
the cover page of this Prospectus from the date of original issuance of the
First Mortgage Notes. Interest on the First Mortgage Notes will be payable
semi-annually on April 1 and October 1 of each year, commencing April 1, 1995,
to the Holders in whose names the First Mortgage Notes are registered at the
close of business on the preceding March 15 and September 15, respectively.
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In the event that the Company is required but unable to make a Deficiency
Offer, the Reset Rate on the First Mortgage Notes will be the greater of (x) the
initial Interest Rate and (y) the sum of (A) 400 basis points and (B) the higher
of the Seven Year Treasury Rate and the Ten Year Treasury Rate and shall further
increase by an additional 50 basis points on each succeeding Interest Payment
Date, PROVIDED, HOWEVER that in no such event shall the interest rate at any
time exceed the Initial Interest Rate by more than 200 basis points.
ADDITIONAL FIRST MORTGAGE NOTE COVENANTS
LIMITATION ON LIENS ON COLLATERAL. Under the terms of the First Mortgage
Note Indenture, the Company will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly, (a) incur or suffer to exist any Lien
upon any of the Collateral other than Permitted Collateral Liens, (b) take any
action or omit to take any action with respect to the Collateral that would have
or could be reasonably expected to have the result of adversely affecting,
impairing or failing to maintain without interruption the security interests in
the Collateral under the First Mortgage Note Indenture or the Security
Documents, or (c) grant any interest whatsoever (other than Permitted Collateral
Liens) in any of the Collateral to any Person (other than the Company or the
First Mortgage Note Trustee) or suffer to exist any such interest. The Company
may not enter into a sale-leaseback transaction involving any Collateral.
LIMITATION ON COLLATERAL ASSET DISPOSITIONS. Under the terms of the First
Mortgage Note Indenture, the Company will not, and will not permit any of its
Restricted Subsidiaries to, directly or indirectly, consummate or permit a
Collateral Asset Disposition unless: (a) the Company receives consideration in
respect of and concurrently with such Collateral Asset Disposition at least
equal to the fair market value of the relevant Collateral; (b) with respect to
each such Collateral Asset Disposition, the Company delivers an Officer's
Certificate to the First Mortgage Note Trustee dated no more than 30 days prior
to the date of consummation of the relevant Collateral Asset Disposition,
certifying that (i) such disposition complies with clause (a) above, (ii) the
fair market value of the Collateral being sold was determined in good faith by
the Board of Directors of the Company, including a majority of the Independent
Directors (whose determination was based on the opinion of a qualified
Independent Appraiser or Independent Financial Adviser prepared
contemporaneously with such Collateral Asset Disposition and which opinion will
be evidenced by an opinion letter of the Independent Appraiser or Independent
Financial Adviser and attached to the Officer's Certificate), as evidenced by
copies of the resolutions of the Board of Directors of the Company, indicating
the requisite approval by the Independent Directors and the Board of Directors
(which shall also indicate that the relevant Collateral Asset Disposition is
being made for an appropriate business purpose which is not the redemption of
the First Mortgage Notes), adopted in respect of and concurrently with such
Collateral Asset Disposition and (iii) in the case of a release of less than all
of a Collateral Property, the release of the relevant portion of such Collateral
Property will not interfere with or materially and adversely affect the value of
the remaining portion of such Collateral Property, the maintenance and operation
of such remaining portion or the First Mortgage Note Trustee's uninterrupted
valid first ranking Lien (subject to Permitted Collateral Liens) on such
remaining portion (accompanied by a binding commitment of a title insurer to
issue an endorsement to the title insurance policy previously issued in respect
of such Collateral Property confirming that, after such release, the First
Mortgage Note Trustee's first ranking Lien on such remaining portion will remain
unimpaired and uninterrupted (subject only to Permitted Collateral Liens
existing on the date of the First Mortgage Note Indenture or obtaining priority
through operation of law)); (c) at least 90% of such consideration is in cash or
Cash Equivalents; (d) the Net Proceeds therefrom shall be paid directly by the
purchaser thereof to the First Mortgage Note Trustee and deposited into the Cash
Collateral Account pending application in accordance with clause (g) below and
the Company takes such actions, at its sole expense, as shall be required to
ensure that the First Mortgage Note Trustee has from such date a first ranking
Lien thereon (subject to Permitted Collateral Liens) pursuant to the First
Mortgage Note Indenture and the Security Documents; (e) concurrently with the
relevant Collateral Asset Disposition, the Company takes such actions, at its
sole expense, as shall be required to ensure that the First Mortgage Note
Trustee has from such date a first ranking Lien (subject to Permitted Collateral
Liens) on any portion of such consideration which is not in the form of cash or
Cash Equivalents ("Non-Cash Consideration"), and,
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upon receipt thereof, of property received in the future in exchange for all or
any part of such Non-Cash Consideration, pursuant to the terms of the First
Mortgage Note Indenture and the Security Documents; (f) the Company takes such
other actions, at its sole expense, as shall be required to permit the First
Mortgage Note Trustee to release the Collateral being sold from the Lien of the
First Mortgage Note Indenture and the Security Documents; and (g) the Company,
within six months from the date of consummation of a Collateral Asset
Disposition, applies all of the Net Proceeds therefrom for the following
purposes, individually or in combination, (i) to purchase or otherwise invest in
Replacement Collateral (in accordance with the third paragraph of this covenant)
or (ii) to make a First Mortgage Note Offer; PROVIDED that, (1) in the event
that the Company enters into a binding commitment to purchase or otherwise
invest in Replacement Collateral pursuant to the foregoing clause (g)(i) within
such six month period, the Company will have eighteen months from the date of
consummation of such Collateral Asset Disposition to consummate such purchase or
investment, which shall be completed with due diligence and (2) in connection
with a Collateral Asset Disposition involving all (but not less than all) of the
Collateral Property located in York, Pennsylvania (as more specifically
described in the relevant Security Document), the Company may, concurrently with
such Collateral Asset Disposition, make subject to the Lien of the First
Mortgage Note Indenture as Replacement Collateral any other assets of the
Company satisfying the definition of "Replacement Collateral" in accordance with
the third paragraph of this covenant below in lieu of the assets purchased with
the Net Proceeds of such Collateral Asset Disposition. The Company will not and
will not permit any of its Restricted Subsidiaries, directly or indirectly, to
enter into a Sale-leaseback transaction involving the Collateral.
Under the terms of the First Mortgage Note Indenture, the Company will not,
and will not permit any of its Restricted Subsidiaries to, directly or
indirectly, suffer or permit a Collateral Loss Event unless: (a) the Net
Proceeds therefrom are paid directly by the party providing such Net Proceeds to
the First Mortgage Note Trustee and deposited in the Cash Collateral Account,
(b) the Company takes such actions, at its sole expense, as shall be required to
ensure that the First Mortgage Note Trustee has from the date of such deposit a
first ranking Lien (subject to Permitted Collateral Liens) on such Net Proceeds
in the Cash Collateral Account pursuant to the terms of the First Mortgage Note
Indenture and the Security Documents and (c) the Company, within six months of
receipt of the Net Proceeds therefrom, applies all the Net Proceeds received
therefrom for the following purposes, individually or in combination: (i) to
purchase or otherwise invest in Replacement Collateral; (ii) to Restore the
relevant Collateral; or (iii) to make a First Mortgage Note Offer; PROVIDED
that, in the event that the Company enters into a binding commitment to purchase
or otherwise invest in Replacement Collateral pursuant to the foregoing clause
(c)(i) or to Restore the relevant Collateral pursuant to the foregoing clause
(c)(ii) within six months of receipt of such Net Proceeds from a Collateral Loss
Event, the Company will have eighteen months from the date of such receipt to
consummate or complete such purchase, investment or Restoration, which shall be
carried out with due diligence. In connection with any Restoration, the Company
shall follow the procedures set forth in the First Mortgage Note Indenture.
Under the terms of the First Mortgage Note Indenture, in the event that the
Company (a) elects pursuant to clause (g)(i) of the first paragraph of this
covenant or clause (c)(i) of the second paragraph of this covenant to apply any
portion of the Net Proceeds from a Collateral Asset Disposition or Collateral
Loss Event, respectively, to purchase or otherwise invest in Replacement
Collateral, (b) pursuant to the last paragraph of this covenant is deemed to
purchase or otherwise invest in Replacement Collateral or (c) pursuant to clause
(2) of the first paragraph of this covenant elects to provide other assets of
the Company as Replacement Collateral for the Collateral Property located in
York, Pennsylvania following the sale thereof (1) the Company shall deliver an
Officers' Certificate to the First Mortgage Note Trustee dated no more than 30
days prior to the date of consummation of the relevant purchase of or investment
in Replacement Collateral (in the case of (a)), or of the relevant Collateral
Asset Disposition (in the case of (c)) or dated the date of withdrawal (in the
case of (b)), certifying that (i) in the case of clause (a), the purchase price
for or the amount of the investment in the relevant Replacement Collateral does
not exceed the fair market value of such Replacement Collateral, (ii) in the
case of clause (b), the Company is required to use the relevant portion of such
Net Proceeds to fund an "Asset Disposition Offer" under the 1991 Indenture in
accordance with the last paragraph of this covenant and has complied with the
last
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paragraph of this covenant in connection therewith or (iii), in the case of (c),
the fair market value of such Replacement Collateral is not less than $31
million as determined in good faith by the Board of Directors of the Company,
including a majority of the Independent Directors (whose determination in the
case of clauses (i) and (iii) was based on the opinion of a qualified
Independent Appraiser or Independent Financial Adviser prepared
contemporaneously with the consummation of such purchase of or investment in the
relevant Replacement Collateral and which opinion will be evidenced by an
opinion letter of the Independent Appraiser or Independent Financial Adviser
attached to the Officers' Certificate), as evidenced by copies of the
resolutions of the Board of Directors, indicating the requisite approval of the
Independent Directors, adopted in respect of and concurrently with the purchase
of or investment in such Replacement Collateral; and (2) the Company shall take
such actions, at its sole expense, as shall be required to permit the First
Mortgage Note Trustee to release such Net Proceeds (or proceeds required to be
applied to the prepayment of Indebtedness under the 1991 Indenture, as described
in the last paragraph of this covenant) from the Lien of the First Mortgage Note
Indenture and the Security Documents and to ensure that the First Mortgage Note
Trustee has, from the date of such purchase or investment, a first ranking Lien
(subject to Permitted Collateral Liens) on such Replacement Collateral pursuant
to the terms of the First Mortgage Note Indenture and the Security Documents.
Furthermore, the First Mortgage Note Trustee shall have received, concurrently
with the grant to it of the Lien in respect of any Replacement Collateral
constituting real property or equipment, the documents set forth in the First
Mortgage Note Indenture relating to such Replacement Collateral substantially in
the form delivered to the First Mortgage Note Trustee on the date of the First
Mortgage Note Indenture in respect of the original Collateral Properties.
Notwithstanding the foregoing, under the terms of the First Mortgage Note
Indenture the Company may defer a First Mortgage Note Offer until such time as
the Excess Proceeds exceed $15 million (30 days from which time the Company must
make a First Mortgage Note Offer), PROVIDED that (a) the Company provides
written notice to the First Mortgage Note Trustee of such deferred application
of Excess Proceeds, (b) all Excess Proceeds are deposited and remain on deposit
in the Cash Collateral Account pending a First Mortgage Note Offer and (c) any
First Mortgage Note Offer shall include all Excess Proceeds on deposit in the
Cash Collateral Account on the date of such First Mortgage Note Offer,
regardless of whether the Excess Proceeds exceed $15 million at such time. All
amounts remaining after the completion of any First Mortgage Note Offer shall
remain in the Cash Collateral Account subject to the Lien of the First Mortgage
Note Indenture. The Company may use such amounts to purchase or otherwise invest
in Replacement Collateral securing the First Mortgage Notes on the basis
described in the previous paragraph at any time and from time to time.
Under the terms of the First Mortgage Note Indenture, within 30 days of any
decision by the Company to make a First Mortgage Note Offer or of the date upon
which the Excess Proceeds exceed $15 million, the Company, or the First Mortgage
Note Trustee at the Company's request, will mail or cause to be mailed to all
Holders of First Mortgage Notes a notice of the First Mortgage Note Offer and of
the Holders' rights resulting therefrom. Such notice will contain all
instructions and materials necessary to enable Holders of First Mortgage Notes
to tender their First Mortgage Notes to the Company.
On the First Mortgage Note Offer Payment Date, the Company shall (i) accept
for payment First Mortgage Notes or portions thereof tendered pursuant to the
First Mortgage Note Offer in an aggregate principal amount equal to the First
Mortgage Note Offer Amount or such lesser amount of First Mortgage Notes as
shall have been tendered, (ii) deposit with the Paying Agent money sufficient to
pay the purchase price of all First Mortgage Notes or portions thereof so
accepted, and (iii) deliver or cause to be delivered to the Trustee First
Mortgage Notes so accepted together with an Officer's Certificate stating the
First Mortgage Notes or portions thereof accepted by the Company. If the
aggregate principal amount of First Mortgage Notes surrendered exceeds the
aggregate principal amount of First Mortgage Notes subject to the First Mortgage
Note Offer, as indicated in the notice required by this covenant, the Trustee
shall select the First Mortgage Notes to be purchased on a PRO RATA basis to the
nearest one thousand dollars ($1,000) of principal amount. The Paying Agent
shall promptly mail or deliver to Holders of First Mortgage Notes so accepted
payment in an amount equal to the purchase price, and the
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Company shall execute and the Trustee shall promptly authenticate and mail or
make available for delivery to such Holders a new First Mortgage Note equal in
principal amount to any unpurchased portion of the First Mortgage Note
surrendered. The Company will publicly announce the results of the First
Mortgage Note Offer.
If, pursuant to the 1991 Indenture, the Company is required to make an
"Asset Disposition Offer" (as defined thereunder) using proceeds from a
Collateral Asset Disposition, the Company may use such proceeds as are on
deposit in the Cash Collateral Account to fund the purchase of Indebtedness
under the 1991 Indenture tendered pursuant to such offer; PROVIDED that the
Company shall have subjected to the Lien of the First Mortgage Note Indenture
and the Security Documents cash in an amount equal to such proceeds as
Replacement Collateral pursuant to the third paragraph of this covenant in lieu
of the cash released from the Cash Collateral Account, the amount so released
being deemed to be the amount invested in or used to purchase Replacement
Collateral for the purpose of such clause and such release and substitution
being deemed to constitute a purchase of such Replacement Collateral. In the
event that the Company is required to make an Asset Disposition Offer under the
1991 Indenture using proceeds from a Collateral Asset Disposition (including to
the extent that proceeds from a Collateral Asset Disposition remain in the Cash
Collateral Account after completion of a First Mortgage Note Offer) and the
Company does not have sufficient additional funds to make such Asset Disposition
Offer, an event of default may occur under the 1991 Indenture and, if so, events
of default may occur under other indebtedness of the Company. If such an event
of default occurs and indebtedness of $25 million or more is accelerated as a
result thereof, such acceleration (if not rescinded or waived within applicable
cure periods) would constitute an event of default under the Indentures.
CERTAIN OTHER COVENANTS WITH RESPECT TO THE COLLATERAL. The First Mortgage
Note Indenture also contains certain covenants of the Company to protect the
Collateral, including, for example, covenants to maintain title to the
Collateral, execute supplemental documents as required to perfect and protect
the Liens without interruption, refrain from impairing the Collateral or any
Liens thereon, notify the First Mortgage Note Trustee with respect to leases
related to any of the Collateral Properties, pay all taxes and assessments,
ensure compliance in all material respects with Environmental Laws, maintain
insurance coverage on the Collateral, maintain all material licenses and permits
required to own and operate the Collateral Properties and preserve the Liens
created under the First Mortgage Note Indenture and the Security Documents.
PARTICULAR TERMS OF THE SENIOR NOTES
The Senior Notes will mature on October 1, 2004. The Senior Notes are not
redeemable at the option of the Company prior to October 1, 1999. Thereafter,
the Senior Notes may be redeemed at the option of the Company, in whole or in
part from time to time on not less than 30 days, nor more than 45 days, prior
notice, mailed by first class mail to the Senior Note holders' last addresses as
they shall appear in the note register, at the following prices (expressed as
percentages of the principal amount of the Senior Notes), if redeemed during the
twelve months beginning October 1 of the year indicated below, in each case
together with interest accrued to the Redemption Date:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
- -------------------------------------------------------------------------------- ------------
<S> <C>
1999............................................................................ 104.31%
2000............................................................................ 102.88%
2001............................................................................ 101.44%
2002 and thereafter............................................................. 100.00%
</TABLE>
Selection of Senior Notes for redemption will be made by the Senior Note
Trustee, upon notice, substantially pro rata, by lot, or by any other method
that the Senior Note Trustee considers fair and appropriate. The Senior Note
indenture provides that, if any Senior Note is to be redeemed in part only, the
notice which relates to the redemption of such Senior Note shall state the
portion of the principal
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amount to be redeemed, and shall state that on or after the Redemption Date,
upon surrender of such Senior Note, a new Senior Note or Senior Notes in
principal amount equal to the unredeemed portion thereof will be issued.
The Senior Notes will bear interest at the rate per annum shown on the cover
page of this Prospectus from the date of original issuance of the Senior Notes.
Interest on the Senior Notes will be payable semi-annually on April 1 and
October 1 of each year, commencing April 1, 1995, to the Holders in whose names
the Notes are registered at the close of business on the preceding March 15 and
September 15, respectively.
In the event that the Company is required but unable to make a Deficiency
Offer, the Reset Rate on the Senior Notes will be the greater of (x) the Initial
Interest Rate and (y) the sum of (A) 400 basis points and (B) the higher of the
Seven Year Treasury Rate and the Ten Year Treasury Rate and shall further
increase by an additional 50 basis points on each succeeding Interest Payment
Date, PROVIDED, HOWEVER that in no such event shall the interest rate at any
time exceed the Initial Interest Rate by more than 200 basis points.
COMMON TERMS OF THE FIRST MORTGAGE NOTES AND THE SENIOR NOTES
THE TERMS AND PROVISIONS OF THE INDENTURES ARE SUBSTANTIALLY IDENTICAL,
EXCEPT THAT THE FIRST MORTGAGE NOTE INDENTURE CONTAINS ADDITIONAL TERMS AND
PROVISIONS RELATING TO THE COLLATERAL SECURING THE FIRST MORTGAGE NOTES AS
DESCRIBED IN "-- ADDITIONAL FIRST MORTGAGE NOTE COVENANTS" AND "-- ADDITIONAL
FIRST MORTGAGE NOTE INDENTURE DEFINITIONS." SET FORTH BELOW IS A DESCRIPTION OF
THE COMMON TERMS OF THE NOTES. IN THIS SECTION, THE TERM "INDENTURE" REFERS TO
THE FIRST MORTGAGE NOTE INDENTURE OR THE SENIOR NOTE INDENTURE, AS THE CASE MAY
BE, AND THE TERM "NOTES" REFERS TO THE FIRST MORTGAGE NOTES OR THE SENIOR NOTES,
AS APPLICABLE.
In addition to the Senior Notes offered hereby, the Company has also issued
$150 million principal amount of its 12 5/8% Senior Notes due July 15, 1998,
$240 million principal amount of its 11 7/8% Senior Notes due December 1, 1998
and $710 million principal amount of its 9 7/8% Senior Notes due February 1,
2001 under its Indenture dated November 1, 1991, as amended and supplemented
(the "1991 Indenture"), between the Company and The Bank of New York, as
trustee.
CERTAIN COVENANTS
MAINTENANCE OF SUBORDINATED CAPITAL BASE
The Indenture provides that, subject to the exception described in the
fourth following paragraph, in the event that the Company's Subordinated Capital
Base is less than $1 billion (the "Minimum Subordinated Capital Base") as at the
end of each of any two consecutive fiscal quarters (the last day of the second
such fiscal quarter, a "Deficiency Date"), then, with respect to the Notes, the
Company shall, no later than 60 days after the Deficiency Date (105 days if a
Deficiency Date is also the end of the Company's fiscal year), make an offer to
all Holders of Notes to purchase (a "Deficiency Offer") 10% of the principal
amount of Notes originally issued, or such lesser amount as may be Outstanding
at the time such Deficiency Offer is made (the "Deficiency Offer Amount"), at a
purchase price equal to 100% of principal amount, plus accrued and unpaid
interest to the Deficiency Payment Date (as defined below). Thereafter,
semiannually the Company shall make like Deficiency Offers for the then
applicable Deficiency Offer Amount of Notes until the Company's Subordinated
Capital Base as at the end of any subsequent fiscal quarter shall be equal to or
greater than the Minimum Subordinated Capital Base. Notwithstanding the
foregoing, after any specified Deficiency Date, the last day of any subsequent
fiscal quarter shall not constitute a Deficiency Date (giving rise to an
additional obligation under the first sentence of this paragraph) unless the
Company's Subordinated Capital Base was equal to or greater than the Minimum
Subordinated Capital Base as at the end of a fiscal quarter that followed such
specified Deficiency Date and preceded such subsequent quarter.
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Within 60 days (105 days if the Deficiency Date is also the end of the
Company's fiscal year) following a Deficiency Date, the Company shall mail a
notice to each Holder of Notes in respect of the Deficiency Offer (which notice
shall contain all instructions and materials necessary to enable such Holders to
tender Notes).
Notes tendered pursuant to a Deficiency Offer will be accepted for payment,
in amounts as set forth below, on the date which shall be 20 Business Days from
the date such notice is mailed or, if acceptance for payment and payment is not
then lawful, on the earliest subsequent Business Day on which acceptance for
payment and payment is then lawful (a "Deficiency Payment Date").
On a Deficiency Payment Date, the Company shall (i) accept for payment Notes
or portions thereof tendered pursuant to the Deficiency Offer in an aggregate
principal amount equal to the Deficiency Offer Amount or such lesser principal
amount of such Notes as shall have been tendered, (ii) deposit with the Paying
Agent money sufficient to pay the purchase price of all such Notes or portions
thereof so accepted, and (iii) deliver, or cause to be delivered, to the Trustee
Notes or portions thereof so accepted together with an Officer's Certificate
stating the Notes or portions thereof accepted by the Company. If the aggregate
principal amount of such Notes tendered exceeds the Deficiency Offer Amount, the
Company shall select the Notes to be purchased on a pro rata basis to the
nearest $1,000 of principal amount. The Paying Agent shall promptly mail or make
available for delivery to Holders of Notes so accepted payment in amounts equal
to the purchase prices therefor, and the Company shall execute and the Trustee
shall promptly authenticate and mail or make available for delivery to such
Holders new Notes equal in principal amounts to, any unpurchased portion of
Notes surrendered. The Company will publicly announce the results of the
Deficiency Offer.
Notwithstanding the foregoing, in the event that (1) the making of a
Deficiency Offer by the Company or (2) the purchase of Notes by the Company in
respect of a Deficiency Offer would constitute a default (with the giving of
notice, the passage of time or both) with respect to any Specified Bank Debt at
the time outstanding, then, in lieu of the making of a Deficiency Offer in the
circumstances set forth above, (i) the interest rate on the Notes shall be reset
as of the first day of the second fiscal quarter following the Deficiency Date
(the "Reset Date") to a rate per annum (the "Reset Rate") specified above under
the headings "Description of Notes -- Particular Terms of the Senior Notes" and
"Description of Notes -- Particular Terms of the First Mortgage Notes,"
respectively, (ii) on the first Interest Payment Date following the Reset Date,
the interest rate on the Notes as reset on the Reset Date, shall increase by 50
basis points, and (iii) the interest rate on the Notes shall further increase by
an additional 50 basis points on each succeeding Interest Payment Date;
PROVIDED, HOWEVER, that in no event shall the interest rate on the Notes at any
time exceed the initial interest rate as set forth on the face of such Note
(with respect to each such Note, the "Initial Interest Rate") by more than 200
basis points. If the Company's Subordinated Capital Base falls below $1 billion,
it is probable that the Company would also be in default under certain covenants
expected to be contained in the Credit Agreement.
Once the interest rate on the Notes has been reset as set forth above, if
the Company's Subordinated Capital Base is equal to or greater than the Minimum
Subordinated Capital Base as of the last day of any fiscal quarter subsequent to
the Deficiency Date, interest on the Notes shall return to the Initial Interest
Rate effective as of the first day of the second following fiscal quarter;
PROVIDED, HOWEVER, that the interest rate on the Notes shall again be adjusted
as set forth above if the Company's Subordinated Capital Base shall thereafter
be less than the Minimum Subordinated Capital Base as at the last day of each of
any two consecutive subsequent fiscal quarters and if the making of a Deficiency
Offer or the purchase of Notes by the Company in respect of a Deficiency Offer
would, at such time, constitute a default (with the giving of notice, passage of
time or both) with respect to any Specified Bank Debt at the time outstanding.
The Company shall notify the Trustee of the Reset Rate not later than two
Business Days after the Reset Date in the circumstances set forth in the second
preceding paragraph. Not later than five Business Days after the Trustee has
received such notice from the Company, the Trustee shall mail to
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each Holder of Notes such notice setting forth the Reset Rate. The Company shall
notify the Trustee and the Holders of Notes promptly when the interest rate on
the Notes returns to the Initial Interest Rate as set forth above.
LIMITATION ON FUTURE INCURRENCE OF INDEBTEDNESS
The Indenture provides that the Company will not, and will not permit any
Restricted Subsidiary to, incur, create, assume, guarantee or in any other
manner become directly or indirectly liable with respect to or responsible for
the payment of any Indebtedness except: (1) Permitted Indebtedness; and (2)
Indebtedness of the Company if at the time thereof and after giving effect
thereto the Consolidated Interest Coverage Ratio of the Company, on a pro forma
basis for the four most recent full quarters, taken as a whole (giving effect to
(i) such Indebtedness and (ii) the effect on the Consolidated Cash Flow
Available for Fixed Charges of the Company for the then four most recent full
fiscal quarters, taken as a whole, as a result of any acquisition of a Person
acquired by the Company or any Restricted Subsidiary with the proceeds of such
Indebtedness), would be greater than 1.75 to 1. Without limiting the foregoing,
the Company shall not, and shall not permit any Restricted Subsidiary to,
guarantee, or in any other manner become directly or indirectly liable with
respect to or responsible for the payment of, Indebtedness of any Unrestricted
Subsidiary in an amount greater than, for all guaranties and undertakings of
responsibility by the Company and its Restricted Subsidiaries, 20% of the
aggregate amount of Indebtedness of such Unrestricted Subsidiary.
RESTRICTIONS ON DIVIDENDS
The Indenture provides that the Company will not, and will not permit any
Subsidiary of the Company to, directly or indirectly, (1) declare or pay any
dividend or make any distribution, in cash or otherwise, in respect of any
shares of Capital Stock of the Company or to the holders of Capital Stock of the
Company as such (other than dividends or distributions payable in shares of
Capital Stock of the Company (other than Redeemable Stock)) or (2) purchase,
redeem or otherwise acquire or retire for value any of the Capital Stock of the
Company or options, warrants or other rights to acquire any such Capital Stock,
other than acquisitions of Capital Stock or such options, warrants or other
rights by any Subsidiary of the Company from the Company (any such transaction
included in clause (1) or (2), a "Restricted Payment") if (i) at the time of
such Restricted Payment and after giving effect thereto, (a) an Event of Default
shall have occurred and be continuing or (b) the Consolidated Net Worth of the
Company shall be less than $750 million; or if (ii) after giving effect to such
Restricted Payment, the aggregate amount expended subsequent to November 1,
1991, for all such Restricted Payments (the amount of any Restricted Payment, if
other than cash, to be the fair market value of such payment as determined by
the Board of Directors of the Company, whose reasonable determination shall be
conclusive and evidenced by a Board Resolution) exceeds the algebraic sum of (w)
a number calculated as follows: (A) if the aggregate Consolidated Net Income of
the Company earned on a cumulative basis during the period subsequent to
September 30, 1991 through the end of the last fiscal quarter that is prior to
the declaration of any such dividend or distribution or the giving of notice of
such purchase, redemption or other acquisition or retirement and for which such
financial information is then available, is a positive number, then 100% of such
positive number, and (B) if the aggregate Consolidated Net Income of the Company
earned on a cumulative basis during the period subsequent to September 30, 1991
through the end of the last fiscal quarter that is prior to the declaration of
any such dividend or distribution or the giving of notice of such purchase,
redemption or other acquisition or retirement and for which such financial
information is then available, is a negative number, then 100% of such negative
number, (x) the aggregate net cash proceeds received by the Company from the
issuance and sale, other than to a Subsidiary of the Company, subsequent to
November 1, 1991, of Capital Stock (including Capital Stock issued upon the
conversion of, or in exchange for, securities other than Capital Stock and
options, warrants or other rights to acquire Capital Stock, but excluding
Redeemable Stock), (y) the aggregate net cash proceeds originally received by
the Company from the issuance and sale, other than to a Subsidiary of the
Company, of Indebtedness of the Company that is converted into Capital Stock of
the Company subsequent to November 1, 1991, and (z) $300 million; PROVIDED,
HOWEVER, that the retirement of any shares of the Company's Capital Stock by
exchange for, or out of the proceeds of the
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substantially concurrent sale of, other shares of Capital Stock of the Company
other than Redeemable Stock shall not constitute a Restricted Payment. If all of
the conditions to the declaration of a dividend or distribution that are
described above are satisfied at the time such dividend or distribution is
declared, then such dividend or distribution may be paid or made within sixty
days after such declaration even if the payment of such dividend, the making of
such distribution or the declaration thereof would not have been permitted at
any time after such declaration.
LIMITATION ON FUTURE LIENS AND GUARANTIES
Pursuant to the terms of the Indenture, if the Company or any Subsidiary of
the Company shall create, incur, assume or suffer to exist any Lien, upon any of
the assets of the Company or a Subsidiary of the Company other than upon the
Collateral (whether such assets are owned at November 1, 1991 or thereafter
acquired) as security for (1) any Indebtedness or other obligation (whether
unconditional or contingent) of the Company that ranks PARI PASSU with the Notes
or any Indebtedness or other obligation (whether unconditional or contingent) of
a Subsidiary of the Company, the Company will secure or will cause such
Subsidiary to guarantee and secure the Outstanding Notes equally and ratably
with (or, at the option of the Company, prior to) such Indebtedness or other
obligation, so long as such Indebtedness or other obligation shall be so
secured, or (2) any Subordinated Indebtedness, the Company will secure the
Outstanding Notes prior to such Subordinated Indebtedness, so long as such
Subordinated Indebtedness shall be so secured; PROVIDED, HOWEVER, that this
covenant does not apply in the case of Permitted Liens or Liens granted by any
Unrestricted Subsidiary to secure Indebtedness or other obligations of itself or
of any Person other than the Company and its Restricted Subsidiaries.
In addition, pursuant to the terms of the Indenture, the Company will not
guarantee the Indebtedness of any Subsidiary of the Company and will not permit
any such Subsidiary or Seminole to guarantee (i) any Indebtedness of the Company
that ranks PARI PASSU with the Notes, (ii) any Indebtedness of a Subsidiary of
the Company or (iii) any Subordinated Indebtedness; PROVIDED, HOWEVER, that this
paragraph does not apply to (1) any guaranty by a Subsidiary if such Subsidiary
also guarantees the Notes on a PARI PASSU basis with respect to guaranties of
Indebtedness described in clauses (i) and (ii) and on a senior basis with
respect to guaranties of Indebtedness described in clause (iii); (2) any
guaranty existing on November 1, 1991 or any extension or renewal of such
guaranty to the extent such extension or renewal is for the same or a lesser
amount; (3) any guaranty which constitutes Indebtedness permitted by clause (v)
or (vi) of the definition of Permitted Indebtedness granted by a Person
permitted to incur such Indebtedness; (4) any guaranty by the Company of
Indebtedness of a Restricted Subsidiary, PROVIDED that (A) incurrence of such
Indebtedness of the Restricted Subsidiary is not prohibited by the Indenture and
(B) (x) such guaranty constitutes Indebtedness of the Company incurred as
Permitted Indebtedness pursuant to clause (vii) or (viii) of the definition of
Permitted Indebtedness (it being understood that, for purposes of determining
Permitted Indebtedness, any such guaranty shall be deemed to constitute
Indebtedness separate from, and, in addition to, Indebtedness of a Restricted
Subsidiary which is so guaranteed) or (y) immediately prior to and (on a pro
forma basis) after granting such guaranty, the Company would be permitted to
incur an additional dollar of Indebtedness (not constituting Permitted
Indebtedness) under the restrictions described in "Limitation on Future
Incurrence of Indebtedness" above; (5) any guaranty by an Unrestricted
Subsidiary of Indebtedness or other obligations of any Person other than the
Company and its Restricted Subsidiaries; (6) any guaranty by the Company or any
Subsidiary or Seminole of Indebtedness or other obligations constituting
Indebtedness permitted by clause (i)(a) of the definition of Permitted
Indebtedness in a principal amount not exceeding the principal amount
outstanding or committed under the Credit Agreements (including any letter of
credit facility, but without duplication with respect to commitments for loans
the use of proceeds of which is restricted to repayment of other Indebtedness
under the Credit Agreements) as of November 1, 1991, PLUS $250 million and LESS
the proceeds from the sale of all Indebtedness under the 1991 Indenture issued
from time to time that are applied to repay Indebtedness under the Credit
Agreements); (7) any guaranty by the Company of Indebtedness of any Restricted
Subsidiary outstanding on November 1, 1991 which is not subordinated to any
Indebtedness of such Restricted Subsidiary, and any renewal extension or
refinancing of such Indebtedness permitted by the Indenture; (8) any
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guaranty by the Company of Indebtedness of any Restricted Subsidiary that is
organized under the laws of a jurisdiction other than the United States or any
subdivision thereof, PROVIDED that the incurrence of such Indebtedness of such
Restricted Subsidiary is not prohibited by the Indenture; (9) any guaranty by a
Restricted Subsidiary that is organized under the laws of a jurisdiction other
than the United States or any subdivision thereof of the Indebtedness of any of
its Subsidiaries that is a Restricted Subsidiary and that is organized under the
laws of a jurisdiction other than the United States or any subdivision thereof,
PROVIDED that incurrence of such Indebtedness of such Restricted Subsidiary is
not prohibited by the Indenture; (10) any guaranty by the Company or a
Subsidiary of the Company of Indebtedness or other obligations in a principal
amount not exceeding $250,000; (11) any guaranty in the form of an endorsement
of negotiable instruments for deposit or collection and similar transactions;
(12) any guaranty arising under or in connection with performance bonds,
indemnity bonds, surety bonds or commercial letters of credit not exceeding $25
million in aggregate principal amount from time to time outstanding; (13) any
guaranty by a Subsidiary of the Company of Indebtedness or other obligations of
another Subsidiary in effect at the time of such guarantor becoming a Subsidiary
and not created in contemplation thereof; or (14) any guaranty by the Company or
a Restricted Subsidiary of any Interest Swap Obligation, Currency Agreement or
Commodities Agreement relating to Indebtedness that is guaranteed pursuant to
another clause of this paragraph.
LIMITATION ON ASSET DISPOSITIONS
The Indenture provides that (i) the Company will not, and will not permit
any Restricted Subsidiary to, make any Asset Disposition unless the Company (or
the Restricted Subsidiary, as the case may be) receives consideration at the
time of such Asset Disposition at least equal to the fair market value for the
assets sold or otherwise disposed of (which shall be determined in good faith
(x) in the case of dispositions of assets having a fair market value of $10
million or more, by the Board of Directors of the Company, whose reasonable
determination shall be conclusive and evidenced by a Board Resolution, or (y) in
the case of dispositions of assets having a fair market value of less than $10
million but not less than $5 million, an Officer of the Company, whose
reasonable determination shall be conclusive and evidenced by a certificate of
such Officer) and (ii) the Company will apply the aggregate net proceeds in
excess of $300 million received by the Company or any Restricted Subsidiary from
all Asset Dispositions occurring subsequent to November 1, 1991 (but excluding
for purposes of this clause (ii), whether before or after the receipt of net
proceeds in excess of $300 million, (1) the net proceeds of any Asset
Disposition or series of related Asset Dispositions where the net proceeds are
less than $5 million and (2) the first $25 million of net proceeds in each
fiscal year without taking into account any amount excluded pursuant to (1)) as
follows: (a) to the payment or prepayment of any Senior Indebtedness within six
months of such Asset Disposition, or (b) to investment in the business of the
Company and its Restricted Subsidiaries (including, without limitation, by
acquiring equity, other than Redeemable Stock, of the transferee of such Asset
Disposition) within six months of such Asset Disposition or, if such investment
is with respect to a project to be completed within a period greater than six
months from such Asset Disposition, then within the period of time necessary to
complete such project; PROVIDED, HOWEVER, that (x) in the case of applications
contemplated by clause (b), the Board of Directors has, within such six-month
period, adopted in good faith a resolution committing such excess proceeds to
such investment, (y) except as provided in the next sentence, none of such
excess proceeds shall be used to make any Restricted Payment or any payment in
respect of Subordinated Indebtedness and (z) to the extent not applied in
accordance with clauses (a) or (b) above, or if after being so applied there
remain excess net proceeds in an amount greater than $10 million, the Company
shall make a pro rata offer to all Holders to purchase Notes at 100% of
principal amount, plus accrued and unpaid interest to the Asset Disposition
Payment Date (as defined below), up to an aggregate principal amount equal to
such excess net proceeds (the "Asset Disposition Offer Amount"). If after being
applied in accordance with clauses (a), (b) and (z) above there remain excess
net proceeds, the Company will apply such excess net proceeds to the general
corporate purposes of the Company or any Subsidiary of the Company.
Notwithstanding the foregoing, to the extent the Company or any of its
Restricted Subsidiaries receives securities or other non-cash property or assets
as proceeds of an Asset Disposition (other than
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equity in the transferee not constituting Redeemable Stock), the Company shall
not be required to make any application required by the preceding paragraph
until it receives cash proceeds from a sale, repayment, exchange, redemption or
retirement of or extraordinary dividend or return of capital on such non-cash
property, EXCEPT that if and to the extent the sum of all cash proceeds plus the
fair market value of equity (other than Redeemable Stock) in the transferee of
such Asset Disposition received at the time of such Asset Disposition is less
than 70% of the fair market value of the total proceeds of such Asset
Disposition (with such fair market value determined and evidenced in the same
manner as stated in clause (i) of the preceding paragraph), the amount of such
deficiency (the "Deficiency Amount") shall be applied as required by the
preceding paragraph as if received at the time of the Asset Disposition. Any
amounts deferred pursuant to the preceding sentence shall be applied in
accordance with the preceding paragraph when cash proceeds are thereafter
received from a sale, repayment, exchange, redemption or retirement of or
extraordinary dividend or return of capital on such non-cash property; PROVIDED,
HOWEVER, that the Company shall not be required to apply with respect to any
equity interest in a transferee an amount exceeding the fair market value
attributable to such equity interest at the time of the Asset Disposition; and
PROVIDED, FURTHER, that if a Deficiency Amount was applied pursuant to the
exception contained in the preceding sentence, then once the cumulative amount
of applications made pursuant to the preceding paragraph and this paragraph
(including any Deficiency Amounts) equals 100% of the fair market value of the
total proceeds of the Asset Disposition at the time of such Asset Disposition,
cash proceeds thereafter received from a sale, repayment, exchange, redemption
or retirement of or extraordinary dividend or return of capital on such non-cash
property shall not be required to be applied in accordance with the preceding
paragraph except to the extent such cash proceeds exceed the Deficiency Amount.
An offer to purchase Notes required to be made pursuant to this covenant is
an "Asset Disposition Offer" and the date on which the purchase of Notes
relating to any such Asset Disposition Offer is to be made is an "Asset
Disposition Payment Date."
Notice of an Asset Disposition Offer shall be mailed on behalf of the
Company by the Trustee to all Holders of Notes at their last registered
addresses not less than 30 days nor more than 60 days before the Asset
Disposition Payment Date, which shall be a date not more than 210 days after the
Asset Disposition giving rise to such Asset Disposition Offer. The Asset
Disposition Offer shall remain open from the time of the mailing of such notice
until not more than five Business Days before the Asset Disposition Payment
Date.
On the Asset Disposition Payment Date, the Company shall (i) accept for
payment Notes or portions thereof tendered pursuant to the Asset Disposition
Offer in an aggregate principal amount equal to the Asset Disposition Offer
Amount or such lesser amount of Notes as shall have been tendered, (ii) deposit
with the Paying Agent money sufficient to pay the purchase price of all Notes or
portions thereof so accepted, and (iii) deliver or cause to be delivered to the
Trustee, Notes so accepted together with an Officer's Certificate stating the
Notes or portions thereof accepted by the Company. If the aggregate principal
amount of Notes tendered exceeds the Asset Disposition Offer Amount, the Company
shall select the Notes to be purchased on a PRO RATA basis to the nearest $1,000
of principal amount. The Paying Agent shall promptly mail or deliver to Holders
of Notes so accepted payment in an amount equal to the purchase price, and the
Company shall execute and the Trustee shall promptly authenticate and mail or
make available for delivery to such Holders a new Note equal in principal amount
to any unpurchased portion of the Note surrendered. The Company will publicly
announce the results of the Asset Disposition Offer.
The Company shall not make an "Asset Disposition Offer" (as defined)
required under the 1991 Indenture in connection with a disposition of assets
other than the Collateral unless the Company shall have made an Asset
Disposition Offer in respect of the First Mortgage Notes and Senior Notes (and
certain other Senior Indebtedness in accordance with the following sentence) on
a PRO RATA basis (in an aggregate amount equal to the amount to be offered
pursuant to the Asset Disposition Offer under the 1991 Indenture), the closing
date of which is prior to six months after the asset disposition triggering the
obligations of the Company under the 1991 Indenture. Notwithstanding the
previous sentence, if on or
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after the date of the Indenture, the Company issues any Senior Indebtedness
(including the Senior Notes or the First Mortgage Notes, as the case may be)
containing a requirement that an offer be made to repurchase such Senior
Indebtedness under the same circumstances and in the same manner (including the
prescribed time periods hereof) provided herein, then (i) the Company may apply
the Asset Disposition Offer Amount (before any adjustment pursuant to this
sentence) to the pro rata purchase of First Mortgage Notes and Senior Notes
tendered under the Indentures and the Senior Indebtedness tendered thereunder
and (ii) the Asset Disposition Offer Amount available to repurchase the First
Mortgage Notes or the Senior Notes, as the case may be, shall be reduced by the
amount applied to the purchase of such Senior Indebtedness; PROVIDED that this
sentence shall only apply to (i) Senior Indebtedness issued on or after the
Issue Date that explicitly permits the pro rata purchase of First Mortgage Notes
and Senior Notes as described in the Indenture and refers to the "Limitation on
Asset Dispositions" covenant and any Indebtedness outstanding at the Issue Date
that is amended to explicitly permit the PRO RATA purchase of First Mortgage
Notes and Senior Notes as described therein and refers to the "Limitation on
Asset Dispositions" covenant and (ii) asset dispositions not involving
Collateral.
In the event that the First Mortgage Notes are refinanced through a public
or private offering of Indebtedness constituting debt securities and the amount
of such refinancing Indebtedness is no greater than the principal amount of the
First Mortgage Notes Outstanding as of the date of such refinancing, the Company
need not comply with the first paragraph of this covenant in respect of an Asset
Disposition involving the collateral securing such Indebtedness (other than
collateral granted in respect of such Indebtedness pursuant to a negative pledge
or similar provision contained in the indenture or similar instrument relating
to such Indebtedness) to the extent that such compliance would constitute a
default under such indenture or similar instrument.
RESTRICTIONS ON MERGERS AND CONSOLIDATIONS AND SALES OF ASSETS
The Indenture provides that the Company shall not consolidate with, or merge
with or into any other corporation (whether or not the Company shall be the
surviving corporation), or sell, assign, transfer or lease all or substantially
all of its properties and assets as an entirety or substantially as an entirety
to any Person or group of affiliated Persons, in one transaction or a series of
related transactions, unless: (1) either the Company shall be the continuing
Person or the Person (if other than the Company) formed by such consolidation or
with which or into which the Company is merged or the Person (or group of
affiliated Persons) to which all or substantially all the properties and assets
of the Company are sold, assigned, transferred or leased is a corporation (or
constitute corporations) organized under the laws of the United States of
America or any State thereof or the District of Columbia and expressly assumes,
by an indenture supplemental to the Indenture, all the obligations of the
Company under the Notes, the Indenture and, in the case of the First Mortgage
Notes, the Security Documents, including the First Mortgage Note Trustee's
uninterrupted Lien (subject to Permitted Collateral Liens) in respect of the
Collateral; (2) immediately before and after giving effect to such transaction
or series of related transactions, no Event of Default, and no Default, shall
have occurred and be continuing; (3) immediately after giving effect to such
transaction or series of related transactions, on a pro forma basis, but prior
to any purchase accounting adjustments resulting from the transaction or series
of related transactions, the Consolidated Net Worth of the Company (or of the
surviving, consolidated or transferee entity if the Company is not continuing,
treating such entity as the Company for purposes of determining Consolidated Net
Worth) shall be at least equal to the Consolidated Net Worth of the Company
immediately before such transaction; (4) immediately after giving effect to such
transaction or series of related transactions, the Company (or the surviving,
consolidated or transferee entity if the Company is not continuing, but treating
such entity as the Company for purposes of making such determination) would be
permitted to incur an additional dollar of Indebtedness (not constituting
Permitted Indebtedness) immediately prior to such transaction or series of
related transactions, under the covenant contained in the Indenture restricting
the incurrence of Indebtedness; PROVIDED, HOWEVER, that this clause (4) shall be
inapplicable if (a) such transaction or series of related transactions, would
result in the occurrence of a Change of Control or (b) immediately prior to
giving effect to such transaction or series of related
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transactions, the Company would not be permitted to incur an additional dollar
of Indebtedness (not constituting Permitted Indebtedness) under such covenant,
and immediately after giving effect to such transaction or series of related
transactions, on a pro forma basis, but prior to any purchase accounting
adjustments resulting from the transaction or series of related transactions,
the Consolidated Interest Coverage Ratio of the Company (or the surviving,
consolidated or transferee entity if the Company is not continuing, treating
such entity as the Company for purposes of determining the Consolidated Interest
Coverage Ratio) shall be at least equal to the Consolidated Interest Coverage
Ratio of the Company immediately before such transaction or series of related
transactions; and (5) the Company shall have delivered to the Trustee an
Officer's Certificate and an Opinion of Counsel, each stating that such
consolidation, merger or transfer and such supplemental indenture comply with
the Indenture and that all conditions precedent to the consummation of the
transaction or series of related transactions under the Indenture have been met.
Notwithstanding the foregoing, if clause (4) of the preceding sentence is
inapplicable by reason of clause (b) of the proviso thereto, and at the date
three months after the consummation of such transaction or series of related
transactions, the rating ascribed to the Notes by Standard and Poor's
Corporation or Moody's Investors Service, Inc. shall be lower than the rating
ascribed to the Notes prior to the public announcement of such transaction, then
the Company shall make an offer for the Notes at the same price and following
the same procedures and obligations as required with respect to a Change of
Control (as if such date three months after the giving effect to such
transaction were the "Change of Control Date"). See "-- Limitation on Future
Incurrence of Indebtedness" above and "-- Change of Control" below.
If, upon any consolidation or merger, or upon any sale, assignment, transfer
or lease, as provided in the preceding paragraph, any material property of the
Company or any Restricted Subsidiary or any shares of Capital Stock or
Indebtedness of any Restricted Subsidiary, owned immediately prior thereto,
would thereupon become subject to any Lien securing any indebtedness for
borrowed money of, or guaranteed by, such other corporation or Person (other
than any Permitted Lien), the Company, prior to such consolidation, merger,
sale, assignment, transfer or lease, will, by an indenture supplemental to the
Indenture, secure the due and punctual payment of the principal of, and premium,
if any, and interest on the Notes then Outstanding (together with, if the
Company shall so determine, any other indebtedness of, or guaranteed by, the
Company or any Restricted Subsidiary and then existing or thereafter created)
equally and ratably with (or, at the option of the Company, prior to) the
Indebtedness secured by such Lien.
CHANGE OF CONTROL
Upon the occurrence of a Change of Control (the "Change of Control Date")
and subject to the requirements of the next succeeding sentence, each Holder
shall have the right to require that the Company repurchase such Holder's Notes
in whole or in part pursuant to the offer described below (the "Change of
Control Offer") at a purchase price equal to 101% of the aggregate principal
amount of such Notes plus accrued and unpaid interest, if any, to the date of
such repurchase. If such repurchase would constitute an event of default under
Specified Bank Debt, then, prior to giving the notice to Holders provided below,
the Indenture requires the Company to (1) repay in full in cash such Specified
Bank Debt or (2) obtain the requisite consent of holders of such Specified Bank
Debt to permit the repurchase of Notes without giving rise to an event of
default under such Specified Bank Debt.
After giving effect to the Offerings and the Related Transactions,
approximately $461 million of Specified Bank Debt is expected to be outstanding.
Promptly upon satisfaction of either one of the obligations, if then
applicable, described above, Company shall mail a notice to each Holder of Notes
and the Trustee in respect of the Change of Control Offer (which notice shall
contain all instructions and materials necessary to enable such Holders to
tender Notes). All Notes tendered will be accepted for payment on a date (the
"Change of Control Payment Date") which shall be no earlier than 30 days nor
later than 40 days from the date such notice is mailed, but in any event prior
to the date on which any Subordinated Indebtedness is paid pursuant to the terms
of a provision similar to the Change of Control Offer covenant.
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On the Change of Control Payment Date, the Company shall (i) accept for
payment Notes or portions thereof tendered pursuant to the Change of Control
Offer, (ii) deposit with the Paying Agent money sufficient to pay the purchase
price of all Notes or portions thereof so accepted and (iii) deliver or cause to
be delivered to the Trustee Notes so accepted, together with an Officer's
Certificate stating the aggregate principal amount of the Notes or portions
thereof so accepted by the Company. The Paying Agent shall promptly mail or
deliver to the Holder of Notes so accepted payment in an amount equal to the
purchase price, and the Trustee shall promptly authenticate and mail or make
available for delivery to such Holder a new Note and equal in principal amount
to any unpurchased portion of the Note surrendered. The Company will publicly
announce the results of the Change of Control Offer.
Whether a Change of Control has occurred depends entirely on the
accumulation of common stock of the Company and on certain changes in the
composition of the Company's Board of Directors. As a result, the Company can
enter into certain highly leveraged transactions, including certain
recapitalizations, mergers or stock repurchases, that would not result in the
application of the Change of Control provisions. Because the definitions of
"Change of Control" and "Acquiring Person" exclude the Company, any Subsidiary
of the Company and certain members of the Stone family, certain transactions in
which such entities and persons participate as beneficial owners of Common Stock
(including, among others, a leveraged buyout or recapitalization) would not
constitute a Change of Control.
RANKING OF NOTES
The payment of the principal of, interest on and any other amounts due on
Subordinated Indebtedness will be subordinated in right of payment to the prior
payment in full of the Senior Notes and the First Mortgage Notes. The Senior
Notes and the First Mortgage Notes are senior to the Company's $150 million
principal amount of 10 3/4% Senior Subordinated Notes due June 15, 1997, $125
million principal amount of 11% Senior Subordinated Notes due August 15, 1999,
$230 million principal amount of 11 1/2% Senior Subordinated Notes due September
1, 1999, $200 million principal amount of 10 3/4% Senior Subordinated Debentures
due April 1, 2002, $250 million principal amount of 8 7/8% Convertible Senior
Subordinated Notes due July 15, 2000 and $115 million principal amount of 6 3/4%
Convertible Subordinated Debentures due February 15, 2007.
EVENTS OF DEFAULT AND NOTICE THEREOF
The following are Events of Default under the Indenture: (1) failure to pay
interest on any Note when due, continued for 30 days; (2) failure to pay the
principal of (or premium, if any, on) any Note when due and payable at Maturity,
upon redemption, upon repurchase pursuant to a Deficiency Offer as described
under "Maintenance of Subordinated Capital Base" above, pursuant to an Asset
Disposition Offer described under "Limitation on Asset Dispositions," First
Mortgage Note Offer as described under "Particular Terms of the First Mortgage
Notes -- Limitation on Collateral Asset Dispositions" or a Change in Control
Offer as described under "Change of Control Offer" above or otherwise; (3)
failure to observe or perform any other covenant, warranty or agreement
contained in the Notes or in the Indenture continued for a period of 60 days
after notice has been given to the Company by the Trustee or Holders of at least
25% in aggregate principal amount of the Outstanding Notes; (4) failure to pay
at final maturity, or acceleration of, Indebtedness of the Company having an
aggregate principal amount of not less than $25 million (or, if less, the least
amount contained in any similar provision of an instrument governing any
outstanding Subordinated Indebtedness of the Company, but in no event less than
$10 million), unless cured within 15 days after notice has been given to the
Company by the Trustee or Holders of at least 25% in aggregate principal amount
of the Outstanding Notes; (5) the entering against the Company of one or more
judgments or decrees involving an aggregate liability of $25 million or more
unless vacated, discharged, satisfied or stayed within 30 days of the entering
of such judgments or decrees; (6) certain events of bankruptcy, insolvency or
reorganization relating to the Company; (7) in the case of the First Mortgage
Note Indenture, the failure to observe or perform any covenant or agreement
under the "Limitation on Collateral Asset Dispositions" covenant and continuance
of such failure for 30 days; and (8) in the case of the First Mortgage Note
Indenture, (i) a default in performance or breach of any covenant or agreement
contained in any Security Document which is not cured within 30 days after
notice has been given to the Company by the First Mortgage Note Trustee or
Holders of at least 25% of
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the principal amount of Outstanding First Mortgage Notes, (ii) for any reason,
other than the satisfaction in full and discharge of all obligations secured
thereby, to the extent permitted by the First Mortgage Note Indenture or any
Security Document, any Security Document ceases to be in full force and effect,
any Lien intended to be created thereby ceases to be or is not a valid and
perfected Lien having the ranking or priority contemplated thereby or any Person
(other than the Trustee and the Holders or the Company) obtains any interest in
the Collateral or any part thereof, except for Permitted Collateral Liens and
continuance of such condition for 30 days, or (iii) the Company asserts in
writing that any Security Document has ceased to be or is not in full force and
effect, in contravention of the First Mortgage Note Indenture.
The Indenture provides that the Trustee shall, within 30 days after the
occurrence of any Default or Event of Default give the Holders of Notes notice
of all uncured Defaults or Events of Default known to it (the term "Default" to
include the events specified above without grace or notice); PROVIDED, HOWEVER,
that, except in the case of an Event of Default or a Default in payment on any
Note, the Trustee shall be protected in withholding such notice if and so long
as the board of directors, the executive committee or directors or responsible
officers of the Trustee in good faith determine that the withholding of such
notice is in the interest of the Holders of Notes.
If an Event of Default (other than due to event of bankruptcy, insolvency or
reorganization) occurs and is continuing, the Trustee or the Holders of at least
25% in aggregate principal amount of the Outstanding Notes by notice in writing
to the Company (and to the Trustee if given by the Holders of at least 25% in
aggregate amount of Notes), may declare the unpaid principal of and accrued
interest to the date of acceleration on all the Outstanding Notes to be due and
payable immediately and, upon any such declaration, the Notes shall become
immediately due and payable.
If an Event of Default occurs due to bankruptcy, insolvency or
reorganization, all unpaid principal (without premium) of and accrued interest
on the Outstanding Notes IPSO FACTO becomes immediately due and payable without
any declaration or other act on the part of the Trustee or any Holder of any
Notes.
Any such declaration with respect to Notes may be annulled and past Events
of Default and Defaults (except, unless theretofore cured, an Event of Default
or a Default, in payment of principal of or interest on the Notes) may be waived
by the Holders of at least two-thirds of the principal amount of the Outstanding
Notes upon the conditions provided in the Indenture.
The Indenture provides that the Company will periodically file statements
with the Trustee regarding compliance by the Company with certain of the
covenants thereof and specifying any Event of Default or Defaults in performing
such covenants of which the signers may have knowledge.
MODIFICATION OF INDENTURES; WAIVER
The Indenture may be modified by the Company and the Trustee without the
consent of any Holders with respect to certain matters, including (i) to cure
any ambiguity, defect or inconsistency or to correct or supplement any provision
which may be inconsistent with any other provision of the Indenture and (ii) to
make any change that does not materially adversely affect the interests of any
Holder of Notes. In addition, under the Indenture, certain rights and
obligations of the Company and the rights of Holders of the Notes may be
modified by the Company and the Trustee with the written consent of the Holders
of at least two-thirds of the principal amount of the Outstanding Notes; but no
extension of the maturity of any Notes, reduction in the interest rate or
extension of the time for payment of interest, change in the optional redemption
or repurchase provisions in a manner adverse to any Holder of Notes, other
modification in the terms of payment of the principal of or interest on any
Notes or reduction of the percentage required for modification, will be
effective against any Holder of any Outstanding Note without his consent.
The Holders of at least two-thirds in principal amount of the Outstanding
Notes may on behalf of the Holders of all Notes waive compliance by the Company
with certain restrictive covenants of the Indenture. The Holders of at least
two-thirds in principal amount of the Outstanding Notes may on behalf of the
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Holders of all Notes waive any past Event of Default or Default under the
Indenture, except an Event of Default or a Default in the payment of the
principal of or premium, if any, or any interest on any Note or in respect of a
provision which under the Indenture cannot be modified or amended without the
consent of the Holder of each Outstanding Note.
SATISFACTION AND DISCHARGE OF INDENTURES; DEFEASANCE
The Company may terminate its substantive obligations in respect of the
Notes by delivering all Outstanding Notes to the Trustee for cancellation and
paying all sums payable by it on account of principal of and interest on all
Notes. The Company may terminate its substantive obligations in respect of the
Notes (except for its obligations to pay the principal of (and premium, if any,
on) and the interest on the Notes) by (i) depositing with the Trustee under the
terms of an irrevocable trust agreement, money or United States Government
Obligations sufficient to pay all remaining indebtedness on the Notes, (ii)
delivering to the Trustee either an Opinion of Counsel or a ruling directed to
the Trustee from the Internal Revenue Service to the effect that the Holders of
the Notes will not recognize income, gain or loss for federal income tax
purposes as a result of such deposit and termination of obligations, and (iii)
complying with certain other requirements set forth in the Indenture. In
addition, the Company may terminate all of its substantive obligations in
respect of the Notes (including its obligations to pay the principal of (and
premium, if any, on) and interest on the Notes) by (i) depositing with the
Trustee under the terms of an irrevocable trust agreement, money or United
States Government Obligations sufficient to pay all remaining indebtedness on
the Notes, (ii) delivering to the Trustee either a ruling directed to the
Trustee from the Internal Revenue Service to the effect that the Holders of the
Notes will not recognize income, gain or loss for federal income tax purposes as
a result of such deposit and termination of obligations or an Opinion of
Counsel, based upon such a ruling or a change in the applicable federal tax law
since the date of the Indenture, to such effect, and (iii) complying with
certain other requirements set forth in the Indenture.
THE TRUSTEES
The Bank of New York will be the Trustee under the Senior Note Indenture.
The Company maintains normal commercial banking relations with The Bank of New
York, which may also be a lender under the Credit Agreement and which is the
trustee under other indentures of the Company.
Norwest Bank Minnesota, National Association will be the Trustee under the
First Mortgage Notes Indenture. Norwest Bank Minnesota is the trustee under
other indentures of the Company.
CERTAIN DEFINITIONS
For purposes of the Indenture, certain defined terms have the following
meanings:
"ACQUIRING PERSON" means any Person or group (as defined in Section 13(d)(3)
of the Exchange Act) who or which, together with all affiliates and associates
(as defined in Rule 12b-2 under the Exchange Act), becomes the beneficial owner
of shares of common stock of the Company having more than 50% of the total
number of votes that may be cast for the election of directors of the Company;
PROVIDED, HOWEVER, that an Acquiring Person shall not include (i) the Company,
(ii) any Subsidiary of the Company, (iii) any employee benefit plan of the
Company or any Subsidiary of the Company or any entity holding common stock of
the Company for or pursuant to the terms of any such plan, (iv) any descendant
of Joseph Stone or the spouse of any such descendant, the estate of any such
descendant or the spouse of any such descendant, any trust or other arrangement
for the benefit of any such descendant or the spouse of any such descendant or
any charitable organization established by any such descendant or the spouse of
any such descendant (collectively, the "Stone Family"), or (v) any group which
includes any member or members of the Stone Family and a majority of the common
stock of the Company held by such group is beneficially owned by such member or
members. Notwithstanding the foregoing, no Person shall become an "Acquiring
Person" as the result of an acquisition of common stock by the Company which, by
reducing the number of shares outstanding, increases the proportionate number of
shares beneficially owned by such Person to more than 50% or more of the common
stock of the Company then outstanding; PROVIDED, HOWEVER, that if a Person shall
become the beneficial owner of more than 50% or more of the common stock of the
Company then outstanding by
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reason of share purchases by the Company and shall, after such share purchases
by the Company, become the beneficial owner of any additional shares of common
stock of the Company, then such Person shall be deemed to be an "Acquiring
Person."
"ASSET DISPOSITION" means any sale, transfer, sale-leaseback or other
disposition of (i) shares of Capital Stock of a Restricted Subsidiary (other
than directors' qualifying shares) or (ii) property or assets of the Company or
any Restricted Subsidiary (other than a sale, transfer, sale-leaseback or other
disposition of Receivables and other assets or property described in clause (vi)
of the definition of Permitted Liens pursuant to a Receivables sale constituting
Indebtedness pursuant to clause (ii) of the definition thereof); PROVIDED,
HOWEVER, that an Asset Disposition shall not include any sale, transfer or other
disposition (a) of Collateral, (b) by a Restricted Subsidiary to the Company or
to another Restricted Subsidiary or by the Company to a Restricted Subsidiary,
(c) of defaulted Receivables for collection or (d) in the ordinary course of
business, but shall include any sale, transfer, sale-leaseback or other
disposition by the Company or a Restricted Subsidiary to an Unrestricted
Subsidiary of the shares, property or assets referred to in clauses (i) and
(ii). The designation by the Company of a Subsidiary of the Company as an
"Unrestricted Subsidiary" shall constitute an Asset Disposition of such
Subsidiary's property and assets net of its liabilities, unless the transfer of
property and assets to such Subsidiary has previously constituted an Asset
Disposition.
"CAPITALIZED LEASE OBLIGATION" means, in respect of any Person, an
obligation to pay rent or other amounts under a lease that is required to be
capitalized for financial reporting purposes in accordance with GAAP, and the
amount of Indebtedness represented by such obligation shall be the capitalized
amount of such obligation determined in accordance with such principles.
"CHANGE OF CONTROL" means any event by which (i) an Acquiring Person has
become such or (ii) Continuing Directors cease to comprise a majority of the
members of the Board of Directors of the Company.
"CONSOLIDATED AMORTIZATION EXPENSE" means, for any period, the amortization
expense of the Company and its Restricted Subsidiaries for such period,
determined on a consolidated basis in accordance with GAAP.
"CONSOLIDATED CASH FLOW AVAILABLE FOR FIXED CHARGES" means, for any period,
(a) the sum of the amounts for such period of (i) Consolidated Net Income, (ii)
Consolidated Interest Expense, (iii) Consolidated Income Tax Expense, (iv)
Consolidated Depreciation Expense, (v) Consolidated Amortization Expense and
(vi) other non-cash items reducing Consolidated Net Income, MINUS (b) non-cash
items increasing Consolidated Net Income, all as determined on a consolidated
basis for the Company and its Restricted Subsidiaries in accordance with GAAP.
"CONSOLIDATED DEPRECIATION EXPENSE" means, for any period, the depreciation
expense of the Company and its Restricted Subsidiaries for such period,
determined on a consolidated basis in accordance with GAAP.
"CONSOLIDATED FREE CASH FLOW" means, for any period, (a) the sum of the
amounts for such period of (i) Consolidated Net Income, (ii) Consolidated
Depreciation Expense and (iii) Consolidated Amortization Expense, MINUS (b) the
sum of (i) Restricted Payments (as defined under the subsection entitled
"Dividend Restrictions" above) during such period, (ii) net reduction during
such period in Indebtedness of the Company and its Restricted Subsidiaries
(other than as a result of Asset Dispositions, Collateral Asset Dispositions or
Collateral Loss Events) and (iii) the excess (but not the deficit) of capital
expenditures of the Company and its Restricted Subsidiaries for such period not
financed pursuant to clause (vi) of the definition of Permitted Indebtedness
over Consolidated Depreciation Expense.
"CONSOLIDATED INCOME TAX EXPENSE" means, for any period, the aggregate of
the income tax expense of the Company and its Restricted Subsidiaries for such
period, determined on a consolidated basis in accordance with GAAP.
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"CONSOLIDATED INTEREST COVERAGE RATIO" means, for any period, the ratio of
(i) Consolidated Cash Flow Available for Fixed Charges to (ii) Consolidated
Interest Expense.
"CONSOLIDATED INTEREST EXPENSE" means, for any period, the interest expense
(including the interest component of all Capitalized Lease Obligations and the
earned discount or yield with respect to a Receivables sale constituting
Indebtedness) of the Company and its Restricted Subsidiaries for such period,
determined on a consolidated basis in accordance with GAAP; PROVIDED, HOWEVER,
that, with respect to revolving credit, revolving Receivables purchases or other
similar arrangements, the interest expense in respect thereof for any period
shall be, the pro forma interest expense attributable to all amounts committed
during such period under such revolving credit, revolving Receivables purchases
or other similar arrangements, whether or not such amounts were actually
outstanding during such period, in accordance with the terms thereof, in each
case on a consolidated basis in accordance with GAAP.
"CONSOLIDATED NET INCOME" means, for any period, the net income (or loss) of
the Company and its Restricted Subsidiaries on a consolidated basis for such
period taken as a single accounting period, determined in accordance with GAAP;
PROVIDED, HOWEVER, that: (a) there shall be excluded therefrom (i) the net
income (or loss) of any Person (other than the Company) which is not a
Restricted Subsidiary, except to the extent of the amount of dividends or other
distributions actually paid in cash or tangible property or tangible assets
(such property or assets to be valued at their fair market value net of any
obligations secured thereby) to the Company or any of its Restricted
Subsidiaries by such Person during such period, (ii) EXCEPT to the extent
includible pursuant to the foregoing clause (i), the net income (or loss) of any
Person accrued prior to the date it becomes a Restricted Subsidiary or is merged
into or consolidated with the Company or any of its Restricted Subsidiaries or
that Person's property or assets are acquired by the Company or any of its
Restricted Subsidiaries, (iii) the net income of any Restricted Subsidiary to
the extent that the declaration or payment of dividends or similar distributions
by that Restricted Subsidiary of that income is not at the time permitted by
operation of the terms of its charter or any agreement, instrument, judgment,
decree, order, statute, rule or governmental regulation applicable to that
Restricted Subsidiary (other than restrictions contained in the instruments
relating to the 12 1/8% Subordinated Debentures due September 15, 2001 of Stone
Southwest) and (iv) the excess (but not the deficit), if any, of (x) any gain
which must be treated as an extraordinary item under GAAP or any gain realized
upon the sale or other disposition of any asset that is not sold in the ordinary
course of business or of any Capital Stock of a Restricted Subsidiary over (y)
any loss which must be treated as an extraordinary item under GAAP or any loss
realized upon the sale or other disposition of any asset that is not sold in the
ordinary course of business or of any Capital Stock of a Restricted Subsidiary;
and (b) there shall be included therein the amount of cash realized by the
Company or any of its Restricted Subsidiaries during such period on account of
dividends or other distributions theretofore paid in other than cash or tangible
property or tangible assets by a Person which is not a Restricted Subsidiary.
"CONSOLIDATED NET WORTH" means the amount which at any date of
determination, in conformity with GAAP consistently applied, would be set forth
under the caption "stockholders' equity" (or any like caption) on the
consolidated balance sheet of the Company and its Restricted Subsidiaries,
exclusive of amounts attributable to Redeemable Stock (at such time as no
Indebtedness is outstanding under the 1991 Indenture, excluding the effects of
foreign currency translation adjustments). If the Company has changed one or
more of the accounting principles used in the preparation of its financial
statements because of a change mandated by the Financial Accounting Standards
Board or its successor, then Consolidated Net Worth shall mean the Consolidated
Net Worth the Company would have had if the Company had continued to use those
generally accepted accounting principles employed on November 1, 1991.
"CONTINENTAL GUARANTY" means the Guaranty dated as of October 7, 1983
between The Continental Group, Inc. and the Company, as amended from time to
time.
"CONTINUING DIRECTOR" means any member of the Board of Directors, while such
person is a member of such Board of Directors, who is not an Acquiring Person,
or an Affiliate or associate of an Acquiring Person or a representative of an
Acquiring Person or of any such Affiliate or associate and who (a) was a
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member of the Board of Directors prior to November 1, 1991, or (b) subsequently
became or becomes a member of such Board of Directors and whose nomination for
election or election to such Board of Directors was or is recommended or
approved by resolution of a majority of the Continuing Directors or who was or
is included as a nominee in a proxy statement of the Company distributed when a
majority of such Board of Directors consists of Continuing Directors.
"CREDIT AGREEMENTS" means (i) the credit agreement, dated as of March 1,
1989, by and among the Company, the financial institutions signatory thereto,
Bankers Trust Company, as agent for such financial institutions, and Citibank,
N.A., Chemical Bank (as successor by merger to Manufacturers Hanover Trust
Company) and The First National Bank of Chicago, as co-agents for such financial
institutions, as amended, modified, refinanced (including, without limitation,
by the New Credit Agreement) or extended from time to time, (ii) the credit
agreement, dated as of March 1, 1989, by and among Stone Canada, the financial
institutions signatory thereto, and Bankers Trust Company, as agent for such
financial institutions, and Citibank, N.A., Chemical Bank (as successor by
merger to Manufacturers Hanover Trust Company) and The First National Bank of
Chicago, as co-agents for such financial institutions, as amended, modified,
refinanced (including, without limitation, by the New Credit Agreement) or
extended from time to time and (iii) the revolving credit agreement, dated as of
March 1, 1989, by and among Stone Canada, the financial institutions signatory
thereto, BT Bank of Canada, as administrative agent, The Bank of Nova Scotia, as
payment agent, and Bankers Trust Company, as collateral agent, as amended,
modified, refinanced (including, without limitation, by the New Credit
Agreement) or extended from time to time.
"GAAP" means generally accepted accounting principles, as in effect as of
November 1, 1991 in the United States of America, set forth in the opinions and
pronouncements of the Accounting Principles Board of the American Institute of
Certified Public Accountants and statements and pronouncements of the Financial
Accounting Standards Board or in such other statements by such other entity as
is approved by a significant segment of the accounting profession.
"INDEBTEDNESS" means (without duplication), with respect to any Person, (i)
any obligation of such Person to pay the principal of, premium, if any, interest
on, penalties, reimbursement or indemnification amounts, fees, expenses or other
amounts relating to any indebtedness, and any other liability, contingent or
otherwise, of such Person (A) for borrowed money or the deferred purchase price
of property or services (excluding trade payables and payables, indebtedness,
obligations and other liabilities of the Company to any Restricted Subsidiary or
of any Restricted Subsidiary to the Company or to any other Restricted
Subsidiary), whether or not the recourse of the lender is to the whole of the
assets of such Person or only to a portion thereof; (B) for any letter of credit
for the account of such Person supporting other obligations of such Person
described in this definition; or (C) for the payment of money relating to a
Capitalized Lease Obligation; (ii) the unrecovered investment of a purchaser
(other than the Company or any of its Restricted Subsidiaries) of such Person's
Receivables pursuant to a Receivables purchase facility or otherwise (whether or
not characterized as a sale of such Receivables or a secured loan, but excluding
any disposition of Receivables in connection with a disposition of fixed assets
or a business of such Person and any disposition of defaulted Receivables for
collection), together with any obligation of such Person to pay any discount,
interest, fees, indemnification amounts, penalties, recourse on account of the
uncollectability of Receivables, expenses or other amounts in connection
therewith; (iii) any obligation of another Person (other than a Restricted
Subsidiary of such Person) of the kind described in the preceding clause (i) or
(ii), which the Person has guaranteed or which is otherwise its legal liability;
(iv) any obligation of another Person (other than a Restricted Subsidiary of
such Person) of the kind described in the preceding clause (i) or (ii) secured
by a Lien to which the property or assets of such Person are subject, whether or
not the obligation secured thereby shall have been assumed by or shall otherwise
be such Person's legal liability; and (v) any renewals, extensions or refundings
of any of the foregoing described in any of the preceding clauses (i), (ii),
(iii) and (iv). The "amount" or "principal amount" of Indebtedness of any Person
at any date, as used herein, shall be the outstanding principal amount at such
date of all unconditional Indebtedness, the maximum principal amount of any
contingent Indebtedness or the unrecovered purchaser's investment in a sale of
Receivables, in each case at
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such date and without taking into account any premium, interest, penalties,
reimbursement or indemnification amounts, fees, expenses or other amounts (other
than principal or unrecovered purchaser's investment) in respect thereof;
PROVIDED, HOWEVER, that (y) with respect to Indebtedness described in clause
(iv) above, the amount of Indebtedness shall be the lesser of (a) the amount of
the Indebtedness of such other Person that is secured by the property or assets
of such Person and (b) the fair market value of the property or assets securing
such Indebtedness, and (z) with respect to revolving credit, revolving
Receivables purchases or other similar arrangements, the amount of Indebtedness
thereunder shall be the amounts of such commitments as of the date of
determination.
"INSURANCE PROCEEDS" means any payment, proceeds or other amounts received
at any time by the Company or any of its Restricted Subsidiaries under any
insurance policy as compensation in respect of a Casualty, PROVIDED that
proceeds received by the Company from business interruption insurance shall not
constitute Insurance Proceeds.
"ISSUE DATE" means October 12, 1994.
"LIEN" means any mortgage, pledge, security interest, adverse claim (as
defined in Section 8.302(2) of the New York Uniform Commercial Code),
encumbrance, lien or charge of any kind (including any conditional sale or other
title retention agreement or lease in the nature thereof, any filing or
agreement to file a financing statement as debtor under the Uniform Commercial
Code or any similar statute other than to reflect ownership by a third party of
property leased to the Company or any of its Subsidiaries under a lease which is
not in the nature of a conditional sale or title retention agreement).
"NEW CREDIT AGREEMENT" means the credit agreement, dated as of October 12,
1994, by and among the Company, the financial institutions signatory thereto and
Bankers Trust Company, as agent for such financial institutions, as amended,
modified, refinanced or extended from time to time.
"ORDINARY COURSE OF BUSINESS LIENS" means, with respect to any Person,
(i) Liens for taxes, assessments, governmental charges, levies or claims
not yet delinquent or being contested in good faith;
(ii) statutory Liens of landlords, carriers, warehousemen, mechanics,
suppliers, materialmen, repairmen or other like Liens arising in the ordinary
course of business (including the construction of facilities) or deposits to
obtain the release of such Liens;
(iii) Liens in connection with workers' compensation, unemployment insurance
and other similar legislation;
(iv) zoning restrictions, licenses, easements, rights-of-way and other
similar charges or encumbrances or restrictions not interfering in any material
respect with the business of such Person or any of its Subsidiaries;
(v) Liens securing such Person's obligations with respect to commercial
letters of credit;
(vi) Liens to secure public or statutory obligations of such Person;
(vii) judgment and attachment Liens against such Person not giving rise to a
Default under the Notes or Liens created by or existing from any litigation or
legal proceeding against such Person which is currently being contested in good
faith by such Person in appropriate proceedings;
(viii) leases or subleases granted to other Persons or existing on property
acquired by such Persons;
(ix) Liens encumbering property or assets of such Person under construction
arising from progress or partial payments;
(x) Liens encumbering customary initial deposits and margin accounts and
other Liens securing obligations arising out of Interest Swap Obligations,
Currency Agreements and Commodities Agreements, in each case of the type
typically securing such obligations; PROVIDED, HOWEVER, that if such
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Interest Swap Obligations, Currency Agreements and Commodities Agreements relate
to Indebtedness not incurred in violation of the Indenture, such Lien may also
cover the property and assets securing the Indebtedness to which such Interest
Swap Obligations, Currency Agreements and Commodities Agreements relate;
(xi) Liens encumbering deposits made to secure obligations arising from
public, statutory, regulatory, contractual or warranty requirements or
obligations of such Person or its Subsidiaries (not constituting Indebtedness);
(xii) Liens arising from filing UCC financing statements regarding leases or
consignments;
(xiii) purchase money Liens securing payables (not constituting Indebtedness)
arising from the purchase by such Person or any of its Affiliates of any
equipment or goods in the ordinary course of business;
(xiv) Liens arising out of consignment or similar arrangement for the sale of
goods entered into by such Person or any of its Subsidiaries in the ordinary
course of business;
(xv) Liens in the ordinary course of business granted by such Person to
secure the performance of tenders, statutory obligations, surety and appeal
bonds, bids, leases, government contracts, or progress payments, performance and
return-of-money bonds and other similar obligations (not constituting
Indebtedness);
(xvi) Liens in favor of collecting banks constituting a right of set-off,
revocation, refund or chargeback with respect to money or instruments of the
Company or any Subsidiary on deposit with or in the possession of such bank; and
(xvii) Liens in favor of customs and revenue authorities.
"PERMITTED EXISTING INDEBTEDNESS OF AN ACQUIRED PERSON" means Indebtedness
of any Person (which may be assumed or guaranteed by, or may otherwise become
the legal liability of, the Company or any Restricted Subsidiary with or into
which such Person is merged or consolidated) existing at the time such Person
becomes a Restricted Subsidiary, or is merged with or into or consolidated with
the Company or one of its Restricted Subsidiaries, so long as such Indebtedness
was not created in anticipation of or as a result of such Person becoming a
Restricted Subsidiary or of such merger or consolidation, and any Indebtedness
to the extent exchanged for, or the net proceeds of which are used to refinance,
redeem or defease, such Indebtedness (or any extension, renewal or refinancing
thereof), or to finance any costs incurred in connection with such exchange,
refinancing, redemption or defeasance; PROVIDED, HOWEVER, that the proceeds of
such Indebtedness shall be used to so refinance, redeem or defease the
Indebtedness within 12 months of the incurrence of such subsequent Indebtedness.
"PERMITTED INDEBTEDNESS" means (i)(a) any Indebtedness in a principal amount
not exceeding the principal amount outstanding or committed under the Credit
Agreements (including any letter of credit facility thereunder) as of November
1, 1991 PLUS $250 million, and LESS the sum of (x) the proceeds from the sale of
all Indebtedness under the 1991 Indenture issued from time to time that is
applied to repay Indebtedness under the Credit Agreements and (y) the proceeds
from the sale of the First Mortgage Notes and the Senior Notes; (b) any
Indebtedness in a principal amount not exceeding 80% of the aggregate face
amount of Receivables of the Company and its Restricted Subsidiaries (measured
as of the latest date as of which information regarding Receivables is
available) and constituting Indebtedness described in clause (ii) of the
definition of Indebtedness or outstanding pursuant to any other revolving credit
facility; (c) any Indebtedness under the 1991 Indenture issued prior to the date
hereof, the proceeds of which have been used to repay Indebtedness under the
Credit Agreements within five business days after such issuance (and any
subsequent Indebtedness the proceeds of which are used
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to refinance such Indebtedness) and (d) the First Mortgage Notes and the Senior
Notes (and any subsequent Indebtedness the proceeds of which are used to
refinance such Indebtedness); PROVIDED, HOWEVER, that:
(1) the aggregate principal amount permitted to be outstanding under clause
(a) shall be reduced by the aggregate amount of any repayments or prepayments of
any Senior Indebtedness (other than the First Mortgage Notes, the Senior Notes
and Indebtedness issued under the 1991 Indenture) out of the proceeds of Asset
Dispositions as described in and required by "Limitation on Asset Dispositions"
above after November 1, 1991, and, thereafter, shall be increased if, at the end
of the fourth consecutive complete fiscal quarter after the initial reduction
pursuant to this clause (1) or at any anniversary of the end of such fourth
fiscal quarter, the Consolidated Free Cash Flow of the Company for the preceding
four quarters has been zero or greater, in which event the amount of the
increase shall be the amount by which the consolidated capital expenditures of
the Company and its Restricted Subsidiaries not financed by Indebtedness
referred to in clause (vi) of this definition during such four-quarter period
exceeds Consolidated Depreciation Expense for such period (provided any such
increase shall be made only to the extent all such reductions occurring prior to
the four fiscal quarters for which such calculation of Consolidated Free Cash
Flow has been made exceed all prior increases pursuant to this clause (1));
(2) (A) the aggregate amount permitted to be incurred under clause (a) shall
be reduced by the principal amount outstanding under the New Credit Agreement on
the Issue Date net of subsequent reductions thereof, and (B) the aggregate
amount permitted to be incurred under clause (b) shall be reduced by the
principal amounts outstanding under each of the Pledge and Administration
Agreement, dated as of August 15, 1991, between Stone Financial Corporation and
Castlewood Funding Corporation (the "Castlewood Agreement") and the Pledge and
Administrative Agreement, dated as of August 18, 1992, between Stone Fin II
Receivables Corporation and South Shore Funding Corporation on the Issue Date
net of subsequent reductions thereof;
(3) the Permitted Indebtedness contemplated by this clause (i) may be
incurred by the Company and, in the case of Permitted Indebtedness constituting
Indebtedness under clause (ii) of the definition of Indebtedness, by the Company
or any Restricted Subsidiary; and
(4) any Restricted Subsidiary in the Stone Canada Group may incur, assume or
guarantee any Indebtedness under clauses (i)(a) and (i)(b) above under any
revolving credit facilities of Restricted Subsidiaries in the Stone Canada Group
entered into pursuant to this clause (i), for which the aggregate amount
committed thereunder does not exceed an amount not exceeding $200 million, to
finance the working capital of Restricted Subsidiaries in the Stone Canada
Group;
(ii) Permitted Subordinated Indebtedness;
(iii) Permitted Refinancing Indebtedness;
(iv) Permitted Stone Canada Indebtedness;
(v) Permitted Existing Indebtedness of an Acquired Person;
(vi) Indebtedness incurred for the purpose of acquiring Capital Stock of
another Person, or assets comprising a business or line of business or
intangible assets or acquiring, constructing or improving fixed assets, in each
case related primarily to, or used in connection with, the paper or forest
products businesses and which (a) constitutes all or a portion of (but not more
than) the purchase price of such Capital Stock or assets (such purchase price
including any Indebtedness assumed or repaid in connection with such purchase)
or the cost of construction or improvement of such assets (together with any
transaction costs relating to such purchase, construction or improvement), (b)
is incurred prior to, at the time of or within 270 days after the acquisition,
construction or improvement of such assets for the purpose of financing the
purchase price of such Capital Stock or assets or the cost of construction or
improvement thereof (together with any transaction costs relating to such
purchase, construction or improvement) and (c) is the direct or guaranteed
obligation of any of (1) the Company, (2) a Restricted Subsidiary formed for the
purpose of acquiring such Capital Stock or assets (and having no material
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assets other than assets to be used for such acquisition), (3) any Person
comprised within the acquired assets or (4) in the case of the construction or
improvement of fixed assets, the Restricted Subsidiary which will own such
assets, or any extension, renewal or refinancing of such Indebtedness; PROVIDED,
HOWEVER, that the amount so extended, renewed or refinanced shall not exceed the
principal amount outstanding on the date of such extension, renewal or
refinancing, PLUS costs incurred in connection with any such extension, renewal
or refinancing (it being understood that any fixed assets included within
capital expenditures which increased Indebtedness permitted under clause (i) of
the definition of Permitted Indebtedness pursuant to clause (1) to the proviso
to such clause may not be financed pursuant to this clause (vi));
(vii) Indebtedness in an aggregate principal amount not to exceed $300
million at any one time outstanding; PROVIDED, HOWEVER, that no Restricted
Subsidiary may incur Indebtedness under this clause (vii) to the extent that
after the incurrence of such Indebtedness the sum (without duplication) of (x)
all Indebtedness of Restricted Subsidiaries incurred under this clause (vii),
PLUS (y) Indebtedness and other obligations then secured pursuant to clause
(xii) of the definition of Permitted Liens, PLUS (z) the amount of Indebtedness
that was not incurred pursuant to clause (i)(b) of this definition and is
secured pursuant to clause (vi) of the definition of Permitted Liens shall
exceed $300 million;
(viii) Indebtedness of the Company in an aggregate principal amount not to
exceed $250 million at any one time outstanding;
(ix) any Interest Swap Obligation, Currency Agreement or Commodities
Agreement relating to Indebtedness that was not incurred in violation of the
terms of the Indenture; and
(x) Indebtedness to finance an increase in the working capital of any Person
or Persons that (a) are organized under the laws of a jurisdiction other than
the United States or any subdivision thereof and (b) became Restricted
Subsidiaries after November 1, 1991; PROVIDED, HOWEVER, that Indebtedness
pursuant to this clause (x) is the obligation of the Company or such Person or
Persons.
"PERMITTED LIENS" means, with respect to any Person,
(i) Ordinary Course of Business Liens;
(ii) Liens upon property or assets acquired or constructed by such Person or
any Affiliate after November 1, 1991 or constituting improvements after November
1, 1991 to property or assets; PROVIDED, HOWEVER, that (a) any such Lien is
created solely for the purpose of securing Indebtedness representing, or
incurred to finance or refinance, the purchase price (such purpose price
including any Indebtedness assumed or repaid in connection with such purchase)
or cost of construction of the property or assets subject thereto or of such
improvement, (b) the principal amount of the Indebtedness secured by such Lien
does not exceed 100% of such purchase price or cost (together with any
transaction costs relating to such purchase, construction or improvement), (c)
such Lien does not extend to or cover any other property or assets other than
such property, assets, improvement and any other improvements thereon (or, in
the case of any construction or improvement, any substantially unimproved real
property on which the property is constructed or the improvement is located) and
(d) the occurrence of such Indebtedness is permitted by clause (vi) of the
definition of Permitted Indebtedness;
(iii) Liens securing obligations with respect to letters of credit (other
than commercial letters of credit) to the extent the obligations supported by
such letters of credit may be secured without violating the limitation on liens
described under "Limitation on Future Liens and Guaranties;"
(iv) Liens covering property subject to any Capitalized Lease Obligation or
other lease which was not entered into in violation of the Indenture securing
the interest of the lessor or other Person under such Capitalized Lease
Obligation or other lease;
(v) Liens securing obligations to a trustee pursuant to the compensation and
indemnity provisions of any indenture (including the Indenture) and Liens
securing obligations to a trustee or agent with respect to collateral for any
Indebtedness;
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(vi) Liens created in connection with a disposition of Receivables (whether
or not characterized as a sale of such Receivables or a secured loan) not
prohibited by the Indenture on (a) such Receivables, (b) collateral securing
such Receivables, (c) goods or services, the sale, lease or furnishing of which
gave rise to such Receivables, (d) books and records relating to such
Receivables, (e) agreements or arrangements supporting or securing such
Receivables and (f) incidental property and assets relating to any of the
foregoing; PROVIDED, HOWEVER, that the aggregate amount at any time of
Indebtedness that is secured pursuant to this clause (vi) and was not incurred
pursuant to clause (i)(b) of the definition of Permitted Indebtedness, shall at
no time exceed (x) $300 million LESS (y) the sum of Indebtedness and other
obligations then secured pursuant to clause (xii) of this definition PLUS the
then outstanding principal amount of Indebtedness of Restricted Subsidiaries
incurred under clause (vii) of the definition of Permitted Indebtedness (and not
secured pursuant to this clause (vi) or such clause (xii));
(vii) Liens upon property or assets of the Company created in substitution
and exchange for a Permitted Lien upon other property or assets of the Company
or any of its Subsidiaries and Liens upon property or assets of any Subsidiaries
of the Company created in substitution and exchange for a Permitted Lien upon
other property or assets of any Subsidiaries of the Company; PROVIDED, HOWEVER,
that (a) such Permitted Lien is released contemporaneously with the creation of
the Lien in substitution therefor, (b) the fair market value of the property or
assets with respect to the Lien so released is substantially the same as the
fair market value of the property or assets subject to the Lien created in
substitution therefor and (c) no Lien may be placed on property or assets of the
Company or a Restricted Subsidiary in substitution and exchange for a Lien upon
property or assets of an Unrestricted Subsidiary;
(viii) Liens upon property or assets of a Subsidiary of a Person securing
Indebtedness of such Person or of such Subsidiary, which Liens are created in
substitution and exchange for an outstanding pledge by such Person of a majority
of the Capital Stock of such Subsidiary for the purpose of securing such
Indebtedness (or a guaranty in respect thereof); PROVIDED, HOWEVER, that if the
property and assets of such Subsidiary to be subjected to such Liens have a fair
market value in excess of $25 million, such Subsidiary shall have guaranteed the
obligations of the Company in respect of the Notes and, if requested by the
Trustee, such Subsidiary shall have waived all its rights of subrogation and
reimbursement from the Company in connection with such guaranty;
(ix) Liens upon any property or assets (a) existing at the time of
acquisition thereof by the Company or any Subsidiary, (b) of a Person existing
at the time such Person is merged with or into or consolidated with the Company
or any Subsidiary of the Company or existing at the time of a sale or transfer
of any such property or assets of such Person to the Company or any Subsidiary
of the Company or (c) of a Person existing at the time such Person becomes a
Subsidiary of the Company; PROVIDED, HOWEVER, that such Liens shall not have
been created in contemplation of such sale, merger, consolidation, transfer or
acquisition;
(x) Liens existing at November 1, 1991;
(xi) (a) Liens upon any property or assets of the Company and its Restricted
Subsidiaries securing Indebtedness under the Credit Agreements in a principal
amount not exceeding the principal amount outstanding or committed under the
Credit Agreements (including any letter of credit facility, but without
duplication with respect to commitments for loans the use of proceeds of which
is restricted to repayment of other Indebtedness under the Credit Agreements) as
of November 1, 1991 LESS (y) the proceeds from the sale of all Indebtedness
under the 1991 Indenture issued from time to time that are or have been applied
to repay Indebtedness under the Credit Agreements and PLUS (z) $250 million and
(b) Liens securing Indebtedness permitted by clause (i) of the definition of
Permitted Indebtedness upon property or assets that as of November 1, 1991
secured the Credit Agreements or the Castlewood Agreement;
(xii) Liens securing Indebtedness or other obligations of the Company and its
Restricted Subsidiaries not to exceed an aggregate principal amount of $350
million LESS, at any time, the sum of (y) the then outstanding principal amount
of Indebtedness of Restricted Subsidiaries incurred under clause (vii) of
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the definition of Permitted Indebtedness (and not secured pursuant to this
clause (xii) or clause (vi) of this definition) PLUS (z) the amount of
Indebtedness secured pursuant to clause (vi) of this definition and not incurred
pursuant to clause (i)(b) of the definition of Permitted Indebtedness;
(xiii) Liens upon property or assets of a Subsidiary securing Indebtedness or
other obligations owing to the Company;
(xiv) Liens on proceeds of any property or assets subject to a Lien permitted
by the other clauses of this definition;
(xv) any equal and ratable Lien that is granted pursuant to the Continental
Guaranty and that relates to a Lien that otherwise constitutes a Permitted Lien;
(xvi) Liens on property or assets used to defease Indebtedness that was not
incurred in violation of the Indenture;
(xvii) Liens on property or assets of any Restricted Subsidiary organized
under the laws of a jurisdiction other than the United States or any subdivision
thereof securing Indebtedness of such Restricted Subsidiary outstanding as of
November 1, 1991 (or any extension, renewal or refinancing thereof);
(xviii) any extension, renewal or replacement (or successive extensions,
renewals or replacements) in whole or in part of any Lien referred to in the
foregoing clauses (i) through (xvii) (covering the same property and assets as
such Lien); and
(xix) Permitted Collateral Liens;
PROVIDED, HOWEVER, that no Lien described in any of the foregoing clauses other
than clause (xi)(a) shall encumber the rights of the Company with respect to
Indebtedness, obligations and other liabilities owed to the Company by any
Restricted Subsidiary or to any Restricted Subsidiary by the Company or another
Restricted Subsidiary.
"PERMITTED REFINANCING INDEBTEDNESS" means Indebtedness of (i) the Company
to the extent exchanged for, or the net proceeds of which are used to refinance,
redeem or defease, Indebtedness of the Company or any Restricted Subsidiary (or
any extension, renewal or refinancing thereof) outstanding at the time of
incurrence of such subsequent Indebtedness, or to finance any costs incurred in
connection with any such exchange, refinancing, redemption or defeasance, (ii) a
Restricted Subsidiary to the extent exchanged for, or the net proceeds of which
are used to refinance, redeem or defease, Indebtedness of such Restricted
Subsidiary (or any extension, renewal or refinancing thereof) outstanding at the
time of incurrence of such subsequent Indebtedness, or to finance any costs
incurred in connection with any such exchange, refinancing, redemption or
defeasance, or (iii) the Company or a Restricted Subsidiary to the extent
exchanged for, or the net proceeds of which are used to refinance, redeem or
defease, any then outstanding industrial revenue or development bonds that were
outstanding at November 1, 1991 (or any extension, renewal or refinancing
thereof), or to finance any costs incurred in connection with such exchange,
refinancing or defeasance; PROVIDED, HOWEVER, that, in the case of (i) (ii) or
(iii), the proceeds of such Indebtedness shall be used to so refinance, redeem
or defease the Indebtedness within 12 months of the incurrence of such
subsequent Indebtedness; and PROVIDED, FURTHER, that the only Indebtedness which
may be subject to exchange, refinancing, redemption or defeasance pursuant to
clause (i), (ii) or (iii) of this definition shall be Indebtedness outstanding
as of November 1, 1991 (other than Indebtedness under the Credit Agreements,
Subordinated Indebtedness and Indebtedness under lines of credit) or any
extension, renewal or refinancing thereof, and Indebtedness that was incurred
after November 1, 1991 and before the Issue Date (other than solely as Permitted
Indebtedness under the 1991 Indenture) or is incurred after the Issue Date
(other than solely as Permitted Indebtedness).
"PERMITTED STONE CANADA INDEBTEDNESS" means Indebtedness of the Company or a
Restricted Subsidiary in the Stone Canada Group outstanding pursuant to lines of
credit in an aggregate principal amount not to exceed U.S. $100 million (of
which not more than Cdn. $60 million may be owed by Restricted Subsidiaries in
the Stone Canada Group) at any one time outstanding or pursuant to any
extension, renewal or refinancing of such outstanding amount PLUS any costs
incurred in connection with
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any such extension, renewal or refinancing; PROVIDED, HOWEVER, that the
aggregate principal amount permitted to be incurred under this definition shall
be reduced by the principal amount under lines of credit outstanding on the
Issue Date net of subsequent repayments or reductions thereof.
"PERMITTED SUBORDINATED INDEBTEDNESS" means (i) Subordinated Indebtedness of
the Company to the extent exchanged for, or the net proceeds of which are used
to refinance, redeem or defease, then outstanding Subordinated Indebtedness of
the Company that was outstanding at November 1, 1991 (or any extension, renewal
or refinancing thereof), or to finance any costs incurred in connection with any
such exchange, refinancing, redemption or defeasance; PROVIDED, HOWEVER, that
(a) such Subordinated Indebtedness does not have a shorter weighted average life
than that then remaining for, or a maturity earlier than that of, the
Indebtedness so exchanged, refinanced, redeemed or defeased, EXCEPT that in the
case of any exchange, such Subordinated Indebtedness may have a maturity that is
earlier (but not more than six months earlier) than that of the Indebtedness so
exchanged, PROVIDED that the Subordinated Indebtedness shall have the same or a
longer weighted average life than that then remaining for the Indebtedness so
exchanged and (b) in the case of refinancings, redemptions or defeasances, the
proceeds of such Subordinated Indebtedness shall be used to so refinance,
redeem, or defease the Indebtedness within 12 months of the incurrence of such
subsequent Subordinated Indebtedness; and (ii) Indebtedness of the Company in an
aggregate principal amount not to exceed $250 million at any one time
outstanding, so long as such Indebtedness (a) constitutes Subordinated
Indebtedness and (b) does not have (A) a weighted average life that is shorter
than that then remaining for the (x) the Company's 9 7/8% Senior Notes due 2000
then outstanding or (y) the First Mortgage Notes or the Senior Notes, as the
case may be, then Outstanding or (B) a maturity that is earlier than the latest
maturity of (x) the Company's 9 7/8% Senior Notes due 2000 then outstanding or
(y) the First Mortgage Notes or the Senior Notes, as the case may be, then
Outstanding.
"RECEIVABLES" means receivables, chattel paper, instruments, documents or
intangibles evidencing or relating to the right to payment of money.
"REDEEMABLE STOCK" means, with respect to any Person, any Capital Stock that
by its terms or otherwise is required to be redeemed or purchased by such Person
or any of its Subsidiaries prior to 30 days after the maturity date of the Notes
then Outstanding, or is redeemable or subject to mandatory purchase or similar
put rights at the option of the Holder thereof at any time prior to 30 days
after the latest maturity date of the First Mortgage Notes or the Senior Notes,
as the case may be, of any series then Outstanding, or any security which is
convertible or exchangeable into a security which has such provisions.
"RESTRICTED SUBSIDIARY" means any Subsidiary of the Company other than an
Unrestricted Subsidiary.
"SENIOR INDEBTEDNESS" means the principal of, interest on and other amounts
due on (i) Indebtedness of the Company, whether outstanding on the Issue Date or
thereafter created, incurred, assumed or guaranteed by the Company, on or prior
to the Issue Date in compliance with the 1991 Indenture and thereafter, in
compliance with the "Limitation on Future Incurrence of Indebtedness" covenant
(including, without limitation, the Senior Notes and the First Mortgage Notes),
(ii) obligations of the Company related to the termination of Interest Swap
Obligations, Currency Agreements or Commodities Agreements pertaining to
Indebtedness described under clause (i) above and (iii) principal of or interest
on the Notes. Notwithstanding anything to the contrary in the foregoing, Senior
Indebtedness shall not include: (a) Subordinated Indebtedness, (b) Indebtedness
of or amounts owed by the Company for compensation to employees, for goods or
materials purchased in the ordinary course of business or for services or (c)
Indebtedness of the Company to a Subsidiary of the Company.
"SPECIFIED BANK DEBT" means (i) all Indebtedness and other monetary
obligations owing under the New Credit Agreement or any credit facilities with
the banks signatory to the New Credit Agreement (or with banks affiliated with
such banks), so long as such facilities are related to the New Credit Agreement;
and (ii) Indebtedness owing as of the date of the Indenture or thereafter to
banks or other financial institutions under credit facilities which may in the
future refinance, refund, replace, supplement or
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succeed (regardless of any gaps in time) the New Credit Agreement or the
facilities referenced in clause (i) hereof (including extensions and
restructurings and the inclusion of additional or different or substitute
lenders), so long as (a) the aggregate principal amount outstanding (including
available amounts under committed revolving credit or similar working capital
facilities, letter of credit facilities and other commitments to provide credit)
of such Indebtedness is at least equal to the principal of all publicly issued
Senior Indebtedness (including, without limitation, the First Mortgage Notes,
the Senior Notes and Indebtedness under the 1991 Indenture) then Outstanding (it
being understood that Indebtedness described in clause (i) above and issues of
Indebtedness having a principal amount lower than set forth in clause (b) below
shall not be included in this amount), (b) Indebtedness outstanding under each
particular credit facility has a principal amount outstanding (including
available amounts under committed revolving credit or similar working capital
facilities, letter of credit facilities and other commitments to provide credit)
of at least $25 million and (c) such Indebtedness constitutes Senior
Indebtedness.
"STONE CANADA GROUP" means Stone Canada and its Restricted Subsidiaries
existing as of the date of the Indenture.
"SUBORDINATED CAPITAL BASE" means the sum of (i) the Consolidated Net Worth
and (ii) to the extent not included in clause (i) above, the amounts (without
duplication) relating to (a) the principal amount of Subordinated Indebtedness
incurred after November 1, 1991 which is unsecured and which does not have at
the time of incurrence of such Subordinated Indebtedness a weighted average life
that is shorter than the weighted average life remaining for the then
outstanding Indebtedness under the 1991 Indenture issued prior to the Issue
Date, or if less than $500,000,000, in the case of the First Mortgage Notes, or
$200,000,000, in the case of the Senior Notes of such Indebtedness is
outstanding, the First Mortgage Notes or the Senior Notes, as the case may be,
or a maturity that is earlier than the latest maturity of any of the then
outstanding Indebtedness under the 1991 Indenture, or if less than $500,000,000,
in the case of the First Mortgage Notes or $200,000,000, in the case of the
Senior Notes of such Indebtedness is outstanding, the First Mortgage Notes or
the Senior Notes, as the case may be, (b) redeemable stock of the Company that
does not constitute Redeemable Stock and (c) the principal amount of the 12 1/8%
Subordinated Debentures due September 15, 2001 of Stone Southwest, Inc. and the
11 1/2% Senior Subordinated Notes due September 1, 1999 of the Company or any
Subordinated Indebtedness exchanged for, or the net proceeds of which are used
to refinance, redeem or defease, such 11 1/2% Senior Subordinated Notes due
September 1, 1999 (or, at such time as no Indebtedness is outstanding under the
1991 Indenture, such 12 1/8% Subordinated Debentures due September 15, 2001)
pursuant to clause (ii) of the definition of "Permitted Indebtedness," that, in
the case of clauses (a), (b) and (c), as at the date of determination, in
conformity with GAAP consistently applied, would be set forth on the
consolidated balance sheet of the Company and its Restricted Subsidiaries.
"SUBORDINATED INDEBTEDNESS" means Indebtedness of the Company (whether
outstanding on the date of the Indenture or thereafter created, incurred,
assumed or guaranteed by the Company) which, pursuant to the terms of the
instrument creating or evidencing the same, is subordinate to the Notes in right
of payment or in rights upon liquidation.
"SUBSIDIARY" means, with respect to any Person, (i) any corporation of which
at least a majority in interest of the outstanding Capital Stock having by the
terms thereof voting power under ordinary circumstances to elect directors of
such corporation, irrespective of whether or not at the time stock of any other
class or classes of such corporation shall have or might have voting power by
reason of the happening of any contingency, is at the time, directly or
indirectly, owned or controlled by such Person, or by one or more corporations a
majority in interest of such stock of which is similarly owned or controlled, or
by such Person and one or more other corporations a majority in interest of such
stock of which is similarly owned or controlled or (ii) any other Person (other
than a corporation) in which such Person, directly or indirectly, at the date of
determination thereof, has at least a majority equity ownership interest;
PROVIDED, HOWEVER, that, with respect to the Company, for purposes of the
Indenture (other than the covenant referred to in the second paragraph of
"Limitation on Future Liens and Guaranties" above), "Subsidiary" shall not
include Seminole.
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"UNRESTRICTED SUBSIDIARY" means a Subsidiary of the Company which has been
designated as an "Unrestricted Subsidiary" for purposes of the Indenture by the
Company and (a) at least 20% of whose common stock is held by one or more
Persons (other than the Company and its Affiliates) which acquired such common
stock in a BONA FIDE transaction for fair value and (b) at least 10% of whose
total capitalization at the time of designation is in the form of common stock
or at least 15% of the fair market value of whose assets at such time shall have
been contributed by such Persons. An Unrestricted Subsidiary may be designated
to be a Restricted Subsidiary only if, at the time of such designation, all
Indebtedness and Liens of such Subsidiary could be incurred under the Indenture.
As of the date of the Indenture, the Company's Unrestricted Subsidiaries are
Stone-Consolidated Corporation and its Subsidiaries.
ADDITIONAL FIRST MORTGAGE NOTE INDENTURE DEFINITIONS
"CASH COLLATERAL ACCOUNT" means one or more accounts forming part of the
Collateral in the sole dominion and control of the First Mortgage Note Trustee
into which certain funds are required to be deposited by or on behalf of the
Company under the terms of the First Mortgage Note Indenture and the Security
Documents.
"COLLATERAL" means the Collateral Properties (and all additions and
improvements thereto and replacements thereof), Replacement Collateral, the Cash
Collateral Account and all other property that from time to time secures the
First Mortgage Notes pursuant to the First Mortgage Note Indenture and the
Security Documents.
"COLLATERAL ASSET DISPOSITION" means any direct or indirect, voluntary or
involuntary sale, conveyance, lease, sale-leaseback, transfer or other
disposition, including, without limitation, by means of a merger, consolidation
or similar transaction (each, a "Disposition"), or a series of related
Dispositions by the Company or any of its Restricted Subsidiaries involving the
Collateral (including, without limitation, a sale of, or receipt by the Company
of cash or Cash Equivalents in connection with the repayment, exchange,
redemption or retirement of, or an extraordinary dividend or return of capital
on, any Non-Cash Consideration), other than (a) the sale of machinery,
equipment, furniture, apparatus, tools or implements or other similar property
that may be defective or may have become worn out or obsolete or no longer used
or useful in the operation of the Collateral Properties, the aggregate fair
market value of which does not exceed U.S. $5 million in any year; (b) the sale
of equipment that has been replaced by equipment of substantially equal value in
an alteration or improvement made at one of the Collateral Properties; (c) the
use by the First Mortgage Note Trustee of amounts on deposit in the Cash
Collateral Account in accordance with the "Limitation on Asset Dispositions" or
"Limitation on Collateral Asset Dispositions" covenants; and (d) a Disposition
permitted pursuant to the "Restrictions on Mergers and Consolidations and Sales
of Assets" covenants. A Collateral Asset Disposition shall not include a
Condemnation (as defined) or Casualty (as defined) involving any Collateral.
"COLLATERAL LOSS EVENT" means a Condemnation or Casualty involving an actual
or constructive total loss or agreed or compromised actual or constructive total
loss of all or substantially all of any Collateral Property.
"COLLATERAL PROPERTIES" means the mills owned by the Company at Uncasville,
Connecticut, Ontonagon, Michigan, Missoula, Montana and York, Pennsylvania, as
more specifically described in the Security Documents, and all mills, plants and
related property constituting Replacement Collateral.
"EXCESS PROCEEDS" means, on any date, the aggregate amount of Net Proceeds
from Collateral Asset Dispositions and Collateral Loss Events consummated or
occurring after the Issue Date that have not been previously (a) used to
purchase or invest in Replacement Collateral or Restore Collateral in accordance
with the "Limitation on Collateral Asset Dispositions" covenant or (b) included
as part of a First Mortgage Note Offer, provided that no such Net Proceeds will
constitute Excess Proceeds until the later of six months from the date of
consummation of the relevant Collateral Asset Disposition or receipt
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of the Net Proceeds from the relevant Collateral Loss Event and the expiration
of any longer period during which such Net Proceeds may be used to purchase or
invest in Replacement Collateral or Restore Collateral to the extent permitted
by the "Limitation on Collateral Asset Dispositions" covenant.
"INDEPENDENT APPRAISER" means an appraisal firm that is nationally
recognized in the United States that (i) does not have any direct financial
interest in the Company or any of its Subsidiaries, the First Mortgage Note
Trustee or in any Affiliate of any of them, and (ii) is not connected with the
Company or any of its Subsidiaries, the First Mortgage Note Trustee or any such
Affiliate as an employee, associate or Affiliate.
"INDEPENDENT DIRECTOR"means, in respect of any transaction involving the
Company, a director of the Company who is in fact independent of the transaction
other than (a) a director who is a party to such transaction, or (b) a director
who is an officer, employee, associate or Affiliate (or is related to any of
them by blood or marriage unless such director is, in fact, independent of such
relation) of a party to such transaction or who is an officer, employee,
director or associate of an Affiliate of the Company (other than the Company and
its Subsidiaries), or (c) a director who is an officer, employee or associate of
the Company or any of its Subsidiaries.
"INDEPENDENT FINANCIAL ADVISER" means an investment banking firm that is
nationally recognized in the United States that (i) does not have any direct
financial interest in the Company, any Subsidiary of the Company or the First
Mortgage Note Trustee or in any Affiliate of any of them, and (ii) is not
connected with the Company, a Subsidiary of the Company or the First Mortgage
Note Trustee or any such Affiliate as an employee, associate or Affiliate.
"NET PROCEEDS" means those proceeds received by the Company or any of its
Restricted Subsidiaries in connection with a Collateral Asset Disposition or
Collateral Loss Event consisting of (a) the sum of cash and Cash Equivalents
therefrom (including any amounts of Insurance Proceeds, Condemnation Proceeds or
other proceeds (other than proceeds from business interruption insurance)
received in connection therewith but excluding any other consideration received
in the form of assumption by the acquiring Person of Indebtedness or other
obligations relating to the relevant property), MINUS (b) all accounting, legal,
title, recording and tax expenses, commissions and other fees and expenses
incurred, and all federal, state, provincial, foreign and local taxes required
to be accrued as a liability under generally accepted accounting principles in
effect at the date of the relevant Collateral Asset Disposition or Collateral
Loss Event, directly as a consequence of such Collateral Asset Disposition or
Collateral Loss Event and net of all payments made on any Indebtedness which is
secured by a Permitted Collateral Lien on the Collateral Property subject to
such Collateral Asset Disposition or Collateral Loss Event, which must be paid
in accordance with the terms of such Permitted Collateral Lien or under
applicable law.
"PERMITTED COLLATERAL LIENS" means:
(i) Liens securing the First Mortgage Notes arising under the First
Mortgage Note Indenture or any Security Document;
(ii) Liens on a Collateral Property for taxes or governmental assessments,
charges, levies or claims not yet delinquent or for which a bond has been posted
in an amount equal to the contested amount (including potential interest and
penalties thereon) not interfering in any material respect with the ordinary
operation of such Collateral Property or materially and adversely affecting the
value thereof;
(iii) statutory Liens of landlords, carriers, warehousemen, mechanics,
suppliers, materialmen, repairmen or other like Liens arising in the ordinary
course of business of ownership and operation of a Collateral Property relating
to obligations either (a) not yet delinquent or (b) being contested in good
faith by appropriate proceedings and to which appropriate reserves or other
provisions have been made in advance in accordance with GAAP in each case, not
interfering in any material respect with the ordinary operation of such
Collateral Property or materially and adversely affecting the value thereof;
(iv) Liens on a Collateral Property in connection with workers'
compensation, unemployment insurance and other similar legislation, surety or
appeal bonds, performance bonds or other obligations
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of a like nature (in each case not constituting Indebtedness) arising in the
ordinary course of business with respect to the ownership and operation of such
Collateral Property not interfering in any material respect with the ordinary
operation of such Collateral Property or materially and adversely affecting the
value thereof;
(v) zoning restrictions, licenses, easements, servitudes, rights-of-way,
title defects, covenants running with the land and other similar charges or
encumbrances or restrictions affecting a Collateral Property not interfering in
any material respect with the ordinary operation of such Collateral Property or
materially and adversely affecting the value thereof; and
(vi) assignments, leases or subleases at a Collateral Property not
interfering in any material respect with the ordinary operation of such
Collateral Property or materially and adversely affecting the value thereof.
"REPLACEMENT COLLATERAL" means, at any relevant date in connection with a
Collateral Asset Disposition, Collateral Loss Event, or in certain circumstances
described in the First Mortgage Note Indenture where Restoration is not
required, Condemnation, assets located in North America to be used in the pulp
and paper business as conducted by the Company at such date other than the
Collateral, which on such date, (a) constitute similar assets to Collateral
disposed of or destroyed (and do not constitute Capital Stock of any Person
(except for Non-Cash Consideration to the extent permitted by the "Limitation on
Collateral Asset Dispositions" covenant)), (b) are acquired by the Company at a
purchase price which does not exceed the fair market value of such Replacement
Collateral (as determined, in the case of each of (a) and (b), in good faith by
a majority of the Board of Directors, including a majority of the Independent
Directors, on the basis of the written opinion of a qualified Independent
Appraiser or Independent Financial Adviser prepared contemporaneously with such
purchase) and made available to the First Mortgage Note Trustee, (c) are free
and clear of all Liens other than Permitted Collateral Liens and (d) satisfy the
requirements of the "Limitation on Collateral Asset Dispositions" covenant.
"RESTORATION" or "RESTORE" means the physical repair, restoration or
rebuilding of all or any portion of the Collateral following any Casualty or
Condemnation.
THE COLLATERAL UNDER THE FIRST MORTGAGE NOTE INDENTURE
THE COLLATERAL
The First Mortgage Notes will initially be secured by a first ranking lien
on the Company's mills located in Uncasville, Connecticut, in Ontonagon,
Michigan (the "Ontonagon Mill"), in Missoula, Montana, and in York, Pennsylvania
(collectively, the "Collateral Mills"). The following table sets forth certain
information with respect to the Collateral Mills:
<TABLE>
<CAPTION>
NUMBER OF PAPER
MILL LOCATION MACHINES TYPE OF MILL
- ----------------------------------------------- ANNUAL CAPACITY PRODUCTION ----------------- -------------
TONS IN 1993 TONS
--------------- ---------------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C>
Missoula, Montana 702.9 654.3 3 Linerboard
Ontonagon, Michigan 262.8 248.4 2 Medium
Uncasville, Connecticut 165.1 158.5 1 Medium
York, Pennsylvania 110.2 110.0 2 Medium
</TABLE>
The products manufactured at the Collateral Mills are utilized by the
Company in its corrugated container facilities; such corrugated container
facilities will be pledged to secure the indebtedness under the Credit
Agreement.
APPRAISAL
The Company engaged American Appraisal Associates, Inc. (the "Consultant"),
an independent valuation consulting firm specializing in the technology,
economics and strategies of the pulp and paper industry, to provide an estimate
of the fair market value of the Collateral Mills.
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<PAGE>
The fair market value of the Collateral Mills was estimated for the purpose
of the appraisal based upon the assumption that the assets comprising the
Collateral Mills would be used in an ongoing business and valued on a continued
use basis. When fair market value is established on the premise of continued
use, it is assumed that the buyer and the seller would be contemplating
retention of the Collateral Mills at their present locations as part of the
current operations. An estimate of fair market value arrived at on the premise
of continued use does not represent the amount that might be realized from
piecemeal disposition of the Collateral Mills in the marketplace or from an
alternative use of the properties. The Consultant's opinion of the fair market
value of the designated assets of the Collateral Mills as of September 1, 1994,
under the premise of continued use, is reasonably represented by an amount of
$695 million.
For purposes of the analysis, the Consultant appraised the designated assets
as part of an operating entity. Balance sheets, financial statistics, and
operating results furnished to the Consultant were accepted without
verification, were examined, and were assumed to properly represent business
operations and conditions. Given the trends indicated, it was concluded by the
Consultant that prospective profits, on a consolidated basis, were adequate to
justify ownership and arm's-length exchange of the Collateral Mills between a
willing buyer and a willing seller at the appraised fair market value. In the
Consultant's review, provisions were made for the value of assets not included
in the appraisal and for sufficient net working capital.
The appraisal methods employed by the Consultant included the cost, income,
and market techniques. The cost approach was the primary method for valuing the
underlying tangible assets of the Collateral Mills, while the income and market
methods were applied to analyze the economics and prospective earning power of
the Collateral Mills.
The Consultant notes in the appraisal that forecasts of pulp and paper
production economics, asset values, replacement costs, and economic performance
involve many significant variables that are subject to uncertainty, performance
and actions of competitive products and companies, and judgement. Therefore, the
Consultant notes that no representation can be or is made as to the accuracy or
attainability of the estimates contained in the appraisal.
The appraisal was prepared in accordance with the Uniform Standards of
Professional Appraisal Practice, as promulgated by the Appraisal Foundation. The
Consultant has stated in the appraisal that the realization of the multiple
assumptions underlying the appraisal, the agreed upon parameters, and the
Company's stated purpose, incorporated in the conclusions arrived at in the
appraisal are fundamental to the reliability of the conclusions set forth. No
assurance can be given that any assumption will, in fact, be so realized or that
a number of material assumptions that could have had a negative impact on the
conclusions reached in the appraisal have been considered by the Consultant or
that the Consultant's estimation of the impact or any negative assumption
otherwise so considered have been properly evaluated. Any such failure of an
assumption so to materialize or be accurately or adequately reflected in the
appraisal could be of a nature or degree that will materially and negatively
impact the actual value, if any, realized by the First Mortgage Note Trustee
upon a foreclosure or other disposition of the Collateral Mills.
An appraisal is an estimate or opinion of value as of the date stated and
cannot be relied upon as a precise measure of value or worth. The amount that
might be realized from the sale of portion of the Collateral Mills may be less
that its portion of the appraised value, and such difference may be material.
The Consultant did not solicit any offers or inquiries with respect to the
Collateral Mills from potential purchasers, and, therefore, the appraisal should
not be read to suggest that a buyer was, in fact, available, or if one were
available, that it would be willing or able to pay the appraised value. In
addition, the number of qualified buyers may be limited by regulatory, legal,
financial and other considerations. Accordingly, no assurance can be given as to
the value that could be obtained from the sale of the Collateral Mills.
Additionally, whatever the value of the Collateral Mills may be under the
conditions
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<PAGE>
assumed in the appraisal, a sale under distress conditions would likely result
in a substantially lower price. (See "Risk Factors -- First Mortgage Note
Holders May Receive Less Than Their Investment Upon Liquidation.")
See Annex A for a summary valuation report prepared by the Consultant. The
foregoing description of the appraisal is qualified in its entirety by reference
to such summary valuation report.
SECURITY DOCUMENTS
Each Collateral Mill will be pledged to the First Mortgage Note Trustee for
the benefit of the Holders pursuant to a mortgage and a security agreement
securing the full amount payable with respect to the Notes. Each mortgage
together with the related security agreement will include all fee and leasehold
interests in the real property, fixtures, plant, machinery and equipment
constituting the Collateral Mill, and all proceeds thereof and additions,
improvements, alterations, replacements and repairs thereto, whether now owned
or hereafter acquired by the Company. Certain equipment used at the mills
constituting Collateral is pledged to third party lenders pursuant to equipment
leases. The Collateral also includes permits necessary to operate the Collateral
Mills to the extent assignable under applicable law.
The security interest granted to the First Mortgage Note Trustee in the
Collateral will be a first ranking security interest, subject to Permitted
Collateral Liens that, in the Company's judgment, do not materially and
adversely affect the normal operations or value of the Collateral Mills. Upon
issuance of the Notes, the First Mortgage Note Trustee will receive a
mortgagee's title insurance policy insuring each mortgage as a first ranking
mortgage lien on the relevant Collateral Mill, subject to standard exceptions
and Permitted Collateral Liens. The aggregate amount of the title insurance in
respect of the four Collateral Mills will equal 110% of their total appraised
value.
BANKRUPTCY CONSIDERATIONS
The right of the First Mortgage Note Trustee under the First Mortgage Note
Indenture to repossess and dispose of the Collateral upon the occurrence of an
Event of Default (as defined herein in "Description of the Notes -- Certain
Definitions") under the First Mortgage Note Indenture is likely to be
significantly impaired by applicable bankruptcy law if a bankruptcy case were to
be commenced by or against the Company prior to the First Mortgage Note
Trustee's having repossessed and disposed of the Collateral. Under the federal
bankruptcy laws, secured creditors, such as the First Mortgage Note Trustee, are
prohibited from foreclosing upon, realizing upon or repossessing security from a
debtor in a bankruptcy case, or from disposing of security repossessed from such
debtor, without bankruptcy court approval. Moreover, the federal bankruptcy laws
permit the debtor to continue to retain and to use collateral even though the
debtor is in default under the applicable debt instruments, provided that the
secured creditor is given "adequate protection." The meaning of the term
"adequate protection" may vary according to circumstances, but it is intended in
general to protect the value of the secured creditor's interest in the
Collateral and may include cash payments or the granting of additional security,
if and at such times as the court in its discretion determines (after request by
the creditor), for any diminution in the value of the creditor's interest in
Collateral as a result of the stay of repossession or disposition or any use of
the collateral by the debtor during the pendency of the bankruptcy case. In view
of the lack of a precise definition of the term "adequate protection" and the
broad discretionary powers of a bankruptcy court, it is impossible to predict
how long payments under the First Mortgage Notes could be delayed following
commencement of a bankruptcy case, whether or when the First Mortgage Note
Trustee could repossess or dispose of the Collateral or whether or to what
extent holders of the First Mortgage Notes would be compensated for any
diminution in value of the Collateral through the requirement of "adequate
protection." Furthermore, in the event that the bankruptcy court determines that
the value of the Collateral is not sufficient to repay all amounts due on the
First Mortgage Notes, the holders of the First Mortgage Notes would hold
undersecured claims. Applicable federal bankruptcy laws do not permit the
payment and/or accrual of interest, costs and attorney's fees for "undersecured
claims" during the pendency of a debtor's bankruptcy case.
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In addition, if prior to or at the time of any bankruptcy case being
commenced by or against the Company, the value of the Collateral is less than
the total amount remaining to be paid on the First Mortgage Notes, the issue of
whether payments on the First Mortgage Notes within ninety days (or one year
with respect to payments to "insiders" as defined under the federal bankruptcy
laws) of the commencement of such bankruptcy case are preferential and may be
recaptured may arise under the federal bankruptcy laws. To the extent that such
issue arises, there may be defenses applicable to the recapture of potentially
preferential payments under the federal bankruptcy laws, including INTER ALIA,
that such payments were made in the ordinary course of business or financial
affairs of the Company according to ordinary business terms.
A portion of the Ontonagon Mill (used for wastewater treatment) is leased
rather than owned by the Company. Although the law is not settled on this issue,
under the federal bankruptcy laws, a failure by the Company to assume such lease
in the case of a bankruptcy of the Company could have the effect of
extinguishing the First Mortgage Note Trustee's Lien in respect of such
leasehold interest.
ENVIRONMENTAL CONSIDERATIONS
The Collateral Properties are subject to extensive and increasingly
stringent environmental regulations. Although management believes that the
Collateral Properties are in substantial compliance with these regulations, the
failure of these mills to remain in compliance therewith or the presence of
hazardous substances at the Collateral Properties could adversely affect the
value of the mills. Furthermore, certain of the Collateral Properties will
require significant capital expenditures to remain in compliance with existing
and future environmental regulations. See "Risk Factors -- Environmental
Regulations and Significant Environmental Expenditures."
Under the federal laws of the United States and many state laws,
contamination of a property may give rise to a lien on the property to assure
the payment of the costs of clean-up. In Connecticut and Michigan, under certain
circumstances, such a lien may have priority over all existing liens (a
"superlien") including those of existing mortgages. In addition, a lender may be
exposed to unforeseen environmental liabilities when taking a security interest
in real property. Under the federal Comprehensive Environmental Response,
Compensation and Liability Act ("CERCLA") and similar state laws, a lender may
be liable in certain circumstances, as an "owner" or "operator", for
environmental clean-up costs on a mortgaged property. Although CERCLA excludes
from liability "a person who, without participating in the management of a . . .
facility, holds indicia of ownership primarily to protect his security
interest", court decisions have indicated that a lender may be subject to CERCLA
liability if it forecloses on or otherwise takes title to the property or if it
becomes involved in the borrower's operations to a degree that indicates
capacity to influence hazardous waste activities. Decisions interpreting the
meaning of "participating in management" have ranged from the decision in the
U.S. Court of Appeals for the Eleventh Circuit in UNITED STATES V. FLEET FACTORS
which suggested that a lender with enough control over a borrower's financial
affairs to have the capacity to influence the borrower's hazardous waste
decisions could be held liable under CERCLA, to a subsequent decision by the
U.S. Court of Appeals for the Ninth Circuit in IN RE BERGSOE METAL CORP. which
held that a secured lender had no liability absent "some actual management of
the facility" by the lender.
Under the First Mortgage Note Indenture, the First Mortgage Note Trustee,
prior to taking certain actions, may request that holders provide an
indemnification against its costs, expenses under CERCLA or similar laws, and
liabilities. It is possible that cleanup costs under CERCLA or similar laws
could become a liability of the First Mortgage Note Trustee and cause a loss to
any holder of First Mortgage Notes that provided an indemnification. In
addition, such holders may act directly rather than through the First Mortgage
Note Trustee, in specified circumstances, in order to pursue a remedy under the
Indenture. If holders exercise that right, they could be deemed to be lenders
who are subject to the risks discussed above.
POSSESSION, USE, RELEASE AND SUBSTITUTION OF COLLATERAL
Unless an Event of Default shall have occurred and be continuing under the
First Mortgage Note Indenture, the Company will have the right to remain in
possession and retain exclusive control of the
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Collateral (other than any of the Collateral on deposit in the Cash Collateral
account and other than as set forth in the Security Documents), to freely
operate the Collateral Properties and to collect, invest and dispose of any
income thereon, subject to certain covenants in the First Mortgage Note
Indenture. All amounts on deposit in the Cash Collateral Account will be
invested in U.S. Government Obligations maturing within 30 days from the date of
acquisition thereof, or such longer period (not exceeding one year) if the funds
are set aside for Restoration in the event of a Casualty or Condemnation.
So long as no Event of Default shall have occurred and be continuing, the
Company and its Restricted Subsidiaries may make a Collateral Asset Disposition
upon the satisfaction of certain procedures set forth in the First Mortgage Note
Indenture, and the First Mortgage Note Trustee will release the Lien under the
Security Documents with respect to the relevant Collateral. See "Limitation on
Collateral Asset Dispositions." Proceeds of insurance relating to the
destruction of all of the Collateral or an award relating to a taking of all or
any part of the Collateral by eminent domain or other seizure or forfeiture (in
excess of $2.5 million so long as no Event of Default has occurred and is
continuing) will be deposited and held in the Cash Collateral Account for the
benefit of the Holders of the First Mortgage Notes. The Company may withdraw
such proceeds or award from the Cash Collateral Account (other than proceeds or
an award relating to the destruction of all or substantially all of one or more
of the Collateral Properties) to reimburse the Company for expenditures made, or
to pay costs incurred, to Restore the Collateral destroyed or taken, subject to
compliance with certain conditions set forth in the First Mortgage Indenture,
including delivery to the First Mortgage Note Trustee of Opinions of Counsel
that the First Mortgage Note Trustee has a perfected Lien under the Security
Documents on such repairs, rebuildings and replacements. A taking, seizure,
forfeiture or casualty involving an actual or constructive total loss of one or
more of the Collateral Properties will be treated under the Indenture as a
Collateral Loss Event and any proceeds or award relating thereto will be applied
in accordance with the "Limitation on Collateral Asset Dispositions" covenant.
The First Mortgage Note Indenture contains certain legal requirements
relating to the release of the Lien on all or any part of the Collateral in
connection with a Collateral Asset Disposition or Collateral Loss Event. See
"Limitation on Collateral Asset Dispositions." Furthermore, all releases of
Collateral are required to comply with the certification requirements of the
Trust Indenture Act. In connection with the acquisition of any Replacement
Collateral pursuant to the "Limitation on Collateral Asset Dispositions"
covenant, the Company is required to comply with the requirements set forth
under such covenant. The Company shall have the right to sell worn out or
obsolete equipment and machinery of up to $5 million per year and sell equipment
to the extent it is replaced with equipment of substantially equal value in an
alteration or improvement of a Collateral Property without complying with the
"Limitation on Collateral Asset Dispositions" covenant.
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UNDERWRITING
Subject to the terms and conditions set forth in an underwriting agreement
(the "Underwriting Agreement") among the Company and Salomon Brothers Inc, BT
Securities Corporation, Morgan Stanley & Co. Incorporated, Kidder, Peabody & Co.
Incorporated and Bear, Stearns & Co. Inc. (the "Underwriters"), the Company has
agreed to sell to the Underwriters, and the Underwriters have severally agreed
to purchase, the respective principal amounts of the First Mortgage Notes and
Senior Notes set forth opposite their names below. The Underwriting Agreement
provides that the obligations of the Underwriters are subject to certain
conditions precedent and that the Underwriters will be obligated to purchase all
of the Notes if any are purchased.
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT
----------------------------------------------------
FIRST MORTGAGE
UNDERWRITER NOTES SENIOR NOTES TOTAL
- -------------------------------------------------- ---------------- ---------------- ----------------
<S> <C> <C> <C>
Salomon Brothers Inc.............................. $ 200,000,000 $ 80,000,000 $ 280,000,000
BT Securities Corporation......................... 135,000,000 54,000,000 189,000,000
Morgan Stanley & Co. Incorporated................. 100,000,000 40,000,000 140,000,000
Kidder, Peabody & Co. Incorporated................ 40,000,000 16,000,000 56,000,000
Bear, Stearns & Co. Inc........................... 25,000,000 10,000,000 35,000,000
---------------- ---------------- ----------------
Total......................................... $ 500,000,000 $ 200,000,000 $ 700,000,000
---------------- ---------------- ----------------
---------------- ---------------- ----------------
</TABLE>
The Underwriters have advised the Company that they propose initially to
offer the First Mortgage Notes and Senior Notes directly to the public at the
public offering price set forth on the cover page of this Prospectus and to
certain dealers at such price less a concession of 0.50% and 0.50%,
respectively, of the principal amount of the First Mortgage Notes and Senior
Notes. The Underwriters may allow and such dealers may reallow a concession not
in excess of 0.25% and 0.25%, respectively, of the principal amount of the First
Mortgage Notes and Senior Notes on sales to certain other dealers. After the
initial offering, the public offering prices and concessions to dealers may be
changed.
The Company has agreed to indemnify the Underwriters against certain civil
liabilities, including certain liabilities under the Securities Act of 1933, as
amended (the "Act").
The Notes are new issues of securities with no established trading market.
The Company has been advised by certain of the Underwriters that they intend to
make a market in the First Mortgage Notes and/ or Senior Notes, but none of such
Underwriters is obligated to do so and may discontinue such market making at any
time without notice. No assurance can be given as to the development or
liquidity of any trading market for the First Mortgage Notes and/or Senior
Notes.
The Company has agreed that, for a period of thirty days from the date of
the issuance of the Notes, without the consent of Salomon Brothers Inc, acting
on behalf of the Underwriters, neither the Company nor any subsidiary of the
Company (except in limited circumstances) will (i) file with the Securities and
Exchange Commission (the "Commission") or publicly announce its intent to file
any registration statement under the Act or pre-effective amendment to any
registration statement under the Act relating to debt securities (other than
industrial development bonds and the Stone Financial Corporation offering) or
(ii) enter into any agreement for or consummate the sale of, or publicly
announce its intent to sell, any debt securities (other than the Notes, the
industrial development bonds and the Stone Financial Corporation offering).
Certain of the Underwriters from time to time perform investment banking and
other financial advisory services for the Company for which they receive
customary compensation.
Bankers Trust Company ("Bankers Trust"), an affiliate of BT Securities
Corporation, is the agent and a lender under the 1989 Credit Agreement and is
expected to be the agent and a lender under the Credit Agreement. In its
capacity as lender under the 1989 Credit Agreement, Bankers Trust will receive
its pro rata share of the net proceeds of the sale of the Notes hereunder used
to repay indebtedness under the 1989 Credit Agreement. See "Use of Proceeds."
Bankers Trust is also the indenture trustee for the Company's 11 1/2% Senior
Subordinated Notes due September 1, 1999.
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An affiliate of Kidder, Peabody & Co. Incorporated is a lender under the
1989 Credit Agreement and will receive its pro rata share of the net sale
proceeds from the sale of the Notes hereunder used to repay indebtedness under
the 1989 Credit Agreement. Another affiliate of Kidder, Peabody & Co.
Incorporated is a lender to Stone-Consolidated pursuant to a revolving credit
facility.
EXPERTS
The financial statements as of December 31, 1993 and 1992 and for each of
the three years in the period ended December 31, 1993 included in this
Prospectus have been so included in reliance on the report (which contains an
explanatory paragraph referring to certain liquidity matters discussed in Notes
11 and 18 to the Company's financial statements) of Price Waterhouse LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
The information contained in this Prospectus under "The Collateral Under the
First Mortgage Notes -- Appraisal" and the summary valuation report in Annex A
hereto have been included on the authority of American Appraisal Associates,
Inc. as an expert regarding the valuation matters contained therein.
LEGAL MATTERS
The validity of the Notes offered hereby will be passed upon for the Company
by Leslie T. Lederer, Vice President, Secretary and Counsel of the Company (who
owns 13,256 shares of Common Stock) and by Sidley & Austin, Chicago, Illinois.
Certain legal matters will be passed upon for the Underwriters by Cleary,
Gottlieb, Steen & Hamilton, New York, New York.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports, proxy statements and other information with the
Commission. Such reports, proxy statements and other information can be
inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at
the following regional offices of the Commission: Northwestern Atrium Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and 13th Floor,
Seven World Trade Center, New York, New York 10048. Copies of such materials may
be obtained from the Public Reference Branch of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549 at prescribed rates. In addition, such
reports, proxy statements and other information can be inspected at the New York
Stock Exchange, Inc., 20 Broad Street, New York, New York 10005, on which
exchange the Common Stock of the Company is listed.
The Company has filed with the Commission in Washington, D.C. a Registration
Statement on Form S-1 under the Act with respect to the Securities offered
hereby. This Prospectus does not contain all of the information set forth in the
Registration Statement, as permitted by the rules and regulations of the
Commission. For further information pertaining to the Company and the Securities
offered hereby, reference is made to the Registration Statement and the exhibits
thereto, which may be examined without charge at the public reference facilities
maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549,
and copies thereof may be obtained from the Public Reference Branch of the
Commission upon payment at prescribed rates.
The Company will provide without charge to each person to whom a copy of
this Prospectus has been delivered, on the written or oral request of such
person made to the Company, a copy of any and all of the documents referred to
above which have been or may be incorporated in this Prospectus by reference,
other than exhibits to such documents unless such exhibits are specifically
incorporated by reference therein. Requests for such copies should be directed
to: Investor Relations Department, Stone Container Corporation, 150 North
Michigan Avenue, Chicago, Illinois 60601; telephone number (312) 346-6600.
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[LOGO]
ANNEX A
SEPTEMBER 23, 1994
STONE CONTAINER CORPORATION
CHICAGO, ILLINOIS
We completed an appraisal of certain property exhibited to us as that of
STONE CONTAINER CORPORATION ("Stone"), located in (1) Missoula, Montana, (2)
Ontonagon, Michigan, (3) York, Pennsylvania and (4) Uncasville, Connecticut and
submitted our findings in a report dated September 23, 1994.
This letter summarizes the appraisal report. By reference herein, all terms,
conditions, definitions, and limitations contained in the appraisal report shall
apply equally to this summary letter.
Our appraisal expressed an opinion, as of September 1, 1994, of the fair
market value of the property on the premise of continued use. It was understood
that our opinion would provide a basis for effecting financing arrangements.
Fair Market Value is defined as the estimated amount at which a property
might be expected to exchange between a willing buyer and a willing seller,
neither being under compulsion, each having reasonable knowledge of all relevant
facts, with equity to both.
When fair market value is established on the premise of continued use, it is
assumed that the buyer and the seller would be contemplating retention of the
property at its present location as part of the current operations. An estimate
of fair market value arrived at on the premise of continued use does not
represent the amount that might be realized from piecemeal disposition of the
property in the marketplace or from an alternative use of the property. The
premise of continued use is generally appropriate when:
- The property is fulfilling an economic demand for the service it provides
or which it houses.
- The property has a significant remaining useful live expectancy.
- There are responsible ownership and competent management.
- Diversion of the property to an alternative use would not be economically
feasible or legally permitted.
- Continuation of the existing use by present or similar users is practical.
- Due consideration is given to the property's functional utility for its
present use.
- Due consideration is given to the property's economic utility.
In our investigation, we appraised the designated assets as part of an
operating entity. Balance sheets, financial statistics, and operating results
furnished to us were accepted without verification, were examined, and were
assumed to properly represent business operations and conditions. Given the
trends indicated, it was concluded that prospective profits from appraised
business operations, on a consolidated basis, were adequate to justify ownership
and arm's-length exchange of the designated assets between a willing buyer and a
willing seller at the appraised fair market value. In the review, provisions
were made for the value of assets not included in the appraisal and for
sufficient net-working capital.
The property appraised comprises the tangible assets of the linerboard and
corrugating medium paperboard mill operations of Stone located at Missoula,
Montana; Ontonagon, Michigan; York, Pennsylvania; and Uncasville, Connecticut.
A-1
<PAGE>
No consideration was given to the impact of any environmental concerns which
are associated with the subject property. Our appraisers are not qualified as
experts in the detection of hazardous substances. Quantification of the cost to
remedy environmentally related problems would have to be identified by experts
in that field.
Our investigation dealt with real estate comprising land, buildings, and
improvements; machinery and equipment; office furniture and equipment; mobile
equipment; and licensed vehicles. Excluded from the investigation were supplies,
materials on hand, inventories, company records, and any current or intangible
assets that might exist.
For the real estate, except for the ground lease described in the mortgage
with respect to the mill located in Ontonagon, Michigan in which Stone has a
valid leasehold interest, we appraised the fee simple interest which is defined
as an absolute fee, free of limitations to any particular class of heirs or
restrictions, but subject to the limitations of eminent domain, escheat, police
power and taxation. Before arriving at an opinion of value, we personally
inspected the designated property and studied market conditions.
For the real estate, we considered:
- Location, size, and utility of the land
- Size, condition, and utility of the improvements compared with
new facilities
- Highest and best use of the land and of the property as
improved
- Cost of replacement new of the improvements and that cost less
depreciation arising from all causes
- Sales and asking prices of vacant sites to the vicinity and
general area
For the personal property, we considered:
- The estimated cost to acquire new or construct, or acquire used
if comparable property was available
- A deduction for depreciation, or loss of value, arising from
condition, utility, age, wear and tear, and obsolescence
- For the cost of comparable used property, used property selling
prices and a positive or a negative adjustment to the market
price to reflect the difference in condition and utility
between the item being appraised and its normal comparative
- Dealers' prices for machinery and equipment in operative
condition, plus allowances for freight and installation
Accordingly, based on the promise of continued use, it is our opinion that,
as of September 1, 1994, the Fair Market Value of the designated assets is
reasonably represented in the amount of SIX HUNDRED NINETY-FIVE MILLION FIVE
HUNDRED THOUSAND U.S. DOLLARS (U.S. $695,500,000), distributed as follows:
<TABLE>
<S> <C>
Land................................................. $ 5,700,000
Building & Land Improvements......................... 136,970,000
Machinery and Equipment.............................. 550,330,000
Office Furniture and Equipment....................... 675,000
Licensed Vehicles and Aircraft....................... 1,825,000
-------------
Grand Total...................................... $ 695,500,000
-------------
-------------
</TABLE>
A-2
<PAGE>
The above fair market value does not represent the amount that might be
realized from the assets' piecemeal disposition in the open market or from their
use for an alternative purpose.
We did not investigate the title to or any liabilities against the property
appraised.
Respectfully submitted,
AMERICAN APPRAISAL ASSOCIATES, INC.
/s/ William K. Domoe
--------------------
A-3
<PAGE>
INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
ITEM: PAGE
- ----------------------------------------------------------------------------------------------------------- ---------
<S> <C>
Financial Statements -- Three Months and Six Months Ended June 30, 1994 and June 30, 1993
(unaudited):
Consolidated Statements of Operations and Retained Earnings (Accumulated Deficit)........................ F-2
Consolidated Balance Sheets.............................................................................. F-3
Consolidated Statements of Cash Flows.................................................................... F-4
Notes to the Consolidated Financial Statements........................................................... F-5
Financial Statements -- Years Ended December 31, 1993, December 31, 1992 and December 31, 1991:
Report of Independent Accountants........................................................................ F-15
Consolidated Statements of Operations.................................................................... F-16
Consolidated Balance Sheets.............................................................................. F-17
Consolidated Statements of Cash Flows.................................................................... F-18
Consolidated Statements of Stockholders' Equity.......................................................... F-19
Notes to the Consolidated Financial Statements........................................................... F-20
Pro Forma Condensed Consolidated Statement of Operations
Six Months Ended June 30, 1994 (unaudited)................................................................ F-55
Pro Forma Condensed Consolidated Statement of Operations
Year Ended December 31, 1993 (unaudited).................................................................. F-56
Pro Forma Condensed Consolidated Balance Sheet
June 30, 1994 (unaudited)................................................................................. F-58
</TABLE>
F-1
<PAGE>
STONE CONTAINER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
AND RETAINED EARNINGS (ACCUMULATED DEFICIT)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- ----------------------
(IN MILLIONS, EXCEPT PER SHARE) 1994 1993 1994 1993
- ---------------------------------------------------------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales....................................................... $ 1,354.3 $ 1,267.6 $ 2,645.1 $ 2,573.9
Operating costs and expenses:
Cost of products sold........................................... 1,116.9 1,050.3 2,184.0 2,120.5
Selling, general and administrative expenses.................... 136.9 131.3 270.5 267.3
Depreciation and amortization................................... 88.5 88.8 177.7 175.9
Equity loss from affiliates..................................... 1.5 1.7 5.7 3.6
Other net operating (income) expense............................ (28.5) 2.3 (33.4) 2.9
---------- ---------- ---------- ----------
1,315.3 1,274.4 2,604.5 2,570.2
---------- ---------- ---------- ----------
Income (loss) from operations................................... 39.0 (6.8) 40.6 3.7
Interest expense................................................ (110.7) (101.8) (224.3) (204.1)
Other, net...................................................... 1.0 .3 (8.1) 3.1
---------- ---------- ---------- ----------
Loss before income taxes, minority interest, extraordinary loss
and cumulative effects of accounting changes................... (70.7) (108.3) (191.8) (197.3)
Credit for income taxes......................................... (20.0) (37.7) (60.0) (64.6)
Minority interest............................................... (.1) (1.0) 2.1 (1.6)
---------- ---------- ---------- ----------
Loss before extraordinary loss and cumulative effects of
accounting changes............................................. (50.8) (71.6) (129.7) (134.3)
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........................................................ (50.8) (71.6) (160.7) (173.8)
Preferred stock dividends....................................... (2.0) (2.0) (4.0) (4.0)
---------- ---------- ---------- ----------
Net loss applicable to common shares............................ (52.8) (73.6) (164.7) (177.8)
---------- ---------- ---------- ----------
Retained earnings (accumulated deficit), beginning of period.... (17.3) 391.8 101.6 496.0
Net loss........................................................ (50.8) (71.6) (160.7) (173.8)
Cash dividends on preferred stock............................... (8.0) (2.0) (8.0) (4.0)
Unrealized gain (loss) on marketable equity security (net of
income tax benefit)............................................ 3.3 -- (5.7) --
---------- ---------- ---------- ----------
Retained earnings (accumulated deficit), end of period.......... $ (72.8) $ 318.2 $ (72.8) $ 318.2
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Per share of common stock:
Loss before extraordinary loss and cumulative effects of
accounting changes........................................... $ (.58) $ (1.03) $ (1.55) $ (1.94)
Extraordinary loss from early extinguishment of debt.......... -- -- (.20) --
Cumulative effect of change in accounting for postemployment
benefits..................................................... -- -- (.17)
Cumulative effect of change in accounting for postretirement
benefits -- -- -- (.56)
---------- ---------- ---------- ----------
Net loss........................................................ $ (.58) $ (1.03) $ (1.92) $ (2.50)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Cash dividends.................................................. -- -- -- --
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Common shares and common share equivalents outstanding (weighted
average, in millions).......................................... 90.4 71.2 86.0 71.2
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
<FN>
- --------------------------
Unaudited; subject to year-end audit
</TABLE>
The accompanying notes are an integral part of these statements.
F-2
<PAGE>
STONE CONTAINER CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1994* 1993
---------- --------------
(IN MILLIONS)
<S> <C> <C>
Current assets:
Cash and cash equivalents........................................................... $ 150.1 $ 247.4
Accounts and notes receivable (less allowances of $20.2 and $19.3).................. 709.3 622.3
Inventories......................................................................... 656.5 719.4
Other............................................................................... 246.0 164.1
---------- --------------
Total current assets.......................................................... 1,761.9 1,753.2
---------- --------------
Property, plant and equipment....................................................... 5,251.9 5,240.7
Accumulated depreciation and amortization........................................... (1,970.0) (1,854.3)
---------- --------------
Property, plant and equipment -- net.......................................... 3,281.9 3,386.4
Timberlands......................................................................... 88.9 83.9
Goodwill............................................................................ 875.9 910.5
Other............................................................................... 679.8 702.7
---------- --------------
Total assets.................................................................. $ 6,688.4 $ 6,836.7
---------- --------------
---------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of senior and subordinated long-term debt........................ $ 18.1 $ 22.6
Current maturities of non-recourse debt of consolidated affiliates.................. 271.3 290.5
Accounts payable.................................................................... 288.8 297.1
Income taxes........................................................................ 46.0 47.6
Accrued and other current liabilities............................................... 313.9 285.7
---------- --------------
Total current liabilities..................................................... 938.1 943.5
---------- --------------
Senior long-term debt............................................................... 2,277.6 2,338.0
Subordinated debt................................................................... 1,159.6 1,257.8
Non-recourse debt of consolidated affiliates........................................ 657.0 672.6
Other long-term liabilities......................................................... 315.6 270.3
Deferred taxes...................................................................... 382.9 470.6
Redeemable preferred stock of consolidated affiliate................................ 42.3 42.3
Minority interest................................................................... 223.3 234.5
Commitments and contingencies.......................................................
Stockholders' equity:
Series E preferred stock............................................................ 115.0 115.0
Common stock (90.4 and 71.2 shares outstanding)..................................... 853.1 574.3
Retained earnings (accumulated deficit)............................................. (72.8) 101.6
Foreign currency translation adjustment............................................. (197.4) (179.0)
Unamortized expense of restricted stock plan........................................ (5.9) (4.8)
---------- --------------
Total stockholders' equity.................................................... 692.0 607.1
---------- --------------
Total liabilities and stockholders' equity.................................... $ 6,688.4 $ 6,836.7
---------- --------------
---------- --------------
<FN>
- ------------------------
* Unaudited; subject to year-end audit
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
STONE CONTAINER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
1994 1993 1994 1993
--------- --------- --------- ---------
(IN MILLIONS)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss............................................................. $ (50.8) $ (71.6) $ (160.7) $ (173.8)
Adjustments to reconcile net loss to net cash provided by (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...................................... 88.5 88.8 177.7 175.9
Deferred taxes..................................................... (21.0) (30.7) (64.2) (59.6)
Foreign currency transaction losses................................ .7 3.7 15.9 5.2
Other -- net....................................................... (31.8) (13.5) (57.7) (5.6)
Changes in current assets and liabilities -- net of adjustments for
dispositions:
Decrease (increase) in accounts and notes receivable -- net...... (19.1) 37.6 (81.4) (2.7)
Decrease in inventories.......................................... 41.1 2.8 56.8 2.5
Decrease (increase) in other current assets...................... (18.0) 8.8 (36.8) (9.4)
Increase in accounts payable and other current liabilities....... 26.3 6.9 21.1 26.0
--------- --------- --------- ---------
Net cash provided by (used in) operating activities.................. 15.9 32.8 (98.3) (2.0)
--------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings........................................................... 30.2 39.5 751.4 133.6
Payments made on debt................................................ (19.8) (37.9) (916.9) (49.5)
Payments by consolidated affiliates on non-recourse debt............. (11.6) (10.7) (30.8) (10.7)
Proceeds from issuance of common stock, net.......................... -- -- 276.3 --
Refund (funding) of letter of credit................................. 1.7 -- (20.6) --
Cash dividends....................................................... (8.0) (2.0) (8.0) (4.0)
--------- --------- --------- ---------
Net cash provided by (used in) financing activities.................. (7.5) (11.1) 51.4 69.4
--------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures................................................. (48.5) (34.1) (66.2) (63.5)
Proceeds from sales of assets........................................ 12.4 1.2 19.9 3.2
Other -- net......................................................... (4.9) (16.3) (6.2) (27.7)
--------- --------- --------- ---------
Net cash used in investing activities................................ (41.0) (49.2) (52.5) (88.0)
--------- --------- --------- ---------
Effect of exchange rate changes on cash.............................. 3.6 (.5) 2.1 (.5)
--------- --------- --------- ---------
Net decrease in cash and cash equivalents............................ (29.0) (28.0) (97.3) (21.1)
Cash and cash equivalents, beginning of period....................... 179.1 65.8 247.4 58.9
--------- --------- --------- ---------
Cash and cash equivalents, end of period............................. $ 150.1 $ 37.8 $ 150.1 $ 37.8
--------- --------- --------- ---------
--------- --------- --------- ---------
<FN>
- ------------------------
See Note 12 regarding non-cash investing and financing activities and
supplemental cash flow information.
Unaudited; subject to year-end audit
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
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 ("SEC") 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") consolidated financial
statements for the year ended December 31, 1993 included herein. 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 June 30, 1994 and the results of operations and cash flows for
the three and six month periods ended June 30, 1994 and 1993.
NOTE 2: RESTATEMENTS
Certain prior year amounts in the Company's Consolidated Statements of
Operations and Retained Earnings (Accumulated Deficit) 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 Consolidated Statement of Operations and
Retained Earnings (Accumulated Deficit).
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 June 30, 1994 recorded a $5.7 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 June 30,
1994 was approximately $12 million and $20 million (exclusive of the unrealized
loss), respectively.
NOTE 4: SUBSEQUENT EVENT
The Company originally filed on July 27, 1994 and subsequently amended on
August 4, 1994, a registration statement with the SEC registering $550 million
principal amount of First Mortgage Notes and $150 million principal amount of
Senior Notes (the "Offering"). If the Offering is completed, the Company would
(i) enter into a new credit agreement (the "Credit Agreement") consisting of a
$400 million senior secured term loan and a $450 million senior secured
revolving credit facility commitment (with the borrowing availability thereunder
being reduced by letter of credit commitments, of which approximately $61
million will be outstanding at closing ), (ii) repay all of the outstanding
indebtedness under and terminate its current bank credit agreements (the "1989
Credit Agreement") and (iii) merge the Company's 93 percent owned subsidiary
Stone Savannah River Pulp & Paper Corporation ("Savannah River") into a wholly
owned subsidiary of the Company and, as described below, repay or acquire
Savannah River's outstanding indebtedness, preferred stock and common stock;
each of the foregoing transactions is expected to be conditioned upon the
successful completion of the other transactions (collectively, the "Related
Transactions"). In connection with the Savannah River merger, the Company would
(i) repay all of the indebtedness outstanding under and terminate Savannah
River's bank credit agreement ($249.5 million as of June 30, 1994), (ii) call
for redemption the $130 million principal amount
F-5
<PAGE>
STONE CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4: SUBSEQUENT EVENT (CONTINUED)
of Savannah River's 14 1/8 percent Senior Subordinated Notes due 2000 at a
redemption price equal to the applicable premium percentage of the principal
amount, (iii) call for redemption or otherwise acquire the outstanding shares of
Series A Cumulative Redeemable Exchangeable Preferred Stock of Savannah River
not owned by the Company at a redemption price equal to the applicable premium
percentage of the principal amount plus accrued and unpaid dividends and (iv)
purchase the outstanding shares of common stock of Savannah River not owned by
the Company. The completion of the Offering, together with the Related
Transactions, is expected to improve the Company's financial flexibility by
extending the scheduled amortization obligations and final maturities of more
than $1 billion of the Company's indebtedness and improve the Company's
liquidity by replacing its current $166 million revolving credit facility
commitments with a $450 million of revolving credit commitment. While the
Company currently anticipates that the Offering and Related Transactions will be
completed during the fourth quarter of 1994, no assurance can be given that they
will be completed.
The Company will incur a charge for the write-off of previously incurred
unamortized debt issuance costs, related to the debt being repaid, currently
estimated to be in the range of $45 to $49 million, net of income tax benefit
upon the completion of the Offering and Related Transactions. This non-cash
charge would be recorded as an extraordinary loss from the early extinguishment
of debt in the Company's Consolidated Statements of Operations and Retained
Earnings (Accumulated Deficit).
NOTE 5: INVOLUNTARY CONVERSION
On April 13, 1994 a digester vessel ruptured at the Company's pulp and
paperboard mill in Panama City, Florida causing extensive damage to certain of
the facility's assets. As a result of this occurrence, the Company's second
quarter 1994 results include a $22 million pretax involuntary conversion gain
(approximately $13.7 million after taxes) which reflects the expected net
proceeds from the property damage insurance claim in excess of the carrying
value of the assets damaged or destroyed.
The Company currently estimates that the mill's linerboard production
facilities will have been shut down for a total of approximately 23 weeks and
bleached market pulp production facilities will have been 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. After deductibles, the Company expects insurance proceeds to cover both
property damage and business interruption claims.
NOTE 6: FINANCING ACTIVITIES
On February 3, 1994, the Company, under its $1 billion shelf registration,
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, 1994, the underwriters elected to
exercise their option to purchase 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 "February 1994
Offerings"). The net proceeds from the February 1994 Offerings of approximately
$962 million were used to (i) prepay all of the 1995 and portions of the 1996
and 1997 scheduled amortization under the Company's bank credit agreements
(aggregating approximately $652 million) which includes two term loan
facilities, two revolving credit facilities and an additional term loan (the
"1989 Credit Agreement"), (including the ratable amortization payment under the
revolving credit facilities of the 1989 Credit Agreement 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
F-6
<PAGE>
STONE CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6: FINANCING ACTIVITIES (CONTINUED)
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 incremental liquidity in the form of
cash. The 9 7/8 percent Senior Notes are redeemable by the Company on or after
February 1, 1999. Interest is payable semi-annually commencing August 1, 1994
and continuing each February 1 and August 1, until maturity.
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 non-cash charge is reflected as an
extraordinary loss from the early extinguishment of debt in the Company's
Consolidated Statement of Operations and Retained Earnings (Accumulated Deficit)
for the six months ended June 30, 1994.
NOTE 7: CREDIT AGREEMENT AMENDMENTS/LIQUIDITY MATTERS
The Company and its bank group have amended the Company's 1989 Credit
Agreement 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 1989 Credit Agreement 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 Company's bank
lenders.
As described in Note 4, the Offering and the Related Transactions, if
completed, would fully repay the 1989 Credit Agreement, which would then be
terminated.
The most recent amendment, which was executed in February of 1994 and became
effective upon the completion of the February 1994 Offerings, as discussed in
Note 6, provided, among other things, for the following:
(i) Enabled the Company to apply up to $200 million of net proceeds
from the February 1994 Offerings, which increased liquidity, as repayment of
borrowings under the revolving credit facilities of the 1989 Credit
Agreement 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) Enabled the Company to redeem the Company's 13 5/8 percent
Subordinated Notes maturing on June 1, 1995 from the proceeds received from
the February 1994 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 1989
Credit Agreement) for certain specified periods to the following:
<TABLE>
<CAPTION>
PERIODS EBITDA
- -------------------------------------------------------------------- --------------
<S> <C>
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
</TABLE>
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
1989 Credit Agreement 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
F-7
<PAGE>
STONE CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7: CREDIT AGREEMENT AMENDMENTS/LIQUIDITY MATTERS (CONTINUED)
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 1989 Credit Agreement) 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 1989 Credit Agreement), 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 February 1994
Offerings for which no dividend credit was received by the Company).
Additionally, the restriction in the 1989 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 and 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, Savannah River and
Seminole.
(vii) Maintains the monthly indebtedness ratio requirement, as defined in
the 1989 Credit Agreement, 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 1989 Credit Agreement), at equal to or greater
than 50 percent of the highest CTNW for any quarter since the inception of
the 1989 Credit Agreement.
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 1989 Credit Agreement. Failure to achieve or maintain
compliance with such financial ratio tests or other requirements under the 1989
Credit Agreement, 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
1989 Credit Agreement. The Company has successfully sought and received waivers
and amendments to its 1989 Credit Agreement on various occasions since entering
into the 1989 Credit Agreement. 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.
Pursuant to an output purchase agreement entered into in 1986 with Seminole,
the Company is obligated to purchase and Seminole is obligated to sell all of
Seminole's linerboard production. Seminole produces 100 percent recycled
linerboard and is dependent upon an adequate supply of recycled fiber, in
particular old corrugated containers ("OCC"). Under the agreement, the Company
paid fixed prices for linerboard, which generally exceeded market prices, until
June 3, 1994. Thereafter, the Company is only obligated to pay market prices for
the remainder of the agreement. Because market prices for linerboard are
currently less than the fixed prices previously in effect under the output
purchase agreement and due to recent significant increases in the cost of
recycled fiber, it is anticipated that Seminole will not comply with certain
financial covenants at September 30, 1994. Accordingly,
F-8
<PAGE>
STONE CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7: CREDIT AGREEMENT AMENDMENTS/LIQUIDITY MATTERS (CONTINUED)
Seminole's lenders under its credit agreement have agreed to grant waivers and
amendments with respect to such covenants for periods up to and including June
30, 1995. There can be no assurance that the lenders will grant such waivers or
that Seminole will not require additional waivers in the future. Depending upon
the level of market prices and the cost and supply of recycled fiber, Seminole
may need to undertake additional measures to meet its debt service requirements
(including covenants), 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
Seminole, the lenders to the Company under the 1989 Credit Agreement and various
other of its debt instruments would be entitled to accelerate the indebtedness
owed by the Company.
Pursuant to an output purchase agreement entered into in 1988 with Savannah
River, the Company is obligated to purchase and Savannah River is obligated to
sell all of Savannah River's linerboard and market pulp production at fixed
prices until December 1994 and November 1995, respectively, and thereafter at
market prices for the remainder of the agreement. While the fixed prices in
effect at June 30, 1994 for Savannah River 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. Notwithstanding the fixed price provisions of the output purchase
agreement, due to the relatively high cost of raw materials (primarily wood and
recycled fiber), and its highly leveraged capital structure, Savannah River has
required a waiver from its bank lenders of its fixed-charges-coverage ratio for
each fiscal quarter end since December 31, 1993. Management has prepared
projections that indicate that Savannah River will require another waiver from
its bank lenders through at least December 31, 1994. Furthermore, Savannah River
may need to undertake additional measures to meet its debt service requirements
(including covenants), 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
Savannah River, the lenders to the Company under the 1989 Credit Agreement and
various other of its debt instruments would be entitled to accelerate the
indebtedness owed by the Company. As described in Note 4, the Offering and
Related Transactions, if completed, would repay the Savannah River indebtedness,
including borrowings outstanding under its credit agreement, and would result in
the termination of the output purchase agreement. The Company will seek
additional waivers from Savannah River's lenders if the Offering and Related
Transactions, as described in Note 4, are not completed as of September 29,
1994.
As a result of the February 1994 Offerings, the "dividend pool" established
by the restrictions on payment of dividends 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 May 16,
1994, the Company paid 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"), to stockholders of record on April 15, 1994. The
cumulative cash dividend fully satisfied all accumulated dividends in arrears on
the Series E Cumulative Preferred Stock at that time. As a result of net losses,
the dividend pool has been subsequently depleted and, accordingly, the Company's
Board of Directors did not declare the scheduled August 15, 1994 quarterly
dividend on the Series E Cumulative Preferred Stock. In the event the Company
does not pay a dividend on the Series E Cumulative Preferred Stock for six
quarters, the holders of the Series E Cumulative Preferred Stock
F-9
<PAGE>
STONE CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7: CREDIT AGREEMENT AMENDMENTS/LIQUIDITY MATTERS (CONTINUED)
would have the right to elect two members to the Company's Board of Directors
until the accumulated dividends on such Series E Cumulative Preferred Stock have
been declared and paid or set apart for payment.
Due to industry conditions during the past few years and due principally to
depressed product prices and significant interest costs attributable to the
Company's highly leveraged capital structure, the Company incurred net losses in
each of the last three years and for the first half of 1994 and expects to incur
a net loss for the 1994 fiscal year. While market conditions have improved since
October 1993, permitting the Company to implement price increases for most of
its products, such prices remain below the historical high prices which were
achieved during the peak of the last industry cycle, particularly prices for
newsprint and market pulp. Additionally, while product prices have increased
since October 1993, the Company's production costs (including labor, fiber and
energy), as well as its interest expense, have increased since the last pricing
peak in the industry, increasing pressure on the Company's net margins for its
products. The successive net losses have significantly impaired the Company's
liquidity and available sources of liquidity.
The Company improved its liquidity and financial flexibility through the
completion of the February 1994 Offerings. Notwithstanding these improvements in
the Company's liquidity and financial flexibility, unless the Company achieves
and maintains increased selling prices beyond current levels, the Company will
continue to incur net losses and would not generate sufficient cash flows to
meet fully the Company's debt service requirements in the future. Without such
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 costs reductions,
additional sales of assets, the deferral of certain capital expenditures,
obtaining additional sources of funds or liquidity and/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 and/or other sources or
refinance and/or restructure maturing indebtedness. No assurance can be given
that the Company will be successful in doing so. As discussed in Note 4, the
Offering, together with the Related Transactions, if completed, is expected to
improve the Company's financial flexibility by extending the scheduled
amortization obligations and final maturities of more than $1 billion of the
Company's indebtedness and improve the Company's liquidity by replacing its
current $166 million revolving credit facility commitments with a $450 million
of revolving credit commitment.
F-10
<PAGE>
STONE CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8: INVENTORIES
Inventories are summarized as follows:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1994 1993
----------- --------------
(IN MILLIONS)
<S> <C> <C>
Raw materials and supplies......................................... $ 296.8 $ 333.8
Paperstock*........................................................ 240.3 284.2
Work in process.................................................... 20.2 16.8
Finished products -- converting facilities......................... 114.0 99.5
----------- -------
671.3 734.3
Excess of current cost over LIFO inventory value................... (14.8) (14.9)
----------- -------
Total inventories.................................................. $ 656.5 $ 719.4
----------- -------
----------- -------
<FN>
- ------------------------
* Includes linerboard, corrugating medium, kraft paper, newsprint, market pulp
and groundwood paper.
</TABLE>
At June 30, 1994 and December 31, 1993, the percentage of total inventories
costed by the LIFO, FIFO and average cost methods were as follows:
<TABLE>
<CAPTION>
JUNE 30, 1994 DECEMBER 31, 1993
------------- -------------------
<S> <C> <C>
LIFO............................................................... 43% 44%
FIFO............................................................... 8% 6%
Average Cost....................................................... 49% 50%
</TABLE>
NOTE 9: CURRENT MATURITIES OF LONG-TERM DEBT
Current maturities of long-term debt at June 30, 1994 and December 31, 1993
consisted of the following components:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1994 1993
----------- --------------
(IN MILLIONS)
<S> <C> <C>
Senior debt........................................................ $ 18.1 $ 17.7
Subordinated debt.................................................. -- 4.9
Non-recourse debt of consolidated affiliates....................... 271.3 290.5
----------- -------
Total current maturities of long-term debt......................... $ 289.4 $ 313.1
----------- -------
----------- -------
</TABLE>
As described in Note 4, the Offering and the Related Transactions, if
completed, would repay the Savannah River indebtedness, including borrowings
outstanding under its credit agreement, which would then be terminated.
The 1989 Credit Agreement limits in certain specific circumstances any
further investments by the Company in Stone-Consolidated, Seminole and Savannah
River. Savannah River has substantial indebtedness which had been incurred in
connection with project financing and is significantly leveraged. As of June 30,
1994, Savannah River had $383.1 million in outstanding indebtedness (including
$249.5 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 May 1994, Savannah River received a
waiver of its fixed-charges-coverage covenant requirement as of June 30, 1994.
Management has prepared projections that indicate that Savannah River will not
be in compliance with
F-11
<PAGE>
STONE CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9: CURRENT MATURITIES OF LONG-TERM DEBT (CONTINUED)
this covenant as of September 30, 1994. Consequently, approximately $215.8
million and $237.9 million of Savannah River debt that otherwise would have been
classified as long-term has been classified as current in the June 30, 1994 and
December 31, 1993 consolidated balance sheets, respectively. Savannah River has
received from its lenders waivers of the appropriate financial covenants through
September 29, 1994. Savannah River will seek additional waivers from its lenders
if the Offering and Related Transactions, as described in Note 4, are not
completed as of September 29, 1994. Failure to obtain covenant relief beyond
September 29, 1994 would result in a default under 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 1989 Credit
Agreement and various other of the Company's debt instruments would be entitled
to accelerate the indebtedness owed by the Company.
The following table provides, as of June 30, 1994, the actual amounts of
long-term debt maturing through 2000 and thereafter.
<TABLE>
<S> <C>
Remainder of 1994......................................... $ 269.3
1995...................................................... 270.1
1996...................................................... 216.1
1997...................................................... 748.7
1998...................................................... 524.8
1999...................................................... 323.0
2000...................................................... 566.5
Thereafter................................................ 1,457.3
</TABLE>
NOTE 10: 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.:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
1994 1993 1994 1993
--------- --------- --------- ---------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Net sales............................................................... $ 402.7 $ 409.6 $ 827.9 847.3
Cost of products sold and depreciation.................................. 343.9 343.1 713.5 698.4
Income (loss) before cumulative effects of accounting changes........... 10.4 (3.2) 6.9 2.4
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 income (loss)....................................................... 10.4 (3.2) 3.0 (5.9)
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1994 1993
---------- --------------
(IN MILLIONS)
<S> <C> <C>
Current assets........................................................................ $ 340.7 $ 360.9
Noncurrent assets*.................................................................... 1,629.5 1,600.5
Current liabilities................................................................... 147.7 141.3
Noncurrent liabilities and obligations................................................ 395.1 395.8
<FN>
- ------------------------
* Includes $890.8 and $857.4 due from the Company at June 30, 1994 and December
31, 1993, respectively.
</TABLE>
F-12
<PAGE>
STONE CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11: SEGMENT INFORMATION
Financial information by business segment is summarized as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
-----------------------------------------------
THREE MONTHS ENDED JUNE 30, 1994
----------------------------------------------- ---------------------- JUNE 30, 1993
INCOME ----------------------
(LOSS) INCOME
BEFORE (LOSS)
INCOME BEFORE
TAXES, INCOME
JUNE 30, 1994 JUNE 30, 1993 MINORITY TAXES,
---------------------- ---------------------- INTEREST, MINORITY
INCOME INCOME EXTRAORDINARY INTEREST
(LOSS) (LOSS) LOSS AND AND
BEFORE BEFORE CUMULATIVE CUMULATIVE
INCOME INCOME EFFECT OF EFFECT OF
TAXES AND TAXES AND AN AN
TOTAL MINORITY TOTAL MINORITY TOTAL ACCOUNTING TOTAL ACCOUNTING
SALES INTEREST SALES INTEREST(A) SALES CHANGE SALES CHANGE(A)
---------- --------- ---------- --------- ---------- --------- ---------- ---------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Paperboard and paper
packaging.................... $ 992.4 $ 52.6 $ 960.2 $ 51.5 $ 1,946.4 $ 105.1 $ 1,933.2 $ 113.9
White paper and pulp.......... 275.8 (7.9) 238.7 (42.9) 536.5 (46.2) 492.7 (86.7)
Other......................... 90.7 14.7 80.5 5.9 179.3 26.4 173.2 19.5
Intersegment.................. (4.6) -- (11.8) -- (17.1) -- (25.2) --
---------- --------- ---------- --------- ---------- --------- ---------- ---------
1,354.3 59.4 1,267.6 14.5 2,645.1 85.3 2,573.9 46.7
Interest expense.............. (110.7) (101.8) (224.3) (204.1)
Foreign currency transaction
adjustments.................. (.7) (3.6) (15.9) (5.1)
General corporate and
miscellaneous (net).......... (18.7) (17.4) (36.9) (34.8)
---------- --------- ---------- --------- ---------- --------- ---------- ---------
Total......................... $ 1,354.3 $ (70.7) $ 1,267.6 $ (108.3) $ 2,645.1 $ (191.8) $ 2,573.9 $ (197.3)
---------- --------- ---------- --------- ---------- --------- ---------- ---------
---------- --------- ---------- --------- ---------- --------- ---------- ---------
</TABLE>
Financial information by geographic region is summarized as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
-----------------------------------------------
THREE MONTHS ENDED JUNE 30, 1994
----------------------------------------------- ---------------------- JUNE 30, 1993
INCOME ----------------------
(LOSS) INCOME
BEFORE (LOSS)
INCOME BEFORE
TAXES, INCOME
JUNE 30, 1994 JUNE 30, 1993 MINORITY TAXES,
---------------------- ---------------------- INTEREST, MINORITY
INCOME INCOME EXTRAORDINARY INTEREST
(LOSS) (LOSS) LOSS AND AND
BEFORE BEFORE CUMULATIVE CUMULATIVE
INCOME INCOME EFFECT OF EFFECT OF
TAXES AND TAXES AND AN AN
TOTAL MINORITY TOTAL MINORITY TOTAL ACCOUNTING TOTAL ACCOUNTING
SALES INTEREST SALES INTEREST(A) SALES CHANGE SALES CHANGE(A)
---------- --------- ---------- --------- ---------- --------- ---------- ---------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
United States................. $ 985.7 $ 61.0 $ 925.7 $ 24.7 $ 1,937.5 $ 100.4 $ 1,850.5 $ 70.0
Canada........................ 247.5 (2.6) 192.1 (9.4) 454.1 (17.3) 383.0 (26.3)
Europe........................ 141.0 1.0 160.8 (.8) 282.3 2.2 359.7 3.0
---------- --------- ---------- --------- ---------- --------- ---------- ---------
1,374.2 59.4 1,278.6 14.5 2,673.9 85.3 2,593.2 46.7
Interest expense.............. (110.7) (101.8) (224.3) (204.1)
Foreign currency transaction
adjustments.................. (.7) (3.6) (15.9) (5.1)
General corporate and
miscellaneous (net).......... (18.7) (17.4) (36.9) (34.8)
Inter-area eliminations....... (19.9) -- (11.0) -- (28.8) -- (19.3) --
---------- --------- ---------- --------- ---------- --------- ---------- ---------
Total......................... $ 1,354.3 $ (70.7) $ 1,267.6 $ (108.3) $ 2,645.1 $ (191.8) $ 2,573.9 $ (197.3)
---------- --------- ---------- --------- ---------- --------- ---------- ---------
---------- --------- ---------- --------- ---------- --------- ---------- ---------
<FN>
- ------------------------------
(a) Adjusted to conform to current financial statement presentation.
</TABLE>
F-13
<PAGE>
STONE CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12: 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:
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS ENDED
ENDED JUNE 30 JUNE 30
----------------- -------------------
1994 1993 1994 1993
------- ------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Non-cash investing and financing activities:
Unrealized (gain) loss on an investment in an equity
security (net of income tax benefit)....................... $ (3.3) $ -- $ 5.7 $ --
Note receivable received from sale of assets................ -- -- 1.3 --
Preferred stock dividends issued by a consolidated
affiliate.................................................. -- 1.5 -- 2.9
Capital lease obligations incurred.......................... -- -- -- .2
Cash paid during the periods for:
Interest (net of capitalization)............................ $ 91.9 $ 92.3 $ 190.7 $ 188.3
Income taxes (net of refunds)............................... (.4) 1.9 2.6 7.7
------- ------- -------- --------
------- ------- -------- --------
</TABLE>
F-14
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Stockholders of
Stone Container Corporation
In our opinion, the accompanying consolidated balance sheets 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, 1993 and 1992, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 1993, 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.
As discussed in Note 11 to the consolidated financial statements, the Company's
liquidity has been adversely affected by the net losses incurred in the past
three years. Recent financings and other transactions have improved liquidity;
however, improvements in cash flows from operations eventually will be
necessary. In addition, as discussed in Note 18, two of the Company's
subsidiaries may need to undertake additional measures to meet their separate
debt service requirements.
As discussed in Note 1 to the consolidated financial statements, the Company
changed its methods of accounting for income taxes and for postretirement
benefits other than pensions effective January 1, 1992 and 1993, respectively.
PRICE WATERHOUSE LLP
Chicago, Illinois
March 23, 1994
F-15
<PAGE>
STONE CONTAINER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1993 1992 1991
---------- ---------- ----------
(IN MILLIONS EXCEPT PER SHARE)
<S> <C> <C> <C>
SALES
Net sales.................................................................. $ 5,059.6 $ 5,520.7 $ 5,384.3
---------- ---------- ----------
OPERATING COSTS AND EXPENSES
Cost of products sold...................................................... 4,223.5 4,473.7 4,287.2
Selling, general and administrative expenses............................... 512.2 543.5 522.8
Depreciation and amortization.............................................. 346.8 329.2 273.5
Equity (income) loss from affiliates....................................... 11.7 5.3 (1.1)
Other net operating (income) expense....................................... 4.7 12.8 (62.8)
---------- ---------- ----------
5,098.9 5,364.5 5,019.6
---------- ---------- ----------
Income (loss) from operations.............................................. (39.3) 156.2 364.7
Interest expense........................................................... (426.7) (386.1) (397.4)
Other, net................................................................. (.9) .6 14.7
---------- ---------- ----------
Loss before income taxes and cumulative effects of accounting changes...... (466.9) (229.3) (18.0)
Provision (credit) for income taxes........................................ (147.7) (59.4) 31.1
---------- ---------- ----------
NET LOSS
Loss before cumulative effects of accounting changes....................... (319.2) (169.9) (49.1)
Cumulative effect of change in accounting for postretirement benefits (net
of income taxes of $23.3)................................................. (39.5) -- --
Cumulative effect of change in accounting for income taxes................. -- (99.5) --
---------- ---------- ----------
Net loss..................................................................... (358.7) (269.4) (49.1)
Preferred stock dividends.................................................... (8.1) (6.9) --
---------- ---------- ----------
Net loss applicable to common shares......................................... $ (366.8) $ (276.3) $ (49.1)
---------- ---------- ----------
---------- ---------- ----------
NET LOSS PER COMMON SHARE*
Loss before cumulative effects of accounting changes....................... (4.59) (2.49) (.78)
Cumulative effect of change in accounting for postretirement benefits...... (.56) -- --
Cumulative effect of change in accounting for income taxes................. -- (1.40) --
---------- ---------- ----------
Net loss per common share.................................................... $ (5.15) $ (3.89) $ (.78)
---------- ---------- ----------
---------- ---------- ----------
<FN>
- ------------------------
* Amounts per common share have been adjusted for the 2 percent common stock
dividend issued September 15, 1992.
</TABLE>
The accompanying notes are an integral part of these statements.
F-16
<PAGE>
STONE CONTAINER CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1993 1992
----------- -----------
(IN MILLIONS)
<S> <C> <C>
Current assets:
Cash and cash equivalents............................................................. $ 247.4 $ 58.9
Accounts and notes receivable (less allowances of $19.3).............................. 622.3 688.1
Inventories........................................................................... 719.4 785.3
Other................................................................................. 164.1 169.5
----------- -----------
Total current assets............................................................ 1,753.2 1,701.8
----------- -----------
Property, plant and equipment......................................................... 5,240.7 5,365.1
Accumulated depreciation and amortization............................................. (1,854.3) (1,661.9)
----------- -----------
Property, plant and equipment -- net............................................ 3,386.4 3,703.2
Timberlands........................................................................... 83.9 69.4
Goodwill.............................................................................. 910.5 983.5
Other................................................................................. 702.7 569.1
----------- -----------
Total assets.................................................................... $ 6,836.7 $ 7,027.0
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable......................................................................... $ -- $ 33.0
Current maturities of senior and subordinated long-term debt.......................... 22.6 144.7
Current maturities of non-recourse debt of consolidated affiliates.................... 290.5 40.1
Accounts payable...................................................................... 297.1 364.2
Income taxes.......................................................................... 47.6 62.2
Accrued and other current liabilities................................................. 285.7 300.6
----------- -----------
Total current liabilities....................................................... 943.5 944.8
----------- -----------
Senior long-term debt................................................................. 2,338.0 2,511.1
Subordinated debt..................................................................... 1,257.8 1,019.2
Non-recourse debt of consolidated affiliates.......................................... 672.6 574.8
Other long-term liabilities........................................................... 270.3 152.7
Deferred taxes........................................................................ 470.6 685.2
Redeemable preferred stock of consolidated affiliate.................................. 42.3 36.3
Minority interest..................................................................... 234.5 .2
Commitments and contingencies (Note 18)...............................................
Stockholders' equity:
Series E preferred stock.............................................................. 115.0 115.0
Common stock (71.2 and 71.0 shares outstanding)....................................... 574.3 645.7
Retained earnings..................................................................... 101.6 496.0
Foreign currency translation adjustment............................................... (179.0) (149.3)
Unamortized expense of restricted stock plan.......................................... (4.8) (4.7)
----------- -----------
Total stockholders' equity...................................................... 607.1 1,102.7
----------- -----------
Total liabilities and stockholders' equity...................................... $ 6,836.7 $ 7,027.0
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these statements.
F-17
<PAGE>
STONE CONTAINER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1993 1992 1991
--------- --------- ---------
(IN MILLIONS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss........................................................................ $ (358.7) $ (269.4) $ (49.1)
Adjustments to reconcile net loss to net cash provided by (used in) operating
activities:
Cumulative effect of change in accounting for postretirement benefits......... 39.5 -- --
Cumulative effect of change in accounting for income taxes.................... -- 99.5 --
Depreciation and amortization................................................. 346.8 329.2 273.5
Deferred taxes................................................................ (133.9) (67.5) 21.6
Foreign currency transaction losses (gains)................................... 11.8 15.0 (4.9)
Payment on settlement of interest rate swaps.................................. (33.0) -- --
Other -- net.................................................................. (89.3) 60.6 12.3
Changes in current assets and liabilities -- net of adjustments for divestitures
and an acquisition:
Decrease (increase) in accounts and notes receivable -- net................... 44.9 (66.6) 33.5
Decrease (increase) in inventories............................................ 28.9 10.5 (60.4)
Decrease (increase) in other current assets................................... (9.3) 9.2 (75.2)
Increase (decrease) in accounts payable and other current liabilities......... (60.4) (34.9) 59.2
--------- --------- ---------
Net cash provided by (used in) operating activities........................... (212.7) 85.6 210.5
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings...................................................................... 611.4 1,024.8 753.0
Payments made on debt........................................................... (698.1) (912.4) (795.9)
Non-recourse borrowings of consolidated affiliates.............................. 400.6 40.0 155.5
Payments by consolidated affiliates on non-recourse debt........................ (55.0) (10.4) (34.4)
Proceeds from issuance of preferred stock....................................... -- 111.0 --
Proceeds from issuance of common stock.......................................... -- .1 176.0
Proceeds from issuance of common stock of a consolidated subsidiary............. 161.8 -- --
Proceeds from the settlement of cross currency swaps............................ 67.9 -- --
Cash dividends.................................................................. (4.0) (30.7) (44.7)
--------- --------- ---------
Net cash provided by financing activities..................................... 484.6 222.4 209.5
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures:
Funded by project financings.................................................. (14.6) (79.1) (219.8)
Other......................................................................... (135.1) (202.3) (210.3)
--------- --------- ---------
Total capital expenditures.................................................. (149.7) (281.4) (430.1)
--------- --------- ---------
Payments made for businesses acquired........................................... (.1) (27.2) (18.8)
Proceeds from sales of assets................................................... 106.0 9.5 22.1
Other -- net.................................................................... (40.7) (10.7) 13.7
--------- --------- ---------
Net cash used in investing activities......................................... (84.5) (309.8) (413.1)
--------- --------- ---------
Effect of exchange rate changes on cash......................................... 1.1 (3.4) 3.3
--------- --------- ---------
NET CASH FLOWS
Net increase (decrease) in cash and cash equivalents............................ 188.5 (5.2) 10.2
Cash and cash equivalents, beginning of period.................................. 58.9 64.1 53.9
--------- --------- ---------
Cash and cash equivalents, end of period........................................ $ 247.4 $ 58.9 $ 64.1
--------- --------- ---------
--------- --------- ---------
<FN>
- ------------------------
See Note 5 regarding non-cash financing and investing activities and
supplemental cash flow
information.
</TABLE>
The accompanying notes are an integral part of these statements.
F-18
<PAGE>
STONE CONTAINER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------
1993 1992 1991
---------------------- ----------------------- -----------------------
AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES
--------- ----------- ---------- ----------- ---------- -----------
(IN MILLIONS EXCEPT PER SHARE)
<S> <C> <C> <C> <C> <C> <C>
PREFERRED STOCK
Balance at January 1............................. $ 115.0 4.6 $ -- -- $ -- --
Issuance of preferred stock:
Public offering................................ -- -- 115.0 4.6 -- --
--------- --- ---------- --- ---------- ---
Balance at December 31........................... 115.0 4.6 115.0 4.6 -- --
--------- --- ---------- --- ---------- ---
--- --- ---
COMMON STOCK
Balance at January 1............................. 645.7 71.0 613.2 69.5 435.7 60.0
Issuance of common stock:
Public offering................................ -- -- -- -- 174.7 9.2
Exercise of stock options...................... -- -- .1 -- .1 --
Restricted stock plan.......................... 2.9 .2 2.8 .1 2.7 .3
Preferred stock conversion..................... .1 -- -- -- -- --
2 percent common stock dividend................ -- -- 29.6 1.4 -- --
Public offering of subsidiary stock............ (74.4) -- -- -- -- --
--------- --- ---------- --- ---------- ---
Balance at December 31........................... 574.3 71.2 645.7 71.0 613.2 69.5
--------- --- ---------- --- ---------- ---
--- --- ---
RETAINED EARNINGS
Balance at January 1............................. 496.0 832.8 926.7
Net loss......................................... (358.7) (269.4) (49.1)
Cash dividends:
Common stock*.................................. -- (24.8) (44.7)
Preferred stock*............................... (4.0) (5.9) --
2 percent common stock dividend.................. -- (29.6) --
Minimum pension liability in excess of
unrecognized prior service cost................. (31.7) (7.1) (.1)
--------- ---------- ----------
Balance at December 31........................... 101.6 496.0 832.8
--------- ---------- ----------
FOREIGN CURRENCY TRANSLATION ADJUSTMENT
Balance at January 1............................. (149.3) 95.5 101.5
Aggregate adjustment from translation of foreign
currency statements............................. (29.7) (244.8) (6.0)
--------- ---------- ----------
Balance at December 31........................... (179.0) (149.3) 95.5
--------- ---------- ----------
UNAMORTIZED EXPENSE OF RESTRICTED STOCK PLAN
Balance at January 1............................. (4.7) (4.0) (3.4)
Issuance of shares............................... (2.9) (2.8) (2.7)
Amortization of expense.......................... 2.8 2.1 2.1
--------- ---------- ----------
Balance at December 31........................... (4.8) (4.7) (4.0)
--------- ---------- ----------
Total stockholders' equity at December 31........ $ 607.1 $ 1,102.7 $ 1,537.5
--------- ---------- ----------
--------- ---------- ----------
<FN>
- ------------------------
* Cash dividends paid on common stock, adjusted for the 2 percent stock dividend
issued September 15, 1992, were $.35 per share in 1992 and $.71 per share in
1991. No cash dividends on common stock were paid in 1993. Cash dividends paid
on preferred stock were $.875 per share in 1993 and $1.28 per share in 1992.
</TABLE>
The accompanying notes are an integral part of these statements.
F-19
<PAGE>
STONE CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of the Company
and all subsidiaries that are more than 50 percent owned. The Company's
subsidiary Cartomills, S.A. ("Cartomills") was also accounted for as a
consolidated subsidiary beginning October 31, 1990 upon the Company's
acquisition of 30 percent of the outstanding common stock of Cartomills. In
1992, the Company purchased the remaining 70 percent of the common stock of
Cartomills. All significant intercompany accounts and transactions have been
eliminated. Investments in non-consolidated affiliated companies are primarily
accounted for by the equity method.
PER SHARE DATA:
Net loss per common share is computed by dividing net loss applicable to
common shares by the weighted average number of common shares outstanding during
each year. The weighted average number of common shares outstanding was
71,162,646 in 1993, 70,986,564 in 1992 and 63,206,529 in 1991. Common stock
equivalent shares, issuable upon exercise of outstanding stock options, are
included in these calculations when they would have a dilutive effect on the per
share amounts. All amounts per common share and the weighted average number of
common shares outstanding have been adjusted for the 2 percent common stock
dividend issued September 15, 1992. Fully diluted earnings per share is not
disclosed because of the anti-dilutive effect of the Company's convertible
securities.
RECLASSIFICATIONS:
Certain prior year amounts have been restated to conform with the current
year presentation in the Consolidated Statements of Operations, the Consolidated
Balance Sheets and the Consolidated Statements of Cash Flows.
CASH AND CASH EQUIVALENTS:
The Company considers all highly liquid short-term investments with original
maturities of three months or less to be cash equivalents and, therefore,
includes such investments as cash and cash equivalents in its financial
statements.
INVENTORIES:
Inventories are stated at the lower of cost or market. The primary methods
used to determine inventory costs are the first-in-first-out ("FIFO") method,
the last-in-first-out ("LIFO") method and the average cost method.
PROPERTY, PLANT, EQUIPMENT AND DEPRECIATION:
Property, plant and equipment is stated at cost. Expenditures for
maintenance and repairs are charged to income as incurred. Additions,
improvements and major replacements are capitalized. The cost and accumulated
depreciation related to assets sold or retired are removed from the accounts and
any gain or loss is credited or charged to income.
For financial reporting purposes, depreciation and amortization is primarily
provided on the straight-line method over the estimated useful lives of
depreciable assets, or over the duration of the leases for capitalized leases,
based on the following annual rates:
<TABLE>
<CAPTION>
TYPE OF ASSET RATES
- ------------------------------------------------------------------------------- -------------
<S> <C>
Machinery and equipment........................................................ 5% to 33%
Buildings and leasehold improvements........................................... 2% to 10%
Land improvements.............................................................. 4% to 7%
</TABLE>
F-20
<PAGE>
STONE CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
TIMBERLANDS:
Timberlands are stated at cost less accumulated cost of timber harvested.
The Company amortizes its private fee timber costs over the estimated total
fiber 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. The Company capitalizes interest costs
related to pre-merchantable timber.
INCOME TAXES:
Effective January 1, 1992, the Company adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"), which
required a change from the deferred method to the liability method of accounting
for income taxes. In connection with the adoption of SFAS 109, the Company
recorded a one-time, non-cash after-tax charge to its first quarter 1992
earnings of $99.5 million or $1.40 per share of common stock. This adjustment is
reported as a cumulative effect of a change in accounting principles in the
Company's Statements of Operations. Under the liability method, deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. SFAS 109
requires that assets and liabilities acquired in a business combination
accounted for under the purchase method of accounting be recorded at their gross
fair values, with a separate deferred tax balance recorded for the related tax
effects. Accordingly, effective with the adoption of SFAS 109, the Company's
property, plant and equipment increased by $331 million, resulting in increased
annual depreciation expense of approximately $28 million which is offset by
comparable reductions in deferred income tax expense as the related taxable
temporary differences reverse. The impact of the adoption of SFAS 109 on the
deferred income tax accounts as of January 1, 1992 was an increase in the
deferred tax liability of approximately $500 million and an increase in the
current deferred tax asset of approximately $18 million. Financial statements
for years prior to 1992 have not been restated.
GOODWILL AND OTHER ASSETS:
Goodwill is amortized on a straight-line basis over 40 years, and is
recorded net of accumulated amortization of approximately $129 million and $107
million at December 31, 1993 and 1992, respectively. The Company assesses at
each balance sheet date whether there has been a permanent impairment in the
value of goodwill. This is accomplished by determining whether projected
undiscounted future cash flows from operations exceed the net book value of
goodwill as of the assessment date. Such projections reflect price, volume and
cost assumptions. Additional factors considered by management in the preparation
of the projections and in assessing the value of goodwill include the effects of
obsolescence, demand, competition and other pertinent economic factors and
trends and prospects that may have an impact on the value or remaining useful
life of goodwill. Deferred debt issuance costs are amortized over the expected
life of the related debt using the interest method. Start-up costs on major
projects were capitalized and amortized over a ten-year period prior to October
1, 1993. Effective October 1, 1993, the Company changed its estimate of the
useful life of deferred start-up costs to a five-year period. The effect of this
change in estimate was to increase depreciation and amortization expense by
approximately $3.1 million and decrease net income by $2.0 million or $.02 per
common share. Other long-term assets include $80 million and $73 million of
unamortized deferred start-up costs at December 31, 1993 and 1992, respectively.
F-21
<PAGE>
STONE CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PUBLIC OFFERING OF SUBSIDIARY STOCK:
When the sale of subsidiary stock takes the form of a direct sale of its
unissued shares, the Company records the difference relating to the carrying
amount per share and the offering price per share as an adjustment to common
stock in those instances in which the Company has determined that the difference
does not represent a permanent impairment.
FOREIGN CURRENCY TRANSLATION:
The functional currency for 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 accumulated as a separate component of stockholders' equity
entitled Foreign Currency Translation Adjustment. Foreign currency transaction
gains or losses are credited or charged to income. These transaction gains or
losses arise primarily from the translation of monetary assets and liabilities
that are denominated in a currency other than the local currency.
FOREIGN CURRENCY AND INTEREST RATE HEDGES:
The Company utilizes various financial instruments to hedge its foreign
currency and interest rate exposures. Premiums received and fees paid on the
financial instruments are deferred and amortized over the period of the
agreements. Gains and losses on the instruments are used to offset the effects
of foreign exchange and interest rate fluctuations in the Statements of
Operations.
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS:
Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits
Other than Pensions" ("SFAS 106"), which required the Company to change from the
pay-as-you-go (cash) method to the accrual method of accounting for such
postretirement benefits (primarily health care and life insurance). Upon
adoption of SFAS 106, the Company recorded its catch-up accumulated
postretirement benefit obligation (approximately $62.8 million) by recognizing a
one-time, non-cash charge of $39.5 million, net of income taxes, as a cumulative
effect of an accounting change in its 1993 first quarter Statement of
Operations.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS:
In November 1992, the Financial Accounting Standards Board issued 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. The Company intends to adopt SFAS 112 by recognizing the catch-up
obligation for its worldwide operations as a cumulative effect of an accounting
change effective January 1, 1994 in the 1994 first quarter Statement of
Operations. The one-time, non-cash charge will be approximately $14 million, net
of income taxes.
NOTE 2 -- SUBSEQUENT EVENTS
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, 1994, 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 in the February 1994 Offerings. The net proceeds from the February
1994 Offerings of approximately $962 million were used to (i) prepay
approximately $652 million of the 1995, 1996 and 1997 required amortization
under the 1989 Credit Agreement 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
F-22
<PAGE>
STONE CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 -- SUBSEQUENT EVENTS (CONTINUED)
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. Had the
issuance of the common shares occurred on January 1, 1993, the Company's
weighted average number of common shares outstanding would have been 84,270,232
and the net loss per common share would have been $4.35 for the year ended
December 31, 1993.
NOTE 3 -- ACQUISITIONS/MERGERS/DISPOSITIONS
In December 1993, the Company sold two of its short-line railroads in a
transaction in which the Company has guaranteed to contract minimum railroad
services which will provide freight revenues to the railroads over a 10 year
period. The transaction has been accounted for as a financing and accordingly,
had no impact on the Company's 1993 net loss. The Company received proceeds of
approximately $28 million, of which approximately $19 million was used to repay
commitments under the 1989 Credit Agreement.
Also in December 1993, the Company sold its 49 percent equity interest in
Titan. The net proceeds were used to repay commitments under the 1989 Credit
Agreement and for repayment of borrowings under its revolving credit facilities
without reducing commitments thereunder. The sale resulted in a pre-tax gain of
approximately $35.4 million.
On May 6, 1993, the Company's wholly-owned German subsidiary, Europa Carton
A.G., ("Europa Carton"), completed a joint venture with Financiere Carton Papier
(FCP), a French company, to merge the folding carton operations of Europa Carton
with those of FCP ("FCP Group"). Under the joint venture, FCP Group is owned
equally by Europa Carton and the shareholders of FCP immediately prior to the
merger. The Company's investment in the joint venture is being accounted for
under the equity method of accounting.
During 1993, the Company increased its ownership in the common stock of
Savannah River from 90.2 percent to 92.8 percent through the purchase of an
additional 6,152 common shares and through the receipt of Series D Preferred
Stock as a dividend in kind on Savannah River's Series B Preferred Stock and the
election of its right to convert the Series D Preferred Stock into 198,438
common shares. The Company had previously increased its ownership in the common
stock of Savannah River from 50.0 percent to 90.2 percent by acquiring 321,502
shares during 1992 and 1991. Savannah River operates a linerboard and market
pulp mill in Port Wentworth, Georgia.
In October and November 1992, the Company purchased the remaining 70.0
percent of the common stock (12,600 shares) of Cartomills, a Belgian company
that operates two corrugated container plants.
In June 1992, the Company acquired an additional 45,666 shares of Seminole
common stock, thereby increasing its ownership in the common stock of Seminole
from 94.4 percent to 99.0 percent. The Company had previously increased its
ownership in the common stock of Seminole from 85.4 percent to 94.4 percent by
purchasing 90,000 shares during 1991. Seminole operates an unbleached recycled
linerboard and kraft paper mill in Jacksonville, Florida.
The Company also made a minor acquisition and a divestiture during the years
for which financial statements are presented which did not have a significant
impact on the Company's results of operations or financial condition.
F-23
<PAGE>
STONE CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4 -- PUBLIC OFFERING OF SUBSIDIARY STOCK
In December 1993, Stone-Consolidated, a newly created Canadian subsidiary,
acquired the newsprint and uncoated groundwood papers business of Stone Canada
and sold $346.5 million of units in an initial public offering comprised of both
common stock and convertible subordinated debentures (the "Units Offering").
Each unit was priced at $2,100 and consisted of 100 shares of common stock at
$10.50 per share and $1,050 principal amount of convertible debentures. The
convertible subordinated debentures mature December 31, 2003, bear interest at
an annual rate of 8 percent and are convertible beginning June 30, 1994, into
6.211 shares of common stock for each Canadian $100 principal amount,
representing a conversion price of $12.08 per share. Concurrent with the initial
public offering, Stone-Consolidated sold $225 million of senior secured notes in
a public offering in the United States. The senior secured notes mature December
15, 2000 and bear interest at an annual rate of 10.25 percent.
As a result of the Units Offering, 16.5 million shares of common stock,
representing 25.4 percent of the total shares outstanding of Stone-Consolidated,
were sold to the public, resulting in the recording in the Company's
Consolidated Balance Sheet of a minority interest liability of $236.7 million.
The Company used approximately $373 million of the net proceeds from the
sale of the Stone-Consolidated securities for repayment of commitments under its
1989 Credit Agreement and the remainder for general corporate purposes. As a
result of the Units Offering, the Company recorded a charge of $74.4 million to
common stock relating to the excess carrying value per common share over the
offering price per common share associated with the shares issued.
NOTE 5 -- ADDITIONAL CASH FLOW STATEMENT INFORMATION
The Company's non-cash investing and financing activities and cash payments
(receipts) for interest and income taxes were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1993 1992 1991
--------- --------- ---------
(IN MILLIONS)
<S> <C> <C> <C>
Issuance of 2 percent common stock dividend.............................. $ -- $ 29.6 $ --
Conversion of notes receivable into investments in an affiliate.......... -- 7.3 --
Preferred stock dividends issued by a consolidated affiliate............. 6.0 5.1 4.4
Capital lease obligations incurred....................................... .3 4.3 --
Assumption of debt in connection with an acquisition..................... -- 3.8 --
Note payable issued in exchange for common shares of a consolidated
affiliate............................................................... -- 1.1 --
Exchange of non-recourse debt of consolidated affiliate.................. -- -- 12.5
Accrued liability converted to subordinated debt......................... -- -- 9.8
--------- --------- ---------
--------- --------- ---------
Cash paid (received) during the year for:
Interest (net of capitalization)....................................... $ 375.9 $ 355.6 $ 370.3
Income taxes (net of refunds).......................................... (11.7) (1.9) 14.3
--------- --------- ---------
--------- --------- ---------
</TABLE>
In 1993, the other-net component of net cash used in operating activities
included debt issuance costs of $84 million and an adjustment to remove the
effect of a $35 million gain from the sale of the Company's 49 percent equity
interest in Titan, partially offset by adjustments to remove the effects of
amortization of deferred debt issuance costs and a non-cash charge of $19
million pertaining to the writedown of certain decommissioned assets.
In 1992, the other-net component of net cash provided by operating
activities included $54 million of cash received from the sale of an energy
contract in October 1992.
F-24
<PAGE>
STONE CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6 -- INVENTORIES
Inventories are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1993 1992
--------- ---------
(IN MILLIONS)
<S> <C> <C>
Raw materials and supplies..................................... $ 333.8 $ 345.9
Paperstock..................................................... 284.2 316.6
Work in process................................................ 16.8 22.2
Finished products.............................................. 99.5 119.3
--------- ---------
734.3 804.0
Excess of current cost over LIFO inventory value............... (14.9) (18.7)
--------- ---------
Total inventories.............................................. $ 719.4 $ 785.3
--------- ---------
--------- ---------
</TABLE>
At December 31, 1993 and 1992, the percentages of total inventories costed
by the LIFO, FIFO and average cost methods were as follows:
<TABLE>
<CAPTION>
1993 1992
----------- -----------
<S> <C> <C>
LIFO.............................................................. 44% 42%
FIFO.............................................................. 6% 7%
Average Cost...................................................... 50% 51%
</TABLE>
NOTE 7 -- PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1993 1992
----------- -----------
(IN MILLIONS)
<S> <C> <C>
Machinery and equipment................................... $ 4,398.7 $ 4,381.4
Buildings and leasehold improvements...................... 675.0 668.4
Land and land improvements................................ 103.0 105.7
Construction in progress.................................. 64.0 209.6
----------- -----------
Total property, plant and equipment....................... 5,240.7 5,365.1
Accumulated depreciation and amortization................. (1,854.3) (1,661.9)
----------- -----------
Total property, plant and equipment -- net................ $ 3,386.4 $ 3,703.2
----------- -----------
----------- -----------
</TABLE>
Property, plant and equipment includes capitalized leases of $70.3 million
and $71.8 million and related accumulated amortization of $24.2 million and
$19.8 million at December 31, 1993 and 1992, respectively.
NOTE 8 -- INCOME TAXES
Effective January 1, 1992, the Company adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"), which
required a change from the deferred method to the liability method of accounting
for income taxes. In connection with the adoption of SFAS 109, the Company
recorded a one-time, non-cash after-tax charge to its first quarter 1992
earnings of $99.5 million or $1.40 per share of common stock. This adjustment is
reported as a cumulative effect of a change in accounting principles in the
Company's Statements of Operations. Under the liability method, deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between financial statement carrying amounts of
existing assets and liabilities and their
F-25
<PAGE>
STONE CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8 -- INCOME TAXES (CONTINUED)
respective tax bases. SFAS 109 requires that assets and liabilities acquired in
a business combination accounted for under the purchase method of accounting be
recorded at their gross fair values, with a separate deferred tax balance
recorded for the related tax effects.
The provision (credit) for income taxes consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1993 1992 1991
--------- --------- ---------
(IN MILLIONS)
<S> <C> <C> <C>
Currently payable (refundable):
Federal....................................................... $ (28.4) $ (24.7) $ (7.2)
State......................................................... 4.0 3.0 (3.1)
Foreign....................................................... 10.6 21.7 18.4
--------- --------- ---------
(13.8) -- 8.1
--------- --------- ---------
Deferred:
Federal....................................................... (45.4) 4.9 --
State......................................................... (31.3) (10.8) .9
Foreign....................................................... (57.2) (53.5) 22.1
--------- --------- ---------
(133.9) (59.4) 23.0
--------- --------- ---------
Total provision (credit) for income taxes....................... $ (147.7) $ (59.4) $ 31.1
--------- --------- ---------
--------- --------- ---------
</TABLE>
The income tax (credit) at the federal statutory rate is reconciled to the
provision (credit) for income taxes as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1993 1992 1991
--------- --------- ---------
(IN MILLIONS)
<S> <C> <C> <C>
Federal income tax (credit) at federal statutory rate........... $ (163.4) $ (78.0) $ (6.1)
Additional taxes (credits) resulting from:
Non-deductible depreciation and amortization of intangibles... 9.5 9.5 27.2
Foreign statutory rate decreases.............................. (11.2) -- --
U.S. statutory rate increase.................................. 8.7 -- --
State income taxes, net of federal income tax effect.......... (17.7) (5.1) (1.4)
Foreign income taxed at rates in excess of U.S. statutory
rate......................................................... 4.3 6.1 10.0
Minimum taxes -- foreign jurisdictions........................ 3.6 4.6 4.3
Other -- net.................................................. 18.5 3.5 (2.9)
--------- --------- ---------
Provision (credit) for income taxes............................. $ (147.7) $ (59.4) $ 31.1
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-26
<PAGE>
STONE CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8 -- INCOME TAXES (CONTINUED)
The components of the net deferred tax liability as of December 31, 1993 and
1992 were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1993 1992
--------- ---------
(IN MILLIONS)
<S> <C> <C>
Deferred tax assets:
Carryforwards............................................... $ 262.6 $ 125.9
Compensation-related accruals............................... 49.3 5.4
Reserves.................................................... 33.7 29.0
Deferred gain............................................... 26.2 20.3
Tax benefit transfers....................................... 8.8 12.7
Other....................................................... 11.6 18.4
--------- ---------
392.2 211.7
Valuation allowance........................................... (1.2) (1.2)
--------- ---------
Total deferred tax asset...................................... 391.0 210.5
Deferred tax liability:
Depreciation and amortization............................... (754.3) (779.5)
Start-up costs.............................................. (27.8) (27.9)
LIFO reserve................................................ (18.1) (8.1)
Pension..................................................... (12.5) (25.7)
Other....................................................... (35.2) (36.5)
--------- ---------
Total deferred tax liability.................................. (847.9) (877.7)
--------- ---------
Deferred tax liability -- net................................. $ (456.9) $ (667.2)
--------- ---------
--------- ---------
</TABLE>
During 1991, deferred taxes were provided for significant timing differences
between revenue and expenses for tax and financial statement purposes. Following
is a summary of the significant components of the deferred tax provision:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1991
---------------
(IN MILLIONS)
<S> <C>
Depreciation and amortization....................................... $ (2.4)
Acquisition related expenses........................................ (2.9)
Capitalized interest................................................ 12.4
Start-up costs...................................................... 7.2
Pension costs....................................................... (.2)
Other -- net........................................................ 8.9
-----
Deferred income tax provision..................................... $ 23.0
-----
-----
</TABLE>
The components of the loss before income taxes and cumulative effects of
accounting changes are:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1993 1992 1991
--------- --------- ---------
(IN MILLIONS)
<S> <C> <C> <C>
United States....................................... $ (315.1) $ (74.1) $ (39.0)
Foreign............................................. (151.8) (155.2) 21.0
--------- --------- ---------
Loss before income taxes and cumulative effects of
accounting changes................................. $ (466.9) $ (229.3) $ (18.0)
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-27
<PAGE>
STONE CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8 -- INCOME TAXES (CONTINUED)
As a result of certain acquisitions, the Company had, at December 31, 1993,
approximately $27 million of pre-acquisition net operating loss carryforwards
and approximately $5 million of investment tax credit carryforwards for federal
income tax purposes. To the extent not utilized, the carryforwards will expire
in the period commencing in the year 1996 and ending in the year 2004.
At December 31, 1993, Bridgewater Paper Company Ltd., which was acquired in
the 1989 Stone-Canada acquisition, had approximately $92 million of net
operating loss carryforwards for United Kingdom income tax purposes. These
losses are available indefinitely.
At December 31, 1993, the Company had approximately $252 million of net
operating loss carryforwards for U.S. tax purposes and, additionally,
approximately $236 million of net operating loss carryforwards for Canadian tax
purposes. To the extent not utilized, the U.S. net operating losses will expire
in 2007 and 2008 and the Canadian net operating losses will expire in 1998, 1999
and 2000. The Company also had approximately $11 million of alternative minimum
tax credit carryforwards for U.S. tax purposes which are available indefinitely.
NOTE 9 -- PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS
The Company has contributory and noncontributory pension plans for the
benefit of most salaried and certain hourly employees. The funding policy for
the plans, with the exception of the Company's salaried supplemental unfunded
plans and the Company's German subsidiary's unfunded plan, is to annually
contribute the statutory required minimum. The salaried pension plans provide
benefits based on a formula which takes into account each participant's
estimated final average earnings. The hourly pension plans provide benefits
under a flat benefit formula. The salaried and hourly plans provide reduced
benefits for early retirement. The salaried plans take into account offsets for
governmental benefits.
Net pension expense for the combined pension plans includes the following
components:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1993 1992 1991
--------- --------- ---------
(IN MILLIONS)
<S> <C> <C> <C>
Service cost -- benefits earned during the period......................... $ 17.4 $ 17.2 $ 15.6
Interest cost on projected benefit obligations............................ 63.7 64.0 61.7
Actual return on plan assets.............................................. (91.9) (32.8) (86.5)
Net amortization and deferral............................................. 40.4 (26.6) 30.2
--------- --------- ---------
Net pension expense....................................................... $ 29.6 $ 21.8 $ 21.0
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-28
<PAGE>
STONE CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9 -- PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS (CONTINUED)
The following table sets forth the funded status of the Company's pension
plans and the amounts recorded in the Consolidated Balance Sheets:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------------------------------
1993 1992
-------------------------------------- --------------------------------------
ACCUMULATED ACCUMULATED
ASSETS EXCEED BENEFITS EXCEED ASSETS EXCEED BENEFITS EXCEED
ACCUMULATED BENEFITS ASSETS ACCUMULATED BENEFITS ASSETS
-------------------- --------------- -------------------- ---------------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Actuarial present value of benefit obligations:
Vested benefits................................. $(185.0) $(498.8) $(465.0) $(116.9)
Non-vested benefits............................. (11.4) (37.9) (34.4) (6.3)
------- ------- ------- -------
Accumulated benefit obligation.................. (196.4) (536.7) (499.4) (123.2)
Effect of increase in compensation levels....... (23.2) (76.6) (75.0) (14.1)
------- ------- ------- -------
Projected benefit obligation for service rendered
through December 31.............................. (219.6) (613.3) (574.4) (137.3)
Plan assets at fair value, primarily stocks,
bonds, guaranteed investment contracts, real
estate and mutual funds which invest in listed
stocks and bonds................................. 219.0 395.3 518.7 49.8
------- ------- ------- -------
Excess of projected benefit obligation over plan
assets........................................... (.6) (218.0) (55.7) (87.5)
Unrecognized prior service cost................... 4.6 29.4 14.5 6.8
Unrecognized net actuarial loss................... 39.4 127.3 96.1 5.6
Unrecognized net assets........................... -- -- (9.9) --
Adjustment required to recognize minimum
liability........................................ -- (92.4) -- (19.6)
------- ------- ------- -------
Net prepaid (accrual)............................. $ 43.4 $(153.7) $ 45.0 $ (94.7)
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
In accordance with Statement of Financial Accounting Standards No. 87,
"Employer's Accounting for Pensions," the Company has recorded an additional
minimum liability for underfunded plans representing the excess of the unfunded
accumulated benefit obligation over previously recorded liabilities. The
additional minimum liability at December 31, 1993 of $92.4 million is recorded
as a long-term liability with an offsetting intangible asset of $29.4 million
and a charge to stockholders' equity of $39.6 million,
F-29
<PAGE>
STONE CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9 -- PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS (CONTINUED)
net of a tax benefit of $23.4 million. Of this additional minimum liability,
$19.6 million was recorded as a long-term liability at December 31, 1992 with an
offsetting intangible asset of $6.7 million and a charge to stockholders' equity
of $7.9 million, net of a tax benefit of $5.0 million.
The weighted average discount rate and the rate of increase in future
compensation levels used in determining the actuarial present value of the
projected benefit obligations was 7.5 percent for all U.S. and German operations
and 8.0 percent for Canadian and United Kingdom operations and 4.0 percent,
respectively, for 1993 and 9.0 percent and 4.5 to 5.0 percent, respectively, for
1992. The expected long-term rate of return on assets was 11 percent for 1993
and 1992. The change in the weighted average discount rates during 1993 had the
effect of increasing the total projected benefit obligation at December 31, 1993
by $108.8 million and the change in the rate of increase in future compensation
levels in 1993 had the effect of decreasing the projected benefit obligation by
$19.3 million.
Certain domestic operations of the Company participate in various
multi-employer union-administered defined benefit pension plans that principally
cover production workers. Pension expense under these plans was $5.1 million for
1993 and 1992 and $4.7 million for 1991.
In addition to providing pension benefits, the Company provides certain
retiree health care and life insurance benefits covering substantially all U.S.
salaried and hourly employees and certain Canadian employees. Employees become
eligible for such benefits if they are fully vested in one of the Company's
pension plans when they retire from the Company and they begin to draw
retirement benefits upon termination of service. Such retiree health care costs
were expensed as the claims were paid through December 31, 1992. However, as
discussed in Note 1 -- "Summary of Significant Accounting Policies," effective
January 1, 1993, the Company adopted SFAS 106, which required the Company to
accrue for its obligation to pay such postretirement health care costs during
the employees' years of service, as opposed to when such costs are actually
paid. The effect of SFAS 106 on income from operations is not material.
In conjunction with the adoption, the Company, effective January 1, 1993,
implemented cost saving provisions designed to reduce certain postretirement
health care and life insurance costs. Among other things, these provisions
provide for a cap on the Company's share of certain health care costs. Such
provisions do not apply to current retirees and those active employees age 55
and over who were eligible to retire as of December 31, 1992. Accordingly, the
Company is generally responsible for 50 percent of the claims of such
individuals.
Net worldwide periodic postretirement benefit cost for 1993 included the
following components:
<TABLE>
<CAPTION>
(IN MILLIONS)
<S> <C>
Service cost-benefits attributed to service during the period......... $ 1.0
Interest cost on accumulated postretirement benefit obligation........ 5.5
---
Net worldwide periodic postretirement benefit cost.................... $ 6.5
---
---
</TABLE>
Worldwide postretirement benefits costs for retired employees approximated
$4.7 million for 1992. Prior to 1992, the cost of providing such benefits for
retired employees was not readily separable from the cost of providing benefits
for active employees. On a combined basis, worldwide health care and life
insurance benefit cost for both active and retired employees approximated $76
million in 1991.
F-30
<PAGE>
STONE CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9 -- PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS (CONTINUED)
The following table sets forth the components of the Company's accumulated
postretirement benefit obligation and the amount recorded in the Consolidated
Balance Sheet at December 31, 1993:
<TABLE>
<CAPTION>
U.S. FOREIGN TOTAL
--------- ----------- ---------
(IN MILLIONS)
<S> <C> <C> <C>
Accumulated postretirement benefit obligation:
Retirees................................................................ $ 19.0 $ 22.5 $ 41.5
Active employees -- fully eligible...................................... 15.3 3.0 18.3
Other active employees.................................................. 15.5 2.6 18.1
--------- ----- ---------
Total accumulated postretirement benefit obligation....................... 49.8 28.1 77.9
Unrecognized net loss..................................................... (12.6) (2.1) (14.7)
--------- ----- ---------
Postretirement benefit liability.......................................... $ 37.2 $ 26.0 $ 63.2
--------- ----- ---------
--------- ----- ---------
</TABLE>
The Company has not currently funded any of its accumulated postretirement
benefit obligation.
The discount rate used in determining the accumulated postretirement benefit
cost was 7.5 percent for U.S. and German operations and 8.0 percent for Canadian
and United Kingdom operations. The assumed health care cost trend rates for
substantially all employees used in measuring the accumulated postretirement
benefit obligation range from 7 percent to 15 percent decreasing to ultimate
rates of 5.5 percent to 8 percent. If the health care cost trend rate
assumptions were increased by 1 percent, the accumulated postretirement benefit
obligation at December 31, 1993 and the net periodic postretirement benefit cost
for the year ended December 31, 1993 would have increased by $6.5 million and
$0.6 million, respectively.
At December 31, 1993, the Company had approximately 8,300 retirees and
29,000 active employees of which approximately 3,000 and 21,100, respectively,
were employees of U.S. operations.
F-31
<PAGE>
STONE CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10 -- LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1993 1992
---------- ----------
(IN MILLIONS)
<S> <C> <C>
Senior debt:
Term loans (8.3% and 10.0% weighted average rates) payable $116.0 on March 31, 1995 and
in semi-annual installments of $116.7 on September 30, 1995, March 31 and September 30,
1996 and $411.6 on March 1, 1997........................................................ $ 877.7 $ 1,230.1
Additional term loan (6.3% and 7.0% weighted average rates) payable $38.7 on March 31,
1995 and in semi-annual installments of $39.0 on September 30, 1995 and March 31, 1996
and $38.9 on September 30, 1996 and $137.3 on March 1, 1997............................. 292.9 371.0
Revolving credit agreements (5.7% and 6.4% weighted average rates) due March 1, 1997..... 263.8 257.0
11.875% senior notes due December 1, 1998 (less unamortized discount of $1.1 and $1.3)... 238.9 238.7
12.625% senior notes due July 15, 1998................................................... 150.0 --
5.8% to 11.625% fixed rate utility systems and pollution control revenue bonds, payable
in varying annual sinking fund payments through the year 2010 and varying principal
payments through the year 2016 (less unamortized debt discount of $7.8 and $8.6)........ 203.5 206.2
Obligations under accounts receivable securitization programs (4.8% and 5.3% weighted
average rates) due September 15, 1995................................................... 232.4 261.8
4.0% to 7.96% term loans payable in varying amounts through 1999......................... 41.2 54.6
Obligations under capitalized leases..................................................... 11.2 23.1
Cartomills 8.50% to 10.75% loans payable in varying installments through the year 1997... 5.1 7.1
Cartomills (4.74% weighted average rate) loan payable in annual installments through the
year 1999............................................................................... 7.1 --
Floating rate revenue bonds (8.0% weighted average rates), payable in semi-annual
installments of $.12 through 1996....................................................... .7 .9
Other.................................................................................... 31.2 5.3
---------- ----------
2,355.7 2,655.8
Less: current maturities................................................................. (17.7) (144.7)
---------- ----------
Total senior long-term debt.............................................................. 2,338.0 2,511.1
---------- ----------
</TABLE>
F-32
<PAGE>
STONE CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10 -- LONG-TERM DEBT (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1993 1992
---------- ----------
(IN MILLIONS)
Subordinated debt:
<S> <C> <C>
11.5% senior subordinated notes, payable in two annual sinking fund payments of $57.5
commencing September 1, 1997 and maturing on September 1, 1999 with a lump sum payment
of $115.0............................................................................... 230.0 230.0
10.75% senior subordinated debentures maturing on April 1, 2002, (less unamortized debt
discount of $.9)........................................................................ 199.1 199.1
8.875% convertible senior subordinated notes maturing on July 15, 2000 (less $1.5)....... 248.5 --
10.75% senior subordinated notes maturing on June 15, 1997............................... 150.0 150.0
11.0% senior subordinated notes maturing on August 15, 1999.............................. 125.0 125.0
6.75% convertible subordinated debentures with annual sinking fund payments of $11.5
commencing on February 15, 2002 and maturing on February 15, 2007 with a lump sum
payment of $57.5........................................................................ 115.0 115.0
13.625% subordinated notes maturing on June 1, 1995 (less unamortized debt discount of
$.2 and $.3)............................................................................ 98.1 98.0
12.125% subordinated debentures with annual sinking fund payments of $14.0 commencing on
September 15, 1996 and maturing in the year 2001 with a lump sum payment of $70.0
(including unamortized debt premium of $2.2 and $2.4 and net of $50.1 repurchased by the
Company)................................................................................ 92.1 92.3
Subordinated note bearing an incremental borrowing rate adjusted annually (10.0% and
11.1% average rates) payable on January 18, 1994........................................ 4.9 9.8
---------- ----------
1,262.7 1,019.2
Less: current maturities................................................................. (4.9) --
---------- ----------
Total subordinated debt.................................................................. 1,257.8 1,019.2
---------- ----------
</TABLE>
F-33
<PAGE>
STONE CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10 -- LONG-TERM DEBT (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1993 1992
---------- ----------
(IN MILLIONS)
Non-recourse debt of consolidated affiliates:
<S> <C> <C>
Stone-Consolidated 10.25% senior secured notes due December 15, 2000..................... 225.0 --
Stone-Consolidated 8% convertible subordinated debentures maturing on December 31,
2003.................................................................................... 174.5 --
Savannah River obligation under a senior credit facility (8.4% and 8.8% weighted average
rates), payable in varying amounts through the year 1998................................ 268.9 297.0
Savannah River 5.375% to 10.25% fixed rate revenue bonds, payable in varying amounts
through the year 1997 and maturing in 2000 and 2010 (less unamortized debt discount of
$.2 and $.2)............................................................................ 4.7 4.9
Savannah River 14.125% senior subordinated notes due December 15, 2000 (less unamortized
debt discount of $1.0 and $1.1)......................................................... 129.0 128.9
Seminole obligation under a senior credit facility (6.4% and 6.8% weighted average
rates), payable in varying amounts from 1993 through the year 2000...................... 120.6 122.0
Seminole senior notes maturing on December 31, 1993 (interest rate of 14.0%)............. -- 15.0
Seminole obligation payable at 13.5% imputed interest rate (less unamortized debt
discount of $2.4 and $2.9).............................................................. 11.6 11.1
Seminole 13.5% subordinated notes due with annual sinking fund payments of $7.2 and
maturing on October 15, 1996 with a lump sum payment of $14.4........................... 28.8 36.0
---------- ----------
963.1 614.9
Less: current maturities................................................................. (290.5) (40.1)
---------- ----------
Total non-recourse debt of consolidated affiliates..................................... 672.6 574.8
---------- ----------
Total long-term debt..................................................................... $ 4,268.4 $ 4,105.1
---------- ----------
---------- ----------
</TABLE>
The 1989 Credit Agreement provided for a $400 million multiple-draw facility
(the "MDF") to supplement the revolving credit facility thereunder. The MDF had
substantially the same terms and conditions, including covenants, as the 1989
Credit Agreement. Proceeds of MDF borrowings (approximately $371 million) were
required to be used solely to repay regularly scheduled amortization of term
loans under the 1989 Credit Agreement. The Company cancelled the remaining
commitment under the MDF in 1991. On October 1, 1992, the $371 million
outstanding under the MDF was converted to an Additional Term Loan (the "ATL").
Borrowings under the ATL are collateralized by an equal and ratable lien on the
existing collateral under the 1989 Credit Agreement.
The 1989 Credit Agreement permits the Company to choose among various
interest rate options, to specify the portion of the borrowings to be covered by
specific interest rate options and to specify the interest rate period to which
the interest rate options are to apply, subject to certain parameters. As a
result of the February 1994 amendment, interest rate options available to the
Company under term loans, ATL and revolving credit borrowings under the 1989
Credit Agreement are (i) U.S. or Canadian prime rate plus a borrowing margin of
2 percent, (ii) CD rate plus a borrowing margin of 3 1/8 percent, (iii)
Eurodollar rate plus a borrowing margin of 3 percent and (iv) bankers'
acceptance rate plus a
F-34
<PAGE>
STONE CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10 -- LONG-TERM DEBT (CONTINUED)
borrowing margin of 3 percent. Upon achievement of specified indebtedness ratios
and interest coverage ratios, the borrowing margins will be reduced.
Additionally, the Company pays a 3/8 percent commitment fee on the unused
portions of the revolving credit facilities. The weighted average rates as
reflected in the table do not include the effects of the amortization of
deferred debt issuance costs.
The 1989 Credit Agreement requires that the Company hedge a portion of the
U.S. dollar-based borrowings to protect against increases in market interest
rates. Pursuant to that requirement, at December 31, 1993, the Company was a
party to an interest rate swap contract which had the effect of fixing the
interest rate at approximately 12.9 percent on $150 million of U.S. term loan
borrowings. The interest rate swap is scheduled to expire on March 22, 1994.
During 1993, the Company sold prior to their expiration date, certain of its
U.S. dollar denominated interest rate swaps and cross currency swaps associated
with the Credit Agreement borrowings of Stone-Canada. The net proceeds totaled
approximately $34.9 million, the substantial portion of which was used to repay
borrowings under the Company's revolving credit facilities.
At December 31, 1993, the $1.45 billion of borrowings and accrued interest
outstanding under the 1989 Credit Agreement and the ATL were secured by
property, plant and equipment with a net book value of $518.4 million and by
common stock of various subsidiaries of the Company representing net assets of
approximately $3.4 billion (including collateralized property, plant and
equipment with a net book value of $349.4 million) and by a lien on the
Company's inventories. Additionally, other loan agreements aggregating $646.0
million were collateralized by approximately $1.56 billion of property, plant
and equipment-net.
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,
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 upon the expiration of the waiver Savannah River
will not be in compliance with this covenant as of June 30, September 30, and
December 31, 1994. Consequently, approximately $237.9 million of Savannah River
debt that otherwise would have been classified as long-term has been classified
as current in the December 31, 1993 consolidated balance sheet. 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 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 1989 Credit Agreement and various
other of the Company's debt instruments will be entitled to accelerate the
indebtedness owed by the Company.
On July 6, 1993, the Company sold $150 million principal amount of 12 5/8
percent Senior Notes due July 15, 1998 (the "12 5/8 percent Senior Notes"). The
12 5/8 percent Senior Notes are not redeemable by the Company prior to maturity.
Interest is payable semi-annually on January 15 and July 15, commencing January
15, 1994.
Also on July 6, 1993, the Company sold, in a private transaction, $250
million principal amount of 8 7/8 percent Convertible Senior Subordinated Notes
due July 15, 2000 (the "8 7/8 percent Convertible Senior Subordinated Notes").
The Company filed a shelf registration statement registering the 8 7/8 percent
Convertible Senior Subordinated Notes for resale by the holders thereof, which
was declared effective August 13, 1993. The 8 7/8 percent Convertible Senior
Subordinated Notes are convertible, at the option of the holder, sixty days
following the date of original issuance and prior to maturity, into shares of
F-35
<PAGE>
STONE CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10 -- LONG-TERM DEBT (CONTINUED)
the Company's common stock at a conversion price of $11.55 per share of common
stock, subject to adjustment in certain events. Additionally, the 8 7/8 percent
Convertible Senior Subordinated Notes are redeemable, at the option of the
Company, in whole or in part, on and after July 15, 1998. Interest is payable
semi-annually on January 15 and July 15, commencing January 15, 1994.
The net proceeds of approximately $386 million received from the sales of
the 12 5/8 percent Senior Notes and the 8 7/8 percent Convertible Senior
Subordinated Notes were used by the Company to repay borrowings, without a
reduction of commitments under the revolving credit facilities of its 1989
Credit Agreement, thereby restoring borrowing availability thereunder.
In December 1993, Stone-Consolidated sold $173.3 million of 8 percent
convertible subordinated debentures as part of the Units Offering. Concurrent
with the Units Offering, Stone-Consolidated sold $225 million of 10 1/4 percent
Senior Secured Notes maturing on December 15, 2000 in a public offering in the
United States. See Note 4 -- "Public Offering of Subsidiary Stock," for further
details.
On February 20, 1992, the Company sold $115 million principal amount of
6 3/4 percent Convertible Subordinated Debentures due February 15, 2007 (the
"6 3/4 percent Subordinated Debentures"). The 6 3/4 percent Subordinated
Debentures are convertible, at the option of the holder, at any time prior to
maturity, into shares of the Company's common stock at a conversion price of
$33.94 per share of common stock (adjusted for the 2 percent common stock
dividend issued September 15, 1992), subject to adjustment in certain events.
Additionally, the 6 3/4 percent Subordinated Debentures are redeemable at the
option of the Company, in whole or from time to time in part, on and after
February 16, 1996. Interest is payable semi-annually on February 15 and August
15, commencing August 15, 1992. The net proceeds from the sale of the 6 3/4
percent Subordinated Debentures were used to fully prepay the $59.5 million
sinking fund obligation due June 1, 1992, including accrued interest due
thereon, and to prepay $47.5 million of the $59.5 million sinking fund
obligation due June 1, 1993, including accrued interest due thereon, on the
Company's 13 5/8 percent Subordinated Notes.
On March 18, 1992, the Company sold $200 million principal amount of 10 3/4
percent Senior Subordinated Debentures due April 1, 2002 (the "10 3/4 percent
Senior Subordinated Debentures"). The 10 3/4 percent Senior Subordinated
Debentures are redeemable at the option of the Company, in whole or from time to
time in part, on and after April 1, 1997. Interest is payable semi-annually on
April 1 and October 1, commencing October 1, 1992. The net proceeds from these
debentures were used to fund future capital expenditures by the Company.
On June 25, 1992, the Company sold $150 million principal amount of 10 3/4
percent Senior Subordinated Notes due June 15, 1997 (the "10 3/4 percent Senior
Subordinated Notes"). The 10 3/4 percent Senior Subordinated Notes are
redeemable at the option of the Company, in whole or from time to time in part,
on and after June 15, 1995. Interest is payable semi-annually on June 15 and
December 15, commencing December 15, 1992. The net proceeds of approximately
$147 million from the issuance of these notes were used to fund a partial
redemption of the Company's 13 5/8 percent Subordinated Notes including accrued
interest due thereon.
On August 11, 1992, the Company sold $125 million principal amount of 11
percent Senior Subordinated Notes due August 15, 1999 (the "11 percent Senior
Subordinated Notes"). The 11 percent Senior Subordinated Notes are redeemable at
the option of the Company, in whole or from time to time in part, on and after
August 15, 1997. Interest is payable semi-annually on February 15 and August 15,
commencing February 15, 1993. The Company entered into a three-year interest
rate swap arrangement that has the effect of converting, for the first three
years, the fixed rate of interest on $100 million of the 11 percent Senior
Subordinated Notes into a floating interest rate. As a result of this swap
arrangement, the effective rate of interest for 1993 was 9.95 percent. While the
Company is exposed to credit loss on its
F-36
<PAGE>
STONE CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10 -- LONG-TERM DEBT (CONTINUED)
interest rate swaps in the event of nonperformance by the counterparties to such
swaps, management believes that such nonperformance is unlikely to occur. The
Company used the net proceeds from the issuance of the 11 percent Senior
Subordinated Notes to partially repay approximately $102 million and $20
million, respectively, under its revolving credit facility and the March 1993
term loan amortization of its Credit Agreement.
In 1992, Stone Financial Corporation ("Stone Fin") extended the maturity
date of the $185 million three-year revolving credit facility used to purchase
the accounts receivable for the first tranche of the Company's accounts
receivable securitization program to September 15, 1995 from September 15, 1994.
Stone Fin has the option, subject to bank consent, to extend the maturity date
of its credit facility beyond September 15, 1995.
Various interest rate options (LIBOR plus 1 1/4 percent or Prime) are
available to Stone Fin under its credit facility. In accordance with the
provisions of this program, Stone Fin purchases (on an ongoing basis) certain of
the accounts receivable of Stone Delaware, Inc., Stone Corrugated, Inc., and
Stone Southwest, Inc., each of which is a wholly-owned subsidiary of the
Company. Such purchased accounts receivable are solely the assets of Stone Fin,
a wholly-owned but separate corporate entity of the Company, with its own
separate creditors. In the event of a liquidation of Stone Fin such creditors
would be entitled to satisfy their claims from Stone Fin's assets prior to any
distribution to the Company. At December 31, 1993 and 1992, the Company's
Consolidated Balance Sheets included $175.6 million and $160.3 million,
respectively of Stone Fin accounts receivable and $150.5 million and $146.3
million, respectively, of borrowings under the program.
On August 20, 1992, the Company completed the second tranche of its accounts
receivable securitization program through the sale of certain of its accounts
receivable to a newly formed wholly-owned subsidiary, Stone Fin II Receivables
Corporation ("Stone Fin II"). Stone Fin II purchased the accounts receivable
with proceeds from borrowings under a $180 million, three-year revolving credit
facility (due September 15, 1995) provided by South Shore Funding Corporation,
an unaffiliated financial organization. Stone Fin II has the option, subject to
bank consent, to extend the maturity date of its credit facility beyond
September 15, 1995.
Two interest rate options (LIBOR plus 1 1/4 percent or Prime) are available
to Stone Fin II under its credit facility. In accordance with the provisions of
this program, Stone Fin II purchases (on an ongoing basis) certain of the
accounts receivable of Stone Consolidated Newsprint, Inc., Stone Packaging
Corporation, Stone Southwest, Inc. and Stone Bag Corporation, each of which is a
wholly-owned subsidiary of the Company. Such purchased accounts receivable are
solely the assets of Stone Fin II, a wholly-owned but separate corporate entity
of the Company, with its own separate creditors. In the event of a liquidation
of Stone Fin II, such creditors would be entitled to satisfy their claims from
Stone Fin II's assets prior to any distribution to the Company. The initial net
proceeds of approximately $100 million from this transaction were used by the
Company to complete the prepayment of its March 31, 1993 term loan installment
and partially prepay approximately $57 million of its $175 million term loan
installment due September 30, 1993. Subsequent proceeds from this securitization
program were used for general corporate purposes. At December 31, 1993 and 1992,
the Company's Consolidated Balance Sheets included $124.4 million and $152.6
million, respectively, of Stone Fin II accounts receivable and $81.9 million and
$115.5 million, respectively, of borrowings under the program.
In August and October 1992, the Company refinanced, in two separate issues,
$30 million and $35 million of tax-exempt revenue bonds, respectively. The $30
million bonds bear interest at a rate of 7 7/8 percent and are due August 1,
2013. The $35 million bonds bear interest at a rate of 8 1/4 percent and are due
June 1, 2016.
F-37
<PAGE>
STONE CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10 -- LONG-TERM DEBT (CONTINUED)
The following table provides, as of December 31, 1993, the actual and pro
forma amounts of long-term debt maturing during the next five years. The
maturities on a pro forma basis reflect the impact of the 1994 Offerings
discussed in Note 2 and the application of the net proceeds received therefrom,
as if such transaction had occurred as of December 31, 1993.
<TABLE>
<CAPTION>
AS ADJUSTED FOR
ACTUAL THE 1994 OFFERINGS
---------- ------------------
(IN MILLIONS)
<S> <C> <C>
1994......................................................... $ 308.4 $ 308.4
1995......................................................... 710.5 270.2
1996......................................................... 437.9 219.1
1997......................................................... 946.4 732.2
1998......................................................... 523.9 523.9
Thereafter................................................... 1,643.2 2,353.2
</TABLE>
The 1995 maturities include $232.4 million outstanding under Stone Fin's and
Stone Fin II's revolving credit facilities. Stone Fin and Stone Fin II have the
option, subject to bank consents, to extend or refinance such obligations beyond
1995.
Amounts payable under capitalized lease agreements are excluded from the
above tabulation. See Note 13 for capitalized lease maturities.
The 1989 Credit Agreement contains 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 1989 Credit Agreement also contains cross-default
provisions relating to the non-recourse debt of its consolidated affiliate,
Stone-Consolidated Corporation, and cross-acceleration provisions relating to
the non-recourse debt of the consolidated affiliates, including Seminole and
Savannah River (see Note 18). Additionally, the Company's 1989 Credit Agreement
provides 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 1989
Credit Agreement. The indebtedness under the 1989 Credit Agreement is secured by
a substantial portion of the assets of the Company.
The Company and its bank group have amended the Company's 1989 Credit
Agreement 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 1989 Credit Agreement 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 February 1994 Offerings, as discussed in
Note 2 -- "Subsequent Events," provided, among other things, for the following:
(i) Permitted the Company to apply up to $200 million of net proceeds
from the 1994 Offerings, which increased liquidity, as repayment of
borrowings under the revolving credit facilities of the 1989 Credit
Agreement 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.
F-38
<PAGE>
STONE CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10 -- LONG-TERM DEBT (CONTINUED)
(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 February 1994 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 1989
Credit Agreement) for certain specified periods to the following:
<TABLE>
<S> <C>
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
</TABLE>
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
1989 Credit Agreement 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 1989 Credit Agreement) 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 1989 Credit Agreement), 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 1994 Offerings
for which no dividend credit was received by the Company). Additionally, the
restriction with respect to dividends on Series E Cumulative Convertible
Exchangeable Preferred Stock (the "Series E Cumulative Preferred Stock") was
amended to mirror 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 and 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, Savannah River and
Seminole.
(vii) Maintains the monthly indebtedness ratio requirement, as defined in
the 1989 Credit Agreement, to be 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 1989 Credit Agreement) to be equal to or greater than 50
percent of the highest CTNW for any quarter since the inception of the 1989
Credit Agreement.
F-39
<PAGE>
STONE CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10 -- LONG-TERM DEBT (CONTINUED)
Additionally, at various times during the year, the Company amended and
restated its 1989 Credit Agreement which provided, among other things to, (i)
extend the maturity of the revolving credit facilities from March 1, 1994 to
March 1, 1997 and reduce over a three-year period the revolving loan
commitments; (ii) revise various financial covenants to provide greater
financial flexibility to the Company; (iii) permit the Company to retain 25
percent of the net proceeds from future sales of equity securities (which could
be used to reduce revolving credit borrowings without reducing the commitments
thereunder); and (iv) permit the Company to retain 50 percent (maximum $100
million in the aggregate) of the net proceeds from any sale or disposition of
its investment in certain joint ventures or unconsolidated subsidiaries (which
could be used to reduce revolving credit borrowings without reducing the
commitments thereunder). As part of these amendments, the Company agreed (i) to
pay certain fees and higher interest rate margins and (ii) mortgage or pledge
additional collateral including a pledge of the Stone-Consolidated common stock
owned 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 1989 Credit Agreement. Failure to achieve or maintain
compliance with such financial ratio tests or other requirements under the 1989
Credit Agreement, 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
1989 Credit Agreement. The Company has successfully sought and received waivers
and amendments to its 1989 Credit Agreement on various occasions since entering
into the 1989 Credit Agreement. 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.
NOTE 11 -- LIQUIDITY MATTERS
The Company's liquidity and financial flexibility is adversely affected by
the net losses incurred during the past three years. Recently, the Company has
improved its liquidity and financial flexibility through the completion of the
February 1994 Offerings as discussed in Note 2 -- "Subsequent Events." At March
14, 1994 the Company had borrowing availability of $168.2 million under its
revolving credit facilities. Notwithstanding these improvements in the Company's
liquidity and financial flexibility, unless the Company achieves substantial
price increases beyond year-end levels, 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 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 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 indebtedness which will require the Company to raise sufficient
cash 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.
The Company, as part of its financial plan, had intended to sell an energy
supply agreement related to its Florence, South Carolina mill. Even though a
sale is still being investigated by the Company, the Company is no longer
pursuing the original transaction; however, the Company is currently
investigating alternative transactions.
F-40
<PAGE>
STONE CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 12 -- DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
At December 31, 1993 and 1992, the carrying values of the Company's
financial instruments approximate their fair values, except as noted below:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------
1993 1992
-------------------------- --------------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------------- ---------- -------------- ----------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Notes receivable and long-term investments......... $ 134.9 $ 118.1 $ 65.5 $ 51.1
Senior debt........................................ 2,344.5 2,362.8 2,623.5 2,635.3
Subordinated debt.................................. 1,262.6 1,189.5 1,019.2 949.5
Non-recourse debt of consolidated affiliates....... 963.1 1,002.3 627.3 627.3
Standby letters of credit.......................... -- 76.1 -- 68.9
Currency and interest rate hedges in payable
position.......................................... 2.6 4.2 6.5 4.4
</TABLE>
The fair values of notes receivable and certain 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. The fair value of letters of credit represent the
face amount of the letters of credit adjusted for current rates. 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.
NOTE 13 -- LONG-TERM LEASES
The Company leases certain of its facilities and equipment under leases
expiring through the year 2023.
Future minimum lease payments under capitalized leases and their present
value at December 31, 1993, and future minimum rental commitments (net of
sublease rental income and exclusive of real estate taxes and other expenses)
under operating leases having initial or remaining non-cancellable terms in
excess of one year, are reflected below:
<TABLE>
<CAPTION>
CAPITALIZED OPERATING
LEASES LEASES
------------- -----------
(IN MILLIONS)
<S> <C> <C>
1994.................................................................. $ 5.6 $ 73.2
1995.................................................................. 2.7 64.0
1996.................................................................. 2.0 52.2
1997.................................................................. 1.2 45.3
1998.................................................................. .3 40.8
Thereafter............................................................ 2.0 148.6
----- -----------
Total minimum lease payments.......................................... 13.8 $ 424.1
-----------
-----------
Less: Imputed interest................................................ (2.6)
-----
Present value of future minimum lease payments........................ $ 11.2
-----
-----
</TABLE>
Approximately $2.8 million of the total present value of future minimum
capital lease payments relates to a Stone-Consolidated newsprint mill. Minimum
lease payments for capitalized leases have not been reduced by minimum sublease
rental income of $1.6 million due in the future under a non-cancellable lease.
F-41
<PAGE>
STONE CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13 -- LONG-TERM LEASES (CONTINUED)
Rent expense for operating leases, including leases having a duration of
less than one year, was approximately $83 million in 1993, $84 million in 1992
and $81 million in 1991.
NOTE 14 -- PREFERRED STOCK
The Company has authorized 10,000,000 shares of preferred stock, $.01 par
value, of which 4,600,000 shares are outstanding at December 31, 1993. Shares of
preferred stock can be issued in series with varying terms as determined by the
Board of Directors.
On February 20, 1992, the Company issued 4,600,000 shares of $1.75 Series E
Cumulative Preferred Stock at $25.00 per share. Dividends on the Series E
Cumulative Preferred Stock are payable quarterly when, as and if declared by the
Company's Board of Directors. The Series E Cumulative Preferred Stock is
convertible, at the option of the holder at any time, into shares of the
Company's common stock at a conversion price of $33.94 per share of common stock
(adjusted for the 2 percent common stock dividend issued September 15, 1992),
subject to adjustment under certain conditions. The Series E Cumulative
Preferred Stock may alternatively be exchanged, at the option of the Company, on
any dividend payment date commencing February 15, 1994, for the Company's 7
percent Convertible Subordinated Exchange Debentures due February 15, 2007 (the
"Exchange Debentures") in a principal amount equal to $25.00 per share of Series
E Cumulative Preferred Stock so exchanged. The Exchange Debentures would be
virtually identical to the 6 3/4 percent Subordinated Debentures, except that
the Exchange Debentures would bear interest at the rate of 7 percent per annum
and the interest payment dates would differ. Additionally, the Series E
Cumulative Preferred Stock is redeemable at the option of the Company, in whole
or from time to time in part, on and after February 16, 1996. The net proceeds
of $111 million from the sale of the Series E Cumulative Preferred Stock were
used to partially prepay the $175 million March 31, 1993 semi-annual term loan
amortization under the 1989 Credit Agreement.
The Company paid cash dividends during the first two quarters of 1993 on its
Series E Cumulative Preferred Stock. However, due to a restrictive provision in
the Senior Subordinated Indenture dated March 15, 1992 (the "Senior Subordinated
Indenture") relating to the Company's 10 3/4 percent Senior Subordinated Notes,
its 11 percent Senior Subordinated Notes and its 10 3/4 percent Senior
Subordinated Debentures, the Board of Directors did not declare the scheduled
August 15, 1993 or the November 15, 1993 quarterly dividend of $.4375 per share
on the Series E Cumulative Preferred Stock nor was it permitted to declare or
pay future dividends on the Series E Cumulative Preferred Stock until the
Company generated income, or effected certain sales of capital stock, to
replenish the dividend "pool" under various of its debt instruments. As of
December 31, 1993, accumulated dividends on the Series E Cumulative Preferred
Stock amounted to $4.0 million. As a result of the February 1994 Offerings, the
dividend pool under the Senior Subordinated Indenture was replenished from the
sale of the common shares. Pursuant to the most recent amendment to the
Company's 1989 Credit Agreement, the Company will be able, to the extent
declared by the Board of Directors, to pay dividends on the Series E Cumulative
Preferred Stock to the extent permitted under the Senior Subordinated Indenture.
In the event the Company does not pay a dividend on the Series E Cumulative
Preferred Stock for six quarters, the holders of the Series E Cumulative
Preferred Stock would have the right to elect two members to the Company's Board
of Directors until the accumulated dividends on such Series E Cumulative
Preferred Stock have been declared and paid or set apart for payment.
REDEEMABLE PREFERRED STOCK OF A CONSOLIDATED AFFILIATE:
The Company's Consolidated Balance Sheets include the Redeemable Series A
Preferred Stock (the "Series A Preferred Stock") of Savannah River. Savannah
River has authorized 650,000 shares of Series A Preferred Stock, of which
637,900 shares and 548,500 shares, having a total liquidation
F-42
<PAGE>
STONE CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14 -- PREFERRED STOCK (CONTINUED)
preference of $63.8 million and $54.9 million, were outstanding at December 31,
1993 and 1992, respectively. The Company owns one-third of the Series A
Preferred Stock and has eliminated such investment in consolidation.
The Series A Preferred Stock, $.01 par value, liquidation preference $100
per share, is cumulative with dividends of $15.375 per annum payable quarterly
when, as and if declared by Savannah River's Board of Directors. On or prior to
December 15, 1993, dividends are payable through the issuance of additional
shares of Series A Preferred Stock; thereafter, such dividends are payable in
cash. Stock dividends of approximately $6.0 million in 1993, $5.1 million in
1992 and $4.4 million in 1991, representing approximately 60,000 shares, 51,000
shares and 44,000 shares, respectively, have been distributed to shareholders
other than the Company. Commencing December 15, 2001, Savannah River is required
to redeem the Series A Preferred Stock at its liquidation preference in no less
than three annual installments. Additionally, upon the occurrence of certain
events, Savannah River may be required to redeem all of the Series A Preferred
Stock at prices declining annually to 100 percent of the liquidation preference
by December 15, 2001. The Series A Preferred Stock is solely the obligation of
Savannah River and is without recourse to the parent company.
SERIES F PREFERRED STOCK:
As a result of the agreement discussed in Note 18 between the Company and
Venezolana de Pulpa y Papel ("Venepal"), a Venezuelan pulp and paper company,
the Company has authorized 400,000 shares of 7 percent Series F Cumulative
Convertible Exchangeable Preferred Stock (the "Series F Preferred Stock"). The
Series F Preferred Stock, $.01 par value, liquidation preference $100 per share,
is cumulative with dividends of $7 per annum payable quarterly when, as and if
declared by the Company's Board of Directors and is convertible into shares of
the Company's common stock at a conversion price of $18.422, subject to
adjustment under certain conditions. The terms of the Series F Preferred Stock
are virtually identical to the Series E Preferred Stock, except for the
liquidation preference and the conversion rate. No shares of Series F Preferred
Stock have been issued to date.
NOTE 15 -- COMMON STOCK
The Company has authorized 200,000,000 shares of common stock, $.01 par
value, of which 71,174,587 shares were outstanding at December 31, 1993.
On September 15, 1992, the Company issued a 2 percent stock dividend to
common stockholders of record August 25, 1992. The stock dividend was effected
by the issuance of one share of common stock for every 50 shares of common stock
held. Accordingly, all amounts per common share and weighted average number of
common shares for all periods included in the consolidated financial statements
have been retroactively adjusted to reflect this stock dividend.
STOCK RIGHTS:
Each outstanding share of the Company's common stock carries a stock
purchase right ("Right"). Each Right entitles the holder to purchase from the
Company one one-hundredth of a share of Series D Junior Participating Preferred
Stock, par value $.01 per share, at a purchase price of $130 subject to
adjustment under certain circumstances. The Rights expire August 8, 1998 unless
extended or earlier redeemed by the Company.
The Rights will be exercisable only if a person or group, subject to certain
exceptions, acquires 15 percent or more of the Company's common stock or
announces a tender offer, the consummation of which would result in ownership by
such person or group of 15 percent or more of the Company's common stock. The
Company can redeem the Rights at the rate of $.01 per Right at any time before
the tenth business day (subject to extension) after a 15 percent position is
acquired.
F-43
<PAGE>
STONE CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 15 -- COMMON STOCK (CONTINUED)
If the Company is acquired in a merger or other business combination
transaction, each Right will entitle its holder (other than the acquiring person
or group) to purchase, at the Right's then-current exercise price, a number of
the acquiring company's shares of common stock having a market value at that
time of twice the Right's then-current exercise price.
In addition, in the event that a 15 percent or greater stockholder acquires
the Company by means of a reverse merger in which the Company and its common
stock survive, or engages in self-dealing transactions with the Company, each
holder of a Right (other than the acquiring person or group) will be entitled to
purchase the number of shares of the Company's common stock having a market
value of twice the then-current exercise price of the Right.
STOCK OWNERSHIP AND OPTION PLANS:
In 1982, the Company adopted an Incentive Stock Option Plan under which
options are granted to key employees who are not participants in the Company's
Long-Term Incentive Program described below. This plan expired on March 21, 1992
and upon its expiration, the Board of Directors adopted a 1993 Plan, effective
January 1, 1993. The provisions under the 1993 Plan are similar to the 1982
Plan, with 1,530,000 shares of common stock authorized except that under the new
plan the Company may issue either incentive stock options or non-qualified stock
options. Options under these plans provide for the purchase of common shares at
prices not less than 100 percent of the market value of such shares on the date
of grant. The options are exercisable, in whole or in part, after one year but
no later than ten years from the date of the respective grant. No accounting
recognition is given to stock options until they are exercised, at which time
the option price received is credited to common stock.
F-44
<PAGE>
STONE CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 15 -- COMMON STOCK (CONTINUED)
Transactions under the stock option plans are summarized as follows:
<TABLE>
<CAPTION>
OPTION PRICE
OPTION SHARES PER SHARE*
-------------- ---------------
<S> <C> <C>
Outstanding January 1, 1991................................... 574,833 $ 4.98-29.28
Granted..................................................... -- --
Exercised................................................... (9,998 ) 6.01-8.74
Cancelled................................................... -- --
-------------- ---------------
Outstanding December 31, 1991................................. 564,835 4.98-29.28
Granted..................................................... -- --
Exercised................................................... (22,950 ) 4.98-29.28
Adjustment for 2 percent stock dividend..................... 10,707 8.74-29.28
Cancelled................................................... (6,561 ) 6.01
-------------- ---------------
Outstanding December 31, 1992................................. 546,031 8.74-29.28
Granted..................................................... -- --
Exercised................................................... -- --
Cancelled................................................... -- --
-------------- ---------------
Outstanding December 31, 1993................................. 546,031 8.74-29.28
-------------- ---------------
Options exercisable at December 31,
1993........................................................ 546,031 8.74-29.29
1992........................................................ 546,031 8.74-29.28
Options available for grant at December 31,
1993........................................................ 1,530,000
1992........................................................ 1,530,000
<FN>
- ------------------------
*Adjusted for the 2 percent stock dividend issued September 15, 1992.
</TABLE>
Additionally, the Company's Long-Term Incentive Program provides for
contingent awards of restricted shares of common stock and cash to certain key
employees.The payment of the cash portion of the awards granted will depend on
the extent to which the Company has met certain long-term performance goals as
established by a committee of outside directors. The compensation related to
this program is amortized over the related five-year restricted periods. The
charge (credit) to compensation expense under this plan was $(1.2) million, $3.6
million and $4.7 million in 1993, 1992 and 1991, respectively. In 1993, prior
cash awards that were accrued have been deemed to be not payable due to the
financial results of the Company. Under this plan, 1,800,000 shares have been
reserved for issuance, of which 186,253, 120,834 and 238,546 shares were granted
in 1993, 1992 and 1991, respectively. At December 31, 1993, there were 951,761
shares available for grant.
NOTE 16 -- RELATED PARTY TRANSACTIONS
The Company sells linerboard and corrugating medium to MacMillan Bathurst, a
50 percent owned non-consolidated affiliate and to Titan, a 49 percent owned
non-consolidated affiliate. As discussed in Note 3, the Company sold its 49
percent interest in Titan in December 1993. Additionally, the Company purchases
market pulp from Stone Venepal Consolidated Pulp Inc. ("Stone Venepal
Consolidated"), a 50 percent owned non-consolidated affiliate of the Company.
Stone Venepal Consolidated owns 50 percent of the Celgar Pulp Company, which
operates a market pulp mill in British Columbia. The Company also sells boxboard
to FCP, a 50 percent owned non-consolidated affiliate. Transactions under all of
these agreements are primarily at market prices.
F-45
<PAGE>
STONE CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 16 -- RELATED PARTY TRANSACTIONS (CONTINUED)
The following table summarizes the transactions between the Company and its
non-consolidated affiliates and the payable and receivable balances outstanding
at the end of each year.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1993 1992 1991
--------- --------- ---------
(IN MILLIONS)
<S> <C> <C> <C>
MacMillan Bathurst:
Sales to........................................................ $ 77.4 $ 67.3 $ 79.4
Net receivable from............................................. 9.9 9.8 6.1
Titan:
Sales to........................................................ $ 18.3 $ 13.4 $ 16.1
Net receivable from............................................. (a) 12.8 14.3
Management fee from............................................. 1.0 1.0 .8
FCP Group:
Sales to........................................................ $ 4.3 (b) (b)
Stone Venepal Consolidated:
Purchases from.................................................. $ 1.4 $ .5 $ 1.1
Net payable to.................................................. .7 .2 --
<FN>
- ------------------------
(a) Not applicable as equity investment in Titan was sold in December 1993.
(b) Not applicable for 1992 and 1991 as FCP Group was formed in 1993.
</TABLE>
NOTE 17 -- ADDITIONAL INFORMATION RELATING TO THE CONSOLIDATED FINANCIAL
STATEMENTS
OTHER NET OPERATING (INCOME) EXPENSE:
The major components of other net operating (income) expense are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1993 1992 1991
--------- --------- ---------
(IN MILLIONS)
<S> <C> <C> <C>
Writedown of decommissioned assets............................. $ 19.2 $ 4.0 $ 4.0
Gain from an involuntary conversion at a paper mill............ -- -- (17.5)
Loss on writedown of investments............................... 3.4 8.8 --
Gains on sales of investments or assets........................ (40.7) -- (7.4)
Loss from sale of business..................................... -- -- 1.5
Gain from settlement and termination of Canadian supply
contract...................................................... -- -- (41.8)
Writedown of certain receivables to net realizable value....... 14.2 -- --
Other.......................................................... 8.6 -- (1.6)
--------- --------- ---------
Total other net operating (income) expense..................... $ 4.7 $ 12.8 $ (62.8)
--------- --------- ---------
--------- --------- ---------
</TABLE>
INTEREST EXPENSE:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1993 1992 1991
--------- --------- ---------
(IN MILLIONS)
<S> <C> <C> <C>
Total interest cost incurred.................................. $ 437.5 $ 433.5 $ 479.3
Interest capitalized.......................................... (10.8) (47.4) (81.9)
--------- --------- ---------
Interest expenses............................................. $ 426.7 $ 386.1 $ 397.4
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-46
<PAGE>
STONE CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 17 -- ADDITIONAL INFORMATION RELATING TO THE CONSOLIDATED FINANCIAL
STATEMENTS (CONTINUED)
PROVISION FOR DOUBTFUL ACCOUNTS AND NOTES RECEIVABLE:
Selling, general and administrative expenses include provisions for doubtful
accounts and notes receivable of $12.2 million for 1993, $8.3 million for 1992
and $7.1 million for 1991.
OTHER, NET:
The major components of other, net are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1993 1992 1991
--------- --------- ---------
(IN MILLIONS)
<S> <C> <C> <C>
Interest income................................................... $ 11.2 $ 11.5 $ 8.4
Dividend income................................................... .4 .8 1.0
Foreign currency transaction gains (losses)....................... (11.8) (15.0) 4.9
Minority interest expense......................................... (3.6) (5.3) (5.8)
Other............................................................. 2.9 8.6 6.2
--------- --------- ---------
Total other, net.................................................. $ (.9) $ .6 $ 14.7
--------- --------- ---------
--------- --------- ---------
</TABLE>
INVESTMENTS IN NON-CONSOLIDATED AFFILIATES:
The Company had investments in non-consolidated affiliates of $107.2 million
and $131.9 million at December 31, 1993 and 1992, respectively. These amounts
are included in other long-term assets in the Company's Consolidated Balance
Sheets. See Note 16 for discussion of the transactions between the Company and
its major non-consolidated affiliates.
ACCRUED AND OTHER CURRENT LIABILITIES:
The major components of accrued and other current liabilities are as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
--------------------
1993 1992
--------- ---------
(IN MILLIONS)
<S> <C> <C>
Accrued interest........................................................... $ 68.2 $ 60.4
Accrued payroll, related taxes and employee benefits....................... 85.8 105.5
Other...................................................................... 131.7 134.7
--------- ---------
Total accrued and other current liabilities................................ $ 285.7 $ 300.6
--------- ---------
--------- ---------
</TABLE>
OTHER LONG-TERM LIABILITIES:
Included in other long-term liabilities at December 31, 1993 and 1992 is
approximately $52.3 million and $57.8 million, respectively, of deferred income
relating to the October 1992 sale of an energy contract at the Company's
Hopewell mill. This amount is being amortized over a 12 year period.
NOTE 18 -- COMMITMENTS AND CONTINGENCIES
At December 31, 1993, the Company, excluding Savannah River and Seminole,
had commitments outstanding for capital expenditures under purchase orders and
contracts of approximately $20.3 million of which $8.3 million relates to
Stone-Consolidated. Savannah River and Seminole had, at December 31, 1993,
commitments outstanding for capital expenditures of approximately $4.9 million
in the aggregate.
The Company has a 50 percent equity interest in Stone Venepal Consolidated
which in turn has a 50 percent undivided interest in the assets and liabilities
of a joint venture which owns the Celgar pulp
F-47
<PAGE>
STONE CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 18 -- COMMITMENTS AND CONTINGENCIES (CONTINUED)
mill located at Castlegar, British Columbia. Venepal owns the other 50 percent
equity interest in Stone Venepal Consolidated. On February 12, 1991, Stone
Venepal Consolidated entered into a $350 million (Canadian) bank credit
agreement for the purpose of financing its 50 percent share of a major
improvement and expansion project at the Castlegar mill. Additionally, the
Company entered into a Completion Financing Agreement for the purpose of funding
part of the project costs that were incurred in excess of the primary borrowing
facility, up to a maximum of $50 million (Canadian) in the aggregate. At
December 31, 1993, the Company has paid $37.5 million (Canadian) under the
Completion Financing Agreement which is the maximum amount the Company has
determined it will be required to contribute.
On October 30, 1992, the Company and Venepal entered into an agreement
whereby Venepal's investment in the Celgar pulp mill, represented by Venepal's
ownership of 50 percent of the outstanding common stock of Stone Venepal
Consolidated can be exchanged for the Company's Series F Preferred Stock (see
Note 14). The exchange would occur at Venepal's option as a result of certain
specific conditions relating to the operations of the Celgar pulp mill. None of
these conditions as of December 31, 1993 have occurred that would trigger the
exchange. The Company may, at its option, elect to honor the contingent exchange
obligation with a cash payment to Venepal. Based upon Venepal's initial
investment in Stone Venepal Consolidated, 212,903 shares of Series F Preferred
Stock, liquidation preference $100 per share, would be issued in the event
Venepal elected its exchange option. Further, if the Series F Preferred shares
were converted to the Company's common stock at the conversion price of $18.422,
an additional 1,155,703 shares of common stock would be issued. Venepal's
interest in Stone Venepal Consolidated replaces the equity ownership formerly
held by Power Corporation of Canada.
The 1989 Credit Agreement limits in certain specific circumstances any
further investments by the Company in Stone-Consolidated Corporation, Seminole
and Savannah River. Savannah River and Seminole have incurred substantial
indebtedness in connection with project financings and are significantly
leveraged. As of December 31, 1993, Savannah River had $402.6 million in
outstanding indebtedness (including $268.9 million in secured indebtedness owed
to bank lenders) and Seminole had $161.0 million in outstanding indebtedness
(including $120.6 million in secured indebtedness owed to bank lenders). 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 no later than September 1, 1994 and 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 December 31, 1993 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 covenants), including obtaining additional sources of funds,
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
Savannah River or Seminole, the lenders to the Company under the 1989 Credit
Agreement and various other of its debt instruments would be entitled to
accelerate the indebtedness owed by the Company.
Under certain timber contracts, title passes as the timber is cut. These are
considered to be commitments and are not recorded until the timber is removed.
At December 31, 1993 commitments on such contracts, which run through 1997, were
approximately $16.8 million.
F-48
<PAGE>
STONE CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 18 -- COMMITMENTS AND CONTINGENCIES (CONTINUED)
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 in
the past made significant capital expenditures to comply with water, air and
solid and hazardous waste regulations and expects to make significant
expenditures in the future. Capital expenditures for environmental control
equipment and facilities were approximately $28 million in 1993 and the Company
anticipates that 1994 and 1995 environmental capital expenditures will
approximate $71 million and $96 million, respectively. Included in these amounts
are capital expenditures for Stone-Consolidated which were approximately $5
million in 1993 and are anticipated to approximate $36 million in 1994 and $64
million in 1995. 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, the Company anticipates that these costs are likely to increase as
environmental regulations become more stringent. Environmental control
expenditures include projects which, in addition to meeting environmental
concerns, 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. On December 17, 1993, the Environmental
Protection Agency proposed regulations under the Clean Air Act and the Clean
Water Act for the pulp and paper industry, which if and when implemented, would
affect directly a number of the Company's facilities. Since the regulations have
only recently been proposed, the Company is currently unable to estimate the
nature or level of future expenditures that may be required to comply with such
regulations if the proposed regulations become final in some form. 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 potentially responsible party ("PRP") at a
number of sites which are the subject of remedial activity under the
Comprehensive Environmental Response, Compensation and Liability Act of 1980
("CERCLA" or "Superfund") or comparable state laws. Although the Company is
subject to joint and several liability imposed under Superfund, at most of the
multi-PRP sites there are organized groups of PRPs and costs are being shared
among PRPs. Future environmental regulations, including the December 17, 1993
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.
The Company has entered into a purchase agreement with a certain party in
which the Company has agreed to purchase annually 90,000 tons of linerboard at
specified prices over a ten year period. Commencement of this agreement is
contingent upon the completion of a manufacturing facility by the other party.
Refer to Notes 10 and 13 for further discussion of the Company's debt,
hedging and lease commitments.
Additionally, the Company is involved in certain litigation primarily
arising in the normal course of business. In the opinion of management, the
Company's liability under any pending litigation would not materially affect its
financial condition or results of operations.
NOTE 19 -- SEGMENT INFORMATION
BUSINESS SEGMENTS:
The Company operates principally in two business segments. The paperboard
and paper packaging segment is comprised primarily of facilities that produce
containerboard, kraft paper, boxboard, corrugated containers and paper bags and
sacks. The white paper and pulp segment consists of
F-49
<PAGE>
STONE CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 19 -- SEGMENT INFORMATION (CONTINUED)
facilities that manufacture and sell newsprint, groundwood paper and market
pulp. The Company has other operations, primarily consisting of wood products
operations, flexible packaging operations and railroad operations. Intersegment
sales are accounted for at transfer prices which approximate market prices.
Operating profit includes all costs and expenses directly related to the
segment involved. The corporate portion of operating profit includes corporate
general and administrative expenses and equity income (loss) of non-consolidated
affiliates.
Assets are assigned to segments based on use. Corporate assets primarily
consist of cash and cash equivalents, fixed assets, certain deferred charges and
investments in non-consolidated affiliates.
Financial information by business segment is summarized as follows:
<TABLE>
<CAPTION>
1993 1992 1991
-------------- -------------- --------------
(IN MILLIONS)
<S> <C> <C> <C>
Sales:
Paperboard and paper packaging......................... $ 3,810.1 $ 4,185.7 $ 4,037.7
White paper and pulp................................... 965.0 1,078.3 1,115.8
Other.................................................. 330.6 303.0 275.3
Intersegment........................................... (46.1) (46.3) (44.5)
-------------- -------------- --------------
Total sales........................................ $ 5,059.6 $ 5,520.7 $ 5,384.3
-------------- -------------- --------------
-------------- -------------- --------------
Income (loss) before income taxes and cumulative
effects of accounting changes:
Paperboard and paper packaging......................... $ 206.4 $ 322.1 $ 355.8
White paper and pulp................................... (194.2) (87.0) 84.1
Other.................................................. 36.4 12.0 (6.0)
-------------- -------------- --------------
48.6 247.1 433.9
Interest expense....................................... (426.7) (386.1) (397.4)
Foreign currency transaction gains (losses)............ (11.8) (15.0) 4.9
General corporate...................................... (77.0)(1) (75.3)(1) (59.4)(1)
-------------- -------------- --------------
Loss before income taxes and cumulative effects of
accounting changes................................ $ (466.9) $ (229.3) $ (18.0)
-------------- -------------- --------------
-------------- -------------- --------------
Depreciation and amortization:
Paperboard and paper packaging......................... $ 179.5 $ 173.3 $ 154.5
White paper and pulp................................... 135.8 123.6 88.8
Other.................................................. 20.9 24.3 23.0
General corporate...................................... 10.6 8.0 7.2
-------------- -------------- --------------
Total depreciation and amortization................ $ 346.8 $ 329.2 $ 273.5
-------------- -------------- --------------
-------------- -------------- --------------
Assets:
Paperboard and paper packaging......................... $ 3,436.5 $ 3,516.3 $ 3,728.5
White paper and pulp................................... 2,632.8 2,763.4 2,459.9
Other.................................................. 344.6 379.6 383.4
General corporate...................................... 422.8(2) 367.7(2) 331.1(2)
-------------- -------------- --------------
Total assets....................................... $ 6,836.7 $ 7,027.0 $ 6,902.9
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
F-50
<PAGE>
STONE CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 19 -- SEGMENT INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
1993 1992 1991
-------------- -------------- --------------
(IN MILLIONS)
Capital expenditures:
<S> <C> <C> <C>
Paperboard and paper packaging......................... $ 100.7 $ 177.1 $ 322.6
White paper and pulp................................... 44.2 98.6 100.6
Other.................................................. 1.5 4.8 4.4
General corporate...................................... 3.3 .9 2.5
-------------- -------------- --------------
Total capital expenditures......................... $ 149.7 $ 281.4 $ 430.1
-------------- -------------- --------------
-------------- -------------- --------------
<FN>
- ------------------------
(1) Includes equity in net income (loss) of non-consolidated vertically
integrated affiliates as follows: Paperboard and paper packaging segment --
$(5.2) in 1993, $(3.3) in 1992 and $2.4 in 1991; White paper and pulp
segment -- $(2.5) in 1993, $(2.7) in 1992 and $(1.5) in 1991; and other --
$(4.0) in 1993, $.7 in 1992 and $.2 in 1991.
(2) Includes investments in non-consolidated vertically integrated affiliates
as follows: Paperboard and paper packaging segment -- $33.6 in 1993, $42.2
in 1992 and $38.6 in 1991; White paper and pulp segment -- $27.8 in 1993,
$29.4 in 1992 and $26.2 in 1991; and other -- $45.8 in 1993, $2.2 in 1992
and $1.3 in 1991.
</TABLE>
GEOGRAPHIC SEGMENTS:
The chart below provides financial information for the Company's operations
based on the region in which the operations are located.
<TABLE>
<CAPTION>
INCOME (LOSS)
BEFORE INCOME
TAXES AND
CUMULATIVE
EFFECT OF AN
INTER-AREA ACCOUNTING
TRADE SALES SALES TOTAL SALES CHANGE ASSETS
----------- ---------- ----------- ------------- ------------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
1993
United States............................................... $3,678.2 $ 16.4 $3,694.6 $ 112.0 $3,256.8
Canada...................................................... 756.2 16.9 773.1 (69.5) 2,374.8
Europe...................................................... 625.2 1.7 626.9 6.1 782.3
----------- ---------- ----------- ------------- ------------
5,059.6 35.0 5,094.6 48.6 6,413.9
Interest expense............................................ (426.7)
Foreign currency transaction losses......................... (11.8)
General corporate........................................... (77.0)(1) 422.8(2)
Inter-area eliminations..................................... (35.0) (35.0) --
----------- ---------- ----------- ------------- ------------
Total....................................................... $5,059.6 $ -- $5,059.6 $(466.9) $6,836.7
----------- ---------- ----------- ------------- ------------
----------- ---------- ----------- ------------- ------------
</TABLE>
F-51
<PAGE>
STONE CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 19 -- SEGMENT INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
INCOME (LOSS)
BEFORE INCOME
TAXES AND
CUMULATIVE
EFFECT OF AN
INTER-AREA ACCOUNTING
TRADE SALES SALES TOTAL SALES CHANGE ASSETS
----------- ---------- ----------- ------------- ------------
(IN MILLIONS)
1992
<S> <C> <C> <C> <C> <C>
United States............................................... $3,908.5 $ 28.9 $3,937.4 $ 300.3 $3,406.0
Canada...................................................... 770.4 20.0 790.4 (97.3) 2,375.6
Europe...................................................... 841.8 5.1 846.9 44.1 877.7
----------- ---------- ----------- ------------- ------------
5,520.7 54.0 5,574.7 247.1 6,659.3
Interest expense............................................ (386.1)
Foreign currency transaction losses......................... (15.0)
General corporate........................................... (75.3)(1) 367.7(2)
Inter-area eliminations..................................... (54.0) (54.0) --
----------- ---------- ----------- ------------- ------------
Total....................................................... $5,520.7 $ -- $5,520.7 $(229.3) $7,027.0
----------- ---------- ----------- ------------- ------------
----------- ---------- ----------- ------------- ------------
1991
United States............................................... $3,700.0 $ 29.8 $3,729.8 $ 335.2 $3,277.5
Canada...................................................... 870.6 24.6 895.2 13.8 2,389.8
Europe...................................................... 813.7 -- 813.7 84.9 904.5
----------- ---------- ----------- ------------- ------------
5,384.3 54.4 5,438.7 433.9 6,571.8
Interest expense............................................ (397.4)
Foreign currency transaction gains.......................... 4.9
General corporate........................................... (59.4)(1) 331.1(2)
Inter-area eliminations..................................... (54.4) (54.4) --
----------- ---------- ----------- ------------- ------------
Total....................................................... $5,384.3 $ -- $5,384.3 $ (18.0) $6,902.9
----------- ---------- ----------- ------------- ------------
----------- ---------- ----------- ------------- ------------
<FN>
- ------------------------
(1) Includes equity in net income (loss) of non-consolidated vertically
integrated affiliates as follows: United States -- $(1.0) in 1993, $(1.2)
in 1992 and $(.1) in 1991; Canada -- $(3.0) in 1993, $(3.0) in 1992 and
$(.6) in 1991; and other -- $(7.7) in 1993, $(1.1) in 1992 and $1.8 in
1991.
(2) Includes investments in non-consolidated vertically integrated affiliates
as follows: United States -- $ -- in 1993, $4.7 in 1992 and $1.2 in 1991;
Canada -- $63.0 in 1993, $68.7 in 1992 and $64.9 in 1991; and other --
$44.2 in 1993, $.4 in 1992 and $ -- in 1991.
</TABLE>
The Company's export sales from the United States were $341 million, $428
million and $330 million for 1993, 1992 and 1991, respectively.
F-52
<PAGE>
STONE CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 20 -- SUMMARY OF QUARTERLY DATA (UNAUDITED)
The following table summarizes quarterly financial data for 1993 and 1992:
<TABLE>
<CAPTION>
QUARTER
----------------------------------------------
FIRST(2) SECOND THIRD FOURTH(1) YEAR
---------- ---------- ---------- ---------- ----------
(IN MILLIONS EXCEPT PER SHARE)
<S> <C> <C> <C> <C> <C>
1993
Net sales.......................................... $ 1,306.3 $ 1,267.6 $ 1,242.6 $ 1,243.1 $ 5,059.6
Cost of products sold.............................. 1,070.3 1,050.3 1,058.9 1,044.1 4,223.5
Depreciation and amortization...................... 87.1 88.8 81.2 89.7 346.8
Loss before cumulative effect of an accounting
change............................................ (62.7) (71.6) (99.2) (85.8) (319.2)
Cumulative effect of change in accounting for
postretirement benefits........................... (39.5) -- -- -- (39.5)
Net loss........................................... (102.2) (71.6) (99.2) (85.8) (358.7)
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Per share of common stock:
Loss before cumulative effect of an accounting
change.......................................... (.91) (1.03) (1.42) (1.23) (4.59)
Cumulative effect of change in accounting for
postretirement benefits......................... (.56) -- -- -- (.56)
---------- ---------- ---------- ---------- ----------
Net loss......................................... (1.47) (1.03) (1.42) (1.23) (5.15)
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Cash dividends per common share.................... -- -- -- -- --
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
1992
Net sales.......................................... $ 1,354.3 $ 1,371.1 $ 1,464.6 $ 1,330.7 $ 5,520.7
Cost of products sold.............................. 1,084.2 1,107.8 1,193.3 1,088.4 4,473.7
Depreciation and amortization...................... 77.8 82.4 87.1 81.9 329.2
Loss before cumulative effect of an accounting
change............................................ (9.3) (40.7) (43.2) (76.7) (169.9)
Cumulative effect of change in accounting for
income taxes...................................... (99.5) -- -- -- (99.5)
Net loss........................................... (108.8) (40.7) (43.2) (76.7) (269.4)
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Per share of common stock:
Loss before cumulative effect of an accounting
change.......................................... (.15) (.60) (.64) (1.10) (2.49)
Cumulative effect of change in accounting for
income taxes.................................... (1.40) -- -- -- (1.40)
---------- ---------- ---------- ---------- ----------
Net loss......................................... (1.55) (.60) (.64) (1.10) (3.89)
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Cash dividends per common share.................... .17 .18 -- -- .35
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
<FN>
- ------------------------
(1) The fourth quarter of 1993 includes a pre-tax gain of approximately $35.4
million from the sale of the Company's 49 percent equity interest in Titan
and a reduction in an accrual resulting from a change in the Company's
vacation pay policy which were partially offset by the writedown of the
carrying values of certain Company assets. The fourth quarter of 1992 was
unfavorably impacted by a roll-back of linerboard price increases which
resulted in the issuance of customer credits in the fourth quarter
pertaining to third quarter 1992 billings. Price increases are invoiced for
shipments on or after the effective date of the price increase. In certain
circumstances the Company, as a result of
</TABLE>
F-53
<PAGE>
STONE CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 20 -- SUMMARY OF QUARTERLY DATA (UNAUDITED) (CONTINUED)
<TABLE>
<S> <C>
competitive pressures, may issue credits for the previously billed price
increases. When it becomes probable that a price increase will not be
successful or will be delayed, the Company accrues for possible credits to
be issued.
(2) The Company adopted SFAS 106 effective January 1, 1993 and SFAS 109
effective January 1, 1992.
(3) Amounts per common share have been adjusted for the 2 percent common stock
dividend issued September 15, 1992.
</TABLE>
F-54
<PAGE>
STONE CONTAINER CORPORATION
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1994
(UNAUDITED)
Set forth below is the unaudited Pro Forma Condensed Consolidated Statement
of Operations of the Company for the six months ended June 30, 1994. The
unaudited Pro Forma Condensed Consolidated Statement of Operations includes the
historical results of the Company and gives effect to the 1994 sale of $710
million principal amount of 9 7/8% Senior Notes due February 1, 2001, the
concurrent issuance of 18.97 million shares of common stock for $287.8 million
at $15.25 per common share, the Offering and the application of the net proceeds
therefrom, and the Related Transactions (collectively, the "1994 Financings") as
if they had occurred as of January 1, 1994. The pro forma financial data do not
purport to be indicative of the Company's results of operations that would
actually have been obtained had the 1994 Financings been completed as of the
beginning of the period presented, or to project the Company's results of
operations at any future date or for any future period. The unaudited pro forma
adjustments are based upon available information and upon certain assumptions
that the Company believes are reasonable. The unaudited pro forma financial data
and accompanying notes should be read in conjunction with the historical
financial information of the Company, including the notes thereto, included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
SIX SIX
MONTHS PRO FORMA MONTHS
ENDED ADJUSTMENTS ENDED
JUNE 30, 1994 JUNE 30,
1994(1) FINANCINGS(2) 1994
--------- ---------- ---------
(IN MILLIONS, EXCEPT PER SHARE
DATA)
<S> <C> <C> <C>
Net sales......................................... $2,645.1 $ $2,645.1
Operating costs and expenses:
Cost of products sold............................. 2,184.0 2,184.0
Selling, general and administrative............... 270.5 270.5
Depreciation and amortization..................... 177.7 177.7
Equity loss from affiliates....................... 5.7 5.7
Other net operating income........................ (33.4) (33.4)
--------- ---------- ---------
2,604.5 2,604.5
--------- ---------- ---------
Income from operations............................ 40.6 40.6
Interest expense.................................. (224.3) 64.7(a) (225.2)
(65.6)(b)
Other, net........................................ (8.1) 11.0(c) 2.9
--------- ---------- ---------
Loss before income taxes, minority interest,
extraordinary loss and cumulative effect of an
accounting change................................ (191.8) 10.1 (181.7)
Credit for income taxes........................... (60.0) 2.8(e) (57.2)
Minority interest................................. 2.1 3.1(d) 5.2
--------- ---------- ---------
Loss before extraordinary loss and cumulative
effect of an accounting change................... $ (129.7) $ 10.4 $ (119.3)
--------- ---------- ---------
--------- ---------- ---------
Loss per share of common stock before
extraordinary loss and cumulative effect of an
accounting change................................ $ (1.55) $ (1.36)
--------- ---------
--------- ---------
Weighted average common shares outstanding (in
millions)........................................ 86.0 90.3
--------- ---------
--------- ---------
<FN>
- ------------------------------
(1) Basis of preparation:
The unaudited Pro Forma Condensed Consolidated Statement of Operations has
been prepared from and should be read in conjunction with the historical
consolidated financial statements of the Company included elsewhere in this
Prospectus.
(2) Pro forma adjustments relating to the 1994 Financings:
(a) To record a reduction of historical interest expense and amortization
of deferred debt issuance costs of $64.7 million as a result of (i)
the assumed repayment of 1989 Credit Agreement indebtedness; (ii) the
assumed repayment of borrowings under the Savannah River Credit
Agreement; (iii) the assumed repayment of the 13 5/8% Subordinated
Notes due June 1, 1995 and (iv) the assumed redemption of the Savannah
River Notes at a redemption price equal to 107.0625% of the principal
amount. In the first quarter of 1994, the Company wrote-off $16.8
million of unamortized deferred debt issuance costs, net of income tax
benefit, as a result of debt repayments. Assuming that the Offering
and the Related Transactions are completed as planned, the Company
will incur a charge of approximately $45 million, net of income tax
benefit, pertaining to the write-off of unamortized deferred debt
issuance costs related to the debt being repaid and costs associated
with the redemption of the Savannah River Notes. These write-offs are
not included in the unaudited Pro Forma Condensed Consolidated
Statement of Operations.
(b) To record pro forma interest expense and amortization of debt fees of
$65.6 million related to the 9 7/8% Senior Notes due February 1, 2001,
the 10 3/4% First Mortgage Notes due October 1, 2002, the 11 1/2%
Senior Notes due October 1, 2004, the term loan under the Credit
Agreement and the revolving credit facility under the Credit
Agreement. For purposes of the unaudited Pro Forma Condensed
Consolidated Statement of Operations, management has assumed weighted
average interest rates of 10.8%, 11.6% and 7.1% for the First Mortgage
Notes, the Senior Notes and the term loan under the Credit Agreement,
respectively.
(c) To decrease the foreign exchange transaction losses by $11.0 million
to reflect the effects of the reversal of the historical foreign
exchange transaction losses associated with a foreign subsidiary's
U.S. dollar denominated debt that was repaid.
(d) To reverse minority interest expense of $3.1 million as a result of
the purchase of the 72,346 outstanding shares of common stock of
Savannah River not owned by the Company and the redemption of the
425,243 outstanding shares of the Savannah River Preferred not owned
by the Company.
(e) To record an adjustment to income taxes of $2.8 million pertaining to
the interest expense adjustments described in Notes 2(a) and 2(b) and
the foreign exchange transaction loss adjustment described in Note
2(c) using the estimated U.S. and Canadian statutory income tax rates
of 39 percent and 35 percent, respectively. The U.S. tax rate includes
the effects of state income taxes.
</TABLE>
F-55
<PAGE>
STONE CONTAINER CORPORATION
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1993
(UNAUDITED)
Set forth below is the unaudited Pro Forma Condensed Consolidated Statement
of Operations of the Company for the year ended December 31, 1993. The unaudited
Pro Forma Condensed Consolidated Statement of Operations includes the historical
results of the Company and gives effect to the public offerings in December 1993
by Stone-Consolidated of Cdn. $231 million of its common stock, Cdn. $231
million of its 8% Convertible Unsecured Subordinated Debentures due 2003 and
$225 million of its 10.25% Senior Secured Notes due 2000 (the "Stone-
Consolidated Transaction") as if they had occurred as of January 1, 1993. The
historical results are further adjusted for the 1994 sale of $710 million
principal amount of 9 7/8% Senior Notes due February 1, 2001, for the concurrent
issuance of 18.97 million shares of common stock for $287.8 million at $15.25
per common share, for the Offering and the application of the net proceeds
therefrom, and for the Related Transactions (collectively, the "1994
Financings") as if they had occurred as of January 1, 1993. The pro forma
financial data do not purport to be indicative of the Company's results of
operations that would actually have been obtained had the Stone-Consolidated
Transaction and the 1994 Financings been completed as of the beginning of the
period presented, or to project the Company's results of operations at any
future date or for any future period. The unaudited pro forma adjustments are
based upon available information and upon certain assumptions that the Company
believes are reasonable. The unaudited pro forma financial data and accompanying
notes should be read in conjunction with the historical financial information of
the Company, including the notes thereto, included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
YEAR YEAR
ENDED PRO FORMA PRO FORMA ENDED
DECEMBER ADJUSTMENTS ADJUSTMENTS DECEMBER
31, STONE-CONSOLIDATED 1994 31,
1993(1) TRANSACTIONS(2) FINANCINGS(3) 1993
--------- ---------- ---------- ---------
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Net sales............................... $5,059.6 $ $ $5,059.6
Operating costs and expenses:
Cost of products sold................... 4,223.5 4,223.5
Selling, general and administrative
expenses............................... 512.2 512.2
Depreciation and amortization........... 346.8 346.8
Equity loss from affiliates............. 11.7 11.7
Other net operating expense............. 4.7 4.7
--------- ---------- ---------- ---------
5,098.9 5,098.9
--------- ---------- ---------- ---------
Loss from operations.................... (39.3) (39.3)
Interest expense........................ (426.7) 21.7(a) 201.6(f) (431.3)
(43.8)(b) (184.1)(g)
Other, net.............................. 2.7 (10.9)(c) 4.0(h) (4.2)
--------- ---------- ---------- ---------
Loss before income taxes and cumulative
effect of an accounting change......... (463.3) (33.0) 21.5 (474.8)
Credit for income taxes................. (147.7) (11.1)(e) 5.6(j) (153.2)
Minority interest....................... (3.6) 9.3(d) 4.3(i) 10.0
--------- ---------- ---------- ---------
Loss before cumulative effect of an
accounting change...................... $ (319.2) $(12.6) $ 20.2 $ (311.6)
--------- ---------- ---------- ---------
--------- ---------- ---------- ---------
Loss per share of common stock before
cumulative effect of an accounting
change................................. $ (4.59) $ (3.55)
--------- ---------
--------- ---------
Weighted average common shares
outstanding (in millions).............. 71.2 90.1
--------- ---------
--------- ---------
<FN>
- ------------------------------
(1) Basis of preparation:
The unaudited Pro Forma Condensed Consolidated Statement of Operations has
been prepared from and should be read in conjunction with the historical
consolidated financial statements of the Company included elsewhere in this
Prospectus.
(2) Pro forma adjustments relating to the Stone-Consolidated Transaction:
(a) To record a reduction of historical interest expense and amortization
of deferred debt issuance costs of $21.7 million as a result of the
assumed repayment of certain 1989 Credit Agreement indebtedness.
(b) To record pro forma interest expense and amortization of debt fees of
$38.7 million related to Stone-Consolidated's 10.25% Senior Secured
Notes due 2000 and 8% Convertible Unsecured Subordinated Debentures
due 2003 and to record amortization of the amendment fees of $5.1
million related to the Company's 1989 Credit Agreement.
(c) To increase the foreign exchange transaction losses by $10.9 million
to reflect the effects of foreign currency remeasurement pertaining to
Stone-Consolidated's U.S. dollar denominated 10.25% Senior Secured
Notes due 2000, partially offset by the reversal of the historical
foreign exchange transaction losses associated with the U.S. dollar
denominated debt that was repaid.
(d) To record the minority interest share of the net losses of
Stone-Consolidated of $9.3 million for the year ended December 31,
1993 based on the pro forma statement of operations of
Stone-Consolidated.
(e) To record the adjustment to income taxes of $11.1 million pertaining
to the interest expense adjustments described in Notes 2(a) and 2(b)
and for the foreign exchange transaction loss adjustment described in
Note 2(c) using the applicable U.S. and Canadian statutory income tax
rates of 39 percent and 35 percent, respectively. The U.S. tax rates
include the effects of state income tax rates.
</TABLE>
F-56
<PAGE>
<TABLE>
<S> <C>
(3) Pro forma adjustments relating to the 1994 Financings:
(f) To record a reduction of historical interest expense and amortization
of deferred debt issuance costs of $201.6 million as a result of (i)
the assumed repayment of 1989 Credit Agreement indebtedness; (ii) the
assumed repayment of borrowings under the Savannah River Credit
Agreement; (iii) the assumed repayment of the 13 5/8% Subordinated
Notes due June 1, 1995 and (iv) the assumed redemption of the Savannah
River Notes at a redemption price equal to 107.0625% of the principal
amount. In the first quarter of 1994, the Company wrote-off $16.8
million of unamortized deferred debt issuance costs, net of income tax
benefit, as a result of debt repayments. Assuming that the Offering
and the Related Transactions are completed as planned, the Company
will incur a charge of approximately $45 million, net of income tax
benefit, pertaining to the write-off of unamortized deferred debt
issuance costs related to the debt being repaid and costs associated
with the redemption of the Savannah River Notes. These write-offs are
not included in the unaudited Pro Forma Condensed Consolidated
Statement of Operations.
(g) To record pro forma interest expense and amortization of debt fees of
$184.1 million related to the 9 7/8% Senior Notes due February 1,
2001, the 10 3/4% First Mortgage Notes due October 1, 2002, the
11 1/2% Senior Notes due October 1, 2004, the term loan under the
Credit Agreement and the revolving credit facility under the Credit
Agreement. For purposes of the unaudited Pro Forma Condensed
Consolidated Statement of Operations, management has assumed weighted
average interest rates of 10.8%, 11.6%, 6.5% and 6.0% for the First
Mortgage Notes, the Senior Notes, the term loan under the Credit
Agreement and the revolving credit facility under the Credit
Agreement, respectively.
(h) To decrease the foreign exchange transaction losses by $4.0 million to
reflect the effects of the reversal of the historical foreign exchange
transaction losses associated with a foreign subsidiary's U.S. dollar
denominated debt that was repaid.
(i) To reverse minority interest expense of $4.3 million as a result of
the purchase of the 72,346 outstanding shares of common stock of
Savannah River not owned by the Company and the redemption of the
425,243 outstanding shares of the Savannah River Preferred not owned
by the Company.
(j) To record an adjustment to income taxes of $5.6 million pertaining to
the interest expense adjustments described in Notes 3(f) and 3(g) and
the foreign exchange transaction loss adjustment described in Note
3(h) using the estimated U.S. and Canadian statutory income tax rates
of 39 percent and 35 percent, respectively. The U.S. tax rate includes
the effects of state income taxes.
</TABLE>
F-57
<PAGE>
STONE CONTAINER CORPORATION
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
JUNE 30, 1994
(UNAUDITED)
Set forth below is the unaudited Pro Forma Condensed Consolidated Balance
Sheet of the Company as of June 30, 1994. The unaudited Pro Forma Condensed
Consolidated Balance Sheet includes the historical financial position of the
Company and gives effect to the Offering and the Related Transactions as if they
had occurred as of June 30, 1994. The pro forma financial data do not purport to
be indicative of the Company's financial position that would actually have been
obtained had the Offering and the application of net proceeds therefrom, and
Related Transactions been completed as of the date presented, or to project the
Company's financial position at any future date. The unaudited pro forma
adjustments are based upon available information and upon certain assumptions
that the Company believes are reasonable. The unaudited pro forma financial data
and accompanying notes should be read in conjunction with the historical
financial information of the Company, including the notes thereto, included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS
FOR
HISTORICAL THE OFFERING PRO FORMA
JUNE 30, AND RELATED JUNE 30,
1994(1) TRANSACTIONS(2) 1994
--------- ------------ ---------
(IN MILLIONS)
<S> <C> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents............... $ 150.1 $1,104.7(a) $ 142.4
(1,051.2)(b)
(61.2)(c)
Accounts and notes receivable (less
allowance of $20.2).................... 709.3 709.3
Inventories............................. 656.5 656.5
Other................................... 246.0 (34.1)(a) 211.9
--------- ------------ ---------
Total current assets................ 1,761.9 (41.8) 1,720.1
--------- ------------ ---------
Property, plant and equipment........... 5,251.9 5.6(c) 5,257.5
Accumulated depreciation and
amortization........................... (1,970.0) (1,970.0)
--------- ------------ ---------
Property, plant and equipment --
net................................ 3,281.9 5.6 3,287.5
Timberlands............................. 88.9 88.9
Goodwill................................ 875.9 875.9
Other................................... 679.8 46.8(a) 659.8
(66.8)(c)
--------- ------------ ---------
Total assets............................ $6,688.4 $ (56.2) $6,632.2
--------- ------------ ---------
--------- ------------ ---------
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Current maturities of senior and
subordinated long-term debt............ $ 18.1 $ 4.0(a) $ 22.1
Current maturities of non-recourse debt
of consolidated affiliates............. 271.3 (249.5)(b) 21.8
Accounts payable........................ 288.8 288.8
Income taxes............................ 46.0 46.0
Accrued and other current liabilities... 313.9 (1.0)(b) 312.9
--------- ------------ ---------
Total current liabilities........... 938.1 (246.5) 691.6
--------- ------------ ---------
Senior long-term debt................... 2,277.6 1,113.4(a) 2,720.3
(670.7)(b)
Subordinated debt....................... 1,159.6 1,159.6
Non-recourse debt of consolidated
affiliates............................. 657.0 (129.1)(b) 527.9
Other long-term liabilities............. 315.6 315.6
Deferred taxes.......................... 382.9 (28.4)(c) 354.1
(.4)(b)
Redeemable preferred stock of
consolidated affiliate................. 42.3 (42.3)(c) --
Minority interest....................... 223.3 (.1)(c) 223.2
Commitments and contingencies
STOCKHOLDERS' EQUITY:
Series E preferred stock.............. 115.0 115.0
Common stock (90.4 shares
outstanding)......................... 853.1 (4.0)(c) 849.1
Accumulated deficit................... (72.8) (47.6)(c) (120.9)
(.5)(b)
Foreign currency translation
adjustment........................... (197.4) (197.4)
Unamortized expense of restricted
stock plan........................... (5.9) (5.9)
--------- ------------ ---------
Total stockholders' equity.......... 692.0 (52.1) 639.9
--------- ------------ ---------
Total liabilities and stockholders'
equity................................. $6,688.4 $ (56.2) $6,632.2
--------- ------------ ---------
--------- ------------ ---------
<FN>
- ------------------------------
(1) Basis of preparation:
The unaudited Pro Forma Condensed Consolidated Balance Sheet has been
prepared from and should be read in conjunction with the historical
consolidated financial statements of the Company included elsewhere in this
Prospectus.
</TABLE>
F-58
<PAGE>
<TABLE>
<S> <C>
(2) Pro forma adjustments relating to the Offering and Related Transactions:
(a) To record gross proceeds of $1.159 billion, less estimated deferred debt
issuance costs of $46.8 million, from (i) the issuance of $500 million
principal amount of 10 3/4% First Mortgage Notes due October 1, 2002; (ii)
the issuance of $200 million principal amount of 11 1/2% Senior Notes due
October 1, 2004; (iii) $400 million of borrowings under a term loan under
the Credit Agreement; and (iv) initial borrowings of $22.0 million under a
$450 million revolving credit facility under the Credit Agreement (these
initial borrowings are net of $34.1 million of cash escrow released due to
the repayment of the 1989 Credit Agreement and $7.7 million of Savannah
River's cash balance at June 30, 1994). The net proceeds from these
borrowings are assumed to have been used as described in Notes 2(b) and
2(c).
(b) To record (i) the assumed repayment of $670.7 million of indebtedness
under the 1989 Credit Agreement; (ii) the assumed repayment of $249.5
million of borrowings outstanding under the Savannah River Credit
Agreement; (iii) the assumed redemption of $129.1 million (net of
unamortized debt discount of $.9 million) of the Savannah River Notes;
(iv) an extraordinary loss of $.5 million, net of income tax benefit
of $.4 million, related to the write-off of $.9 million of unamortized
debt discount; and (v) the assumed payment of $1.0 million of accrued
interest.
(c) To record (i) the purchase of the 72,346 outstanding shares of common
stock of Savannah River not owned by the Company for $2.2 million;
(ii) the redemption of the 425,243 outstanding shares of the Savannah
River Preferred not owned by the Company, along with accrued and
unpaid dividends thereunder for $45.8 million; (iii) the elimination
of the $.1 million minority interest liability pertaining to Savannah
River; (iv) an extraordinary loss of $47.6 million, net of income tax
benefit of $28.4 million, relating to the write-off of $66.8 million
of unamortized deferred debt issuance costs pertaining to the debt
being repaid in Note (b) and $9.2 million of other costs associated
with the redemption of the Savannah River Notes; and (v) a charge to
common stock of $4.0 million associated with the redemption of the
Savannah River Preferred not owned by the Company.
</TABLE>
F-59
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS, OTHER THAN THOSE CONTAINED OR INCORPORATED BY REFERENCE IN THIS
PROSPECTUS, IN CONNECTION WITH THE OFFER CONTAINED IN THIS PROSPECTUS, AND, IF
GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE OF THIS PROSPECTUS. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER OR SOLICITATION BY ANYONE IN ANY STATE IN WHICH SUCH
OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER
OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT IS UNLAWFUL TO
MAKE SUCH OFFER OR SOLICITATION.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Prospectus Summary............................. 3
Risk Factors................................... 13
Company Profile................................ 21
Use of Proceeds................................ 22
Capitalization................................. 23
Selected Consolidated Financial Data........... 25
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 26
Business....................................... 42
Properties..................................... 52
Management..................................... 55
Security Ownership By Certain Beneficial Owners
and Management................................ 59
Credit Agreement............................... 64
Description of Notes........................... 68
The Collateral Under the First Mortgage Note
Indenture..................................... 98
Underwriting................................... 103
Experts........................................ 104
Legal Matters.................................. 104
Available Information.......................... 104
Annex A -- Summary Appraisal................... A-1
Index to Financial Statements.................. F-1
</TABLE>
$700,000,000
[LOGO] STONE
CONTAINER
$500,000,000
10 3/4% FIRST MORTGAGE NOTES
DUE 2002
$200,000,000
11 1/2% SENIOR NOTES DUE 2004
SALOMON BROTHERS INC
BT SECURITIES CORPORATION
MORGAN STANLEY & CO.
INCORPORATED
KIDDER, PEABODY & CO. INCORPORATED
BEAR, STEARNS & CO. INC.
PROSPECTUS
DATED SEPTEMBER 29, 1994
