SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Quarterly period ended June 30, 1994
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from ______________ to _____________.
Commission file number 1-3439
STONE CONTAINER CORPORATION
________________________________________________________________
(Exact name of registrant as specified in its charter)
Delaware 36-2041256
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
150 North Michigan Avenue, Chicago, Illinois 60601
(Address of principal executive offices) (Zip Code)
Registrant's telephone number: 312-346-6600
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the Registrant was required to file such reports), and (2) has
been subject to such filing requirement for the past 90 days.
Yes X No
Number of common shares outstanding as of July 29, 1994: 90,392,222
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<TABLE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
STONE CONTAINER CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<CAPTION>
June 30, December 31,
(in millions) 1994* 1993
____________________________________________________ _______________________
<S> <C> <C>
Assets
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
The accompanying notes are an integral part of these statements.
</TABLE>
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<TABLE>
STONE CONTAINER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
AND RETAINED EARNINGS (ACCUMULATED DEFICIT)
<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
The accompanying notes are an integral part of these statements.
</TABLE>
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<TABLE>
STONE CONTAINER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
Three months ended Six months ended
June 30, June 30,
(in millions) 1994 1993 1994 1993
<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
The accompanying notes are an integral part of these statements.
</TABLE>
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<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") latest Annual Report on Form
10-K. In the opinion of the Company, the accompanying unaudited
consolidated financial statements contain all adjustments necessary to
fairly present the Company's financial position as of 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 $59 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 ("Stone
Savannah") into a wholly owned subsidiary of the Company and, as
described below, repay or acquire Stone Savannah'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 Stone Savannah merger, the
Company would (i) repay all of the indebtedness outstanding under and
terminate Stone Savannah's bank credit agreement ($249.5 million as of
June 30, 1994), (ii) call for redemption the $130 million principal
amount of Stone Savannah'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 Stone Savannah 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 Stone Savannah 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.
Assuming that the Offering and Related Transactions are completed as
planned, the Company would 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. 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).
<PAGE>
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 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:
Periods EBITDA
For the six months ended June 30, 1994 $ 55 million
For the nine months ended September 30, 1994 $111 million
For the twelve months ended December 31, 1994 $180 million
For the twelve months ended March 31, 1995 $226 million
The required level of EBITDA is scheduled to increase for each
rolling four quarter period thereafter until December 31, 1996,
when the EBITDA for the twelve months ended December 31, 1996 is
required to be $822 million.
(iv) Reset to zero as of January 1, 1994 the dividend pool
under the 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 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 Kraft
Corporation ("Seminole") and Stone Savannah, with
cross-acceleration provisions.
(vi) Replaced the current prohibition of investments in
Stone Venepal Consolidated Pulp Inc. with restrictions
substantially similar to the restrictions applicable to
the Company's subsidiaries, Stone Savannah 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, Seminole is currently seeking waivers
and amendments with respect to such covenants from its bank lenders 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
Stone Savannah, the Company is obligated to purchase and Stone Savannah
is obligated to sell all of Stone Savannah'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 Stone Savannah 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, Stone Savannah 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 Stone Savannah will require another waiver from its bank
lenders through at least December 31, 1994. Furthermore, Stone
Savannah 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 Stone
Savannah, 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 the Related Transactions, if completed, would repay
the Stone Savannah 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
Stone Savannah'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 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 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. 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
$450 million of revolving credit commitments.
<PAGE>
NOTE 8: Inventories
Inventories are summarized as follows:
June 30, December 31,
(in millions) 1994 1993
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
========== ============
*Includes linerboard, corrugating medium, kraft paper, newsprint,
market pulp and groundwood paper.
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:
June 30, December 31,
1994 1993
LIFO.................................. 43% 44%
FIFO.................................. 8% 6%
Average Cost.......................... 49% 50%
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:
June 30, December 31,
(in millions) 1994 1993
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
As described in Note 4, the Offering and the Related Transactions,
if completed, would repay the Stone Savannah indebtedness, including
borrowings outstanding under its credit agreement, which would then be
terminated.
<PAGE>
The 1989 Credit Agreement limits in certain specific circumstances
any further investments by the Company in Stone-Consolidated, Seminole
and Stone Savannah. Stone Savannah has substantial indebtedness which
had been incurred in connection with project financing and is
significantly leveraged. As of June 30, 1994, Stone Savannah 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, Stone Savannah received a waiver of its fixed-charges-
coverage covenant requirement as of June 30, 1994. Management has
prepared projections that indicate that Stone Savannah will not be in
compliance with this covenant as of September 30, 1994. Consequently,
approximately $215.8 million and $237.9 million of Stone Savannah 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. Stone Savannah has received
from its lenders waivers of the appropriate financial covenants through
September 29, 1994. Stone Savannah 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 Stone Savannah's credit agreement and other indebtedness and, if
any such indebtedness were 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.<PAGE>
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.:
Three months ended Six months ended
June 30 June 30,
(in millions) 1994 1993 1994 1993
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)
June 30, December 31,
(in millions) 1994 1993
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
*Includes $890.8 and $857.4 due from the Company at June 30, 1994 and
December 31, 1993, respectively.
<PAGE>
NOTE 10: Segment Information
Financial information by business segment is summarized as follows:
Three months ended
June 30, 1994 June 30, 1993
Income (loss) Income (loss)
before income before income
taxes and taxes and
Total minority Total minority
(in millions) sales interest sales interest(a)
Paperboard and paper
packaging........... $ 992.4 $ 52.6 $ 960.2 $ 51.5
White paper and pulp.. 275.8 (7.9) 238.7 (42.9)
Other................. 90.7 14.7 80.5 5.9
Intersegment.......... (4.6) -- (11.8) --
1,354.3 59.4 1,267.6 14.5
Interest expense...... (110.7) (101.8)
Foreign currency
transaction
adjustments......... (.7) (3.6)
General corporate and
miscellaneous (net). (18.7) (17.4)
Total................. $1,354.3 $ (70.7) $1,267.6 $ (108.3)
Six months ended
June 30, 1994 June 30, 1993
Income (loss)
before income
taxes, minority Income (loss)
interest, before income
extraordinary taxes, minority
loss and interest and
cumulative cumulative
effect of an effect of an
Total accounting Total accounting
(in millions) sales change sales change(a)
Paperboard and paper
packaging........... $1,946.4 $ 105.1 $1,933.2 $ 113.9
White paper and pulp.. 536.5 (46.2) 492.7 (86.7)
Other................. 179.3 26.4 173.2 19.5
Intersegment.......... (17.1) -- (25.2) --
2,645.1 85.3 2,573.9 46.7
Interest expense...... (224.3) (204.1)
Foreign currency
transaction
adjustments......... (15.9) (5.1)
General corporate and
miscellaneous (net). (36.9) (34.8)
Total................. $2,645.1 $ (191.8) $2,573.9 $ (197.3)
(a) Adjusted to conform to current financial statement presentation.
Financial information by geographic region is summarized as follows:
Three months ended
June 30, 1994 June 30, 1993
Income (loss) Income (loss)
before income before income
taxes and taxes and
Total minority Total minority
(in millions) sales interest sales interest(a)
United States......... $ 985.7 $ 61.0 $ 925.7 $ 24.7
Canada................ 247.5 (2.6) 192.1 (9.4)
Europe................ 141.0 1.0 160.8 (.8)
1,374.2 59.4 1,278.6 14.5
Interest expense...... (110.7) (101.8)
Foreign currency
transaction
adjustments......... (.7) (3.6)
General corporate and
miscellaneous (net). (18.7) (17.4)
Inter-area
eliminations........ (19.9) -- (11.0) --
Total................. $1,354.3 $ (70.7) $1,267.6 $ (108.3)
Six months ended
June 30, 1994 June 30, 1993
Income (loss)
before income
taxes, minority Income (loss)
interest, before income
extraordinary taxes, minority
loss and interest and
cumulative cumulative
effect of an effect of an
Total accounting Total accounting
(in millions) sales change sales change(a)
United States......... $1,937.5 $ 100.4 $1,850.5 $ 70.0
Canada................ 454.1 (17.3) 383.0 (26.3)
Europe................ 282.3 2.2 359.7 3.0
2,673.9 85.3 2,593.2 46.7
Interest expense...... (224.3) (204.1)
Foreign currency
transaction
adjustments......... (15.9) (5.1)
General corporate and
miscellaneous (net). (36.9) (34.8)
Inter-area
eliminations........ (28.8) -- (19.3) --
Total................. $2,645.1 $ (191.8) $2,573.9 $ (197.3)
(a) Adjusted to conform to current financial statement presentation.
NOTE 11: Additional Cash Flow Statement Information
The Company's non-cash investing and financing activities and cash payments
for interest and income taxes were as follows:
Three months ended Six months ended
June 30, June 30,
(in millions) 1994 1993 1994 1993
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
======= ====== ======= =======
<PAGE>
STONE CONTAINER CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Three months ended June 30,
1994 1993
Percent of Percent of
(dollars in millions) Amount net sales Amount net sales
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 operating (income)
expense--net............ (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)
<PAGE>
Results of Operations (continued)
Six months ended June 30,
1994 1993
Percent of Percent of
(dollars in millions) Amount net sales Amount net sales
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 operating (income)
expense--net............ (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)
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
(see Note 5) 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 percent and 0.7
percent, 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 percent
and 3.9 percent, 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.
<PAGE>
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 percent of the shipments by its previously owned non-
consolidated affiliate Empaques de Carton Titan, S.A. ("Titan"). The
Company sold its 49 percent equity interest in Titan in December 1993.
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 percent and 954 million
square feet, or 3.8 percent, 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.
Production of containerboard and kraft paper for the three and six
month periods ended June 30, 1994, including 100 percent of the
production at Seminole Kraft Corporation ("Seminole") and Stone
Savannah River Pulp & Paper Corporation ("Stone Savannah"), 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 percent and 198 thousand tons, or 8.3 percent, respectively
compared to the prior year periods.
Operating income for the paperboard and paper packaging segment
increased 2.1 percent for the three months ended June 30, 1994 and
decreased 7.7 percent 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
percent and 17 percent, 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 percent and 8.9 percent,
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 percent
of the production at Stone-Consolidated Corporation, the Company's 75
percent owned Canadian subsidiary, and 25 percent of the production at
the Company's affiliated market pulp 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 percent and 46.7
percent, 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.
Financial Condition and Liquidity
The Company's working capital ratio was 1.9 to 1 at June 30, 1994 and
December 31, 1993. The Company's long-term debt to total
capitalization ratio was 75.3 percent at June 30, 1994 and 75.9 percent
at December 31, 1993. Capitalization, for purposes of this ratio,
includes long-term debt (which includes debt of certain consolidated
affiliates which is non-recourse to the Company), deferred income
taxes, redeemable preferred stock, minority interest and stockholders'
equity.
As described in Note 4, the Offering and the Related Transactions,
if completed, would fully repay the bank credit agreements ("1989
Credit Agreement"), which would then be terminated. The Company and
Stone Container (Canada) Inc. ("Stone-Canada"), a wholly-owned
subsidiary, currently have indebtedness under the 1989 Credit Agreement
consisting of (i) two term-loan facilities with outstanding borrowings
in the aggregate of $461.2 million as of June 30, 1994, (ii) an
additional term loan (the "Additional Term Loan") with outstanding
borrowings of $189.3 million at June 30, 1994 and (iii) two revolving
credit facilities with aggregate commitments of $166 million and total
outstanding borrowings thereunder of $20.2 million at June 30, 1994.
The Company is the borrower under one of the term loans, the Additional
Term Loan and one of the revolving credit facilities (collectively, the
"U.S. Credit Agreement") and Stone-Canada is the borrower under the
other term loan and revolving credit facility. At August 12, 1994, the
Company had combined borrowing availability under its revolving credit
facilities of $85 million. The term loans (other than the Additional
Term Loan) and the revolving credit facilities had weighted average
interest rates for the six months ended June 30, 1994 of 9.3 percent
and 6.7 percent, respectively. The weighted average interest rate on
the Additional Term Loan was 6.8 percent for the six months ended June
30, 1994. The weighted average rates as reflected above do not include
the effects of the amortization of deferred debt issuance costs.
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 ("Stone-Consolidated"), and
cross-acceleration provisions relating to the non-recourse debt of
certain consolidated affiliates, including Seminole and Stone Savannah.
Additionally, the 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 1989 Credit Agreement limits in certain specific circumstances
any further investments by the Company in Stone-Consolidated, Seminole
and Stone Savannah. Stone Savannah has substantial indebtedness which
had been incurred in connection with project financing and is
significantly leveraged. As of June 30, 1994, Stone Savannah 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, Stone Savannah received a waiver of its fixed-charges-
coverage covenant requirement as of June 30, 1994. Management has
prepared projections that indicate that Stone Savannah will not be in
compliance with this covenant as of September 30, 1994. Consequently,
approximately $215.8 million and $237.9 million of Stone Savannah 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. Stone Savannah has received
from its lenders waivers of the appropriate financial covenants through
September 29, 1994. Stone Savannah 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 Stone Savannah's credit agreement and other indebtedness and, if
any such indebtedness were 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.
Pursuant to an output purchase agreement entered into in 1988 with
Stone Savannah, the Company is obligated to purchase and Stone Savannah
is obligated to sell all of Stone Savannah'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 Stone
Savannah 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, Stone Savannah 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 Stone Savannah will require another waiver from its bank lenders
through at least December 31, 1994. Furthermore, Stone Savannah 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 Stone
Savannah, 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
Stone Savannah 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
Stone Savannah's lenders if the Offering and Related Transactions, as
discussed in Note 4, are not completed as of September 29, 1994.
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
container ("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, Seminole is currently seeking waivers
and amendments with respect to such covenants from its bank lenders 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 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.
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 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. See also Outlook section.
For a description of the most recent amendment to the Company's 1989
Credit Agreement which was enacted in February of 1994 and became
effective upon the completion of the February 1994 Offerings, refer to
Note 7: Credit Agreement Amendments/Liquidity Matters.
The financial resources of certain of the Company's consolidated
affiliates are not available to the Company due to restrictive
financial covenants contained in debt instruments of such affiliates
and are also limited in availability by tax and other considerations.
Such financial covenants have not been satisfied to date and are not
likely to be satisfied in 1994. There can be no assurance that such
financial covenants will be met in the future.
Under the Company's two existing accounts receivable securitization
programs, Stone Financial Corporation ("Stone Fin") purchases (on an
ongoing basis) certain of the accounts receivable of Stone Delaware,
Inc., Stone Corrugated, Inc., and Stone Southwest, Inc. while Stone Fin
II Receivables Corporation ("Stone Fin II") purchases (on a ongoing
basis) certain of the accounts receivable of Stone Consolidated
Newsprint, Inc., Stone Packaging Corporation, Stone Southwest, Inc. and
Stone Bag Corporation all of which are wholly-owned subsidiaries by the
Company. Such purchased accounts receivable are solely the assets of
either Stone Fin or Stone Fin II each of which are a wholly-owned but
separate corporate entity of the Company, with its own separate
creditors. In the event of a liquidation of either Stone Fin or Stone
Fin II, such creditors would be entitled to satisfy their claims
against these receivables prior to any distribution to the Company.
The Company, through its accounts receivable financing subsidiary, is
currently planning a transaction to refinance its two existing
receivables programs. The proposed refinancing transaction is
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 the financial subsidiary to provide funding for
such receivables financing. There can be no assurance such financing
transaction will be consummated.
The Company filed on July 27, 1994, as amended on August 4, 1994, a
registration statement with the Securities and Exchange Commission
registering $700 million principal amount of debt securities.
Additionally, the Company is currently negotiating a new bank credit
facility. See Outlook section for further details.
Operating activities:
Net cash used in operating activities was $98.3 million for the six
months ended June 30, 1994 compared with $2.0 million for the
comparable period of 1993. This decrease in cash flows 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 half of 1994 compared with
the prior year period.
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 1989 Credit Agreement (aggregating approximately $652
million), 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 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.
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 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.
Investing activities:
Capital expenditures for the six months ended June 30, 1994 totalled
$66.2 million.
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. 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'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. However, the Company increased linerboard
prices by $25 per ton in the fourth quarter of 1993 and $30 per ton in
the first quarter of 1994 and concurrently increased corrugating medium
prices by $25 per ton and $40 per ton, respectively. In addition, in
the first half of 1994, the Company implemented corrugated container
price increases. The Company implemented a further $40 per ton
increase in the price of linerboard and a $50 per ton increase in
corrugating medium effective July 1, 1994. The Company announced to
its customers and began implementing on July 25, 1994, a 9.5 percent
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 percent 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 a further price increase of $40
per ton for linerboard and $50 per ton for corrugating medium. While
there can be no assurance that announced 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 are improving which could allow for further price
restorations 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 July 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 July 1,
1994.
The Company also has implemented price increases for kraft paper and
kraft paper converted products. The Company increased prices for
retail bags and sacks by 8 percent on each of April 1, May 1 and July
1, 1994 and announced a further increase of 10 percent effective
September 1, 1994. In addition, the Company has announced a $50 per
ton price increase for kraft paper effective
August 1, 1994.
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 had
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 $190 per
metric tonne since November 1993. According to industry publications,
the reported transaction price for southern bleached hardwood kraft 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. The Company has begun
to implement a further market pulp price increase of $70 per metric
tonne (approximately 12.2 percent) as of July 1, 1994. 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 has announced price increases 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 $455 per metric tonne as of June 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)
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 price increase for this
product line has been announced for the third 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 core products, there can be no assurance that the above price
increases will be achieved or that prices can be maintained at the
present levels.
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. 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 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 $125 per ton as of June 30, 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.
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 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. 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 and/or refinance 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
$450 million of revolving credit commitments.
The Company is continuing to pursue its financial strategy of
enhancing its liquidity and improving its financial flexibility. As
previously mentioned, the Company originally filed on July 27, 1994 and
subsequently amended on August 4, 1994, a registration statement with
the Securities and Exchange Commission 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 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 $59 million will be outstanding at closing), (ii) repay
all of the outstanding indebtedness under and terminate its 1989 Credit
Agreement and (iii) merge the Company's 93 percent owned subsidiary
Stone Savannah into a wholly owned subsidiary of the Company and, as
described below, repay or acquire Stone Savannah'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 Stone Savannah merger, the
Company would (i) repay all of the indebtedness outstanding under and
terminate Stone Savannah's bank credit agreement ($249.5 million as of
June 30, 1994), (ii) call for redemption the $130 million principal
amount of Stone Savannah'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 Stone Savannah 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 Stone Savannah 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.
Assuming that the Offering and Related Transactions are completed as
planned, the Company would 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. 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).
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On April 20, 1994, Carolina Power & Light ("CP&L") commenced
proceedings against the Company before the Federal Energy Regulatory
Commission ("FERC") (the "FERC Proceeding") and in the United States
District Court for the Eastern District of North Carolina (the "Federal
Court Action"). Both proceedings relate to the Company's electric
cogeneration facility located at its Florence, South Carolina plant
(the "Facility") and the Company's Electric Power Purchase Agreement
(the "Agreement") with CP&L. Prior to the filing of the proceedings,
the Company and CP&L had been in discussions relating to a transaction
involving the Facility and the Agreement.
In the FERC Proceeding, CP&L alleges that the Facility lost its
qualifying facility ("QF") certification under the Public Utility
Regulatory Policy Act of 1978 on August 13, 1991, when the Agreement
pursuant to which CP&L purchases electricity generated by the Facility
was amended to reflect the Company's election under the Agreement to
switch to a "buy-all/sell-all mode of operation." As a result, CP&L
alleges the Company became a "public utility" 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 or
will respond. 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"
would become 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 become 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 initial 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, the Company has postponed a previously
disclosed possible transaction related to the Facility and the
Agreement.
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 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.
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.
Item 2. Changes in Securities
(b) Due to restrictive covenants in certain instruments evidencing
indebtedness of the Company, the Company's Board of Directors did not
declare the scheduled August 15, 1994 quarterly dividend on the
Company's $1.75 Series E Cumulative Convertible Exchangeable Preferred
Stock (the "Series E Cumulative Preferred Stock"). The Company had
failed to pay dividends on the Series E Cumulative Preferred Stock with
respect to three prior quarterly dividend periods, however, the accrued
and unpaid dividends with respect to such prior three quarters were
paid in full on May 16, 1994. In the event the Company does not pay a
dividend on the Series E Cumulative Preferred Stock for six quarters
beginning August 15, 1994, whether or not consecutive, 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 thereon have been declared and paid or set aside for payment.
Item 4. Submission of Matters to a Vote of Security-Holders
(a) The Company held its Annual Meeting of Stockholders on May 10,
1994.
(c) The following matter was voted upon at the Annual Meeting of
Stockholders:
The election of the nominees for Directors who will serve for a
term to expire at the next succeeding Annual Meeting of
Stockholders was voted on by the stockholders. The nominees, all
of whom were elected, are set forth below. The Inspectors of
Election certified the following vote tabulations:
FOR WITHHELD NON-VOTES
Richard A. Giesen 70,229,987 448,437 0
James J. Glasser 70,231,692 446,732 0
George Kennedy 70,188,565 489,859 0
Howard C. Miller, Jr. 70,193,792 484,632 0
John D. Nichols 70,228,716 449,708 0
Jerry K. Pearlman 70,220,013 458,411 0
Richard J. Raskin 70,225,052 453,372 0
Alan Stone 70,216,662 461,762 0
Avery J. Stone 70,221,994 456,430 0
Ira N. Stone 70,220,582 457,842 0
James H. Stone 70,225,708 452,716 0
Roger W. Stone 70,224,156 454,268 0
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
1. A Report on Form 8-K dated April 19, 1994 was filed
reporting under Item 5--Other Events, certain
environmental capital expenditures and expenses which
could be required if and when the "cluster rules" are
finalized by the U.S. Environmental Protection Agency.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
STONE CONTAINER CORPORATION
By: Thomas P. Cutilletta
Thomas P. Cutilletta
Senior Vice President and Corporate Controller
(Principal Accounting Officer)
Date: August 15, 1994
