STONE CONTAINER CORP, 10-K, 1997-03-24

STONE CONTAINER CORP
10-K, 1997-03-24
PAPERBOARD MILLS

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<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

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FORM 10-K

(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 1996.

( ) 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)

[LOGO]

<TABLE>
<S> <C>
DELAWARE 36-2041256
- -------------------------------------------------- --------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
(State or other jurisdiction of incorporation (I.R.S. employer identification no.)
or organization)
150 NORTH MICHIGAN AVENUE, CHICAGO, ILLINOIS 60601
- --------------------------------------------------------------------------------------------------------
(Address of principal executive offices) (Zip code)
REGISTRANT'S TELEPHONE NUMBER: 312 346-6600
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
</TABLE>

<TABLE>
<S> <C>
NAME OF EACH EXCHANGE ON WHICH
TITLE OF EACH CLASS REGISTERED
- -------------------------------------------- ---------------------------------------
Common Stock New York Stock Exchange
Rights to purchase Series D Preferred Stock New York Stock Exchange
$1.75 Series E Cumulative Convertible
Exchangeable Preferred Stock New York Stock Exchange
10 3/4% Senior Subordinated Notes due June
15, 1997 New York Stock Exchange
12 5/8% Senior Notes due July 15, 1998 New York Stock Exchange
11 7/8% Senior Notes due December 1, 1998 New York Stock Exchange
11% Senior Subordinated Notes due August 15,
1999 New York Stock Exchange
9 7/8% Senior Notes due February 1, 2001 New York Stock Exchange
10 3/4% Senior Subordinated Debentures due
April 1, 2002 New York Stock Exchange
10 3/4% First Mortgage Notes due October 1,
2002 New York Stock Exchange
11 1/2% Senior Notes due October 1, 2004 New York Stock Exchange
6 3/4% Convertible Subordinated Debentures
due February 15, 2007 New York Stock Exchange
Rating Adjustable Senior Notes due August 1,
2016 New York Stock Exchange
</TABLE>

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE.

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, and (2) has been
subject to such filing requirements for the past 90 days.
Yes _X No ___

Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of the Registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K. ( )

The aggregate market value as of March 20, 1997 of the voting common
stock held by non-affiliates of the Registrant was approximately
$1,094,000,000.

The number of shares of common stock outstanding at March 20, 1997 was
99,319,186.

The Proxy Statement, to be filed on or before April 30, 1997, for the
Annual Meeting of Stockholders scheduled May 13, 1997 is partially
incorporated by reference into Part III, Items 10, 11, 12 and 13; and
Part IV, Item 14, excluding the sections entitled "Compensation
Committee Report on Executive Compensation" and "Performance Graph."

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<PAGE>
PART I

ITEM 1. BUSINESS

(a) GENERAL DEVELOPMENT OF BUSINESS

The information relating to the general development of the Registrant's
business for the year ended December 31, 1996, is incorporated herein by
reference to Item 7--Management's Discussion and Analysis of Financial Condition
and Results of Operations ("MD&A") included in this report, under the section
entitled "Financial Condition and Liquidity," pages 14 -18, and to the Financial
Statements, included in this report, under Notes to the Consolidated Financial
Statements, "Note 3--Joint Ventures, Acquisitions and Investments," pages 34-35,
"Note 16--Related Party Transactions," page 49, and "Note 19--Segment and
Geographic Information," pages 51-53.

Except where the context clearly indicates otherwise, the terms "Registrant"
and "Company" as hereinafter used refer to Stone Container Corporation together
with its consolidated subsidiaries.

(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS

Effective with the November 1, 1995 amalgamation of Stone-Consolidated
Corporation with Rainy River Forest Products Inc. discussed in Note 4 of the
Consolidated Financial Statements included in this report, the Registrant began
reporting Stone-Consolidated as a non-consolidated affiliate in accordance with
the equity method of accounting. As a result of this de-consolidation of
Stone-Consolidated and the integrated nature of the Registrant's principal
consolidated operations, the Registrant now operates in a single business--the
production and sale of commodity pulp, paper and packaging products.
Accordingly, effective in 1996, business segment reporting is no longer
applicable. Financial information relating to the Registrant's historical
industry segments, for the year ended December 31, 1995 is incorporated herein
by reference to the Financial Statements included in this report, under Notes to
the Consolidated Financial Statements, "Note 19--Segment and Geographic
Information," pages 51-53.

Descriptive information relating to the Registrant's principal products,
markets and industry ranking is outlined in the table entitled "Profile" on page
2 of this report and is also incorporated herein by reference to the MD&A,
included in this report, under the sections entitled "Results of Operations,"
pages 12-14, "Investing Activities," page 17, and "Environmental Issues," pages
17-18, and to the Financial Statements, included in this report, under Notes to
the Consolidated Financial Statements, "Note 3--Joint Ventures, Acquisitions and
Investments," pages 34-35, and "Note 19--Segment and Geographic Information,"
pages 51-53.

1
<PAGE>
PROFILE

<TABLE>
<CAPTION>
KEY PRODUCTS Markets Industry Position
<S> <C> <C>
CONTAINERBOARD AND A broad range of manufacturers of consumable and Industry leader
CORRUGATED CONTAINERS durable goods and other manufacturers of
corrugated containers.

KRAFT PAPER AND BAGS AND Industrial and consumer bags sold to the food, Industry leader
SACKS agricultural, chemical and cement industries,
among others. Retail bags and sacks sold to
supermarket chains and other retailers of
consumable products.

BOXBOARD, FOLDING Manufacturers of consumable goods, especially A major position in Europe (FCP Group); a
CARTONS AND OTHER food, beverage and tobacco products, and other box nominal position in North America
manufacturers.

PUBLICATION PAPERS Newspaper publishers, commercial printers, and Industry leader, through its
producers of advertising materials, magazines, non-consolidated affiliate,
directories and computer papers. Stone-Consolidated Corporation

MARKET PULP Manufacturers of paper products, including fine A major position
papers, photographic papers, tissue and newsprint.
</TABLE>

1996 PRODUCTION AND SHIPMENT STATISTICS

<TABLE>
<S> <C>
MILL PRODUCTION* (thousands of short tons)
Containerboard................................................................................ 4,591
Kraft Paper................................................................................... 439
Market Pulp................................................................................... 1,009
Publication Papers............................................................................ 1,269
Boxboard and Other............................................................................ 88
---------
Total....................................................................................... 7,396
---------
---------

CONTAINERBOARD AND KRAFT PAPER CONVERTED* (thousands of short tons)............................. 4,326

WASTEPAPER RECOVERED AND RECYCLED (thousands of short tons)..................................... 2,992

CONVERTED PRODUCT SHIPMENTS*
Corrugated Containers (billions of square feet)............................................... 53.1
Paper Bags and Sacks (thousands of short tons)................................................ 538
Folding Cartons (thousands of short tons)..................................................... 88
Flexible Packaging (thousands of short tons).................................................. 16

NUMBER OF MANUFACTURING FACILITIES (including certain affiliates)
Paperboard, Paper and Pulp Mills.............................................................. 31
Converting Plants............................................................................. 164
Sawmills...................................................................................... 7
Packaging Machinery Plants.................................................................... 2
Preprint Plants............................................................................... 2
---------
Total....................................................................................... 206
---------
---------
</TABLE>

*Includes certain affiliates on an equity ownership basis.

2
<PAGE>
The major markets in which the Company sells its principal products are
highly competitive. Its products compete with similar products manufactured by
others and, in some instances, with products manufactured from other materials.
Areas of competition include price, innovation, quality and service. The
Company's business is affected by cyclical industry conditions and economic
factors such as industry capacity, growth in the economy, interest rates,
unemployment levels and fluctuations in foreign currency exchange rates.

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 has
caused, and will likely continue to cause, higher wood fiber costs in some of
the regions in which the Company procures wood. In addition, the increase in
demand for products manufactured, in whole or in part, from recycled fiber has
from time to time caused a tightness in the supply of recycled fiber and at
those times a significant increase in the cost of such fiber used in the
manufacture of recycled containerboard and related products. The Company's paper
and paper packaging products use a large volume of recycled fiber. 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.

At December 31, 1996, the Company owned approximately 2 thousand and 137
thousand acres of private fee timberland in the United States and Canada,
respectively.

The Company's business is not dependent upon a single customer or upon a
small number of major customers. The loss of any one customer would not have a
material adverse effect on the Company.

Backlogs are not a significant factor in the industry in which the Company
operates; most orders placed with the Company are for delivery within 60 days or
less.

The Company expenses research and development expenditures as incurred.
Research and development costs were $9 million and $11 million for 1996 and
1995, respectively.

The Company owns patents, licenses, trademarks and tradenames on products.
The loss of any patent, license, trademark or tradename would not have a
material adverse effect on the Company's operations.

As of December 31, 1996, the Registrant had approximately 24,200 employees,
of whom approximately 19,700 were employees of U.S. operations and the remainder
were employees of foreign operations. Of those in the United States,
approximately 12,800 are union employees.

(d) FINANCIAL INFORMATION ABOUT FOREIGN AND
DOMESTIC OPERATIONS AND EXPORT SALES

Financial information relating to the Registrant's foreign and domestic
operations and export sales for the year ended December 31, 1996, is
incorporated herein by reference to the Financial Statements, included in this
report, under Notes to the Consolidated Financial Statements, "Note 19--Segment
and Geographic Information," pages 51-53. The Company's results are affected by
economic conditions in certain foreign countries and by fluctuations in foreign
exchange rates.

ITEM 2. PROPERTIES

The Registrant, including its subsidiaries and affiliates, maintains
manufacturing facilities and sales offices throughout North America, Europe,
Central and South America, Australia and Asia. A listing of such worldwide
facilities as of December 31, 1996 is provided on pages 5-6 of this report.

3
<PAGE>
The approximate annual production capacity of the Company's mills is
summarized in the following table:

<TABLE>
<CAPTION>
(IN THOUSANDS OF SHORT TONS) DECEMBER 31, 1996 1995
- -------------------------------------------------- ------ ------
<S> <C> <C>
United States (1)................................. 6,041 5,611
Canada (2)(3)..................................... 2,174 2,164
Europe (3)........................................ 643 505
------ ------
8,858 8,280
------ ------
------ ------
</TABLE>

- ---------

(1) Includes 50 percent of the Florida Coast mill for 1996.

(2) Includes 45 percent of the Celgar mill.

(3) Includes 46.6 percent of Stone-Consolidated Corporation.

All mills and converting facilities are owned, or partially owned through
investments in other companies, by the Registrant, except for 51 converting
plants in the United States, which are leased.

The Registrant owns certain properties that have been mortgaged or otherwise
encumbered. These properties include 12 paper mills and 76 corrugated container
plants, including those subject to a leasehold mortgage.

The Registrant's properties and facilities are properly equipped with
machinery suitable for their use. Such facilities and related equipment are well
maintained and adequate for the Registrant's current operations.

Additional information relating to the Registrant's properties for the year
ended December 31, 1996 is incorporated herein by reference to the Financial
Statements, included in this report, under the Notes to the Consolidated
Financial Statements, "Note 3--Joint Ventures, Acquisitions and Investments"
pages 34-35, "Note 4--Subsidiary Issuance of Stock," page 35, "Note
11--Long-term Debt," pages 42-44, and "Note 13--Long-term Leases," page 46.

4
<PAGE>
WORLDWIDE FACILITIES

- ----------------------------------------------------------------

UNITED STATES

ALABAMA
Birmingham (corrugated container)

ARIZONA
Eagar (forest products)
Glendale (corrugated container)
*Phoenix (bag)
Snowflake (paperboard/paper/pulp)
Snowflake (paperboard/paper/pulp)
The Apache Railway
Company

ARKANSAS
Jacksonville (bag)
(Little Rock)
Little Rock (corrugated container)
Rogers (corrugated container)

CALIFORNIA
City of Industry (corrugated container)
(Los Angeles)
Fullerton (corrugated container)
Los Angeles (bag)
Salinas (corrugated container)
San Jose (corrugated container)
Santa Fe Springs (corrugated container, 2)

COLORADO
Denver (corrugated container)

CONNECTICUT
Portland (corrugated container)
Torrington (corrugated container)
Uncasville (paperboard/paper/pulp)

FLORIDA
Cantonment (bag)
(Pensacola)
Jacksonville (paperboard/paper/pulp); (corrugated container)
Panama City (paperboard/paper/pulp)
*Port St. Joe (paperboard/paper/pulp)
*Yulee (bag)
Orlando (corrugated container)
Packaging Systems
Jacksonville (corrugated container)
Preprint

GEORGIA
Atlanta (corrugated container, 3)
Port Wentworth (paperboard/paper/pulp)
Atlanta (paperboard/paper/pulp)
Technology and
Engineering Center

ILLINOIS
*Alsip (bag)
Bedford Park (corrugated container)
(Chicago)
Bloomington (corrugated container)
Cameo (corrugated container)
(Chicago)
Danville (corrugated container)
*Herrin (corrugated container)
Joliet (corrugated container)
Naperville (corrugated container)
(Chicago)
North Chicago (corrugated container)
*Plainfield (bag)
Quincy (bag)
*Zion (corrugated container)
Burr Ridge (paperboard/paper/pulp)
Technology and Engineering
Center
Westmont (corrugated container)
Marketing and Technical
Center

INDIANA
Columbus (corrugated container)
Fowler (bag)
Mishawaka (corrugated container)
South Bend (corrugated container)

IOWA
Des Moines (corrugated container); (bag)
Keokuk (corrugated container)
Sioux City (corrugated container)

KANSAS
Kansas City (corrugated container)

KENTUCKY
Louisville (corrugated container); (bag)

LOUISIANA
Arcadia (bag)
Hodge (paperboard/paper/pulp)
*Hodge (bag)
New Orleans (corrugated container)

MASSACHUSETTS
Mansfield (corrugated container)
Westfield (corrugated container)

MICHIGAN
*Detroit (corrugated container)
Grand Rapids (bag)
Ontonagon (paperboard/paper/pulp)
*Melvindale (corrugated container)
(Detroit)

MINNESOTA
Minneapolis (corrugated container)
Rochester (corrugated container)
St. Cloud (corrugated container)
St. Paul (corrugated container)
Minneapolis (corrugated container)
Preprint

MISSISSIPPI
Jackson (corrugated container)
Tupelo (corrugated container, 2)

MISSOURI
Blue Springs (corrugated container)
Kansas City (bag)
Liberty (corrugated container)
(Kansas City)
Springfield (corrugated container)
St. Joseph (corrugated container)
St. Louis (corrugated container)

MONTANA
Missoula (paperboard/paper/pulp)

NEBRASKA
Omaha (corrugated container)

NEW JERSEY
*Elizabeth (bag)
Teterboro (corrugated container)

NEW YORK
Buffalo (corrugated container)
*Walden (bag)

NORTH CAROLINA
Charlotte (corrugated container)
Lexington (corrugated container)
Raleigh (corrugated container)

NORTH DAKOTA
Fargo (corrugated container)

OHIO
Cincinnati (corrugated container)
Coshocton (paperboard/paper/pulp)
Jefferson (corrugated container)
Mansfield (corrugated container)
Marietta (corrugated container)
New Philadelphia (bag)

OKLAHOMA
Oklahoma City (corrugated container)
Sand Springs (corrugated container)
(Tulsa)

PENNSYLVANIA
Philadelphia (corrugated container, 2)
Williamsport (corrugated container)
York (paperboard/paper/pulp)

SOUTH CAROLINA
Columbia (corrugated container)
Florence (paperboard/paper/pulp)
Fountain Inn (corrugated container)
Orangeburg (forest products)

SOUTH DAKOTA
Sioux Falls (corrugated container)

TENNESSEE
Chattanooga (corrugated container)
Collierville (corrugated container)
(Memphis)
Nashville (corrugated container)

TEXAS
Dallas (corrugated container)
El Paso (corrugated container, 2); (folding carton)
Grand Prairie (corrugated container)
(Dallas)
Houston (corrugated container)
Temple (corrugated container)
Tyler (corrugated container)

UTAH
Salt Lake City (bag)
Salt Lake City (bag)
Bag Packaging Systems

VIRGINIA
Hopewell (paperboard/paper/pulp)
Martinsville (corrugated container)
Richmond (corrugated container, 2)
*Richmond (bag)

WASHINGTON
SEATTLE (CORRUGATED CONTAINER)
*Tacoma (paperboard/paper/pulp)

WEST VIRGINIA
Wellsburg (bag)

WISCONSIN
Beloit (corrugated container)
Germantown (corrugated container)
(Milwaukee)
Neenah (corrugated container)

CANADA

ALBERTA
*Calgary (corrugated container)
*Edmonton (corrugated container)

BRITISH COLUMBIA
*Castlegar (paperboard/paper/pulp)
*New Westminster (corrugated container)

MANITOBA
*Winnipeg (corrugated container)

NEW BRUNSWICK
Bathurst (paperboard/paper/pulp); (forest products)
*Saint John (corrugated container)

NOVA SCOTIA
*Dartmouth (corrugated container)

ONTARIO
*Etobicoke (corrugated container)
*Ft. Frances (paperboard/paper/pulp)
*Guelph (corrugated container)
*Kenora (paperboard/paper/pulp)
*Pembroke (corrugated container)
*Rexdale (corrugated container)
*Whitby (corrugated container)

PRINCE EDWARD ISLAND
*Summerside (corrugated container)

5
<PAGE>

- -----------------------

QUEBEC
*Grand-Mere (paperboard/paper/pulp)
*La Baie (paperboard/paper/pulp)
*La Tuque (forest products, 2)
New Richmond (paperboard/paper/pulp)
Portage-du-Fort (paperboard/paper/pulp)
*Roberval (forest products)
*Saint-Fulgence (forest products)
*Saint-Laurent (corrugated container)
*Shawinigan (paperboard/paper/pulp)
*Trois-Rivieres (paperboard/paper/pulp)
*Ville Mont-Royal (corrugated container)
*Grand-Mere (paperboard/paper/pulp)
Research Center

SASKATCHEWAN
*Regina (corrugated container)

MEXICO
Monterrey (corrugated container)
Queretaro (corrugated container)

EUROPE

GERMANY
*Augsburg (folding carton)
*Bremen (folding carton)
Delitzsch (corrugated container)
Dusseldorf (corrugated container)
*Frankfurt (folding carton)
Germersheim (corrugated container)
Hamburg (corrugated container)
Heppenheim (corrugated container)
Hoya (paperboard/paper/pulp)
Julich (corrugated container)
Lauenburg (corrugated container)
Lubbecke (corrugated container)
Neuburg (corrugated container)
Plattling (corrugated container)
Viersen (paperboard/paper/pulp)
Waren (corrugated container)
Hamburg
Institute for Package
and Corporate Design

UNITED KINGDOM
*Chesterfield (folding carton)
*Ellesmere Port (paperboard/paper/pulp)

NETHERLANDS
*Sneek (folding carton)

BELGIUM
Ghlin (corrugated container)
Groot-Bijgaarden (corrugated container)

FRANCE
*Bordeaux (folding carton)
*Cholet (folding carton)
Molieres-Sur-Ceze (corrugated container)
Nimes (corrugated container)
*Soissons (folding carton)
*Strasbourg (folding carton)
*Valenciennes (corrugated container)

SPAIN
Cordoba (paperboard/paper/pulp); (corrugated container)
Madrid (corrugated container)
Seville (corrugated container)

AUSTRALIA
Melbourne (corrugated container)
Sydney (corrugated container)

ASIA

CHINA
*Shanghai (corrugated container)
*Beijing (joint venture office)

JAPAN
*Tokyo (joint venture office)

CENTRAL AND SOUTH AMERICA

ARGENTINA
*Bernal (Buenos Aires) (joint venture office); (corrugated container)
*Mendoza (corrugated container)

CHILE
*San Francisco (Santiago) (corrugated container)

COSTA RICA
Palmar Norte (forest products)
San Jose (forest products)
Administrative Office

VENEZUELA
*Maracay (other, 2)
*Miranda (other)
*Moron (paperboard/paper/pulp); (bag)
*Puerto Ordaz (joint venture office)
*Valencia (paperboard/paper/pulp); (corrugated container); (bag)

CORPORATE HEADQUARTERS
Chicago, Illinois

*affiliates

6
<PAGE>
ITEM 3. LEGAL PROCEEDINGS

In November 1990, the U.S. Environmental Protection Agency ("EPA") announced
its decision to list two bodies of water in Arizona, Dry Lake and Twin Lakes, as
"waters of the United States" impacted by toxic pollutant discharges under
Section 304(l) of the federal Clean Water Act. These bodies of water had been
used by the Company's Snowflake, Arizona pulp and paperboard mill for the
evaporation of its process wastewater. The Company has vigorously disputed the
application of the Clean Water Act to these two privately owned evaporation
ponds. The Company has implemented a plan to use its wastewater to irrigate a
biomass plantation and discontinue using Dry Lake to evaporate wastewater. The
parties have been negotiating a consent decree to resolve this matter which
currently is expected to include civil penalties in the amount of $375,000.

On October 27, 1992, the Florida Department of Environmental Regulation,
predecessor to the Department of Environmental Protection ("DEP"), filed a civil
complaint in the Fourteenth Judicial Circuit Court of Bay County, Florida
against the Company seeking injunctive relief, an unspecified amount of fines
and civil penalties, and other relief based on alleged groundwater contamination
at the Company's Panama City, Florida pulp and paperboard mill. In addition, the
complaint alleges operation of a solid waste facility without a permit and
discrepancies in hazardous waste shipping manifests. Because of uncertainties in
the interpretation and application of DEP's rules, it is premature to assess the
Company's potential liability, if any, in the event of an adverse ruling. At the
parties' request, the case has been placed in abeyance pending the conclusion of
a related administrative proceeding petitioned by the Company in June 1992
following DEP's proposal to deny the Company a permit renewal to continue
operating its wastewater pretreatment facility at the mill site. The
administrative proceeding has been referred to a hearing officer for an
administrative hearing on the consolidated issues of compliance with a prior
consent order, denial of the permit renewal, completion of a contamination
assessment and denial of a sodium exemption. The consolidated cases were abated
at the parties' request and extensive settlement negotiations are being
conducted between the parties. The Company intends to vigorously assert its
entitlement to the permit renewal and to defend against the groundwater
contamination and unpermitted facility allegations in the event that a
settlement cannot be reached.

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 mill (the "Facility") and the Company's Electric Power Purchase
Agreement (the "Agreement") with CP&L.

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 that the FERC 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 that the FERC waive compliance with any applicable FERC
regulations in the event that the FERC should determine, contrary to the
Company's position, that the Company has not complied with the FERC's
regulations in any respect. CP&L has also filed several other pleadings to which
the Company has responded. If the FERC were to determine that the Company had
become a "public utility," the Company's issuance of securities and incurrence
of debt after the date that it became a "public utility" could be subject to the
jurisdiction and approval of the FERC unless the FERC granted a waiver. In the
absence of such a waiver, certain other activities and contracts of the Company
after such date could also be subject to additional federal and state regulatory
requirements, and defaults might be created under certain existing agreements.
Based on past administrative practice of the FERC in granting waivers of certain
other regulations, the Company believes that it is likely that such a waiver
would be granted by the FERC in the event that such a waiver became necessary.

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 the 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 the
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

7
<PAGE>
District Court are premature unless and until the FERC Proceeding is finally
resolved. On September 20, 1994, the United States District Court stayed the
Federal Court action pending the outcome of the FERC proceeding.

The two proceedings are in their preliminary stages and no assurance can be
provided as to the timing of the decisions or the outcome of either of them. The
Company intends to contest these actions vigorously.

On September 30, 1994, the EPA, Region IV, issued an Administrative Order
("Order") to the Company's Panama City Mill pursuant to Section 3008(h) of the
Federal Resource Conservation and Recovery Act ("RCRA"), 42 U.S.C. Section
6928(h)(l). The Order required the Company to perform a RCRA Facility
Investigation at the Panama City Mill together with confirmatory sampling,
interim corrective measures and any other activities necessary to correct
alleged actual or threatened releases of hazardous substances or hazardous
constituents at or from the Panama City Mill. The Company filed a protest and
requested a hearing to contest the EPA's RCRA Section 3008(h) jurisdiction over
the Panama City Mill. The Company believes that the Panama City Mill is not
currently a RCRA facility. The corrective measures mandated by the Order
required the Company to conduct extensive groundwater and soil sampling and
analyses. In early 1996 the EPA issued another Order to the mill pursuant to
Section 3013 of RCRA ("Section 3013 Order") incorporating certain sampling and
analysis activities which the Company had proposed in settlement negotiations
and requiring additional sampling and analysis. In its response to the Section
3013 Order the Company agreed to implement all of the proposed activities except
dioxin sampling. The parties have been engaged in extensive settlement
negotiations with respect to both Orders. The Company does not know at this time
the likelihood of success in challenging the Orders. Notwithstanding the success
in challenging the Orders, an owner of property adjacent to the Panama City Mill
is currently subject to extensive clean-up under RCRA, and the EPA is empowered
to require clean-up for materials discharged from the property which may have
migrated onto the Panama City Mill's property. The Company does not yet know the
extent, if any, of such adjacent property owner's responsibility to remediate
contamination, if any, at the Panama City Mill site.

On January 22, 1996, the United States of America filed a suit against the
Company in the United States District Court for the District of Montana seeking
injunctive relief and an unspecified amount in civil penalties based on the
alleged failure of the Company to comply with certain provisions of the Clean
Air Act ("CAA"), its implementing regulations, and the Montana State
Implementation Plan at the Company's Missoula, Montana kraft pulp mill, (the
"Missoula Mill"). The complaint specifically alleges that the Company exceeded
the 20% opacity limitation for recovery boiler emissions; failed to properly set
the span on a recovery boiler continuous emissions monitor; and concealed the
emission of an air contaminant by improperly venting non-condensible gasses. The
statutory penalty for violations of the CAA is $25,000 per day for each day of
violation. The Company has engaged in extensive negotiations with EPA and the
United States Department of Justice to settle this matter while vigorously
contesting the allegations. While it is premature to predict the outcome of this
matter at this time, negotiators for the Company and the United States have
reached an agreement in principle to settle this case, which currently is
expected to include a penalty of $300,000.

In a related matter, on November 27, 1995, the Company received notice from
several environmental groups that they intended to file citizens suits under the
CAA, the Federal Water Pollution Control Act ("CWA") and the Emergency Planning
and Community Right-to-Know Act ("EPCRA") against the Company based on alleged
violations of those Acts at the Missoula Mill. In December, 1995,
representatives of the Company met with representatives of the groups that sent
the notice to discuss the Company's position that the majority of the alleged
violations were not in excess of applicable permit limits or were excused
because they occurred during reported malfunctions, start-up or shutdown
conditions. On January 29, 1996, a Complaint was filed by the Montana Coalition
for Health, Environmental and Economic Rights Inc., Cold Mountain, Cold Rivers,
Inc. and Native Forest Network, Inc. (collectively "Plaintiffs") in the United
States District Court for the District of Montana alleging numerous violations
of the provisions of the CAA, the CWA and the EPCRA. On February 7, 1996,
Plaintiffs filed an Amended Complaint seeking (1) a declaratory judgment that
the Company has violated Section 301(a) of the CWA, Section 502(a) of the CAA
and Section 313 of the EPCRA; (2) injunctive relief enjoining the Company from
operating the Missoula Mill in a manner as will result in further violations of
the CAA, CWA and EPCRA; and (3) civil penalties of $25,000 per day for each day
of alleged violation. The Company has engaged in negotiations with Plaintiffs to
settle this matter, and in December 1996 the parties reached an agreement in
principle, which is currently expected to include a penalty of $100,000. No
assurance can be given that a definitive settlement agreement will be entered
into by the parties or approved by the Court.

In addition, the Registrant is from time to time subject to litigation and
governmental proceedings regarding environmental matters in which injunctive
and/or monetary relief is sought. The Company has been named as a potentially
responsible party ("PRP") at a number of sites which are the subject of remedial
activity under the federal Comprehensive Environmental Response, Compensation
and Liability Act of 1980 ("CERCLA" or "Superfund") or

8
<PAGE>
comparable state laws. Although the Company is subject to joint and several
liability imposed under Superfund, at most of the multi-PRP sites there are
organized groups of PRPs and costs are being shared among PRPs.

The Registrant is involved in contractual disputes, administrative and legal
proceedings and investigations of various types. Although any litigation,
proceeding or investigation has an element of uncertainty, the Registrant
believes that the outcome of any proceeding, lawsuit or claim which is pending
or threatened, or all of them combined, would not have a material adverse effect
on its consolidated financial position, results of operations or liquidity.

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

None.

PART II

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

(a) PRINCIPAL MARKET, STOCK PRICE AND DIVIDEND INFORMATION

Information relating to the principal market, stock price and dividend
information for the Registrant's Common and Preferred Stock and related
stockholder matters, for the year ended December 31, 1996, is incorporated
herein by reference to the MD&A, included in this report, under the sections
entitled "Common and Series E Cumulative Preferred Stock--Cash Dividends, Market
and Price Range," page 18 and "Financial Condition and Liquidity," pages 14-18,
and to the Financial Statements, included in this report, under Notes to the
Consolidated Financial Statements, "Note 11--Long-term Debt," pages 42-44, "Note
14--Preferred Stock," page 46, "Note 15--Common Stock," pages 47-49 and "Note
20--Summary of Quarterly Data (unaudited)," page 54.

(b) APPROXIMATE NUMBER OF HOLDERS OF COMMON STOCK

There were approximately 6,378 holders of record of the Registrant's common
stock, as of March 20, 1997.

ITEM 6. SELECTED FINANCIAL DATA

In addition to the table set forth on pages 10-11 of this report, selected
financial data of the Registrant is incorporated herein by reference to the
Financial Statements, included in this report, under Notes to the Consolidated
Financial Statements, "Note 1--Summary of Significant Accounting Policies,"
pages 33-34, and "Note 3--Joint Ventures, Acquisitions and Investments," pages
34-35.

9
<PAGE>
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
(DOLLARS IN MILLIONS EXCEPT PER SHARE) 1996 1995(b) 1994 1993 1992 1991 1990
- ---------------------------------------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS
Net sales............................... $ 5,141.8 $7,351.2 $ 5,748.7 $ 5,059.6 $ 5,520.7 $ 5,384.3 $ 5,755.9
Cost of products sold................... 4,085.4 5,168.9 4,564.3 4,223.5 4,473.7 4,287.2 4,421.9
Selling, general and administrative
expenses............................... 596.2 608.5 568.2 512.2 543.5 522.8 495.5
Depreciation and amortization........... 314.8 371.8 358.9 346.8 329.2 273.5 257.0
Interest expense........................ 413.5 460.3 456.0 426.7 386.1 397.4 421.7
Income (loss) before income taxes,
minority interest, extraordinary
charges and cumulative effects of
accounting changes..................... (189.1) 794.7 (163.1) (463.3) (224.0) (12.2) 194.1
(Provision) credit for income taxes..... 66.0 (320.9) 35.5 147.7 59.4 (31.1) (92.8)
Minority interest....................... .6 (29.3) (1.2) (3.6) (5.3) (5.8) (5.9)
Income (loss) before extraordinary
charges and cumulative effects of
accounting changes..................... (122.5) 444.5 (128.8) (319.2) (169.9) (49.1) 95.4
Extraordinary charges from early
extinguishments of debt................ (3.7) (189.0) (61.6) -- -- -- --
Cumulative effects of accounting
changes................................ -- -- (14.2) (39.5) (99.5) -- --
Net income (loss)....................... (126.2) 255.5 (204.6) (358.7) (269.4) (49.1) 95.4
---------- ---------- ---------- ---------- ---------- ---------- ----------

PER SHARE OF COMMON STOCK (a)
PRIMARY:
Income (loss) before extraordinary
charges and cumulative effects of
accounting changes..................... (1.32) 4.64 (1.60) (4.59) (2.49) (.78) 1.56
Extraordinary charges from early
extinguishments of debt................ (.03) (2.01) (.70) -- -- -- --
Cumulative effects of accounting
changes................................ -- -- (.16) (.56) (1.40) -- --
Net income (loss)--Primary.............. (1.35) 2.63 (2.46) (5.15) (3.89) (.78) 1.56
FULLY DILUTED:
Income (loss) before extraordinary
charges and cumulative effects of
accounting changes..................... (j) 3.89 (j) (j) (j) (j) (j)
Extraordinary charges from early
extinguishments of debt................ (j) (1.65) (j) (j) (j) (j) (j)
Cumulative effects of accounting
changes................................ (j) -- (j) (j) (j) (j) (j)
Net income--Fully diluted............... (j) 2.24 (j) (j) (j) (j) (j)
Dividends and distributions paid........ .60 .30 -- -- .35 .71 .71
Common stockholders' equity (end of
year).................................. 6.85 8.98 5.90 6.91 13.91 22.12 24.34
Price range of common shares--N.Y.S.E.
High.................................. 17.38 24.63 21.13 19.50 32.63 26.00 25.25
Low................................... 12.13 12.50 9.63 6.38 12.50 9.00 8.13
Average common shares outstanding (in
millions):
Primary............................... 99.2 94.1 88.2 71.2 71.0 63.2 61.3
Fully diluted......................... (j) 114.7 (j) (j) (j) (j) (j)
---------- ---------- ---------- ---------- ---------- ---------- ----------
FINANCIAL POSITION AT END OF YEAR
Current assets.......................... $ 1,561.2 $1,682.9 $ 1,816.9 $ 1,753.2 $ 1,701.8 $ 1,685.3 $ 1,586.0
Current liabilities..................... 889.2 701.7 1,031.5 943.5 944.8 914.8 1,146.5
Working capital......................... 672.0 981.2 785.4 809.7 757.0 770.5 439.5
Property, plant and equipment--net...... 2,633.7 2,635.8 3,359.0 3,386.4 3,703.2 3,520.2 3,364.0
Total assets............................ 6,353.8 6,398.9 7,004.9 6,836.7 7,027.0 6,902.9 6,690.0
Long-term debt.......................... 3,951.1 3,885.1 4,431.9 4,268.4 4,105.1 4,046.4 3,680.5
Deferred taxes.......................... 410.2 493.1 381.4 470.6 685.2 263.9 262.7
Redeemable preferred stock.............. -- -- -- 42.3 36.3 31.1 26.6
Minority interest (i)................... 4.3 .7 221.8 234.5 .2 3.8 8.0
Stockholders' equity.................... 795.2 1,005.3 648.1 607.1 1,102.7 1,537.5 1,460.5
---------- ---------- ---------- ---------- ---------- ---------- ----------
ADDITIONAL INFORMATION
Paperboard, paper and market pulp:
Produced (thousand short tons) (e).... 7,396 7,980 7,928 7,475 7,517 7,365 7,447
Converted (thousand short tons) (e)... 4,326 4,355 4,477 4,354 4,373 4,228 4,241
Corrugated shipments (billion square
feet) (e).............................. 53.1 53.0 54.10 52.48 51.67 49.18 47.16
Employees (end of year--in thousands)... 24.2 25.9 29.1 29.0 31.2 31.8 32.3
Capital expenditures.................... $ 250.8 $ 386.5 $ 232.6 $ 149.7 $ 281.4 $ 430.1 $ 552.0
Net cash/funds provided by (used in)
operating activities (f)............... $ 287.6 $ 961.7 $ 72.3 $ (129.1) $ 120.9 $ 247.2 $ 468.6
Working capital ratio................... 1.8/1 2.4/1 1.8/1 1.9/1 1.8/1 1.8/1 1.4/1
Percent long-term debt/total
capitalization (g)..................... 76.6% 72.2% 78.0% 75.9% 69.2% 68.8% 67.7%
Return on beginning common stockholders'
equity (h)............................. (13.7%) 83.4% (26.2%) (32.3%) (11.1%) (3.4%) 7.1%
Pretax margin........................... (3.7%) 10.4% (2.9%) (9.2%) (4.2%) (.3%) 3.3%
After-tax margin........................ (2.5%) 3.5% (3.6%) (7.1%) (4.9%) (.9%) 1.7%
---------- ---------- ---------- ---------- ---------- ---------- ----------

<CAPTION>
(DOLLARS IN MILLIONS EXCEPT PER SHARE) 1989(c) 1988 1987(c) 1986(c)
- ---------------------------------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
SUMMARY OF OPERATIONS
Net sales............................... $5,329.7 $ 3,742.5 $3,232.9 $2,032.3
Cost of products sold................... 3,893.8 2,618.0 2,347.8 1,564.6
Selling, general and administrative
expenses............................... 474.5 351.1 343.8 241.2
Depreciation and amortization........... 237.1 148.1 138.7 92.3
Interest expense........................ 344.7 108.3 131.1 85.3
Income (loss) before income taxes,
minority interest, extraordinary
charges and cumulative effects of
accounting changes..................... 481.8 549.7 283.5 59.7
(Provision) credit for income taxes..... (195.2) (207.7) (122.1) (24.3)
Minority interest....................... (.8) (.2) (.1) --
Income (loss) before extraordinary
charges and cumulative effects of
accounting changes..................... 285.8 341.8 161.3 35.4
Extraordinary charges from early
extinguishments of debt................ -- -- -- --
Cumulative effects of accounting
changes................................ -- -- -- --
Net income (loss)....................... 285.8 341.8 161.3 35.4
---------- ---------- ---------- ----------
PER SHARE OF COMMON STOCK (a)
PRIMARY:
Income (loss) before extraordinary
charges and cumulative effects of
accounting changes..................... 4.67 5.58 2.79 .73
Extraordinary charges from early
extinguishments of debt................ -- -- -- --
Cumulative effects of accounting
changes................................ -- -- -- --
Net income (loss)--Primary.............. 4.67 5.58 2.79 .73
FULLY DILUTED:
Income (loss) before extraordinary
charges and cumulative effects of
accounting changes..................... (j) (j) 2.65 (j)
Extraordinary charges from early
extinguishments of debt................ (j) (j) -- (j)
Cumulative effects of accounting
changes................................ (j) (j) -- (j)
Net income--Fully diluted............... (j) (j) 2.65 (j)
Dividends and distributions paid........ .70 .35 .25 .19
Common stockholders' equity (end of
year).................................. 22.50 17.73 12.40 9.92(d)
Price range of common shares--N.Y.S.E.
High.................................. 36.38 39.50 39.83 20.00
Low................................... 22.13 20.67 15.33 11.38
Average common shares outstanding (in
millions):
Primary............................... 61.2 61.3 57.9 48.8
Fully diluted......................... (j) (j) 60.9 (j)
---------- ---------- ---------- ----------
FINANCIAL POSITION AT END OF YEAR
Current assets.......................... $1,687.0 $ 865.7 $ 737.4 $ 530.4
Current liabilities..................... 1,072.6 408.3 334.9 203.4
Working capital......................... 614.4 457.4 402.5 327.0
Property, plant and equipment--net...... 2,977.9 1,276.0 1,300.0 924.4
Total assets............................ 6,253.7 2,395.0 2,286.1 1,523.6
Long-term debt.......................... 3,536.9 765.1 1,070.5 767.0
Deferred taxes.......................... 185.6 140.3 120.4 69.9
Redeemable preferred stock.............. 22.7 -- 1.5 1.5
Minority interest (i)................... 9.7 .3 .2 --
Stockholders' equity.................... 1,347.6 1,063.6 740.3 481.8
---------- ---------- ---------- ----------
ADDITIONAL INFORMATION
Paperboard, paper and market pulp:
Produced (thousand short tons) (e).... 6,772 4,729 4,373 3,154
Converted (thousand short tons) (e)... 3,930 3,344 2,998 2,495
Corrugated shipments (billion square
feet) (e).............................. 41.56 34.47 32.09 25.95
Employees (end of year--in thousands)... 32.6 20.7 18.8 15.5
Capital expenditures.................... $ 501.7 $ 136.6 $ 105.7 $ 63.3
Net cash/funds provided by (used in)
operating activities (f)............... $ 370.9 $ 454.1 $ 298.3 $ 166.7
Working capital ratio................... 1.6/1 2.1/1 2.2/1 2.6/1
Percent long-term debt/total
capitalization (g)..................... 69.3% 38.9% 55.4% 58.1%
Return on beginning common stockholders'
equity (h)............................. 26.9% 46.2% 41.8% 10.2%
Pretax margin........................... 9.0% 14.7% 8.8% 2.9%
After-tax margin........................ 5.4% 9.1% 5.0% 1.7%
---------- ---------- ---------- ----------
</TABLE>

10
<PAGE>
- ---------

NOTES TO SELECTED FINANCIAL DATA

(a) Amounts per average common share and average common shares outstanding have
been adjusted to reflect the 2 percent stock dividend in 1992, the 3-for-2
stock split in 1988 and the 2-for-1 stock split in 1987. The price range of
common shares outstanding has been adjusted only to reflect the previously
mentioned stock splits.

(b) On November 1, 1995, Stone-Consolidated Corporation, a Canadian subsidiary
of the Company, amalgamated its operations with Rainy River Forest Products,
Inc. a Toronto-based Canadian pulp and paper company. As a result of the
amalgamation, the Company's equity ownership in Stone-Consolidated
Corporation was reduced from 74.6 percent to 46.6 percent and accordingly,
effective November 1, 1995, the Company began reporting Stone-Consolidated
Corporation as a non-consolidated affiliate in accordance with the equity
method of accounting.

(d) For 1986, calculation assumes conversion of convertible preferred stock and
convertible subordinated debentures which were converted/redeemed in 1987.

(e) Includes certain non-consolidated affiliates.

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

(g) Represents the percentage of long-term debt to the sum of long-term debt,
stockholders' equity, redeemable preferred stock, minority interest and
deferred taxes.

(h) 1996, 1995, 1994, 1993 and 1992 return on beginning common stockholders'
equity calculated using the income (loss) before the extraordinary charges
and cumulative effects of accounting changes.

(i) For 1994 and 1993, includes the Company's 25.4 percent minority interest
liability in the common shares of Stone-Consolidated.

(j) Fully diluted amounts and average common shares outstanding have not been
presented as amounts are either anti-dilutive or, when compared to primary
earnings per share, the potential dilution effect is less than 3 percent.
Furthermore, from 1988 through 1991, fully diluted amounts were not
applicable because the Company did not have any convertible securities
outstanding.

11
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

RESULTS OF OPERATIONS

Effective November 1, 1995, the Company began reporting Stone-Consolidated
as a non-consolidated affiliate in accordance with the equity method of
accounting (the "SCI de-consolidation"). Prior to such date the Company reported
Stone-Consolidated as a consolidated subsidiary. See also Note 4 to the
Consolidated Financial Statements.

Provided below is certain financial data for 1996, 1995 and 1994. Also
provided, for comparative purposes only, is supplemental restated financial data
for 1995 and 1994 assuming that the historical financial results of Stone-
Consolidated were reported by the Company in accordance with the equity method
of accounting effective January 1, 1994.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
ACTUAL RESTATED
------------------------ ----------------
(IN MILLIONS) 1996 1995 1994 1995 1994
- -------------------------------------------------- ------ ------- ------ ------- ------
<S> <C> <C> <C> <C> <C>
Net sales......................................... $5,142 $7,351 $5,749 $6,459 $4,898
Depreciation and amortization..................... 315 372 359 315 290
Interest expense.................................. 414 460 456 432 416
Equity income (loss) from affiliates.............. 63 20 (8) 104 (18)
Income (loss) before income taxes, minority
interest and extraordinary charges............... (189) 795 (163) 704 (159)
Net income (loss)................................. $ (126) $ 256 $ (205) $ 256 $ (205)
</TABLE>

1996 COMPARED WITH 1995

In 1996, the Company incurred a loss before extraordinary charges from the
early extinguishments of debt of $122 million, or $1.32 per share of common
stock. The Company recorded extraordinary charges from the early extinguishments
of debt totaling $4 million, net of income tax benefit, or $.03 per share of
common stock resulting in a net loss for 1996 of $126 million, or $1.35 per
share of common stock. In 1995, the Company reported income before extraordinary
charges from the early extinguishments of debt of $445 million, or $4.64 per
share of common stock on a primary basis and $3.89 per share of common stock on
a fully diluted basis. The Company recorded extraordinary charges from the early
extinguishments of debt totaling $189 million, net of income tax benefit, or
$2.01 per share on a primary basis and $1.65 per share on a fully diluted basis,
resulting in net income for 1995 of $256 million, or $2.63 per share of common
stock on a primary basis and $2.24 per share of common stock on a fully diluted
basis.

The net loss for 1996 represents a significant decrease from the net
earnings of 1995. This decrease resulted from substantially lower operating
margins primarily attributable to significantly lower average selling prices for
most of the Company's products. Additionally, the Company's 1996 results include
a non-recurring $5 million pretax loss associated with the sale of certain
assets and foreign exchange transaction losses of $.5 million as compared with
foreign exchange transaction gains of $8 million in 1995. Furthermore, the
Company recorded an income tax benefit of $66 million on a pretax loss of $189
million in 1996 as compared with a 1995 income tax provision of $321 million on
pretax earnings of $795 million. The Company's effective income tax rates for
both years reflect the impact of non-deductible amortization of intangibles.

PRODUCT LINE SALES DATA

<TABLE>
<CAPTION>
NET SALES
-------------------------------
(IN MILLIONS) YEAR ENDED DECEMBER 31, 1996 1995 1994
- -------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Paperboard and corrugated containers.................... $ 3,662 $ 4,444 $ 3,450
Kraft paper and paper bags and sacks.................... 713 802 679
Market pulp............................................. 330 750 305
Net sales of Stone-Consolidated (a)..................... -- 892 851
Other................................................... 437 463 464
--------- --------- ---------
Total net sales....................................... $ 5,142 $ 7,351 $ 5,749
--------- --------- ---------
--------- --------- ---------
</TABLE>

- ---------

(a) Primarily newsprint and groundwood paper.

12
<PAGE>
Net sales for 1996 decreased $2.2 billion from 1995. Net sales for 1995
included $892 million of sales of Stone-Consolidated. Excluding the effect of
Stone-Consolidated, sales for 1996 decreased approximately $1.3 billion or 20.4
percent from 1995.

Net sales of paperboard and corrugated containers, kraft paper and paper
bags and sacks, and market pulp decreased 17.6 percent, 11.1 percent and 56.0
percent, respectively, from 1995 mainly due to sharply lower selling prices.
Additionally, a 21 percent reduction in market pulp sales volume also
contributed to the sales decrease. Corrugated container sales volume of 53.1
billion square feet, including the proportionate share of the Company's
non-consolidated affiliates, was virtually unchanged from that of the prior
year, while paperboard and kraft paper volume improved modestly.

The decrease in sales for paper bags and sacks was primarily attributable to
the de-consolidation of the Company's retail bag packaging operations effective
with the July 12, 1996 contribution of such operations, together with those of
Gaylord Container Corporation to form S&G Packaging Company L.L.C., a joint
venture that the Company reports as a non-consolidated affiliate under the
equity method of accounting. Net sales of industrial paper bags and sacks
increased 2 percent from 1995 as modest price improvement more than offset a
slight volume decrease.

As previously mentioned, the Company began reporting Stone-Consolidated as a
non-consolidated affiliate under the equity method of accounting effective
November 1, 1995. Largely as a result of this, equity earnings increased to
$63.2 million in 1996 from $19.9 million in 1995. However, 1996 equity earnings
decreased approximately $40.6 million when compared to equity earnings for 1995
on a restated basis (restated to reflect Stone-Consolidated historical results
as those of a non-consolidated affiliate under the equity method of accounting
effective January 1, 1995). This decrease was mainly due to reduced operating
margins at Stone-Consolidated primarily attributable to lower average selling
prices for newsprint and groundwood papers.

The Company continues to incur substantial interest expense due to its
significant level of indebtedness. Interest expense decreased in 1996 to $414
million from $460 million in 1995. This decrease was partially due to the SCI
de-consolidation as interest expense for 1995 included approximately $28 million
of Stone-Consolidated's interest expense. The remainder of the decrease
primarily reflects the effect of lower average outstanding borrowings in 1996 as
compared with 1995.

1995 COMPARED WITH 1994

In 1995, the Company reported income before extraordinary charges from the
early extinguishments of debt of $445 million, or $4.64 per share of common
stock on a primary basis and $3.89 per share of common stock on a fully diluted
basis. The Company recorded extraordinary charges from the early extinguishments
of debt totaling $189 million, net of income tax benefit, or $2.01 per share on
a primary basis and $1.65 per share on a fully diluted basis, resulting in net
income for 1995 of $256 million, or $2.63 per share of common stock on a primary
basis and $2.24 per share of common stock on a fully diluted basis. In 1994, the
Company incurred a loss before extraordinary charges from the early
extinguishments of debt and the cumulative effect of a change in the accounting
for postemployment benefits of $129 million, or $1.60 per share of common stock.
The Company recorded extraordinary charges from the early extinguishments of
debt totaling $62 million, net of income tax benefits, or $.70 per share of
common stock and a one-time, non-cash charge of $14 million, net of income tax
benefit, or $.16 per share of common stock, to reflect the cumulative effect of
adopting Statement of Financial Accounting Standard No. 112, "Employers'
Accounting for Postemployment Benefits", resulting in a net loss for 1994 of
$205 million, or $2.46 per share of common stock.

The improved sales and earnings for 1995 over 1994 reflected significantly
higher average selling prices for the Company's products. As a result of the
higher average selling prices, net sales increased to $7.4 billion in 1995, a 28
percent increase over 1994 net sales of $5.7 billion. Net sales of paperboard
and corrugated containers, kraft paper and paper bags and sacks increased 28.8
percent and 18.1 percent, respectively, over 1994. These increases reflected the
higher selling prices which more than offset a reduction in sales volume for
these products. Sales volumes for containerboard, corrugated containers and for
paper bags and sacks decreased approximately 8 percent, 2 percent and 12
percent, respectively from 1994. Net sales of kraft paper increased 58.2 percent
over 1994 reflecting both increased sales volume and higher selling prices. Net
sales of newsprint and groundwood paper for 1995 increased 14.6 percent over
1994 as significantly higher average selling prices more than offset a decrease
in volume mainly attributable to the SCI de-consolidation. Net sales of market
pulp increased to $750 million in 1995 from $305 million in 1994. Approximately
$163 million of the market pulp sales increase resulted from the inclusion of
sales for Stone Venepal (Celgar) Pulp, Inc. ("SVCPI"), which effective December
31, 1994, became a consolidated subsidiary when the Company increased its
ownership in SVCPI from 50 to 90 percent. Excluding the effect of SVCPI, sales
of

13
<PAGE>
market pulp increased $282 million over 1994 mainly due to significantly higher
average selling prices, although a 22 percent volume improvement also
contributed to the sales increase.

Partially offsetting the effect on earnings of the improved product pricing
for 1995 over 1994, was an increase in recycled fiber costs of approximately
$145 million which occurred primarily as a result of an industry shortage for
this raw material. The 1995 results were also unfavorably impacted by an
after-tax charge of approximately $8 million related to Stone-Consolidated's
acquisition of Rainy River and by an increase in interest expense primarily
resulting from higher interest rates associated with the Company's indebtedness.
The 1995 results included foreign currency transaction gains of $8 million,
whereas the 1994 results included a non-recurring $22 million involuntary
conversion gain related to a digester accident at the Company's Panama City,
Florida, pulp and paperboard mill and foreign currency transaction losses of $16
million. Additionally, the Company recorded an income tax provision of $321
million in 1995 compared to a 1994 income tax benefit of $35 million reflecting
the tax effect of the increased pretax earnings for 1995 over 1994.

FINANCIAL CONDITION AND LIQUIDITY

The Company's working capital ratio was 1.8 to 1 at December 31, 1996 and
2.4 to 1 at December 31, 1995. This decrease was primarily due to the increase
in current maturities of the Company's indebtedness. The Company's long-term
debt to total capitalization ratio was 76.6 percent at December 31, 1996 and
72.2 percent at December 31, 1995. 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 and stockholders'
equity.

On March 22, 1996, the Company and its bank group amended and restated the
Company's bank credit agreement to, among other things, provide for an
additional senior secured term loan facility of $190 million and a supplemental
revolving credit facility of $110 million. Subsequently in 1996, the Company and
its bank group further amended the credit agreement to, among other things,
permit the Company to contribute its retail packaging assets into a joint
venture with Gaylord Container Corporation (see Note 3) and ease certain
financial covenant requirements (including the interest coverage and
indebtedness ratio requirements). At December 31, 1996, the Company's bank
credit agreement, as amended, provides for three senior secured term loans
aggregating $763 million which mature through October 1, 2003 and a $560 million
senior secured revolving credit facility commitment maturing May 15, 1999
(collectively the "Credit Agreement"). At March 20, 1997, the Company had
borrowing availability of approximately $249 million (net of letters of credit
which reduce the amount available to be borrowed) under its revolving credit
facilities. The term loans and revolving credit facility had weighted average
interest rates for the year ended December 31, 1996 of 8.7 percent and 8.9
percent, respectively. The weighted average rates do not include the effect of
the amortization of deferred debt issuance costs.

The term loan portions of the Credit Agreement provide for mandatory
prepayments from sales of certain assets, certain debt financing and a
percentage of excess cash flow (as defined). The Company's bank lenders, at the
Company's request, may at their option, waive the receipt of certain mandatory
prepayments. In 1996, the Company received consents from a majority of its
holders to waive mandatory repayment requirements from excess cash flow (as
defined) on no less than 80 percent of each of the Company's term loans until
September 1997. Any mandatory and voluntary prepayments are allocated against
the term loan amortizations in inverse order of maturity. Any mandatory
prepayments from sales of collateral, unless replacement collateral is provided,
will be applied ratably to the term loans and revolving credit facility,
permanently reducing the loan commitments under the Credit Agreement. The Credit
Agreement also contains cross-default provisions to the indebtedness of $10
million or more of the Company and certain subsidiaries. The Credit Agreement no
longer has a cross-acceleration provision in the event of an acceleration of the
non-recourse debt of Stone Venepal (Celgar) Pulp, Inc. ("SVCPI").

The Credit Agreement contains covenants that include, among other things,
the maintenance of certain financial tests and ratios. Unless operating results
improve, the Company may be required to seek covenant relief from its bank group
during 1997. Although no assurance can be given, the Company believes such
relief, if sought, would be granted.

14
<PAGE>
maximum of 200 basis points until the minimum Subordinated Capital Base is
attained. The Company's Subordinated Capital Base was $1,040 million at December
31, 1996. It is anticipated that the minimum Subordinated Capital Base will fall
below the required levels in the first quarter of 1997 and unless results
improve in the second quarter of 1997, the required level of Subordinated
Capital Base will not be met in the second quarter of 1997. As a result of this,
the Company plans to issue securities which will increase the Subordinated
Capital Base to required levels by June 30, 1997. There is however no assurance
that the Company will achieve such financings.

OUTLOOK:

The Company incurred a net loss of $126 million in 1996 primarily due to
sharply lower selling prices for the majority of the Company's products in
conjunction with significant interest expense on its indebtedness. Currently,
industry conditions have resulted in continued downward pressure on product
prices and the Company will report a first quarter 1997 net loss.

The Company's primary capital requirements consist of debt service and
capital expenditures, including capital investment for compliance with certain
environmental legislation requirements and ongoing maintenance expenditures and
improvements. The Company is highly leveraged, and while highly leveraged, will
incur substantial ongoing interest expense. The Company has debt amortizations
of $194 million of principal plus interest of approximately $412 million due in
1997. In the event that operating cash flows and borrowing availability under
its revolving credit facilities or from other financing sources do not provide
sufficient liquidity for the Company to meet its 1997 debt service requirements,
the Company will be required to pursue other alternatives to improve liquidity,
including cost reductions, sales of assets, the deferral of certain capital
expenditures and/or obtaining additional sources of funds. Beginning in 1998 and
continuing thereafter, the Company will be required to make significantly
increased principal re-payments on its existing indebtedness. The Company has
debt amortizations of approximately $432 million in 1998, $410 million in 1999
and $484 million in 2000. In the event that the Company is unable to generate
sufficient cash flows to fully meet such debt service requirements, the Company
will seek to refinance significant portions of this indebtedness and use a
substantial portion of its sources of liquidity including availabilities under
its revolving credit facilities to repay such indebtedness. Further, the Company
may be required to pursue other alternatives to improve liquidity, including
cost reductions, sales of assets, the deferral of certain capital expenditures
and/or obtaining additional sources of funds.

On January 27, 1997 the Company filed a $1 billion shelf registration with
the Securities and Exchange Commission providing for the issuance of equity
and/or debt securities.

Wood fiber and recycled fiber, the principal raw materials used 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. 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 has caused, and will
likely continue to cause, higher wood fiber costs in some of the regions in
which the Company procures wood. In addition, the increase in demand of products
manufactured, in whole or in part, from recycled fiber has from time to time
caused a tightness in supply of recycled fiber and at those times a significant
increase in the cost of such fiber used in the manufacture of recycled
containerboard and related products. Such costs are likely to continue to
fluctuate based upon demand/supply characteristics. 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.

On February 14, 1997, Stone-Consolidated, a 46.6 percent owned
non-consolidated affiliate of the Company, and Abitibi-Price Inc., announced a
merger agreement to amalgamate under Canadian law the two companies to create
Abitibi-Consolidated, Inc. The transaction, which is subject to shareholder and
regulatory approval, is expected to close in the second quarter of 1997.
Abitibi-Consolidated, Inc. would be a significant manufacturer and marketer of
publication grade papers with combined revenues approximating $4.9 billion
(CDN). Upon completion of the transaction, the Company would own approximately
25 percent of the common equity of Abitibi-Consolidated, Inc.

15
<PAGE>
CASH FLOWS FROM OPERATIONS:

The following table shows, for the last three years, the net cash provided
by operating activities:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
(IN MILLIONS) 1996 1995
- -------------------------------------------------------------------------------------------------- --------- ------------
<S> <C> <C>
Net income (loss)................................................................................. $ (126) $ 256
Depreciation and amortization..................................................................... 315 372
Deferred taxes.................................................................................... (88) 214
Extraordinary charges from early extinguishments of debt.......................................... 4 189
Cumulative effect of accounting change............................................................ -- --
(Increase) decrease in accounts and notes receivable--net......................................... 185 (81)
(Increase) decrease in inventories................................................................ (51) (146)
(Increase) decrease in other current assets....................................................... 15 22
Increase in accounts payable and other current liabilities........................................ 56 62
Other............................................................................................. (22) 74(a)
--------- ------
Net cash provided by operating activities......................................................... $ 288 $ 962
--------- ------
--------- ------

(IN MILLIONS) 1994
- -------------------------------------------------------------------------------------------------- ---------
<S> <C>
Net income (loss)................................................................................. $ (205)
Depreciation and amortization..................................................................... 359
Deferred taxes.................................................................................... (55)
Extraordinary charges from early extinguishments of debt.......................................... 62
Cumulative effect of accounting change............................................................ 14
(Increase) decrease in accounts and notes receivable--net......................................... (176)
(Increase) decrease in inventories................................................................ 30
(Increase) decrease in other current assets....................................................... (46)
Increase in accounts payable and other current liabilities........................................ 87
Other............................................................................................. 2
---------
Net cash provided by operating activities......................................................... $ 72
---------
---------
</TABLE>

- ---------

(a) Includes minority interest expense of $29 million.

The Company's 1996 operating cash flow of $288 million was not sufficient to
fully fund the Company's capital expenditures and investing activities. As a
result the Company increased its indebtedness to meet cash flow needs.

The 1996 decrease in accounts and notes receivable reflects lower average
selling prices for the Company's products, while the 1995 increase primarily
reflects higher average selling prices for the Company's products.

The increase in inventories for 1996 and 1995 primarily reflects an increase
in the quantity of paperstock levels as a result of weak demand.

The increase in accounts payable and other current liabilities in 1996 and
1995 was due primarily to the timing of payments.

FINANCING ACTIVITIES:

The following summarizes the Company's primary financing activities in 1996:

- On December 16, 1996, Stone Receivables Corporation redeemed $50 million
of its floating rate notes.

- On September 16, 1996, the Company purchased and retired $222 million
principal amount of its 11 1/2 percent Senior Subordinated Notes due 1999.
Earlier in the year, the Company purchased $8 million of the 11 1/2
percent Senior Subordinated Notes on the open market.

- On August 16, 1996, Stone Container Finance Company of Canada, a
newly-formed, wholly-owned subsidiary of the Company, sold $200 million
principal amount of 11 1/2 percent Senior Notes due August 15, 2006 (the
"SCFCC Notes"). On July 24, 1996, the Company sold $125 million principal
amount of 11 7/8 percent Rating Adjustable Senior Notes due August 1, 2016
("Rating Adjustable Senior Notes"). The net proceeds received from the
sales of the SCFCC Notes and the Rating Adjustable Senior Notes were used
by the Company to purchase and retire the remaining $222 million of the
11 1/2 percent Senior Subordinated Notes referred to above and to provide
funds for general corporate purposes.

- On April 25, 1996, the Company issued $33 million aggregate principal
amount of tax-exempt, industrial development revenue bonds at 7 1/4
percent. The proceeds from the issuance have been and will be used to
acquire, construct and install certain solid waste disposal components of
the Company's containerboard mill facilities located in Snowflake, Arizona
and Port Wentworth, Georgia.

- On March 22, 1996, the Company borrowed $190 million under a senior
secured term loan facility provided under its Credit Agreement. The
proceeds of the term loan were used to repay indebtedness outstanding
under the Company's $450 million revolving credit facility (without a
corresponding reduction in commitments) and provide additional liquidity
in the form of cash.

See also Note 11 to the Consolidated Financial Statements.

16
<PAGE>
INVESTING ACTIVITIES:

The following summarizes the Company's primary 1996 investing activities:

- Capital expenditures for 1996 totaled approximately $251 million. The
Company's capital expenditures for 1997 are budgeted at approximately $164
million.

- On November 29, 1996, the Company acquired Graficarton S.A., a Spanish
company that operates a recycled containerboard mill in Cordoba and
corrugated container plants in Cordoba, Madrid and Seville, Spain.
Additionally, on November 30, 1996, Stone acquired 50 percent of Cartonex
Bernal S.A., a company that operates a containerboard mill and two
corrugated container plants in Argentina, and on November 26, 1996
acquired 50 percent of Corrupac S.A., a corrugated box manufacturer in
Chile.

- On September 11, 1996, the Company sold the majority of its U.S. wood
products assets to U.S. Forest Industries, Inc. for cash and long-term
promissory notes.

- On July 12, 1996, the Company and Gaylord Container Corporation entered
into a joint venture whereby the retail packaging businesses of these two
companies were combined to form S&G.

- On May 30, 1996, the Company entered into a joint venture agreement with
Four M Corporation to purchase a paperboard mill located in Port St. Joe,
Florida, from St. Joe Paper Company for $185 million plus applicable
working capital.

- Additionally, on March 14, 1996, the Company purchased approximately $40
million of convertible debt securities of Financiere Carton Papier
("FCP"), a non-consolidated affiliate of the Company.

See also Note 3 to the Consolidated Financial Statements.

ENVIRONMENTAL ISSUES:

The Company's operations are subject to extensive environmental regulation
by federal, state and local authorities in the United States and regulatory
authorities with jurisdiction over its foreign operations. The Company has, in
the past, made significant capital expenditures to comply with water, air and
solid and hazardous waste regulations and expects to make significant
expenditures in the future. Capital expenditures for environmental control
equipment and facilities were approximately $46 million in 1996, and the Company
anticipates that 1997 and 1998 environmental capital expenditures will
approximate $33 million and $43 million, respectively. The majority of the 1998
expenditures relate to amounts that the Company currently anticipates will be
required once final "cluster rules" described below are adopted. Although
capital expenditures for environmental control equipment and facilities and
compliance costs in future years will depend on legislative and technological
developments which cannot be predicted at this time, such costs could increase
when final "cluster rules" are adopted and as other environmental regulations
become more stringent. Environmental control expenditures include projects
which, in addition to meeting environmental concerns, yield certain benefits to
the Company in the form of increased capacity and production cost savings. In
addition to capital expenditures for environmental control equipment and
facilities, other expenditures incurred to maintain environmental regulatory
compliance (including any remediation) represent ongoing costs to the Company.

In December 1993, the U.S. Environmental Protection Agency (the "EPA")
issued a proposed rule affecting the pulp and paper industry. These proposed
regulations, informally known as the "cluster rules", would make more stringent
requirements for discharge of wastewaters under the Clean Water Act and would
impose new requirements on air emissions under the Clean Air Act. Pulp and paper
manufacturers (including the Company) have submitted extensive comments to the
EPA on the proposed regulations in support of the position that requirements
under the proposed regulations are unnecessarily complex, burdensome and
environmentally unjustified. Estimates, based on currently proposed regulations,
indicate that the Company could be required to make capital expenditures of
$350-$450 million through 1998 in order to meet the requirements of the
regulations, although it is likely this range will decrease upon finalization of
the rules. While it cannot be predicted with certainty, it appears as though the
final cluster rules which are currently expected to be issued in 1997, will be
modified to reduce certain requirements. Assuming that the anticipated reduced
requirements are promulgated as the Company expects, the Company currently
believes it would be required to make capital expenditures of approximately
$200-250 million during the period of 1998 through 2006 in order to meet the
requirements of the anticipated regulations. Also, additional operating expense
will be incurred as capital installations required by the cluster rules are put
into service. Such incremental expense will ultimately increase to as much as
$20 million per year by the year 2006. The ultimate financial impact of the
regulations cannot be precisely estimated at this time but will be affected by
several factors, including the actual requirements

17
<PAGE>
imposed under the final rules, advancements in control process technologies,
possible reconfiguration of mills and inflation.

In addition, the Company is from time to time subject to litigation and
governmental proceedings regarding environmental matters in which injunctive
and/or monetary relief is sought. The Company has been named as a potentially
responsible party ("PRP") at a number of sites which are the subject of remedial
activity under the federal Comprehensive Environmental Response, Compensation
and Liability Act of 1980 ("CERCLA" or "Superfund") or comparable state laws.
Although the Company is subject to joint and several liability imposed under
Superfund, at most of the multi-PRP sites there are organized groups of PRPs and
costs are being shared among PRPs. Future environmental regulations, including
the final "cluster rules", may have an unpredictable adverse effect on the
Company's operations and earnings, but they are not expected to adversely affect
the Company's competitive position.

COMMON AND SERIES E CUMULATIVE PREFERRED STOCK -- CASH DIVIDENDS, MARKET AND
PRICE RANGE

The Company has restrictions on the payment of cash dividends on its common
stock under certain of the Company's indentures and under its Credit Agreement.
Common stock cash dividends cannot be declared and paid in the event the Company
has any accumulated preferred stock dividend arrearage or there is no
availability in the dividend pool under the Credit Agreement or under the Senior
Subordinated Indentures dated March 15, 1992 (the "Senior Subordinated
Indenture") 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 Debentures due April 1, 2002.
Additionally, preferred and common stock dividends cannot be declared and paid
in the event the Company's total stockholders' equity falls below $750 million.
The Company paid cash dividends of $0.60 and $0.30 per share on its common stock
in 1996 and 1995, respectively.

The Company paid cash dividends of $1.75 and $2.625 per share on its Series
E Cumulative Preferred Stock in 1996 and 1995, respectively. The declaration of
dividends by the Board of Directors is subject to, among other things, the
Company's ability to comply with financial covenants contained in the Company's
Credit Agreement and in its Senior Subordinated Indenture. In the event the
Company has six quarterly dividends which remain unpaid on the Series E
Cumulative Preferred Stock, 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. Irrespective of the
amount available in the dividend pool under the Credit Agreement, the Credit
Agreement permits dividends to be paid on the Series E Cumulative Preferred
Stock if there is an available dividend pool under the Senior Subordinated
Indenture. At December 31, 1996 the amounts available in the dividend pool under
the Credit Agreement and under the Senior Subordinated Indenture were
approximately $46 million and $50 million, respectively. On January 27, 1997 the
Board of Directors of the Company declared a cash dividend of $0.4375 per share
on the Company's Series E Cumulative Preferred Stock which was paid February 17,
1997, to shareholders of record February 7, 1997. The Board of Directors did not
declare a dividend on the Company's common stock. It is expected that the
Company's dividend pool will not be sufficient to declare a Series E Preferred
Stock dividend in May 1997.

<TABLE>
<CAPTION>
SERIES E CUMULATIVE
COMMON STOCK PREFERRED STOCK
------------------------------------------ ------------------------------------------
1996 1995 1996 1995
-------------------- -------------------- -------------------- --------------------
Quarter High Low High Low High Low High Low
- ----------------------------------------- --------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1st...................................... $ 15.88 $ 12.38 $ 24.50 $ 16.88 $ 21.75 $ 18.50 $ 22.63 $ 16.88
2nd...................................... 17.38 13.50 24.00 16.25 21.00 18.88 24.25 21.00
3rd...................................... 15.88 12.13 24.63 18.88 20.63 18.63 24.88 20.63
4th...................................... 16.25 13.63 19.00 12.50 20.50 18.00 21.88 17.13
Year..................................... 17.38 12.13 24.63 12.50 21.75 18.00 24.88 16.88
--------- --------- --------- --------- --------- --------- --------- ---------
</TABLE>

There were approximately 6,502 common stockholders and 419 preferred
stockholders of record at December 31, 1996.

18
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The Registrant's financial statements required by Item 8, together with the
report thereon of the independent accountants dated February 10, 1997 are set
forth on pages 28-54 of this report. The financial statement schedules listed
under Item 14(a)2, together with the report thereon of the independent
accountants dated February 10, 1997 are set forth on pages 55 and 56 of this
report and should be read in conjunction with the financial statements.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information relating to the Registrant's Directors and Executive Officers is
incorporated herein by reference to the Proxy Statement, to be filed on or
before April 30, 1997, for the Annual Meeting of Stockholders scheduled May 13,
1997, under the captions "Nominees for Directors," "Information as to Directors
and Executive Officers" and "Directors--Certain Transactions."

ITEM 11. EXECUTIVE COMPENSATION

Information relating to the Registrant's executive compensation is
incorporated herein by reference to the Proxy Statement, to be filed on or
before April 30, 1997, for the Annual Meeting of Stockholders scheduled May 13,
1997, under the caption "Compensation," excluding the section thereunder
entitled "Compensation Committee Report on Executive Compensation."

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS

Information relating to certain beneficial ownership of the Registrant's
common stock is incorporated herein by reference to the Proxy Statement, to be
filed on or before April 30, 1997, for the Annual Meeting of Stockholders
scheduled May 13, 1997, under the captions "Nominees for Directors" and
"Security Ownership by Certain Beneficial Owners and Management--Security
Ownership by Certain Beneficial Owners."

SECURITY OWNERSHIP OF MANAGEMENT

Information relating to ownership of the Registrant's equity securities by
Directors and Executive Officers is incorporated herein by reference to the
Proxy Statement, to be filed on or before April 30, 1997, for the Annual Meeting
of Stockholders scheduled May 13, 1997, under the captions "Nominees for
Directors" and "Security Ownership by Certain Beneficial Owners and
Management--Security Ownership by Management."

CHANGES IN CONTROL

The Registrant knows of no contractual arrangements which may, at a
subsequent date, result in a change in control of the Registrant.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information related to certain relationships and related transactions is
incorporated herein by reference to the Proxy Statement, to be filed on or
before April 30, 1997, for the Annual Meeting of Stockholders scheduled May 13,
1997, under the caption "Directors--Certain Transactions."

19
<PAGE>
PART IV

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

(a) DOCUMENTS FILED AS PART OF THIS REPORT

1. FINANCIAL STATEMENTS. The Registrant's financial statements, for
the year ended December 31, 1996, together with the Report of Independent
Accountants are set forth on pages 28-54 of this report. The supplemental
financial information listed and appearing hereafter should be read in
conjunction with the Financial Statements included in this report.

2. FINANCIAL STATEMENT SCHEDULES. The following are included in Part
IV of this report for each of the years ended December 31, 1996, 1995 and
1994 as applicable:

<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Accountants on Financial Statement Schedule..... 55
Valuation and Qualifying Accounts and Reserves (Schedule II).......... 56
Financial Statements of Stone-Consolidated Corporation................ *
</TABLE>

- ---------

* To be filed as an amendment to this Report on or before June 30, 1997.

Financial statement schedules not included in this report have been omitted,
either because they are not applicable or because the required information is
shown in the financial statements or notes thereto, included in this report. At
December 31, 1996, the Company had outstanding non-interest bearing loans
receivable of $270,000 to Randolph Read, Senior Vice President--Chief Financial
and Planning Officer, and $300,000 to Harold Wright, Senior Vice President and
General Manager, North American Containerboard, Paper and Pulp. Mr. Read's loan
is repayable on demand pursuant to request by the Company. Mr. Wright's loan is
due in 2002.

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

(b) REPORTS ON FORM 8-K

A Report on Form 8-K dated May 16, 1996 was filed under Item 5--Other
Events.

A Report on Form 8-K dated June 28, 1996 was filed under Item 5--Other
Events.

A Report on Form 8-K dated July 19, 1996 was filed under Item 5--Other
Events.

A Report on Form 8-K dated July 25, 1996 was filed under Item 5--Other
Events.

A Report on Form 8-K dated December 18, 1996 was filed under Item 5--Other
Events and Item 7--Exhibits.

20
<PAGE>
(c) EXHIBITS

<TABLE>
<C> <S>
3(a) Restated Certificate of Incorporation of the Company, filed as Exhibit 3(a) to the Company's
Registration Statement on Form S-1, Registration Number 33-54769, is hereby incorporated by
reference.

3(b) By-laws of the Company, as amended October 2, 1995, filed as Exhibit 3 to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1995, is hereby incorporated
by reference.

4(a) Specimen certificate representing Common Stock, $.01 par value, filed as Exhibit 4(a) to the
Company's Annual Report on Form 10-K for the year ended December 31, 1987, is hereby
incorporated by reference.

4(b) Specimen certificate representing the $1.75 Series E Cumulative Convertible Exchangeable
Preferred Stock, filed as Exhibit 4(g) to the Company's Registration Statement on Form S-3,
Registration Number 33-45374, is hereby incorporated by reference.

4(c) Rights Agreement, dated as of July 25, 1988, between the Company and The First National Bank
of Chicago, filed as Exhibit 1 to the Company's Registration Statement on Form 8-A dated July
27, 1988, is hereby incorporated by reference.

4(d) Amendment to Rights Agreement, dated as of July 23, 1990, between the Company and The First
National Bank of Chicago, filed as Exhibit 1A to the Company's Form 8 dated August 2, 1990
amending the Company's Registration Statement on Form 8-A dated July 27, 1988, is hereby
incorporated by reference.

4(e) Amendment to Rights Agreement dated as of May 16, 1996 between the Company and First Chicago
Trust Company of New York, filed as Exhibit 1 to the Company's Form 8 dated June 8, 1996
amending the Company's Registration Statement on Form 8 dated August 2, 1990 amending the
Company's Registration Statement on Form 8-A dated July 27, 1988, as amended, is hereby
incorporated by reference.

4(f) Amended and Restated Credit Agreement ("Credit Agreement") dated as of March 22, 1996 among
the Company, the financial institutions signatory thereto, Bankers Trust Company, as agent
(the "Agent"), and Bank of America National Trust & Savings Association, The Bank of New York,
The Bank of Nova Scotia, Caisse Nationale de Credit Agricole, Chemical Bank, The Chase
Manhattan Bank, N.A., Dresdner Bank AG-Chicago and Grand Cayman Branches, The First National
Bank of Chicago, The Long-Term Credit Bank of Japan, Ltd., NationsBank of North Carolina,
N.A., The Sumitomo Bank, Ltd., Chicago Branch and The Toronto-Dominion Bank, as co-agents (the
"Co-Agents"), is hereby incorporated by reference.

4(g) First Amendment of Credit Agreement dated as of June 20, 1996 among the Company, the financial
institutions signatory thereto and Bankers Trust Company, as Agent (the "Agent"), filed as
Exhibit 4(s) to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30,
1996, is hereby incorporated by reference.

4(h) Second Amendment of Credit Agreement dated as of December 18, 1996 among the Company, the
financial institutions signatory thereto and Bankers Trust Company, as Agent (the "Agent"),
filed as Exhibit 4 to the Company's Current Report on Form 8-K dated December 18, 1996, is
hereby incorporated by reference.

4(i) Indenture dated as of July 24, 1996 between the Company and The Bank of New York, as Trustee,
relating to the Rating Adjustable Senior Notes due 2016, filed as Exhibit 4.1to the Company's
Registration Statement on Form S-4, Registration Number 333-12155, is hereby incorporated by
reference.

4(j) First Supplemental Indenture dated July 24, 1996 between the Company and The Bank of New York,
as Trustee, relating to the Rating Adjustable Senior Notes due 2016, filed as Exhibit 4.2 to
the Company's Registration Statement on Form S-4, Registration Number 333-12155, is hereby
incorporated by reference.

4(k) Indenture dated as of October 12, 1994 between the Company and Norwest Bank Minnesota, N.A.,
as Trustee, relating to the 10 3/4 percent First Mortgage Notes due October 1, 2002, filed as
Exhibit 4(b) to the Company's Quarterly Report on Form 10-Q for the quarter ended September
30, 1994, is hereby incorporated by reference.
</TABLE>

21
<PAGE>
<TABLE>
<C> <S>
4(l) Indenture dated as of October 12, 1994 between the Company and The Bank of New York, as
Trustee, relating to the 11 1/2 percent Senior Notes due October 1, 2004, filed as Exhibit
4(c) to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1994,
is hereby incorporated by reference.

4(m) Indenture, dated as of February 15, 1992, between the Company and The Bank of New York, as
Trustee, relating to the Company's 6 3/4 percent Convertible Subordinated Debentures due
February 15, 2007, filed as Exhibit 4(p) to the Company's Registration Statement on Form S-3,
Registration Number 33-45978, is hereby incorporated by reference.

4(n) Senior Subordinated Indenture, dated as of March 15, 1992, between the Company, and The Bank
of New York, as Trustee, filed as Exhibit 4(a) to the Company's Registration Statement Form
S-3, Registration Number 33-46764, is hereby incorporated by reference.

4(o) Indenture dated as of June 15, 1993, between the Company and Norwest Bank Minnesota, National
Association, as Trustee, relating to the Company's 8 7/8 percent Convertible Senior
Subordinated Notes due 2000, filed as Exhibit 4(a) to the Company's Registration Statement on
Form S-3, Registration Number 33-66086, is hereby incorporated by reference.

4(p) Indenture, dated as of November 1, 1991, between the Company and The Bank of New York, as
Trustee, relating to the Company's Senior Debt Securities, filed as Exhibit 4(u) to the
Company's Registration Statement on Form S-3, Registration Number 33-45374, is hereby
incorporated by reference.

4(q) First Supplemental Indenture dated as of June 23, 1993, between the Company and The Bank of
New York, as Trustee, relating to the Indenture, dated as of November 1, 1991, between the
Company and The Bank of New York, as Trustee, filed as Exhibit 4(aa) to the Company's
Registration Statement on Form S-3, Registration Number 33-66086, is hereby incorporated by
reference.

4(r) Second Supplemental Indenture dated as of February 1, 1994, between the Company and the Bank
of New York, as Trustee, relating to the Indenture, dated as of November 1, 1991, as amended,
filed as Exhibit 4.2 to the Company's Current Report on Form 8-K, dated January 24, 1994, is
hereby incorporated by reference.

4(s) Master Trust Indenture and Security Agreement dated as of March 14, 1995, among Stone
Receivables Corporation, the Company, as Servicer, Marine Midland Bank, as Trustee, and
Bankers Trust Company, as Administrative Agent, relating to the accounts receivable
securitization program, is hereby incorporated by reference.

4(t) Series 1995-1 Supplement dated as of March 14, 1995, to the Master Trust Indenture and
Security Agreement dated as of March 14, 1995, among Stone Receivables Corporation, the
Company, as Servicer, Marine Midland Bank, as Trustee, and Bankers Trust Company, as
Administrative Agent, relating to the accounts receivable securitization program, is hereby
incorporated by reference.

4(u) Indenture dated as of August 16, 1996 between Stone Container Finance Company of Canada (the
"Issuer"), the Company, as guarantor, and The Bank of New York, as Trustee, relating to the
Issuer's 11 1/2 percent Senior Notes due 2006.**

Indentures with respect to other long-term debt, none of which exceeds 10 percent of the total
assets of the Company and its subsidiaries on a consolidated basis, are not attached. (The
Registrant agrees to furnish a copy of such documents to the Commission upon request).

4(v) Guaranty, dated October 7, 1983, between the Company and The Continental Group, Inc., filed as
Exhibit 4(h) to the Company's Registration Statement on Form S-3, Registration Number
33-36218, is hereby incorporated by reference.

4(w) Amendment No. 1 to Guaranty, dated as of June 1, 1996, among Continental Holdings, Inc.,
Continental Group, Inc. and the Company, filed as Exhibit 4(r) to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1996, is hereby incorporated by reference.

10(a) Management Incentive Plan, filed as Exhibit 10(b) to the Company's Annual Report on Form 10-K
for the year ended December 31, 1980, is hereby incorporated by reference.*
</TABLE>

22
<PAGE>
<TABLE>
<C> <S>
10(b) Unfunded Deferred Director Fee Plan, filed as Exhibit 10(d) to the Company's Annual Report on
Form 10-K for the year ended December 31, 1981, is hereby incorporated by reference.*

10(c) Form of "Stone Container Corporation Compensation Agreement" between the Company and its
directors that elect to participate, filed as Exhibit 10(e) to the Company's Annual Report on
Form 10-K for the year ended December 31, 1988, is hereby incorporated by reference.*

10(d) Stone Container Corporation 1982 Incentive Stock Option Plan, filed as Appendix A to the
Prospectus included in the Company's Form S-8 Registration Statement, Registration Number
2-79221, effective September 27, 1982, is hereby incorporated by reference.*

10(e) Stone Container Corporation 1993 Stock Option Plan, filed as Appendix A to the Company's Proxy
Statement dated as of April 10, 1992, is hereby incorporated by reference.*

10(f) Stone Container Corporation Deferred Income Savings Plan, conformed to reflect amendment
effective as of January 1, 1990, filed as Exhibit 4(i) to the Company's Form S-8 Registration
Statement, Registration Number 33-33784, filed March 9, 1990, is hereby incorporated by
reference.*

10(g) Stone Container Corporation 1992 Long-Term Incentive Program, filed as Exhibit A to the
Company's Proxy Statement dated as of April 11, 1991, is hereby incorporated by reference.*

10(h) Stone Container Corporation 1995 Long-Term Incentive Plan, filed as Exhibit A to the Company's
Proxy Statement dated as of April 7, 1995, is hereby incorporated by reference.*

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

10(j) Form of Severance Agreement, dated July 22, 1996, entered into between the Company and Roger
W. Stone.*-**

10(k) Form of Severance Agreement, dated July 22, 1996, entered into between the Company and John D.
Bence, Thomas W. Cadden, Matthew S. Kaplan, Randolph C. Read and Harold D. Wright.*-**

10(l) Form of Severance Agreement, dated July 22, 1996, entered into between the Company and all
other executive and divisional officers of the Company.*-**

11 Computation of Primary and Fully Diluted Net Income (Loss) Per Common Share.**

12 Computation of Ratios of Earnings to Fixed Charges.**

21 Subsidiaries of the Company.**

23 Consent of Independent Accountants.**

27 Financial Data Schedule.**
</TABLE>

- ------------------------

* Management contract or compensatory plan or arrangement

** Filed herewith

(d) SEPARATE FINANCIAL STATEMENTS OF AFFILIATES

Stone-Consolidated Corporation, a 46.6 percent owned affiliate of the
Company, qualifies as a significant subsidiary under Rule 3-09 of Regulation
S-X. The December 31, 1996 separate financial statements of Stone-Consolidated
Corporation, a foreign business, will be filed as an amendment to this Report,
as required, on or before June 30, 1997.

23
<PAGE>
SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

<TABLE>
<S> <C> <C>
STONE CONTAINER CORPORATION

By: ROGER W. STONE
------------------------------------------------------- March 24, 1997
Roger W. Stone
CHAIRMAN OF THE BOARD OF DIRECTORS AND PRESIDENT
(CHIEF EXECUTIVE OFFICER)

RANDOLPH C. READ
------------------------------------------------------- March 24, 1997
Randolph C. Read
SENIOR VICE PRESIDENT
(CHIEF FINANCIAL AND PLANNING OFFICER)

THOMAS P. CUTILLETTA
------------------------------------------------------- March 24, 1997
Thomas P. Cutilletta
SENIOR VICE PRESIDENT, ADMINISTRATION AND
CORPORATE CONTROLLER (PRINCIPAL ACCOUNTING OFFICER)
</TABLE>

24
<PAGE>
SIGNATURES--(CONTINUED)

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.

<TABLE>
<S> <C>
WILLIAM F. ALDINGER, III JERRY K. PEARLMAN
- ------------------------------------------ ------------------------------------------
William F. Aldinger, III Jerry K. Pearlman
DIRECTOR March 24, 1997 DIRECTOR March 24, 1997

RICHARD A. GIESEN RICHARD J. RASKIN
- ------------------------------------------ ------------------------------------------
Richard A. Giesen Richard J. Raskin
DIRECTOR March 24, 1997 DIRECTOR March 24, 1997

JAMES J. GLASSER ALAN STONE
- ------------------------------------------ ------------------------------------------
James J. Glasser Alan Stone
DIRECTOR March 24, 1997 DIRECTOR March 24, 1997

JACK M. GREENBERG AVERY J. STONE
- ------------------------------------------ ------------------------------------------
Jack M. Greenberg Avery J. Stone
DIRECTOR March 24, 1997 DIRECTOR March 24, 1997

GEORGE D. KENNEDY IRA N. STONE
- ------------------------------------------ ------------------------------------------
George D. Kennedy Ira N. Stone
DIRECTOR March 24, 1997 DIRECTOR March 24, 1997

HOWARD C. MILLER, JR. JAMES H. STONE
- ------------------------------------------ ------------------------------------------
Howard C. Miller, Jr. James H. Stone
DIRECTOR March 24, 1997 DIRECTOR March 24, 1997

JOHN D. NICHOLS ROGER W. STONE
- ------------------------------------------ ------------------------------------------
John D. Nichols Roger W. Stone
DIRECTOR March 24, 1997 DIRECTOR March 24, 1997
</TABLE>

25
<PAGE>
INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

<TABLE>
<CAPTION>
ITEM: PAGE
- ------------------------------------------------------------------------- -----
<S> <C>
Financial Statements:
Management's Responsibility for the Financial Statements............... 27
Report of Independent Accountants...................................... 28
Consolidated Statements of Operations.................................. 29
Consolidated Balance Sheets............................................ 30
Consolidated Statements of Cash Flows.................................. 31
Consolidated Statements of Stockholders' Equity........................ 32
Notes to the Consolidated Financial Statements......................... 33

Financial Statement Schedules:
Report of Independent Accountants on Financial Statement Schedule...... 55
Valuation and Qualifying Accounts and Reserves (Schedule II)........... 56
</TABLE>

26
<PAGE>
Management's Responsibility for the Financial Statements

The management of Stone Container Corporation is responsible for insuring that
the financial statements and other information in this report give a fair and
accurate financial picture of the Company. In preparing this material, we make
informed judgments and estimates that conform with generally accepted accounting
principles.

We have developed a system of internal controls which is designed to provide
reasonable assurance that the books and records accurately reflect the
transactions of the Company and that the Company's established policies and
procedures are followed properly. The concept of reasonable assurance recognizes
that the cost of a control procedure should not exceed the expected benefits.
Our system is augmented by written policies and procedures, a comprehensive
internal audit program, and the selection and training of qualified personnel.

The Company engages Price Waterhouse LLP, who are responsible for performing an
independent audit of the financial statements. Their audit includes obtaining an
understanding of the Company's accounting systems and procedures to the extent
required by generally accepted auditing standards and testing them as they deem
necessary.

An audit committee of Stone Container's directors, who are not employees of the
Company, meet periodically to review internal financial controls and procedures.
The audit committee and our independent accountants have unrestricted access to
each other, with or without the presence of management representatives.

ROGER W. STONE
Chairman of the Board of Directors and President
(Chief Executive Officer)

RANDOLPH C. READ
Senior Vice President
(Chief Financial and Planning Officer)

THOMAS P. CUTILLETTA
Senior Vice President, Administration and Corporate Controller
(Principal Accounting Officer)

27
<PAGE>
Report of Independent Accountants

To the Board of Directors
and Stockholders of
Stone Container Corporation

In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of cash flows and of stockholders' equity
present fairly, in all material respects, the financial position of Stone
Container Corporation and its subsidiaries at December 31, 1996 and 1995, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 1996, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.

As discussed in Note 1 to the consolidated financial statements, the Company
changed its method of accounting for postemployment benefits effective January
1, 1994.

PRICE WATERHOUSE LLP

Chicago, Illinois
February 10, 1997, except as to Note 2,
which is as of February 14, 1997.

28
<PAGE>
STONE CONTAINER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions except per share)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
SALES
Net sales................................................................ $ 5,141.8 $ 7,351.2 $ 5,748.7
---------- ---------- ----------
COST AND EXPENSES
Cost of products sold.................................................... 4,085.4 5,168.9 4,564.3
Selling, general and administrative expenses............................. 596.2 608.5 568.2
Depreciation and amortization............................................ 314.8 371.8 358.9
Equity (income) loss from affiliates..................................... (63.2) (19.9) 7.7
Other operating (income) expense-net..................................... 5.4 -- (34.4)
Other (income) expense-net............................................... (21.2) (33.1) (8.9)
---------- ---------- ----------
Income before interest expense, income taxes, minority interest,
extraordinary charges and cumulative effect of accounting change....... 224.4 1,255.0 292.9
Interest expense......................................................... (413.5) (460.3) (456.0)
---------- ---------- ----------
Income (loss) before income taxes, minority interest, extraordinary
charges and cumulative effect of accounting change..................... (189.1) 794.7 (163.1)
(Provision) credit for income taxes...................................... 66.0 (320.9) 35.5
Minority interest........................................................ .6 (29.3) (1.2)
---------- ---------- ----------
NET INCOME (LOSS)
Income (loss) before extraordinary charges and cumulative effect of
accounting change...................................................... (122.5) 444.5 (128.8)
Extraordinary charges from early extinguishments of debt (net of income
tax benefits).......................................................... (3.7) (189.0) (61.6)
Cumulative effect of accounting change (net of income tax benefit)....... -- -- (14.2)
---------- ---------- ----------
Net income (loss)........................................................ (126.2) 255.5 (204.6)
Preferred stock dividends................................................ (8.1) (8.1) (8.1)
Redemption premium of redeemable preferred stock of a consolidated
affiliate.............................................................. -- -- (4.0)
---------- ---------- ----------
Net income (loss) applicable to common shares............................ $ (134.3) $ 247.4 $ (216.7)
---------- ---------- ----------
---------- ---------- ----------
PER SHARE OF COMMON STOCK:
PRIMARY:
Income (loss) before extraordinary charges and cumulative effect of
accounting change...................................................... $ (1.32) $ 4.64 $ (1.60)
Extraordinary charges from early extinguishments of debt................. (.03) (2.01) (.70)
Cumulative effect of accounting change................................... -- -- (.16)
---------- ---------- ----------
Net income (loss)........................................................ $ (1.35) $ 2.63 $ (2.46)
---------- ---------- ----------
---------- ---------- ----------
FULLY DILUTED:
Income before extraordinary charges and cumulative effect of accounting
change................................................................. $ * $ 3.89 $ *
Extraordinary charges from early extinguishments of debt................. * (1.65) *
Cumulative effect of accounting change................................... -- -- *
---------- ---------- ----------
Net income............................................................... $ * $ 2.24 $ *
---------- ---------- ----------
---------- ---------- ----------
</TABLE>

- ---------

* Fully diluted earnings per share not applicable because the amounts are
anti-dilutive.

The accompanying notes are an integral part of these statements.

29
<PAGE>
STONE CONTAINER CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in millions)

<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1996 1995
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................................................. $ 112.6 $ 40.3
Accounts and notes receivable (less allowances of $24.3 and $22.1).................................... 572.8 743.0
Inventories........................................................................................... 741.6 733.3
Other................................................................................................. 134.2 166.3
---------- ----------
Total current assets................................................................................ 1,561.2 1,682.9
---------- ----------

Property, plant and equipment........................................................................... 4,939.1 4,750.0
Accumulated depreciation and amortization............................................................... (2,305.4) (2,114.2)
---------- ----------
Property, plant and equipment--net.................................................................. 2,633.7 2,635.8

Timberlands............................................................................................. 34.6 57.7
Goodwill................................................................................................ 485.4 545.5
Investment in equity of non-consolidated affiliates..................................................... 1,198.2 1,109.4
Other................................................................................................... 440.7 367.6
---------- ----------
Total assets........................................................................................ $ 6,353.8 $ 6,398.9
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Accounts payable...................................................................................... $ 363.8 $ 347.9
Current maturities of senior and subordinated long-term debt.......................................... 186.7 27.1
Notes payable and current maturities of non-recourse debt of consolidated affiliates.................. 21.9 29.3
Income taxes.......................................................................................... 15.1 .8
Accrued and other current liabilities................................................................. 301.7 296.6
---------- ----------
Total current liabilities........................................................................... 889.2 701.7
---------- ----------
Senior long-term debt................................................................................. 3,269.6 2,807.3
Subordinated debt..................................................................................... 422.3 809.2
Non-recourse debt of consolidated affiliates.......................................................... 259.2 268.6
Other long-term liabilities........................................................................... 308.1 313.7
Deferred taxes........................................................................................ 410.2 493.1
Commitments and contingencies (Note 18).................................................................

Stockholders' equity:
Series E preferred stock.............................................................................. 115.0 115.0
Common stock (99.3 and 99.1 shares outstanding)....................................................... 954.8 953.1
Retained earnings (accumulated deficit)............................................................... (94.2) 97.8
Foreign currency translation adjustment............................................................... (178.8) (156.9)
Unamortized expense of restricted stock plan.......................................................... (1.6) (3.7)
---------- ----------
Total stockholders' equity.......................................................................... 795.2 1,005.3
---------- ----------
Total liabilities and stockholders' equity.......................................................... $ 6,353.8 $ 6,398.9
---------- ----------
---------- ----------
</TABLE>

The accompanying notes are an integral part of these statements.

30
<PAGE>
STONE CONTAINER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1996 1995 1994
--------- --------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)............................................................................ $ (126.2) $ 255.5 $ (204.6)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating
activities:
Depreciation and amortization............................................................ 314.8 371.8 358.9
Deferred taxes........................................................................... (88.1) 213.6 (54.6)
Foreign currency transaction (gains) losses.............................................. .5 (8.1) 15.8
Equity (income) loss from affiliates..................................................... (63.2) (19.9) 7.7
Extraordinary charges from early extinguishments of debt................................. 3.7 189.0 61.6
Cumulative effect of accounting change................................................... -- -- 14.2
Other--net............................................................................... 41.1 102.1 (21.3)
Changes in current assets and liabilities--net of adjustments for acquisitions and
dispositions:
(Increase) decrease in accounts and notes receivable--net................................ 185.1 (80.8) (175.7)
(Increase) decrease in inventories....................................................... (51.4) (145.5) 29.7
(Increase) decrease in other current assets.............................................. 15.0 21.7 (45.9)
Increase in accounts payable and other current liabilities............................... 56.3 62.3 86.5
--------- --------- -----------
Net cash provided by operating activities.................................................... 287.6 961.7 72.3
--------- --------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Debt repayments.............................................................................. (376.2) (826.3) (1,655.8)
Payments by consolidated affiliates on non-recourse debt..................................... (18.9) (146.1) (429.3)
Borrowings................................................................................... 587.7 515.8 1,871.0
Non-recourse borrowings of consolidated affiliates........................................... 2.6 4.2 8.4
Proceeds from issuance of common stock....................................................... .4 1.7 276.3
Redemption of redeemable preferred stock of a consolidated affiliate......................... -- -- (52.6)
Refund of letter of credit................................................................... -- -- 13.5
Cash dividends............................................................................... (67.6) (41.5) (8.1)
--------- --------- -----------
Net cash provided by (used in) financing activities.......................................... 128.0 (492.2) 23.4
--------- --------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures......................................................................... (250.8) (386.5) (232.6)
Payments made for businesses acquired........................................................ (107.2) (56.7) (24.5)
Proceeds from sales of assets................................................................ 53.1 20.3 36.5
Purchase of securities of a non-consolidated affiliate....................................... (39.6) -- --
Effect on cash of de-consolidation of Stone-Consolidated..................................... -- (113.1) --
Other--net................................................................................... 2.9 (9.1) (14.4)
--------- --------- -----------
Net cash used in investing activities........................................................ (341.6) (545.1) (235.0)
--------- --------- -----------
Effect of exchange rate changes on cash...................................................... (1.7) 7.3 .5
--------- --------- -----------
NET CASH FLOWS
Net increase (decrease) in cash and cash equivalents......................................... 72.3 (68.3) (138.8)
Cash and cash equivalents, beginning of period............................................... 40.3 108.6 247.4
--------- --------- -----------
Cash and cash equivalents, end of period..................................................... $ 112.6 $ 40.3 $ 108.6
--------- --------- -----------
--------- --------- -----------
</TABLE>

- ---------

See Note 5 regarding non-cash financing and investing activities and
supplemental cash flow information.

The accompanying notes are an integral part of these statements.

31
<PAGE>
STONE CONTAINER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in millions except per share)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1996 1995 1994
--------------- --------------- ----------------
AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES
------- ------ ------- ------ -------- ------
<S> <C> <C> <C> <C> <C> <C>
PREFERRED STOCK
Balance at January 1 and December 31.................................. $ 115.0 4.6 $ 115.0 4.6 $ 115.0 4.6
------ ------ ------
------ ------ ------
COMMON STOCK
Balance at January 1.................................................. 953.1 99.1 849.1 90.4 574.3 71.2
Issuance of common stock:
Debt conversions.................................................... 1.3 .1 180.4 8.5 -- --
Public offering..................................................... -- -- -- -- 276.3 19.0
Exercise of stock options........................................... .4 .1 1.7 .1 .1 --
Restricted stock plan............................................... -- -- 2.1 .1 2.4 .2
Redemption premium of redeemable preferred stock
of a consolidated affiliate........................................ -- -- -- -- (4.0) --
Subsidiary issuance of stock.......................................... -- -- (80.2) -- -- --
------- ------ ------- ------ -------- ------
Balance at December 31................................................ 954.8 99.3 953.1 99.1 849.1 90.4
------- ------ ------- ------ -------- ------
------ ------ ------
RETAINED EARNINGS (ACCUMULATED DEFICIT)
Balance at January 1.................................................. 97.8 (96.3) 101.6
Net income (loss)..................................................... (126.2) 255.5 (204.6)
Cash dividends:
Preferred stock*.................................................... (8.1) (12.1) (8.1)
Common stock*....................................................... (59.5) (29.4) --
Decrease (increase) in minimum pension liability in excess of
unrecognized prior service cost...................................... 1.8 (19.9) 14.8
------- ------- --------
Balance at December 31................................................ (94.2) 97.8 (96.3)
------- ------- --------
FOREIGN CURRENCY TRANSLATION ADJUSTMENT
Balance at January 1.................................................. (156.9) (215.2) (179.0)
Adjustment from translation of foreign currency statements............ (21.9) 58.3 (36.2)
------- ------- --------
Balance at December 31................................................ (178.8) (156.9) (215.2)
------- ------- --------
UNAMORTIZED EXPENSE OF RESTRICTED STOCK PLAN
Balance at January 1.................................................. (3.7) (4.5) (4.8)
Issuance of shares.................................................... -- (2.0) (2.4)
Amortization of expense............................................... 2.1 2.8 2.7
------- ------- --------
Balance at December 31................................................ (1.6) (3.7) (4.5)
------- ------- --------
Total stockholders' equity at December 31............................. $ 795.2 $1,005.3 $ 648.1
------- ------- --------
------- ------- --------
</TABLE>

- ---------

* Cash dividends paid on common stock were $.60 per share in 1996 and $.30 in
1995. No cash dividends on common stock were paid in 1994. Cash dividends paid
on preferred stock were $1.75 per share in 1996, $2.625 per share in 1995 and
$1.75 per share in 1994.

The accompanying notes are an integral part of these statements.

32
<PAGE>
STONE CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION:

The consolidated financial statements include the accounts of the Company
and all subsidiaries that are more than 50 percent owned except for S&G
Packaging Company, L.L.C. which is accounted for under the equity method. All
significant intercompany accounts and transactions have been eliminated.
Investments in non-consolidated affiliated companies are primarily accounted for
by the equity method. The consolidated financial statements are prepared in
conformity with generally accepted accounting principles which require the use
of management estimates. Changes in such estimates may affect amounts reported
in future periods.

PER SHARE DATA:

Net income (loss) per common share is computed by dividing the net income
(loss) applicable to common shares by the weighted average number of common
shares outstanding during each year. The weighted average number of common
shares outstanding on a primary basis was 99,176,935 in 1996, 94,131,569 in 1995
and 88,195,190 in 1994.

Net income per fully diluted common share is computed after making the
necessary adjustments to net income and to the weighted average number of common
shares outstanding to reflect the assumed conversion of any dilutive convertible
securities not considered common stock equivalents. The weighted average number
of common shares outstanding on a fully diluted basis in 1995 was 114,674,021.

RECLASSIFICATIONS:

Certain prior year amounts have been reclassified to conform with the
current year presentation in the Consolidated Balance Sheets and Consolidated
Statements of Cash Flows.

CASH AND CASH EQUIVALENTS:

The Company considers all highly liquid short-term investments with original
maturities of three months or less to be cash equivalents and, therefore,
includes such investments as cash and cash equivalents in its financial
statements.

INVENTORIES:

Inventories are stated at the lower of cost or market. The primary methods
used to determine inventory costs are the last-in-first-out ("LIFO") method and
the average cost method.

PROPERTY, PLANT, EQUIPMENT AND DEPRECIATION:

Property, plant and equipment is stated at cost. Expenditures for
maintenance and repairs are charged to income as incurred. Additions,
improvements and major replacements are capitalized. The cost and accumulated
depreciation related to assets sold or retired are removed from the accounts and
any gain or loss is credited or charged to income.

For financial reporting purposes, depreciation and amortization is provided
on the straight-line method over the estimated useful lives of depreciable
assets, or over the duration of the lease for certain capitalized leases, based
on the following annual rates:

<TABLE>
<CAPTION>
TYPE OF ASSET RATES
- --------------------------------------------- -------------
<S> <C>
Machinery and equipment...................... 5% to 33%
Buildings and leasehold improvements......... 2% to 10%
Land improvements............................ 4% to 7%
</TABLE>

TIMBERLANDS:

Timberlands are stated at cost less accumulated cost of timber harvested.
The Company amortizes its private fee timber costs over the estimated total
fiber that will be available during the estimated growth cycle. Cost of non-fee
timber harvested is determined on the basis of timber removal rates and the
estimated volume of recoverable timber. The Company capitalizes interest costs
related to pre-merchantable timber.

GOODWILL AND OTHER ASSETS:

Goodwill is amortized on a straight-line basis over 40 years and is recorded
net of accumulated amortization of approximately $122 million and $116 million
at December 31, 1996 and 1995, respectively. The Company assesses at

33
<PAGE>
STONE CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
each balance sheet date whether there has been a permanent impairment in the
value of goodwill. This is accomplished by determining whether projected
undiscounted future cash flows from operations exceed the net book value of
goodwill as of the assessment date. Such projections reflect price, volume and
cost assumptions.

Deferred debt issuance costs are amortized over the expected life of the
related debt using the interest method. Start-up costs on major projects are
capitalized and amortized over a five-year period. Other long-term assets
include approximately $35 million and $47 million of unamortized deferred
start-up costs at December 31, 1996 and 1995, respectively.

SUBSIDIARY ISSUANCE OF STOCK:

When a subsidiary issues stock, the Company records the difference relating
to the carrying amount per share and the issuance price per share as an
adjustment to common stock in those instances in which the Company has
determined that the difference does not represent a permanent impairment.

FOREIGN CURRENCY TRANSLATION:

The functional currency for the majority of the Company's foreign operations
is the applicable local currency. Accordingly, assets and liabilities are
translated at the exchange rate in effect at the balance sheet date, and income
and expenses are translated at average exchange rates prevailing during the
year. Translation gains or losses are accumulated as a separate component of
stockholders' equity entitled Foreign Currency Translation Adjustment. Foreign
currency transaction gains or losses are credited or charged to income. The
functional currency for foreign operations operating in highly inflationary
economies is the U.S. dollar and any gains or losses are credited or charged to
income.

FOREIGN CURRENCY AND FINANCIAL INSTRUMENTS:

The Company has utilized various financial instruments to reduce certain of
its foreign currency and/or interest rate exposures. Premiums received and fees
paid on the financial instruments are deferred and amortized over the period of
the agreements. Gains and losses or interest received and paid on the
instruments are recorded as foreign exchange transaction gains or losses or as
interest in the Consolidated Statements of Operations.

POSTEMPLOYMENT BENEFITS:

Effective January 1, 1994, the Company adopted Statement of Financial
Accounting Standards No. 112 and 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.

IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF:

Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of" ("SFAS 121"), which requires
that long-lived assets be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. The adoption SFAS 121 did not have a material effect on the
Company's financial statements.

NOTE 2--SUBSEQUENT EVENT

On February 14, 1997 Stone-Consolidated, a 46.6 percent owned
non-consolidated affiliate of the Company, and Abitibi-Price Inc., announced
that they have agreed to amalgamate under Canadian law the two companies to
create Abitibi-Consolidated, Inc. The transaction, which is subject to
shareholder and regulatory approval, is expected to close in the second quarter
of 1997. Abitibi-Consolidated, Inc. would be a significant manufacturer and
marketer of publication grade papers with combined revenues approximating $4.9
billion (CDN). Upon completion of the transaction, the Company would own
approximately 25 percent of the common equity of Abitibi-Consolidated, Inc.

NOTE 3--JOINT VENTURES, ACQUISITIONS AND INVESTMENTS

On May 30, 1996, the Company entered into a joint venture with Four M
Corporation ("Four M") to form Florida Coast Paper Company, L.L.C. ("Florida
Coast") to purchase a paperboard mill located in Port St. Joe, Florida, from St.
Joe Paper Company for $185 million plus applicable working capital. As part of
the transaction, Florida Coast sold, through a private placement, debt of
approximately $165 million. Pursuant to an exchange offer, such privately-placed

34
<PAGE>
STONE CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

NOTE 3--JOINT VENTURES, ACQUISITIONS AND INVESTMENTS (CONTINUED)
debt was exchanged for registered notes identical to the privately-placed notes.
The Company accounts for its investment in Florida Coast under the equity
method. Concurrent with the formation of the joint venture, the Company and Four
M entered into output purchase agreements with Florida Coast which require each
of the joint venture partners to purchase 50 percent of the production of
Florida Coast. The output purchase agreements also require the Company and Four
M to equally share in the funding of certain cash flow deficits of Florida
Coast.

On July 12, 1996, the Company and Gaylord Container Corporation entered into
a joint venture whereby the retail bag packaging businesses of these two
companies were contributed to form S&G Packaging Company, L.L.C. ("S&G"). The
Company accounts for its interest in S&G under the equity method. S&G produces
paper grocery bags and sacks, handle sacks and variety bags, with estimated
annual sales in excess of $300 million and serves supermarkets, quick service
restaurants, paper distributors and non-food mass merchandisers throughout North
America and the Caribbean.

On March 14, 1996, the Company purchased approximately $40 million of
convertible debt securities of Financiere Carton Papier ("FCP"), a
non-consolidated affiliate of the Company. The securities are not convertible
into FCP common stock until March 1999. If the company converted the securities
into FCP common stock, the Company would own approximately 80 percent of the
outstanding shares of FCP.

NOTE 4--SUBSIDIARY ISSUANCE OF STOCK

On November 1, 1995, Stone-Consolidated Corporation, a Canadian subsidiary
of the Company, amalgamated its operations (the "Amalgamation") with Rainy River
Forest Products Inc. ("Rainy River"), a Toronto-based Canadian pulp and paper
company. The combination of Stone-Consolidated Corporation and Rainy River to
form the amalgamated entity ("Amalco") was accounted for as the acquisition of
Rainy River by Stone-Consolidated Corporation. Therefore, the purchase method of
accounting was used by Stone-Consolidated Corporation to account for the
business combination. Amalco continues under the name of Stone-Consolidated
Corporation ("Stone-Consolidated"). As a result of the issuance of common shares
by Stone-Consolidated associated with the Amalgamation, the Company's equity
ownership in Stone-Consolidated was reduced from 74.6 percent to 46.6 percent.
The Company recorded in 1995 a charge of approximately $80 million to common
stock related to the excess carrying value per common share over the issuance
price per common share associated with the shares issued. Effective November 1,
1995, the Company began reporting Stone-Consolidated as a non-consolidated
affiliate in accordance with the equity method of accounting.

NOTE 5--ADDITIONAL CASH FLOW STATEMENT INFORMATION

The Company's non-cash investing and financing activities and cash payments
(receipts) for interest and income taxes were as follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
(IN MILLIONS) 1996 1995 1994
- ---------------------------------------------------------------------- ------- ------- -------
<S> <C> <C> <C>
Note receivable received as partial consideration for sale of
assets............................................................... $ 32.7 $ -- $ 1.3
Capital lease obligations incurred.................................... 5.0 2.3 2.4
Assumption of debt of consolidated affiliates......................... 5.0 -- --
Issuance of common stock as partial consideration to extinguish
debt................................................................. 1.3 180.4 --
Assumption of non-recourse debt of affiliates......................... -- 15.0 115.0
Short-term note receivable recorded as partial consideration from sale
of an investment..................................................... -- -- 7.8
Conversion of investment in an affiliate into a note receivable....... -- -- 3.2
------- ------- -------
------- ------- -------
Cash paid (received) during the year for:
Interest (net of capitalization).................................... $ 383.1 $ 443.7 $ 373.7
Income taxes (net of refunds)....................................... 4.8 125.5 (4.1)
------- ------- -------
------- ------- -------
</TABLE>

In 1995, the other-net component of net cash provided from operating
activities included minority interest expense of $29.3 million.

35
<PAGE>
STONE CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

NOTE 6--INVENTORIES

Inventories are summarized as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
(IN MILLIONS) 1996 1995
- ------------------------------------------------------------ ------- -------
<S> <C> <C>
Raw materials and supplies.................................. $ 255.3 $ 287.5
Paperstock.................................................. 378.1 358.8
Work in process............................................. 19.5 23.1
Finished products........................................... 105.1 123.1
------- -------
758.0 792.5
Excess of current cost over LIFO inventory value............ (16.4) (59.2)
------- -------
Total inventories........................................... $ 741.6 $ 733.3
------- -------
------- -------
</TABLE>

Inventories costed by the LIFO, FIFO and average cost methods represented
approximately 39 percent, 7 percent and 54 percent, respectively, of total
inventories at December 31, 1996 and approximately 42 percent, 8 percent and 50
percent, respectively, of total inventories at December 31, 1995.

NOTE 7--PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment is summarized as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
(IN MILLIONS) 1996 1995
- ------------------------------------------------------------ --------- ---------
<S> <C> <C>
Machinery and equipment..................................... $ 4,053.2 $ 3,888.4
Buildings and leasehold improvements........................ 656.5 630.7
Land and land improvements.................................. 122.4 107.0
Construction in progress.................................... 107.0 123.9
--------- ---------
Total property, plant and equipment......................... 4,939.1 4,750.0
Accumulated depreciation and amortization................... (2,305.4) (2,114.2)
--------- ---------
Total property, plant and equipment--net.................... $ 2,633.7 $ 2,635.8
--------- ---------
--------- ---------
</TABLE>

Property, plant and equipment includes capitalized leases of $21.0 million
and $18.7 million and related accumulated amortization of $5.6 million and $7.0
million at December 31, 1996 and 1995, respectively.

36
<PAGE>
STONE CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

NOTE 8--SUMMARIZED FINANCIAL INFORMATION OF NON-CONSOLIDATED AFFILIATES

Combined summarized financial information for the Company's non-consolidated
affiliates that are accounted for under the equity method of accounting is
presented below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
(IN MILLIONS) 1996 1995
- ------------------------------------------------------------------------------ ------------- -------------
<S> <C> <C>
Results of operations:(a)
Net sales................................................................... $ 3,059.9 $ 1,472.9
Income before income taxes, minority interest and extraordinary charges..... 207.8 67.7
Net income.................................................................. 151.4 45.3
------------- -------------

DECEMBER 31,
----------------------------
(IN MILLIONS) 1996 1995
- ------------------------------------------------------------------------------ ------------- -------------
<S> <C> <C>
Financial position:
Current assets.............................................................. $ 1,084.8 $ 924.8
Non-current assets.......................................................... 3,515.6 3,091.7
Current liabilities......................................................... 668.0 692.9
Non-current liabilities..................................................... 1,302.9 979.5
Stockholders' equity........................................................ 2,629.5 2,344.1
------------- -------------
</TABLE>

- ---------

(a) Includes results for each affiliate for the period it was accounted for
under the equity method. Consolidated retained earnings included
approximately $42 million which represents undistributed earnings accounted
for by the equity method at December 31, 1996.

NOTE 9--INCOME TAXES

The Company provides for income taxes in accordance with the liability
method of accounting for income taxes. Under the liability method, deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between financial statement carrying amounts of
existing assets and liabilities and their respective tax bases.

The (provision) credit for income taxes consists of the following:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
(IN MILLIONS) 1996 1995 1994
- -------------------------------------------------- -------- ------- --------
<S> <C> <C> <C>
Currently (payable) refundable:
Federal......................................... $ (2.0) $ (59.6) $ --
State........................................... (.3) (10.5) (1.1)
Foreign......................................... (19.8) (37.2) (18.0)
-------- ------- --------
(22.1) (107.3) (19.1)
Deferred:
Federal......................................... 64.1 (80.9) 45.3
State........................................... 13.0 (26.2) 1.1
Foreign......................................... 11.0 (106.5) 8.2
-------- ------- --------
88.1 (213.6) 54.6
-------- ------- --------
Total (provision) credit for income taxes......... $ 66.0 $(320.9) $ 35.5
-------- ------- --------
-------- ------- --------
</TABLE>

37
<PAGE>
STONE CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

NOTE 9--INCOME TAXES (CONTINUED)
The income tax (provision) credit at the federal statutory rate is
reconciled to the (provision) credit for income taxes as follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
(IN MILLIONS) 1996 1995 1994
- ---------------------------------------------------------------------- -------- ------- --------
<S> <C> <C> <C>
Federal income tax (provision) credit at federal statutory rate....... $ 66.2 $(278.1) $ 57.1
Additional (taxes) credits resulting from:
Non-deductible amortization of intangibles.......................... (6.8) (8.8) (9.0)
Equity earnings of affiliates, net of tax........................... 18.7 1.4 (3.7)
State income taxes, net of federal income tax effect................ 8.3 (23.9) --
Valuation allowance adjustment...................................... (10.1) -- --
Minimum taxes-foreign jurisdictions................................. (4.9) (7.8) (5.8)
Permanent differences on assets sold................................ (3.5) -- --
Expenses not deductible in foreign jurisdictions.................... -- -- (4.3)
Other--net.......................................................... (1.9) (3.7) 1.2
-------- ------- --------
(Provision) credit for income taxes................................... $ 66.0 $(320.9) $ 35.5
-------- ------- --------
-------- ------- --------
</TABLE>

The components of the net deferred tax liability as of December 31, 1996 and
1995 were as follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
-------------------
(IN MILLIONS) 1996 1995
- ---------------------------------------------------------------------- -------- --------
<S> <C> <C>
Deferred tax assets:
Carryforwards....................................................... $ 191.3 $ 127.3
Compensation-related accruals....................................... 43.4 39.5
Extraordinary charges from early extinguishments of debt............ 2.4 4.9
Minimum pension liability........................................... 16.3 14.9
Reserves............................................................ 52.3 43.7
Deferred gain....................................................... 22.7 23.0
Other............................................................... 10.6 12.4
-------- --------
339.0 265.7
Valuation allowance................................................... (10.1) (1.2)
-------- --------
Total deferred tax asset.............................................. 328.9 264.5

Deferred tax liabilities:
Depreciation and amortization....................................... (639.4) (652.1)
Start-up costs...................................................... (7.8) (11.5)
LIFO reserve........................................................ (19.3) (15.8)
Pension............................................................. (7.2) (7.8)
Other............................................................... (48.6) (54.2)
-------- --------
Total deferred tax liability.......................................... (722.3) (741.4)
-------- --------
Deferred tax liability--net........................................... $ (393.4) $ (476.9)
-------- --------
-------- --------
</TABLE>

38
<PAGE>
STONE CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

NOTE 9--INCOME TAXES (CONTINUED)

The components of the income (loss) before income taxes, minority interest,
extraordinary charges and cumulative effect of accounting change are:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
(IN MILLIONS) 1996 1995 1994
- ---------------------------------------------------------------------- -------- -------- --------
<S> <C> <C> <C>
United States......................................................... $ (207.8) $ 455.8 $ (126.6)
Foreign............................................................... 18.7 338.9 (36.5)
-------- -------- --------
Income (loss) before income taxes, minority interest, extraordinary
charges and cumulative effect of accounting change................... $ (189.1) $ 794.7 $ (163.1)
-------- -------- --------
-------- -------- --------
</TABLE>

At December 31, 1996, the Company had approximately $219 million of net
operating loss carryforwards for U.S. federal tax purposes. To the extent not
utilized, the U.S. federal net operating losses will expire in 2011. Further,
the Company had approximately $725 million of net operating loss carryforwards
for U.S. state tax purposes (which represents approximately $49 million of
deferred tax assets), which to the extent not utilized, expire in 1997 through
2011. The Company also had approximately $57 million of alternative minimum tax
credit carryforwards for U.S. federal tax purposes which are available
indefinitely.

NOTE 10--PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS

The Company has contributory and noncontributory pension plans for the
benefit of most salaried and certain hourly employees. The funding policy for
the plans, with the exception of the Company's salaried supplemental unfunded
plans and the Company's German subsidiary's unfunded plan, is to annually
contribute the statutory required minimum. The salaried pension plans provide
benefits based on a formula that takes into account each participant's estimated
final average earnings. The hourly pension plans provide benefits under a flat
benefit formula. The salaried and hourly plans provide reduced benefits for
early retirement. The salaried plans take into account offsets for governmental
benefits.

Net pension expense for the combined pension plans includes the following
components:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
(IN MILLIONS) 1996 1995 1994
- ---------------------------------------------------------- ------ ------- ------
<S> <C> <C> <C>
Service cost--benefits earned during the period........... $ 17.7 $ 17.0 $ 21.5
Interest cost on projected benefit obligations............ 42.9 63.5 63.5
Actual return on plan assets.............................. (47.6) (100.0) (13.7)
Net amortization and deferral............................. 20.4 51.7 (37.5)
------ ------- ------
Net pension expense....................................... $ 33.4 $ 32.2 $ 33.8
------ ------- ------
------ ------- ------
</TABLE>

39
<PAGE>
STONE CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

NOTE 10--PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS (CONTINUED)
The following table sets forth the funded status of the Company's pension
plans and the amounts recorded in the Consolidated Balance Sheets:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------
1996 1995
--------------------------- ------------
ASSETS ACCUMULATED ASSETS
EXCEED BENEFITS EXCEED
ACCUMULATED EXCEED ACCUMULATED
(IN MILLIONS) BENEFITS ASSETS BENEFITS
- -------------------------------------------------------------------------------- ------------ ------------ ------------
<S> <C> <C> <C>
Actuarial present value of benefit obligations:
Vested benefits............................................................... $ (57.0) $ (460.5) $ (59.5)
Non-vested benefits........................................................... (9.5) (21.9) (2.1)
------ ------------ ------
Accumulated benefit obligation................................................ (66.5) (482.4) (61.6)
Effect of increase in compensation levels..................................... (4.7) (54.1) (2.3)
------ ------------ ------
Projected benefit obligation for service rendered through December 31........... (71.2) (536.5) (63.9)
Plan assets at fair value, primarily stocks, bonds,
fixed investment contracts, real estate and
mutual funds which invest in listed stocks
and bonds..................................................................... 72.4 320.9 64.4
------ ------------ ------
Plan assets in excess of (less than) projected benefits obligation.............. 1.2 (215.6) .5
Unrecognized prior service cost................................................. 3.7 19.0 2.8
Unrecognized net actuarial loss................................................. 3.3 93.3 14.4
Adjustment required to recognize minimum liability.............................. -- (69.7) --
------ ------------ ------
Net prepaid (accrual)........................................................... $ 8.2 $ (173.0) $ 17.7
------ ------------ ------
------ ------------ ------

ACCUMULATED
BENEFITS
EXCEED
(IN MILLIONS) ASSETS
- -------------------------------------------------------------------------------- ------------
<S> <C>
Actuarial present value of benefit obligations:
Vested benefits............................................................... $ (422.1)
Non-vested benefits........................................................... (32.4)
------------
Accumulated benefit obligation................................................ (454.5)
Effect of increase in compensation levels..................................... (59.6)
------------
Projected benefit obligation for service rendered through December 31........... (514.1)
Plan assets at fair value, primarily stocks, bonds,
fixed investment contracts, real estate and
mutual funds which invest in listed stocks
and bonds..................................................................... 286.6
------------
Plan assets in excess of (less than) projected benefits obligation.............. (227.5)
Unrecognized prior service cost................................................. 22.1
Unrecognized net actuarial loss................................................. 96.2
Adjustment required to recognize minimum liability.............................. (68.3)
------------
Net prepaid (accrual)........................................................... $ (177.5)
------------
------------
</TABLE>

The Company has recorded an additional minimum liability for underfunded
plans representing the excess of the unfunded accumulated benefit obligation
over previously recorded liabilities. The additional minimum liability at
December 31, 1996 of $69.7 million is recorded as a long-term liability with an
offsetting intangible asset of $19.1 million and a charge to stockholders'
equity of $31.5 million, net of a tax benefit of $19.1 million. In addition, at
December 31, 1996, the Company had a cumulative net charge to retained earnings
of $11.1 million representing its share of the net charges to retained earnings
recorded by certain non-consolidated affiliates associated with their additional
minimum liabilities. At December 31, 1995, the additional minimum liability of
$68.3 million was recorded as a long-term liability with an offsetting
intangible asset of $21.6 million and a charge to stockholders' equity of $29.0
million, net of a tax benefit of $17.7 million. Also, at December 31, 1995, the
Company had a cumulative net charge to retained earnings of $15.4 million
representing its share of the net charges to retained earnings recorded by
certain non-consolidated affiliates associated with their additional minimum
liabilities.

The weighted average discount rates used in determining the actuarial
present value of the projected benefit obligations at December 31, 1996 and 1995
were 7.75 percent and 7.5 percent, respectively. The rate of increase in future
compensation levels used in determining the actuarial present value of the
projected benefit obligations was 4.0 percent for 1996 and 1995. The expected
long-term rate of return on assets was 11 percent for 1996 and 1995. The change
in the weighted average discount rates and the adoption of a different mortality
table for the valuation of its U.S. plans during 1996 had the net effect of
decreasing the total projected benefit obligation at December 31, 1996 by $3.5
million.

Certain domestic operations of the Company participate in various
multi-employer union-administered defined benefit pension plans that principally
cover production workers. Pension expense under these plans was $5.2 million,
$5.5 million and $5.2 million for 1996, 1995 and 1994, respectively.

40
<PAGE>
STONE CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

NOTE 10--PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS (CONTINUED)
In addition to providing pension benefits, the Company provides certain
retiree health care and life insurance benefits covering substantially all U.S.
salaried and hourly employees and certain Canadian employees. Net periodic
postretirement benefit costs for 1996, 1995 and 1994 included the following
components:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
(IN MILLIONS) 1996 1995 1994
- --------------------------------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Service cost--benefits attributed to service during the period......................... $ 1.0 $ .8 $ 1.5
Interest cost on accumulated postretirement benefit obligation......................... 4.6 6.6 6.0
Net amortization and deferral.......................................................... .4 .7 .9
--- --- ---
Net periodic postretirement benefit cost............................................... $ 6.0 $ 8.1 $ 8.4
--- --- ---
--- --- ---
</TABLE>

The following table sets forth the components of the Company's accumulated
postretirement benefit obligation and the amount recorded in the Consolidated
Balance Sheets:

<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
------------------------------ -----------------------------
(IN MILLIONS) U.S. FOREIGN TOTAL U.S. FOREIGN TOTAL
- ------------------------------ -------- --------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Accumulated postretirement
benefit obligation:
Retirees.................... $ 17.7 $ 11.7 $ 29.4 $ 31.6 $ 10.6 $ 42.2
Active employees--fully
eligible.................. 18.4 .9 19.3 16.0 .8 16.8
Other active employees...... 15.0 1.3 16.3 15.8 1.2 17.0
-------- --------- -------- -------- -------- ---------
Total accumulated
postretirement benefit
obligation.................. 51.1 13.9 65.0 63.4 12.6 76.0
Unrecognized net loss......... (9.6) (2.4) (12.0) (21.5) (1.2 ) (22.7)
-------- --------- -------- -------- -------- ---------
Postretirement benefit
obligation.................. $ 41.5 $ 11.5 $ 53.0 $ 41.9 $ 11.4 $ 53.3
-------- --------- -------- -------- -------- ---------
-------- --------- -------- -------- -------- ---------
</TABLE>

The Company has not currently funded any of its accumulated postretirement
benefit obligation.

The discount rates used in determining the accumulated postretirement
benefit obligation were 7.75 percent at December 31, 1996 and 7.5 percent at
December 31, 1995. The change in the discount rate and the adoption of a new
mortality table had the net effect of increasing the total accumulated
postretirement benefit obligation at December 31, 1996 by $1.1 million. The
assumed health care cost trend rates for substantially all employees used in
measuring the accumulated postretirement benefit obligation ranged from 6.0
percent to 11.0 percent at December 31, 1996 and 7.0 percent to 12.0 percent at
December 31, 1995, decreasing to ultimate rates of 5.5 percent to 8.0 percent.
If the health care cost trend rate assumptions were increased by 1 percent, the
total accumulated postretirement benefit obligation at December 31, 1996 and
1995 would have increased by $5.7 million and $6.8 million, respectively. The
effect of a 1 percent increase in the health care cost trend rate assumptions on
the net periodic postretirement benefit costs for 1996 and 1995 would be
immaterial.

At December 31, 1996, the Company had approximately 6,400 retirees and
24,200 active employees of which approximately 3,400 and 19,700, respectively,
were employees of U.S. operations.

41
<PAGE>
STONE CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

NOTE 11--LONG-TERM DEBT

Long-term debt consists of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
(IN MILLIONS) 1996 1995
- ------------------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
SENIOR DEBT:
9.875% senior notes due February 1, 2001............................................. $ 573.7 $ 573.7
10.75% first mortgage notes due October 1, 2002 (less unamortized debt discount of
$2.6 and $2.9)..................................................................... 497.4 497.1
Term loan (8.6% and 9.2% weighted average rates) payable in five semiannual
installments of $2.0 on April 1 and October 1 of each year through April 1, 1999,
$190.0 on October 1, 1999 and $176.0 on April 1, 2000.............................. 376.0 380.0
Additional term loans (8.9% and 9.3% weighted average rates) payable in twelve
semiannual payments of $2.0 on April 1 and October 1 of each year through 2002,
$181.3 on April 1, 2003 and $182.3 on October 1, 2003.............................. 387.0 200.0
Revolving credit facility (8.9% and 9.4% weighted average rates) due May 15, 1999.... 50.0 53.0
11.875% senior notes due December 1, 1998 (less unamortized debt discount of $.5 and
$.7)............................................................................... 239.5 239.3
11.5% senior notes due August 15, 2006............................................... 200.0 --
11.5% senior notes due October 1, 2004 (less unamortized debt discount of $1.2 and
$1.3).............................................................................. 198.8 198.7
12.625% senior notes due July 15, 1998............................................... 150.0 150.0
11.875% rating adjustable senior notes due August 1, 2016............................ 125.0 --
5.375% to 9.55% fixed rate utility systems and pollution control revenue bonds,
payable in varying annual sinking fund payments through the year 2010 and varying
principal payments through the year 2026 (less unamortized debt discount of $5.7
and $6.4).......................................................................... 229.6 199.1
Floating rate receivables-backed notes (5.9% and 6.4% weighted average rates) due
December 15, 2000.................................................................. 210.0 260.0
5.0% to 8.8% term loans payable in varying amounts through 2003...................... 23.8 31.1
Other (including obligations under capitalized leases of $10.5 and $10.5)............ 45.5 52.4
--------- ---------
3,306.3 2,834.4
Less: current maturities............................................................. (36.7) (27.1)
--------- ---------
Total senior long-term debt........................................................ 3,269.6 2,807.3
--------- ---------
SUBORDINATED DEBT:
11.5% senior subordinated notes...................................................... -- 230.0
10.75% senior subordinated debentures maturing on April 1, 2002 (less unamortized
debt discount of $.7 and $.7)...................................................... 199.3 199.3
10.75% senior subordinated notes maturing on June 15, 1997........................... 150.0 150.0
11.0% senior subordinated notes maturing on August 15, 1999.......................... 119.4 125.0
8.875% convertible senior subordinated notes (convertible at $11.55 per share)
maturing on July 15, 2000 (less unamortized debt discount of $.2 and $.3).......... 58.4 59.7
6.75% convertible subordinated debentures (convertible at $33.94 per share) maturing
on February 15, 2007............................................................... 45.2 45.2
--------- ---------
572.3 809.2
Less: current maturities............................................................. (150.0) --
--------- ---------
Total subordinated debt............................................................ 422.3 809.2
--------- ---------
NON-RECOURSE DEBT OF CONSOLIDATED AFFILIATES:
SVCPI credit facilities (6.4% and 7.7% weighted average rates) payable in semiannual
installments beginning July 31, 1997 of $8.5 through July 31, 1998 and $14.1
thereafter through January 31, 2002 with a final payment of $138.3 on December 31,
2002............................................................................... 262.8 276.6
Other................................................................................ 7.4 12.0
--------- ---------
270.2 288.6
Less: current maturities............................................................. (11.0) (20.0)
--------- ---------
Total non-recourse debt of consolidated affiliates................................. 259.2 268.6
--------- ---------
Total long-term debt................................................................. $ 3,951.1 $ 3,885.1
--------- ---------
--------- ---------
</TABLE>

42
<PAGE>
STONE CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

NOTE 11--LONG-TERM DEBT (CONTINUED)
On March 22, 1996, the Company and its bank group amended and restated the
Company's bank credit agreement to, among other things, provide for an
additional senior secured term loan facility of $190 million and a supplemental
revolving credit facility of $110 million. Subsequently in 1996, the Company and
its bank group further amended the credit agreement to, among other things,
permit the Company to contribute its retail packaging assets into a joint
venture with Gaylord Container Corporation (see Note 3) and ease certain
financial covenant requirements (including the interest coverage and
indebtedness ratio requirements). At December 31, 1996, the Company's bank
credit agreement, as amended, provides for three senior secured term loans
aggregating $763 million which mature through October 1, 2003 and a $560 million
senior secured revolving credit facility commitment maturing May 15, 1999
(collectively the "Credit Agreement"). The Credit Agreement no longer has a
cross-acceleration provision in the event of an acceleration of the non-recourse
debt of Stone Venepal (Celgar) Pulp, Inc. ("SVCPI").

On July 24, 1996, the Company, in a private placement, sold $125 million
principal amount of 11 7/8 percent Rating Adjustable Senior Notes due 2016
("Rating Adjustable Senior Notes"). Interest, which is payable semi-annually
commencing February 1, 1997, can be adjusted from time to time by reference to
the credit rating assigned to the Rating Adjustable Senior Notes by Moody's
Investors Service, Inc. and/or Standard and Poor's Corporation. Subsequently, on
November 8, 1996, pursuant to an exchange offer, the holders of the privately
placed debt exchanged such notes for registered notes. On August 16, 1996, Stone
Container Finance Company of Canada ("SCFCC"), a newly-formed, wholly owned
subsidiary of the Company, sold $200 million principal amount of 11 1/2 percent
Senior Notes due August 15, 2006 (the "SCFCC Notes"). Interest on the SCFCC
Notes is payable semi-annually commencing February 15, 1997. Payment of the
principal and interest on the SCFCC Notes is guaranteed by the Company. The net
proceeds received from the sales of the Rating Adjustable Senior Notes and the
SCFCC Notes were used by the Company to purchase and retire the remaining $222
million principal amount of its 11 1/2 percent Senior Subordinated Notes on
September 16, 1996 and to provide funds for general corporate purposes. Earlier
in the year, the Company purchased $8 million of the 11 1/2 percent Senior
Subordinated Notes on the open market.

During the third and fourth quarters of 1995, in separate, independently
negotiated transactions, the Company purchased and retired $190 million
principal amount of its 8 7/8 percent Convertible Senior Subordinated Notes (the
"Convertible Senior Subordinated Notes"). The aggregate value paid by the
Company to purchase and retire the $190 million Convertible Senior Subordinated
Notes was approximately $370 million comprised of approximately $190 million
cash (which was equal to the face value of the Convertible Senior Subordinated
Notes purchased) and the issuance of approximately 8.5 million shares of common
stock valued at approximately $180 million. The Convertible Senior Subordinated
Notes purchased and retired were convertible into approximately 16.5 million
common shares. Although the Company issued approximately 8.5 million shares of
common stock, total common shares on a fully diluted basis were reduced by
approximately 8 million common shares.

As a result of certain debt prepayments and repurchases (including the 1995
purchase of $190 million principal amount of Convertible Senior Subordinated
Notes), the Company's results reflect extraordinary charges from the early
extinguishments of debt of $3.7 million (net of income tax benefit of $2.4
million), $189.0 million (net of income tax benefit of $4.9 million) and $61.6
million (net of income tax benefit of $36.5 million) for 1996, 1995 and 1994,
respectively.

At December 31, 1996, the $819.5 million of borrowings and accrued interest
outstanding under the Credit Agreement were secured by property, plant and
equipment with a net book value of $1.5 billion, and by a lien on certain of the
Company's inventories. Additionally, other loan agreements with a balance of
$1.0 billion were collateralized by approximately $490.7 million of property,
plant and equipment--net and an investment and by $310.3 million of cash,
accounts receivable and inventories.

The Company pays a 1/2 percent commitment fee on the unused portions of its
revolving credit facility. The Credit Agreement contains covenants that include,
among other things, the maintenance of certain financial tests and ratios.
Unless operating results improve, the Company may be required to seek covenant
relief from its bank group during 1997. Although no assurance can be given, the
Company believes such relief, if sought, would be granted. Additionally, the
term loan portions of the Credit Agreement provide for mandatory prepayments
from sales of certain assets, certain debt financings and a percentage of excess
cash flow (as defined). The Company's bank lenders, at the Company's request,
may at their option waive the receipt of certain mandatory prepayments. In 1996,
the Company

43
<PAGE>
STONE CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

NOTE 11--LONG-TERM DEBT (CONTINUED)
received consents from a majority of its holders to waive mandatory repayment
requirements from excess cash flow (as defined) on no less than 80 percent of
each of the Company's term loans until September 1997. Any mandatory and
voluntary prepayments are allocated against the term loan amortizations in
inverse order of maturity. Mandatory prepayments from sales of collateral,
unless replacement collateral is provided, will be applied ratably to the term
loans and revolving credit facility, permanently reducing the loan commitments
under the Credit Agreement. The Credit Agreement also contains cross-default
provisions to the indebtedness of $10 million or more of the Company and certain
subsidiaries.

The Company's various Senior Note Indentures under which approximately $2.0
billion of debt is outstanding contains provisions which require the Company to
maintain a minimum Subordinated Capital Base (as defined) of $1 billion. In the
event of a failure to maintain such minimum amount for two successive quarters
the Company would be required to semi-annually offer to purchase 10 percent of
such outstanding indebtedness at par until the minimum Subordinated Capital Base
is again attained. In the event that the Company's Credit Agreement had
outstanding amounts in excess of that outstanding under the Senior Note
Indentures, and would not permit the offer to repurchase, then the Company would
be required to increase the rates on the Notes by 50 basis points per quarter up
to a maximum of 200 basis points until the minimum Subordinated Capital Base is
attained. The Company's Subordinated Capital Base was $1,040 million at December
31, 1996. It is anticipated that the minimum Subordinated Capital Base will fall
below the required levels in the first quarter of 1997 and unless results
improve in the second quarter of 1997, the required level of Subordinated
Capital Base will not be met in the second quarter of 1997. As a result of this,
the Company plans to issue securities which will increase the Subordinated
Capital Base to required levels by June 30, 1997. There is however no assurance
that the Company will achieve such financings.

The Company has an accounts receivable securitization program whereby Stone
Receivables Corporation purchases, on an ongoing basis, certain of the accounts
receivable of the Company. The initial accounts receivable under the program
were purchased with the net proceeds received from the issuance of $260 million
of floating-rate notes by Stone Receivables Corporation in March 1995. The
purchased accounts receivable are solely the assets of Stone Receivables
Corporation, which is a wholly owned but separate corporate entity of the
Company with its own separate creditors. In the event of a liquidation of Stone
Receivables Corporation, such creditors would be entitled to satisfy their
claims from Stone Receivables Corporation prior to any distribution to the
Company. On December 16, 1996, Stone Receivables Corporation redeemed $50
million principal of its $260 million floating-rate notes. At December 31, 1996,
the Company's Consolidated Balance Sheet included $213 million of Stone
Receivables Corporation accounts receivable under the program and $210 million
of borrowings under the program. At December 31, 1995, the Company's
Consolidated Balance Sheet included $302 million of Stone Receivables
Corporation accounts receivable under the program and $260 million of borrowings
under the program.

The amounts of long-term debt outstanding at December 31, 1996 maturing
during the next five years are as follows:

<TABLE>
<CAPTION>
(IN MILLIONS)
- --------------------------------------------------------------------
<S> <C>
1997................................................................ $ 193.6
1998................................................................ 431.9
1999................................................................ 409.5
2000................................................................ 483.5
2001................................................................ 622.7
Thereafter.......................................................... 1,997.1
</TABLE>

See also first three paragraphs included in the "Outlook" section of the
MD&A. Amounts payable under capitalized lease agreements are excluded from the
above tabulation. See Note 13--"Long-term Leases" for capitalized lease
maturities.

44
<PAGE>
STONE CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

NOTE 12--FINANCIAL INSTRUMENTS

At December 31, 1996 and 1995, the carrying values and fair values of the
Company's financial instruments are listed below:

<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------
1996 1995
--------------------- ---------------------
CARRYING FAIR CARRYING FAIR
(IN MILLIONS) AMOUNT VALUE AMOUNT VALUE
- ------------------------------------------------------------ --------- --------- --------- ---------
<S> <C> <C> <C> <C>
Notes receivable and long-term investments.................. $ 147.8 $ 136.7 $ 112.9 $ 102.9
Indebtedness................................................ 4,138.3 4,246.1 3,921.6 3,985.3
Interest rate swaps in receivable (payable) position........ (.1) (9.8) (.2) (1.9)
</TABLE>

The fair values of notes receivable and certain investments are based on
discounted future cash flows or the applicable quoted market price. The fair
value of the Company's debt is estimated based on the quoted market price for
the same or similar issues. The fair value of interest-rate swap agreements are
obtained from dealer quotes. These values represent the estimated amount the
Company would pay to terminate agreements, taking into consideration the current
interest rate and market conditions. These financial instruments are not held
for trading purposes.

The Company is party to two interest-rate swap contracts with a duration of
five and ten years to manage interest rate exposures on $250 million of certain
fixed rate indebtedness. The separate contracts have the effect of converting
the fixed rate of interest into a floating interest rate on $100 million of the
9 7/8 percent Senior Notes and on $150 million of the 11 1/2 percent Senior
Notes. These interest-rate swap contracts were entered into in order to balance
the Company's fixed-rate and floating-rate debt portfolios. Under the
interest-rate swaps, the Company agrees with the other party to exchange, at
specified intervals, the difference between fixed-rate and floating-rate
interest amounts calculated by reference to an agreed notional principal amount.
While the Company is exposed to credit loss on its interest-rate swaps in the
event of nonperformance by the counterparties to such swaps, management believes
that such nonperformance is unlikely to occur given the financial resources of
the counterparties.

The following table indicates the weighted average receive rate and pay rate
during 1996 relating to the interest-rate swaps outstanding at December 31, 1996
and 1995:

<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Interest-rate swap--notional amount (in millions)................... $ 150.0 $ 150.0
Average receive rate (fixed by contract terms).................... 5.7% 5.8%
Average pay rate.................................................. 5.5% 6.2%

Interest-rate swap--notional amount (in millions)................... $ 100.0 $ 100.0
Average receive rate (fixed by contract terms).................... 5.6% 5.6%
Average pay rate.................................................. 5.6% 5.6%
</TABLE>

The average pay rate for both interest-rate swaps is the six month LIBOR.

45
<PAGE>
STONE CONTAINER CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

NOTE 13--LONG-TERM LEASES

The Company leases certain of its facilities and equipment under leases
expiring through the year 2023.

Future minimum lease payments under capitalized leases and their present
value at December 31, 1996 and future minimum rental commitments (exclusive of
real estate taxes and other expenses) under operating leases having initial or
remaining non-cancellable terms in excess of one year are reflected below:

<TABLE>
<CAPTION>
CAPITALIZED OPERATING
(IN MILLIONS) LEASES LEASES
- -------------------------------------------------------------------- --------- ---------
<S> <C> <C>
1997................................................................ $ 4.8 $ 86.3
1998................................................................ 3.4 75.2
1999................................................................ 2.0 63.5
2000................................................................ .4 52.1
2001................................................................ .4 46.1
Thereafter.......................................................... 1.2 192.4
--------- ---------
Total minimum lease payments........................................ 12.2 $ 515.6
---------
---------
Less: Imputed interest.............................................. 1.7
---------
Present value of future minimum lease payments...................... $ 10.5
---------
---------
</TABLE>

Rent expense for operating leases, including leases having a duration of
less than one year, was approximately $108 million in 1996, $103 million in 1995
and $87 million in 1994.

NOTE 14--PREFERRED STOCK

The Company has authorized 10 million shares of Preferred Stock. At December
31, 1996, the Company has issued and outstanding 4.6 million shares of $1.75
Series E Cumulative Convertible Exchangeable Preferred Stock (the "Series E
Cumulative Preferred Stock"), $.01 par value. Shares of preferred stock can be
issued in series with varying terms as determined by the Board of Directors.
Dividends on the Series E Cumulative Preferred Stock are payable quarterly when
declared by the Company's Board of Directors. The Series E Cumulative Preferred
Stock is convertible, at the option of the holder at any time, into shares of
the Company's common stock at a conversion price of $33.94 per share of common
stock, subject to adjustment under certain conditions. The Series E Cumulative
Preferred Stock may alternatively be exchanged, at the option of the Company,
for the Company's 7 percent Convertible Subordinated Exchange Debentures due
February 15, 2007 in a principal amount equal to $25.00 per share of Series E
Cumulative Preferred Stock so exchanged. Additionally, the Series E Cumulative
Preferred Stock is redeemable at the option of the Company, in whole or from
time to time in part, commencing February 16, 1996.

The Company paid cash dividends of $1.75 per share on the Series E
Cumulative Preferred Stock in 1996 and $2.625 per share in 1995. The declaration
of dividends by the Board of Directors is subject to, among other things, the
Company's ability to comply with financial covenants contained in the Company's
Credit Agreement and in its Senior Subordinated Indenture. In the event the
Company has six quarterly dividends that remain unpaid on the Series E
Cumulative Preferred Stock, 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. Irrespective of the
amount available in the dividend pool under the Credit Agreement, the Credit
Agreement permits dividends to be paid on the Series E Cumulative Preferred
Stock if there is an available dividend pool under the Company's Senior
Subordinated Indenture dated March 15, 1992 (the "Senior Subordinated
Indenture") relating to its 10 3/4 percent Senior Subordinated Notes, its 11
percent Senior Subordinated Notes and its 10 3/4 percent Senior Subordinated
Debentures. At December 31, 1996 the amounts available in the dividend pool
under the Credit Agreement and under the Senior Subordinated Indenture were
approximately $46 million and $50 million, respectively.

46
<PAGE>
STONE CONTAINER CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

NOTE 15--COMMON STOCK

The Company has authorized 200,000,000 shares of common stock, $.01 par
value, of which 99,297,021 shares were outstanding at December 31, 1996.

In 1995, the Company issued approximately 8.5 million shares of common stock
related to the extinguishment of debt and in 1994 sold approximately 19 million
shares of common stock.

The Company has restrictions on the payment of cash dividends on its common
stock under certain of the Company's Indentures and under its Credit Agreement.
Common stock cash dividends cannot be declared and paid in the event the Company
has any accumulated preferred stock dividend arrearages or there is no
availability in the dividend pool under the Credit Agreement or under the Senior
Subordinated Indenture. Additionally, preferred and common stock cash dividends
cannot be declared and paid in the event the Company's total stockholders'
equity falls below $750 million. See also Note 14. The Company paid cash
dividends of $0.60 and $0.30 per share on its common stock in 1996 and 1995,
respectively.

STOCK RIGHTS:

Each outstanding share of the Company's common stock carries a stock
purchase right ("Right"). Each Right entitles the holder to purchase from the
Company one one-hundredth of a share of Series D Junior Participating Preferred
Stock, par value $.01 per share, at a purchase price of $130 subject to
adjustment under certain circumstances. The Rights expire August 8, 1998 unless
extended or earlier redeemed by the Company.

The Rights will be exercisable only if a person or group, subject to certain
exceptions, acquires 15 percent or more of the Company's common stock or
announces a tender offer, the consummation of which would result in ownership by
such person or group of 15 percent or more of the Company's common stock. The
Company can redeem the Rights at the rate of $.01 per Right at any time before
the tenth business day (subject to extension) after a 15 percent position is
acquired.

If the Company is acquired in a merger or other business combination
transaction, each Right will entitle its holder (other than the acquiring person
or group) to purchase, at the Right's then-current exercise price, a number of
the acquiring company's shares of common stock having a market value at that
time of twice the Right's then-current exercise price.

In addition, in the event that a 15 percent or greater stockholder acquires
the Company by means of a reverse merger in which the Company and its common
stock survive, or engages in self-dealing transactions with the Company, each
holder of a Right (other than the acquiring person or group) will be entitled to
purchase the number of shares of the Company's common stock having a market
value of twice the then-current exercise price of the Right.

STOCK OWNERSHIP AND OPTION PLANS:

The Company's stockholders approved a Stock Option Plan, effective January
1, 1993 (the "1993 Plan"), which authorized 1,530,000 shares of common stock and
provided for the issuance of either incentive stock options or non-qualified
stock options for the purchase of common shares at prices not less than 100
percent of the market value of such shares on the date of grant. Options granted
under the 1993 Plan are exercisable, in whole or in part, after one year but no
later than ten years from the date of the respective grant. On May 9, 1995, the
stockholders approved the 1995 Long-term Incentive Plan (the "1995 Plan") which
permits the Company to issue incentive stock options, non-qualified stock
options, stock appreciation rights, restricted stock, bonus stock and
performance shares. Under the 1995 Plan, the annual amount of common stock
available for grant, other than for incentive stock options, will be limited to
1 1/2 percent of the outstanding shares of common stock as of the beginning of
each year plus a carryover from prior years if such 1 1/2 percent is not
granted. In no event shall any stock options be exercised later than ten years
from the respective grant date.

47
<PAGE>
STONE CONTAINER CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

NOTE 15--COMMON STOCK (CONTINUED)
Transactions under the stock option plans are summarized as follows:

<TABLE>
<CAPTION>
OPTION OPTION PRICE
SHARES PER SHARE
----------- ---------------
<S> <C> <C>
Outstanding January 1, 1994....................................................................... 546,031 $ 8.74-29.29
Granted......................................................................................... 670,000 13.38
Exercised....................................................................................... (9,691) 8.74-13.38
Cancelled....................................................................................... (162,528) 8.74-29.29
----------- ---------------
Outstanding December 31, 1994..................................................................... 1,043,812 8.74-29.29
Granted......................................................................................... 1,037,900 18.00-22.13
Exercised....................................................................................... (134,860) 8.74-21.20
Cancelled....................................................................................... (49,890) 13.38-29.29
----------- ---------------
Outstanding December 31, 1995..................................................................... 1,896,962 13.38-29.29
Granted......................................................................................... 1,980,721 13.38
Exercised....................................................................................... (30,000) 13.38
Cancelled....................................................................................... (97,147) 13.38-29.29
----------- ---------------
Outstanding December 31, 1996..................................................................... 3,750,536 13.38-29.29
-----------
-----------
Options exercisable at December 31,
1996............................................................................................ 1,003,890 13.38-29.29
1995............................................................................................ 881,262 13.38-29.29
1994............................................................................................ 395,285 8.74-29.29
Options available for grant at December 31,
1996............................................................................................ 805,932
1995............................................................................................ 1,227,066
1994............................................................................................ 882,000
</TABLE>

The Company's previous Long-term Incentive Plan, which had been adopted in
1992 (the "1992 Plan") and provided for contingent awards of restricted shares
of common stock and cash to certain key employees, was replaced by the 1995
Plan. The payment of the cash portion of awards granted under the 1992 Plan will
depend on the extent to which the Company has met certain long-term performance
goals as established by a committee of outside directors. The compensation
related to this program is amortized over the related five-year restricted
periods. Under the 1992 Plan, 1,800,000 shares had been reserved for issuance,
of which 133,176 and 249,655 shares were granted in 1995 and 1994, respectively.

The Company applies APB Opinion 25 and related Interpretations in accounting
for its plans. Accordingly, no recognition is given to stock options until they
are exercised, at which time the option price received is credited to common
stock. The charge to compensation cost related to the restricted shares was $1.5
million, $3.8 million and $3.6 million for 1996, 1995 and 1994, respectively. In
1996, prior cash awards that were accrued have been deemed to be not payable due
to the financial results of the Company.

Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123"), by electing to continue to apply the intrinsic value-based method of
accounting for stock-based compensation. Had compensation cost been determined
on the basis of fair value pursuant to SFAS 123, net income and earnings per
share would have been reduced as follows:

<TABLE>
<CAPTION>
1996 1995
------------------------- -------------------------
AS REPORTED PRO FORMA AS REPORTED PRO FORMA
------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
Net income......................................................... $ (126.2) $ (130.0) $ 255.5 $ 254.2
Primary earnings per share......................................... (1.35) (1.39) 2.63 2.61
Fully diluted earnings per share................................... n/a n/a 2.24 2.23
</TABLE>

The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions: for grants in both years a dividend yield of 4.2 percent; expected

48
<PAGE>
STONE CONTAINER CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

NOTE 15--COMMON STOCK (CONTINUED)
lives of 6 years; and expected volatility of 47 percent; for grants made in 1996
and 1995 risk free interest rates of 5.5 percent and 7.2 percent, respectively.

NOTE 16--RELATED PARTY TRANSACTIONS

The Company sold paperboard, market pulp and fiber to and purchased
containerboard and kraft paper from various non-consolidated affiliates. Such
transactions were primarily at market prices. The Company also paid a commission
fee to Stone-Consolidated pursuant to a sales agency agreement expiring December
31, 2004 and paid fees for services rendered by Stone-Consolidated. The amounts
included in the table below include transactions with Stone-Consolidated since
November 1, 1995, with Florida Coast since June 1, 1996 and with S&G since July
12, 1996. (See also Note 3).

The following table summarizes the Company's related party transactions with
its non-consolidated affiliates for each year presented:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
(IN MILLIONS) 1996 1995 1994
- ---------------------------------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Net sales to/(purchases from)........................................................... $ 183.0 $ 211.2 $ 147.1
Net receivable from/(payable to)........................................................ 45.9 40.5 37.9
Commissions and fees for services received.............................................. 10.4 2.3 --
</TABLE>

The Company had outstanding loans and interest receivable from
non-consolidated affiliates of approximately $44.4 million and $9.9 million at
December 31, 1996 and 1995, respectively. Additionally, the Company held
securities of a non-consolidated affiliate of approximately $40.0 million at
December 31, 1996.

NOTE 17--ADDITIONAL INFORMATION RELATING TO THE CONSOLIDATED FINANCIAL
STATEMENTS

OTHER OPERATING (INCOME) EXPENSE, NET:

The major components of other operating (income) expense--net are as
follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
(IN MILLIONS) 1996 1995 1994
- --------------------------------------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
(Gains) losses on sales of investments or assets............................................. $ 5.4 $ -- $ (13.8)
Gain from an involuntary conversion at a paper mill.......................................... -- -- (22.0)
Other........................................................................................ -- -- 1.4
--------- --------- ---------
Total other operating (income) expense--net.................................................. $ 5.4 $ -- $ (34.4)
--------- --------- ---------
--------- --------- ---------
</TABLE>

OTHER (INCOME) EXPENSE, NET:

The major components of other (income) expense--net are as follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
(IN MILLIONS) 1996 1995 1994
- ----------------------------------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Interest income.......................................................................... $ (16.1) $ (15.5) $ (20.9)
Foreign currency transaction (gains) losses.............................................. .5 (8.1) 15.8
Other.................................................................................... (5.6) (9.5) (3.8)
--------- --------- ---------
Total other (income) expense--net........................................................ $ (21.2) $ (33.1) $ (8.9)
--------- --------- ---------
--------- --------- ---------
</TABLE>

INTEREST EXPENSE:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
(IN MILLIONS) 1996 1995 1994
- ---------------------------------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Total interest cost incurred............................................................ $ 425.2 $ 473.5 $ 460.7
Interest capitalized.................................................................... (11.7) (13.2) (4.7)
--------- --------- ---------
Interest expense........................................................................ $ 413.5 $ 460.3 $ 456.0
--------- --------- ---------
--------- --------- ---------
</TABLE>

49
<PAGE>
STONE CONTAINER CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

NOTE 17--ADDITIONAL INFORMATION RELATING TO THE CONSOLIDATED FINANCIAL
STATEMENTS (CONTINUED)
PROVISION FOR DOUBTFUL ACCOUNTS AND NOTES RECEIVABLE:

Selling, general and administrative expenses include provisions for doubtful
accounts and notes receivable of $5.5 million for 1996, $6.7 million for 1995
and $6.6 million for 1994.

ASSETS HELD FOR SALE:

The Company has ceased operations of certain non-core wood products
facilities and is liquidating such assets as appropriate opportunities are
presented. These net assets which are included in other current assets in the
Consolidated Balance Sheets aggregated approximately $18 million and $32 million
at December 31, 1996 and 1995, respectively.

INSURANCE RECEIVABLE:

As a result of the 1994 Panama City digester accident, the Company is
seeking recovery from its insurance carriers for both the losses to property and
the losses as result of business interruption. A partial recovery of
approximately $31 million has been received by the Company from certain
carriers, claims of approximately $9 million have been committed to be paid and
claims of approximately $43 million covering the remaining portion of such
losses are still pending.

LONG-TERM NOTE RECEIVABLE:

The Company had a net receivable from a domestic customer of approximately
$58 million and $74 million at December 31, 1996 and 1995, respectively. Of
these amounts, approximately $44 million and $61 million, respectively, are
included in other long-term assets with the remaining amounts reflected in
accounts and notes receivable in the Company's Consolidated Balance Sheets. This
seven year interest bearing note receivable requires quarterly payments which
commenced in the first quarter of 1995.

ACCRUED AND OTHER CURRENT LIABILITIES:

The major components of accrued and other current liabilities are as
follows:

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
(IN MILLIONS) 1996 1995
- ----------------------------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
Accrued interest............................................................................... $ 93.4 $ 88.1
Accrued payroll, related taxes and employee benefits........................................... 70.8 87.7
Other.......................................................................................... 137.5 120.8
--------- ---------
Total accrued and other current liabilities.................................................... $ 301.7 $ 296.6
--------- ---------
--------- ---------
</TABLE>

OTHER LONG-TERM LIABILITIES:

Included in other long-term liabilities at December 31, 1996 and 1995 is
approximately $36 million and $42 million, respectively, of deferred income
relating to the October 1992 sale of an energy contract at the Company's
Hopewell mill. This amount is being amortized over a 12-year period.

NOTE 18--COMMITMENTS AND CONTINGENCIES

At December 31, 1996, the Company had commitments outstanding for capital
expenditures under purchase orders and contracts of approximately $14 million.

SVCPI (which is a 90 percent owned indirect subsidiary of the Company) and
CITIC B.C. each own 50 percent of the assets comprising the Celgar Pulp mill
located in Castlegar, British Columbia. Each of SVCPI and CITIC B.C. borrowed
equal amounts of money from a group of banks (the "Lenders") to finance the
expansion of the Celgar mill. The assets of the mill are cross collateralized
supporting the loans of CITIC B.C. and SVCPI. In June 1996, CITIC B.C. defaulted
on its loan and as a result the Lenders gave CITIC B.C. and SVCPI a notice of
termination of CITIC B.C.'s loan.

SVCPI elected to give the Lenders notice that, pursuant to the loan
agreement, it would elect to purchase CITIC B.C.'s share of the Celgar mill
assets or find a third party buyer. The purchase by SVCPI would include the
assumption of CITIC B.C.'s debt. The notice by SVCPI imposed a six month
moratorium on the Lenders from pursuing their rights.

50
<PAGE>
STONE CONTAINER CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

NOTE 18--COMMITMENTS AND CONTINGENCIES (CONTINUED)
On January 18, 1997, SCVPI cured the CITIC B.C. default and gave notice to take
possession of the assets owned by CITIC B.C. CITIC B.C. initiated a suit to
enjoin SVCPI from such action. Currently, the joint venture partners are
arbitrating a dispute over whether or not SVCPI had the right to give notice to
take possession of the mill.

The Company's operations are subject to extensive environmental regulation
by federal, state and local authorities in the United States and regulatory
authorities with jurisdiction over its foreign operations. The Company has in
the past made significant capital expenditures to comply with water, air and
solid and hazardous waste regulations and expects to make significant
expenditures in the future. Capital expenditures for environmental control
equipment and facilities were approximately $46 million in 1996, and the Company
anticipates that 1997 and 1998 environmental capital expenditures will
approximate $33 million and $43 million, respectively. The majority of the 1998
expenditures relate to the amounts that the Company currently anticipates will
be required once final "cluster rules" described in "Environmental Issues" on
pages 17-18 of the MD&A are adopted. Although capital expenditures for
environmental control equipment and facilities and compliance costs in future
years will depend on legislative and technological developments that cannot be
predicted at this time, the Company anticipates that these costs will increase
when final "cluster rules" are adopted and as other environmental regulations
become more stringent. See also "Environmental Issues" on pages 17-18 of the
MD&A for further environmental matters.

Refer to Notes 11, 12 and 13 for further discussion of the Company's debt,
hedging and lease commitments.

Additionally, the Company is involved in certain litigation primarily
arising in the normal course of business. In the opinion of management, the
Company's liability under any pending litigation would not materially affect its
financial condition, results of operations or liquidity.

NOTE 19--SEGMENT AND GEOGRAPHIC INFORMATION

BUSINESS SEGMENTS:

As a result of the November 1995 de-consolidation of Stone-Consolidated (see
Note 4) and the integrated nature of the Company's principal consolidated
operations, the Company now operates in a single business--the production and
sale of commodity pulp, paper and packaging products. Accordingly, business
segment reporting is no longer presented.

Financial information by business segment for prior years is summarized as
follows:

<TABLE>
<CAPTION>
DEPRECIATION
INCOME AND CAPITAL
(IN MILLIONS) SALES (LOSS)(1) AMORTIZATION ASSETS EXPENDITURES
- -------------------------------------------------------- ---------- ------------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
1995
- --------------------------------------------------------
Paperboard and paper packaging.......................... $ 5,405.8 $ 943.6 $ 203.5 $ 3,536.2 $ 198.3
White paper and other................................... 2,010.6 367.7 158.4 1,347.2 183.2
Intersegment sales(4)................................... (65.2)
---------- ------------- ------------- ------------- ------------
7,351.2 1,311.3 361.9 4,883.4 381.5
Interest expense........................................ (460.3)
Foreign currency gains.................................. 8.1
General corporate....................................... (64.4)(2) 9.9 1,515.5(3) 5.0
---------- ------------- ------------- ------------- ------------
Total................................................... $ 7,351.2 $ 794.7 $ 371.8 $ 6,398.9 $ 386.5
---------- ------------- ------------- ------------- ------------
---------- ------------- ------------- ------------- ------------
</TABLE>

51
<PAGE>
STONE CONTAINER CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

NOTE 19--SEGMENT AND GEOGRAPHIC INFORMATION (CONTINUED)

<TABLE>
<CAPTION>
DEPRECIATION
INCOME AND CAPITAL
SALES (LOSS)(1) AMORTIZATION ASSETS EXPENDITURES
---------- ------------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
1994
- --------------------------------------------------------
Paperboard and paper packaging.......................... $ 4,241.5 $ 354.2 $ 199.1 $ 3,440.1 $ 114.6
White paper and other................................... 1,549.6 25.4 147.3 2,884.4 114.0
Intersegment sales(4)................................... (42.4)
---------- ------------- ------------- ------------- ------------
5,748.7 379.6 346.4 6,324.5 228.6
Interest expense........................................ (456.0)
Foreign currency losses................................. (15.8)
General corporate....................................... (70.9)(2) 12.5 680.4(3) 4.0
---------- ------------- ------------- ------------- ------------
Total................................................... $ 5,748.7 $ (163.1) $ 358.9 $ 7,004.9 $ 232.6
---------- ------------- ------------- ------------- ------------
---------- ------------- ------------- ------------- ------------
</TABLE>

- ---------

(1) Income (loss) before taxes, minority interest, extraordinary charges and
cumulative effect of accounting change.

(2) Included equity in net income (loss) of non-consolidated vertically
integrated affiliates as follows: Paperboard and paper packaging segment
$4.2 in 1995 and $(1.4) in 1994 and White paper and other segment $15.7 in
1995, and $(6.3) in 1994.

(3) Included investments in non-consolidated vertically integrated affiliates as
follows: Paperboard and paper packaging segment $85.8 in 1995 and $82.7 in
1994 and White paper and other segment $1,010.4 in 1995 and $263.1 in 1994.

(4) Intersegment sales were accounted for at transfer prices which approximate
market prices.

GEOGRAPHIC SEGMENTS:

The table below provides financial information for the Company's operations
based on the region in which the operations are located.

<TABLE>
<CAPTION>
TRADE INTER-AREA TOTAL INCOME
(IN MILLIONS) SALES SALES SALES (LOSS)(3) ASSETS
- ------------------------------------------------------- --------- ---------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C>
1996
- -------------------------------------------------------
United States.......................................... $ 4,223.5 $ 33.0 $ 4,256.5 $ 243.7 $2,961.2
Canada................................................. 309.6 54.5 364.1 (15.1) 916.4
Europe and other....................................... 608.7 -- 608.7 15.9 669.8
--------- ---------- --------- ---------- ----------
5,141.8 87.5 5,229.3 244.5 4,547.4
Interest expense....................................... (413.5)
Foreign currency transaction losses.................... (.5)
General corporate...................................... (19.6)(1) 1,806.4(2)
Inter-area eliminations................................ (87.5) (87.5) --
--------- ---------- --------- ---------- ----------
Total.................................................. $ 5,141.8 $ -- $ 5,141.8 $ (189.1) $6,353.8
--------- ---------- --------- ---------- ----------
--------- ---------- --------- ---------- ----------
</TABLE>

52
<PAGE>
STONE CONTAINER CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

NOTE 19--SEGMENT AND GEOGRAPHIC INFORMATION (CONTINUED)

<TABLE>
<CAPTION>
TRADE INTER-AREA TOTAL INCOME
(IN MILLIONS) SALES SALES SALES (LOSS)(3) ASSETS
- ------------------------------------------------------- --------- ---------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C>
1995
- -------------------------------------------------------
United States.......................................... $ 5,238.7 $ 46.1 $ 5,284.8 $ 941.9 $3,313.4
Canada................................................. 1,276.8 60.2 1,337.0 334.3 942.5
Europe and other....................................... 835.7 -- 835.7 35.1 627.5
--------- ---------- --------- ---------- ----------
7,351.2 106.3 7,457.5 1,311.3 4,883.4
Interest expense....................................... (460.3)
Foreign currency transaction gains..................... 8.1
General corporate...................................... (64.4)(1) 1,515.5(2)
Inter-area eliminations................................ (106.3) (106.3) --
--------- ---------- --------- ---------- ----------
Total.................................................. $ 7,351.2 $ -- $ 7,351.2 $ 794.7 $6,398.9
--------- ---------- --------- ---------- ----------
--------- ---------- --------- ---------- ----------
</TABLE>

<TABLE>
<CAPTION>
TRADE INTER-AREA TOTAL INCOME
(IN MILLIONS) SALES SALES SALES (LOSS)(3) ASSETS
- ------------------------------------------------------- --------- ---------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C>
1994
- -------------------------------------------------------
United States.......................................... $ 4,187.7 $ 23.9 $ 4,211.6 $ 344.0 $3,393.8
Canada................................................. 942.0 36.0 978.0 20.3 2,152.8
Europe................................................. 619.0 -- 619.0 15.3 777.9
--------- ---------- --------- ---------- ----------
5,748.7 59.9 5,808.6 379.6 6,324.5
Interest expense....................................... (456.0)
Foreign currency transaction losses.................... (15.8)
General corporate...................................... (70.9)(1) 680.4(2)
Inter-area eliminations................................ (59.9) (59.9) --
--------- ---------- --------- ---------- ----------
Total.................................................. $ 5,748.7 $ -- $ 5,748.7 $ (163.1) $7,004.9
--------- ---------- --------- ---------- ----------
--------- ---------- --------- ---------- ----------
</TABLE>

- ---------
(1) Includes equity in net income (loss) of non-consolidated vertically
integrated affiliates as follows: United States $(2.0) in 1996, $3.5 in 1995
and $.6 in 1994; Canada $74.5 in 1996, $28.6 in 1995 and $(2.3) in 1994; and
other $(9.3) in 1996, $(12.2) in 1995 and $(6.0) in 1994.

(2) Includes investments in non-consolidated vertically integrated affiliates as
follows: United States $37.4 in 1996, $9.8 in 1995 and $1.5 in 1994; Canada
$1,077.9 in 1996, $1,022.3 in 1995 and $295.2 in 1994; and other $69.8 in
1996, $64.1 in 1995 and $49.1 in 1994.

(3) Income (loss) before taxes, minority interest, extraordinary charges and
cumulative effect of accounting change.

The Company's export sales from the United States were approximately $470
million, $839 million and $476 million for 1996, 1995 and 1994,
respectively.

53
<PAGE>
STONE CONTAINER CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

NOTE 20--SUMMARY OF QUARTERLY DATA (UNAUDITED)

The following table summarizes quarterly financial data for 1996 and 1995:

<TABLE>
<CAPTION>
QUARTER YEAR
---------------------------------------------- ----------
(IN MILLIONS EXCEPT PER SHARE) FIRST SECOND THIRD FOURTH
- ------------------------------------------------------------------ ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
1996
- ------------------------------------------------------------------
Net sales......................................................... $ 1,321.5 $ 1,282.3 $ 1,295.1 $ 1,242.9 $ 5,141.8
Cost of products sold............................................. 972.2 1,013.0 1,037.1 1,063.1 4,085.4
Depreciation and amortization..................................... 79.0 79.0 78.2 78.6 314.8
Income (loss) before extraordinary charges........................ 32.4 (21.1) (47.7) (86.1) (122.5)
Extraordinary charges from early extinguishments of debt.......... -- -- (3.3) (.3) (3.7)
---------- ---------- ---------- ---------- ----------
Net income (loss)................................................. 32.4 (21.1) (51.0) (86.4) (126.2)
---------- ---------- ---------- ---------- ----------
Per share of common stock--primary:
Income (loss) before extraordinary charges........................ .31 (.23) (.50) (.89) (1.32)
Extraordinary charges from early extinguishments of debt.......... -- -- (.03) -- (.03)
---------- ---------- ---------- ---------- ----------
Net income (loss)--primary........................................ .31 (.23) (.53) (.89) (1.35)
---------- ---------- ---------- ---------- ----------
Net income--fully diluted......................................... .30 * * * *
---------- ---------- ---------- ---------- ----------
Cash dividends per common share................................... .15 .15 .15 .15 .60
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
</TABLE>

<TABLE>
<CAPTION>
QUARTER YEAR
---------------------------------------------- ----------
(IN MILLIONS EXCEPT PER SHARE) FIRST SECOND THIRD FOURTH(1)
- ------------------------------------------------------------------ ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
1995
- ------------------------------------------------------------------
Net sales......................................................... $ 1,819.3 $ 1,963.6 $ 1,924.0 $ 1,644.4 $ 7,351.2
Cost of products sold............................................. 1,288.7 1,382.8 1,330.4 1,167.0 5,168.9
Depreciation and amortization..................................... 96.0 92.7 97.1 86.1 371.8
Income before extraordinary charges............................... 96.8 131.0 129.0 87.7 444.5
Extraordinary charges from early extinguishments of debt.......... -- (3.1) (177.9) (8.0) (189.0)
---------- ---------- ---------- ---------- ----------
Net income (loss)................................................. 96.8 127.9 (48.9) 79.7 255.5
---------- ---------- ---------- ---------- ----------
Per share of common stock--primary:
Income before extraordinary charges............................... 1.04 1.42 1.32 .86 4.64
Extraordinary charges from early extinguishments of debt.......... -- (.03) (1.85) (.08) (2.01)
---------- ---------- ---------- ---------- ----------
Net income (loss)--primary........................................ 1.04 1.39 (.53) .78 2.63
---------- ---------- ---------- ---------- ----------
Per share of common stock--fully diluted:
Income before extraordinary charges............................... .85 1.12 1.12 .80 3.89
Extraordinary charges from early extinguishments of debt.......... -- (.03) (1.57) (.07) (1.65)
---------- ---------- ---------- ---------- ----------
Net income (loss)--fully diluted.................................. .85 1.09 (.45) .73 2.24
---------- ---------- ---------- ---------- ----------
Cash dividends per common share................................... -- -- .15 .15 .30
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
</TABLE>

- ---------

(1) As a result of the Amalgamation discussed in Note 4, the Company, effective
November 1, 1995, began reporting Stone-Consolidated under the equity method
of accounting.

* Fully diluted earnings per share are not disclosed because the amounts are
anti-dilutive.

54
<PAGE>
Report of Independent Accountants on

Financial Statement Schedule
-----------------------------------

To the Board of Directors of
Stone Container Corporation

Our audits of the consolidated financial statements referred to in our report
dated February 10, 1997, except as to Note 2, which is as of February 14, 1997,
appearing in this Annual Report on Form 10-K (such report contains an
explanatory paragraph referring to the change in accounting method discussed in
Note 1 to the Company's consolidated financial statements) also included an
audit of the Financial Statement Schedule listed and appearing in Item 14(a)2 of
this Form 10-K. In our opinion, the Financial Statement Schedule presents
fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements.

PRICE WATERHOUSE LLP

Chicago, Illinois
February 10, 1997, except as to Note 2,
which is as of February 14, 1997.

55
<PAGE>
STONE CONTAINER CORPORATION AND SUBSIDIARIES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(IN MILLIONS)
<TABLE>
<CAPTION>
COLUMN C
COLUMN B -----------
----------- ADDITIONS
BALANCE CHARGED
COLUMN A AT TO COSTS COLUMN D
- --------------------------------------------------------------------------------- BEGINNING AND -----------
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS
- --------------------------------------------------------------------------------- ----------- ----------- -----------
<S> <C> <C> <C>
Allowance for doubtful accounts and notes and sales returns and allowances:

Year ended December 31, 1996................................................... $ 22.1 $ 14.9 $ 12.7

Year ended December 31, 1995................................................... $ 20.2 $ 14.6 $ 12.7

Year ended December 31, 1994................................................... $ 19.3 $ 13.0 $ 12.1

COLUMN E
-----------
COLUMN A BALANCE
- --------------------------------------------------------------------------------- AT END OF
DESCRIPTION PERIOD
- --------------------------------------------------------------------------------- -----------
<S> <C>
Allowance for doubtful accounts and notes and sales returns and allowances:
Year ended December 31, 1996................................................... $ 24.3
Year ended December 31, 1995................................................... $ 22.1
Year ended December 31, 1994................................................... $ 20.2
</TABLE>

<PAGE>

STONE CONTAINER FINANCE COMPANY OF CANADA

as Issuer

and

STONE CONTAINER CORPORATION,

as Guarantor

THE BANK OF NEW YORK,

as Trustee

-------------------

Indenture

Dated as of August 16, 1996

-------------------

up to $200,000,000

11-1/2% Senior Notes due 2006

-------------------

<PAGE>

TABLE OF CONTENTS(1)
[To be Updated]
PAGE
Parties

Recitals of the Company

ARTICLE ONE
Definitions and Other Provisions of General Application

SECTION 101. Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1991 Indenture . . . . . . . . . . . . . . . . . . . . . . . . 2
1996 Senior Notes. . . . . . . . . . . . . . . . . . . . . . . 2
Acquiring Person . . . . . . . . . . . . . . . . . . . . . . . 2
Act. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Additional Amounts . . . . . . . . . . . . . . . . . . . . . . 3
Affiliate. . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Asset Disposition. . . . . . . . . . . . . . . . . . . . . . . 3
Asset Disposition Offer. . . . . . . . . . . . . . . . . . . . 3
Asset Disposition Offer Amount . . . . . . . . . . . . . . . . 3
Asset Disposition Payment Date . . . . . . . . . . . . . . . . 3
Assumption . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Authenticating Agent . . . . . . . . . . . . . . . . . . . . . 4
Authority. . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Bankruptcy Law . . . . . . . . . . . . . . . . . . . . . . . . 4
Board of Directors . . . . . . . . . . . . . . . . . . . . . . 4
Board Resolution . . . . . . . . . . . . . . . . . . . . . . . 4
Business Day . . . . . . . . . . . . . . . . . . . . . . . . . 4
Capital Stock. . . . . . . . . . . . . . . . . . . . . . . . . 4
Capitalized Lease Obligation . . . . . . . . . . . . . . . . . 4
Change of Control. . . . . . . . . . . . . . . . . . . . . . . 5
Change of Control Date; Change of Control Offer; Change of
Control Payment Date . . . . . . . . . . . . . . . . . . . 5
Commission . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Commodities Agreement. . . . . . . . . . . . . . . . . . . . . 5
Company. . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Company Event of Default . . . . . . . . . . . . . . . . . . . 5
Company Request; Company Order . . . . . . . . . . . . . . . . 5
Consolidated Amortization Expense. . . . . . . . . . . . . . . 5
Consolidated Cash Flow Available for Fixed Charges . . . . . . 5

(1) NOTE: This table of contents shall not, for any purpose, be deemed to be a
part of this Indenture.

<PAGE>

Consolidated Depreciation Expense. . . . . . . . . . . . . . . 5
Consolidated Free Cash Flow. . . . . . . . . . . . . . . . . . 6
Consolidated Income Tax Expense. . . . . . . . . . . . . . . . 6
Consolidated Interest Coverage Ratio . . . . . . . . . . . . . 6
Consolidated Interest Expense. . . . . . . . . . . . . . . . . 6
Consolidated Net Income. . . . . . . . . . . . . . . . . . . . 6
Consolidated Net Worth . . . . . . . . . . . . . . . . . . . . 7
Continental Guaranty . . . . . . . . . . . . . . . . . . . . . 7
Continuing Director. . . . . . . . . . . . . . . . . . . . . . 7
Corporate Trust Office . . . . . . . . . . . . . . . . . . . . 7
Corporation. . . . . . . . . . . . . . . . . . . . . . . . . . 7
Covenant Defeasance. . . . . . . . . . . . . . . . . . . . . . 7
Credit Agreements. . . . . . . . . . . . . . . . . . . . . . . 8
Currency Agreement . . . . . . . . . . . . . . . . . . . . . . 8
Custodian. . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Default. . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Defaulted Interest . . . . . . . . . . . . . . . . . . . . . . 8
Defeasance . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Deficiency Amount. . . . . . . . . . . . . . . . . . . . . . . 8
Deficiency Date. . . . . . . . . . . . . . . . . . . . . . . . 8
Deficiency Offer . . . . . . . . . . . . . . . . . . . . . . . 8
Deficiency Offer Amount. . . . . . . . . . . . . . . . . . . . 8
Deficiency Payment Date. . . . . . . . . . . . . . . . . . . . 8
Depositary . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Dollars; $ . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Event of Default . . . . . . . . . . . . . . . . . . . . . . . 9
Exchange Act . . . . . . . . . . . . . . . . . . . . . . . . . 9
First Mortgage Note Indenture. . . . . . . . . . . . . . . . . 9
First Mortgage Notes . . . . . . . . . . . . . . . . . . . . . 9
GAAP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Global Note. . . . . . . . . . . . . . . . . . . . . . . . . . 8
Global Note Holder . . . . . . . . . . . . . . . . . . . . . . 8
Guaranty . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Holder; Securityholder . . . . . . . . . . . . . . . . . . . . 9
Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . 9
Indenture. . . . . . . . . . . . . . . . . . . . . . . . . . .10
Initial Interest Rate. . . . . . . . . . . . . . . . . . . . .10
Initial Purchaser. . . . . . . . . . . . . . . . . . . . . . .10
Institutional Accredited Investor. . . . . . . . . . . . . . .10
Interest Payment Date. . . . . . . . . . . . . . . . . . . . .10
Interest Swap Obligations. . . . . . . . . . . . . . . . . . .10
Investment Grade Date. . . . . . . . . . . . . . . . . . . . .10
Issue Date . . . . . . . . . . . . . . . . . . . . . . . . . .11
Lien . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11

<PAGE>

Maturity . . . . . . . . . . . . . . . . . . . . . . . . . . .11
Minimum Subordinated Capital Base. . . . . . . . . . . . . . .11
New Credit Agreement . . . . . . . . . . . . . . . . . . . . .11
Non-U.S. Person. . . . . . . . . . . . . . . . . . . . . . . .11
Note Purchase Agreement. . . . . . . . . . . . . . . . . . . .11
Officer. . . . . . . . . . . . . . . . . . . . . . . . . . . .11
Officer's Certificate. . . . . . . . . . . . . . . . . . . . .12
Opinion of Counsel . . . . . . . . . . . . . . . . . . . . . .12
Ordinary Course of Business Liens. . . . . . . . . . . . . . .12
Outstanding. . . . . . . . . . . . . . . . . . . . . . . . . .13
Participant. . . . . . . . . . . . . . . . . . . . . . . . . .14
Paying Agent . . . . . . . . . . . . . . . . . . . . . . . . .14
Permitted Existing Indebtedness of an Acquired Person. . . . .14
Permitted Indebtedness . . . . . . . . . . . . . . . . . . . .14
Permitted Liens. . . . . . . . . . . . . . . . . . . . . . . .17
Permitted Refinancing Indebtedness . . . . . . . . . . . . . .19
Permitted Stone Canada Indebtedness. . . . . . . . . . . . . .20
Permitted Subordinated Indebtedness. . . . . . . . . . . . . .20
Person . . . . . . . . . . . . . . . . . . . . . . . . . . . .21
Place of Payment . . . . . . . . . . . . . . . . . . . . . . .21
Predecessor Senior Note. . . . . . . . . . . . . . . . . . . .21
Private Placement Legend . . . . . . . . . . . . . . . . . . .20
QIB. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20
Rate Determination Period. . . . . . . . . . . . . . . . . . .21
Receivables. . . . . . . . . . . . . . . . . . . . . . . . . .21
Record Date. . . . . . . . . . . . . . . . . . . . . . . . . .21
Redeemable Stock . . . . . . . . . . . . . . . . . . . . . . .21
Redemption Date. . . . . . . . . . . . . . . . . . . . . . . .22
Redemption Price . . . . . . . . . . . . . . . . . . . . . . .22
Register" and "Registrar . . . . . . . . . . . . . . . . . . .22
Regulation S . . . . . . . . . . . . . . . . . . . . . . . . .21
Reset Date . . . . . . . . . . . . . . . . . . . . . . . . . .22
Reset Rate . . . . . . . . . . . . . . . . . . . . . . . . . .22
Restricted Note. . . . . . . . . . . . . . . . . . . . . . . .22
Responsible Officer. . . . . . . . . . . . . . . . . . . . . .22
Restricted Payment . . . . . . . . . . . . . . . . . . . . . .22
Restricted Subsidiary. . . . . . . . . . . . . . . . . . . . .22
Rule 144 . . . . . . . . . . . . . . . . . . . . . . . . . . .21
Rule 144A. . . . . . . . . . . . . . . . . . . . . . . . . . .21
Securities Act . . . . . . . . . . . . . . . . . . . . . . . .21
Senior Indebtedness. . . . . . . . . . . . . . . . . . . . . .22
Senior Notes . . . . . . . . . . . . . . . . . . . . . . . . .23
Seven Year Treasury Rate . . . . . . . . . . . . . . . . . . .23
Special Record Date. . . . . . . . . . . . . . . . . . . . . .23

iii

<PAGE>

Specified Bank Debt. . . . . . . . . . . . . . . . . . . . . .23
Stated Maturity. . . . . . . . . . . . . . . . . . . . . . . .24
Stone Canada . . . . . . . . . . . . . . . . . . . . . . . . .24
Stone Canada Group . . . . . . . . . . . . . . . . . . . . . .24
Subordinated Capital Base. . . . . . . . . . . . . . . . . . .24
Subordinated Indebtedness. . . . . . . . . . . . . . . . . . .25
Subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . .25
Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . .25
Ten Year Treasury Rate . . . . . . . . . . . . . . . . . . . .25
Trustee. . . . . . . . . . . . . . . . . . . . . . . . . . . .26
Trust Indenture Act. . . . . . . . . . . . . . . . . . . . . .26
U.S. Government Obligations. . . . . . . . . . . . . . . . . .26
Unrestricted Subsidiary. . . . . . . . . . . . . . . . . . . .26
Vice President . . . . . . . . . . . . . . . . . . . . . . . .26
Wholly Owned Subsidiary. . . . . . . . . . . . . . . . . . . .26
SECTION 102. Compliance Certificates and Opinions. . . . . . . . . . . . . .26
SECTION 103. Form of Documents Delivered to Trustee. . . . . . . . . . . . .27
SECTION 104. Acts of Holders . . . . . . . . . . . . . . . . . . . . . . . .28
SECTION 105. Notices, etc., to Trustee and Company . . . . . . . . . . . . .29
SECTION 106. Notice to Holders; Waiver . . . . . . . . . . . . . . . . . . .29
SECTION 107. Express Incorporation of the Trust Indenture Act;
Conflict with Trust Indenture Act. . . . . . . . . . . . . .30
SECTION 108. Effect of Headings and Table of Contents. . . . . . . . . . . .30
SECTION 109. Successors and Assigns. . . . . . . . . . . . . . . . . . . . .30
SECTION 110. Separability Clause . . . . . . . . . . . . . . . . . . . . . .30
SECTION 111. Benefits of Indenture . . . . . . . . . . . . . . . . . . . . .30
SECTION 112. Governing Law . . . . . . . . . . . . . . . . . . . . . . . . .30
SECTION 113. Legal Holidays. . . . . . . . . . . . . . . . . . . . . . . . .30
SECTION 114. No Recourse Against Others. . . . . . . . . . . . . . . . . . .31
SECTION 115. Consent to Jurisdiction and Service of Process. . . . . . . . .31
SECTION 116. Incorporation by Reference to Trust Indenture Act . . . . . . .32

ARTICLE TWO
Senior Note Forms

SECTION 201. Forms Generally . . . . . . . . . . . . . . . . . . . . . . . .33
SECTION 202. Form of Face of Senior Note . . . . . . . . . . . . . . . . . .34
SECTION 203. Form of Reverse of Senior Note. . . . . . . . . . . . . . . . .38
SECTION 204. Form of Trustee's Certificate of Authentication . . . . . . . .45
SECTION 205. CUSIP Number. . . . . . . . . . . . . . . . . . . . . . . . . .45

<PAGE>

ARTICLE THREE
The Senior Notes

SECTION 301. Title and Terms . . . . . . . . . . . . . . . . . . . . . . . .45
SECTION 302. Denominations . . . . . . . . . . . . . . . . . . . . . . . . .46
SECTION 303. Execution, Authentication, Delivery and Dating. . . . . . . . .46
SECTION 304. Temporary Senior Notes. . . . . . . . . . . . . . . . . . . . .47
SECTION 305. Registration, Registration of Transfer and Exchange . . . . . .47
SECTION 306. Transfer and Exchange of Restricted Notes . . . . . . . . . . .49
SECTION 307. Mutilated, Destroyed, Lost and Stolen Senior Mortgage Notes . .53
SECTION 308. Payment of Interest; Interest Rights Preserved. . . . . . . . .54
SECTION 309. Persons Deemed Owners . . . . . . . . . . . . . . . . . . . . .55
SECTION 310. Cancellation. . . . . . . . . . . . . . . . . . . . . . . . . .55
SECTION 311. Computation of Interest . . . . . . . . . . . . . . . . . . . .55

ARTICLE FOUR
Satisfaction and Discharge

SECTION 401. Satisfaction and Discharge of Indenture . . . . . . . . . . . .56
SECTION 402. Application of Trust Money. . . . . . . . . . . . . . . . . . .57

ARTICLE FIVE
Remedies

SECTION 501. Events of Default and Company Events of Default . . . . . . . .57
SECTION 502. Acceleration of Maturity; Rescission and Annulment. . . . . . .59
SECTION 503. Collection of Indebtedness and Suits for Enforcement
by Trustee . . . . . . . . . . . . . . . . . . . . . . . . .60
SECTION 504. Trustee May File Proofs of Claim. . . . . . . . . . . . . . . .61
SECTION 505. Trustee May Enforce Claims Without Possession of
Senior Notes . . . . . . . . . . . . . . . . . . . . . . . .62
SECTION 506. Application of Money Collected. . . . . . . . . . . . . . . . .62
SECTION 507. Limitation on Suits . . . . . . . . . . . . . . . . . . . . . .62
SECTION 508. Unconditional Right of Holders to Receive Principal, Premium
and Interest . . . . . . . . . . . . . . . . . . . . . . . .63
SECTION 509. Restoration of Rights and Remedies. . . . . . . . . . . . . . .63
SECTION 510. Rights and Remedies Cumulative. . . . . . . . . . . . . . . . .63
SECTION 511. Delay or Omission Not Waiver. . . . . . . . . . . . . . . . . .64
SECTION 512. Control by Holders. . . . . . . . . . . . . . . . . . . . . . .64
SECTION 513. Waiver of Past Defaults . . . . . . . . . . . . . . . . . . . .64
SECTION 514. Undertaking for Costs . . . . . . . . . . . . . . . . . . . . .65
SECTION 515. Waiver of Stay or Extension Laws. . . . . . . . . . . . . . . .65

ARTICLE SIX
The Trustee

SECTION 601. Certain Duties and Responsibilities of the Trustee. . . . . . .65
SECTION 602. Notice of Defaults. . . . . . . . . . . . . . . . . . . . . . .66

<PAGE>

SECTION 603. Certain Rights of Trustee . . . . . . . . . . . . . . . . . . .66
SECTION 604. Not Responsible for Recitals or Issuance of Senior Notes. . . .67
SECTION 605. May Hold Senior Notes . . . . . . . . . . . . . . . . . . . . .67
SECTION 606. Money Held in Trust . . . . . . . . . . . . . . . . . . . . . .68
SECTION 607. Compensation and Reimbursement. . . . . . . . . . . . . . . . .68
SECTION 608. Disqualification; Conflicting Interests . . . . . . . . . . . .69
SECTION 609. Corporate Trustee Required; Eligibility . . . . . . . . . . . .69
SECTION 610. Resignation and Removal; Appointment of Successor . . . . . . .69
SECTION 611. Acceptance of Appointment by Successor. . . . . . . . . . . . .70
SECTION 612. Merger, Conversion, Consolidation or Succession to Business . .71
SECTION 613. Preferential Collection of Claims Against Company . . . . . . .71
SECTION 614. Appointment of Authenticating Agent . . . . . . . . . . . . . .71

ARTICLE SEVEN
Holders' Lists and Reports by the Trustee and the Issuer

SECTION 701. Issuer to Furnish Trustee Names and Addresses of Holders. . . .73
SECTION 702. Preservation of Information; Communications to Holders. . . . .73
SECTION 703. Reports by Trustee. . . . . . . . . . . . . . . . . . . . . . .74
SECTION 704. Reports by Company. . . . . . . . . . . . . . . . . . . . . . .74

ARTICLE EIGHT
Consolidation, Merger, Lease, Sale or Transfer

SECTION 801. When Company May Merge, etc . . . . . . . . . . . . . . . . . .75
SECTION 802. Senior Notes to Be Secured in Certain Events. . . . . . . . . .77
SECTION 803. Officer's Certificate; Opinion of Counsel . . . . . . . . . . .77
SECTION 804. Successor Corporation Substituted . . . . . . . . . . . . . . .77

ARTICLE NINE
Supplements to the Indenture

SECTION 901. Supplemental Indentures Without Consent of Holders. . . . . . .78
SECTION 902. Supplemental Indentures with Consent of Holders . . . . . . . .78
SECTION 903. Execution of Supplemental Indentures. . . . . . . . . . . . . .79
SECTION 904. Effect of Supplemental Indentures . . . . . . . . . . . . . . .80
SECTION 905. Conformity with Trust Indenture Act . . . . . . . . . . . . . .80
SECTION 906. Reference in Senior Notes to Supplemental Indentures. . . . . .80

ARTICLE TEN
Covenants

SECTION 1001. Payment of Principal, Premium and Interest . . . . . . . . . .80
SECTION 1002. Maintenance of Office or Agency. . . . . . . . . . . . . . . .80
SECTION 1003. Money for Senior Notes Payments to Be Held in Trust. . . . . .81

<PAGE>

SECTION 1004. Corporate Existence. . . . . . . . . . . . . . . . . . . . . .82
SECTION 1005. Payment of Taxes and Other Claims. . . . . . . . . . . . . . .83
SECTION 1006. Restriction on Dividends . . . . . . . . . . . . . . . . . . .83
SECTION 1007. Limitation on Future Liens and Guaranties. . . . . . . . . . .84
SECTION 1008. Limitation on Future Incurrence of Indebtedness. . . . . . . .86
SECTION 1009. Limitation on Asset Dispositions . . . . . . . . . . . . . . .86
SECTION 1010. Maintenance of Properties. . . . . . . . . . . . . . . . . . .90
SECTION 1011. Compliance Certificates. . . . . . . . . . . . . . . . . . . .91
SECTION 1012. Waiver of Stay, Extension or Usury Laws. . . . . . . . . . . .91
SECTION 1013. Change of Control. . . . . . . . . . . . . . . . . . . . . . .92
SECTION 1014. Payment of Additional Amounts. . . . . . . . . . . . . . . . .93
SECTION 1015. Waiver of Certain Covenants. . . . . . . . . . . . . . . . . .94
SECTION 1016. Certain Additional Issuer Covenants. . . . . . . . . . . . . .95

ARTICLE ELEVEN
Maintenance of Subordinated Capital Base

SECTION 1101. Maintenance of Subordinated Capital Base . . . . . . . . . . .95
SECTION 1102. Alternative Interest Rate Adjustment . . . . . . . . . . . . .97

ARTICLE TWELVE
Guaranty

SECTION 1201. Guaranty . . . . . . . . . . . . . . . . . . . . . . . . . . .98
SECTION 1202. Obligations of the Company Unconditional . . . . . . . . . . .99
SECTION 1203. Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . 100

ARTICLE THIRTEEN
Defeasance And Covenant Defeasance

SECTION 1301. Applicability of Article; Company's Option to Effect
Defeasance or Covenant Defeasance . . . . . . . . . . . . 101
SECTION 1302. Defeasance and Discharge . . . . . . . . . . . . . . . . . . 101
SECTION 1303. Covenant Defeasance. . . . . . . . . . . . . . . . . . . . . 102
SECTION 1305. Deposited Money and Government Obligations to be Held in
Trust; Other Miscellaneous Provisions . . . . . . . . . . 104

ARTICLE FOURTEEN
Redemption of Securities

SECTION 1401. Applicability of Article . . . . . . . . . . . . . . . . . . 104
SECTION 1401. Election to Redeem; Notice to Trustee. . . . . . . . . . . . 104
SECTION 1403. Selection by Trustee of the Senior Notes to Be Redeemed. . . 105
SECTION 1404. Notice of Redemption . . . . . . . . . . . . . . . . . . . . 105
SECTION 1405. Deposit of Redemption Price. . . . . . . . . . . . . . . . . 106

vii

<PAGE>

SECTION 1406. Senior Notes Payable on Redemption Date. . . . . . . . . . . 106
SECTION 1407. Senior Notes Redeemed in Part. . . . . . . . . . . . . . . . 106

EXHIBIT A FORM OF TRANSFER CERTIFICATE FOR TRANSFER TO A QIB
EXHIBIT B FORM OF TRANSFER CERTIFICATE FOR TRANSFER TO AN
INSTITUTIONAL ACCREDITED INVESTOR
EXHIBIT C FORM OF INVESTMENT LETTER FOR INSTITUTIONAL
ACCREDITED INVESTORS
EXHIBIT D FORM OF TRANSFER CERTIFICATE FOR TRANSFER TO
A NON-U.S. PERSON
EXHIBIT E FORM OF INVESTMENT LETTER FOR REGULATION S PURCHASERS

viii

<PAGE>

INDENTURE, dated as of August 16, 1996, between STONE
CONTAINER FINANCE COMPANY OF CANADA (herein called the "Issuer"), an
unlimited liability company duly organized and existing under the laws of
Nova Scotia, STONE CONTAINER CORPORATION, a corporation duly constituted and
existing under the laws of the State of Delaware (herein called the
"Company"), and THE BANK OF NEW YORK, a New York banking corporation, as
Trustee (herein called the "Trustee") having its Corporate Trust office at
101 Barclay Street, New York, New York 10286.

RECITALS OF THE COMPANY

The Issuer has duly authorized the creation of an issue
of its 11-1/2% Senior Notes due 2006 (the "Senior Notes") of substantially
the tenor and amount hereinafter set forth, and to provide therefor, and the
Issuer and the Company have duly authorized the execution and delivery of
this Indenture.

All things necessary to make the Senior Notes, when
executed by the Issuer and the Company and authenticated and delivered by the
Trustee hereunder and duly issued by the Issuer, the valid obligations of the
Issuer, and to make this Indenture a valid and binding agreement of the
Issuer and the Company, in accordance with its terms, have been done.

NOW, THEREFORE, THIS INDENTURE WITNESSETH:

For and in consideration of the premises and the purchase
of the Senior Notes by the Holders (as hereinafter defined) thereof, it is
mutually covenanted and agreed, for the equal and proportionate benefit of
all Holders as follows:

ARTICLE ONE

DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION

SECTION 101. DEFINITIONS.

For all purposes of this Indenture, except as otherwise
expressly provided for unless the context otherwise requires:

(1) the terms defined in this Article have the meanings
assigned to them in this Article and include the plural as well as the
singular;

(2) all other terms used herein which are defined in the
Trust Indenture Act, either directly or by reference therein, have the
meanings assigned to them therein;

(3) all accounting terms not otherwise defined herein
have the meanings assigned to them in accordance with GAAP;

(4) the word "including" (and with correlative meaning
"include") means including, without limiting the generality of, any
description preceding such term; and

<PAGE>

(5) the words "herein", "hereof" and "hereunder" and
other words of similar import refer to this Indenture as a whole and not to
any particular Article, Section or other subdivision.

Certain terms, used principally in Article Six, are
defined in that Article.

"11-7/8% Rating Adjustable Notes" means the Company's
11-7/8% Rating Adjustable Senior Notes issued under the 1996 Rating
Adjustable Indenture on July 24, 1996.

"1991 Indenture" means the indenture dated as of November
1, 1991 between the Company and The Bank of New York, as Trustee, as amended
and supplemented to the date hereof and, unless otherwise indicated, from
time to time after the date hereof. References herein to Indebtedness issued
under the 1991 Indenture shall include any Indebtedness issued thereunder
both before and after the date hereof.

"1994 Senior Notes" means the Company's 11-1/2% Senior
Notes due 2004 issued on October 12, 1994.

"1994 Senior Notes Indenture" means the indenture dated
as of October 12, 1994 between the Company and the Bank of New York, as
Trustee, with respect to the 1994 Senior Notes, as amended and supplemented
from time to time.

"1996 Rating Adjustable Indenture" means the indenture
dated as of July 24, 1996 between the Company and The Bank of New York, as
Trustee, as amended and supplemented to the date hereof, including the First
Supplemental Indenture thereto dated as of July 24, 1996, and, unless
otherwise indicated, from time to time after the date hereof. References
herein to Indebtedness issued under the 1996 Rating Adjustable Indenture
shall include any Indebtedness issued thereunder both before and after the
date hereof.

"Acquiring Person" means any Person or group (as defined
in Section 13(d)(3) of the Exchange Act) who or which, together with all
affiliates and associates (as defined in Rule 12b-2 under the Exchange Act),
becomes the beneficial owner of shares of common stock of the Company having
more than 50% of the total number of votes that may be cast for the election
of directors of the Company; PROVIDED, HOWEVER, that an Acquiring Person
shall not include (i) the Company, (ii) any Subsidiary of the Company, (iii)
any employee benefit plan of the Company or any Subsidiary of the Company or
any entity holding common stock of the Company for or pursuant to the terms
of any such plan, (iv) any descendant of Joseph Stone or the spouse of any
such descendant, the estate of any such descendant or the spouse of any such
descendant, any trust or other arrangement for the benefit of any such
descendant or the spouse of any such descendant or any charitable
organization established by any such descendant or the spouse of any such
descendant (collectively, the "Stone Family"), or (v) any group which
includes any member or members of the Stone Family and a majority of the
common stock of the Company held by such group is beneficially owned by such
member or members. Notwithstanding the foregoing, no Person shall become an
"Acquiring Person" as the result of an acquisition of common stock by the
Company which, by reducing the number of shares outstanding, increases the
proportionate

<PAGE>

number of shares beneficially owned by such Person to more than 50% or more of
the common stock of the Company then outstanding; PROVIDED, HOWEVER, that if a
Person shall become the beneficial owner of more than 50% or more of the common
stock of the Company then outstanding by reason of share purchases by the
Company and shall, after such share purchases by the Company, become the
beneficial owner of any additional shares of common stock of the Company, then
such Person shall be deemed to be an "Acquiring Person."

"Act", when used with respect to any Holder, has the
meaning specified in Section 104.

"Additional Amounts" has the meaning specified in Section
1014.

"Affiliate" of any specified Person means any other
Person directly or indirectly controlling or controlled by or under direct or
indirect common control with such specified Person. For the purposes of this
definition, "control" when used with respect to any specified Person means
the power to direct the management and policies of such Person, directly or
indirectly, whether through the ownership of voting securities, by contract
or otherwise; and the terms "controlling" and "controlled" have meanings
correlative to the foregoing.

"Asset Disposition" means any sale, transfer,
sale-leaseback or other disposition of (i) shares of Capital Stock of a
Restricted Subsidiary (other than directors' qualifying shares) or (ii)
property or assets of the Company or any Restricted Subsidiary (other than a
sale, transfer, sale-leaseback or other disposition of Receivables and other
assets or property described in clause (vi) of the definition of Permitted
Liens pursuant to a Receivables sale constituting Indebtedness pursuant to
clause (ii) of the definition thereof); PROVIDED, HOWEVER, that an Asset
Disposition shall not include any sale, transfer, sale-leaseback or other
disposition (a) of Collateral (as defined in the First Mortgage Note
Indenture while the First Mortgage Notes are outstanding), (b) of the shares,
property or assets referred to in clause (i) and (ii) by a Restricted
Subsidiary to the Company or to another Restricted Subsidiary or by the
Company to a Restricted Subsidiary, (c) of defaulted Receivables for
collection or (d) in the ordinary course of business, but shall include any
sale, transfer, sale-leaseback or other disposition by the Company or a
Restricted Subsidiary to an Unrestricted Subsidiary of the shares, property
or assets referred to in clauses (i) and (ii). The designation by the
Company of a Subsidiary of the Company as an "Unrestricted Subsidiary" shall
constitute an Asset Disposition of such Subsidiary's property and assets net
of its liabilities, unless the transfer of property and assets to such
Subsidiary has previously constituted an Asset Disposition.

"Asset Disposition Offer" shall have the meaning provided
in Section 1009(c).

"Asset Disposition Offer Amount" shall have the meaning
provided in Section 1009(a).

"Asset Disposition Payment Date" shall have the meaning
provided in Section 1009(c).

<PAGE>

"Assumption" means the assumption by the Company of all
of the rights and obligations of the Issuer under the Indenture and the Notes
and any related documents in accordance with Section 901(7), whether arising
before or after such assumption, which assumption shall not release the
Guaranty with respect to matters arising prior to such assumption.

"Authenticating Agent" means any Person authorized by the
Trustee to act on behalf of the Trustee to authenticate Senior Notes.

"Authority" means any federal, state, municipal or local
government or quasi-governmental agency or authority.

"Bankruptcy Law" means Title 11, U.S., Code Companies'
Creditors Arrangement Act (Canada), Bankruptcy and Insolvency Act (Canada) or
Winding-Up Act (Canada) or any similar federal, state or provincial law for
the relief of debtors.

"Board of Directors" means the board of directors of the
Issuer or the Company as the case may be; PROVIDED, HOWEVER, that when the
context refers to actions or resolutions of the Board of Directors, then the
term "Board of Directors" shall also mean any duly authorized committee of
the Board of Directors of the Issuer or the Company, as the case may be, or
Officer authorized to act with respect to any particular matter to exercise
the power of the Board of Directors of the Issuer or the Company as the case
may be.

"Board Resolution" means a copy of a resolution certified
by the Secretary or an Assistant Secretary of the Issuer or the Company, as
the case may be, to have been duly adopted by the relevant Board of Directors
and to be in full force and effect on the date of such certification, and
delivered to the Trustee.

"Business Day", when used with respect to any Place of
Payment, means each Monday, Tuesday, Wednesday, Thursday and Friday which is
not a day on which banking institutions in that Place of Payment are
authorized or obligated by law or regulation to close.

"Capital Stock" means, with respect to any Person, any
and all shares, interests, participations, warrants, rights, options or other
equivalents (however designated) of capital stock or any other equity
interest of such Person, including each class of common stock and preferred
stock.

"Capitalized Lease Obligation" means, in respect of any
Person, an obligation to pay rent or other amounts under a lease that is
required to be capitalized for financial reporting purposes in accordance
with GAAP, and the amount of Indebtedness represented by such obligation
shall be the capitalized amount of such obligation determined in accordance
with such principles.

"Certificated Notes" shall have the meaning provided in
Section 201(c).

<PAGE>

"Change of Control" means any event by which (i) an
Acquiring Person has become such or (ii) Continuing Directors cease to
comprise a majority of the members of the Board of Directors of the Company.

"Change of Control Date", "Change of Control Offer" and
"Change of Control Payment Date" shall have the respective meanings provided
in Section 1013.

"Commission" means the Securities and Exchange
Commission, as from time to time constituted, created under the Exchange Act,
or, if at any time after the execution of this Indenture such Commission is
not existing and performing the duties now assigned to it under the Trust
Indenture Act, then the body performing such duties at such time.

"Commodities Agreement" of any Person means any forward
contract, option or futures contract or similar agreement or arrangement
designed to protect such Person or any of its Subsidiaries from fluctuations
in the price of, or shortage of supply of, commodities.

"Company" means the Person named as the "Company" in the
first paragraph of this Indenture until a successor corporation shall have
become such pursuant to the applicable provisions of this Indenture, and
thereafter "Company" shall mean such successor corporation.

"Company Event of Default" shall have the meaning
specified in Section 501(b).

"Company Request" or "Company Order" means a written
request or order signed in the name of the Issuer or the Company, as the case
may be, by its Chairman of the Board, its President or a Vice President, and
by its Treasurer, an Assistant Treasurer, its Controller, an Assistant
Controller, its Secretary or an Assistant Secretary, and delivered to the
Trustee.

"Consolidated Amortization Expense" means, for any
period, the amortization expense of the Company and its Restricted
Subsidiaries for such period, determined on a consolidated basis in
accordance with GAAP.

"Consolidated Cash Flow Available for Fixed Charges"
means, for any period, (a) the sum of the amounts for such period of (i)
Consolidated Net Income, (ii) Consolidated Interest Expense, (iii)
Consolidated Income Tax Expense, (iv) Consolidated Depreciation Expense, (v)
Consolidated Amortization Expense and (vi) other non-cash items reducing
Consolidated Net Income, MINUS (b) non-cash items increasing Consolidated Net
Income, all as determined on a consolidated basis for the Company and its
Restricted Subsidiaries in accordance with GAAP.

"Consolidated Depreciation Expense" means, for any
period, the depreciation expense of the Company and its Restricted
Subsidiaries for such period, determined on a consolidated basis in
accordance with GAAP.

"Consolidated Free Cash Flow" means, for any period, (a)
the sum of the amounts for such period of (i) Consolidated Net Income, (ii)
Consolidated Depreciation Expense and (iii) Consolidated Amortization
Expense, MINUS (b) the sum of (i) Restricted Payments during such

<PAGE>

period, (ii) net reduction during such period in Indebtedness of the Company
and its Restricted Subsidiaries (other than as a result of (A) Asset
Dispositions or (B) Collateral Asset Dispositions or Collateral Loss Events
(as such terms are defined in the First Mortgage Note Indenture)) and (iii)
the excess (but not the deficit) of capital expenditures of the Company and
its Restricted Subsidiaries for such period not financed pursuant to clause
(vi) of the definition of Permitted Indebtedness over Consolidated
Depreciation Expense.

"Consolidated Income Tax Expense" means, for any period,
the aggregate of the income tax expense of the Company and its Restricted
Subsidiaries for such period, determined on a consolidated basis in
accordance with GAAP.

"Consolidated Interest Coverage Ratio" means, for any
period, the ratio of (i) Consolidated Cash Flow Available for Fixed Charges
to (ii) Consolidated Interest Expense.

"Consolidated Interest Expense" means, for any period,
the interest expense (including the interest component of all Capitalized
Lease Obligations and the earned discount or yield with respect to a
Receivables sale constituting Indebtedness) of the Company and its Restricted
Subsidiaries for such period, determined on a consolidated basis in
accordance with GAAP; PROVIDED, HOWEVER, that, with respect to revolving
credit, revolving Receivables purchases or other similar arrangements, the
interest expense in respect thereof for any period shall be the PRO FORMA
interest expense attributable to all amounts committed during such period
under such revolving credit, revolving Receivables purchases or other similar
arrangements, whether or not such amounts were actually outstanding during
such period, in accordance with the terms thereof, in each case on a
consolidated basis in accordance with GAAP.

"Consolidated Net Income" means, for any period, the net
income (or loss) of the Company and its Restricted Subsidiaries on a
consolidated basis for such period taken as a single accounting period,
determined in accordance with GAAP; PROVIDED, HOWEVER, that: (a) there shall
be excluded therefrom (i) the net income (or loss) of any Person (other than
the Company) which is not a Restricted Subsidiary, EXCEPT to the extent of
the amounts of dividends or other distributions actually paid in cash or
tangible property or tangible assets (such property or assets to be valued at
their fair market value net of any obligations secured thereby) to the
Company or any of its Restricted Subsidiaries by such Person during such
period, (ii) EXCEPT to the extent includable pursuant to the foregoing clause
(i), the net income (or loss) of any Person accrued prior to the date it
becomes a Restricted Subsidiary or is merged into or consolidated with the
Company or any of its Restricted Subsidiaries or that Person's property or
assets are acquired by the Company or any of its Restricted Subsidiaries,
(iii) the net income of any Restricted Subsidiary to the extent that the
declaration or payment of dividends or similar distributions by that
Restricted Subsidiary of that income is not at the time permitted by
operation of the terms of its charter or any agreement, instrument, judgment,
decree, order, statute, rule or governmental regulation applicable to that
Restricted Subsidiary and (iv) the excess (but not the deficit), if any, of
(x) any gain which must be treated as an extraordinary item under GAAP or any
gain realized upon the sale or other disposition of any asset that is not
sold in the ordinary course of business or of any Capital Stock of a
Restricted Subsidiary over (y) any loss which must be treated as an

<PAGE>

extraordinary item under GAAP or any loss realized upon the sale or other
disposition of any asset that is not sold in the ordinary course of business
or of any Capital Stock of a Restricted Subsidiary; and (b) there shall be
included therein the amount of cash realized by the Company or any of its
Restricted Subsidiaries during such period on account of dividends or other
distributions theretofore paid in other than cash or tangible property or
tangible assets by a Person which is not a Restricted Subsidiary.

"Consolidated Net Worth" means the amount which at any
date of determination, in conformity with GAAP consistently applied, would be
set forth under the caption "stockholders' equity" (or any like caption) on a
consolidated balance sheet of the Company and its Restricted Subsidiaries,
exclusive of amounts attributable to Redeemable Stock (at such time as no
Indebtedness is outstanding under the 1991 Indenture, excluding the effects
of foreign currency translation adjustments). If the Company has changed one
or more of the accounting principles used in the preparation of its financial
statements because of a change mandated by the Financial Accounting Standards
Board or its successor, then Consolidated Net Worth shall mean the
Consolidated Net Worth the Company would have had if the Company had
continued to use those generally accepted accounting principles employed on
November 1, 1991.

"Continental Guaranty" means the Guaranty dated as of
October 7, 1983 between The Continental Group, Inc. and the Company, as
amended from time to time.

"Continuing Director" means any member of the Board of
Directors, while such person is a member of such Board of Directors of the
Company, who is not an Acquiring Person, or an Affiliate or associate of an
Acquiring Person or a representative of an Acquiring Person or of any such
Affiliate or associate and who (a) was a member of such Board of Directors
prior to November 1, 1991, or (b) subsequently became or becomes a member of
such Board of Directors and whose nomination for election or election to such
Board of Directors was or is recommended or approved by resolution of a
majority of the Continuing Directors or who was or is included as a nominee
in a proxy statement of the Company distributed when a majority of such Board
of Directors consists of Continuing Directors.

"Corporate Trust Office" means the office of the Trustee
at which at any particular time its corporate trust business shall be
principally administered, which office at the date hereof is located at 101
Barclay Street, New York, New York, 10286.

"Corporation" includes corporations, associations,
companies, business trusts and limited partnerships.

"Covenant Defeasance" has the meaning specified in
Section 1303.

"Credit Agreements" means (i) the credit agreement, dated
as of March 1, 1989, by and among the Company, the financial institutions
signatory thereto, Bankers Trust Company, as agent for such financial
institutions, and Citibank, N.A., Chemical Bank (as successor by merger to
Manufacturers Hanover Trust Company) and The First National Bank of Chicago,
as co-agents for such financial institutions, as amended, modified,
refinanced (including, without

<PAGE>

limitation, by the New Credit Agreement) or extended from time to time, (ii)
the credit agreement, dated as of March 1, 1989, by and among Stone Canada,
the financial institutions signatory thereto, Bankers Trust Company, as agent
for such financial institutions, and Citibank, N.A., Chemical Bank (as
successor by merger to Manufacturers Hanover Trust Company) and The First
National Bank of Chicago, as co-agents for such financial institutions, as
amended, modified, refinanced (including, without limitation, by the New
Credit Agreement) or extended from time to time and (iii) the revolving
credit agreement, dated as of March 1, 1989, by and among Stone Canada, the
financial institutions signatory thereto, BT Bank of Canada, as
administrative agent, The Bank of Nova Scotia, as payment agent, and Bankers
Trust Company, as collateral agent, as amended, modified, refinanced
(including, without limitation, by the New Credit Agreement) or extended from
time to time.

"Currency Agreement" of any Person means any foreign
exchange contract, currency swap agreement, forward currency contract, option
or futures contract or other similar agreement or arrangement, and any
renewal or extension thereof, designed to protect such Person or any of its
Subsidiaries against fluctuations in currency values.

"Custodian" means any receiver, trustee, assignee,
liquidator, sequestrator or similar official under any Bankruptcy Law.

"Default" means any event which is, or after notice or
passage or time or both would be, an Event of Default or a Company Event of
Default, as the case may be.

"Defaulted Interest" has the meaning specified in Section
308.

"Defeasance" has the meaning specified in Section 1302.

"Deficiency Amount" shall have the meaning provided in
Section 1009(b).

"Deficiency Date" shall have the meaning provided in
Section 1101(a).

"Deficiency Offer" shall have the meaning provided in
Section 1101(a).

"Deficiency Offer Amount" shall have the meaning provided
in Section 1101(a).

"Deficiency Payment Date" shall have the meaning provided
in Section 1101(c)(2).

"Depositary" means The Depositary Trust Company, as
depositary for the Global Notes, and its successors and assigns.

"Dollars" and "$" means lawful money of the United States
of America.

"Event of Default" has the meaning specified in Section
501(a).

"Exchange Act" means the Securities Exchange Act of 1934,
as amended from time to time, and the rules and regulations promulgated
thereunder.

<PAGE>

"First Mortgage Note Indenture" means the indenture dated
as of October 12, 1994 between the Company and Norwest Bank Minnesota,
National Association, as Trustee, with respect to the Company's 10-3/4% First
Mortgage Notes due 2002 as amended and supplemented from time to time.

"First Mortgage Notes" mean the Company's 10-3/4% First
Mortgage Notes due 2002, issued on October 12, 1994.

"GAAP" means generally accepted accounting principles, as
in effect as of November 1, 1991 in the United States of America, set forth
in the opinions and pronouncements of the Accounting Principles Board of the
American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity as is approved by a significant segment of
the accounting profession.

"Global Note" shall have the meaning provided in Section
201(b).

"Global Note Holder" shall have the meaning specified in
Section 201(b).

"Guaranty" has the meaning specified in Section 1201.

"Holder" or "Securityholder" means a Person in whose name
a Senior Note is registered in the Register.

"Indebtedness" means (without duplication), with respect
to any Person, (i) any obligation of such Person to pay the principal of,
premium, if any, interest on, penalties, reimbursement or indemnification
amounts, fees, expenses or other amounts relating to any indebtedness, and
any other liability, contingent or otherwise, of such Person (A) for borrowed
money or the deferred purchase price of property or services (excluding trade
payables and payables, indebtedness, obligations and other liabilities of the
Company to any Restricted Subsidiary or of any Restricted Subsidiary to the
Company or to any other Restricted Subsidiary), whether or not the recourse
of the lender is to the whole of the assets of such Person or only to a
portion thereof; (B) for any letter of credit for the account of such Person
supporting other obligations of such Person described in this definition; or
(C) for the payment of money relating to a Capitalized Lease Obligation; (ii)
the unrecovered investment of a purchaser (other than the Company or any of
its Restricted Subsidiaries) of such Person's Receivables pursuant to a
Receivables purchase facility or otherwise (whether or not characterized as a
sale of such Receivables or a secured loan, but excluding any disposition of
Receivables in connection with a disposition of fixed assets or a business of
such Person and any disposition of defaulted Receivables for collection),
together with any obligation of such Person to pay any discount, interest,
fees, indemnification amounts, penalties, recourse on account of the
uncollectability of Receivables, expenses or other amounts in connection
therewith; (iii) any obligation of another Person (other than a Restricted
Subsidiary of such Person) of the kind described in the preceding clause (i)
or (ii), which the Person has guaranteed or which is otherwise its legal
liability; (iv) any obligation of another Person (other than a Restricted
Subsidiary of such Person) of the kind

<PAGE>

described in the preceding clause (i) or (ii) secured by a Lien to which the
property or assets of such Person are subject, whether or not the obligation
secured thereby shall have been assumed by or shall otherwise be such
Person's legal liability; and (v) any renewals, extensions or refundings of
any of the foregoing described in any of the preceding clauses (i), (ii),
(iii) and (iv). The "amount" or "principal amount" of Indebtedness of any
Person at any date, as used herein, shall be the outstanding principal amount
at such date of all unconditional Indebtedness, the maximum principal amount
of any contingent Indebtedness or the unrecovered purchaser's investment in a
sale of Receivables, in each case at such date and without taking into
account any premium, interest, penalties, reimbursement or indemnification
amounts, fees, expenses or other amounts (other than principal or unrecovered
purchaser's investment) in respect thereof; PROVIDED, HOWEVER, that (y) with
respect to Indebtedness described in clause (iv) above, the amount of
Indebtedness shall be the lesser of (a) the amount of the Indebtedness of
such other Person that is secured by the property or assets of such Person
and (b) the fair market value of the property or assets securing such
Indebtedness, and (z) with respect to revolving credit, revolving Receivables
purchases or other similar arrangements, the amount of Indebtedness
thereunder shall be the amounts of such commitments as of the date of
determination.

"Indenture" means this instrument as originally executed
or as it may from time to time be supplemented or amended by one or more
indentures supplemental hereto entered into pursuant to the applicable
provisions hereof.

"Initial Interest Rate", when used with respect to any
Senior Note, means the initial rate of interest to be borne by such Senior
Note as stated on the face thereof.

"Initial Purchaser" means Salomon Brothers Inc, in its
capacity as Initial Purchaser under the Note Purchase Agreement.

"Institutional Accredited Investor" means an
institutional "accredited investor," as defined in Rule 501(A)(1), (2), (3)
or (7) under the Securities Act, other than QIBs.

"Interest Payment Date" means the Stated Maturity of an
installment of interest on any Senior Note.

"Interest Swap Obligations" of any Person means the
obligations of such Person pursuant to any interest rate swap agreement,
interest rate collar agreement, forward rate agreement, interest rate cap
insurance, option or futures contract or other similar agreement or
arrangement, and any renewal or extension thereof, designed to protect such
Person or any of its Subsidiaries against fluctuations in interest rates or
to permit the exchange of fixed rate obligations of such Person for floating
rate obligations and entered into in the ordinary course of financial
management of the Company and not for speculative purposes.

"Investment Grade Date" shall mean any day on which the
Notes are assigned a rating of either (i) Baa3 or higher by Moody's Investors
Service, Inc., or (ii) BBB- or higher by Standard & Poor's Corporation.

<PAGE>

"Issue Date" means August 16, 1996.

"Issuer" means the Person named the Issuer in the first
paragraph of this Indenture until a successor corporation shall have become
such pursuant to the applicable provisions of this Indenture, and thereafter
"Issuer" shall mean such successor corporation.

"Lien" means any mortgage, pledge, security interest,
adverse claim (as defined in Section 8.302(2) of the New York Uniform
Commercial Code), encumbrance, lien or charge of any kind (including any
conditional sale or other title retention agreement or lease in the nature
thereof, any filing or agreement to file a financing statement as debtor
under the Uniform Commercial Code or any similar statute other than to
reflect ownership by a third party of property leased to the Company or any
of its Subsidiaries under a lease which is not in the nature of a conditional
sale or title retention agreement).

"Maturity", when used with respect to any Senior Note,
means the date on which the principal of such Senior Note or an installment
of the principal becomes due and payable as therein or herein provided,
whether at the Stated Maturity or by declaration of acceleration, call for
redemption or otherwise.

"Minimum Subordinated Capital Base" shall have the
meaning provided in Section 1101(a).

"New Credit Agreement" means the credit agreement, dated
as of October 12, 1994 and amended and restated as of March 22, 1996, by and
among the Company, the financial institutions signatory thereto and Bankers
Trust Company, as agent for such financial institutions, as amended,
modified, refinanced or extended from time to time.

"Non-U.S. Person" means any Person who is not a "U.S.
Person," as defined in Rule 902(o) under the Securities Act.

"Note Purchase Agreement" means the Purchase Agreement
dated as of August 9, 1996 relating to the Senior Notes among the Issuer, the
Company and the Initial Purchaser, as amended.

"Officer" means the Chairman of the Board, the President,
any Vice President, the Treasurer, any Assistant Treasurer or the Secretary
of the Issuer or the Company, as the case may be.

"Officer's Certificate" means a certificate signed by an
Officer and delivered to the Trustee that shall comply with Sections 102 and
103.

"Opinion of Counsel" means a written opinion of counsel,
who may be an employee of or counsel for the Issuer or the Company, and who
shall be reasonably acceptable to the Trustee.

<PAGE>

"Ordinary Course of Business Liens" means, with respect
to any Person,

(i) Liens for taxes, assessments, governmental charges,
levies or claims not yet delinquent or being contested in good faith;

(ii) statutory Liens of landlords, carriers,
warehousemen, mechanics, suppliers, materialmen, repairmen or other like
Liens arising in the ordinary course of business (including the construction
of facilities) or deposits to obtain the release of such Liens;

(iii) Liens in connection with workers' compensation,
unemployment insurance and other similar legislation;

(iv) zoning restrictions, licenses, easements,
rights-of-way and other similar charges or encumbrances or restrictions not
interfering in any material respect with the business of such Person or any
of its Subsidiaries;

1. Liens securing such Person's obligations with respect to
commercial letters of credit;

2. Liens to secure public or statutory obligations of such Person;

3. judgment and attachment Liens against such Person not giving
rise to a Default under the Senior Notes or Liens created by or
existing from any litigation or legal proceeding against such
Person which is currently being contested in good faith by such
Person in appropriate proceedings;

4. leases or subleases granted to other Persons or existing on
property acquired by such Persons;

5. Liens encumbering property or assets of such Person under
construction arising from progress or partial payments;

6. Liens encumbering customary initial deposits and margin accounts and
other Liens securing obligations arising out of Interest Swap
Obligations, Currency Agreements and Commodities Agreements, in each
case of the type typically securing such obligations; provided,
however, that if such Interest Swap Obligations, Currency Agreements
and Commodities Agreements relate to Indebtedness not incurred in
violation of this Indenture, such Lien may also cover the property
and assets securing the Indebtedness to which such Interest Swap
Obligations, Currency Agreements and Commodities Agreements relate;

7. Liens encumbering deposits made to secure obligations arising from
public, statutory, regulatory, contractual or warranty requirements
or obligations of such Person or its Subsidiaries (not constituting
Indebtedness);

<PAGE>

8. Liens arising from filing UCC financing statements regarding leases or
consignments;

9. purchase money Liens securing payables (not constituting Indebtedness)
arising from the purchase by such Person or any of its Affiliates of
any equipment or goods in the ordinary course of business;

10. Liens arising out of consignment or similar arrangements for the sale
of goods entered into by such Person or any of its Subsidiaries in the
ordinary course of business;

11. Liens in the ordinary course of business granted by such Person to
secure the performance of tenders, statutory obligations, surety and
appeal bonds, bids, leases, government contracts, or progress
payments, performance and return-of-money bonds and other similar
obligations (not constituting Indebtedness);

12. Liens in favor of collecting banks constituting a right of set-off,
revocation, refund or chargeback with respect to money or instruments
of the Company or any Subsidiary on deposit with or in the possession
of such bank; and

13. Liens in favor of customs and revenue authorities.

"Outstanding" means, as of the date of determination, all
Senior Notes theretofore authenticated and delivered under this Indenture,
EXCEPT:

(i)Senior Notes theretofore canceled by the Trustee or
delivered to the Trustee for cancellation;

(ii)Senior Notes, or portions thereof, for whose payment or
redemption money in the necessary amount has been theretofore deposited with
the Trustee or any Paying Agent (other than the Issuer) in trust or set aside
and segregated in trust by the Issuer (if the Issuer shall act as its own
Paying Agent) for the Holders of such Senior Notes; PROVIDED that, if such
Senior Notes are to be redeemed, notice of such redemption has been duly
given pursuant to this Indenture or provision therefor satisfactory to the
Trustee has been made;

(iii)Senior Notes which have been paid pursuant to Section 306
or in exchange for or in lieu of which other Senior Notes have been
authenticated and delivered pursuant to this Indenture, other than any such
Senior Notes in respect of which there shall have been presented to the
Trustee proof satisfactory to it that such Senior Notes are held by a BONA
FIDE purchaser in whose hands such Senior Notes are valid obligations of the
Issuer; and

(iv)Senior Notes which have been defeased pursuant to Section
1302; provided, however, that in determining whether the Holders of the
requisite principal amount of the Outstanding Senior Notes have given any
request, demand, authorization, direction, notice,

<PAGE>

consent or waiver hereunder, Senior Notes owned by the Issuer, the Company or
any other obligor upon the Senior Notes or any Affiliate of the Issuer, or
Company or of such other obligor shall be disregarded and deemed not to be
Outstanding, except that, in determining whether the Trustee shall be protected
in relying upon any such request, demand, authorization, direction, notice,
consent or waiver, only Senior Notes which the Trustee knows to be so owned
shall be so disregarded. Senior Notes so owned which have been pledged in good
faith may be regarded as Outstanding if the pledgee establishes to the
satisfaction of the Trustee the pledgee's right so to act with respect to such
Senior Notes and that the pledgee is not the Issuer or the Company or any other
obligor upon the Senior Notes or any Affiliate of the Issuer or the Company or
of such other obligor.

"Participant" shall have the meaning provided in Section 201(b).

"Paying Agent" means any Person authorized by the Issuer to
pay the principal of (and premium, if any) or interest on any Senior Note on
behalf of the Company. The Issuer or the Company may act as Paying Agent
with respect to any Senior Note issued hereunder.

"Permitted Existing Indebtedness of an Acquired Person" means
Indebtedness of any Person (which may be assumed or guaranteed by, or may
otherwise become the legal liability of, the Company or any Restricted
Subsidiary with or into which such Person is merged or consolidated) existing
at the time such Person becomes a Restricted Subsidiary, or is merged with or
into or consolidated with the Company or one of its Restricted Subsidiaries,
so long as such Indebtedness was not created in anticipation of or as a
result of such Person becoming a Restricted Subsidiary or of such merger or
consolidation, and any Indebtedness to the extent exchanged for, or the net
proceeds of which are used to refinance, redeem or defease, such Indebtedness
(or any extension, renewal or refinancing thereof), or to finance any costs
incurred in connection with such exchange, refinancing, redemption or
defeasance; PROVIDED, HOWEVER, that the proceeds of such Indebtedness shall
be used to so refinance, redeem or defease the Indebtedness within 12 months
of the incurrence of such subsequent Indebtedness.

"Permitted Indebtedness" means (i)(a) any Indebtedness in a
principal amount not exceeding the principal amount outstanding or committed
under the Credit Agreements (including any letter of credit facility
thereunder) as of November 1, 1991 PLUS two hundred fifty million dollars
($250,000,000), and LESS the sum of (x) proceeds from the sale of all
Indebtedness under the 1991 Indenture issued from time to time that are
applied to repay Indebtedness under the Credit Agreements and (y) the
proceeds from the sale of the First Mortgage Notes, the 1994 Senior Notes,
the Senior Notes and the 11-7/8% Rating Adjustable Notes; (b) any
Indebtedness in a principal amount not exceeding 80% of the aggregate face
amount of Receivables of the Company and its Restricted Subsidiaries
(measured as of the latest date as of which information regarding Receivables
is available) and constituting Indebtedness described in clause (ii) of the
definition of Indebtedness or outstanding pursuant to any other revolving
credit facility; (c) any Indebtedness under the 1991 Indenture issued prior
to the date hereof the proceeds of which have been used to repay Indebtedness
under the Credit Agreements within five Business Days after such issuance
(and any subsequent Indebtedness the proceeds of which are used to refinance
such

<PAGE>

Indebtedness) and (d) the First Mortgage Notes, the 1994 Senior Notes, the
Senior Notes and the 11-7/8% Rating Adjustable Notes (and any subsequent
Indebtedness the proceeds of which are used to refinance such Indebtedness);
PROVIDED, HOWEVER, that:

(1)the aggregate principal amount permitted to be outstanding
under clause (a) shall be reduced by the aggregate amount of any repayments
or prepayments of any Senior Indebtedness (other than the Senior Notes, First
Mortgage Notes, the 1994 Senior Notes and Indebtedness issued under the 1991
Indenture or the 1996 Rating Adjustable Indenture) out of the proceeds of
Asset Dispositions as described in and required by Section 1009 hereof after
November 1, 1991, and, thereafter, shall be increased if, at the end of the
fourth consecutive complete fiscal quarter after the initial reduction
pursuant to this clause (1) or at any anniversary of the end of such fourth
fiscal quarter, the Consolidated Free Cash Flow of the Company for the
preceding four quarters has been zero or greater, in which event the amount
of the increase shall be the amount by which the consolidated capital
expenditures of the Company and its Restricted Subsidiaries not financed by
Indebtedness referred to in clause (vi) of this definition during such
four-quarter period exceeds Consolidated Depreciation Expense for such period
(provided any such increase shall be made only to the extent all such
reductions occurring prior to the four fiscal quarters for which such
calculation of Consolidated Free Cash Flow has been made exceed all prior
increases pursuant to this clause (1));

(2)(A) the aggregate amount permitted to be incurred under
clause (a) shall be reduced by the principal amount outstanding under the New
Credit Agreement on the date hereof net of subsequent reductions thereof, and
(B) the aggregate amount permitted to be incurred under clause (b) shall be
reduced by the principal amounts outstanding under the Master Trust Indenture
and Security Agreement among the Company, Stone Receivables Corporation,
Marine Midland Bank, as Trustee, and Bankers Trust Company, as Administrative
Agent (the "SRC Master Trust Indenture");

(3)the Permitted Indebtedness contemplated by this clause (i)
may be incurred by the Company and, in the case of Permitted Indebtedness
constituting Indebtedness under clause (ii) of the definition of
Indebtedness, by the Company or any Restricted Subsidiary; and

(4)any Restricted Subsidiary in the Stone Canada Group may
incur, assume or guarantee any Indebtedness under clauses(i)(a) and (i)(b)
above under any revolving credit facilities of Restricted Subsidiaries in the
Stone Canada Group entered into pursuant to this clause (i), for which the
aggregate amount committed thereunder does not exceed two hundred million
dollars ($200,000,000), to finance the working capital of Restricted
Subsidiaries in the Stone Canada Group;

(i)Permitted Subordinated Indebtedness;

(ii)Permitted Refinancing Indebtedness;

(iii)Permitted Stone Canada Indebtedness;

<PAGE>

(iv)Permitted Existing Indebtedness of an Acquired Person;

(v)Indebtedness incurred for the purpose of acquiring Capital
Stock of another Person, or assets comprising a business or line of business
or intangible assets or acquiring, constructing or improving fixed assets, in
each case related primarily to, or used in connection with, the paper or
forest products businesses and which (a) constitutes all or a portion of (but
not more than) the purchase price of such Capital Stock or assets (such
purchase price including any Indebtedness assumed or repaid in connection
with such purchase) or the cost of construction or improvement of such assets
(together with any transaction costs relating to such purchase, construction
or improvement), (b) is incurred prior to, at the time of or within 270 days
after the acquisition, construction or improvement of such assets for the
purpose of financing the purchase price of such Capital Stock or assets or
the cost of construction or improvement thereof (together with any
transaction costs relating to such purchase, construction or improvement) and
(c) is the direct or guaranteed obligation of any of (1) the Company, (2) a
Restricted Subsidiary formed for the purpose of acquiring such Capital Stock
or assets (and having no other material assets other than assets to be used
for such acquisition), (3) any Person comprised within the acquired assets or
(4) in the case of the construction or improvement of fixed assets, the
Restricted Subsidiary which will own such assets, or any extension, renewal
or refinancing of such Indebtedness; provided, however, that the amount so
extended, renewed or refinanced shall not exceed the principal amount
outstanding on the date of such extension, renewal or refinancing, plus costs
incurred in connection with any such extension, renewal or refinancing (it
being understood that any fixed assets included within capital expenditures
which increased Indebtedness permitted under clause (i) of the definition of
Permitted Indebtedness pursuant to clause (1) to the proviso to such clause
may not be financed pursuant to this clause (vi));

(vi)Indebtedness in an aggregate principal amount not to
exceed three hundred million dollars ($300,000,000) at any one time
outstanding; PROVIDED, HOWEVER, that no Restricted Subsidiary may incur
Indebtedness under this clause (vii) to the extent that after the incurrence
of such Indebtedness the sum (without duplication) of (x) all Indebtedness of
Restricted Subsidiaries incurred under this clause (vii), plus (y)
Indebtedness and other obligations then secured pursuant to clause (xii) of
the definition of Permitted Liens, plus (z) the amount of Indebtedness that
was not incurred pursuant to clause (i)(b) of this definition and is secured
pursuant to clause (vi) of the definition of Permitted Liens shall not exceed
three hundred million dollars ($300,000,000);

(vii)Indebtedness of the Company in an aggregate principal
amount not to exceed two hundred fifty million dollars ($250,000,000) at any
one time outstanding;

(viii)any Interest Swap Obligation, Currency Agreement or
Commodities Agreement relating to Indebtedness that was not incurred in
violation of the terms of this Indenture; and

(ix)Indebtedness to finance an increase in the working capital
of any Person or Persons that (a) are organized under the laws of a
jurisdiction other than the United States or any subdivision thereof and (b)
became Restricted Subsidiaries after November 1, 1991; provided, however,
that Indebtedness pursuant to this clause (x) is the obligation of the
Company or such Person or

<PAGE>

Persons.

"Permitted Liens" means, with respect to any Person,

(i)Ordinary Course of Business Liens;

(ii)Liens upon property or assets acquired or constructed by
such Person or any Affiliate of such Person after November 1, 1991 or
constituting improvements after November 1, 1991 to property or assets;
PROVIDED, HOWEVER, that (a) any such Lien is created solely for the purpose
of securing Indebtedness representing, or incurred to finance or refinance,
the purchase price (such purchase price including any Indebtedness assumed or
repaid in connection with such purchase) or cost of construction of the
property or assets subject thereto or of such improvement, (b) the principal
amount of the Indebtedness secured by such Lien does not exceed 100% of such
purchase price or cost (together with any transaction costs relating to such
purchase, construction or improvement), (c) such Lien does not extend to or
cover any other property or assets other than such property, assets,
improvement and any other improvements thereon (or, in the case of any
construction or improvement, any substantially unimproved real property on
which the property is constructed or the improvement is located) and (d) the
occurrence of such Indebtedness is permitted by clause (vi) of the definition
of Permitted Indebtedness;

(iii)Liens securing obligations with respect to letters of
credit (other than commercial letters of credit) to the extent the
obligations supported by such letters of credit may be secured without
violating Section 1007 hereof;

(iv)Liens covering property subject to any Capitalized Lease
Obligation or other lease which was not entered into in violation of this
Indenture securing the interest of the lessor or other Person under such
Capitalized Lease Obligation or other lease;

(v)Liens securing obligations to a trustee pursuant to the
compensation and indemnity provisions of any indenture (including this
Indenture) and Liens securing obligations to a trustee or agent with respect
to collateral for any Indebtedness;

(vi)Liens created in connection with a disposition of
Receivables (whether or not characterized as a sale of such Receivables or a
secured loan) not prohibited by this Indenture on (a) such Receivables, (b)
collateral securing such Receivables, (c) goods or services, the sale, lease
or furnishing of which gave rise to such Receivables, (d) books and records
relating to such Receivables, (e) agreements or arrangements supporting or
securing such Receivables and (f) incidental property and assets relating to
any of the foregoing; PROVIDED, HOWEVER, that the aggregate amount at any
time of Indebtedness that is secured pursuant to this clause (vi) and was not
incurred pursuant to clause (i)(b) of the definition of Permitted
Indebtedness, shall at no time exceed (x) three hundred million dollars
($300,000,000) LESS (y) the sum of Indebtedness and other obligations then
secured pursuant to clause (xii) of this definition PLUS the then outstanding
principal amount of Indebtedness of Restricted Subsidiaries incurred under
clause (vii) of the definition of Permitted Indebtedness (and not secured
pursuant to this clause (vi) or such clause (xii));

<PAGE>

(vii)Liens upon property or assets of the Company created in
substitution and exchange for a Permitted Lien upon other property or assets
of the Company or any of its Subsidiaries and Liens upon property or assets
of any Subsidiaries of the Company created in substitution and exchange for a
Permitted Lien upon other property or assets of any Subsidiaries of the
Company; PROVIDED, HOWEVER, that (a) such Permitted Lien is released
contemporaneously with the creation of the Lien in substitution therefor, (b)
the fair market value of the property or assets with respect to the Lien so
released is substantially the same as the fair market value of the property
or assets subject to the Lien created in substitution therefor and (c) no
Lien may be placed on property or assets of the Company or a Restricted
Subsidiary in substitution and exchange for a Lien upon property or assets of
an Unrestricted Subsidiary;

(viii)Liens upon property or assets of a Subsidiary of a
Person securing Indebtedness of such Person or of such Subsidiary, which
Liens are created in substitution and exchange for an outstanding pledge by
such Person of a majority of the Capital Stock of such Subsidiary for the
purpose of securing such Indebtedness (or a guaranty in respect thereof);
PROVIDED , HOWEVER, that if the property and assets of such Subsidiary to be
subjected to such Liens have a fair market value in excess of twenty-five
million dollars ($25,000,000), such Subsidiary shall have guaranteed the
obligations of the Company in respect of the Senior Notes and, if requested
by the Trustee, such Subsidiary shall have waived all its rights of
subrogation and reimbursement from the Company in connection with such
guaranty;

(ix)Liens upon any property or assets (a) existing at the time
of acquisition thereof by the Company or any Subsidiary, (b) of a Person
existing at the time such Person is merged with or into or consolidated with
the Company or any Subsidiary of the Company or existing at the time of a
sale or transfer of any such property or assets of such Person to the Company
or any Subsidiary of the Company or (c) of a Person existing at the time such
Person becomes a Subsidiary of the Company; PROVIDED, HOWEVER, that such
Liens shall not have been created in contemplation of such sale, merger,
consolidation, transfer or acquisition;

(x)Liens existing at November 1, 1991;

(xi)(a) Liens upon any property or assets of the Company and
its Restricted Subsidiaries securing Indebtedness under the Credit Agreements
in a principal amount not exceeding the principal amount outstanding or
committed under the Credit Agreements (including any letter of credit
facility, but without duplication with respect to commitments for loans the
use of proceeds of which is restricted to repayment of other Indebtedness
under the Credit Agreements) as of November 1, 1991 LESS (y) the proceeds
from the sale of all Indebtedness under the 1991 Indenture issued from time
to time that are or have been applied to repay Indebtedness under the Credit
Agreements and PLUS (z) two hundred fifty million dollars ($250,000,000) and
(b) Liens securing Indebtedness permitted by clause (i) of the definition of
Permitted Indebtedness upon property or assets that as of November 1, 1991
secured the Credit Agreements or that secure the SRC Master Trust Indenture;

(xii)Liens securing Indebtedness or other obligations of the
Company and its Restricted

<PAGE>

Subsidiaries not to exceed an aggregate principal amount of three hundred
fifty million dollars ($350,000,000) LESS, at any time, the sum of (y) the
then outstanding principal amount of Indebtedness of Restricted Subsidiaries
incurred under clause (vii) of the definition of Permitted Indebtedness (and
not secured pursuant to this clause (xii) or clause (vi) of this definition)
PLUS (z) the amount of Indebtedness secured pursuant to clause (vi) of this
definition and not incurred pursuant to clause (i)(b) of the definition of
Permitted Indebtedness;

(xiii)Liens upon property or assets of a Subsidiary securing
Indebtedness or other obligations owing to the Company;

(xiv)Liens on proceeds of any property or assets subject to a
Lien permitted by the other clauses of this definition;

(xv)any equal and ratable Lien that is granted pursuant to the
Continental Guaranty and that relates to a Lien that otherwise constitutes a
Permitted Lien;

(xvi)Liens on property or assets used to defease Indebtedness
that was not incurred in violation of this Indenture;

(xvii)Liens on property or assets of any Restricted Subsidiary
organized under the laws of a jurisdiction other than the United States or
any subdivision thereof securing Indebtedness of such Restricted Subsidiary
outstanding as of November 1, 1991 (or any extension, renewal or refinancing
thereof);

(xviii)any extension, renewal or replacement (or successive
extensions, renewals or replacements) in whole or in part of any Lien
referred to in the foregoing clauses (i) through (xvii) (covering the same
property and assets as such Lien); and

Permitted Collateral Liens (as defined in the First Mortgage
Note Indenture);

PROVIDED, HOWEVER, that no Lien described in any of the foregoing clauses
other than clause (xi)(a) shall encumber the rights of the Company with
respect to Indebtedness, obligations and other liabilities owed to the
Company by any Restricted Subsidiary or to any Restricted Subsidiary by the
Company or another Restricted Subsidiary.

"Permitted Refinancing Indebtedness" means Indebtedness of (i)
the Company to the extent exchanged for, or the net proceeds of which are
used to refinance, redeem or defease, Indebtedness of the Company or any
Restricted Subsidiary (or any extension, renewal or refinancing thereof)
outstanding at the time of incurrence of such subsequent Indebtedness, or to
finance any costs incurred in connection with any such exchange, refinancing,
redemption or defeasance, (ii) a Restricted Subsidiary to the extent
exchanged for, or the net proceeds of which are used to refinance, redeem or
defease, Indebtedness of such Restricted Subsidiary (or any extension,
renewal or refinancing thereof) outstanding at the time of incurrence of such
subsequent Indebtedness, or to finance any costs incurred in connection with
any such exchange, refinancing, redemption or defeasance, or (iii) the
Company or a Restricted Subsidiary to the

<PAGE>

extent exchanged for, or the net proceeds of which are used to refinance,
redeem or defease, any then outstanding industrial revenue or development
bonds that were outstanding at November 1, 1991 (or any extension, renewal or
refinancing thereof), or to finance any costs incurred in connection with
such exchange, refinancing or defeasance; PROVIDED, HOWEVER, that, in the
case of (i), (ii) or (iii), the proceeds of such Indebtedness shall be used
to so refinance, redeem or defease the Indebtedness within 12 months of the
incurrence of such subsequent Indebtedness; and PROVIDED, FURTHER, that the
only Indebtedness which may be subject to exchange, refinancing, redemption,
or defeasance pursuant to clause (i), (ii) or (iii) of this definition shall
be Indebtedness outstanding as of November 1, 1991 (other than Indebtedness
under the Credit Agreements, Subordinated Indebtedness and Indebtedness under
lines of credit) or any extension, renewal or refinancing thereof, and
Indebtedness that was incurred after November 1, 1991 and before the date
hereof (other than solely as Permitted Indebtedness under the 1991 Indenture)
or is incurred after the date hereof (other than solely as Permitted
Indebtedness).

"Permitted Stone Canada Indebtedness" means Indebtedness of
the Company or a Restricted Subsidiary in the Stone Canada Group outstanding
pursuant to lines of credit in an aggregate principal amount not to exceed
one hundred million dollars ($100,000,000), (of which not more than Canadian
sixty million dollars (Cn.$60,000,000) may be owed by Restricted Subsidiaries
in the Stone Canada Group) at any one time outstanding or pursuant to any
extension, renewal or refinancing of such outstanding amount PLUS any costs
incurred in connection with any such extension, renewal or refinancing;
PROVIDED, HOWEVER, that the aggregate principal amount permitted to be
incurred under this definition shall be reduced by the principal amount under
lines of credit outstanding on the date hereof net of subsequent repayments
or reductions thereof.

"Permitted Subordinated Indebtedness" means (i) Subordinated
Indebtedness of the Company to the extent exchanged for, or the net proceeds
of which are used to refinance, redeem or defease, then outstanding
Subordinated Indebtedness of the Company that was outstanding at November 1,
1991 (or any extension, renewal or refinancing thereof), or to finance any
costs incurred in connection with any such exchange, refinancing, redemption
or defeasance; PROVIDED, HOWEVER, that (a) such Subordinated Indebtedness
does not have a shorter weighted average life than that then remaining for,
or a maturity earlier than that of, the Indebtedness so exchanged,
refinanced, redeemed or defeased, EXCEPT that in the case of any exchange,
such Subordinated Indebtedness may have a maturity that is earlier (but not
more than six months earlier) than that of the Indebtedness so exchanged,
PROVIDED that the Subordinated Indebtedness shall have the same or a longer
weighted average life than that then remaining for the Indebtedness so
exchanged and (b) in the case of refinancings, redemptions or defeasances,
the proceeds of such Subordinated Indebtedness shall be used to so refinance,
redeem or defease the Indebtedness within 12 months of the incurrence of such
subsequent Subordinated Indebtedness; and (ii) Indebtedness of the Company in
an aggregate principal amount not to exceed two hundred fifty million dollars
($250,000,000) at any one time outstanding, so long as such Indebtedness (a)
constitutes Subordinated Indebtedness and (b) does not have (A) a weighted
average life that is shorter than that then remaining for (x) the Company's
9-7/8% Senior Notes due 2001 then outstanding, (y) 1994 Senior Notes then
outstanding or (z) the Senior Notes then Outstanding or (B) a maturity

<PAGE>

that is earlier than the latest maturity of (x) the Company's 9-7/8% Notes
due 2001 then outstanding, (y) the 1994 Senior Notes then outstanding or (z)
the Senior Notes then outstanding.

"Person" means any individual, corporation, partnership, joint
venture, association, joint-stock company, trust, unincorporated organization
or government or any agency or political subdivision thereof.

"Place of Payment", means The City of New York or any other
place or places where the principal of (and premium, if any) and interest on
the Senior Notes are payable.

"Predecessor Senior Note" of any particular Senior Note means
every previous Senior Note evidencing all or a portion of the same debt as
that evidenced by such particular Senior Note; and, for the purposes of this
definition, any Senior Note authenticated and delivered under Section 306 in
exchange for or in lieu of a mutilated, destroyed, lost or stolen Senior Note
shall be deemed to evidence the same debt as the mutilated, destroyed, lost
or stolen Senior Note.

"Private Placement Legend" means the legend on a Senior Note
specified in Section 202(b).

"QIB" means a Qualified Institutional Buyer as defined in Rule
144A.

"Rate Determination Period" means the four full weeks ending
on the seventh Business Day prior to a Reset Date.

"Receivables" means receivables, chattel paper, instruments,
documents or intangibles evidencing or relating to the right to payment of
money.

"Record Date" for the interest payable on any Interest Payment
Date means the close of business on February 1 or August 1, as the case may
be, whether or not a Business Day, immediately preceding the Interest Payment
Date on which such interest is payable.

"Redeemable Stock" means, with respect to any Person, any
Capital Stock that by its terms or otherwise is required to be redeemed or
purchased by such Person or any of its Subsidiaries prior to 30 days after
the latest maturity date of the Senior Notes then Outstanding, or is
redeemable or subject to mandatory purchase or similar put rights at the
option of the Holder thereof at any time prior to 30 days after the maturity
date of the Senior Notes then Outstanding, or any security which is
convertible or exchangeable into a security which has such provisions.

"Redemption Date" means the date fixed for redemption of any
Senior Note by or pursuant to this Indenture.

"Redemption Price" means the price at which any Senior Note is
to be redeemed pursuant to this Indenture.

"Register" and "Registrar" have the respective meanings
specified in Section 305.

<PAGE>

"Regulation S" means Regulation S under the Securities Act
(including any successor regulation thereto), as it may be amended from time
to time.

"Reset Date" means a date on which the interest rate on the
Senior Notes shall be reset pursuant to Section 1102(a).

"Reset Rate" shall have the meaning provided in Section
1102(a).

"Responsible Officer", when used with respect to the Trustee,
means the chairman or any vice-chairman of the board of directors, the
chairman or any vice-chairman of the executive committee of the board of
directors, the chairman of the trust committee, the president, any vice
president, the secretary, any assistant secretary, the treasurer, any
assistant treasurer, the cashier, any assistant cashier, any senior trust
officer or assistant trust officer, the controller or any assistant
controller or any other officer of the Trustee customarily performing
functions similar to those performed by any of the above designated officers
and also means, with respect to a particular corporate trust matter, any
other officer to whom such matter is referred because of his knowledge of and
familiarity with the particular subject.

"Restricted Payment" shall have the meaning provided in
Section 1006.

"Restricted Senior Note" shall mean any Senior Note required
to bear the Private Placement Legend in accordance with Section 306(a).

"Restricted Subsidiary" means any Subsidiary of the Company
other than an Unrestricted Subsidiary.

"Rule 144" means Rule 144 under the Securities Act (including
any successor regulation thereto), as amended from time to time.

"Rule 144A" means Rule 144A under the Securities Act
(including any successor regulation thereto), as amended from time to time.

"Securities Act" means the Securities Act of 1933 (including
any successor statute thereto), as amended from time to time.

"Senior Indebtedness" means the principal of, interest on and
other amounts due on (i) Indebtedness of the Company, whether outstanding on
the date hereof or thereafter created, incurred, assumed or guaranteed by the
Company, on or prior to the date hereof in compliance with the 1991 Indenture
and thereafter in compliance with Section 1008 hereof (including, without
limitation, the Senior Notes), (ii) obligations of the Company related to the
termination of Interest Swap Obligations, Currency Agreements or Commodities
Agreements pertaining to Indebtedness described under clause (i) above and
(iii) principal of or interest on the Senior Notes. Notwithstanding anything
to the contrary in the foregoing, Senior Indebtedness shall not include: (a)
Subordinated Indebtedness, (b) Indebtedness of or amounts owed by the Company
for compensation to employees, for goods or materials purchased in the
ordinary course of

<PAGE>

business or for services or (c) Indebtedness of the Company to a Subsidiary
of the Company.

"Senior Notes" has the meaning stated in the first recital of
this Indenture and more particularly means any Senior Note authenticated and
delivered under this Indenture.

"Seven Year Treasury Rate" means the arithmetic average
(rounded to the nearest basis point) of the weekly average per annum yield to
maturity values adjusted to constant maturities of seven years, for the Rate
Determination Period as determined from the yield curves of the most actively
traded marketable United States Treasury fixed interest rate securities (x)
constructed daily by the United States Treasury Department (i) as published
by the Federal Reserve Board in its Statistical Release H.15 (519), "Selected
Interest Rates," which weekly average yield to maturity values currently are
set forth in such Statistical Release under the caption "U.S. Government
Securities--Treasury Constant Maturities--7 Year" or (ii) if said Statistical
Release H.15 (519) is not then published, as published by the Federal Reserve
Board in any release comparable to its Statistical Release H.15 (519) or
(iii) if the Federal Reserve Board shall not be publishing a comparable
release, as published in any official publication or release of any other
United States Government Department or agency, or (y) if the United States
Treasury Department shall not then be constructing such yield curves, then as
constructed by the Federal Reserve Board or any other United States
Government Department or agency and published as set forth in (x) above.
However, if the Seven Year Treasury Rate cannot be determined as provided
above, then the Seven Year Treasury Rate shall mean the arithmetic average
(rounded to the nearest basis point) of the per annum yields to maturity for
each Business Day during the Rate Determination Period of all of the issues
of actively trading issues of non-interest bearing United States Treasury
fixed interest rate securities with a maturity of not less than 81 months nor
more than 87 months from such Business Day (1) as published in THE WALL
STREET JOURNAL or (2) if THE WALL STREET JOURNAL shall cease such
publication, based on average asked prices (or yields) as quoted by each of
three United States Government securities dealers of recognized national
standing selected by the Company.

"Special Record Date" for the payment of any Defaulted
Interest means a date fixed by the Trustee pursuant to Section 308.

"Specified Bank Debt" means (i) all Indebtedness and other
monetary obligations owing under the New Credit Agreement or any credit
facilities with the banks signatory to the New Credit Agreement (or with
banks affiliated with such banks), so long as such facilities are related to
the New Credit Agreement; and (ii) Indebtedness owing as of the date hereof
or hereafter to banks or other financial institutions under credit facilities
which may in the future refinance, refund, replace, supplement or succeed
(regardless of any gaps in time) the New Credit Agreement or the facilities
referenced in clause (i) hereof (including extensions and restructurings and
the inclusion of additional or different or substitute lenders), so long as
(a) the aggregate principal amount outstanding (including available amounts
under committed revolving credit or similar working capital facilities,
letter of credit facilities and other commitments to provide credit) of such
Indebtedness is at least equal to the principal of all publicly issued Senior
Indebtedness (including without limitation, the Senior Notes, the First
Mortgage Notes, the 1994

<PAGE>

Senior Notes and Indebtedness under the 1991 Indenture) then outstanding (it
being understood that Indebtedness described in clause (i) above and issues
of Indebtedness having a principal amount lower than set forth in clause (b)
below shall not be included in this amount), (b) Indebtedness outstanding
under each particular credit facility has a principal amount outstanding
(including available amounts under committed revolving credit or similar
working capital facilities, letter of credit facilities and other commitments
to provide credit) of at least twenty-five million dollars ($25,000,000) and
(c) such Indebtedness constitutes Senior Indebtedness.

"SRC Master Trust Indenture" has the meaning specified in
clause (2) of the proviso to clause (i) of the definition of Permitted
Indebtedness.

"Stated Maturity", when used with respect to any Senior Note
or any installment of principal thereof or interest thereon, means the date
specified in such Senior Note as the fixed date on which the principal of
such Senior Note or any installment of principal or interest is due and
payable.

"Stone Canada" means Stone Container (Canada) Inc., a company
organized under the Canadian Business Corporations Act.

"Stone Canada Group"" means Stone Canada and its Restricted
Subsidiaries existing as of the date hereof.

"Subordinated Capital Base" means the sum of (i) the
Consolidated Net Worth and (ii) to the extent not included in clause (i)
above, the amounts (without duplication) relating to (a) the principal amount
of Subordinated Indebtedness incurred after November 1, 1991 which is
unsecured and which does not have at the time of incurrence of such
Subordinated Indebtedness a weighted average life that is shorter than the
weighted average life remaining for the then outstanding Indebtedness under
the 1991 Indenture issued prior to the date hereof, or if less than two
hundred million dollars ($200,000,000) of such Indebtedness is outstanding,
the Senior Notes or a maturity that is earlier than the maturity of any of
the then outstanding Indebtedness under the 1991 Indenture, or if less than
two hundred million dollars ($200,000,000) of such Indebtedness is
outstanding, the Senior Notes, (b) redeemable stock of the Company that does
not constitute Redeemable Stock and (c) the principal amount of the 11-1/2%
Senior Subordinated Securities due September 1, 1999 of the Company or any
Subordinated Indebtedness exchanged for, or the net proceeds of which are
used to refinance, redeem or defease, such 11-1/2% Senior Subordinated Notes
due September 1, 1999 pursuant to clause (ii) of the definition of "Permitted
Indebtedness", that in the case of clauses (a), (b) and (c), as at the date
of determination, in conformity with GAAP consistently applied, would be set
forth on the consolidated balance sheet of the Company and its Restricted
Subsidiaries.

"Subordinated Indebtedness" means Indebtedness of the Company
(whether outstanding on the date hereof or hereafter created, incurred,
assumed or guaranteed by the Company) which, pursuant to the terms of the
instrument creating or evidencing the same, is subordinate to the Senior
Notes in right of payment or in rights upon liquidation.

<PAGE>

"Subsidiary" means, with respect to any Person, (i) any
corporation of which at least a majority in interest of the outstanding
Capital Stock having by the terms thereof voting power under ordinary
circumstances to elect directors of such corporation, irrespective of whether
or not at the time stock of any other class or classes of such corporation
shall have or might have voting power by reason of the happening of any
contingency, is at the time, directly or indirectly, owned or controlled by
such Person, or by one or more other corporations a majority in interest of
such stock of which is similarly owned or controlled, or by such Person and
one or more other corporations a majority in interest of such stock of which
is similarly owned or controlled or (ii) any other Person (other than a
corporation) in which such Person, directly or indirectly, at the date of
determination thereof, has at least a majority equity ownership interest.

"Taxes" means any tax, duty, levy, impost, assessment or other
governmental charge imposed or levied by or on behalf of the Government of
Canada or of any province or territory thereof or by an authority or agency
therein or thereof having power to tax.

"Ten Year Treasury Rate" means the arithmetic average (rounded
to the nearest basis point) of the weekly average per annum yield to maturity
values (adjusted to constant maturities of ten years, for the Rate
Determination Period as determined from the yield curves of the most actively
traded marketable United States Treasury fixed interest rate securities (x)
constructed daily by the United States Treasury Department (i) as published
by the Federal Reserve Board in its Statistical Release H.15 (519), "Selected
Interest Rates." which weekly average yield to maturity values currently are
set forth in such Statistical Release under the caption "U.S. Government
Securities--Treasury Constant Maturities-10 Year" or (ii) if said Statistical
Release H.15 (519) is not then published, as published by the Federal Reserve
Board in any release comparable to its Statistical Release H.15 (519) or
(iii) if the Federal Reserve Board shall not be publishing a comparable
release, as published in any official publication or release of any other
United States Government Department or agency, or (y) if the United States
Treasury Department shall not then be constructing such yield curves, then as
constructed by the Federal Reserve Board or any other United States
Government Department or agency and published as set forth in (x) above.
However, if the Ten Year Treasury Rate cannot be determined as provided
above, then the Ten Year Treasury Rate shall mean the arithmetic average
(rounded to the nearest basis point) of the per annum yields to maturity for
each Business Day during the Rate Determination Period of all of the issues
of actively trading issues of non-interest bearing United States Treasury
fixed interest rate securities with a maturity of not less then 117 months
nor more than 123 months from such Business Day (1) as published in THE WALL
STREET JOURNAL or (2) if THE WALL STREET JOURNAL shall cease such
publication, based on average asked prices (or yields) as quoted by each of
three United States Government securities dealers of recognized national
standing selected by the Company.

"Trustee" means the Person named as the "Trustee" in the first
paragraph of this instrument until a successor Trustee shall have become such
pursuant to the applicable provisions of this Indenture, and thereafter
"Trustee" shall mean or include each Person who is then a Trustee hereunder.

<PAGE>

"Trust Indenture Act" means the Trust Indenture Act of 1939,
as amended, as in force at the date as of which this Indenture was executed;
PROVIDED, HOWEVER, that in the event that such Act is amended after such
date, "Trust Indenture Act" means, to the extent required by any such
amendment, the Trust Indenture Act of 1939 as so amended.

"U.S. Government Obligations" means securities which are (i)
direct obligations of the United States of America for the payment of which
its full faith and credit is pledged or (ii) obligations of a person
controlled or supervised by and acting as an agency or instrumentality of the
United States of America the timely payment of which is unconditionally
guaranteed by the full faith and credit of the United States of America
which, in either case, are not callable or redeemable at the option of the
issuer thereof or otherwise subject to prepayment.

"Unrestricted Subsidiary" means a Subsidiary of the Company
which has been designated as an "Unrestricted Subsidiary" for purposes of
this Indenture by the Company and (i) at least 20% of whose common stock is
held by one or more Persons (other than the Company and its Affiliates) which
acquired such common stock in a BONA FIDE transaction for fair value and (ii)
at least 10% of whose total capitalization at the time of designation is in
the form of common stock or at least 15% of the fair market value of whose
assets at such time shall have been contributed by such Persons. An
Unrestricted Subsidiary may be designated to be a Restricted Subsidiary only
if, at the time of such designation, all Indebtedness and Liens of such
Subsidiary could be incurred under this Indenture.

"Vice President", when used with respect to the Issuer, the
Company or the Trustee, means any vice president, whether or not designated
by a number or a word or words added before or after the title "vice
president".

"Wholly Owned Subsidiary" means a Person organized under the
laws of Canada or any province thereof or any state of the United States, all
of the Capital Stock (other than directors' qualifying shares) of which is
owned by the Company directly by the Company and/or indirectly through one or
more other Wholly Owned Subsidiaries.

(xviii) SECTION 102. COMPLIANCE CERTIFICATES AND
OPINIONS.

Upon any application or request by the Issuer or the Company
to the Trustee to take any action under any provision of this Indenture, the
Issuer or the Company, as the case may be, shall furnish to the Trustee an
Officer's Certificate stating that all conditions precedent, if any, provided
for in this Indenture relating to the proposed action have been complied with
and an Opinion of Counsel stating that in the opinion of such counsel all
such conditions precedent, if any, have been complied with, except that in
the case of any such application or request as to which the furnishing of
such documents is specifically required by any provision of this Indenture
relating to such particular application or request, no additional certificate
or opinion need be furnished.

Every certificate or opinion with respect to compliance with a
condition or covenant provided for in this Indenture shall include:

<PAGE>

(1)a statement that each individual signing such certificate
or opinion has read such covenant or condition and the definitions herein
relating thereto;

(2)a brief statement as to the nature and scope of the
examination or investigation upon which the statements or opinions contained
in such certificate or opinion are based;

(3)a statement that, in the opinion of each such individual,
he has made such examination or investigation as is necessary to enable him
to express an informed opinion as to whether or not such covenant or
condition has been complied with; and

(4)a statement as to whether, in the opinion of each such
individual, such condition or covenant has been complied with.

(4) SECTION 103. FORM OF DOCUMENTS DELIVERED
TO TRUSTEE.

In any case where several matters are required to be certified
by, or covered by an opinion of, any specified Person, it is not necessary
that all such matters be certified by, or covered by the opinion of, only one
such Person, or that they be so certified or covered by only one document,
but one such Person may certify or give an opinion with respect to some
matters and one or more other such Persons as to other matters, and any such
Person may certify or give an opinion as to such matters in one or several
documents.

Any certificate or opinion of an Officer may be based, insofar
as it relates to legal matters, upon a certificate or opinion of, or
representations by, counsel, unless such Officer knows, or in the exercise of
reasonable care should know, that the certificate or opinion or
representations with respect to the matters upon which his certificate or
opinion is based are erroneous. Any such certificate or Opinion of Counsel
may be based, insofar as it relates to factual matters, upon a certificate or
opinion of, or representations by, an Officer or Officers of the Issuer or
the Company, as the case may be, stating that the information with respect to
such factual matters is in the possession of the Issuer or the Company, as
the case may be, unless such counsel knows, or in the exercise of reasonable
care should know, that the certificate or opinion or representations with
respect to such matters are erroneous.

Where any Person is required to make, give or execute two or
more applications, requests, consents, certificates, statements, opinions or
other instruments under this Indenture, they may, but need not, be
consolidated and form one instrument.

SECTION 104. ACTS OF HOLDERS.

(a) Any request, demand, authorization, direction,
notice, consent, waiver or other action provided by this Indenture to be
given or taken by Holders may be embodied in and evidenced by one or more
instruments of substantially similar tenor signed by such Holders in person
or by agents duly appointed in writing; and, except as herein otherwise
expressly provided, such action shall become effective when such instrument
or instruments are delivered to the Trustee and, where it is hereby expressly
required, to the Issuer. Such instrument or instruments

<PAGE>

(and the action embodied therein and evidenced thereby) are herein sometimes
referred to as the "Act" of the Holders signing such instrument or instruments.
Proof of execution of any such instrument or of a writing appointing any such
agent shall be sufficient for any purpose of this Indenture and (subject to
Section 601) conclusive in favor of the Trustee, the Issuer and the Company, if
made in the manner provided in this Section.

(b) The fact and date of the execution by any Person or
any such instrument or writing may be proved by the affidavit or a witness of
such execution or by a certificate of a notary public or other Person
authorized by law to take acknowledgments of deeds, certifying that the
individual signing such instrument or writing acknowledged to him the
execution thereof. Where such execution is by a signer acting in a capacity
other than his individual capacity, such certificate or affidavit shall also
constitute sufficient proof of his authority. The fact and date of the
execution of any such instrument or writing, or the authority of the Person
executing the same, may also be proved in any other manner which the Trustee
deems sufficient.

(d) Any request, demand, authorization, direction,
notice, consent, waiver or other Act of the Holder of any Senior Note shall
bind every future Holder of the same Senior Note and the Holder of every
Senior Note issued upon the registration of transfer thereof or in exchange
therefor in lieu thereof in respect of anything done, omitted or suffered to
be done by the Trustee, the Issuer or the Company in reliance thereon,
whether or not notation of such action is made upon such Senior Note.

(e) If the Issuer or the Company shall solicit from the
Holders any request, demand, authorization, direction, notice, consent,
waiver or other Act, the Issuer or the Company, as the case may be, may, at
its option, by or pursuant to a Board Resolution, fix in advance a record
date for the determination of Holders entitled to give such request, demand,
authorization, direction, notice, consent, waiver or other Act, but the
Issuer or the Company, as the case may be, shall have no obligation to do so.
If such a record date is fixed, such request, demand, authorization,
direction, notice, consent, waiver or other Act (including revocation
thereof) may be given before or after such record date, but only the Holders
of record at the close of business on such record date shall be deemed to be
Holders for the purposes of determining whether Holders of the requisite
proportion of Outstanding Senior Notes have authorized or agreed or consented
to such request, demand, authorization, direction, notice, consent, waiver or
other Act, and for that purpose the Outstanding Senior Notes shall be
computed as of such record date; PROVIDED that no such authorization,
agreement or consent by the Holders on such record date shall be deemed
effective unless it shall become effective pursuant to the provisions of this
Indenture not later than six months after the record date.

SECTION 105. NOTICES, ETC., TO TRUSTEE AND COMPANY.

Any request, demand, authorization, direction, notice,
consent, waiver or Act of Holders or other document provided or permitted by
this Indenture to be made upon, given or furnished to, or filed with:

<PAGE>

(1)the Trustee by any Holder or by the Issuer or the Company
shall be sufficient for every purpose hereunder if made, given, furnished or
filed in writing to or with the Trustee at its Corporate Trust Office, or

(2)the Issuer or the Company by the Trustee or by any Holder
shall be sufficient for every purpose hereunder (unless otherwise herein
expressly provided) if in writing and mailed, first-class postage prepaid, to
the Issuer or the Company, as the case may be, addressed to it at the address
of its principal office specified in the first paragraph of this Indenture,
attention: Secretary or at any other address previously furnished in writing
to the Trustee by the Issuer or the Company, as the case may be.

(2) SECTION 106. NOTICE TO HOLDERS; WAIVER.

Where this Indenture or any Senior Note provides for notice to
Holders of any event, such notice shall be deemed sufficiently given (unless
otherwise herein or in such Senior Note expressly provided) if in writing and
mailed, first-class postage prepaid, to each Holder affected by such event,
at his address as it appears in the Register, not later than the latest date,
and not earlier than the earliest date, prescribed for the giving of such
notice. In any case where notice to Holders is given by mail, neither the
failure to mail such notice, nor any defect in any notice so mailed, to any
particular Holder shall affect the sufficiency of such notice with respect to
other Holders or the validity of the proceedings to which such notice
relates. Where this Indenture or any Senior Note provides for notice in any
manner, such notice may be waived in writing by the Person entitled to
receive such notice, either before or after the event, and such waiver shall
be the equivalent of such notice. Waivers of notice by Holders shall be
filed with the Trustee, but such filing shall not be a condition precedent to
the validity of any action taken in reliance upon such waiver.

In case by reason of the suspension of regular mail service or
by reason of any other cause it shall be impracticable to give such notice by
mail, then such notification as shall be made with the approval of the
Trustee shall constitute a sufficient notification for every purpose
hereunder.

Any request, demand, authorization, direction, notice, consent
or waiver required or permitted under this Indenture shall be in the English
language, except that any published notice may be in an official language of
the country of publication.

SECTION 107. THE TRUST INDENTURE ACT; CONFLICT WITH TRUST
INDENTURE ACT.

(a) Reference in this Indenture to specific Sections of
the Trust Indenture Act are to be treated as if this Indenture were required
to be qualified under and to conform to the requirements of the Trust
Indenture Act.

(b) If any provision hereof limits, qualifies or
conflicts with the duties imposed by any of Sections 310 through 317,
inclusive, of the Trust Indenture Act through the operation of Section 318(c)
thereof, such imposed duties shall control.

<PAGE>

SECTION 108. EFFECT OF HEADINGS AND TABLE OF CONTENTS.

The Article and Section headings herein and the Table of
Contents are for convenience only and shall not affect the construction
hereof.

SECTION 109. SUCCESSORS AND ASSIGNS.

All covenants and agreements in this Indenture by the Issuer
and the Company shall bind each of their successors and assigns, whether so
expressed or not.

SECTION 110. SEPARABILITY CLAUSE.

In case any provision in this Indenture or in the Senior Notes
shall be invalid, illegal or unenforceable, the validity, legality and
enforceability of the remaining provisions shall not in any way be affected
or impaired thereby.

SECTION 111. BENEFITS OF INDENTURE.

Nothing in this Indenture or in the Senior Notes, express or
implied, shall give to any Person, other than the parties hereto or thereto
and their successors hereunder and the Holders, any benefit or any legal or
equitable right, remedy or claim under this Indenture.

SECTION 112. GOVERNING LAW.

This Indenture and the Senior Notes shall be governed by and
construed in accordance with the laws (other than the choice of law
provisions) of the State of New York.

SECTION 113. LEGAL HOLIDAYS.

In any case where any Interest Payment Date, Redemption Date,
or Stated Maturity of any Senior Note, or any other payment date, including,
without limitation, any Asset Disposition Payment Date, Change of Control
Payment Date, Deficiency Payment Date or Redemption Date, shall not be a
Business Day, then (notwithstanding any other provision of this Indenture or
of the Senior Notes) payment of interest or principal (and premium, if any)
need not be made on such date, but may be made on the next succeeding
Business Day with the same force and effect as if made on the Interest
Payment Date, or Redemption Date or at the Stated Maturity or other payment
date, PROVIDED that no interest shall accrue for the period from and after
such Interest Payment Date or Redemption Date or Stated Maturity or other
payment date, as the case may be.

SECTION 114. NO RECOURSE AGAINST OTHERS.

Directors, officers, employees or stockholders, as such, of
the Issuer or Company shall not have any liability for any obligations of the
Issuer or the Company under the Senior Notes or this Indenture, or for any
claim based on, in respect of or by reason of such obligations or their
creation. Each Securityholder, by accepting a Senior Note, waives and
releases all such liability. Such waivers and releases are part of the
consideration for the issuance of the Senior Notes.

<PAGE>

SECTION 115. CONSENT TO JURISDICTION AND SERVICE OF PROCESS.

(a) The Issuer and the Company each irrevocably submit
to the jurisdiction of any Federal court (or, if such court refuses to take
jurisdiction, any New York State Court) located in the Borough of Manhattan
in The City of New York over any suit, action or proceeding arising out of or
relating to this Indenture or any Senior Note. The Issuer and the Company
each irrevocably waives, to the fullest extent permitted by law, any
objection which it may have to the laying of the venue of any such suit,
action or proceeding brought in such a court and any claim that any suit,
action or proceeding brought in such a court has been brought in an
inconvenient forum. The Issuer and the Company each agrees that final
judgment in any such suit, action or proceeding brought in such a court shall
be conclusive and binding upon it and may be enforced in the courts of, in
the case of the Issuer, Canada or any other courts to the jurisdiction of
which the Issuer or the Company is subject, by a suit upon judgment, PROVIDED
that service of process is effected upon the Issuer or the Company, as the
case may be, in the manner specified in the following paragraph or as
otherwise permitted by law; PROVIDED, HOWEVER, that the Issuer and the
Company do not waive, and the foregoing provisions of this sentence shall not
constitute or be deemed to constitute a waiver of, (i) any right to appeal
any such judgment, to seek any stay or otherwise to seek reconsideration or
review of any such judgment in each case before the trial court of a United
States Federal or State court having appellate jurisdiction over such trial
court or (ii) any stay of execution or levy pending an appeal from, or a
suit, action or proceeding for reconsideration or review of, any such
judgment.

(b) As long as any of the Senior Notes remain
Outstanding, the Issuer and the Company will at all times have an authorized
agent in the Borough of Manhattan, The City of New York upon whom process may
be served in any suit, action or proceeding arising out of or relating to
this Indenture or any Senior Note. Service of process upon such agent and
written notice of such service mailed or delivered to the Issuer or the
Company, as the case may be, shall to the extent permitted by law be deemed
in every respect effective service of process upon the Issuer or the Company,
as the case may be, in any such suit, action or proceeding. The Issuer and
the Company each hereby irrevocably appoints CT Corporation System whose
address is, as of the date hereof, 1633 Broadway, New York, New York 10019,
as their agent for such purpose until August 16, 2008, and covenants and
agrees that service of process in any such suit, action or proceeding may be
made upon them at the office of such agent at said address (or at such other
address in the Borough of Manhattan, The City of New York, as the Issuer and
the Company may designate by written notice to the Trustee). The Issuer and
the Company each hereby represents and warrants that such agent has accepted
such appointment and has agreed to act as said agent for service of process,
and the Issuer and the Company each agrees to take any and all action,
including the filing of any and all documents that may be necessary to
continue such appointment in full force and effect as aforesaid.

(c) The Issuer and the Company each hereby consents to
process being served in any suit, action or proceeding of the nature referred
to in the preceding paragraphs by service upon such agent together with the
mailing of a copy thereof by registered or certified mail, postage prepaid,
return receipt requested to the address of the Issuer or the Company, as the
case

<PAGE>

may be, specified in Section 105 or to any other address of which the Issuer
or the Company, as the case may be, shall have given written notice to the
Trustee. The Issuer and the Company each hereby irrevocably waives, to the
fullest extent permitted by law, all claim of error by reason of any such
service (but does not waive any right to assert lack of subject matter
jurisdiction) and agree that such service and mailing (i) shall be deemed in
every respect effective service of process upon the Issuer or the Company, as
the case may be, in any such suit, action or proceeding and (ii) shall, to
the fullest extent permitted by law, be taken and held to be valid personal
service.

(d) Nothing in this Section 115 shall affect the right of the
Trustee or any Holder to serve process in any manner permitted by law or
limit the right of the Trustee to bring proceedings against the Issuer or the
Company in the courts of any jurisdiction or jurisdictions.

SECTION 116. INCORPORATION BY REFERENCE TO TRUST INDENTURE
ACT.

Whenever this Indenture refers to a provision of the Trust
Indenture Act, the provision is incorporated by reference in and made a part
of this Indenture. The following Trust Indenture Act terms incorporated by
reference in this Indenture have the following meanings:

"indenture securities" means the Senior Notes.

"indenture security holder" means a Holder or a Securityholder.

"indenture to be qualified" means this Indenture.

"indenture trustee" or "institutional trustee" means the
Trustee.

"obligor" on the indenture securities means the Company or any
other obligor on the Senior Notes, if any.

All other Trust Indenture Act terms used or incorporated by
reference in this Indenture that are defined by the Trust Indenture Act,
defined by Trust Indenture Act reference to another statute or defined by
Commission rule have the meanings assigned to them therein.

ARTICLE TWO

SENIOR NOTE FORMS

SECTION 201. FORMS GENERALLY.

(a)The Senior Notes and the certificate of authentication
of the Trustee therein shall be in substantially the form set forth in this
Article, with such appropriate insertions, omissions, substitutions and other
variations as are required or permitted by this Indenture, and may have such
letters, numbers or other marks of identification and such legends or
endorsements placed thereon as may be required to comply with the rules of
any securities exchange or as may, consistently herewith, be determined by
the Officers executing such Senior Notes, as evidenced by

<PAGE>

their execution of the Senior Notes. The definitive Senior Notes shall be
typed, printed, lithographed or engraved on steel engraved borders or any
combination of such methods or produced in any other manner, all as
determined by the Officers of the Issuer executing such Senior Notes, as
evidenced by their execution of such Senior Notes.

(b) Senior Notes initially offered and sold (i) to QIBs in
reliance on Rule 144A or (ii) Non-U.S. Persons in reliance on Regulation S,
as provided in the Note Purchase Agreement, shall be issued initially in the
form of one or more permanent global notes in definitive, fully registered
form, without coupons, substantially in the form set forth in Section 202
(each, a "Global Note"). Upon issuance, each such Global Note shall be
registered in the name of Cede & Co. or such other nominee designated by the
Depositary (the "Global Note Holder"), duly executed by the Issuer and the
Company (as guarantor) and authenticated by the Trustee as hereinafter
provided and deposited on behalf of the purchasers of the Senior Notes
represented thereby with the Trustee at its Corporate Trust Office, as
custodian for the Depositary. The aggregate principal amount of each Global
Note may from time to time be increased or decreased by adjustments made on
the records of the Trustee, as custodian for the Depositary for such Global
Note, as provided in Section 305, which adjustments shall be conclusive as to
the aggregate principal amount of such Global Note. So long as the Global
Note Holder is the registered owner of any Senior Notes, the Global Note
Holder will be considered the sole Holder under the Indenture of any Senior
Notes evidenced by a Global Note. Beneficial owners of Senior Notes
evidenced by a Global Note will not be considered the owners or Holders
thereof under this Indenture for any purpose, including with respect to the
giving of any directions, instructions or approvals to the Trustee
thereunder. Accordingly, beneficial owners of an interest in a Global Note
must rely on the procedures of the Depositary, and if such person is not a
member of, or participant in, the Depository ("Participant"), on the
procedures of the Participant through which such person owns its interest, to
exercise any rights and fulfill any obligations of a Holder under this
Indenture. No beneficial owners of an interest in a Global Note will be able
to transfer that interest except in accordance with the Depository's
applicable procedures, in addition to those provided for in the Indenture.
None of the Company, the Issuer, the Trustee, the Registrar or any Paying
Agent will have any responsibility or liability for any aspect of the records
of the Depository on any Participant or for maintaining, supervising or
reviewing any records of the Depository or any Participant relating to the
Senior Notes, and may conclusively rely on, and will be protected in relying
on, instructions from the Global Note Holder or the Depository for all
purposes.

(c) Senior Notes initially offered and sold to Institutional
Accredited Investors as provided in the Note Purchase Agreement, shall be
issued initially in definitive certificated, fully registered form, without
coupons ("Certificated Notes") substantially in the form set forth in Section
202.

(a) SECTION 202. FORM OF FACE OF SENIOR NOTE.

Each Senior Note shall be in substantially the following form:

(a) [INCLUDE IF SENIOR NOTE IS A GLOBAL NOTE -- UNLESS THIS
CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE

<PAGE>

DEPOSITORY TRUST COMPANY TO THE ISSUER OR ITS AGENT FOR REGISTRATION OF
TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE ISSUED IN EXCHANGE FOR THIS
CERTIFICATE OR ANY PORTION HEREOF IS REGISTERED IN THE NAME OF CEDE & CO. OR IN
SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF THE
DEPOSITORY TRUST COMPANY (AND ANY PAYMENT IS MADE TO CEDE & CO. OR TO SUCH OTHER
ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST
COMPANY) ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR
TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO.,
HAS AN INTEREST HEREIN.

THIS NOTE IS A GLOBAL NOTE WITHIN THE MEANING OF THE INDENTURE
HEREINAFTER REFERRED TO. THIS GLOBAL NOTE MAY NOT BE EXCHANGED, IN WHOLE OR
IN PART, FOR A NOTE REGISTERED IN THE NAME OF ANY PERSON OTHER THAN THE
DEPOSITORY TRUST COMPANY OR A NOMINEE THEREOF EXCEPT IN THE CIRCUMSTANCES SET
FORTH IN SECTIONS 305 AND 306 OF THE INDENTURE, AND MAY NOT BE TRANSFERRED,
IN WHOLE OR IN PART, EXCEPT IN ACCORDANCE WITH THE RESTRICTIONS SET FORTH IN
SECTIONS 305 AND 306 OF THE INDENTURE. BENEFICIAL INTERESTS IN THIS GLOBAL
NOTE MAY NOT BE TRANSFERRED EXCEPT IN ACCORDANCE WITH SECTIONS 305 AND 306 OF
THE INDENTURE.]

(b) [INCLUDE THE FOLLOWING LEGEND ONLY IF REQUIRED PURSUANT TO
SECTION 306(a) -- THIS NOTE (OR ITS PREDECESSOR) EVIDENCED HEREBY WAS ORIGINALLY
ISSUED IN A TRANSACTION EXEMPT FROM REGISTRATION UNDER SECTION 5 OF THE UNITED
STATES SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND THE NOTE
EVIDENCED HEREBY MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED IN THE
ABSENCE OF SUCH REGISTRATION OR AN APPLICABLE EXEMPTION THEREFROM. EACH
PURCHASER OF THE NOTE EVIDENCED HEREBY IS HEREBY NOTIFIED THAT THE SELLER MAY
BE RELYING ON THE EXEMPTION PROVIDED BY RULE 144A UNDER THE SECURITIES ACT. THE
HOLDER OF THE NOTE EVIDENCED HEREBY AGREES FOR THE BENEFIT OF THE ISSUER AND
STONE CONTAINER CORPORATION (THE "COMPANY") THAT (A) SUCH NOTE MAY BE RESOLD,
PLEDGED OR OTHERWISE TRANSFERRED, ONLY (1) (a) TO A PERSON WHO THE SELLER
REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER (AS DEFINED IN RULE 144A
UNDER THE SECURITIES ACT) IN A TRANSACTION MEETING THE REQUIREMENTS OF
RULE 144A, (b) IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144 UNDER THE
SECURITIES ACT (c) PURSUANT TO OFFERS AND SALES OUTSIDE THE UNITED STATES IN
COMPLIANCE WITH THE PROVISIONS OF REGULATION S UNDER THE SECURITIES ACT OR (d)
IN ACCORDANCE WITH ANOTHER EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE
SECURITIES ACT (AND BASED UPON CERTIFICATES AND/OR OPINIONS OF COUNSEL TO THE
EXTENT REQUIRED IN THE INDENTURE), (2) TO THE ISSUER OR THE COMPANY OR
(3) PURSUANT TO AN

<PAGE>

EFFECTIVE REGISTRATION STATEMENT AND, IN EACH CASE, IN ACCORDANCE WITH THE
APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES OR ANY OTHER
APPLICABLE JURISDICTION AND (B) THE HOLDER WILL, AND EACH SUBSEQUENT HOLDER IS
REQUIRED TO, NOTIFY ANY PURCHASER OF THE NOTE EVIDENCED HEREBY OF THE RESALE
RESTRICTIONS SET FORTH IN (A)(1) ABOVE IF THEN APPLICABLE.

(d) (Face of Senior Note)

STONE CONTAINER FINANCE COMPANY OF CANADA

11-1/2% Senior Note due 2006

guaranteed on a senior basis by

STONE CONTAINER CORPORATION

Number ______ U.S.$______ CUSIP NO.: ________

Stone Container Finance Company of Canada (herein called the
"Issuer," which term includes any successor corporation under the Indenture
hereinafter referred to), for value received, hereby promises to pay to ______
or registered assigns, [[INCLUDE IF NOT A GLOBAL NOTE] the principal sum of
_____ UNITED STATES DOLLARS] [INCLUDE IF A GLOBAL NOTE -- the Initial Principal
Amount Specified in Schedule A hereto] on August 15, 2006, and to pay interest
thereon from the date hereof or from the most recent Interest Payment Date to
which interest has been paid or duly provided for, semi-annually on February 15
and August 15 of each year (commencing February 15, 1997), at the rate of
11-1/2% per annum, until the principal hereof is paid or made available for
payment. The interest so payable, and punctually paid or duly provided for, on
any Interest Payment Date will, as provided in such Indenture, be paid to the
Person in whose name this Senior Note (or one or more Predecessor Senior Notes)
is registered at the close of business on the Record Date for such interest,
which shall be the February 1 or August 1 (whether or not a Business Day), as
the case may be, preceding such Interest Payment Date. Any such interest not so
punctually paid or duly provided for will forthwith cease to be payable to the
Holder on such Record Date and may either be paid to the Person in whose name
this Senior Note (or one or more Predecessor Senior Notes) is registered at the
close of business on a Special Record Date for the payment of such Defaulted
Interest to be fixed by the Trustee, notice whereof shall be given to Holders of
Senior Notes not less than 10 days prior to such Special Record Date, or be paid
at any time in any other lawful manner not inconsistent with the requirements of
any securities exchange on which the Senior Notes may be listed, and upon such
notice as may be required by such exchange, all as more fully provided in the
Indenture.

<PAGE>

Payment of the principal of (and premium, if any) and interest
on this Senior Note will be made at the office or agency of the Issuer
maintained for that purpose in the Borough of Manhattan, The City of New York
in dollars; PROVIDED, HOWEVER, that at the option of the Issuer, payment of
interest may be made by check mailed to the address of the Person entitled
thereto as such address shall appear in the Register.

Payment of the principal of (and premium, if any), interest,
Additional Amounts on, and other amounts payable in respect of, this Senior
Note is guaranteed on a senior basis by the Company as provided in such
Indenture.

Reference is hereby made to the further provisions of this
Senior Note set forth on the reverse hereof, which further provisions shall
for all purposes have the same effect as if set forth at this place.

Unless the certificate of authentication hereon has been
executed by the Trustee referred to on the reverse hereof by manual
signature, this Senior Note shall not be entitled to any benefit under the
Indenture or be valid or obligatory for any purpose.

IN WITNESS WHEREOF, each of the Issuer and the Company has
caused this instrument to be duly executed.

STONE CONTAINER FINANCE COMPANY OF
CANADA, as Issuer

By
--------------------------------

STONE CONTAINER CORPORATION, as Guarantor

By
--------------------------------

<PAGE>

SECTION 203. FORM OF REVERSE OF SENIOR NOTE.

(Reverse of Senior Note)

1.This Senior Note is one of a duly authorized issue of
securities of the Issuer designated as its "11-1/2% Senior Notes due 2006"
(herein called the "Senior Notes") limited in aggregate principal amount to
two hundred million United States dollars (U.S.$200,000,000), issued and to
be issued in a single series under an indenture, dated as of August 16, 1996
(as amended or supplemented from time to time, the "Indenture"), between the
Issuer, Stone Container Corporation (the "Company"), as guarantor, and The
Bank of New York, as trustee (the "Trustee," which term includes any
successor Trustee under the Indenture), to which Indenture reference is
hereby made for a statement of the respective rights, limitations of rights,
duties and immunities thereunder of the Issuer, the Company, the Trustee and
each of the Holders and of the terms upon which the Senior Notes are, and are
to be, authenticated and delivered. All terms used in this Senior Note which
are not defined herein shall have the meanings assigned to them in the
Indenture.

2.Interest on this Senior Note will be computed on the basis
of a 360-day year of twelve, 30-day months. Each payment of interest in
respect of an Interest Payment Date will include interest accrued through the
day before such Interest Payment Date. If an Interest Payment Date falls on
a day that is not a Business Day, the interest payment to be made on such
Interest Payment Date will be made on the next succeeding Business Day with
the same force and effect as if made on such Interest Payment Date, and no
additional interest will accrue as a result of such delayed payment. If any
payment of principal of (and premium, if any) or installment of interest on
this Senior Note is not paid when due then, to the extent that payment of
such interest shall be legally enforceable, interest upon such overdue
principal (and premium, if any) and installment of interest, shall be paid at
the rate set forth on the face of this Senior Note. The Issuer shall pay the
Holders such Additional Amounts as may be payable under Section 1014 of the
Indenture.

3.Under certain circumstances following an Asset Disposition,
the Company may offer to repurchase Senior Notes, in whole or in part, at a
repurchase price equal to 100% of the principal amount thereof, plus accrued
interest to the date of repurchase, from proceeds or excess net proceeds of
such Asset Disposition, as provided in, and subject to the terms of, the
Indenture. The Company is required to give Holders notice of such right
within the period specified in the Indenture. Holders may tender their
Senior Notes for repurchase on or prior to the close of business on the
applicable payment date. If the aggregate principal amount of Senior Notes
surrendered for repurchase exceeds the aggregate principal amount of the
applicable offer price, the selection of the Senior Notes to be repurchased
shall be made by the Trustee on a PRO RATA basis.

4.Except as set forth below, as provided in the Indenture, in
the event that the Company's Subordinated Capital Base is less than one
billion dollars ($1,000,000,000) (the "Minimum Subordinated Capital Base") as
at the end of each of any two consecutive fiscal quarters (the last day of
the second such fiscal quarter, a "Deficiency Date"), then the Company shall,
no later than

<PAGE>

60 days after the Deficiency Date (105 days if a Deficiency Date is also the
end of the Company's fiscal year), make an offer to all Holders to purchase
(a "Deficiency Offer") 10% of the principal amount of the Senior Notes
originally issued, or such lesser amount as may be Outstanding at the time
such Deficiency Offer is made (the "Deficiency Offer Amount"), at a purchase
price equal to 100% of principal amount, plus accrued and unpaid interest to
the Deficiency Payment Date. Thereafter, semi-annually the Company shall
make like Deficiency Offers for the then applicable Deficiency Offer Amount
of Senior Notes until the Company's Subordinated Capital Base as at the end
of any subsequent fiscal quarter shall be equal to or greater than the
Minimum Subordinated Capital Base. Notwithstanding the foregoing, after any
specified Deficiency Date, the last day of any subsequent fiscal quarter
shall not constitute a Deficiency Date (giving rise to an additional
obligation under the first sentence of this paragraph) unless the Company's
Subordinated Capital Base was equal to or greater than the Minimum
Subordinated Capital Base as at the end of a fiscal quarter that followed
such specified Deficiency Date and preceded such subsequent quarter.

5.Notwithstanding the foregoing, as provided in the Indenture,
in the event that (1) the making of a Deficiency Offer by the Company or (2)
the purchase of Senior Notes by the Company in respect of a Deficiency Offer
would constitute a default (with the giving of notice, the passage of time or
both) with respect to any Specified Bank Debt at the time outstanding, then,
in lieu of the making of a Deficiency Offer in the circumstances set forth
above, (i) the interest rate on the Senior Notes shall be reset as of the
first day of the second fiscal quarter following the Deficiency Date (the
"Reset Date") to a rate per annum (the "Reset Rate") equal to the greater of
(x) the Initial Interest Rate and (y) the sum of (A) 400 basis points and (B)
the higher of the Seven Year Treasury Rate and the Ten Year Treasury Rate,
(ii) on the first Interest Payment Date following the Reset Date, the
interest rate on the Senior Notes, as reset on the Reset Date, shall increase
by fifty (50) basis points, and (iii) the interest rate on the Senior Notes
shall further increase by an additional fifty (50) basis points on each
succeeding Interest Payment Date; PROVIDED, HOWEVER, that notwithstanding
clauses (i), (ii) or (iii) above, in no event shall the interest rate to be
borne by the Senior Notes at any time exceed the Initial Interest Rate by
more than two hundred (200) basis points. Once the interest rate on the
Senior Notes has been reset as set forth above, as provided in the Indenture,
if the Company's Subordinated Capital Base is equal to or greater than the
Minimum Subordinated Capital Base as of the last day of any fiscal quarter
subsequent to the Deficiency Date, interest on the Senior Notes shall return
to the Initial Interest Rate effective as of the first day of the second
following fiscal quarter.

6.The Indenture also provides that upon the occurrence of a
Change of Control, subject to the satisfaction of certain substantial
conditions precedent set forth in the Indenture, each Holder shall have the
right to require that the Company repurchase such Holder's Senior Notes in
whole or in part at a price equal to 101% of the aggregate principal amount
thereof plus accrued and unpaid interest, if any, to the date of such
repurchase.

7.The Indenture contains provisions for (i) defeasance of
certain of the obligations of the Issuer and the Company (including
covenants) under the Indenture and (ii) satisfaction and discharge of the
Indenture upon compliance by the Issuer and the Company with certain

<PAGE>

conditions set forth therein, which provisions apply to this Senior Note.

8.The Senior Notes will not be redeemable on or prior to
August 17, 2001. After such date, the Senior Notes will be redeemable at the
option of the Issuer, at any time as a whole, or from time to time in part,
on not less than 30 days nor more than 45 days' notice, at 101% of the
principal amount thereof, plus accrued and unpaid interest (if any) to the
Redemption Date, so long as the date upon which such notice is given is an
Investment Grade Date. In addition, after August 15, 2004, the Senior Notes
will be redeemable at the option of the Company, at any time as a whole, or
from time to time in part, on not less than 30 days nor more than 45 days'
notice, at 100% of the principal amount thereof, plus accrued and unpaid
interest (if any) to the Redemption Date.

9.The Indenture imposes certain limitations on the ability of
the Company and its Restricted Subsidiaries to, among other things, make
certain Restricted Payments, create and incur Indebtedness and create or
suffer to exist certain Liens (other than Permitted Liens). The Indenture
imposes limitations on the ability of the Issuer and the Company to merge or
consolidate with any other Person or sell, assign, transfer or lease all or
substantially all of its properties or assets. All such covenants and
limitations are subject to a number of important qualifications and
exceptions. The Issuer and the Company must report periodically to the
Trustee on compliance with the covenants in the Indenture.

10.The payment of principal, interest, Additional Amounts and
other amounts payable in respect of the Senior Notes is unconditionally
guaranteed by the Company in accordance with Article Twelve of the Indenture.
The Indenture permits the Company, at its option at any time, to assume all
of the Issuer's rights and obligations under the Indenture, the Senior Notes
and related documents in accordance with the terms of a supplemental
Indenture, in which event the Issuer will be released from such rights and
obligations. Upon the occurrence of a Company Event of Default, and the
declaration of principal, interest, Additional Amounts and other amounts
payable in respect of the Senior Notes to be immediately due and payable in
accordance with this Indenture, the Company shall be deemed to directly
assume such obligations.

11.The Indenture permits, with certain exceptions as therein
provided, the amendment thereof and the modification of the rights and
obligations of the Issuer and the Company and the rights of the Holders to be
affected under the Indenture at any time by the Issuer and the Company and
the Trustee with the consent of the Holders representing at least a majority
in principal amount of the Senior Notes at the time Outstanding. The
Indenture also contains provisions permitting the Holders of at least a
majority in principal amount of the Senior Notes at the time Outstanding, on
behalf of the Holders of all Senior Notes, to waive compliance by the Issuer
and the Company with certain provisions of the Indenture and certain defaults
under the Indenture and their consequences. Any such consent or waiver by
the Holder of this Senior Note shall bind such Holder and all future Holders
of this Senior Note and of any Senior Note issued upon the registration of
transfer hereof or in exchange hereof or in lieu hereof, whether or not
notation of such consent or waiver is made upon this Senior Note.

<PAGE>

12.No reference herein to the Indenture and no provision of
this Senior Note or of the Indenture shall alter or impair the obligations of
the Issuer or the Company, which are absolute and unconditional, to pay (in
the case of the Company as provided in the Guaranty or as otherwise provided
in the case of a Company Event of Default) the principal of (and premium, if
any), interest and Additional Amounts on this Senior Note at the times, place
and rate, and in the coin or currency, herein prescribed.

13.As provided in the Indenture and subject to certain
limitations therein set forth, the transfer of this Senior Note is
registrable in the Register, upon surrender of this Senior Note for
registration of transfer at the office or agency of the Issuer in any place
where the principal of (and premium, if any) and interest on this Senior Note
are payable, duly endorsed by, or accompanied by a written instrument of
transfer in form satisfactory to the Company and the Registrar duly executed
by the Holder hereof, such Holder's attorney duly authorized in writing, and
thereupon one or more new Senior Notes, of authorized denominations and for
the same Stated Maturity and aggregate principal amount, will be issued to
the designated transferee or transferees.

14.The Senior Notes are issuable only in registered form
without coupons in denominations of one thousand dollars ($1,000) and any
integral multiple thereof. As provided in the Indenture and subject to
certain limitations therein set forth, Senior Notes are exchangeable for a
like aggregate principal amount of Senior Notes of a different authorized
denomination, as requested by the Holder surrendering the same. No service
charge shall be made for any such registration of transfer or exchange, but
the Issuer may require payment by the Holder of a sum sufficient to cover any
tax or other governmental charge payable in connection therewith.

15.Prior to due presentment of this Senior Note for
registration of transfer, the Issuer, the Company, the Trustee and any agent
of the Issuer, the Company or the Trustee may treat the Person in whose name
this Senior Note is registered as the owner hereof for all purposes, whether
or not this Senior Note be overdue, and neither the Issuer, the Company, the
Trustee nor any such agent shall be affected by notice to the contrary.

16.All payments on the Senior Notes will be made in United
States Dollars.

17.A director, officer, employee or stockholder, as such, of
the Issuer or the Company shall not have any liability for any obligations of
the Issuer or the Company under this Senior Note or the Indenture, or for any
claim based on, in respect of or by reason of, such obligations or their
creation. Each Holder, by accepting a Senior Note, waives and releases all
such liability. The waiver and release are part of the consideration for the
issuance of this Senior Note.

18.Pursuant to a recommendation promulgated by the Committee
on Uniform Security Identification Procedures ("CUSIP"), the Issuer or the
Company has caused CUSIP numbers to be printed on the Senior Notes as a
convenience to the Holders of the Senior Notes. No representation is made as
to the correctness or accuracy of such numbers as printed on the Senior Notes
and reliance may be placed only on the other identification numbers printed
hereon.

<PAGE>

19.At any time when the Company is not subject to Section 13
or 15(d) of the Securities Exchange Act of 1934, as amended, upon request of
a Holder of a Senior Note [FOR GLOBAL NOTE -- or of a beneficial owner of an
interest in a Global Note], the Issuer and the Company will promptly furnish
or cause to be furnished Rule 144A Information (as defined below) to such Holder
[FOR GLOBAL NOTE -- or beneficial owner], or to a prospective purchaser of a
Senior Note [FOR GLOBAL NOTE -- or a beneficial interest in a Global Note]
designated by such holder [or beneficial owner of such interest], in order to
permit compliance by such Holder [FOR GLOBAL NOTE or beneficial owner] with
Rule 144A under the Securities Act of 1933, as amended (the "Securities
Act"). "Rule 144A Information" shall be such information as is specified
pursuant to Rule 144A(d)(4) under the Securities Act (or any successor
provision thereto).

ASSIGNMENT FORM

To assign this Senior Note, fill in the form below: (I) or
(we) assign and transfer this Senior Note to

-------------------------------------------------------
(Insert assignee's social security or tax I.D. number)

-------------------------------------------------------

-------------------------------------------------------
(Print or type assignee's name, address and zip code)

and irrevocably appoint _____________________________ agent to transfer this
Senior Note on the books of the Company. The agent may substitute another to
act for him or her.

Dated: ____________ Your Signature: _________________________

(Sign exactly as your name appears on the other side of this Senior Note)

Signature Guaranty:______________________________

Signatures must be guaranteed by an "eligible guarantor institution" meeting
the requirements of the Registrar, which requirements include membership or
participation in STAMP or such other "signature guarantee program" as may be
determined by the Registrar in addition to, or in substitution for, STAMP, all
in accordance with the Securities Exchange Act of 1934, as amended.

<PAGE>

OPTION OF HOLDER TO ELECT PURCHASE

If you wish to elect to have all or any portion of this Senior
Note purchased by the Company pursuant to Section 1009 ("Asset Disposition
Offer"), Section 1013 ("Change of Control Offer"), or Section 1101
("Deficiency Offer") of the Indenture, check the applicable boxes:

Section 1009: Section 1013: Section 1101:
in whole in whole in whole
in part in part in part
amount to be amount to be amount to be
purchased: $ purchased: $ purchased: $
-------- -------- ---------
Dated:________________ Your Signature:

(Sign exactly as your name appears on the other side of this Senior Note)

Signature Guaranty:

Signatures must be guaranteed by an "eligible guarantor
institution" meeting the requirements of the Registrar, which requirements
include membership or participation in STAMP or such other "signature
guarantee program" as may be determined by the Registrar in addition to, or
in substitution for, STAMP, all in accordance with the Securities Exchange
Act of 1934, as amended.

Social Security Number or Taxpayer Identification Number:________

<PAGE>

[IF NOTE IS A GLOBAL NOTE, INSERT AS A SEPARATE PAGE --
Schedule A
SCHEDULE OF ADJUSTMENTS

Notation made on
Principal amount behalf of the
Date adjustment Principal amount Principal amount following Security
made increase decrease adjustment Registrar
<S> <C> <C> <C> <C>

__________ __________ __________ __________ __________
__________ __________ __________ __________ __________
__________ __________ __________ __________ __________
__________ __________ __________ __________ __________
__________ __________ __________ __________ __________
__________ __________ __________ __________ __________
__________ __________ __________ __________ __________
__________ __________ __________ __________ __________
__________ __________ __________ __________ __________
__________ __________ __________ __________ __________
__________ __________ __________ __________ __________
__________ __________ __________ __________ __________
__________ __________ __________ __________ __________
__________ __________ __________ __________ __________
__________ __________ __________ __________ __________
__________ __________ __________ __________ __________
__________ __________ __________ __________ __________
__________ __________ __________ __________ _________]

</TABLE>

<PAGE>

19. SECTION 204. FORM OF TRUSTEE'S CERTIFICATE OF AUTHENTICATION.

The Trustee's certificate of authentication on each Senior Note shall be in
substantially the following form:

Dated:____________

TRUSTEE'S CERTIFICATE OF AUTHENTICATION

This is one of the 111/2% Senior Notes due 2006 issued under the Indenture
referred to in this Senior Note.

THE BANK OF NEW YORK,
as Trustee

By_____________________
Authorized Signatory

SECTION 205. CUSIP NUMBER.

The Issuer in issuing Senior Notes may use a "CUSIP" number, and if so, the
Trustee may use the CUSIP number in notices of redemption or exchange as a
convenience to Holders; PROVIDED, that any such notice may state that no
representation is made as to the correctness or accuracy of the CUSIP number
printed on the notice or on the Senior Notes, and that reliance may be placed
only on the other identification numbers printed on the Senior Notes, and any
such redemption shall not be affected by any defect in or omission of such
numbers. The Issuer will promptly notify the Trustee of any change in the CUSIP
number of the Senior Notes.

ARTICLE THREE
THE SENIOR NOTES

SECTION 301. TITLE AND TERMS.

The aggregate principal amount of Senior Notes Outstanding at any time may
not exceed the amount of two hundred million dollars ($200,000,000).

The Senior Notes shall be issued in a single series, known and designated
as the "11-1/2% Senior Notes due 2006" of the Issuer. The Stated Maturity for
the payment of principal of the Senior Notes shall be August 15, 2006, and the
Senior Notes shall bear interest at 11-1/2% per annum from the Issue Date, or
from the most recent Interest Payment Date to which interest has been paid
thereon or duly provided for, payable semi-annually on February 15 and August 15
of each year (commencing February 15, 1997) until the principal thereof is paid
or duly provided for.

The principal of (and premium, if any,) interest and Additional Amounts on
the Senior

<PAGE>

Notes shall be payable at the office or agency of the Issuer in the Borough of
Manhattan, The City of New York, maintained for such purpose and at any other
office or agency maintained by the Issuer for such purpose; PROVIDED, HOWEVER,
that interest may be payable at the option of the Issuer by check mailed to the
address of the Person entitled thereto as such address shall appear on the
Register except in the case of any Global Notes, as otherwise provided under the
rules of the Depository or in any Letter of Representations provided by the
Issuer or the Company to the Depository.

SECTION 302. DENOMINATIONS.

The Senior Notes shall be issuable in fully registered form without coupons
in denominations of one thousand dollars ($1,000) or any integral multiple
thereof.

SECTION 303. EXECUTION, AUTHENTICATION, DELIVERY AND DATING.

The Senior Notes shall be executed on behalf of each of the Issuer and the
Company, as guarantor, by its Chairman of the Board, its President or one of its
Vice President. The signature of any of these officers on the Senior Notes may
be manual or facsimile. The seal of the Issuer may be in the form of a
facsimile thereof and may be impressed, affixed, imprinted or otherwise
reproduced on the Senior Notes. Typographical and other minor errors or defects
in any such reproduction of the seal or any such signature shall not affect the
validity or enforceability of any Senior Note that has been duly authenticated
and delivered by the Trustee.

Senior Notes bearing the manual or facsimile signatures of individuals who
were at any time the proper officers of the Issuer shall bind the Issuer,
notwithstanding that such individuals or any of them have ceased to hold such
offices prior to the authentication and delivery of such Senior Notes or did not
hold such offices at the date of such Senior Notes. At any time and from time
to time after the execution and delivery of this Indenture, the Issuer may
deliver Senior Notes executed by the Issuer and the Company as guarantor to the
Trustee for authentication, together with a Company Order of the Issuer for the
authentication and delivery of such Senior Notes, and the Trustee in accordance
with such Company Order shall authenticate and make such Senior Notes available
for delivery. Each Senior Note shall be dated the date of its authentication.
The Senior Notes may contain such notations, legends or endorsements required by
law, stock exchange rule or usage.

No Senior Note shall be entitled to any benefit under this Indenture or be
valid or obligatory for any purpose unless there appears on such Senior Note a
certificate of authentication substantially in the form provided for herein
executed by the Trustee by manual signature, and such certificate upon any
Senior Note shall be conclusive evidence, and the only evidence, that such
Senior Note has been duly authenticated and delivered hereunder and is entitled
to the benefits of this Indenture.

SECTION 304. TEMPORARY SENIOR NOTES.

Pending the preparation of definitive Senior Notes, the Issuer and the
Company may

<PAGE>

execute, and upon a Company Order of the Issuer, the Trustee shall authenticate
and make available for delivery, temporary Senior Notes which are printed,
lithographed, typewritten, mimeographed, or otherwise produced, in any
authorized denomination, substantially in the tenor of the definitive Senior
Notes in lieu of which they are issued and with such appropriate insertions,
omissions, substitutions and other variations as the officers executing such
Senior Notes may determine, as conclusively evidenced by their execution of such
Senior Notes.

If temporary Senior Notes are issued, the Issuer will cause definitive
Senior Notes to be prepared without unreasonable delay. After the preparation
of definitive Senior Notes, the temporary Senior Notes shall be exchangeable for
definitive Senior Notes upon surrender of the temporary Senior Notes at the
office or agency of the Issuer in a Place of Payment, without charge to the
Holder. Upon surrender for cancellation of any one or more temporary Senior
Notes, the Issuer and the Company shall execute and the Trustee shall
authenticate and make available for delivery in exchange therefor a like
principal amount of definitive Senior Notes of authorized denominations and of
like tenor. Until so exchanged, the temporary Senior Notes shall in all
respects be entitled to the same benefits under this Indenture as definitive
Senior Notes.

SECTION 305. REGISTRATION, REGISTRATION OF TRANSFER AND EXCHANGE.

(a) The Issuer shall cause to be kept at the Corporate Trust Office
of the Trustee a register (the register maintained in such office and in any
other office or agency of the Issuer in a Place of Payment being herein
sometimes collectively referred to as the "Register") in which, subject to such
reasonable regulations as it may prescribe, the Issuer shall provide for the
registration of Senior Notes and for registration of transfers of Senior Notes.
The Trustee is hereby appointed "Registrar" for the purpose of registering
Senior Notes and transfers of Senior Notes as herein provided.

Upon surrender for registration of transfer of any Senior Note at the
office or agency of the Issuer in a Place of Payment, the Issuer shall execute,
and the Trustee shall authenticate and make available for delivery, in the name
of the designated transferee or transferees, one or more new Senior Notes, of
any authorized denomination or denominations and of a like aggregate principal
amount, all as requested by the transferor.

At the option of the Holder, Senior Notes may be exchanged for other Senior
Notes, of any authorized denomination or denominations and of a like aggregate
principal amount, upon surrender of the Senior Notes to be exchanged at such
office or agency upon the payment of the charges, if any, hereinafter provided.
Whenever any of the Senior Notes are so surrendered for exchange, the Issuer
shall execute, and the Trustee shall authenticate and make available for
delivery, the Senior Notes which the Holder making the exchange is entitled to
receive.

All Senior Notes issued upon any registration of transfer or exchange of
Senior Notes shall be the valid obligations of the Issuer and the Company (as
provided in the Guaranty), evidencing the same debt, and entitled to the same
benefits under this Indenture, as the Senior Notes surrendered upon such
registration of transfer or exchange. Every Senior Note presented or
surrendered for registration of transfer or for exchange shall (if so required
by the Issuer or the

<PAGE>

Trustee) be duly endorsed, or be accompanied by a written instrument of transfer
in form satisfactory to the Issuer and the Registrar duly executed, by the
Holder thereof or such Holder's attorney duly authorized in writing.

No service charge shall be made for any registration of transfer or
exchange of Senior Notes, but the Issuer may require payment of a sum sufficient
to cover any tax or other governmental charge that may be imposed in connection
with any registration of transfer or exchange of Senior Notes, other than
exchanges pursuant to Section 304, 906, 1009(f), 1013(b) or 1101(d) not
involving any transfer.

The Company shall not be required (i) to issue, register the transfer of or
exchange the Senior Notes during a period beginning at the opening of business
15 days before the date of the mailing of a notice of redemption of the Senior
Notes selected for redemption under Section 1403 and ending at the close of
business on the day of such mailing, or (ii) to register the transfer of or
exchange any Senior Notes so selected for redemption in whole or in part, except
the unredeemed portion of any Senior Notes being redeemed in part.

As used in this Section 305, the term "transfer" encompasses any sale,
pledge or other transfer of any Senior Notes referred to herein.

(b) A Global Note may not be transferred, in whole or in part, to any
Person other than the Depositary or a nominee thereof, and no such transfer to
any such other Person may be registered; PROVIDED that this shall not prohibit
any transfer of a Senior Note that is issued in exchange for a Global Note but
is not itself a Global Note. Beneficial interests in a Global Note may be
transferred to persons who take delivery thereof in the form of a beneficial
interest in the same Global Note in accordance with the transfer restrictions
set forth thereon and in accordance with the Depositary's applicable procedures.
Nothing in this Section shall prohibit or render ineffective any transfer of a
beneficial interest in a Global Note effected in accordance with the other
provisions of this Indenture.

(c) Notwithstanding any other provision in this Indenture, any person
having a beneficial interest in a Global Note may, upon written request to the
Trustee, exchange such beneficial interest for Senior Notes in the form of
Certificated Notes, subject to Section 306. In addition, if (i) the Issuer
notifies the Trustee in writing that the Depositary is no longer willing or able
to act as a depositary and the Issuer is unable to locate a qualified successor
within 90 days or (ii) the Issuer, at its option, notifies the Trustee in
writing that it elects to cause the issuance of Notes in the form of
Certificated Notes under the Indenture, then, upon surrender by the Global Note
Holder of its Global Note, Senior Notes in such form will be issued to each
Person that the Global Note Holder and the Depository identify as being the
beneficial owners of the related Notes. Subject to the foregoing, any exchange
of a Global Note for other Certificated Notes may be made in whole or in part,
and all Certificated Notes issued in exchange for a Global Note or any portion
thereof shall be registered in such name or names as the Depository shall
direct.

SECTION 306. TRANSFER AND EXCHANGE OF RESTRICTED SENIOR NOTES.

<PAGE>

(a)By its acceptance of any Restricted Senior Note, each Holder of,
and beneficial owner of an interest in, such Restricted Senior Note acknowledges
the restrictions on transfer of such Restricted Senior Note set forth in the
Private Placement Legend thereon and agrees that it will transfer such
Restricted Senior Note only in accordance with the Private Placement Legend.
Upon the registration of transfer, exchange or replacement of a Senior Note not
bearing the Private Placement Legend, the Trustee shall deliver a Senior Note or
Senior Notes that do not bear the Private Placement Legend. Upon the transfer,
exchange or replacement of a Senior Note bearing the Private Placement Legend,
the Trustee shall deliver a Senior Note or Senior Notes bearing the Private
Placement Legend, unless such legend may be removed from such Senior Note as
provided in this Section 306(a). Each Senior Note shall bear the Private
Placement Legend unless and until:

(i)a transfer of such Senior Note is made pursuant to an
effective registration statement under the Securities Act; or

(ii)such Senior Note is transferred or exchanged for the account
of a Person who is not an Affiliate of the Company at the time of the
transfer or exchange and has not been an Affiliate during the preceding
three months, PROVIDED a period of at least three years (or such shorter
period specified in any modification occurring after the Issue Date to Rule
144(k) under the Securities Act or any successor provision thereto) has
elapsed since the later of the date the Senior Notes were acquired from the
Company or from an Affiliate of the Company, and there is delivered to the
Issuer such satisfactory evidence, which may include an opinion of
independent counsel licensed to practice law in the State of New York or
one or more certificates from the transferor, transferee and/or exchanging
parties, as may reasonably be requested by the Issuer confirming that
neither such legend nor the restrictions on transfer set forth therein are
required to ensure that transfers of such Senior Note will not violate the
registration and prospectus delivery requirements of the Securities Act and
the applicable securities laws of any other jurisdiction; PROVIDED, that
the Trustee shall not be required to determine (but may rely on a
determination made by the Issuer with respect to) the sufficiency of any
such evidence; and upon provision of such evidence, the Trustee shall
authenticate and deliver in exchange for such Senior Note, a Senior Note or
Senior Notes (representing the same aggregate principal amount of the
Senior Note being exchanged) without such Private Placement Legend.

(b)SPECIAL TRANSFER PROVISIONS. The following provisions of this
paragraph (b) are applicable only to Restricted Senior Notes:

(i) TRANSFERS OF CERTIFICATED NOTES TO QIBS OR NON-U.S. PERSONS
IN GLOBAL NOTE FORM. If the Holder of a Certificated Note wishes to
transfer such Certificated Note to a QIB pursuant to Rule 144A or a
Non-U.S. Person pursuant to Regulation S, who wishes to take delivery in
the form of a beneficial interest in a Global Note, such Holder may,
subject to the rules and procedures of the Depositary, cause the exchange
of such Certificated Note for an equivalent beneficial interest in a Global
Note.

<PAGE>

Upon receipt by the Trustee, as Registrar, at its office in The City of New
York of (A) such Certificated Note, duly endorsed as provided herein,
(B) instructions from such Holder directing the Trustee, as Registrar, to
credit or cause to be credited a beneficial interest in the Global Note
equal to the principal amount of the Certificated Note to be exchanged,
such instructions to contain information regarding the participant account
with the Depositary to be credited with such increase, (C) a certificate in
the form of Exhibit A attached hereto from the transferor (if such transfer
is to a QIB) or Exhibit D attached hereto (if such transfer is to a
Non-U.S. Person and (D) if the transfer is being made to a Non-U.S. Person
pursuant to Regulation S, a Certificate in the form of Exhibit E attached
hereto from the transferee, then the Trustee, as Registrar, shall cancel or
cause to be canceled such Certificated Note and shall instruct the
Depositary to increase or cause to be increased such Global Note by the
aggregate principal amount of the beneficial interest in the Certificated
Note to be exchanged and to credit or cause to be credited to the account
of the Person specified in such instructions a beneficial interest in the
Global Note equal to the principal amount of the Certificated Note so
canceled;

(ii) TRANSFERS OF CERTIFICATED NOTES TO QIBS OR NON-U.S. PERSONS
IN CERTIFICATED FORM. If the Holder of a Certificated Note wishes to
transfer such Certificated Note to a QIB pursuant to Rule 144A or a
Non-U.S. Person pursuant to Regulation S, who wishes to take delivery in
the form of a Certificated Note, such Holder may, subject to the
restrictions on transfer set forth herein and in such Certificated Note,
cause the exchange of such Certificated Note for one or more Certificated
Notes of any authorized denomination or denominations and of the same
aggregate principal amount. Upon receipt by the Trustee, as Registrar, at
its office in The City of New York of (A) such Certificated Note, duly
endorsed as provided herein, (B) instructions from such Holder directing
the Trustee, as Registrar, to authenticate and deliver one or more
Certificated Notes to be exchanged, such instructions to contain the name
or names of the designated transferee or transferees, the authorized
denomination or denominations of the Certificated Notes to be so issued
and appropriate delivery instructions, (C) a certificate in the form of
Exhibit A attached hereto from the transferor (if such transfer is to a
QIB) or Exhibit D hereto (if such transfer is to a Non-U.S. Person) and (4)
if the transfer is being made pursuant to Regulation S to a Non-U.S.
Person, a certificate in the form of Exhibit E attached hereto from the
transferee, then the Trustee, as Registrar, shall cancel or cause to be
canceled such Certificated Note and concurrently therewith, the Issuer
shall execute, and the Trustee shall authenticate and deliver, one or more
Certificated Notes of the same aggregate principal amount, in accordance
with the instructions referred to above;

(iii) TRANSFERS TO INSTITUTIONAL ACCREDITED INVESTORS. (1)
If a Holder of a beneficial interest in a Global Note deposited with the
Depositary or the Trustee as custodian for the Depositary wishes at any
time to transfer its interest in such Global Note to an Institutional
Accredited Investor, such Holder may, subject to the rules and procedures
of the Depositary, cause the exchange of such interest for one or more
Certificated Notes of any authorized denomination or denominations and of
the same aggregate principal amount. Upon receipt by the Trustee, as
Registrar, at its office in The

<PAGE>

City of New York of (A) instructions from the Depositary directing the
Trustee, as Registrar, to authenticate and deliver one or more
Certificated Notes of the same aggregate principal amount as the beneficial
interest in the Global Note to be exchanged, such instructions to contain
the name or names of the designated transferee or transferees, the
authorized denomination or denominations of the Certificated Notes to be
so issued and appropriate delivery instructions, (B) a certificate in the
form of Exhibit B attached hereto from the transferor, (C) a certificate in
the form of Exhibit C attached hereto from the transferee and (D) such
other certifications, legal opinions or other information as the Issuer or
the Trustee may reasonably require to confirm that such transfer is being
made pursuant to an exemption from, or in a transaction not subject to, the
registration requirements of the Securities Act and the applicable
securities laws of any other applicable jurisdiction, then the Trustee, as
Registrar, will instruct the Depositary to reduce or cause to be reduced
such Global Note by the aggregate principal amount of the beneficial
interest therein to be exchanged and to debit or cause to be debited from
the account of the Person making such transfer the beneficial interest in
the Global Note that is being transferred, and concurrently with such
reduction and debit the Issuer shall execute, and the Trustee shall
authenticate and deliver, one or more Certificated Notes of the same
aggregate principal amount in accordance with the instructions referred to
above;

(2) If a Holder of a Certificated Note wishes to transfer such
Note to an Institutional Accredited Investor, such Holder may, subject to
the restrictions on transfer set forth herein and in such Certificated
Note, cause the exchange of such Certificated Note for one or more
Certificated Notes of any authorized denomination or denominations and of
the same aggregate principal amount. Upon receipt by the Trustee, as
Registrar, at its office in The City of New York of (A) such Certificated
Note, duly endorsed as provided herein, (B) instructions from such Holder
directing the Trustee, as Registrar, to authenticate and deliver one or
more Certificated Notes of the same aggregate principal amount as the
Certificated Notes to be exchanged, such instructions to contain the name
or names of the designated transferee or transferees, the authorized
denomination or denominations of the Certificated Notes to be so issued
and appropriate delivery instructions, (C) a certificate in the form of
Exhibit B attached hereto from the transferor, (D) a certificate in the
form of Exhibit C attached hereto from the transferee and (E) such other
certifications, legal opinions or other information as the Issuer or the
Trustee may reasonably require to confirm that such transfer is being made
pursuant to an exemption from, or in a transaction not subject to, the
registration requirements of the Securities Act and the applicable
securities laws of any other applicable jurisdiction, then the Trustee, as
Registrar, shall cancel or cause to be canceled such Certificated Note and
concurrently therewith, the Issuer shall execute, and the Trustee shall
authenticate and deliver, one or more Certificated Notes of the same
aggregate principal amount, in accordance with the instructions referred to
above;

(iv) TRANSFERS OF BENEFICIAL INTERESTS IN A GLOBAL NOTE .
Interests of beneficial owners in a Global Note shall be transferred in
accordance with the rules and procedures of the Depositary (or its
successors), which shall, in the case of an initial

<PAGE>

Global Note, include restrictions designed to ensure that the beneficial
owners of such initial Global Note are QIBs or Non-U.S. Persons acquiring
their beneficial interests pursuant to Regulation S.

(v) TRANSFERS PURSUANT TO OTHER EXEMPTIONS. (1) If a Holder of
a beneficial interest in a Global Note deposited with the Depositary or
the Trustee as custodian for the Depositary wishes at any time to transfer
its interest in such Global Note pursuant to another applicable exemption
from the registration requirements of the Securities Act, such Holder may,
subject to the rules and procedures of the Depositary, cause the exchange
of such interest for one or more Certificated Notes of any authorized
denomination or denominations and of the same aggregate principal amount.
Upon receipt by the Trustee, as Registrar, at its office in The City of New
York of (A) instructions from the Depositary directing the Trustee, as
Registrar, to authenticate and deliver one or more Certificated Notes of
the same aggregate principal amount as the beneficial interest in the
Global Note to be exchanged, such instructions to contain the name or names
of the designated transferee or transferees, the authorized denomination or
denominations of the Certificated Notes to be so issued and appropriate
delivery instructions and (B) such certifications, legal opinions or other
information as the Issuer or the Trustee may reasonably require to confirm
that such transfer is being made pursuant to an exemption from, or in a
transaction not subject to, the registration requirements of the Securities
Act and the applicable securities laws of any other applicable
jurisdiction, then the Trustee, as Registrar, will instruct the Depositary
to reduce or cause to be reduced such Global Note by the aggregate
principal amount of the beneficial interest therein to be exchanged and to
debit or cause to be debited from the account of the Person making such
transfer the beneficial interest in the Global Note that is being
transferred, and concurrently with such reduction and debit the Issuer
shall execute, and the Trustee shall authenticate and deliver, one or more
Certificated Notes of the same aggregate principal amount in accordance
with the instructions referred to above; and

(2) if a Holder of a Certificated Note wishes to transfer such
Certificated Note pursuant to another applicable exemption from the
registration requirements of the Securities Act, such Holder may, subject
to the restrictions on transfer set forth herein and in such Certificated
Note, cause the exchange of such Certificated Note for one or more
Certificated Notes of any authorized denomination or denominations and of
the same aggregate principal amount. Upon receipt by the Trustee, as
Registrar, at its office in The City of New York of (A) such Certificated
Note, duly endorsed as provided herein, (B) instructions from such Holder
directing the Trustee, as Registrar, to authenticate and deliver one or
more Certificated Notes of the same aggregate principal amount as the
Certificated Notes to be exchanged, such instructions to contain the name
or authorized denomination or denominations of the Certificated Notes to
be so issued and appropriate delivery instructions and (C) such
certifications, legal opinions or other information as the Issuer or the
Trustee may reasonably require to confirm that such transfer is being made
pursuant to an exemption from, or in a transaction not subject to, the
registration requirements of the Securities Act and the

<PAGE>

applicable securities laws of any other applicable jurisdiction, then the
Trustee, as Registrar, shall cancel or cause to be canceled such
Certificated Note and concurrently therewith, the Issuer shall execute, and
the Trustee shall authenticate and deliver, one or more Certificated Notes
of the same aggregate principal amount, in accordance with the instructions
referred to above;

(vi) In the event that a Global Note is exchanged for
Certificated Notes pursuant to Section 3.05(c), such Notes may be exchanged
only in accordance with such procedures as are substantially consistent
with the provisions of clauses (i) through (v) above (including the
certification requirements intended to ensure that such transfers comply
with the Private Placement Legend) and such other procedures as may from
time to time be adopted by the Issuer; and

(vii) The Trustee shall retain for two years, copies of all
documents received pursuant to this Section 3.06. The Issuer shall have
the right to inspect and make copies of all such documents at any
reasonable time upon the giving of reasonable written notice to the
Trustee.

SECTION 307. MUTILATED, DESTROYED, LOST AND STOLEN
SENIOR MORTGAGE NOTES.

If any mutilated Senior Note is surrendered to the Trustee, the Issuer
shall execute and upon the Issuer's request the Trustee shall authenticate and
deliver in exchange therefor a new Senior Note of like tenor and principal
amount and bearing a number not contemporaneously outstanding.

If there shall be delivered to the Issuer or the Trustee (i) evidence
to their satisfaction of the destruction, loss or theft of any Senior Note and
(ii) such security or indemnity as may be required by them to save each of them
and any agent of either of them harmless, then, in the absence of notice to the
Issuer or the Trustee that such Senior Note has been acquired by a BONA FIDE
purchaser, the Issuer shall execute and upon its request the Trustee shall
authenticate and deliver, in lieu of any such destroyed, lost or stolen Senior
Note, a new Senior Note of like tenor and principal amount and bearing a number
not contemporaneously outstanding.

In case any such mutilated, destroyed, lost or stolen Senior Note has
become or is about to become due and payable, the Issuer in its discretion may,
instead of issuing a new Senior Note, pay such Senior Note.

No service charge shall be made for the issuance of any new Senior
Note under this Section, but the Issuer may require the payment of a sum
sufficient to cover any tax or other governmental charge that may be imposed in
relation thereto and any other expenses (including the fees and expenses of the
Trustee) connected therewith.

Every new Senior Note issued pursuant to this Section in lieu of any
destroyed, lost or stolen Senior Note shall constitute an original additional
contractual obligation of the

<PAGE>

Issuer, whether or not the destroyed, lost or stolen Senior Note shall be at any
time enforceable by anyone, and shall be entitled to all the benefits of this
Indenture equally and proportionately with any and all other Senior Notes duly
issued hereunder.

The provisions of this Section are exclusive and shall preclude (to
the extent lawful) all other rights and remedies with respect to the replacement
or payment of mutilated, destroyed, lost or stolen Senior Notes.

SECTION 308. PAYMENT OF INTEREST; INTEREST RIGHTS PRESERVED.

Interest on any Senior Note which is payable, and is punctually paid
or duly provided for, on any Interest Payment Date shall be paid to the Person
in whose name such Senior Note (or one or more Predecessor Senior Notes) is
registered at the close of business on the Record Date for such interest.

Any interest on any Senior Note which is payable, but is not
punctually paid or duly provided for, on any Interest Payment Date (herein
called "Defaulted Interest") shall forthwith cease to be payable to the Holder
on the relevant Record Date by virtue of having been such Holder, and such
Defaulted Interest may be paid by the Issuer, at its election in each case, as
provided in clause (1) or (2) below:

(1) Issuer may elect to make payment of any Defaulted Interest, and
any interest payable on Defaulted Interest, to the Persons in whose names the
Senior Notes (or their respective Predecessor Senior Notes) are registered at
the close of business on a Special Record Date for the payment of such Defaulted
Interest, which shall be fixed in the following manner. The Issuer shall notify
the Trustee in writing of the amount of Defaulted Interest proposed to be paid
on each Senior Note and the date of the proposed payment, and at the same time
the Issuer shall deposit with the Trustee an amount of money equal to the
aggregate amount proposed to be paid in respect of such Defaulted Interest or
shall make arrangements satisfactory to the Trustee for such deposit prior to
the date of the proposed payment, such money when deposited to be held in trust
for the benefit of the Persons entitled to such Defaulted Interest as in this
clause provided. Thereupon the Trustee shall fix a Special Record Date for the
payment of such Defaulted Interest which shall be not more than 15 days and not
less than 10 days prior to the date of the proposed payment and not less than 10
days after the receipt by the Trustee of the notice of the proposed payment.
The Trustee shall promptly notify the Issuer of such Special Record Date and, in
the name and at the expense of the Issuer, shall cause notice of the proposed
payment of such Defaulted Interest and the Special Record Date therefor to be
mailed, first-class postage prepaid, to each Holder at such Holder's address as
it appears in the Register, not less than 10 days prior to such Special Record
Date. Notice of the proposed payment of such Defaulted Interest and the Special
Record Date therefor having been so mailed, such Defaulted Interest shall be
paid to the Persons in whose names the Senior Notes (or their respective
Predecessor Senior Notes) are registered at the close of business on such
Special Record Date and shall no longer be payable pursuant to the following
clause (2).

(2) The Issuer may make payment of any Defaulted Interest, and any
interest

<PAGE>

payable on Defaulted Interest, on the Senior Notes in any other lawful manner
not inconsistent with the requirements of any securities exchange on which such
Senior Notes may be listed, and upon such notice as may be required by such
exchange, if, after notice given by the Issuer to the Trustee of the proposed
payment pursuant to this clause, such manner of payment shall be deemed
practicable by the Trustee.

Subject to the foregoing provisions of this Section, each Senior Note
delivered under this Indenture upon registration of transfer of or in exchange
for or in lieu of any other Senior Note shall carry the rights to interest
accrued and unpaid, and to accrue, which were carried by such Predecessor Senior
Note.

SECTION 309. PERSONS DEEMED OWNERS.

Prior to due presentment of a Senior Note for registration of
transfer, the Issuer, the Company, the Trustee and any agent of the Issuer, the
Company or the Trustee may treat the Person in whose name such Senior Note is
registered as the owner of such Senior Note for the purpose of receiving payment
of principal of (and premium, if any) and (subject to Section 308) interest on
such Senior Note and for all other purposes whatsoever, whether or not such
Senior Note be overdue, and neither the Issuer, the Company, the Trustee nor any
agent of the Issuer, the Company or the Trustee shall be affected by notice to
the contrary.

SECTION 310. CANCELLATION.

All Senior Notes surrendered for payment, redemption, registration of
transfer or exchange shall, if surrendered to any Person other than the Trustee,
be delivered to the Trustee and shall be promptly canceled by it. The Issuer
may at any time deliver to the Trustee for cancellation any Senior Note
previously authenticated and delivered hereunder which the Issuer may have
acquired in any manner whatsoever, and all Senior Notes so delivered shall be
promptly canceled by the Trustee. No Senior Notes shall be authenticated in
lieu of or in exchange for any of the Senior Notes canceled as provided in this
Section, except as expressly permitted by this Indenture. All canceled Senior
Notes shall be held by the Trustee and may be destroyed (and, if so destroyed,
certification of their destruction shall be delivered to the Issuer, unless, by
a Company Order, the Issuer shall direct that canceled Senior Notes be returned
to it).

SECTION 311. COMPUTATION OF INTEREST.

Interest on the Senior Notes shall be computed on the basis of a
360-day year of twelve 30-day months.

ARTICLE FOUR

<PAGE>

SATISFACTION AND DISCHARGE

SECTION 401. SATISFACTION AND DISCHARGE OF INDENTURE.

This Indenture shall cease to be of further effect (except as to any
surviving rights of registration of transfer or exchange of Senior Notes herein
expressly provided for), when the Trustee, upon Company Request by and at the
expense of the Issuer, shall execute proper instruments acknowledging
satisfaction and discharge of this Indenture, when

(1) either:

(A) all Outstanding Senior Notes theretofore authenticated and
issued hereunder (other than (i) Senior Notes which have been destroyed, lost or
stolen and which have been replaced or paid as provided in Section 306 and (ii)
Senior Notes for whose payment money has theretofore been deposited in trust or
segregated and held in trust by the Issuer and thereafter repaid to the Issuer
or discharged from such trust, as provided in Section 1003) have been delivered
to the Trustee for cancellation; or

(B) all such Senior Notes not theretofore delivered to the
Trustee for cancellation

(i) have become due and payable,

(ii) will become due and payable at their Stated Maturity within one
year, or

(iii) are to be called for redemption within one year under
arrangements satisfactory to the Trustee for the giving of notice of redemption
by the Trustee in the name, and at the expense, of the Issuer,

and the Issuer, in the case of (B)(i), (ii) or (iii) above, has
deposited with the Trustee as trust funds in trust for the purpose an amount
sufficient to pay and discharge the entire indebtedness on such Senior Notes not
theretofore delivered to the Trustee for cancellation, for principal (and
premium, if any) and interest to the date of such deposit (in the case of Senior
Notes which have become due and payable) or the Stated Maturity or Redemption
Date, as the case may be;

(2) the Issuer has paid or caused to be paid all other sums payable
hereunder by the Issuer; and

(3) the Issuer has delivered to the Trustee an Officer's Certificate
of the Issuer and the Company and an Opinion of Counsel, each stating that all
conditions precedent provided for herein relating to the satisfaction and
discharge of this Indenture have been complied with.

Notwithstanding the satisfaction and discharge of this Indenture, the
obligations of (a) the Issuer to the Trustee under Section 607, the obligations
of the Issuer to any Authenticating

<PAGE>

Agent under Section 614 and, if money shall have been deposited with the Trustee
pursuant to clause (B) of clause (1) of this Section, the obligations of the
Trustee under Section 402 and the last paragraph of Section 1003 (b) the
obligations of the Issuer under Section 1014 and (c) the Company's obligations
pursuant to the Guaranty in respect of the matters specified in (a) and (b)
shall survive.

SECTION 402. APPLICATION OF TRUST MONEY.

Subject to the provisions of the last paragraph of Section 1003, all
money deposited with the Trustee pursuant to Section 401 shall be held in trust
and applied by it, in accordance with the provisions of the Senior Notes and
this Indenture, to the payment, either directly or through any Paying Agent
(including the Issuer acting as its own Paying Agent) as the Trustee may
determine, to the Persons entitled thereto, of the principal (and premium, if
any) and interest for whose payment such money has been deposited with or
received by the Trustee.

ARTICLE FIVE

REMEDIES

SECTION 501. EVENTS OF DEFAULT AND COMPANY EVENTS OF DEFAULT.

(a) "Event of Default", wherever used herein with respect to Senior
Notes, means any one of the following events (whatever the reason for such Event
of Default and whether it shall be voluntary or involuntary or to be effected by
operation of law or pursuant to any judgment, decree or order of any court or
any order, rule or regulation of any administrative or governmental body):

(1) the Issuer defaults in the payment of interest or Additional
Amounts on any Senior Note when such interest becomes due and payable and the
default continues for a period of 30 days; or

(2) the Issuer defaults in the payment of the principal of (or
premium, if any, on) any Senior Note when the same becomes due and payable at
Maturity or otherwise (except for a default in payment which constitutes a
Company Event of Default); or

(3) the Issuer or the Company fails to observe or perform any of its
other covenants, warranties or agreements in the Senior Notes or this Indenture
(other than a covenant, agreement or warranty a default in whose performance or
whose breach is elsewhere in this Section specifically dealt with), and the
failure to observe or perform continues for the period and after the notice
specified in the last paragraph of this Section 501(a); or

(4) (i) the Company fails to pay at final maturity the principal of
any Indebtedness of the Company, whether such Indebtedness now exists or shall
hereafter be created and an aggregate principal amount of not less than
twenty-five million dollars ($25,000,000) (or, if less, the least amount
contained in any similar provision of an instrument governing any outstanding

<PAGE>

Subordinated Indebtedness of the Company, but in no event less than ten million
dollars ($10,000,000)) or more of such Indebtedness is outstanding or (ii) an
event or events of default, as defined in any one or more mortgages, indentures,
agreements or instruments under which there may be issued, or by which there may
be secured or evidenced, any Indebtedness of the Company, whether such
Indebtedness now exists or shall hereafter be created, shall happen and shall
result in Indebtedness in an aggregate amount of not less than twenty-five
million dollars ($25,000,000) (or, if less, the least amount contained in any
similar provision of an instrument governing any outstanding Subordinated
Indebtedness of the Company, but in no event less than ten million dollars
($10,000,000)) or more becoming or being declared due and payable prior to the
date on which it would otherwise have become due and payable, and such
acceleration shall not have been rescinded or annulled (or if such acceleration
shall not have been rescinded or annulled, such Indebtedness shall not have been
discharged), within a period of 15 days after there shall have been given to the
Issuer and the Company by the Trustee or by the Holders of at least 25% in
aggregate principal amount of the Outstanding Senior Notes a written notice
specifying such event or events of default and requiring the Company to cause
such acceleration to be rescinded or annulled or to cause such Indebtedness to
be discharged and stating that such notice is a "Notice of Default" hereunder;
or

(5) one or more judgments or decrees shall be entered against the
Issuer or the Company involving, individually or in the aggregate, a liability
of twenty-five million dollars ($25,000,000) or more and a sufficient number of
such judgments or decrees shall not have been vacated, discharged, satisfied or
stayed pending appeal within 30 days from the entry thereof so as to bring the
aggregate liability in respect thereof below the twenty-five million dollar
($25,000,000) threshold; or

(6) the Issuer or the Company pursuant to or within the meaning of
any Bankruptcy Law (i) commences a voluntary case or proceeding under any
Bankruptcy Law with respect to itself, (ii) consents to the entry of a judgment,
decree or order for relief against it in an involuntary case or proceeding under
any Bankruptcy Law, (iii) consents to or acquiesces in the institution of
bankruptcy or insolvency proceedings against it, (iv) applies for, consents to
or acquiesces in the appointment of or taking possession by a Custodian of the
Issuer or the Company or for any material part of its property, (v) makes a
general assignment for the benefit of its creditors or (vi) takes any corporate
action in furtherance of or to facilitate, conditionally or otherwise, any of
the foregoing; or

(7) (i) a court of competent jurisdiction enters a judgment, decree
or order for relief in respect of the Issuer or the Company in an involuntary
case or proceeding under any Bankruptcy Law which shall (A) approve as properly
filed a petition seeking reorganization, arrangement, adjustment or composition
in respect of the Company, (B) appoint a Custodian of the Issuer or the Company
or for any material part of its property or (C) order the winding-up or
liquidation of its affairs, and such judgment, decree or order shall remain
unstayed and in effect for a period of 90 consecutive days; or (ii) any
bankruptcy or insolvency petition or application is filed, or any bankruptcy or
insolvency proceeding is commenced against the Issuer or the Company and such
petition, application or proceeding is not dismissed within 90 days; or (iii)
any

<PAGE>

warrant of attachment is issued against any material portion of the property of
the Issuer or the Company which is not released within 90 days of service.

(8) the dissolution or termination of the existence of the Issuer
(prior to the Assumption) or the Company or the liquidation or winding up of the
affairs (in each case whether voluntarily or by operation of law) of the Issuer
(prior to the Assumption) or the Company.

A Default under clause (3) above is not an Event of Default until the
Trustee or the Holders of at least 25% in aggregate principal amount of the
Outstanding Senior Notes notify the Issuer and the Company of the Default and
the Issuer or the Company does not cure the Default within 60 days after receipt
of the notice. The notice must specify the Default, demand that it be remedied
and state that the notice is a "Notice of Default." When a Default under clause
(3) above is cured within such 60-day period, it ceases.

(b) In the event that the Company fails to make or complete: (a) a
Deficiency Offer required hereunder; (b) an Asset Disposition Offer required
hereunder; (c) a Change of Control Offer required hereunder; or (d) an offer to
repurchase Senior Notes as required under Section 801(4), any such event shall
constitute a Company Event of Default.

(c) The Issuer and the Company shall file with the Trustee written
notice of the occurrence of any Default, Event of Default or Company Event of
Default within five (5) business days of an Officer of such Person becoming
aware of any such Default, Event of Default or Company Event of Default.

SECTION 502. ACCELERATION OF MATURITY;
RESCISSION AND ANNULMENT.

If an Event of Default with respect to Senior Notes (other than an
Event of Default specified in clause (6) or (7) of Section 501) occurs and is
continuing, the Trustee by notice in writing to the Issuer, or the Holders of at
least 25% in aggregate principal amount of the Outstanding Senior Notes by
notice in writing to the Issuer and the Trustee, may declare the unpaid
principal of and accrued interest to the date of acceleration on all the
Outstanding Senior Notes to be due and payable immediately and, upon any such
declaration, the Outstanding Senior Notes shall become and be immediately due
and payable.

If an Event of Default specified in clause (6) or (7) of Section 501
occurs, all unpaid principal (without premium) of and accrued interest on the
Outstanding Senior Notes shall IPSO FACTO become and be immediately due and
payable without any declaration or other act on the part of the Trustee or any
Holder of any Senior Note.

If a Company Event of Default occurs, the Trustee or the Holders of at
least 25% in aggregate principal amount of the Outstanding Notes by notice in
writing to the Company (and to the Trustee if given by the Holders of at least
25% in aggregate amount of Notes) may declare all unpaid principal of and
accrued interest and Additional Amounts on the Outstanding Senior Notes to be
immediately due and payable by the Company, and the Company shall be deemed to

<PAGE>

have assumed all such obligations as direct obligations of the Company.

Upon payment of all such principal and interest, all of the
obligations of the Issuer under the Senior Notes and the Company under the
Guaranty and (upon payment of the Senior Notes) this Indenture shall terminate,
EXCEPT obligations under Section 607, 1014, 1201 (in respect of the Issuer's
surviving obligations) and 1203.

The Holders representing at least a majority in principal amount of
the Outstanding Senior Notes by notice to the Trustee may rescind an
acceleration and its consequences if (i) all existing Events of Default or
Company Events of Default, other than the nonpayment of the principal and
interest of the Senior Notes that has become due solely by such declaration of
acceleration, have been cured or waived, (ii) to the extent the payment of such
interest is lawful, interest on overdue installments of interest and overdue
principal that has become due otherwise than by such declaration of acceleration
have been paid, (iii) the rescission would not conflict with any judgment or
decree of a court of competent jurisdiction and (iv) all payments due to the
Trustee and any predecessor Trustee under Section 607 have been made.

SECTION 503. COLLECTION OF INDEBTEDNESS AND
SUITS FOR ENFORCEMENT BY TRUSTEE.

The Issuer covenants that if:

(1) default is made in the payment of any interest on any Senior Note
when such interest becomes due and payable and such default continues for a
period of 30 days, or

(2) default is made in the payment of the principal of (or premium,
if any, on) any Senior Note at the Maturity thereof,

the Issuer will, upon demand of the Trustee, pay to it, for the
benefit of the Holders of such Senior Notes, the whole amount then due and
payable on such Senior Notes for principal (and premium, if any) and interest
and, to the extent that payment of such interest shall be legally enforceable,
interest on any overdue principal (and premium, if any) and on any overdue
interest, at the rate or rates prescribed therefor in such Senior Notes, and, in
addition thereto, such further amount as shall be sufficient to cover the costs
and expenses of collection, including the reasonable compensation, expenses,
disbursements and advances of the Trustee, its agents and counsel.

If the Issuer fails to pay such amounts forthwith upon such demand,
the Trustee, in its own name and as trustee of an express trust, may institute a
judicial proceeding for the collection of the sums so due and unpaid, may
prosecute such proceeding to judgment or final decree and may enforce the same
against the Issuer and the Company or any other obligor upon such Senior Notes
and collect the moneys adjudged or decreed to be payable in the manner provided
by law out of the property of the Issuer and the Company or any other obligor
upon such Senior Notes, wherever situated.

<PAGE>

If an Event of Default or Company Event of Default occurs and is
continuing, the Trustee may in its discretion proceed to protect and enforce its
rights and the rights of the Holders by such appropriate judicial proceedings as
the Trustee shall deem most effectual to protect and enforce any such rights,
either for the specific enforcement of any covenant or agreement in this
Indenture or in aid of the exercise of any power granted therein, or to secure
any other proper remedy.

SECTION 504. TRUSTEE MAY FILE PROOFS OF CLAIM.

In case of the pendency of any receivership, insolvency, liquidation,
bankruptcy, reorganization, arrangement, adjustment, composition or other
judicial proceeding relative to the Issuer or the Company or any other obligor
upon the Senior Notes or the property of the Issuer or the Company or of such
other obligor or their creditors, the Trustee (irrespective of whether the
principal of the Senior Notes shall then be due and payable as therein expressed
or by declaration or otherwise and irrespective of whether the Trustee shall
have made any demand on the Issuer or the Company for the payment of overdue
principal or interest) shall be entitled and empowered, by intervention in such
proceeding or otherwise,

(1) to file and prove a claim for the whole amount of principal (and
premium, if any) and interest owing and unpaid in respect of the Senior Notes or
under the Indenture and to file such other papers or documents as may be
necessary or advisable in order to have the claims of the Trustee (including any
claim for the reasonable compensation, expenses, disbursements and advances of
the Trustee, its agent and counsel) and of the Holders allowed in such judicial
proceedings, and

(2) to collect and receive any moneys or other property payable or
deliverable on any such claims and to distribute the same;

and any custodian, receiver, assignee, trustee, liquidator,
sequestrator or other similar official in any such judicial proceeding is hereby
authorized by each Holder to make such payments to the Trustee and, in the event
that the Trustee shall consent to the making of such payments directly to the
Holders, to pay to the Trustee any amount due it for the reasonable
compensation, expenses, disbursements and advances of the Trustee, its agents
and counsel, and any other amounts due the Trustee under Section 607.

Nothing herein contained shall be deemed to authorize the Trustee to
authorize or consent to or accept or adopt on behalf of any Holder any plan of
reorganization, arrangement, adjustment or composition affecting the Senior
Notes or the rights of any Holder thereof or to authorize the Trustee to vote in
respect of the claim of any Holder in any such proceeding.

SECTION 505. TRUSTEE MAY ENFORCE CLAIMS WITHOUT
POSSESSION OF SENIOR NOTES.

All rights of action and claims under this Indenture or the Senior
Notes may be prosecuted and enforced by the Trustee without the possession of
any of the Senior Notes or the

<PAGE>

production thereof in any proceeding relating thereto, and any such proceeding
instituted by the Trustee shall be brought in its own name as trustee of an
express trust, and any recovery of judgment shall, after provision for the
payment of the reasonable compensation, expenses, disbursements and advances of
the Trustee, its agents and counsel, be for the ratable benefit of the Holders
in respect of which such judgment has been recovered.

SECTION 506. APPLICATION OF MONEY COLLECTED.

Any money collected by the Trustee pursuant to this Article shall be
applied in the following order, at the date or dates fixed by the Trustee and,
in case of the distribution of such money on account of principal (or premium,
if any) or interest, upon presentation of the Senior Notes in respect of which
moneys have been collected and the notation thereon of the payment if only
partially paid and upon surrender thereof if fully paid:

First: To the payment of all amounts due the Trustee under Section
607;

Second: To the payment of the amounts then due and unpaid for
principal of (and premium, if any), interest and Additional Amounts on the
Senior Notes in respect of which or for the benefit of which such money has been
collected, ratably, without preference or priority of any kind, according to the
amounts due and payable on such Senior Notes for principal (and premium, if
any), interest and Additional Amounts, respectively; and

Third: To the Issuer.

The Trustee may fix a record date and payment date for any payment to
Holders pursuant to this Section 506. At least fifteen (15) days before such
record date, the Trustee shall mail to each Holder and the Issuer a notice that
states the record date, the payment date and the amount to be paid.

SECTION 507. LIMITATION ON SUITS.

No Holder shall have any right to institute any proceeding, judicial
or otherwise, with respect to this Indenture, or for the appointment of a
receiver or trustee, or for any other remedy hereunder, unless:

(1) such Holder has previously given written notice to the Trustee of
a continuing Event of Default or Company Event of Default;

(2) the Holders of not less than 25% in principal amount of the
Outstanding Senior Notes shall have made written request to the Trustee to
institute proceedings in respect of such Event of Default or Company Event of
Default in its own name as Trustee hereunder;

(3) such Holder or Holders have offered to the Trustee reasonable
indemnity against the costs, expenses and liabilities to be incurred in
compliance with such request;

<PAGE>

(4) the Trustee for 60 days after its receipt of such notice, request
and offer of indemnity has failed to institute any such proceeding; and

(5) no direction inconsistent with such written request has been
given to the Trustee during such 60-day period by the Holders of a majority in
principal amount of the Outstanding Senior Notes;

it being understood and intended that no one or more Holders shall
have any right in any manner whatever by virtue of, or by availing of, any
provision of this Indenture to affect, disturb or prejudice the rights of any
other of such Holders, or to obtain or to seek to obtain priority or preference
over any other of such Holders or to enforce any right under this Indenture,
except in the manner herein provided and for the equal and ratable benefit of
all such Holders.

SECTION 508. UNCONDITIONAL RIGHT OF HOLDERS TO
RECEIVE PRINCIPAL, PREMIUM AND INTEREST.

Notwithstanding any other provision of this Indenture, the Holder of
any Senior Note shall have the right, which is absolute and unconditional, to
receive payment of the principal of (and premium, if any) (subject to Section
308) interest on such Senior Note on the Stated Maturity or Maturities expressed
in such Senior Note (or, in the case of a repurchase offer for Senior Notes
under terms set forth in this Indenture, on the date specified therefor) and to
institute suit for the enforcement of any such payment, and such rights shall
not be impaired without the consent of such Holder.

SECTION 509. RESTORATION OF RIGHTS AND REMEDIES.

If the Trustee or any Holder has instituted any proceeding to enforce
any right or remedy under this Indenture and such proceeding has been
discontinued or abandoned for any reason, or has been determined adversely to
the Trustee or to such Holder, then and in every such case, subject to any
determination in such proceeding, the Issuer and the Company, the Trustee and
the Holders shall be restored severally and respectively to their former
positions hereunder and thereafter all rights and remedies of the Trustee and
the Holders shall continue as though no such proceeding had been instituted.

SECTION 510. RIGHTS AND REMEDIES CUMULATIVE.

Except as otherwise provided with respect to the replacement of
mutilated, destroyed, lost or stolen Senior Notes in the last paragraph of
Section 306, no right or remedy herein conferred upon or reserved to the Trustee
or to the Holders is intended to be exclusive of any other right or remedy, and
every right and remedy shall, to the extent permitted by law, be cumulative and
in addition to every other right and remedy given hereunder or now or hereafter
existing at law or in equity or otherwise. The assertion or employment of any
right or remedy hereunder, or otherwise, shall not prevent the concurrent
assertion of employment of any other appropriate right or remedy.

<PAGE>

SECTION 511. DELAY OR OMISSION NOT WAIVER.

No delay or omission of the Trustee or of any Holder of any of the
Senior Notes to exercise any right or remedy accruing upon an Event of Default
shall impair any such right or remedy or constitute a waiver of any Event of
Default or Company Event of Default or an acquiescence therein. Every right and
remedy given by this Article or by law to the Trustee or to the Holders may be
exercised from time to time, and as often as may be deemed expedient, by the
Trustee or by the Holders, as the case may be.

SECTION 512. CONTROL BY HOLDERS.

The Holders of a majority in principal amount of the Outstanding
Senior Notes shall have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the Trustee, or exercising
any trust or power conferred on the Trustee, with respect to the Senior Notes,
PROVIDED that:

(1) such direction shall not be in conflict with any rule of law or
with this Indenture;

(2) the Trustee may take any other action deemed proper by the
Trustee which is not inconsistent with such direction; and

(3) subject to Section 601, the Trustee need not take any action
which might involve the Trustee in personal liability or be unduly prejudicial
to the Holders not joining therein.

SECTION 513. WAIVER OF PAST DEFAULTS.

Holders representing not less than a majority in principal amount of
the Outstanding Senior Notes may by written notice to the Trustee on behalf of
the Holders of all Senior Notes waive any Default, Event of Default or Company
Event of Default and its consequences, except a Default, Event of Default or
Company Event of Default

(1) in respect of the payment of the principal of (or premium, if
any) or interest on any Senior Note, or

(2) in respect of a covenant or other provision hereof which under
Article Nine cannot be modified or amended without the consent of the Holder of
each Outstanding Senior Note affected.

Upon any such waiver, such Default, Event of Default or Company Event
of Default shall cease to exist and shall be deemed to have been cured, for
every purpose of this Indenture and the Senior Notes; but no such waiver shall
extend to any subsequent or other Default, Event of Default or Company Event of
Default impair any right consequent thereon.

SECTION 514. UNDERTAKING FOR COSTS.

<PAGE>

All parties to this Indenture agree, and each Holder of any Senior
Note by such Holder's acceptance thereof shall be deemed to have agreed, that
any court may in its discretion require, in any suit for the enforcement of any
right or remedy under this Indenture, or in any suit against the Trustee for any
action taken, suffered or omitted by it as Trustee, the filing by any party
litigant in such suit of an undertaking to pay the costs of such suit, and that
such court may in its discretion assess reasonable costs, including reasonable
attorneys' fees, against any party litigant in such suit, having due regard to
the merits and good faith of the claims or defenses made by such party litigant;
but the provisions of this Section shall not apply to any suit instituted by the
Issuer or the Company, to any suit instituted by the Trustee, to any suit
instituted by any Holder, or group of Holders, holding in the aggregate more
than 10% in principal amount of the Outstanding Senior Notes, or to any suit
instituted by any Holder for the enforcement of the payment of the principal of
(or premium, if any) or interest on any Senior Note on or after the Stated
Maturity or Maturities expressed in such Senior Note (or, in the case of a
repurchase of Senior Notes hereunder, on or after the date specified therefor).

SECTION 515. WAIVER OF STAY OR EXTENSION LAWS.

The Issuer and the Company each covenants (to the extent that it may
lawfully do so) that it will not at any time insist upon, or plead, or in any
manner whatsoever claim or take the benefit or advantage of, any stay or
extension law wherever enacted, now or at any time hereafter in force, which may
affect the covenants or the performance of this Indenture; and the Issuer and
the Company (to the extent that it may lawfully do so) each hereby expressly
waives all benefit or advantage of any such law and covenants that it will not
hinder, delay or impede the execution of any power herein granted to the
Trustee, but will suffer and permit the execution of every such power as though
no such law had been enacted.

ARTICLE SIX

THE TRUSTEE

SECTION 601. CERTAIN DUTIES AND RESPONSIBILITIES OF THE TRUSTEE.

(a) Except during the continuance of an Event of Default or Company
Event of Default, the Trustee's duties and responsibilities under this Indenture
shall be governed by Section 315(a) of the Trust Indenture Act as though this
Indenture were qualified under the Trust Indenture Act.

(b) In case an Event of Default or Company Event of Default has
occurred and is continuing, and is actually known to the Trustee, the Trustee
shall exercise the rights and powers vested in it by this Indenture and shall
use the same degree of care and skill in their exercise, as a prudent person
would exercise or use under the circumstances in the conduct of his or her own
affairs.

<PAGE>

(d) No implied covenants or obligations shall be read into this
Indenture against the Trustee.

SECTION 602. NOTICE OF DEFAULTS.

Within 30 days after the occurrence of any Default, Event of Default
or Company Event of Default, the Trustee shall give to all Holders, as their
names and addresses appear in the Register, notice of such Default, Event of
Default or Company Event of Default or Company Event of Default actually known
to the Trustee, unless such Default, Event of Default or Company Event of
Default shall have been cured or waived; PROVIDED, HOWEVER, that, except in the
case of a Default, Event of Default or Company Event of Default in the payment
of the principal of (or premium, if any) or interest on any Senior Note, the
Trustee shall be protected in withholding such notice if and so long as the
board of directors, the executive committee or directors or Responsible Officers
of the Trustee in good faith determine that the withholding of such notice is in
the interest of the Holders.

SECTION 603. CERTAIN RIGHTS OF TRUSTEE.

Subject to the provisions of the Trust Indenture Act:

(1) the Trustee may rely and shall be protected in acting or
refraining from acting upon any resolution, certificate, statement, instrument,
opinion, report, notice, request, direction, consent, order, bond, debenture,
note, other evidence of indebtedness or other paper or document believed by it
to be genuine and to have been signed or presented by the proper party or
parties;

(2) any request or direction of the Issuer or the Company mentioned
herein shall be sufficiently evidenced by a Company Request or Company Order of
the Issuer or the Company, as the case may be, and any resolution of the Board
of Directors may be sufficiently evidenced by a Board Resolution of the Issuer
or the Company, as the case may be;

(3) whenever in the administration of this Indenture the Trustee
shall deem it desirable that a matter be proved or established prior to taking,
suffering or omitting any action hereunder, the Trustee (unless other evidence
be herein specifically prescribed) may, in the absence of bad faith on its part,
rely upon an Officer's Certificate of the Issuer or the Company, as the case may
be;

(4) the Trustee may consult with counsel of its selection and the
written advice of such counsel or any Opinion of Counsel shall be full and
complete authorization and protection in respect of any action taken, suffered
or omitted by it hereunder in good faith and in reliance thereon;

(5) the Trustee shall be under no obligation to exercise any of the
rights or powers vested in it by this Indenture at the request or direction of
any of the Holders pursuant to this Indenture, unless such Holders shall have
offered to the Trustee reasonable security or

<PAGE>

indemnity against the costs, expenses and liabilities which might be incurred by
it in compliance with such request or direction;

(6) prior to the occurrence of an Event of Default or Company Event
of Default and after the curing or waiving of all such Events of Default or
Company Events of Default which may have occurred, the Trustee shall not be
bound to make any investigation into the facts or matters stated in any
resolution, certificate, statement, instrument, opinion, report, notice,
request, direction, consent, order, approval or other paper or document, or the
books and records of the Issuer or the Company, unless requested in writing to
do so by the Holders of a majority in principal amount of the Outstanding Senior
Notes; PROVIDED, HOWEVER, that if the payment within a reasonable time to the
Trustee of the costs, expenses or liabilities likely to be incurred by it in the
making of such investigation is not, in the opinion of the Trustee, reasonably
assured to the Trustee by the security afforded to it by the terms of this
Indenture, the Trustee may require reasonable indemnity against such costs,
expenses or liabilities as a condition to so proceeding; the reasonable expense
of every such investigation shall be paid by the Issuer or, if paid by the
Trustee, shall be repaid by the Issuer upon demand;

(7) the Trustee may execute any of the trusts or powers hereunder or
perform any duties hereunder either directly or by or through agents or
attorneys and the Trustee shall not be responsible for any misconduct or
negligence on the part of any agent or attorney appointed with due care by it
hereunder; and

(8) the Trustee shall not be required to expend or risk its own funds
or otherwise incur any financial liability in the performance of any of its
duties hereunder or in the exercise of its rights or power, if it shall have
reasonable grounds for believing that repayment of such funds or adequate
indemnity against such risk or liability is not reasonably assured to it.

SECTION 604. NOT RESPONSIBLE FOR RECITALS OR ISSUANCE OF
SENIOR NOTES.

The recitals contained herein and in the Senior Notes, except the
Trustee's certificates of authentication, shall be taken as the statements of
the Issuer and the Company, and the Trustee or any Authenticating Agent assumes
no responsibility for their correctness. The Trustee makes no representations
as to the validity or sufficiency of this Indenture or of the Senior Notes.
Neither the Trustee nor any Authenticating Agent shall be accountable for the
use or application by the Issuer or the Company of Senior Notes or the proceeds
thereof.

SECTION 605. MAY HOLD SENIOR NOTES.

The Trustee, any Authenticating Agent, any Paying Agent, any Registrar
or any other agent of the Issuer or the Company, in its individual or any other
capacity, may become the owner or pledgee of Senior Notes and, subject to
Sections 608 and 613, may otherwise deal with the Issuer and the Company with
the same rights it would have if it were not Trustee, Authenticating Agent,
Paying Agent, Registrar or such other agent.

<PAGE>

SECTION 606. MONEY HELD IN TRUST.

Money held by the Trustee in trust hereunder (including amounts held
by the Trustee as Paying Agent) need not be segregated from other funds except
to the extent required by law. The Trustee shall be under no liability for
interest on any money received by it hereunder except as otherwise agreed upon
in writing with the Issuer.

SECTION 607. COMPENSATION AND REIMBURSEMENT.

The Issuer and the Company jointly and severally agree:

(1) to pay to the Trustee from time to time such reasonable
compensation as the Company and the Trustee shall from time to time agree for
all services rendered by it hereunder (which compensation shall not be limited
by any provision of law in regard to the compensation of a trustee of an express
trust);

(2) except as otherwise expressly provided herein, to reimburse the
Trustee upon its request for all reasonable expenses, disbursements and advances
incurred or made by the Trustee in accordance with any provision of this
Indenture (including the reasonable compensation and the expenses and
disbursements of its agents and counsel), except any such expense, disbursement
or advance as may be attributable to its negligence or bad faith; and

(3) to indemnify the Trustee for, and to hold it harmless against,
any loss, liability, damage, claim or expense, including taxes (other than taxes
based upon or determined or measured by the income of the Trustee), incurred
without negligence or bad faith on its part, arising out of or in connection
with the acceptance or administration of the trust or trusts hereunder,
including the costs and expenses of defending itself against any claim or
liability in connection with the exercise or performance of any of its powers or
duties hereunder.

The Trustee shall have a claim prior to the Senior Notes as to all
property and funds held by it hereunder for any amount owing it or any
predecessor Trustee pursuant to this Section 607, except with respect to funds
held in trust for the benefit of the Holders.

When the Trustee incurs expenses or renders services in connection
with an Event of Default specified in Section 501(6) or Section 501(7), the
expenses (including the reasonable charges and expenses of its counsel) and the
compensation for the services are intended to constitute expenses of
administration under any applicable federal or state bankruptcy, insolvency or
other similar law.

The provisions of this Section 607 shall survive the termination of
this Indenture and the resignation or removal of the Trustee.

SECTION 608. DISQUALIFICATION; CONFLICTING INTERESTS.

The Trustee shall be disqualified only where such disqualification is
required by

<PAGE>

Section 310(b) of the Trust Indenture Act.

SECTION 609. CORPORATE TRUSTEE REQUIRED; ELIGIBILITY.

There shall at all times be a Trustee hereunder which shall be
eligible to act as Trustee under Section 310(a)(1) of the Trust Indenture Act
having a combined capital and surplus of at least fifty million dollars
($50,000,000) subject to supervision or examination by federal or State
authority, to the extent there is such an institution eligible and willing to
serve. If such corporation publishes reports of condition at least annually,
pursuant to law or to the requirements of said supervising or examining
authority, then for the purposes of this Section, the combined capital and
surplus of such corporation shall be deemed to be its combined capital and
surplus as set forth in its most recent report of condition so published.
Neither the Company nor any Affiliate of the Issuer or the Company may serve as
Trustee. If at any time the Trustee shall cease to be eligible in accordance
with the provisions of this Section, it shall resign immediately in the manner
and with the effect hereinafter specified in this Article.

SECTION 610. RESIGNATION AND REMOVAL; APPOINTMENT OF SUCCESSOR.

(a) No resignation or removal of the Trustee and no appointment of a
successor Trustee pursuant to this Article shall become effective until the
acceptance of appointment by the successor Trustee in accordance with the
applicable requirements of Section 611.

(b) The Trustee may resign at any time by giving written notice
thereof to the Issuer. If the instrument of acceptance by a successor Trustee
required by Section 611 shall not have been delivered to the Trustee within 30
days after the giving of such notice of resignation, the resigning Trustee may
petition any court of competent jurisdiction for the appointment of a successor
Trustee.

(c) The Trustee may be removed at any time by Act of the Holders of a
majority in principal amount of the Outstanding Senior Notes, delivered to the
Trustee and to the Issuer.

(d) If at any time:

(i) the Trustee shall fail to comply with Section 310(b) of the Trust
Indenture Act after written request therefor by the Issuer or by any Holder who
has been a BONA FIDE Holder for at least six months; or

(ii) the Trustee shall cease to be eligible under Section 609 and
shall fail to resign after written request therefor by the Issuer or by any
Holder who has been a BONA FIDE Holder for at least six months; or

(iii) the Trustee shall become incapable of acting or shall be adjudged
a bankrupt or insolvent or a receiver of the Trustee or of its property shall be
appointed or any

<PAGE>

public officer shall take charge or control of the Trustee or of its property or
affairs for the purpose of rehabilitation, conservation or liquidation;

then, in any such case, (A) the Issuer by a Board Resolution may
remove the Trustee, or (B) subject to Section 315(e) of the Trust Indenture Act,
any Holder who has been a BONA FIDE Holder for at least six months may, on
behalf of himself and all others similarly situated, petition any court of
competent jurisdiction for the removal of the Trustee and the appointment of a
successor Trustee, subject to any stay of such removal entered in accordance
with Section 310(b) of the Trust Indenture Act.

(e) If the Trustee shall resign, be removed or become incapable of
acting, or if a vacancy shall occur in the office of Trustee for any cause, the
Issuer, by a Board Resolution, shall promptly appoint a successor Trustee and
shall comply with the applicable requirements of Section 611. If, within one
year after such resignation, removal or incapability, or the occurrence of such
vacancy, a successor Trustee shall be appointed by Act of the Holders of a
majority in principal amount of the Outstanding Senior Notes delivered to the
Issuer and the retiring Trustee, the successor Trustee so appointed shall,
forthwith upon its acceptance of such appointment in accordance with the
applicable requirements of Section 611, become the successor Trustee and to that
extent supersede the successor Trustee appointed by the Company. If no
successor Trustee shall have been so appointed by the Issuer or the Holders and
accepted appointment in the manner required by Section 611, any Holder who has
been a BONA FIDE Holder for at least six months may, subject to Section 514
hereof, on behalf of himself and all others similarly situated, petition any
court of competent jurisdiction for the appointment of a successor Trustee.

(f) The Issuer shall give notice of each resignation and each removal
of the Trustee and each appointment of a successor Trustee by mailing written
notice of such event by first-class mail, postage prepaid, to all Holders as
their names and addresses appear in the Register. Each notice shall include the
name of the successor Trustee and the address of its Corporate Trust Office.

(iii) SECTION 611. ACCEPTANCE OF APPOINTMENT BY SUCCESSOR.

(a) In case of the appointment hereunder of a successor Trustee,
every such successor Trustee so appointed shall execute, acknowledge and deliver
to the Issuer and to the retiring Trustee an instrument accepting such
appointment, and thereupon the resignation or removal of the retiring Trustee
shall become effective and such successor Trustee, without any further act, deed
or conveyance, shall become vested with all the rights, powers, trusts and
duties of the retiring Trustee; but, on the request of the Issuer or the
successor Trustee, such retiring Trustee shall, upon payment of its charges,
execute and deliver an instrument transferring to such successor Trustee all the
rights, powers and trusts of the retiring Trustee, and shall duly assign,
transfer and deliver to such successor Trustee all property and money held by
such retiring Trustee hereunder, subject to its Lien, if any, provided for in
Section 607.

(b) Upon request of any such successor Trustee, the Issuer shall
execute any and all instruments for more fully and certainly vesting in and
confirming to such successor

<PAGE>

Trustee all such rights, powers and trusts referred to in Subsection (a) above.

(c) No successor Trustee shall accept its appointment unless at the
time of such acceptance such successor Trustee shall be qualified and eligible
under this Article and the Trust Indenture Act.

SECTION 612. MERGER, CONVERSION, CONSOLIDATION OR
SUCCESSION TO BUSINESS.

Any corporation into which the Trustee may be merged or converted or
with which it may be consolidated, or any corporation resulting from any merger,
conversation or consolidation to which the Trustee shall be a party, or any
corporation succeeding to all or substantially all the corporate trust business
of the Trustee, shall be the successor of the Trustee hereunder, PROVIDED such
corporation shall be otherwise qualified and eligible under this Article and the
Trust Indenture Act, without the execution or filing of any paper or any further
act on the part of any of the parties hereto. In case any Senior Notes shall
have been authenticated, but not delivered, by the Trustee then in office, any
successor by merger, conversion or consolidation to such authenticating Trustee
may adopt such authentication and deliver the Senior Notes so authenticated with
the same effect as if such successor Trustee had itself authenticated such
Senior Notes.

SECTION 613. PREFERENTIAL COLLECTION OF CLAIMS AGAINST COMPANY.

The Trustee shall comply with Section 311(a) of the Trust Indenture
Act, excluding any creditor relationship listed in Section 311(b) of the Trust
Indenture Act. A Trustee who has resigned or been removed shall be subject to
Section 311(a) of the Trust Indenture Act to the extent indicated therein.

SECTION 614. APPOINTMENT OF AUTHENTICATING AGENT.

At any time when any of the Senior Notes remain Outstanding the
Trustee may appoint an Authenticating Agent or Agents which shall be authorized
to act on behalf of, and subject to the direction of, the Trustee to
authenticate Senior Notes issued upon exchange, registration of transfer or
partial redemption thereof or pursuant to Section 306, and Senior Notes so
authenticated shall be entitled to the benefits of this Indenture and shall be
valid and obligatory for all purposes as if authenticated by the Trustee
hereunder. Wherever reference is made in this Indenture to the authentication
and delivery of Senior Notes by the Trustee or the Trustee's certificate of
authentication, such reference shall be deemed to include authentication and
delivery on behalf of the Trustee by an Authenticating Agent and a certificate
of authentication executed on behalf of the Trustee by an Authenticating Agent.
Each Authenticating Agent shall be acceptable to the Issuer and shall at all
times be a corporation organized and doing business under the laws of the United
States of America, any State thereof or the District of Columbia, authorized
under such laws to act as Authenticating Agent, having a combined capital and
surplus of not less than fifty million dollars ($50,000,000) and subject to
supervision or examination by federal or State authority. If such
Authenticating Agent publishes reports of condition at least

<PAGE>

annually, pursuant to law or to the requirements of said supervising or
examining authority, then for the purposes of this Section, the combined capital
and surplus of such Authenticating Agent shall be deemed to be its combined
capital and surplus as set forth in its most recent report of condition so
published. If at any time an Authenticating Agent shall cease to be eligible in
accordance with the provisions of this Section, such Authenticating Agent shall
resign immediately in the manner and with the effect specified in this Section.

Any corporation into which an Authenticating Agent may be merged or
converted to or with which it may be consolidated, or any corporation resulting
from any merger, conversion or consolidation to which such Authenticating Agent
shall be a party, or any corporation succeeding to the corporate agency or
corporate trust business of an Authenticating Agent, shall continue to be an
Authenticating Agent, provided such corporation shall be otherwise eligible
under this Section, without the execution or filing of any paper or any further
act on the part of the Trustee or the Authenticating Agent.

An Authenticating Agent may resign at any time by giving written
notice thereof to the Trustee and to the Issuer. The Trustee may at any time
terminate the agency of an Authenticating Agent by giving written notice thereof
to such Authenticating Agent and to the Issuer. Upon receiving such a notice of
resignation or upon such a termination, or in case at any time such
Authenticating Agent shall cease to be eligible in accordance with the
provisions of this Section, the Trustee may appoint a successor Authenticating
Agent which shall be acceptable to the Issuer and shall mail written notice of
such appointment by first-class mail, postage prepaid, to all Holders, as their
names and addresses appear in the Register. Any successor Authenticating Agent
upon acceptance of its appointment hereunder shall become vested with all the
rights, powers and duties of its predecessor hereunder, with like effect as if
originally named as an Authenticating Agent. No successor Authenticating Agent
shall be appointed unless eligible under the provisions of this Section.

The Issuer agrees to pay to each Authenticating Agent from time to
time reasonable compensation for its services under this Section.

If an appointment is made pursuant to this Section, the Senior Notes
may have endorsed thereon, in addition to the Trustee's certificate of
authentication, an alternate certificate of authentication in the following
form:

Dated:
----------

This is one of the 11-1/2% Senior Notes due 2006 issued under the
Indenture referred to in this Senior Note.

THE BANK OF NEW YORK
as Trustee

By:
-------------

<PAGE>

as Authenticating Agent

By:
-------------
AUTHORIZED SIGNATORY

ARTICLE SEVEN

HOLDERS' LISTS AND REPORTS BY THE TRUSTEE AND THE ISSUER

SECTION 701. ISSUER TO FURNISH TRUSTEE NAMES
AND ADDRESSES OF HOLDERS.

The Issuer will furnish or cause to be furnished to the Trustee:

(1) semi-annually, not later than January 1 and July 1 in each year,
a list, in such form as the Trustee may reasonably require, of the names and
addresses of the Holders as of the preceding December 15 or June 15, as the case
may be, and

(2) at such other times as the Trustee may request in writing, within
30 days after the receipt by the Issuer of any such request, a list of similar
form and content as of a date not more than 15 days prior to the time such list
is furnished;

PROVIDED, HOWEVER, that so long as the Trustee is the Registrar, no such list
shall be required to be furnished.

SECTION 702. PRESERVATION OF INFORMATION;
COMMUNICATIONS TO HOLDERS.

(a) The Trustee shall preserve, in as current a form as is reasonably
practicable, the names and addresses of Holders contained in the most recent
list furnished to the Trustee as provided in Section 701 and the names and
addresses of Holders received by the Trustee in its capacity as Registrar. The
Trustee may destroy any list furnished to it as provided in Section 701 upon
receipt of a new list so furnished.

(b) Holders may communicate as provided in Section 312(b) of the
Trust Indenture Act with other Holders with respect to their rights under this
Indenture or under the Senior Notes, and the Trustee shall comply with its
obligations under such Section 312(b).

(c) Each Holder of Senior Notes, by receiving and holding the same,
agrees with the Issuer and the Company and the Trustee that none of the Issuer,
the Company or the Trustee nor any agent of either of them shall be held
accountable by reason of the disclosure of any such information as to the names
and addresses of the Holders in accordance with Section 702(b), regardless of
the source from which such information was derived, and that the Trustee shall
not be held accountable by reason of mailing any material pursuant to a request
made under

<PAGE>

Section 702(b).

SECTION 703. REPORTS BY TRUSTEE.

(a) Within 60 days after May 15 of each year commencing with the year
1997, the Trustee shall transmit by mail to all Holders as provided in Section
313(c) of the Trust Indenture Act, a brief report dated as of such May 15, if
required by and in compliance with Section 313(a) of the Trust Indenture Act.

(b) The Trustee shall comply with Sections 313(b) and 313(c) of the
Trust Indenture Act.

(c) A copy of each such report shall, at the time of such
transmission to Holders, be filed by the Trustee with each stock exchange upon
which the Senior Notes are listed, with the Commission and with the Issuer. The
Company will notify the Trustee when any of the Senior Notes are listed on any
stock exchange.

SECTION 704. REPORTS BY COMPANY.

(a) The Issuer and the Company shall:

(1) file with the Trustee, within 15 days after the Company is
required to file the same with the Commission, copies of the annual reports and
of the information, documents and other reports (or copies of such portions of
any of the foregoing as the Commission may from time to time by rules and
regulations prescribe) which the Company may be required to file with the
Commission pursuant to Section 13 or Section 15(d) of the Exchange Act; or, if
the Company is not required to file information, documents or reports pursuant
to either of said Sections, then it shall file with the Trustee and the
Commission, within the earlier of (a) the same 15 days after the Company would
have been required to file with the Commission under the preceding clause and
(b) the date which it is required to so file under the 1991 Indenture so long as
any Indebtedness is outstanding thereunder, in accordance with rules and
regulations prescribed from time to time by the Commission, such of the
supplementary and periodic information, documents and reports which may be
required pursuant to Section 13 of the Exchange Act in respect of a security
listed and registered on a national securities exchange as may be prescribed
from time to time in such rules and regulations;

(2) file with the Trustee and the Commission, in accordance with
rules and regulations prescribed from time to time by the Commission, such
additional information, documents and reports with respect to compliance by the
Company with the conditions and covenants of this Indenture as may be required
from time to time by such rules and regulations;

(3) transmit by mail to all Holders, as their names and addresses
appear in the Register, (a) concurrently with furnishing the same to its
stockholders, the Company's annual report to stockholders, containing certified
financial statements, and any other financial reports which the Company
generally furnishes to its stockholders, and (b) within 30 days after the filing

<PAGE>

thereof with the Trustee, such summaries of any other information, documents and
reports required to be filed by the Company pursuant to paragraphs (1) and (2)
of this Section as may be required by rules and regulations prescribed from time
to time by the Commission; and

(4) furnish to the Trustee, on or before May 1 of each year, a brief
certificate from the principal executive officer, principal financial officer or
principal accounting officer as to his or her knowledge of the Issuer's and the
Company's compliance with all conditions and covenants under this Indenture.
For purposes of this paragraph, such compliance shall be determined without
regard to any period of grace or requirement of notice provided under this
Indenture. Such certificate need not comply with Section 102.

(b) At any time when the Company is not subject to Section 13 or
15(d) of the Securities Exchange Act of 1934, as amended, upon request of a
Holder of a Senior Note or, in the case of a Global Note, or of a beneficial
owner of an interest in a Global Note, the Issuer and the Company will promptly
furnish or cause to be furnished Rule 144A Information (as defined below) to
such Holder (or beneficial owner of a Global Note), or to a prospective
purchaser of a Note (or a beneficial interest in a Global Note) designated by
such holder (or beneficial owner of such interest), in order to permit
compliance by such Holder (or beneficial owner) with Rule 144A under the
Securities Act. "Rule 144A Information" shall be such information as is
specified pursuant to Rule 144A(d)(4) under the Securities Act (or any successor
provision thereto).

ARTICLE EIGHT

CONSOLIDATION, MERGER, LEASE, SALE OR TRANSFER

SECTION 801. WHEN COMPANY MAY MERGE, ETC.

The Company shall not consolidate with, or merge with or into any
other corporation (whether or not the Company shall be the surviving
corporation), or sell, assign, transfer or lease all or substantially all of its
properties and assets as an entirety or substantially as an entirety to any
Person or group of affiliated Persons, in one transaction or a series of related
transactions, unless:

(1) either the Company shall be the continuing Person or the Person
(if other than the Company) formed by such consolidation or with which or into
which the Company is merged or the Person (or group of affiliated Persons) to
which all or substantially all the properties and assets of the Company as an
entirety are sold, assigned, transferred or leased is a corporation (or
constitute corporations) organized and existing under the laws of the United
States of America or any State thereof or the District of Columbia and expressly
assumes, by an indenture supplemental hereto, executed and delivered to the
Trustee, in form satisfactory to the Trustee, all the obligations of the Company
under the Senior Notes and this Indenture;

(2) immediately before and after giving effect to such transaction or
series of related transactions, no Event of Default, and no Default, shall have
occurred and be continuing;

<PAGE>

(3) immediately after giving effect to such transaction or series of
related transactions on a PRO FORMA basis, but prior to any purchase accounting
adjustments resulting from the transaction or series of related transactions,
the Consolidated Net Worth of the Company (or of the surviving, consolidated or
transferee entity if the Company is not continuing, treating such entity as the
Company for purposes of determining Consolidated Net Worth) shall be at least
equal to the Consolidated Net Worth of the Company immediately before such
transaction or series of related transactions; and

(4) immediately after giving effect to such transaction or series of
related transactions, the Company (or the surviving, consolidated or transferee
entity if the Company is not continuing, but treating such entity as the Company
for purposes of making such determination) would be permitted to incur an
additional dollar of Indebtedness (not constituting Permitted Indebtedness)
immediately prior to such transaction or series of related transactions under
Section 1008; PROVIDED, HOWEVER, that this Subsection (4) shall be inapplicable
if (a) such transaction or series of related transactions would result in the
occurrence of a Change of Control or (b) immediately prior to giving effect to
such transaction or series of related transactions, the Company would not be
permitted to incur an additional dollar of Indebtedness (not constituting
Permitted Indebtedness) under Section 1008, and immediately after giving effect
to such transaction or series of related transactions on a PRO FORMA basis, but
prior to any purchase accounting adjustments resulting from the transaction or
series of related transactions, the Consolidated Interest Coverage Ratio of the
Company (or the surviving, consolidated or transferee entity if the Company is
not continuing, treating such entity as the Company for purposes of determining
Consolidated Interest Coverage Ratio) shall be at least equal to the
Consolidated Interest Coverage Ratio of the Company immediately before such
transaction or series of related transactions; and PROVIDED, FURTHER, that
notwithstanding the foregoing, if this Subsection (4) is inapplicable by reason
of clause (b) of the first proviso to this Subsection, and at the date three
months after the consummation of such transaction or series of related
transactions the rating ascribed to the Senior Notes by Standard & Poor's
Corporation or Moody's Investors Service, Inc. shall be lower than the rating
ascribed to the Senior Notes prior to the public announcement of such
transaction or series of related transactions, then the Company shall make an
offer for the Senior Notes at the same price and following the same procedures
and obligations as required with respect to a Change of Control pursuant to
Section 1013 (as if such date three months after the giving effect to such
transaction or series of related transactions were the Change of Control Date).

SECTION 802. SENIOR NOTES TO BE SECURED IN CERTAIN EVENTS.

If, upon any consolidation or merger, or upon any sale, assignment,
transfer or lease as provided in Section 801, any material property of the
Company or any Restricted Subsidiary or any shares of Capital Stock or
Indebtedness of any Restricted Subsidiary, owned immediately prior thereto,
would thereupon become subject to any Lien securing any indebtedness for
borrowed money of, or guaranteed by, such other corporation or Person (other
than any Permitted Lien), the Company, prior to such consolidation, merger,
sale, assignment, transfer or lease, will by indenture supplemental hereto
secure the due and punctual payment of the principal

<PAGE>

of, and premium, if any, and interest on the Senior Notes then Outstanding
(together with, if the Company shall so determine, any other Indebtedness of, or
guaranteed by, the Company or any Restricted Subsidiary and then existing or
thereafter created) equally and ratably with (or, at the option of the Company,
prior to) the Indebtedness secured by such Lien.

SECTION 803. OFFICER'S CERTIFICATE; OPINION OF COUNSEL.

The Company shall deliver to the Trustee prior to the proposed
transaction(s) covered by Section 801 an Officer's Certificate and an Opinion of
Counsel, each stating that the transaction(s) and such supplemental indenture
comply with this Indenture and that all conditions precedent to the consummation
of the transaction(s) under this Indenture have been met.

SECTION 804. SUCCESSOR CORPORATION SUBSTITUTED.

Upon any consolidation by the Company with or merger by the Company
into any other corporation or any lease, sale, assignment or transfer of all or
substantially all of the property and assets of the Company in accordance with
Section 801, the successor corporation formed by such consolidation or into
which the Company is merged or the successor corporation or affiliated group of
corporations to which such lease, sale, assignment or transfer is made shall
succeed to, and be substituted for, and may exercise every right and power of,
the Company under this Indenture with the same effect as if such successor
corporation or corporations had been named as the Company herein, and
thereafter, except in the case of a lease, the predecessor corporation or
corporations shall be relieved of all obligations and covenants under this
Indenture and the Senior Notes and in the event of such conveyance or transfer,
except in the case of a lease, any such predecessor corporation may be dissolved
and liquidated.

ARTICLE NINE

SUPPLEMENTS TO THE INDENTURE

SECTION 901. SUPPLEMENTAL INDENTURES WITHOUT CONSENT OF HOLDERS.

Without notice to or the consent of any Holders, the Issuer and the
Company, when authorized by Board Resolutions, and the Trustee, at any time and
from time to time, may, subject to Section 1003, enter into one or more
indentures supplemental hereto, in form satisfactory to the Trustee, for any of
the following purposes:

(1) to evidence the succession of another Person to the Issuer or the
Company and the assumption by any such successor of the covenants of the Issuer
or the Company herein and in the Senior Notes; or

(2) to add to the covenants of the Issuer and the Company for the
benefit of the Holders or to surrender any right or power herein or in the
Senior Notes conferred upon the Issuer or the Company; or

<PAGE>

(3) to add any additional Events of Default or Company Events of
Default; or

(4) to secure the Senior Notes; or

(5) to evidence and provide for the acceptance of appointment
hereunder by a successor Trustee; or

(6) to cure any ambiguity, defect or inconsistency or to correct or
supplement any provision herein which may be inconsistent with any other
provision herein; or

(7) to provide for the assumption by the Company of all of the
obligations of the Issuer under the Indenture, the Notes and all related
documents; or

(8) to make any change that does not materially adversely affect the
interests of the Holders.

Upon request of the Issuer and the Company, accompanied by Board
Resolutions of each of them authorizing the execution of any such supplemental
indenture, and upon receipt by the Trustee of the documents described in (and
subject to the last sentence of) Section 903, the Trustee shall join with the
Issuer and the Company in the execution of any supplemental indenture authorized
or permitted by the terms of this Indenture.

SECTION 902. SUPPLEMENTAL INDENTURES WITH CONSENT OF HOLDERS.

With the written consent of Holders representing at least a majority
in principal amount of the Outstanding Senior Notes, by Act of said Holders
delivered to the Issuer and the Trustee, the Issuer and the Company, when
authorized by Board Resolutions, and the Trustee shall, subject to Section 903,
enter into an indenture or indentures supplemental hereto for the purpose of
adding any provisions to or changing in any manner or eliminating any of the
provisions of this Indenture or of modifying in any manner the rights of the
Holders under this Indenture; PROVIDED, HOWEVER, that no such supplemental
indenture shall, without the consent of the Holder of each Outstanding Senior
Note,

(1) change the Stated Maturity of the principal of, or any
installment of principal of or interest on, any Senior Note, or reduce the
principal amount thereof or the rate of interest thereon or any premium payable
upon the redemption thereof or extend the time for payment thereof, or change
the Place of Payment where, or the coin or currency in which, any Senior Note or
any premium or the interest thereon is payable, or impair the right to institute
a suit for the enforcement of any such payment on or after the Stated Maturity
thereof (or, in the case of a repurchase offer for the Senior Notes under this
Indenture, on or after the repurchase date specified therefor), or

(2) reduce the percentage in principal amount of the Outstanding
Senior Notes, the consent of whose Holders is required for any such supplemental
indenture, or the consent of whose Holders is required for any waiver of
compliance with certain provisions of this Indenture

<PAGE>

or Defaults, Events of Default or Company Events of Default hereunder and their
consequences provided for in this Indenture, or

(3) change the repurchase provisions (including those contained in
Section 801(4), Article Eleven, Section 1009 and Section 1013) hereof in a
manner adverse to such Holder, or

(4) subordinate in right of payment, or otherwise subordinate, the
Senior Notes to any other Indebtedness; or

(5) modify any of the provisions of this Section, Section 513 or
Section 1014, except to increase any such percentage or to provide that certain
other provisions of this Indenture cannot be modified or waived without the
consent of the Holder of each Outstanding Senior Note affected thereby,
PROVIDED, HOWEVER, that this clause shall not be deemed to require the consent
of any Holder with respect to changes in the references to "the Trustee" and
concomitant changes in this Section and Section 1014, or the deletion of this
proviso, in accordance with the requirements of Sections 611(b) and 901(7).

It shall not be necessary for any Act of Holders under this Section to
approve the particular form of any proposed supplemental indenture, but it shall
be sufficient if such Act shall approve the substance thereof.

SECTION 903. EXECUTION OF SUPPLEMENTAL INDENTURES.

The Trustee shall sign any supplemental indenture authorized pursuant
to this Article, subject to the last sentence of this Section 903. In
executing, or accepting the additional trusts created by, any supplemental
indenture permitted by this Article or the modifications thereby of the trusts
created by this Indenture, the Trustee shall be entitled to receive, and
(subject to Section 601) shall be fully protected in relying upon, an Officer's
Certificate and an Opinion of Counsel stating that the execution of such
supplemental indenture is authorized or permitted by this Indenture. The
Trustee may, but shall not be obligated to, enter into any such supplemental
indenture which affects the Trustee's own rights, duties or immunities under
this Indenture or otherwise.

SECTION 904. EFFECT OF SUPPLEMENTAL INDENTURES.

Upon the execution of any supplemental indenture under this Article,
this Indenture shall be modified in accordance therewith, and such supplemental
indenture shall form a part of this Indenture for all purposes; and every Holder
of Senior Notes theretofore or thereafter authenticated and delivered hereunder
shall be bound thereby.

SECTION 905. CONFORMITY WITH TRUST INDENTURE ACT.

Every supplemental indenture executed pursuant to this Article shall
conform to the requirements of the Trust Indenture Act as though this Indenture
were qualified thereunder.

<PAGE>

SECTION 906. REFERENCE IN SENIOR NOTES TO SUPPLEMENTAL INDENTURES.

Senior Notes authenticated and delivered after the execution of any
supplemental indenture pursuant to this Article may, and shall if required by
the Trustee, bear a notation in form approved by the Trustee as to any matter
provided for in such supplemental indenture. If the Issuer shall so determine,
new Senior Notes so modified as to conform, in the opinion of the Trustee and
the Issuer, to any such supplemental indenture may be prepared and executed by
the Issuer and the Company and authenticated and delivered by the Trustee in
exchange for Outstanding Senior Notes.

ARTICLE TEN

COVENANTS

SECTION 1001. PAYMENT OF PRINCIPAL, PREMIUM AND INTEREST.

The Issuer covenants and agrees for the benefit of the Holders that it
will duly and punctually pay the principal of (and premium, if any) and interest
on the Senior Notes in United States Dollars accordance with the terms of the
Senior Notes and this Indenture. An installment of principal or interest shall
be considered paid on the date it is due if the Trustee or Paying Agent holds by
12:00 noon New York City time on that date dollars designated for and
sufficient to pay the installment and is not prohibited from paying such money
to the Holders pursuant to the terms of this Indenture.

SECTION 1002. MAINTENANCE OF OFFICE OR AGENCY.

The Issuer and the Company will maintain in the Place of Payment, an
office or agency where Senior Notes may be presented or surrendered for payment,
where Senior Notes may be surrendered for registration of transfer or exchange
and where notices and demands to or upon the Issuer and the Company in respect
of the Senior Notes and this Indenture may be served. The Issuer or the Company
will give prompt written notice to the Trustee of the location, and any change
in the location, of such office or agency. If at any time the Issuer and the
Company shall fail to maintain such required office or agency or shall fail to
furnish the Trustee with the address thereof, such presentations, surrenders,
notices and demands may be made or served at the Corporate Trust Office of the
Trustee, and the Issuer and the Company each hereby appoints the Trustee as its
agent to receive all such presentations, surrenders, notices and demands.

The Issuer and the Company may also from time to time designate one or
more other offices or agencies where the Senior Notes may be presented or
surrendered for any or all such purposes and may from time to time rescind such
designations; PROVIDED, HOWEVER, that no such designation or rescission shall in
any manner relieve the Issuer of its obligation to maintain an office or agency
in the Place of Payment for such purposes. The Issuer will give prompt written
notice to the Trustee of any such designation or rescission and of any change in
the location of any such other office or agency.

<PAGE>

SECTION 1003. MONEY FOR SENIOR NOTES PAYMENTS
TO BE HELD IN TRUST.

If the Issuer or the Company shall at any time act as the Paying Agent
with respect to the Senior Notes, it will, on or before each due date of the
principal of (and premium, if any), interest and Additional Amounts on any of
the Senior Notes, segregate and hold in trust for the benefit of the Persons
entitled thereto a sum sufficient to pay the principal (and premium, if any) or
interest so becoming due until such sums shall be paid to such Persons or
otherwise disposed of as herein provided and will promptly notify the Trustee of
its action or failure so to act.

Whenever the Issuer shall have one or more Paying Agents with respect
to the Senior Notes, it will, prior to each due date of the principal of (and
premium, if any) or interest on any of the Senior Notes, deposit with a Paying
Agent a sum sufficient to pay the principal (and premium, if any) or interest so
becoming due, such sum to be held in trust for the benefit of the Persons
entitled to such principal, premium or interest, and (unless such Paying Agent
is the Trustee) the Issuer will promptly notify the Trustee of its action or
failure to so act.

The Issuer will cause each Paying Agent for the Senior Notes (other
than the Trustee) to execute and deliver to the Trustee an instrument in which
such Paying Agent shall agree with the Trustee, subject to the provisions of
this Section, that such Paying Agent will:

(1) hold all sums held by it for the payment of the principal of (and
premium, if any) or interest on Senior Notes in trust for the benefit of the
Persons entitled thereto until such sums shall be paid to such Persons or
otherwise disposed of as herein provided;

(2) give the Trustee notice of any default by the Issuer or the
Company (or any other obligor upon the Senior Notes) in the making of any
payment of principal (and premium, if any), interest or Additional Amounts on
the Senior Notes; and

(3) at any time during the continuance of any such default, upon the
written request of the Trustee, forthwith pay to the Trustee all sums so held in
trust by such Paying Agent.

The Issuer may at any time, for the purpose of obtaining the
satisfaction and discharge of this Indenture or for any other purpose, pay, or
by Company Order direct any Paying Agent to pay, to the Trustee all sums held in
trust by the Issuer, the Company or such Paying Agent, such sums to be held by
the Trustee upon the same trusts as those upon which such sums were held by the
Issuer, the Company or such Paying Agent; and, upon such payment by any Paying
Agent to the Trustee, such Paying Agent shall be released from all further
liability with respect to such money.

Any money deposited with the Trustee or any Paying Agent, or then held
by the Issuer or the Company, in trust for the payment of the principal of (and
premium, if any) or interest on any Senior Note and remaining unclaimed for one
year after such principal (and premium, if any) or interest has become due and
payable shall be paid to the Issuer or the

<PAGE>

Company, as the case may be, on Company Request, or (if then held by the Issuer
or the Company, as the case may be) shall be discharged from such trust; and the
Holder of such Senior Note shall thereafter, as an unsecured general creditor,
look only to the Issuer and the Company (as provided in the Guaranty) for
payment thereof, and all liability of the Trustee or such Paying Agent with
respect to such trust money, and all liability of the Issuer or the Company, as
the case may be, as trustee thereof, shall thereupon cease; PROVIDED, HOWEVER,
that the Trustee or such Paying Agent, before being required to make any such
repayment, may at the expense of the Issuer cause to be published once, in a
newspaper published in the English language, customarily published on each
Business Day and of general circulation in New York, New York notice that such
money remains unclaimed and that, after a date specified therein, which shall
not be less than 30 days from the date of such publication, any unclaimed
balance of such money then remaining will be repaid to the Issuer.

SECTION 1004. CORPORATE EXISTENCE.

Subject to Article Eight, the Issuer and the Company will do or cause
to be done all things necessary to preserve and keep in full force and effect
its corporate existence and that of each of the Company's Restricted
Subsidiaries and the rights (charter and statutory), licenses and franchises of
the Company and its Restricted Subsidiaries; PROVIDED, HOWEVER, that (a) the
Company shall not be required to preserve any such right, license or franchise
or the corporate existence of any of its Restricted Subsidiaries (other than the
Issuer on or prior to the Assumption) if the Board of Directors, or the board of
directors of the Restricted Subsidiary concerned, as the case may be, shall
determine that the preservation thereof is no longer desirable in the conduct of
the business of the Company or any of its Restricted Subsidiaries and that the
loss thereof is not materially disadvantageous to the Holders; (b) nothing
herein contained shall prevent any Restricted Subsidiary of the Company from (i)
liquidating or dissolving (other than the Issuer prior to the Assumption), or
(ii) merging into, or consolidating with the Company (PROVIDED that the Company
shall be the continuing or surviving corporation) or with any one or more
Restricted Subsidiaries of the Company if the Board of Directors or the board of
directors of the Restricted Subsidiary concerned, as the case may be, shall so
determine, provided that any such merger or consolidation involving the Issuer
on or prior to the Assumption may only be with a Wholly Owned Subsidiary.

SECTION 1005. PAYMENT OF TAXES AND OTHER CLAIMS.

The Company will pay or discharge or cause to be paid or discharged,
before the same shall become delinquent, (1) all material taxes, assessments and
governmental charges levied or imposed upon the Company or any Restricted
Subsidiary or upon the income, profits or property of the Company or any
Restricted Subsidiary and (2) all lawful claims against the Company or any
Restricted Subsidiary for labor, materials and supplies which in the case of
either clause (1) or (2) of this Section, if unpaid, might by law become a
material Lien upon the property of the Company or any Restricted Subsidiary;
PROVIDED, HOWEVER, that neither the Company nor any Restricted Subsidiary shall
be required to pay or discharge or cause to be paid or discharged any such tax,
assessment, charge or claim whose amount, applicability or validity is being

<PAGE>

contested in good faith by appropriate proceedings.

SECTION 1006. RESTRICTION ON DIVIDENDS.

The Company will not, and will not permit any Subsidiary of the
Company to, directly or indirectly, (1) declare or pay any dividend or make any
distribution, in cash or otherwise, in respect of any shares of Capital Stock of
the Company or to the holders of Capital Stock of the Company as such (other
than dividends or distributions payable in shares of Capital Stock of the
Company (other than Redeemable Stock)) or (2) purchase, redeem or otherwise
acquire or retire for value any of the Capital Stock of the Company or options,
warrants or other rights to acquire any such Capital Stock, other than
acquisitions of Capital Stock or such options, warrants or other rights by any
Subsidiary of the Company from the Company (any such transaction included in
clause (1) or (2) being hereafter collectively referred to as a "Restricted
Payment") if (i) at the time of such Restricted Payment and after giving effect
thereto, (a) an Event of Default shall have occurred and be continuing or (b)
the Consolidated Net Worth of the Company shall be less than seven hundred fifty
million dollars ($750,000,000); or if (ii) after giving effect to such
Restricted Payment, the aggregate amount expended subsequent to November 1,
1991, for all such Restricted Payments (the amount of any Restricted Payment, if
other than cash, to be the fair market value of such payment as determined by
the Board of Directors of the Company, whose reasonable determination shall be
conclusive and evidenced by a Board Resolution) exceeds the algebraic sum of (w)
a number calculated as follows: (A) if the aggregate Consolidated Net Income of
the Company earned on a cumulative basis during the period subsequent to
September 30, 1991 through the end of the last fiscal quarter that is prior to
the declaration of any such dividend or distribution or the giving of notice of
such purchase, redemption or other acquisition or retirement and for which such
financial information is then available, is a positive number, then 100% of such
positive number, and (B) if the aggregate Consolidated Net Income of the Company
earned on a cumulative basis during the period subsequent to September 30, 1991
through the end of the last fiscal quarter that is prior to the declaration of
any such dividend or distribution or the giving of notice of such purchase,
redemption or other acquisition or retirement and for which such financial
information is then available, is a negative number, then 100% of such negative
number, (x) the aggregate net cash proceeds received by the Company from the
issuance and sale, other than to a Subsidiary of the Company, subsequent to
November 1, 1991, of Capital Stock (including Capital Stock issued upon the
conversion of, or in exchange for, securities other than Capital Stock and
options, warrants or other rights to acquire Capital Stock, but excluding
Redeemable Stock), (y) the aggregate net cash proceeds originally received by
the Company from the issuance and sale, other than to a Subsidiary of the
Company, of Indebtedness of the Company that is converted into Capital Stock of
the Company subsequent to November 1, 1991, and (z) three hundred million
dollars ($300,000,000); PROVIDED, HOWEVER, that the retirement of any shares of
the Company's Capital Stock by exchange for, or out of the proceeds of the
substantially concurrent sale of, other shares of Capital Stock of the Company
other than Redeemable Stock shall not constitute a Restricted Payment. If all
of the conditions to the declaration of a dividend or distribution set out in
this Section are satisfied at the time such dividend or distribution is
declared, then such dividend or distribution may be paid or made within sixty
days after such declaration even if the

<PAGE>

payment of such dividend, the making of such distribution or the declaration
thereof would not have been permitted under this Section at any time after such
declaration.

The Issuer will not declare or pay any dividend or make any
distribution, in cash or otherwise, in respect of any shares of its Capital
Stock other than to the Company.

SECTION 1007. LIMITATION ON FUTURE LIENS AND GUARANTIES.

(a) If the Company or any Subsidiary of the Company shall create,
incur, assume or suffer to exist any Lien upon any of the assets of the Company
or a Subsidiary of the Company (whether such assets are owned at November 1,
1991 or thereafter acquired) as security for (i) any Indebtedness or other
obligation (whether unconditional or contingent) of the Company that ranks PARI
PASSU with the Senior Notes or any Indebtedness or other obligation (whether
unconditional or contingent) of a Subsidiary of the Company, the Company will
secure or will cause such Subsidiary to guarantee and secure the Outstanding
Senior Notes equally and ratably with (or, at the option of the Company, prior
to) such Indebtedness or other obligation, so long as such Indebtedness or other
obligation shall be so secured, or (ii) any Subordinated Indebtedness, the
Company will secure the Outstanding Senior Notes prior to such Subordinated
Indebtedness, so long as such Subordinated Indebtedness shall be so secured;
PROVIDED, HOWEVER, that this Subsection shall not apply in the case of Permitted
Liens or Liens granted by any Unrestricted Subsidiary to secure Indebtedness or
other obligations of itself or of any Person other than the Company and its
Restricted Subsidiaries.

(b) The Company will not guarantee the Indebtedness of any Subsidiary
of the Company and will not permit any such Subsidiary to guarantee (i) any
Indebtedness of the Company that ranks PARI PASSU with the Senior Notes, (ii)
any Indebtedness of a Subsidiary of the Company or (iii) any Subordinated
Indebtedness; PROVIDED, HOWEVER, that this Subsection shall not apply to (1) any
guaranty by a Subsidiary if such Subsidiary also guarantees the Senior Notes on
a PARI PASSU basis with respect to guaranties of Indebtedness described in
clause (i) and (ii) and on a senior basis with respect to guaranties of
Indebtedness described in clause (iii); (2) any guaranty existing on November 1,
1991 or any extension or renewal of such guaranty to the extent such extension
or renewal is for the same or a lesser amount; (3) any guaranty which
constitutes Indebtedness permitted by clause (v) or (vi) of the definition of
Permitted Indebtedness granted by a Person permitted to incur such Indebtedness;
(4) any guaranty by the Company of Indebtedness of a Restricted Subsidiary,
PROVIDED that (A) incurrence of such Indebtedness of the Restricted Subsidiary
is not prohibited by this Indenture and (B) (x) such guaranty constitutes
Indebtedness of the Company incurred as Permitted Indebtedness pursuant to
clause (vii) or (viii) of the definition of Permitted Indebtedness (it being
understood that, for purposes of determining Permitted Indebtedness, any such
guaranty shall be deemed to constitute Indebtedness separate from, and, in
addition to, Indebtedness of a Restricted Subsidiary which is so guaranteed) or
(y) immediately prior to and (on a PRO FORMA basis) after granting such
guaranty, the Company would be permitted to incur an additional dollar of
Indebtedness (not constituting Permitted Indebtedness) under Section 1008; (5)
any guaranty by an Unrestricted Subsidiary of Indebtedness or other obligations
of any Person other than the Company and its Restricted

<PAGE>

Subsidiaries; (6) any guaranty by the Company or any Subsidiary or Seminole of
Indebtedness or other obligations constituting Indebtedness permitted by clause
(i)(a) of the definition of Permitted Indebtedness in a principal amount not
exceeding the principal amount outstanding or committed under the Credit
Agreements (including any letter of credit facility, but without duplication
with respect to commitments for loans the use of proceeds of which is restricted
to repayment of other Indebtedness under the Credit Agreements) as of
November 1, 1991, PLUS two hundred fifty million dollars ($250,000,000) and LESS
the proceeds from the sale of all Indebtedness under the 1991 Indenture issued
from time to time applied to repay Indebtedness under the Credit Agreements; (7)
any guaranty by the Company of Indebtedness of any Restricted Subsidiary
outstanding on November 1, 1991 which is not subordinated to any Indebtedness of
such Restricted Subsidiary, and any renewal, extension or refinancing of such
Indebtedness permitted by this Indenture; (8) any guaranty by the Company of
Indebtedness of any Restricted Subsidiary that is organized under the laws of a
jurisdiction other than the United States or any subdivision thereof, PROVIDED
that the incurrence of such Indebtedness of such Restricted Subsidiary is not
prohibited by this Indenture; (9) any guaranty by a Restricted Subsidiary that
is organized under the laws of a jurisdiction other than the United States or
any subdivision thereof of the Indebtedness of any of its Subsidiaries that is a
Restricted Subsidiary and that is organized under the laws of a jurisdiction
other than the United States or any subdivision thereof, PROVIDED that
incurrence of such Indebtedness of such Restricted Subsidiary is not prohibited
by this Indenture; (10) any guaranty by the Company or a Subsidiary of the
Company of Indebtedness or other obligations in a principal amount not exceeding
two hundred fifty thousand dollars ($250,000); (11) any guaranty in the form of
an endorsement of negotiable instruments for deposit or collection and similar
transactions; (12) any guaranty arising under or in connection with performance
bonds, indemnity bonds, surety bonds, or commercial letters of credit not
exceeding twenty-five million dollars ($25,000,000) in aggregate principal
amount from time to time outstanding; (13) any guaranty by a Subsidiary of the
Company of Indebtedness or other obligations of another Subsidiary in effect at
the time of such guarantor becoming a Subsidiary and not created in
contemplation thereof; or (14) any guaranty by the Company or a Restricted
Subsidiary of any Interest Swap Obligation, Currency Agreement or Commodities
Agreement relating to Indebtedness that is guaranteed pursuant to another clause
of this Subsection.

(c) Notwithstanding subparagraphs (a) and (b), the Issuer will not
(i) create, incur, assume or suffer to exist any Lien upon any of its assets
other than Liens specified in (1) clause (i), (iii), (vi), (vii) or (xvi) of the
definition of Ordinary Course of Business Liens or (2) clause (v) of the
definition of Permitted Liens (in respect of the Indenture only) or (iii)
guarantee any Indebtedness.

SECTION 1008. LIMITATION ON FUTURE INCURRENCE OF INDEBTEDNESS.

(a) The Company will not, and will not permit any Restricted
Subsidiary to, incur, create, assume, guarantee or in any other manner become
directly or indirectly liable with respect to or responsible for the payment of
any Indebtedness except: (1) Permitted Indebtedness; and (2) Indebtedness of
the Company if at the time thereof and after giving effect thereto the
Consolidated Interest Coverage Ratio of the Company, on a PRO FORMA basis for
the

<PAGE>

then four most recent fiscal quarters, taken as a whole (giving effect to (i)
such Indebtedness and (ii) the effect on the Consolidated Cash Flow Available
for Fixed Charges of the Company for the then four most recent fiscal quarters,
taken as a whole, as a result of any acquisition of a Person acquired by the
Company or any Restricted Subsidiary with the proceeds of such Indebtedness),
would be greater than 1.75 to 1. Without limiting the foregoing, the Company
shall not, and shall not permit any Restricted Subsidiary to, guarantee, or in
any other manner become directly or indirectly liable with respect to or
responsible for the payment of, Indebtedness of any Unrestricted Subsidiary in
an amount greater than, for all guaranties and undertakings of responsibility by
the Company and its Restricted Subsidiaries, 20% of the aggregate amount of
Indebtedness of such Unrestricted Subsidiary.

(b) Notwithstanding the foregoing, the Issuer will not incur, create,
assume, guarantee or in any other manner become directly or indirectly liable
with respect to or responsible for the payment of any Indebtedness other than
the Notes and Indebtedness owed to the Company or a Wholly Owned Subsidiary.

SECTION 1009. LIMITATION ON ASSET DISPOSITIONS.

(a) (i) The Company will not, and will not permit any Restricted
Subsidiary to, make any Asset Disposition. In the event that the Company fails
to observe the covenant set forth in the foregoing sentence, such event of
failure shall constitute an Event of Default unless (i) (except as otherwise
permitted in the last sentence of Subsection (g) below) the Company (or the
Restricted Subsidiary, as the case may be) receives consideration at the time of
such Asset Disposition at least equal to the fair market value for the assets
sold or otherwise disposed of (which shall be as determined in good faith (x) in
the case of dispositions of assets having a fair market value of ten million
dollars ($10,000,000) or more, by the Board of Directors, whose reasonable
determination shall be conclusive and evidenced by a Board Resolution, or (y) in
the case of dispositions of assets having a fair market value of less than ten
million dollars ($10,000,000) but not less than five million dollars
($5,000,000), an Officer of the Company, whose reasonable determination shall be
conclusive and evidenced by a certificate of such Officer) and (ii) the Company
applies the aggregate net proceeds in excess of three hundred million dollars
($300,000,000) received by the Company or any Restricted Subsidiary from all
Asset Dispositions occurring subsequent to November 1, 1991 (but excluding for
purposes of this clause (ii), whether before or after the receipt of net
proceeds in excess of three hundred million dollars ($300,000,000), (1) the net
proceeds of any Asset Disposition or series of related Asset Dispositions where
the net proceeds are less than five million dollars ($5,000,000) and (2) the
first twenty-five million dollars ($25,000,000) of net proceeds in each fiscal
year without taking into account any amount excluded pursuant to (1)) as
follows: (A) to the payment or prepayment of any Senior Indebtedness within six
months of such Asset Disposition, or (B) to investment in the business of the
Company and its Restricted Subsidiaries (including, without limitation, by
acquiring equity, other than Redeemable Stock, of the transferee of such Asset
Disposition) within six months of such Asset Disposition or, if such investment
is with respect to a project to be completed within a period greater than six
months from such Asset Disposition, then within the period of time necessary to
complete such project; PROVIDED, HOWEVER, that (x) in the case of

<PAGE>

applications contemplated by clause (B), the Board of Directors has, within such
six-month period, adopted in good faith a resolution committing such excess
proceeds to such investment, (y) EXCEPT as provided in the next sentence, none
of such excess proceeds shall be used to make any Restricted Payment or any
payment in respect of Subordinated Indebtedness and (z) to the extent not
applied in accordance with clauses (A) or (B) above, or if after being so
applied there remain excess net proceeds in an amount greater than ten million
dollars ($10,000,000), the Company shall make a PRO RATA offer to all Holders to
purchase Senior Notes at 100% of principal amount, plus accrued and unpaid
interest to the Asset Disposition Payment Date, up to an aggregate principal
amount equal to such excess net proceeds (as adjusted pursuant to Subsection (g)
of this Section, the "Asset Disposition Offer Amount"). If after being applied
in accordance with clauses (A), (B) and (z) above there remain excess net
proceeds, the Company will apply such excess net proceeds to the general
corporate purposes of the Company or any Subsidiary of the Company.

(b) Notwithstanding Subsection (a) of this Section, to the extent the
Company or any of its Restricted Subsidiaries receives securities or other
non-cash property or assets as proceeds of an Asset Disposition (other than
equity in the transferee not constituting Redeemable Stock), the Company shall
not be required to make any application required by Subsection (a) of this
Section until the Company or such Restricted Subsidiary receives cash proceeds
from a sale, repayment, exchange, redemption or retirement of or extraordinary
dividend or return of capital on such non-cash property, EXCEPT that if and to
the extent the sum of all cash proceeds plus the fair market value of equity
(other than Redeemable Stock) in the transferee of such Asset Disposition
received at the time of such Asset Disposition is less than 70% of the fair
market value of the total proceeds of such Asset Disposition (with such fair
market value determined and evidenced in the same manner as stated in clause (i)
of Subsection (a) of this Section), the amount of such deficiency (the
"Deficiency Amount") shall be applied as required by Subsection (a) of this
Section as if received at the time of the Asset Disposition. Any amounts
deferred pursuant to the preceding sentence shall be applied in accordance with
Subsection (a) of this Section when cash proceeds are thereafter received from a
sale, repayment, exchange, redemption or retirement of or extraordinary dividend
or return of capital on such non-cash property; PROVIDED, HOWEVER, that the
Company shall not be required to apply with respect to any equity interest in a
transferee an amount exceeding the fair market value attributable to such equity
interest at the time of the Asset Disposition; and PROVIDED, FURTHER, that if a
Deficiency Amount was applied pursuant to the exception contained in the
preceding sentence, then once the cumulative amount of applications made
pursuant to Subsections (a) and (b) of this Section (including any Deficiency
Amounts) equals 100% of the fair market value of the total proceeds of the Asset
Disposition at the time of such Asset Disposition, cash proceeds thereafter
received from a sale, repayment, exchange, redemption or retirement of or
extraordinary dividend or return of capital on such non-cash property shall not
be required to be applied in accordance with Subsection (a) of this Section
EXCEPT to the extent such cash proceeds exceed the Deficiency Amount.

(c) An offer to purchase Senior Notes required to be made pursuant to
this Section is referred to as an "Asset Disposition Offer" and the date on
which the purchase of Senior Notes relating to any such Asset Disposition Offer
is to be made is referred to as the

<PAGE>

"Asset Disposition Payment Date."

(d) The Company shall provide the Trustee with notice of an Asset
Disposition Offer and with all information required to accompany the notice
described in (e) below, at least 45 days before any such Asset Disposition
Payment Date and at least 10 days before the notice of any Asset Disposition
Offer is mailed to Holders.

(e) Notice of an Asset Disposition Offer described in this Section
shall be mailed on behalf of the Company by the Trustee to all Holders at their
last registered addresses not less than 30 days nor more than 60 days before the
Asset Disposition Payment Date, which shall be a date not more than 210 days
after the Asset Disposition giving rise to such Asset Disposition Offer. The
Asset Disposition Offer shall remain open from the time of the mailing of such
notice until not more than five Business Days before the Asset Disposition
Payment Date. The notice shall state:

(1) that the Asset Disposition Offer is being made pursuant to this
Section and the reason for the Asset Disposition Offer;

(2) the purchase price and the Asset Disposition Payment Date;

(3) the aggregate principal amount of Senior Notes initially subject
to the Asset Disposition Offer Amount and, if applicable, a description of the
adjustment mechanisms describe in Subsection (g) of this Section;

(4) the name and address of the Paying Agent and the Trustee and that
Senior Notes must be surrendered to the Paying Agent to collect the purchase
price;

(5) that any of the Senior Notes not tendered or accepted for payment
will continue to accrue interest;

(6) that any Senior Note accepted for payment pursuant to the Asset
Disposition Offer shall cease to accrue interest after the Asset Disposition
Payment Date;

(7) that each Holder electing to have a Senior Note purchased
pursuant to an Asset Disposition Offer will be required to surrender the Senior
Note, with the form entitled "Option of Holder to Elect Purchase" on the reverse
of the Senior Note completed, to the Paying Agent at the address specified in
the notice prior to the close of business on the fifth Business Day prior to the
Asset Disposition Payment Date;

(8) that Holders will be entitled to withdraw their election if the
Paying Agent receives, not later than the close of business on the third
Business Day preceding the Asset Disposition Payment Date, a telegram, telex,
facsimile transmission or letter setting forth: the name of the Holder, the
principal amount of the Senior Note the Holder delivered for purchase, the
certificate number of the Senior Note the Holder delivered and a statement that
such Holder is withdrawing his election to have the Senior Note purchased; and

<PAGE>

(9) that Holders whose Senior Notes are purchased only in part will
be issued new Senior Notes equal in principal amount to the unpurchased portion
of the Senior Notes surrendered.

(f) On the Asset Disposition Payment Date, the Company shall (i)
accept for payment Senior Notes or portions thereof tendered pursuant to the
Asset Disposition Offer in an aggregate principal amount equal to the Asset
Disposition Offer Amount or such lesser amount of Senior Notes as shall have
been tendered, (ii) on or before 12:00 noon New York City time, deposit with the
Paying Agent money sufficient to pay the purchase price of all Senior Notes or
portions thereof so accepted, and (iii) deliver or cause to be delivered to the
Trustee Senior Notes so accepted together with an Officer's Certificate stating
the Senior Notes or portions thereof accepted by the Company, which Notes will
be retired by the Issuer. If the aggregate principal amount of Senior Notes
tendered exceeds the Asset Disposition Offer Amount, the Issuer shall select the
Senior Notes to be purchased on a PRO RATA basis to the nearest one thousand
dollars ($1,000) of principal amount. The Paying Agent shall promptly mail or
deliver to Holders of Senior Notes so accepted payment in an amount equal to the
purchase price, and the Issuer shall execute and the Trustee shall promptly
authenticate and mail or make available for delivery to such Holders a new
Senior Note equal in principal amount to any unpurchased portion of the Senior
Note surrendered. Any Senior Notes not so accepted shall be promptly mailed or
made available for delivery to the Holder thereof. The Issuer will publicly
announce the results of the Asset Disposition Offer on or as soon as practicable
after the Asset Disposition Payment Date. For purposes of this Section, the
Trustee or its agent shall act as the Paying Agent.

(g) The Company shall not make an "Asset Disposition Offer" (as
defined) required under Section 1009 of the 1991 Indenture, the First Mortgage
Indenture, the 1994 Senior Notes Indenture or the 1996 Rating Adjustable
Indenture, in connection with a disposition of assets (other than the Collateral
(as defined in the First Mortgage Note Indenture)) unless the Company shall have
made an Asset Disposition Offer hereunder (and in respect of certain other
Senior Indebtedness in accordance with the following sentence) on a PRO RATA
basis (in an aggregate amount equal to the amount to be offered pursuant to the
Asset Disposition Offer under the 1991 Indenture, the First Mortgage Indenture,
the 1994 Senior Notes Indenture and the 1996 Rating Adjustable Indenture, and in
accordance with Section 1009(g) of the First Mortgage Note Indenture, the 1994
Senior Notes and the 1996 Rating Adjustable Indenture) the closing date of which
is prior to six months after the asset disposition triggering the obligations of
the Company under the 1991 Indenture, the First Mortgage Note Indenture, the
1994 Senior Notes Indenture and/or the 1996 Rating Adjustable Indenture.
Notwithstanding the previous sentence, if the Company issues on or after the
Issue Date, any Senior Indebtedness (including Senior Notes) containing a
requirement that an offer be made to repurchase such Senior Indebtedness under
the same circumstances and in the same manner (including the prescribed time
periods hereof) provided in this Section 1009, then (i) the Company may apply
the Asset Disposition Offer Amount (before any adjustment pursuant to this
sentence) to the PRO RATA purchase of Senior Notes tendered hereunder and the
Senior Indebtedness tendered thereunder and (ii) the Asset Disposition Offer
Amount available to repurchase the Senior Notes shall be reduced by the amount
applied to the purchase of such Senior Indebtedness; PROVIDED that this sentence
shall only

<PAGE>

apply to (i) Senior Indebtedness issued on or after the Issue Date that
explicitly permits the PRO RATA purchase of Senior Notes as described herein and
refers to this Section 1009(g), and (ii) any Indebtedness outstanding at the
date of this Indenture that is amended to explicitly permit the pro-rata
purchase of Senior Notes as described herein and refers to this Section 1009(g).
In the event that the First Mortgage Notes are refinanced through a public or
private offering of Indebtedness constituting debt securities and the amount of
such refinancing Indebtedness is no greater than the principal amount of the
First Mortgage Notes outstanding as of the date of such refinancing, the Company
need not comply with Subsection (a) of this Section 1009 in respect of an Asset
Disposition involving the collateral securing such Indebtedness (other than
collateral granted in respect of such Indebtedness pursuant to a negative pledge
or similar provision contained in the indenture or similar instrument relating
to such Indebtedness) to the extent that such compliance would constitute a
default under such indenture or similar instrument.

SECTION 1010. MAINTENANCE OF PROPERTIES.

The Company will cause all material properties used or useful in the
conduct of its business or the business of any of its Subsidiaries to be
maintained and kept in good condition, repair and working order (normal wear and
tear excepted) and supplied with all necessary equipment and will cause to be
made all necessary repairs, renewals, replacements, betterments and improvements
thereof, all as in the judgment of the Company may be necessary, so that the
business carried on in connection therewith may be properly and advantageously
conducted at all times; PROVIDED, HOWEVER, that nothing in this Section shall
prevent the Company from discontinuing the operation or maintenance of any of
such properties, or disposing of any of them, if such discontinuance or disposal
is, in the judgment of the Board of Directors or of the board of directors of
the Subsidiary concerned, as the case may be, desirable in the conduct of the
business of the Company or any Subsidiary of the Company and not materially
disadvantageous to the Holders.

SECTION 1011. COMPLIANCE CERTIFICATES.

(a) The Issuer and the Company shall each deliver to the Trustee
within 90 days after the end of each fiscal year of the Company (which fiscal
year currently ends on December 31), an Officer's Certificate stating whether or
not the signer knows of any Default or Event of Default by the Issuer or the
Company that occurred prior to the end of the fiscal year and is then
continuing. If the signer does know of such a Default or Event of Default, the
certificate shall describe each such Default or Event of Default and its status
and the specific section or sections of this Indenture in connection with which
such Default or Event or Default has occurred. The Company shall also promptly
notify the Trustee in writing should the Company's fiscal year be changed so
that the end thereof is on any date other than the date on which the Company's
fiscal year currently ends.

(b) The Company shall deliver to the Trustee as soon as practicable
but in any event not later than 45 days after the end of each fiscal quarter an
Officer's Certificate setting forth the Company's Subordinated Capital Base for
purposes of this Section 1011. The Trustee

<PAGE>

may conclusively rely on the Officer's Certificate for such purposes.

(c) The Company shall deliver to the Trustee within 90 days after the
end of each fiscal year a written statement by the Company's independent
certified public accountants stating (i) that their audit examination has
included a review of the terms of this Indenture and the Senior Notes as they
relate to accounting matters and (ii) whether, in connection with their audit
examination, any Default has come to their attention and if such a Default has
come to their attention, specifying the nature and period of existence thereof
and the specific section or sections of this Indenture in connection with which
such Default has occurred; PROVIDED, that without any restriction as to the
scope of the audit examination, such independent certified public accountants
shall not be liable by reason of the failure to obtain knowledge of such Default
that would not be disclosed in the course of an audit examination conducted in
accordance with generally accepted auditing standards.

(d) The Issuer and the Company shall each deliver to the Trustee
forthwith upon becoming aware of a Default, Event of Default or Company Event of
Default (but in no event later than 10 days after the occurrence of each
Default, Event of Default or Company Event of Default that is continuing), an
Officer's Certificate setting forth the details of such Default, Event of
Default or Company Event of Default and the action that it proposes to take
with respect thereto and the specific section or sections of this Indenture in
connection with which such Default, Event of Default, or Company Event of
Default has occurred.

SECTION 1012. WAIVER OF STAY, EXTENSION OR USURY LAWS.

The Issuer and the Company each covenant (to the extent that it may
lawfully do so) that it will not at any time insist upon, or plead, or in any
manner whatsoever claim, and will actively resist any and all efforts to be
compelled to take the benefit or advantage of, any stay or extension law or any
usury law or other law, which would prohibit or forgive the Issuer or the
Company from paying all or any portion of the principal of and/or interest on
the Senior Notes as contemplated herein (including, in the case of the Company,
payments in respect of the Guaranty), wherever enacted, now or at any time
hereafter in force, or which may affect the covenants or the performance of this
Indenture; and (to the extent that it may lawfully do so) the Issuer and the
Company each hereby expressly waive all benefit or advantage of any such law,
and covenants that it will not hinder, delay or impede the execution of any
power herein granted to the Trustee, but will suffer and permit the execution of
every such power as though no such law had been enacted.

SECTION 1013. CHANGE OF CONTROL.

(a) Upon the occurrence of a Change of Control (the "Change of
Control Date") and subject to the requirements of the next succeeding sentence,
each Holder shall have the right to require that the Company repurchase such
Holder's Senior Notes in whole or in part pursuant to the offer described in
Subsection (b) below (the "Change of Control Offer") at a purchase price equal
to 101% of the aggregate principal amount of such Senior Notes plus accrued and
unpaid interest, if any, to the date of such purchase. If such purchase would

<PAGE>

constitute an event of default under Specified Bank Debt, then, prior to giving
the notice to Holders provided in Subsection (b) below, the Issuer shall (i)
repay in full in cash such Specified Bank Debt or (ii) obtain the requisite
consent of holders of such Specified Bank Debt to permit the purchase of Senior
Notes without giving rise to an event of default under such Specified Bank Debt.

(b) Promptly upon satisfaction of either one of the obligations, if
then applicable, set forth in clause (i) or (ii) of Subsection (a) above, the
Company shall mail a notice to each Holder and the Trustee in respect of the
Change of Control Offer (which notice shall contain all instructions and
materials necessary to enable such Holders to tender Senior Notes) stating:

(1) that the Change of Control Offer is being made pursuant to this
Section and that all Senior Notes properly tendered will be accepted for
payment;

(2) the purchase price and the purchase date (which shall be no
earlier than 30 days nor later than 40 days from the date such notice is mailed,
but in any event prior to the date on which any Subordinated Indebtedness is
paid pursuant to the terms of a provision similar to this Section) (the "Change
of Control Payment Date");

(3) the name and address of the Paying Agent and the Trustee and that
the Senior Notes must be surrendered to the Paying Agent to collect the purchase
price;

(4) that any Senior Note not tendered will continue to accrue
interest;

(5) that any Senior Note accepted for payment pursuant to the Change
of Control Offer shall cease to accrue interest after the Change of Control
Payment Date;

(6) that each Holder electing to have a Senior Note purchased
pursuant to a Change of Control Offer will be required to surrender the Senior
Note, with the form entitled "Option of Holder to Elect Purchase" on the reverse
of the Senior Note completed, to the Paying Agent at the address specified in
the notice prior to the close of business on the Business Day prior to the
Change of Control Payment Date;

(7) that Holders will be entitled to withdraw their election if the
Paying Agent receives, not later than the close of business on the third
Business Day preceding the Change of Control Payment Date, a telegram, telex,
facsimile transmission or letter setting forth the name of the Holder, the
principal amount of the Senior Note the Holder delivered for purchase, the
certificate numbers of the Senior Note the Holder delivered and a statement that
such Holder is withdrawing his election to have such Senior Note purchased; and

(8) that Holders whose Senior Notes are purchased only in part will
be issued new Senior Notes equal in principal amount to the unpurchased portion
of the Senior Notes surrendered.

<PAGE>

On or before 12:00 noon New York City time on the Change of Control
Payment Date, the Company shall (i) accept for payment Senior Notes or portions
thereof tendered pursuant to the Change of Control Offer, (ii) deposit with the
Paying Agent money sufficient to pay the purchase price of all Senior Notes or
portions thereof so accepted and (iii) deliver or cause to be delivered to the
Trustee Senior Notes so accepted, together with an Officer's Certificate stating
the aggregate principal amount of the Senior Notes or portions thereof so
accepted by the Company, which shall be retired by the Issuer. The Paying Agent
shall promptly mail or deliver to the Holder of Senior Notes so accepted payment
in an amount equal to the purchase price, and the Trustee shall promptly
authenticate and mail or make available for delivery to such Holder a new Senior
Note equal in principal amount to any unpurchased portion of the Senior Note
surrendered. The Issuer will publicly announce or cause to be announced the
results of the Change of Control Offer on or as soon as practicable after the
Change of Control Payment Date. For purposes of this Section, the Trustee or
its agent shall act as the Paying Agent.

If a Change of Control has occurred but a Change of Control Offer is
not permitted to be made, the Issuer shall mail a notice of such Change of
Control to each Holder within 30 days following a Change of Control Date.

The Company shall comply with any applicable tender offer rules
(including, without limitation, any applicable requirements of Rule 14e-1 under
the Exchange Act) and any other legal requirements in the event that a Change of
Control Offer is made under the circumstances described in this Section 1013.

SECTION 1014. PAYMENT OF ADDITIONAL AMOUNTS.

All payments made by the Issuer under or with respect to the Senior
Notes will be made free and clear of and without withholding or deduction for or
on account of any present or future Taxes, unless the Issuer is required to
withhold or deduct Taxes by Canadian law or by the interpretation or
administration thereof. If, after the Issue Date, the Issuer is so required to
withhold or deduct any amount for or on account of Taxes from any payment made
under or with respect to the Notes, the Issuer shall pay to each Holder of Notes
on the date of the required payment such additional amounts (the "Additional
Amounts") as may be necessary so that the net amount received by such Holder
(including the Additional Amounts) after such withholding or deduction will not
be less than the amount the Holder would have received if such taxes had not
been withheld or deducted, PROVIDED that no Additional Amounts will be payable
with respect to a payment made to a Holder (an "Excluded Holder") (i) with which
the Issuer does not deal at arm's length (within the meaning of the Income Tax
Act (Canada)) at the time of making such payment or (ii) which is subject to
such Taxes by reason of its being connected with Canada or any province or
territory thereof otherwise than by the mere holding of the Senior Notes or the
receipt of payments thereunder. The Issuer shall also (i) make such withholding
or deduction and (ii) remit the full amount deducted or withheld to the relevant
authority in accordance with the applicable law. The Issuer shall furnish to
the Holders of Senior Notes that are Outstanding on the date of the required
payment within 30 days after the date the payment of any Taxes is due

<PAGE>

pursuant to applicable law, certified copies of tax receipts evidencing that
such payment has been made by the Issuer. The Issuer shall indemnify and hold
harmless each Holder on the date of the required payment (other than an Excluded
Holder) and upon written request reimburse each such Holder for the amount of
(i) any Taxes so levied or imposed and paid by such Holder as a result of
payments made under or with respect to the Outstanding Notes, (ii) any liability
(including penalties, interest and expense) arising therefrom or with respect
thereto, and (iii) any Taxes imposed with respect to any reimbursement under
clause (i) or (ii) above.

At least 30 days prior to each date on which any payment under or with
respect to the Senior Notes is due and payable, if the Issuer becomes obligated
to pay Additional Amounts with respect to such payment, the Issuer shall deliver
to the Trustee an Officers' Certificate stating the fact that such Additional
Amounts will be payable, and the amounts so payable and will set forth such
other information as is necessary to enable the Trustee to pay such Additional
Amounts to the Holders on the payment date. Whenever in this Indenture there is
mentioned, in any context, the payment of principal (and premium, if any);
payments in connection with a Change of Control Offer, a Deficiency Offer or an
Asset Disposition Offer, interest (including Defaulted Interest); or any other
amount payable on or with respect to any of the Senior Notes, such mention shall
be deemed to include mention of the payment of Additional Amounts provided for
in this Section 1014 to the extent that, in such context, Additional Amounts
are, were or would be payable in respect thereof pursuant to the provisions of
this Section 1014 and express mention of the payment of Additional Amounts in
those provisions hereof shall not be construed as excluding Additional Amounts
in those provisions hereof where such express mention is not made (if
applicable).

The obligations of the Issuer under this Section 1014 shall survive
the termination of this Indenture and the payment of all amounts under or with
respect to this Indenture and the Senior Notes.

SECTION 1015. WAIVER OF CERTAIN COVENANTS.

The Issuer and the Company may omit in any particular instance to
comply with any term, provision or condition set forth in Sections 1006, 1007,
1008 and 1009, if before the time for such compliance Holders representing at
least a majority in principal amount of the Outstanding Senior Notes shall, by
Act of such Holders, either waive such compliance in such instance or generally
waive compliance with such term, provision or condition, but no such waiver
shall extend to or affect such term, provision or condition except to the extent
so expressly waived, and, until such waiver shall become effective, the
obligations of the Issuer and the duties of the Trustee in respect of any such
term, provision or condition shall remain in full force and effect.

SECTION 1016. CERTAIN ADDITIONAL ISSUER COVENANTS.

(a) The Issuer will not (i) engage in any business other than the
issuance, sale and administration of the Notes and activities incidental
thereto, (ii) make any investment (whether in the form of a loan, advance,
guaranty, extension of credit, capital contribution,

<PAGE>

acquisition of Capital Stock, bonds or other securities or other items that
would be classified as investments in accordance with GAAP) in or with respect
to any Person other than the Company or a Wholly-Owned Subsidiary; (iii) prior
to the Assumption, dissolve or terminate, or permit the dissolution or
termination of its existence or liquidate or wind up, or permit the liquidation
or winding up, of its affairs (in each case whether voluntarily or by operation
of law); or (iv) prior to the Assumption consolidate with or merge with or into
any Person other than the Company or a Wholly-Owned Subsidiary (which shall
become a successor corporation to the Issuer hereunder (whether or not the
Issuer shall be the surviving corporation) or a Wholly-Owned Subsidiary; or (v)
sell, assign, transfer or lease any of its properties or assets to any Person
other than the Company or a Wholly-Owned Subsidiary.

ARTICLE ELEVEN

MAINTENANCE OF SUBORDINATED CAPITAL BASE

SECTION 1101. MAINTENANCE OF SUBORDINATED CAPITAL BASE.

(a) Subject to the terms of Section 1102, in the event that the
Company's Subordinated Capital Base is less than one billion dollars
($1,000,000,000) (the "Minimum Subordinated Capital Base") as at the end of each
of any two consecutive fiscal quarters (the last day of the second such fiscal
quarter, a "Deficiency Date"), then, with respect to Senior Notes, the Company
shall, no later than 60 days after the Deficiency Date (105 days if a Deficiency
Date is also the end of the Company's fiscal year), make an offer to all Holders
to purchase (a "Deficiency Offer") 10% of the principal amount of Senior Notes
originally issued, or such lesser amount as may be Outstanding at the time each
Deficiency Offer is made (the "Deficiency Offer Amount"), at a purchase price
equal to 100% of principal amount, plus accrued and unpaid interest to the
Deficiency Payment Date.

(b) Thereafter, semi-annually the Company shall make like Deficiency
Offers for the then applicable Deficiency Offer Amount of Senior Notes until the
Company's Subordinated Capital Base as at the end of any subsequent fiscal
quarter shall be equal to or greater than the Minimum Subordinated Capital Base.
Notwithstanding the foregoing, after any specified Deficiency Date, the last day
of any subsequent fiscal quarter shall not constitute a Deficiency Date (giving
rise to an additional obligation under Subsection (a) of this Section) unless
the Company's Subordinated Capital Base was equal to or greater than the Minimum
Subordinated Capital Base as at the end of a fiscal quarter that followed such
specified Deficiency Date and preceded such subsequent quarter.

(c) Within 60 days (105 days if a Deficiency Date is also the end of
the Company's fiscal year) following a Deficiency Date, the Company shall mail a
notice to each Holder in respect of the Deficiency Offer (which notice shall
contain all instructions and materials necessary to enable such Holders to
tender Senior Notes) stating:

(1) that the Deficiency Offer is being made pursuant to this Section
and the reason for the Deficiency Offer;

<PAGE>

(2) the purchase price and the purchase date, which shall be 20
Business Days from the date such notice is mailed or, if acceptance for payment
and payment is not then lawful, on the earliest subsequent Business Day on which
acceptance for payment and payment is then lawful (a "Deficiency Payment Date");

(3) the aggregate principal amount of Senior Notes subject to the
Deficiency Amount;

(4) the name and address of the Paying Agent and the Trustee and that
Senior Notes must be surrendered to the Paying Agent to collect the purchase
price;

(5) that any of the Senior Notes not tendered or accepted for payment
will continue to accrue interest;

(6) that any Senior Note accepted for payment pursuant to the
Deficiency Offer shall cease to accrue interest after the Deficiency Payment
Date;

(7) that each Holder electing to have a Senior Note purchased
pursuant to a Deficiency Offer will be required to surrender the Senior Note,
with the form entitled "Option of Holder to Elect Purchase" on the reverse of
the Senior Note completed, to the Paying Agent at the address specified in the
notice prior to the close of business on the Business Day prior to the
Deficiency Payment Date;

(8) that Holders will be entitled to withdraw their election if the
Paying Agent receives, not later than the close of business on the third
Business Day preceding the Deficiency Payment Date, a telegram, telex, facsimile
transmission or letter setting forth: the name of the Holder, the principal
amount of the Senior Note the Holder delivered for purchase, the certificate
number of the Senior Note the Holder delivered and a statement that such Holder
is withdrawing his election to have the Senior Note purchased; and

(9) that Holders whose Senior Notes are purchased only in part will
be issued new Senior Notes equal in principal amount to the unpurchased portion
of the Senior Notes surrendered.

(d) On a Deficiency Payment Date, the Company shall (i) accept for
payment Senior Notes or portions thereof tendered pursuant to the Deficiency
Offer in an aggregate principal amount equal to the Deficiency Offer Amount or
such lesser principal amount of such Senior Notes as shall have been tendered,
(ii) on or before 12:00 noon New York City time, deposit with the Paying Agent
money sufficient to pay the purchase price of all such Senior Notes or portions
thereof so accepted, and (iii) deliver, or cause to be delivered to the Trustee,
Senior Notes or portions thereof so accepted together with an Officer's
Certificate stating the Senior Notes or portions thereof accepted by the
Company, which shall be retired by the Issuer. If the aggregate principal
amount of such Senior Notes tendered exceeds the Deficiency Offer Amount, the
Issuer shall select the Senior Notes to be purchased on a PRO RATA basis to the
nearest one thousand dollars ($1,000) of principal amount. The Paying Agent
shall promptly mail or make

<PAGE>

available for delivery to Holders of Senior Notes so accepted payment in amounts
equal to the purchase prices therefor, and the Issuer shall execute and the
Trustee shall promptly authenticate and mail or make available for delivery to
such Holders new Senior Notes equal in principal amounts to, any unpurchased
portion of the Senior Notes surrendered. Any Senior Notes not so accepted shall
be promptly mailed or made available for delivery to the Holder thereof. The
Issuer will publicly announce the results of the Deficiency Offer on or as soon
as practicable after the Deficiency Payment Date. For purposes of this Section,
the Trustee or its agent shall act as the Paying Agent.

(e) The Company shall comply with all applicable tender offer rules
(including, without limitation, any applicable requirements of Rule 14e-1 under
the Exchange Act) and any other legal requirements in the event that a
Deficiency Offer is made under the circumstances described in this Section 1101.

SECTION 1102. ALTERNATIVE INTEREST RATE ADJUSTMENT.

(a) Notwithstanding the terms of Section 1101, in the event that (1)
the making of a Deficiency Offer by the Company or (2) the purchase of Senior
Notes by the Company in respect of a Deficiency Offer would constitute a default
(with the giving of notice, the passage of time or both) with respect to any
Specified Bank Debt at the time outstanding, then, in lieu of the making of a
Deficiency Offer in the circumstances set forth in Section 1101, (i) the
interest rate on the Senior Notes shall be reset as of the first day of the
second fiscal quarter following the Deficiency Date (the "Reset Date") to a rate
per annum (the "Reset Rate") equal to the greater of (x) the Initial Interest
Rate and (y) the sum of (A) 400 basis points and (B) the higher of the Seven
Year Treasury Rate and the Ten Year Treasury Rate, (ii) on the first Interest
Payment Date following the Reset Date, the interest rate on the Senior Notes, as
reset on the Reset Date, shall increase by fifty (50) basis points, and (iii)
the interest rate on the Senior Notes shall further increase by an additional
fifty (50) basis points on each succeeding Interest Payment Date; PROVIDED,
HOWEVER, that in no event shall the interest rate on the Senior Notes at any
time exceed the Initial Interest Rate by more than two hundred (200) basis
points.

(b) Once the interest rate on the Senior Notes has been reset
pursuant to Subsection (a) of this Section, if the Company's Subordinated
Capital Base is equal to or greater than the Minimum Subordinated Capital Base
as of the last day of any fiscal quarter subsequent to the Deficiency Date,
interest on the Senior Notes shall return to the Initial Interest Rate effective
as of the first day of the second following fiscal quarter; PROVIDED, HOWEVER,
that the interest rate on the Senior Notes shall again be adjusted in accordance
with Subsection (a) of this Section if the Company's Subordinated Capital Base
shall thereafter be less than the Minimum Subordinated Capital Base as at the
last day of any two consecutive subsequent fiscal quarters and if the making of
a Deficiency Offer or the purchase of Senior Notes by the Company in respect of
a Deficiency Offer would, at such time, constitute a default (with the giving of
notice, the passage of time, or both) with respect to any Specified Bank Debt at
the time outstanding.

<PAGE>

Business Days after the Reset Date in the circumstances set forth in Subsection
(a) of this Section. Not later than five Business Days after the Trustee has
received such notice from the Issuer, the Trustee shall mail to each Holder such
notice setting forth the Reset Rate. Commencing on the Reset Date, the Senior
Notes shall bear interest (as determined in accordance with clauses (i), (ii)
and (iii) of Subsection (a) of this Section) until the date on which such
interest rate returns to the Initial Interest Rate pursuant to Subsection (b) of
this Section. The Issuer shall notify the Trustee and the Holders of such
Senior Notes promptly when the interest rate on such Senior Notes returns to the
Initial Interest Rate pursuant to Subsection (b) of this Section. Failure of
the Issuer or the Trustee to give, or failure of a Holder to receive, such
notices shall not in any event affect the validity of the proceedings of the
adjustment of the interest to be borne by such Senior Notes effective on the
Reset Date of the Issuer's obligations hereunder.

ARTICLE TWELVE

GUARANTY

SECTION 1201. GUARANTY.

The Company hereby unconditionally guarantees (the "Guaranty") to each
Holder and the Trustee on behalf of the Holders that: (a) the Issuer will
promptly and punctually perform and observe each and every agreement, covenant
and condition on the part of the Issuer to be performed or observed in this
Indenture or the Senior Notes, (b) all sums stated in this Indenture and the
Senior Notes to be payable and all other amounts payable pursuant to this
Indenture and the Senior Notes, including, without limitation, the principal of,
the interest (and Defaulted Interest) and any premium on, the Notes, and any
Additional Amounts, will be promptly paid in full when due in accordance with
the provisions thereof, whether at maturity, or as a prepayment or by
acceleration or otherwise, all at the time and place and in the amount and
manner prescribed in, and otherwise in accordance with, this Indenture and the
Senior Notes and (c) the Issuer will promptly satisfy and discharge all other
obligations, indebtedness or liabilities now or hereafter incurred by it to the
Holders and the Trustee on behalf of the Holders pursuant to any waiver,
modification, amendment or change of any provision of this Indenture or the
Senior Notes in accordance with the terms of the applicable waiver,
modification, amendment or change, and the Guaranty also applies to amounts
payable by the Issuer to the Trustee under this Indenture.

SECTION 1202. OBLIGATIONS OF THE COMPANY UNCONDITIONAL.

(a) The Guaranty is an unconditional and absolute guaranty of payment
and not a guaranty of collection, and if for any reason any duty, agreement or
obligation of the Issuer contained in this Indenture or the Senior Notes shall
not be performed or observed by the Issuer as provided therein, or if any amount
payable under or in connection with this Indenture or the Senior Notes shall not
be paid in full when the same becomes due and payable, the guarantor undertakes
to perform or cause to be performed promptly each of such duties, agreements and
obligations and to pay forthwith each such amount to the person entitled to
receive the same, regardless of any defense or set-off or counterclaim which the
Issuer or any other person may have or assert and regardless of whether or not
the Trustee or any Holder shall have instituted any

<PAGE>

suit, action or proceeding or exhausted its remedies or taken any steps to
enforce any rights against the Issuer or any other person to compel any such
performance or observance or to collect all or part of any such amount, either
pursuant to the provisions of this Indenture or the Senior Notes or at law or in
equity, and regardless of any other condition or contingency.

(b) The Company hereby unconditionally: (i) waives any requirement
that, in the event of any Event of Default, the Issuer, the Trustee or the
Holders first make demand upon, or seek to enforce remedies against, the Issuer
or any other person before demanding payment under or seeking to enforce this
guaranty; (ii) covenants that this Guaranty will not be discharged except by
complete performance of all obligations contained in this Indenture and the
Senior Notes; (iii) agrees that this Guaranty shall remain in full force and
effect without regard to, and shall not be affected or impaired, without
limitation, by, any invalidity, irregularity or unenforceability in whole or in
part of this Indenture or the Senior Note or any limitation on the liability of
the Issuer thereunder, or any impossibility or illegality of performance on the
part of the Issuer under this Indenture or the Senior Notes or any limitation on
the method or terms of payment thereunder which may now or hereafter be caused
or imposed in any manner whatsoever; and (iv) waives diligence, presentment and
protest with respect to, and, except for any notices specifically required to be
delivered to the Company under this Indenture, any notice of Default or Events
of Default in the payment of any amount at any time payable by the Issuer under
or in connection with, the Indenture or the Senior Notes. The Company
acknowledges its own responsibility to keep itself informed of the financial
condition of the Issuer, and of all other circumstances bearing upon the risk of
nonpayment of such obligations or any part thereof, that diligent inquiry would
reveal. The Company agrees that neither the Trustee nor any Holder shall have
any duty to advise the Company of information regarding such conditions or any
such circumstance.

(c) The obligations, covenants, agreements and duties of the Company
under this Guaranty shall not be released, affected or impaired by any
assignment or transfer, in whole or in part, of this Indenture or the Senior
Notes, even if made without notice to or the consent of the Company, or any
waiver by the Trustee or any Holder, of the performance or observance by the
Issuer or the Company of any of the agreements, covenants, terms or conditions
contained in this Indenture or the Senior Notes, or any indulgence in or the
extension of the time for payment by the Issuer or the Company of any amounts
payable under or in connection with this Indenture or the Senior Notes or of the
time for performance by the Issuer or the guarantor of any other obligations
under or arising out of this Indenture or the Senior Notes or the extension or
renewal thereof, or the modification or amendment (whether material or
otherwise) of any duty, agreement or obligation of the Issuer or the Company set
forth in this Indenture or the Senior Notes, or the voluntary or involuntary
liquidation, administration, sale or other disposition of all or substantially
all of the assets of the Issuer or the Company, or any receivership, insolvency,
bankruptcy, reorganization, or other similar proceeding, affecting the Issuer or
the Company or any assets of the Issuer or the Company, or the release of any
property from any security for the Senior Notes, or the impairment of any such
property or security, or the release or discharge of the Issuer or the Company
from the performance or observance of any agreement, covenant, term or condition
contained in this Indenture or the Senior Notes by operation of law, or the m

<PAGE>

other circumstances bearing upon the risk of nonpayment of such obligations or
any part thereof, that diligent inquiry would reveal. The Company agrees that
neitd instrument is such corporate seal, that it was so affixed by authority of
the Board of Directors of said corporation; and that he signed his name thereto
by like authority.

- -------------------------
My commission expires:

<PAGE>

SEVERANCE AGREEMENT

THIS AGREEMENT, dated July 22, 1996, is made by and between Stone Container
Corporation, a Delaware corporation (the "Company"), and X (the "Executive").

WHEREAS, the Company considers it essential to the best interests of its
stockholders to foster the continued employment of key management personnel; and

WHEREAS, the Board recognizes that, as is the case with many publicly held
corporations, the possibility of a Change in Control exists and that such
possibility, and the uncertainty and questions which it may raise among
management, may result in the departure or distraction of management personnel
to the detriment of the Company and its stockholders; and

WHEREAS, the Board has determined that appropriate steps should be taken to
reinforce and encourage the continued attention and dedication of members of the
Company's management, including the Executive, to their assigned duties without
distraction in the face of potentially disturbing circumstances arising from the
possibility of a Change in Control;

NOW, THEREFORE, in consideration of the premises and the mutual covenants
herein contained, the Company and the Executive hereby agree as follows:

1. DEFINED TERMS. The definitions of capitalized terms used in this
Agreement are provided in the last Section hereof.

2. TERM OF AGREEMENT. The Term of this Agreement shall commence on the
date hereof and shall continue in effect through December 31, 1998;
PROVIDED, HOWEVER, that commencing on January 1, 1998 and each January 1
thereafter, the Term shall automatically be extended for one additional
year unless a Change in Control shall have occurred prior to such
January 1 or, not later than September 30 of the preceding year, the
Company or the Executive shall have given notice not to extend this
Agreement; and FURTHER PROVIDED, HOWEVER, that if a Change in Control
shall have occurred during the Term, the Term shall be extended for a
period of twenty-four (24) months beyond the month in which such Change
in Control occurred.

<PAGE>

3. COMPANY'S COVENANTS SUMMARIZED. In order to induce the Executive to
remain in the employ of the Company and in consideration of the
Executive's covenants set forth in Section 4 hereof, the Company agrees,
under the conditions described herein, to pay the Executive the
Severance Payments and the other payments and benefits described herein.
Except as provided in the first sentence of Section 6.2(A) hereof and
Section 9.1 hereof, no amount or benefit shall be payable under this
Agreement unless there shall have been (or, under the terms of the
second sentence of Section 6.1 hereof, there shall be deemed to have
been) a termination of the Executive's employment with the Company
following a Change in Control and during the Term. This Agreement shall
not be construed as creating an express or implied contract of
employment and, except as otherwise agreed in writing between the
Executive and the Company, the Executive shall not have any right to be
retained in the employ of the Company.

4. THE EXECUTIVE'S COVENANTS. The Executive agrees that, subject to the
terms and conditions of this Agreement, in the event of a Potential
Change in Control during the Term, the Executive will remain in the
employ of the Company until the earliest of (i) a date which is six (6)
months from the date of such Potential Change of Control, (ii) the date
of a Change in Control, (iii) the date of termination by the Executive
of the Executive's employment for Good Reason or by reason of death,
Disability or Retirement, or (iv) the termination by the Company of the
Executive's employment for any reason.

5. COMPENSATION OTHER THAN SEVERANCE PAYMENTS.

5.1 Following a Change in Control and during the Term, during any period
that the Executive fails to perform the Executive's full-time duties
with the Company as a result of incapacity due to physical or mental
illness, the Company shall pay the Executive's full salary to the
Executive at the rate in effect at the commencement of any such period,
together with all compensation and benefits payable to the Executive
under the terms of any compensation or benefit plan, program or
arrangement

2
<PAGE>

maintained by the Company during such period, until the Executive's
employment is terminated by the Company for Disability.

5.2 If the Executive's employment shall be terminated for any reason
following a Change in Control and during the Term, the Company shall pay
the Executive's full salary to the Executive through the Date of
Termination at the rate in effect immediately prior to the Change in
Control or, if greater, at the rate in effect at the time the Notice of
Termination is given, together with all compensation and benefits
payable to the Executive through the Date of Termination under the terms
of the Company's compensation and benefit plans, programs or
arrangements.

5.3 If the Executive's employment shall be terminated for any reason
following a Change in Control and during the Term, the Company shall pay
to the Executive the Executive's normal post-termination compensation
and benefits as such payments become due. Such post-termination
compensation and benefits shall be determined under, and paid in
accordance with, the Company's retirement, insurance and other
compensation or benefit plans, programs and arrangements as in effect
immediately prior to the Change in Control or, to the extent more
favorable to the Executive, as in effect immediately prior to the Date
of Termination.

6. SEVERANCE PAYMENTS.

6.1 If the Executive's employment terminates following a Change in
Control and during the Term, other than (A) by the Company for Cause,
(B) by reason of death or Disability, or (C) by the Executive without
Good Reason, then the Company shall pay the Executive the payments
described in this Section 6.1 (the "Severance Payments") and Section
6.2, in addition to any payments and benefits to which the Executive is
entitled under Section 5 hereof. For purposes of this Agreement, the
Executive's employment shall be deemed to have been terminated following
a Change in Control by the Company without Cause or by the Executive
with Good Reason, if (i) the Executive's employment is terminated by the
Company without Cause prior to a

3
<PAGE>

Change in Control which actually occurs during the term of this
Agreement and such termination was at the request or direction of a
Person who has entered into an agreement with the Company the
consummation of which would constitute a Change in Control, (ii) the
Executive terminates his employment with Good Reason prior to a Change
in Control which actually occurs during the term of this Agreement and
the circumstance or event which constitutes Good Reason occurs at the
request or direction of such Person, or (iii) the Executive's
employment is terminated by the Company without Cause prior to a
Change in Control and the Executive reasonably demonstrates that such
termination is otherwise in connection with or in anticipation of a
Change in Control which actually occurs during the term of this
Agreement. For purposes of any determination regarding the
applicability of the immediately preceding sentence, any position
taken by the Executive shall be presumed to be correct unless the
Company establishes to the Committee by clear and convincing evidence
that such position is not correct.

(A) In lieu of any further salary payments to the Executive for
periods subsequent to the Date of Termination and in lieu of any
severance benefit otherwise payable to the Executive, the Company
shall pay to the Executive a lump sum severance payment, in cash,
equal to three times the sum of (i) the higher of the Executive's
annual base salary in effect immediately prior to the occurrence of
the event or circumstance upon which the Notice of Termination is
based and the Executive's annual base salary in effect immediately
prior to the Change in Control, and (ii) the product of (a) the
amount determined under clause (i) above and (b) the higher of the
average percentage of base salary paid to or earned by the Executive
pursuant to any annual bonus or incentive plan maintained by the
Company in respect of the three years immediately preceding that in
which the Date of Termination occurs or the average percentage of
base salary paid to or

4
<PAGE>

earned by the Executive in respect of the three years immediately
preceding that in which the Change in Control occurs.

5
<PAGE>

periods under any such plan, calculated as to each such award by
multiplying the award that the Executive would have earned on the
last day of the performance award period, assuming the
achievement, at the target level, of the individual and corporate
performance goals established with respect to such award, by the
fraction obtained by dividing the number of full months and any
fractional portion of a month during such performance award period
through the Date of Termination by the total number of months
contained in such performance award period.

(D) In addition to the retirement benefits to which the Executive is
entitled under each Pension Plan, the Company shall pay the
Executive a lump sum amount, in cash, equal to the excess of (i) the
actuarial equivalent of the aggregate retirement pension (taking
into account any early retirement subsidies associated therewith and
determined as a straight life annuity commencing at the date (but in
no event earlier than the third anniversary of the Date of
Termination) as of which the actuarial equivalent of such annuity is
greatest) which the Executive would have accrued under the terms of
all Pension Plans (without regard to any amendment to any Pension
Plan made subsequent to a Change in Control and on or prior to the
Date of Termination, which amendment adversely affects in any manner
the computation of retirement benefits thereunder), determined as if
the Executive were fully vested thereunder and had accumulated
(after the Date of Termination) thirty-six (36) additional months of
service credit thereunder and had been credited under each Pension
Plan during such period with compensation at the higher of (i) the
Executive's compensation (as defined in such Pension Plan) during
the twelve (12) months immediately preceding the Date of Termination
or (ii) the Executive's compensation (as defined in such Pension
Plan) during the twelve (12) months immediately preceding the Change
in Control, over (ii) the actuarial equivalent of the aggregate
retirement pension

6
<PAGE>

(taking into account any early retirement subsidies associated
therewith and determined as a straight life annuity commencing at
the date (but in no event earlier than the Date of Termination) as
of which the actuarial equivalent of such annuity is greatest)
which the Executive had accrued pursuant to the provisions of the
Pension Plans as of the Date of Termination. For purposes of this
Section 6.1(D), "actuarial equivalent" shall be determined using
the same assumptions utilized under the Stone Container
Corporation Salaried Employees Retirement Plan immediately prior
to the Date of Termination.

(E) If the Executive would have become entitled to benefits under the
Company's post-retirement health care or life insurance plans, as in
effect immediately prior to the Change in Control or the Date of
Termination (whichever is more favorable to the Executive), had the
Executive's employment terminated at any time during the period of
thirty-six (36) months after the Date of Termination, the Company
shall provide such post-retirement health care or life insurance
benefits to the Executive and the Executive's dependents commencing
on the later of (i) the date on which such coverage would have first
become available and (ii) the date on which benefits described in
subsection (B) of this Section 6.1 terminate.

6.2 (A) Whether or not the Executive becomes entitled to the Severance
Payments, if any of the payments or benefits received or
to be received by the Executive in connection with a Change in
Control or the Executive's termination of employment (whether
pursuant to the terms of this Agreement or any other plan,
arrangement or agreement with the Company, any Person whose actions
result in a Change in Control or any Person affiliated with the
Company or such Person) (such payments or benefits, excluding the
Gross-Up Payment, being hereinafter referred to as the "Total
Payments") will be subject to the Excise Tax, the Company shall pay
to the Executive an additional amount (the

7
<PAGE>

"Gross-Up Payment") such that the net amount retained by the
Executive, after deduction of any Excise Tax on the Total Payments
and any federal, state and local income and employment taxes and
Excise Tax upon the Gross-Up payment, shall be equal to the Total
Payments.

(B) For purposes of determining whether any of the Total Payments
will be subject to the Excise Tax and the amount of such Excise Tax,
(i) all of the Total Payments shall be treated as "parachute
payments" (within the meaning of section 280G(b)(2) of the Code)
unless, in the opinion of tax counsel ("Tax Counsel") reasonably
acceptable to the Executive and selected by the accounting firm
which was, immediately prior to the Change in Control, the Company's
independent auditor (the "Auditor"), such payments or benefits (in
whole or in part) do not constitute parachute payments, including by
reason of section 280G(b)(4)(A) of the Code, (ii) all "excess
parachute payments" within the meaning of section 280G(b)(l) of the
Code shall be treated as subject to the Excise Tax unless, in the
opinion of Tax Counsel, such excess parachute payments (in whole or
in part) represent reasonable compensation for services actually
rendered (within the meaning of section 280G(b)(4)(B) of the Code)
in excess of the Base Amount allocable to such reasonable
compensation, or are otherwise not subject to the Excise Tax, and
(iii) the value of any noncash benefits or any deferred payment or
benefit shall be determined by the Auditor in accordance with the
principles of sections 280G(d)(3) and (4) of the Code. For purposes
of determining the amount of the Gross-Up Payment, the Executive
shall be deemed to pay federal income tax at the highest marginal
rate of federal income taxation in the calendar year in which the
Gross-Up Payment is to be made and state and local income taxes at
the highest marginal rate of taxation in the state and locality of
the Executive's residence or, if higher, in the state and locality
of the Executive's principal place of employment, on the Date

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<PAGE>

of Termination (or if there is no Date of Termination, then the
date on which the Gross-Up Payment is calculated for purposes of
this Section 6.2), net of the maximum reduction in federal income
taxes which could be obtained from deduction of such state and
local taxes.

(C) In the event that the Excise Tax is finally determined to be less
than the amount taken into account hereunder in calculating the
Gross-Up Payment, the Executive shall repay to the Company, at the
time that the amount of such reduction in Excise Tax is finally
determined, the portion of the Gross-Up Payment attributable to such
reduction (plus that portion of the Gross-Up Payment attributable to
the Excise Tax and federal, state and local income and employment
taxes imposed on the Gross-Up Payment being repaid by the Executive
to the extent that such repayment results in a reduction in Excise
Tax and/or a federal, state or local income or employment tax
deduction) plus interest on the amount of such repayment at 120% of
the rate provided in section 1274(b)(2)(B) of the Code. In the
event that the Excise Tax is determined to exceed the amount taken
into account hereunder in calculating the Gross-Up Payment
(including by reason of any payment the existence or amount of which
cannot be determined at the time of the Gross-Up Payment), the
Company shall make an additional Gross-Up Payment in respect of such
excess (plus any interest, penalties or additions payable by the
Executive with respect to such excess) at the time that the amount
of such excess is finally determined. The Executive and the Company
shall each reasonably cooperate with the other in connection with
any administrative or judicial proceedings concerning the existence
or amount of liability for Excise Tax with respect to the Total
Payments.

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6.3 The payments provided in subsections (A), (C) and (D) of Section 6.1
hereof and in Section 6.2 hereof shall be made not later than the fifth
day following the Date of Termination; PROVIDED, HOWEVER, that if the
amounts of such payments cannot be finally determined on or before such
day, the Company shall pay to the Executive on such day an estimate, as
determined in good faith by the Executive or, in the case of payments
under Section 6.2 hereof, in accordance with Section 6.2 hereof, of the
minimum amount of such payments to which the Executive is clearly
entitled and shall pay the remainder of such payments (together with
interest on the unpaid remainder (or on all such payments to the extent
the Company fails to make such payments when due) at 120% of the rate
provided in section 1274(b)(2)(B) of the Code) as soon as the amount
thereof can be determined but in no event later than the thirtieth
(30th) day after the Date of Termination. In the event that the amount
of the estimated payments exceeds the amount subsequently determined to
have been due, such excess shall constitute a loan by the Company to the
Executive, payable on the fifth (5th) business day after demand by the
Company (together with interest at 120% of the rate provided in section
1274(b)(2)(B) of the Code). At the time that payments are made under
this Section, the Company shall provide the Executive with a written
statement setting forth the manner in which such payments were
calculated and the basis for such calculations including, without
limitation, any opinions or other advice the Company has received from
Tax Counsel, the Auditor or other advisors or consultants (and any such
opinions or advice which are in writing shall be attached to the
statement).

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Code to any payment or benefit provided hereunder. Such payments
shall be made within five (5) business days after delivery of the
Executive's written requests for payment accompanied with such
evidence of fees and expenses incurred as the Company reasonably may
require.

7. TERMINATION PROCEDURES AND COMPENSATION DURING DISPUTE.

7.1 NOTICE OF TERMINATION. After a Change in Control and during the
Term, any purported termination of the Executive's employment (other
than by reason of death) shall be communicated by written Notice of
Termination from one party hereto to the other party hereto in
accordance with Section 10 hereof. For purposes of this Agreement, a
"Notice of Termination" shall mean a notice which shall indicate the
specific termination provision in this Agreement relied upon and shall
set forth in reasonable detail the facts and circumstances claimed to
provide a basis for termination of the Executive's employment under the
provision so indicated. Further, a Notice of Termination for Cause is
required to include a copy of a resolution duly adopted by the
affirmative vote of not less than three-quarters (3/4) of the entire
membership of the Board at a meeting of the Board which was called and
held for the purpose of considering such termination (after reasonable
notice to the Executive and an opportunity for the Executive, together
with the Executive's counsel, to be heard before the Board) finding
that, in the good faith opinion of the Board, the Executive was guilty
of conduct set forth in clause (i) or (ii) of the definition of Cause
herein, and specifying the particulars thereof in detail.

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reason, the date specified in the Notice of Termination (which, in the
case of a termination by the Company, shall not be less than thirty
(30) days (except in the case of a termination for Cause) and, in the
case of a termination by the Executive, shall not be less than fifteen
(15) days nor more than sixty (60) days, respectively, from the date
such Notice of Termination is given).

7.3 DISPUTE CONCERNING TERMINATION. If within fifteen (15) days after
any Notice of Termination is given, or, if later, prior to the Date of
Termination (as determined without regard to this Section 7.3), the
party receiving such Notice of Termination notifies the other party that
a dispute exists concerning the termination, the Date of Termination
shall be extended until the earlier of (i) the date on which the Term
ends or (ii) the date on which the dispute is finally resolved, either
by mutual written agreement of the parties or by a final judgment, order
or decree of an arbitrator or a court of competent jurisdiction (which
is not appealable or with respect to which the time for appeal therefrom
has expired and no appeal has been perfected); PROVIDED, HOWEVER, that
the Date of Termination shall be extended by a notice of dispute given
by the Executive only if such notice is given in good faith and the
Executive pursues the resolution of such dispute with reasonable
diligence.

7.4 COMPENSATION DURING DISPUTE. If a purported termination occurs
following a Change in Control and during the Term and the Date of
Termination is extended in accordance with Section 7.3 hereof, the
Company shall continue to pay the Executive the full compensation in
effect when the notice giving rise to the dispute was given (including,
but not limited to, salary) and continue the Executive as a participant
in all compensation, benefit and insurance plans in which the Executive
was participating when the notice giving rise to the dispute was given,
until the Date of Termination, as determined in accordance with Section
7.3 hereof. Amounts paid under this Section 7.4 are in addition to all
other amounts due under this Agreement (other than those

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due under Section 5.2 hereof) and shall not be offset against or
reduce any other amounts due under this Agreement.

8. NO MITIGATION. The Company agrees that, if the Executive's employment
with the Company terminates during the Term, the Executive is not
required to seek other employment or to attempt in any way to reduce any
amounts payable to the Executive by the Company pursuant to Section 6
hereof or Section 7.4 hereof. Further, except as specifically provided
in Section 6.1(B) and (E) hereof, the amount of any payment or benefit
provided for in this Agreement shall not be reduced by any compensation
earned by the Executive as the result of employment by another employer,
by retirement benefits, by offset against any amount claimed to be owed
by the Executive to the Company, or otherwise.

9. SUCCESSORS; BINDING AGREEMENT.

9.1 In addition to any obligations imposed by law upon any successor to
the Company, the Company will require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company to
expressly assume and agree to perform this Agreement in the same manner
and to the same extent that the Company would be required to perform it
if no such succession had taken place. Failure of the Company to obtain
such assumption and agreement prior to the effectiveness of any such
succession shall be a breach of this Agreement and shall entitle the
Executive to compensation from the Company in the same amount and on the
same terms as the Executive would be entitled to hereunder if the
Executive were to terminate the Executive's employment for Good Reason
after a Change in Control, except that, for purposes of implementing the
foregoing, the date on which any such succession becomes effective shall
be deemed the Date of Termination.

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9.2 This Agreement shall inure to the benefit of and be enforceable by
the Executive's personal or legal representatives, executors,
administrators, successors, heirs, distributees, devisees and legatees.
If the Executive shall die while any amount would still be payable to
the Executive hereunder (other than amounts which, by their terms,
terminate upon the death of the Executive) if the Executive had
continued to live, all such amounts, unless otherwise provided herein,
shall be paid in accordance with the terms of this Agreement to the
executors, personal representatives or administrators of the Executive's
estate.

10. NOTICES. For the purpose of this Agreement, notices and all other
communications provided for in the Agreement shall be in writing and
shall be deemed to have been duly given when delivered or mailed by
United States registered mail, return receipt requested, postage
prepaid, addressed, if to the Executive, to the address inserted below
the Executive's signature on the final page hereof and, if to the
Company, to the address set forth below, or to such other address as
either party may have furnished to the other in writing in accordance
herewith, except that notice of change of address shall be effective
only upon actual receipt:

To the Company:

Stone Container Corporation
150 N. Michigan Avenue
Chicago, Illinois 60601
Attention: General Counsel

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dissimilar provisions or conditions at the same or at any prior or
subsequent time. This Agreement supersedes any other agreements or
representations, oral or otherwise, express or implied, with respect
to the subject matter hereof which have been made by either party.
The validity, interpretation, construction and performance of this
Agreement shall be governed by the laws of the State of Illinois. All
references to sections of the Exchange Act or the Code shall be deemed
also to refer to any successor provisions to such sections. Any
payments provided for hereunder shall be paid net of any applicable
withholding required under federal, state or local law and any
additional withholding to which the Executive has agreed. The
obligations of the Company and the Executive under this Agreement
which by their nature may require either partial or total performance
after the expiration of the Term (including, without limitation, those
under Sections 6 and 7 hereof) shall survive such expiration.

12. VALIDITY. The invalidity or unenforceability of any provision of
this Agreement shall not affect the validity or enforceability of any
other provision of this Agreement, which shall remain in full force and
effect.

13. COUNTERPARTS. This Agreement may be executed in several
counterparts, each of which shall be deemed to be an original but all of
which together will constitute one and the same instrument.

14. SETTLEMENT OF DISPUTES; ARBITRATION.
(a) All claims by the Executive for benefits under this Agreement
shall be directed to and determined by the Committee and shall be in
writing. Any denial by the Committee of a claim for benefits under
this Agreement shall be delivered to the Executive in writing and
shall set forth the specific reasons for the denial and the specific
provisions of this Agreement relied upon. The Committee shall
afford a reasonable opportunity to the Executive for a review of the
decision denying a claim and shall further allow the Executive to
appeal to the

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Committee a decision of the Committee within sixty (60) days after
notification by the Committee that the Executive's claim has been
denied.

(b) Any further dispute or controversy arising under or in connection
with this Agreement shall be settled exclusively by arbitration in
Chicago, Illinois in accordance with the rules of the American
Arbitration Association then in effect; PROVIDED, HOWEVER, that the
evidentiary standards set forth in this Agreement shall apply.
Judgment may be entered on the arbitrator's award in any court
having jurisdiction. Notwithstanding any provision of this
Agreement to the contrary, the Executive shall be entitled to seek
specific performance of the Executive's right to be paid until the
Date of Termination during the pendency of any dispute or
controversy arising under or in connection with this Agreement.

1. DEFINITIONS. For purposes of this Agreement, the following terms shall
have the meanings indicated below:

(A) "Affiliate" shall have the meaning set forth in Rule 12b-2
promulgated under Section 12 of the Exchange Act.

(B) "Auditor" shall have the meaning set forth in Section 6.2 hereof.

(D) "Beneficial Owner" shall have the meaning set forth in Rule 13d-3
under the Exchange Act.

(E) "Board" shall mean the Board of Directors of the Company.

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for Good Reason by the Executive pursuant to Section 7.1 hereof)
after a written demand for substantial performance is delivered to
the Executive by the Board, which demand specifically identifies
the manner in which the Board believes that the Executive has not
substantially performed the Executive's duties, or (ii) the
willful engaging by the Executive in conduct which is demonstrably
and materially injurious to the Company or its subsidiaries,
monetarily or otherwise. For purposes of clauses (i) and (ii) of
this definition, (x) no act, or failure to act, on the Executive's
part shall be deemed "willful" unless done, or omitted to be done,
by the Executive not in good faith and without reasonable belief
that the Executive's act, or failure to act, was in the best
interest of the Company and (y) in the event of a dispute
concerning the application of this provision, no claim by the
Company that Cause exists shall be given effect unless the Company
establishes to the Committee by clear and convincing evidence that
Cause exists.

(G) A "Change in Control" shall be deemed to have occurred if the
event set forth in any one of the following paragraphs shall have
occurred:

(I) any Person is or becomes the Beneficial Owner, directly or
indirectly, of securities of the Company (not including in the
securities beneficially owned by such Person any securities
acquired directly from the Company or its affiliates)
representing 20% or more of the combined voting power of the
Company's then outstanding securities, excluding any Person who
becomes such a Beneficial Owner in connection with a transaction
described in clause (i) of paragraph (III) below; or

17
<PAGE>

election contest, including but not limited to a consent
solicitation, relating to the election of directors of the
Company) whose appointment or election by the Board or
nomination for election by the Company's stockholders was
approved or recommended by a vote of at least two-thirds (2/3)
of the directors then still in office who either were
directors on the date hereof or whose appointment, election or
nomination for election was previously so approved or
recommended; or

(III) there is consummated a merger or consolidation of the
Company or any direct or indirect subsidiary of the Company with
any other corporation, other than (i) a merger or consolidation
which would result in the voting securities of the Company
outstanding immediately prior to such merger or consolidation
continuing to represent (either by remaining outstanding or by
being converted into voting securities of the surviving entity or
any parent thereof), in combination with the ownership of any
trustee or other fiduciary holding securities under an employee
benefit plan of the Company or any subsidiary of the Company, at
least 60% of the combined voting power of the securities of the
Company or such surviving entity or any parent thereof
outstanding immediately after such merger or consolidation, or
(ii) a merger or consolidation effected to implement a
recapitalization of the Company (or similar transaction) in which
no Person is or becomes the Beneficial Owner, directly or
indirectly, of securities of the Company (not including in the
securities Beneficially Owned by such Person any securities
acquired directly from the Company or its Affiliates)
representing 20% or more of the combined voting power of the
Company's then outstanding securities; or

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<PAGE>

(IV) the stockholders of the Company approve a plan of complete
liquidation or dissolution of the Company or there is consummated
an agreement for the sale or disposition by the Company of all or
substantially all of the Company's assets, other than a sale or
disposition by the Company of all or substantially all of the
Company's assets to an entity, at least 60% of the combined
voting power of the voting securities of which is owned by
stockholders of the Company in substantially the same proportions
as their ownership of the Company immediately prior to such sale.

Notwithstanding the foregoing, a "Change in Control" shall not be
deemed to have occurred by virtue of the consummation of any
transaction or series of integrated transactions immediately
following which the record holders of the common stock of the
Company immediately prior to such transaction or series of
transactions continue to have substantially the same proportionate
ownership in an entity which owns all or substantially all of the
assets of the Company immediately following such transaction or
series of transactions.

(H) "Code" shall mean the Internal Revenue Code of 1986, as amended
from time to time.

(I) "Committee" shall mean (i) the individuals (not fewer than three
in number) who, on the date six months before a Change in Control,
constitute the Compensation Committee of the Board, plus (ii) in the
event that fewer than three individuals are available from the group
specified in clause (i) above for any reason, such individuals as
may be appointed by the individual or individuals so available
(including for this purpose any individual or individuals previously
so appointed under this clause (ii)).

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(J) "Company" shall mean Stone Container Corporation and, except in
determining under Section 15(G) hereof whether or not any Change in
Control of the Company has occurred, shall include any successor to
its business and/or assets which assumes and agrees to perform this
Agreement by operation of law, or otherwise.

(K) "Date of Termination" shall have the meaning set forth in Section
7.2 hereof.

(L) "Disability" shall be deemed the reason for the termination by
the Company of the Executive's employment, if, as a result of the
Executive's incapacity due to physical or mental illness, the
Executive shall have been absent from the full-time performance of
the Executive's duties with the Company for a period of six (6)
consecutive months, the Company shall have given the Executive a
Notice of Termination for Disability, and, within thirty (30) days
after such Notice of Termination is given, the Executive shall not
have returned to the full-time performance of the Executive's
duties.

(M) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended from time to time.

(N) "Excise Tax" shall mean any excise tax imposed under section 4999
of the Code.

(O) "Executive" shall mean the individual named in the first
paragraph of this Agreement.

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<PAGE>

unless, in the case of any act or failure to act described in
paragraph (I), (V), (VI) or (VII) below, such act or failure to
act is corrected prior to the Date of Termination specified in the
Notice of Termination given in respect thereof:

(I) the assignment to the Executive of any duties inconsistent
in any material respect with the Executive's positions, duties,
responsibilities or status with the Company immediately prior to
the Change in Control, a change in the Executive's reporting
responsibilities, titles or offices as in effect immediately
prior to the Change in Control, or any failure to re-elect the
Executive to any office, title or position with the Company held
by the Executive immediately prior to the Change in Control;

(II) a reduction by the Company in the Executive's annual base
salary as in effect on the date hereof or as the same may be
increased from time to time except for across-the-board salary
reductions similarly affecting all senior executives of the
Company and all senior executives of any Person in control of the
Company;

(III) the relocation of the Executive's principal place of
employment to a location more than 50 miles from the Executive's
principal place of employment immediately prior to the Change in
Control or the Company's requiring the Executive to be based
anywhere other than such principal place of employment (or
permitted relocation thereof) except for required travel on the
Company's business to an extent substantially consistent with the
Executive's present business travel obligations;

(IV) the failure by the Company to pay to the Executive any
portion of the Executive's current compensation, or to pay to the
Executive any portion of an installment of deferred compensation
under any deferred compensation program of the Company, within
seven (7) days of the date such compensation is due;

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<PAGE>

(V) the failure by the Company to continue in effect any
compensation plan in which the Executive participates immediately
prior to the Change in Control which is material to the
Executive's total compensation, including but not limited to any
such plans relating to stock options, restricted stock, stock
appreciation rights, incentive compensation, or annual or long
term bonus, unless an equitable arrangement (embodied in an
ongoing substitute or alternative plan) has been made with
respect to such plan, or the failure by the Company to continue
the Executive's participation therein (or in such substitute or
alternative plan) on a basis not materially less favorable, both
in terms of the amount or timing of payment of benefits provided
and the level of the Executive's participation relative to other
participants, as existed immediately prior to the Change in
Control;

(VI) the failure by the Company to continue to provide the
Executive with benefits substantially similar to those enjoyed by
the Executive under any of the Company's pension, savings, life
insurance, medical, health and accident, or disability plans in
which the Executive was participating immediately prior to the
Change in Control, the taking of any action by the Company which
would directly or indirectly materially reduce any of such
benefits or deprive the Executive of any material fringe benefit
enjoyed by the Executive at the time of the Change in Control, or
the failure by the Company to provide the Executive with the
number of paid vacation days to which the Executive is entitled
on the basis of years of service with the Company in accordance
with the Company's normal vacation policy in effect at the time
of the Change in Control; or

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<PAGE>

The Executive's right to terminate the Executive's employment for
Good Reason shall not be affected by the Executive's incapacity due
to physical or mental illness. The Executive's continued employment
shall not constitute consent to, or a waiver of rights with respect
to, any act or failure to act constituting Good Reason hereunder.

For purposes of any determination regarding the existence of Good
Reason, any claim by the Executive that Good Reason exists shall be
presumed to be correct unless the Company establishes to the
Committee by clear and convincing evidence that Good Reason does not
exist.

(Q) "Gross-Up Payment" shall have the meaning set forth in Section
6.2 hereof.

(R) "Notice of Termination" shall have the meaning set forth in
Section 7.1 hereof.

(S) "Pension Plan" shall mean any tax-qualified, supplemental or
excess benefit pension plan maintained by the Company and any other
plan or agreement entered into between the Executive and the Company
which is designed to provide the Executive with supplemental
retirement benefits.

(T) "Person" shall have the meaning given in Section 3(a)(9) of the
Exchange Act, as modified and used in Sections 13(d) and 14(d)
thereof, except that such term shall not include (i) the Company or
any of its subsidiaries, (ii) a trustee or other fiduciary holding
securities under an employee benefit plan of the Company or any of
its Affiliates, (iii) an underwriter temporarily holding securities
pursuant to an offering of such securities, (iv) a corporation
owned, directly or indirectly, by the stockholders of the Company in
substantially the same proportions as their ownership of stock of
the Company or (v) any descendant of Joseph Stone,

23
<PAGE>

the spouse of any such descendant, the estate of any such
descendant or spouse, any trust or any other arrangement for the
benefit of any such descendant or any such spouse or any
charitable organization established by any such descendant or any
such spouse.

(U) "Potential Change in Control" shall be deemed to have occurred if
the event set forth in any one of the following paragraphs shall
have occurred:

(I) the Company enters into an agreement, the consummation of
which would result in the occurrence of a Change in Control;

(II) the Company or any Person publicly announces an intention to
take or to consider taking actions which, if consummated, would
constitute a Change in Control;

(III) any Person becomes the Beneficial Owner, directly or
indirectly, of securities of the Company representing 10% or more
of either the then outstanding shares of common stock of the
Company or the combined voting power of the Company's then
outstanding securities (not including in the securities
beneficially owned by such Person any securities acquired
directly from the Company or its affiliates); or

(IV) the Board adopts a resolution to the effect that, for
purposes of this Agreement, a Potential Change in Control has
occurred.

(V) "Retirement" shall be deemed the reason for the termination by
the Company or the Executive of the Executive's employment if such
employment is terminated in accordance with the Company's retirement
policy, including early retirement, generally applicable to its
salaried employees, as in effect immediately prior to the Change in
Control, or in accordance with any retirement arrangement
established with the Executive's express written consent with
respect to the Executive.

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(W) "Severance Payments" shall mean those payments described in
Section 6.1 hereof.

(X) "Tax Counsel" shall have the meaning set forth in Section 6.2
hereof.

(Y) "Term" shall mean the period of time described in Section 2
hereof (including any extension, continuation or termination
described therein).

(Z) "Total Payments" shall mean those payments so described in
Section 6.2 hereof.

STONE CONTAINER CORPORATION

By: _______________________________________________________
Name: Thomas P. Cutilletta
Title: Senior Vice President,
Administration & Corporate Controller

By: _______________________________________________________
[Signature]

Name & Address:
_________________________________________________

_________________________________________________

_________________________________________________
(Please print)

<PAGE>

VALLEY 3X
SEVERANCE AGREEMENT

THIS AGREEMENT, dated July 22, 1996, is made by and between Stone
Container Corporation, a Delaware corporation (the "Company"), and X (the
"Executive").

WHEREAS, the Company considers it essential to the best interests of its
stockholders to foster the continued employment of key management personnel;
and

WHEREAS, the Board recognizes that, as is the case with many publicly held
corporations, the possibility of a Change in Control exists and that such
possibility, and the uncertainty and questions which it may raise among
management, may result in the departure or distraction of management
personnel to the detriment of the Company and its stockholders; and

WHEREAS, the Board has determined that appropriate steps should be taken
to reinforce and encourage the continued attention and dedication of members
of the Company's management, including the Executive, to their assigned
duties without distraction in the face of potentially disturbing
circumstances arising from the possibility of a Change in Control;

NOW, THEREFORE, in consideration of the premises and the mutual covenants
herein contained, the Company and the Executive hereby agree as follows:

1. DEFINED TERMS. The definitions of capitalized terms used in this
Agreement are provided in the last Section hereof.

<PAGE>

3. COMPANY'S COVENANTS SUMMARIZED. In order to induce the Executive to
remain in the employ of the Company and in consideration of the
Executive's covenants set forth in Section 4 hereof, the Company agrees,
under the conditions described herein, to pay the Executive the
Severance Payments and the other payments and benefits described herein.
Except as provided in Section 9.1 hereof, no amount or benefit shall be
payable under this Agreement unless there shall have been (or, under the
terms of the second sentence of Section 6.1 hereof, there shall be
deemed to have been) a termination of the Executive's employment with
the Company following a Change in Control and during the Term. This
Agreement shall not be construed as creating an express or implied
contract of employment and, except as otherwise agreed in writing
between the Executive and the Company, the Executive shall not have any
right to be retained in the employ of the Company.

5. COMPENSATION OTHER THAN SEVERANCE PAYMENTS.

5.1 Following a Change in Control and during the Term, during any
period that the Executive fails to perform the Executive's full-time
duties with the Company as a result of incapacity due to physical or
mental illness, the Company shall pay the Executive's full salary to
the Executive at the rate in effect at the commencement of any such
period, together with all compensation and benefits payable to the
Executive under the terms of any compensation or benefit plan, program
or arrangement maintained by the Company during such period, until the
Executive's employment is terminated by the Company for Disability.

<PAGE>

6. SEVERANCE PAYMENTS.

6.1 Subject to Section 6.2 hereof, if the Executive's employment
terminates following a Change in Control and during the Term, other
than (A) by the Company for Cause, (B) by reason of death or
Disability, or (C) by the Executive without Good Reason, then the
Company shall pay the Executive the payments described in this Section
6.1 (the "Severance Payments"), in addition to any payments and
benefits to which the Executive is entitled under Section 5 hereof.
For purposes of this Agreement, the Executive's employment shall be
deemed to have been terminated following a Change in Control by the
Company without Cause or by the Executive with Good Reason, if (i) the
Executive's employment is terminated by the Company without Cause
prior to a Change in Control which actually occurs during the term of
this Agreement and such termination was at the request or direction of
a Person who has entered into an agreement with the Company the
consummation of which would constitute a Change in Control, (ii) the
Executive terminates his employment with Good Reason prior to a Change
in Control which actually occurs during the term of this Agreement and
the circumstance or event which constitutes Good Reason occurs at the
request or direction of such Person, or (iii) the Executive's
employment is terminated by the Company without Cause prior to a
Change in Control and the Executive reasonably demonstrates that such
termination is otherwise in connection with or in anticipation of a
Change in Control which actually occurs during the term of this
Agreement. For purposes of any determination regarding the
applicability of the immediately preceding sentence, any position
taken by the Executive shall be presumed to be correct unless the
Company establishes to the Committee by clear and convincing evidence
that such position is not correct.

<PAGE>

(B) For the thirty-six (36) month period immediately following the
Date of Termination, the Company shall arrange to provide the
Executive with life, disability, accident and health insurance
benefits and Company-provided perquisites (including, but not
limited to a Company car and club membership dues), in each case
substantially similar to those which the Executive is receiving
immediately prior to the Notice of Termination (without giving
effect to any amendment to such benefits or perquisites made
subsequent to a Change in Control which amendment adversely affects
in any manner the Executive's entitlement to or the amount of such
benefits); PROVIDED, HOWEVER, that, such health insurance benefits
shall be provided through a third-party insurer. Benefits and
perquisites otherwise receivable by the Executive pursuant to this
Section 6.1(B) shall be reduced to the extent comparable benefits or
perquisites are actually received by or made available to the
Executive without cost during the thirty-six (36) month period
following the Executive's termination of employment (and any such
benefits and perquisites actually received by or made available to
the Executive shall be reported to the Company by the Executive).
If the Severance Payments shall be decreased pursuant to Section 6.2
hereof, and the Section 6.1(B) benefits or perquisites which remain
payable after the application of Section 6.2 hereof are thereafter
reduced pursuant to the immediately preceding sentence because of
the receipt or availability of comparable benefits or perquisites,
the Company shall, at the time of such reduction, pay to the
Executive the least of (a) the amount of the decrease made in the
Severance Payments pursuant to Section 6.2 hereof, (b) the amount of
the subsequent reduction in these Section 6.1(B) benefits or
perquisites, or (c) the maximum amount which can be paid to the
Executive without being, or causing any other payment to be,
nondeductible by reason of section 280G of the Code.

<PAGE>

(C) Notwithstanding any provision of any annual or long-term
incentive plan to the contrary, the Company shall pay to the
Executive a lump sum amount, in cash, equal to the sum of (i) any
incentive compensation which has been allocated or awarded to the
Executive for a completed fiscal year or other measuring period
preceding the Date of Termination under any such plan and which, as
of the Date of Termination, is contingent only upon the continued
employment of the Executive to a subsequent date or otherwise has
not been paid, and (ii) a pro rata portion to the Date of
Termination of the aggregate value of all contingent incentive
compensation awards to the Executive for all then uncompleted
periods under any such plan, calculated as to each such award by
multiplying the award that the Executive would have earned on the
last day of the performance award period, assuming the achievement,
at the target level, of the individual and corporate performance
goals established with respect to such award, by the fraction
obtained by dividing the number of full months and any fractional
portion of a month during such performance award period through the
Date of Termination by the total number of months contained in such
performance award period.

(D) In addition to the retirement benefits to which the Executive is
entitled under each Pension Plan, the Company shall pay the
Executive a lump sum amount, in cash, equal to the excess of (i)
the actuarial equivalent of the aggregate retirement pension
(taking into account any early retirement subsidies associated
therewith and determined as a straight life annuity commencing at
the date (but in no event earlier than the third anniversary of
the Date of Termination) as of which the actuarial equivalent of
such annuity is greatest) which the Executive would have accrued
under the terms of all Pension Plans (without regard to any
amendment to any Pension Plan made subsequent to a Change in
Control and on or prior to the Date of Termination, which
amendment adversely affects in any manner the computation of
retirement benefits thereunder), determined as if the Executive
were fully vested thereunder and had accumulated (after the Date
of Termination) thirty-six (36) additional months of service
credit thereunder and had been credited under each Pension Plan
during such period with compensation at the higher of (i) the

<PAGE>

Executive's compensation (as defined in such Pension Plan) during
the twelve (12) months immediately preceding the Date of
Termination or (ii) the Executive's compensation (as defined in
such Pension Plan) during the twelve (12) months immediately
preceding the Change in Control, over (ii) the actuarial
equivalent of the aggregate retirement pension (taking into
account any early retirement subsidies associated therewith and
determined as a straight life annuity commencing at the date (but
in no event earlier than the Date of Termination) as of which the
actuarial equivalent of such annuity is greatest) which the
Executive had accrued pursuant to the provisions of the Pension
Plans as of the Date of Termination. For purposes of this Section
6.1(D), "actuarial equivalent" shall be determined using the same
assumptions utilized under the Stone Container Corporation
Salaried Employees Retirement Plan immediately prior to the Date
of Termination.

<PAGE>

6.2 (A) Notwithstanding any other provisions of this Agreement, in
the event that any payment or benefit received or to be received by
the Executive in connection with a Change in Control or the
termination of the Executive's employment (whether pursuant to the
terms of this Agreement or any other plan, arrangement or agreement
with the Company, any Person whose actions result in a Change in
Control or any Person affiliated with the Company or such Person)
(all such payments and benefits, including the Severance Payments,
being hereinafter called "Total Payments") would be subject (in
whole or part), to the Excise Tax, then, after taking into account
any reduction in the Total Payments provided by reason of section
280G of the Code in such other plan, arrangement or agreement, the
cash Severance Payments shall first be reduced, and the noncash
Severance Payments shall thereafter be reduced, to the extent
necessary so that no portion of the Total Payments is subject to the
Excise Tax but only if (A) the net amount of such Total Payments, as
so reduced (and after subtracting the net amount of federal, state
and local income taxes on such reduced Total Payments) is greater
than (B) the excess of (i) the net amount of such Total Payments,
without reduction (but after subtracting the net amount of federal,
state and local income taxes on such Total Payments), over (ii) the
amount of Excise Tax to which the Executive would be subject in
respect of such unreduced Total Payments; PROVIDED, HOWEVER, that
the Executive may elect (at any time prior to the delivery of a
Notice of Termination hereunder) to have the noncash Severance
Payments reduced (or eliminated) prior to any reduction of the cash
Severance Payments.

<PAGE>

(B) For purposes of determining whether and the extent to which the
Total Payments will be subject to the Excise Tax, (i) no portion of
the Total Payments the receipt or enjoyment of which the Executive
shall have effectively waived at such time and manner so that such
portion does not constitute a "payment" within the meaning of
section 280G(b) of the Code shall be taken into account, (ii) no
portion of the Total Payments shall be taken into account which, in
the opinion of tax counsel reasonably acceptable to the Executive
and selected by the accounting firm (the "Auditor") which was,
immediately prior to the Change in Control, the Company's
independent auditor, does not constitute a "parachute payment"
within the meaning of section 280G(b)(2) of the Code (including by
reason of section 280G(b)(4)(A) of the Code) and, in calculating the
Excise Tax, no portion of such Total Payments shall be taken into
account which constitutes reasonable compensation for services
actually rendered, within the meaning of section 280G(b)(4)(B) of
the Code, in excess of the Base Amount allocable to such reasonable
compensation, and (iii) the value of any non-cash benefit or any
deferred payment or benefit included in the Total Payments shall be
determined by the Auditor in accordance with the principles of
sections 280G(d)(3) and (4) of the Code.

<PAGE>

the Date of Termination. In the event that the amount of the
estimated payments exceeds the amount subsequently determined to have
been due, such excess shall constitute a loan by the Company to the
Executive, payable on the fifth (5th) business day after demand by the
Company (together with interest at 120% of the rate provided in
section 1274(b)(2)(B) of the Code). At the time that payments are
made under this Section, the Company shall provide the Executive with
a written statement setting forth the manner in which such payments
were calculated and the basis for such calculations including, without
limitation, any opinions or other advice the Company has received from
Tax Counsel, the Auditor or other advisors or consultants (and any
such opinions or advice which are in writing shall be attached to the
statement).

6.4 The Company also shall pay to the Executive all legal fees and
expenses incurred by the Executive in disputing in good faith any issue
hereunder relating to the termination of the Executive's employment, in
seeking in good faith to obtain or enforce any benefit or right provided
by this Agreement or in connection with any tax audit or proceeding to
the extent attributable to the application of section 4999 of the Code
to any payment or benefit provided hereunder. Such payments shall be
made within five (5) business days after delivery of the Executive's
written requests for payment accompanied with such evidence of fees and
expenses incurred as the Company reasonably may require.

7. TERMINATION PROCEDURES AND COMPENSATION DURING DISPUTE.

7.1 NOTICE OF TERMINATION. After a Change in Control and during the Term,
any purported termination of the Executive's employment (other than by
reason of death) shall be communicated by written Notice of
Termination from one party hereto to the other party hereto in
accordance with Section 10 hereof. For purposes of this Agreement, a
"Notice of Termination" shall mean a notice which shall indicate the
specific termination provision in this Agreement relied upon and shall
set forth in reasonable detail the facts and circumstances claimed to
provide a basis for termination of the Executive's employment under
the provision so indicated. Further, a Notice of Termination for Cause
is required to include a copy of a resolution duly adopted by the
affirmative vote of not less than three-quarters (3/4) of the entire
membership of the Board at a meeting of the Board which was called and
held for the purpose of considering such termination (after reasonable
notice to the Executive and an opportunity for the Executive, together
with the Executive's counsel, to be heard before the Board) finding
that, in the good faith opinion of the Board, the Executive was guilty
of conduct set forth in clause (i) or (ii) of the definition of Cause
herein, and specifying the particulars thereof in detail.

<PAGE>

7.2 DATE OF TERMINATION. "Date of Termination," with respect to any
purported termination of the Executive's employment after a Change in
Control and during the Term, shall mean (i) if the Executive's
employment is terminated for Disability, thirty (30) days after Notice
of Termination is given (provided that the Executive shall not have
returned to the full-time performance of the Executive's duties during
such thirty (30) day period), and (ii) if the Executive's employment is
terminated for any other reason, the date specified in the Notice of
Termination (which, in the case of a termination by the Company, shall
not be less than thirty (30) days (except in the case of a termination
for Cause) and, in the case of a termination by the Executive, shall not
be less than fifteen (15) days nor more than sixty (60) days,
respectively, from the date such Notice of Termination is given).

7.3 DISPUTE CONCERNING TERMINATION. If within fifteen (15) days after any
Notice of Termination is given, or, if later, prior to the Date of
Termination (as determined without regard to this Section 7.3), the
party receiving such Notice of Termination notifies the other party
that a dispute exists concerning the termination, the Date of
Termination shall be extended until the earlier of (i) the date on
which the Term ends or (ii) the date on which the dispute is finally
resolved, either by mutual written agreement of the parties or by a
final judgment, order or decree of an arbitrator or a court of
competent jurisdiction (which is not appealable or with respect to
which the time for appeal therefrom has expired and no appeal has been
perfected); PROVIDED, HOWEVER, that the Date of Termination shall be
extended by a notice of dispute given by the Executive only if such
notice is given in good faith and the Executive pursues the resolution
of such dispute with reasonable diligence.

<PAGE>

9. SUCCESSORS; BINDING AGREEMENT.

<PAGE>

To the Company:

Stone Container Corporation
150 N. Michigan Avenue
Chicago, Illinois 60601
Attention: General Counsel

11. MISCELLANEOUS. No provision of this Agreement may be modified,
waived or discharged unless such waiver, modification or discharge is
agreed to in writing and signed by the Executive and such officer as may
be specifically designated by the Board. No waiver by either party
hereto at any time of any breach by the other party hereto of, or of any
lack of compliance with, any condition or provision of this Agreement to
be performed by such other party shall be deemed a waiver of similar or
dissimilar provisions or conditions at the same or at any prior or
subsequent time. This Agreement supersedes any other agreements or
representations, oral or otherwise, express or implied, with respect to
the subject matter hereof which have been made by either party. The
validity, interpretation, construction and performance of this Agreement
shall be governed by the laws of the State of Illinois. All references
to sections of the Exchange Act or the Code shall be deemed also to
refer to any successor provisions to such sections. Any payments
provided for hereunder shall be paid net of any applicable withholding
required under federal, state or local law and any additional
withholding to which the Executive has agreed. The obligations of the
Company and the Executive under this Agreement which by their nature may
require either partial or total performance after the expiration of the
Term (including, without limitation, those under Sections 6 and 7
hereof) shall survive such expiration.

<PAGE>

13. COUNTERPARTS. This Agreement may be executed in several
counterparts, each of which shall be deemed to be an original but all of
which together will constitute one and the same instrument.

14. SETTLEMENT OF DISPUTES; ARBITRATION.

(a) All claims by the Executive for benefits under this Agreement
shall be directed to and determined by the Committee and shall be in
writing. Any denial by the Committee of a claim for benefits under
this Agreement shall be delivered to the Executive in writing and
shall set forth the specific reasons for the denial and the specific
provisions of this Agreement relied upon. The Committee shall
afford a reasonable opportunity to the Executive for a review of the
decision denying a claim and shall further allow the Executive to
appeal to the Committee a decision of the Committee within sixty
(60) days after notification by the Committee that the Executive's
claim has been denied.

<PAGE>

1. DEFINITIONS. For purposes of this Agreement, the following terms shall
have the meanings indicated below:

(A) "Affiliate" shall have the meaning set forth in Rule 12b-2
promulgated under Section 12 of the Exchange Act.

(B) "Auditor" shall have the meaning set forth in Section 6.2 hereof.

(D) "Beneficial Owner" shall have the meaning set forth in Rule 13d-3
under the Exchange Act.

(E) "Board" shall mean the Board of Directors of the Company.

(F) "Cause" for termination by the Company of the Executive's
employment shall mean (i) the willful and continued failure by the
Executive to substantially perform the Executive's duties with the
Company (other than any such failure resulting from the Executive's
incapacity due to physical or mental illness or any such actual or
anticipated failure after the issuance of a Notice of Termination
for Good Reason by the Executive pursuant to Section 7.1 hereof)
after a written demand for substantial performance is delivered to
the Executive by the Board, which demand specifically identifies the
manner in which the Board believes that the Executive has not
substantially performed the Executive's duties, or (ii) the willful
engaging by the Executive in conduct which is demonstrably and
materially injurious to the Company or its subsidiaries, monetarily
or otherwise. For purposes of clauses (i) and (ii) of this
definition, (x) no act, or failure to act, on the Executive's part
shall be deemed "willful" unless done, or omitted to be done, by the
Executive not in good faith and without reasonable belief that the
Executive's act, or failure to act, was in the best interest of the
Company and (y) in the event of a dispute concerning the application
of this provision, no claim by the Company that Cause exists shall
be given effect unless the Company establishes to the Committee by
clear and convincing evidence that Cause exists.

<PAGE>

(G) A "Change in Control" shall be deemed to have occurred if the
event set forth in any one of the following paragraphs shall have
occurred:

(II) the following individuals cease for any reason to constitute
a majority of the number of directors then serving: individuals
who, on the date hereof, constitute the Board and any new
director (other than a director whose initial assumption of
office is in connection with an actual or threatened election
contest, including but not limited to a consent solicitation,
relating to the election of directors of the Company) whose
appointment or election by the Board or nomination for election
by the Company's stockholders was approved or recommended by a
vote of at least two-thirds (2/3) of the directors then still in
office who either were directors on the date hereof or whose
appointment, election or nomination for election was previously
so approved or recommended; or

(III) there is consummated a merger or consolidation of the Company
or any direct or indirect subsidiary of the Company with any
other corporation, other than (i) a merger or consolidation
which would result in the voting securities of the Company
outstanding immediately prior to such merger or consolidation
continuing to represent (either by remaining outstanding or
by being converted into voting securities of the surviving
entity or any parent thereof), in combination with the
ownership of any trustee or other fiduciary holding
securities under an employee benefit plan of the Company or
any subsidiary of the Company, at least 60% of the combined
voting power of the securities of the Company or such
surviving entity or any parent thereof outstanding
immediately after such merger or consolidation, or (ii) a
merger or consolidation effected to implement a
recapitalization of the Company (or similar transaction) in
which no Person is or becomes the Beneficial Owner, directly
or indirectly, of securities of the Company (not including in
the securities Beneficially Owned by such Person any
securities acquired directly from the Company or its
Affiliates) representing 20% or more of the combined voting
power of the Company's then outstanding securities; or

<PAGE>

(IV) the stockholders of the Company approve a plan of complete
liquidation or dissolution of the Company or there is
consummated an agreement for the sale or disposition by the
Company of all or substantially all of the Company's assets,
other than a sale or disposition by the Company of all or
substantially all of the Company's assets to an entity, at
least 60% of the combined voting power of the voting
securities of which is owned by stockholders of the Company
in substantially the same proportions as their ownership of
the Company immediately prior to such sale.

Notwithstanding the foregoing, a "Change in Control" shall not be deemed
to have occurred by virtue of the consummation of any transaction or series
of integrated transactions immediately following which the record holders of
the common stock of the Company immediately prior to such transaction or
series of transactions continue to have substantially the same proportionate
ownership in an entity which owns all or substantially all of the assets of
the Company immediately following such transaction or series of transactions.

<PAGE>

(H) "Code" shall mean the Internal Revenue Code of 1986, as amended
from time to time.

(K) "Date of Termination" shall have the meaning set forth in Section
7.2 hereof.

<PAGE>

(M) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended from time to time.

(N) "Excise Tax" shall mean any excise tax imposed under section 4999
of the Code.

(O) "Executive" shall mean the individual named in the first
paragraph of this Agreement.

(P) "Good Reason" for termination by the Executive of the Executive's
employment shall mean the occurrence (without the Executive's
express written consent) after any Change in Control, or prior to a
Change in Control under the circumstances described in clause (ii)
of the second sentence of Section 6.1 hereof (treating all
references in paragraphs (I) through (VII) below to a "Change in
Control" as references to a "Potential Change in Control"), of any
one of the following acts by the Company, or failures by the Company
to act, unless, in the case of any act or failure to act described
in paragraph (I), (V), (VI) or (VII) below, such act or failure to
act is corrected prior to the Date of Termination specified in the
Notice of Termination given in respect thereof:

(II) a reduction by the Company in the Executive's annual base
salary as in effect on the date hereof or as the same may be
increased from time to time except for across-the-board salary
reductions similarly affecting all executives of the Company
and all executives of any Person in control of the Company;

<PAGE>

(Q) "Notice of Termination" shall have the meaning set forth in
Section 7.1 hereof.

(R) "Pension Plan" shall mean any tax-qualified, supplemental or
excess benefit pension plan maintained by the Company and any other
plan or agreement entered into between the Executive and the Company
which is designed to provide the Executive with supplemental
retirement benefits.

(S) "Person" shall have the meaning given in Section 3(a)(9) of the
Exchange Act, as modified and used in Sections 13(d) and 14(d)
thereof, except that such term shall not include (i) the Company or
any of its subsidiaries, (ii) a trustee or other fiduciary holding
securities under an employee benefit plan of the Company or any of
its Affiliates, (iii) an underwriter temporarily holding securities
pursuant to an offering of such securities, (iv) a corporation
owned, directly or indirectly, by the stockholders of the Company in
substantially the same proportions as their ownership of stock of
the Company or (v) any descendant of Joseph Stone, the spouse of any
such descendant, the estate of any such descendant or spouse, any
trust or any other arrangement for the benefit of any such
descendant or any such spouse or any charitable organization
established by any such descendant or any such spouse.

(T) "Potential Change in Control" shall be deemed to have occurred if
the event set forth in any one of the following paragraphs shall
have occurred:

(I) the Company enters into an agreement, the consummation of
which would result in the occurrence of a Change in Control;

(II) the Company or any Person publicly announces an intention to
take or to consider taking actions which, if consummated, would
constitute a Change in Control;

<PAGE>

(IV) the Board adopts a resolution to the effect that, for
purposes of this Agreement, a Potential Change in Control has
occurred.

(U) "Retirement" shall be deemed the reason for the termination by
the Company or the Executive of the Executive's employment if such
employment is terminated in accordance with the Company's retirement
policy, including early retirement, generally applicable to its
salaried employees, as in effect immediately prior to the Change in
Control, or in accordance with any retirement arrangement
established with the Executive's express written consent with
respect to the Executive.

(V) "Severance Payments" shall mean those payments described in
Section 6.1 hereof.

(W) "Term" shall mean the period of time described in Section 2
hereof (including any extension, continuation or termination
described therein).

(X) "Total Payments" shall mean those payments so described in
Section 6.2 hereof.

<PAGE>

STONE CONTAINER CORPORATION

By: _______________________________________________________
Name: Thomas P. Cutilletta
Title: Senior Vice President,
Administration & Corporate Controller

By: ______________________________________________________
[Signature]

Name & Address:
_________________________________________________

_________________________________________________

_________________________________________________
(Please print)

<PAGE>

VALLEY 2X
SEVERANCE AGREEMENT

THIS AGREEMENT, dated July 22, 1996, is made by and between Stone
Container Corporation, a Delaware corporation (the "Company"), and X (the
"Executive").

WHEREAS, the Company considers it essential to the best interests of its
stockholders to foster the continued employment of key management personnel;
and

WHEREAS, the Board recognizes that, as is the case with many publicly held
corporations, the possibility of a Change in Control exists and that such
possibility, and the uncertainty and questions which it may raise among
management, may result in the departure or distraction of management
personnel to the detriment of the Company and its stockholders; and

WHEREAS, the Board has determined that appropriate steps should be taken
to reinforce and encourage the continued attention and dedication of members
of the Company's management, including the Executive, to their assigned
duties without distraction in the face of potentially disturbing
circumstances arising from the possibility of a Change in Control;

NOW, THEREFORE, in consideration of the premises and the mutual covenants
herein contained, the Company and the Executive hereby agree as follows:

1. DEFINED TERMS. The definitions of capitalized terms used in this
Agreement are provided in the last Section hereof.

2. TERM OF AGREEMENT. The Term of this Agreement shall commence on the
date hereof and shall continue in effect through December 31, 1998;
PROVIDED, HOWEVER, that commencing on January 1, 1998 and each January
1 thereafter, the Term shall automatically be extended for one
additional year unless a Change in Control shall have occurred prior
to such January 1 or, not later than September 30 of the preceding
year, the Company or the Executive shall have given notice not to
extend this Agreement; and FURTHER PROVIDED, HOWEVER, that if a Change
in Control shall have occurred during the Term, the Term shall be
extended for a period of twenty-four (24) months beyond the month in
which such Change in Control occurred.

<PAGE>

3. COMPANY'S COVENANTS SUMMARIZED. In order to induce the Executive to
remain in the employ of the Company and in consideration of the
Executive's covenants set forth in Section 4 hereof, the Company
agrees, under the conditions described herein, to pay the Executive
the Severance Payments and the other payments and benefits described
herein. Except as provided in Section 9.1 hereof, no amount or benefit
shall be payable under this Agreement unless there shall have been
(or, under the terms of the second sentence of Section 6.1 hereof,
there shall be deemed to have been) a termination of the Executive's
employment with the Company following a Change in Control and during
the Term. This Agreement shall not be construed as creating an
express or implied contract of employment and, except as otherwise
agreed in writing between the Executive and the Company, the Executive
shall not have any right to be retained in the employ of the Company.

4. THE EXECUTIVE'S COVENANTS. The Executive agrees that, subject to the
terms and conditions of this Agreement, in the event of a Potential
Change in Control during the Term, the Executive will remain in the
employ of the Company until the earliest of (i) a date which is six
(6) months from the date of such Potential Change of Control, (ii) the
date of a Change in Control, (iii) the date of termination by the
Executive of the Executive's employment for Good Reason or by reason
of death, Disability or Retirement, or (iv) the termination by the
Company of the Executive's employment for any reason.

5. COMPENSATION OTHER THAN SEVERANCE PAYMENTS.

5.1 Following a Change in Control and during the Term, during any period
that the Executive fails to perform the Executive's full-time duties
with the Company as a result of incapacity due to physical or mental
illness, the Company shall pay the Executive's full salary to the
Executive at the rate in effect at the commencement of any such
period, together with all compensation and benefits payable to the
Executive under the terms of any compensation or benefit plan, program
or arrangement maintained by the Company during such period, until the
Executive's employment is terminated by the Company for Disability.

<PAGE>

5.2 If the Executive's employment shall be terminated for any reason
following a Change in Control and during the Term, the Company shall
pay the Executive's full salary to the Executive through the Date of
Termination at the rate in effect immediately prior to the Change in
Control or, if greater, at the rate in effect at the time the Notice
of Termination is given, together with all compensation and benefits
payable to the Executive through the Date of Termination under the
terms of the Company's compensation and benefit plans, programs or
arrangements.

5.3 If the Executive's employment shall be terminated for any reason
following a Change in Control and during the Term, the Company shall
pay to the Executive the Executive's normal post-termination
compensation and benefits as such payments become due. Such
post-termination compensation and benefits shall be determined under,
and paid in accordance with, the Company's retirement, insurance and
other compensation or benefit plans, programs and arrangements as in
effect immediately prior to the Change in Control or, to the extent
more favorable to the Executive, as in effect immediately prior to the
Date of Termination.

6. SEVERANCE PAYMENTS.

<PAGE>

employment with Good Reason prior to a Change in Control which actually
occurs during the term of this Agreement and the circumstance or event
which constitutes Good Reason occurs at the request or direction of
such Person, or (iii) the Executive's employment is terminated by the
Company without Cause prior to a Change in Control and the Executive
reasonably demonstrates that such termination is otherwise in
connection with or in anticipation of a Change in Control which
actually occurs during the term of this Agreement. For purposes of
any determination regarding the applicability of the immediately
preceding sentence, any position taken by the Executive shall be
presumed to be correct unless the Company establishes to the Committee
by clear and convincing evidence that such position is not correct.

(A) In lieu of any further salary payments to the Executive for
periods subsequent to the Date of Termination and in lieu of any
severance benefit otherwise payable to the Executive, the Company
shall pay to the Executive a lump sum severance payment, in cash,
equal to two times the sum of (i) the higher of the Executive's
annual base salary in effect immediately prior to the occurrence of
the event or circumstance upon which the Notice of Termination is
based and the Executive's annual base salary in effect immediately
prior to the Change in Control, and (ii) the product of (a) the
amount determined under clause (i) above and (b) the higher of the
average percentage of base salary paid to or earned by the Executive
pursuant to any annual bonus or incentive plan maintained by the
Company in respect of the three years immediately preceding that in
which the Date of Termination occurs or the average percentage of
base salary paid to or earned by the Executive in respect of the
three years immediately preceding that in which the Change in
Control occurs.

<PAGE>

(B) For the twenty-four (24) month period immediately following the
Date of Termination, the Company shall arrange to provide the
Executive with life, disability, accident and health insurance
benefits and Company-provided perquisites (including, but not
limited to a Company car and club membership dues), in each case
substantially similar to those which the Executive is receiving
immediately prior to the Notice of Termination (without giving
effect to any amendment to such benefits or perquisites made
subsequent to a Change in Control which amendment adversely affects
in any manner the Executive's entitlement to or the amount of such
benefits); PROVIDED, HOWEVER, that, such health insurance benefits
shall be provided through a third-party insurer. Benefits and
perquisites otherwise receivable by the Executive pursuant to this
Section 6.1(B) shall be reduced to the extent comparable benefits or
perquisites are actually received by or made available to the
Executive without cost during the twenty-four (24) month period
following the Executive's termination of employment (and any such
benefits and perquisites actually received by or made available to
the Executive shall be reported to the Company by the Executive).
If the Severance Payments shall be decreased pursuant to Section 6.2
hereof, and the Section 6.1(B) benefits or perquisites which remain
payable after the application of Section 6.2 hereof are thereafter
reduced pursuant to the immediately preceding sentence because of
the receipt or availability of comparable benefits or perquisites,
the Company shall, at the time of such reduction, pay to the
Executive the least of (a) the amount of the decrease made in the
Severance Payments pursuant to Section 6.2 hereof, (b) the amount of
the subsequent reduction in these Section 6.1(B) benefits or
perquisites, or (c) the maximum amount which can be paid to the
Executive without being, or causing any other payment to be,
nondeductible by reason of section 280G of the Code.

<PAGE>

(D) In addition to the retirement benefits to which the Executive is
entitled under each Pension Plan, the Company shall pay the
Executive a lump sum amount, in cash, equal to the excess of (i) the
actuarial equivalent of the aggregate retirement pension (taking
into account any early retirement subsidies associated therewith and
determined as a straight life annuity commencing at the date (but in
no event earlier than the second anniversary of the Date of
Termination) as of which the actuarial equivalent of such annuity is
greatest) which the Executive would have accrued under the terms of
all Pension Plans (without regard to any amendment to any Pension
Plan made subsequent to a Change in Control and on or prior to the
Date of Termination, which amendment adversely affects in any manner
the computation of retirement benefits thereunder), determined as if
the Executive were fully vested thereunder and had accumulated
(after the Date of Termination) twenty-four (24) additional months
of service credit thereunder and had been credited under each

<PAGE>

Pension Plan during such period with compensation at the higher of
(i) the Executive's compensation (as defined in such Pension Plan)
during the twelve (12) months immediately preceding the Date of
Termination or (ii) the Executive's compensation (as defined in such
Pension Plan) during the twelve (12) months immediately preceding
the Change in Control, over (ii) the actuarial equivalent of the
aggregate retirement pension (taking into account any early
retirement subsidies associated therewith and determined as a
straight life annuity commencing at the date (but in no event
earlier than the Date of Termination) as of which the actuarial
equivalent of such annuity is greatest) which the Executive had
accrued pursuant to the provisions of the Pension Plans as of the
Date of Termination. For purposes of this Section 6.1(D),
"actuarial equivalent" shall be determined using the same
assumptions utilized under the Stone Container Corporation Salaried
Employees Retirement Plan immediately prior to the Date of
Termination.

(E) If the Executive would have become entitled to benefits under the
Company's post-retirement health care or life insurance plans, as in
effect immediately prior to the Change in Control or the Date of
Termination (whichever is more favorable to the Executive), had the
Executive's employment terminated at any time during the period of
twenty-four (24) months after the Date of Termination, the Company
shall provide such post-retirement health care or life insurance
benefits to the Executive and the Executive's dependents commencing
on the later of (i) the date on which such coverage would have first
become available and (ii) the date on which benefits described in
subsection (B) of this Section 6.1 terminate.

<PAGE>

6.3 The payments provided in subsections (A), (C) and (D) of Section 6.1
hereof shall be made not later than the fifth day following the Date
of Termination; PROVIDED, HOWEVER, that if the amounts of such
payments, and the limitation on such payments set forth in Section 6.2
hereof, cannot be finally determined on or before such day, the
Company shall pay to the Executive on such day an estimate, as
determined in good faith by the Executive, of the minimum amount of
such payments to which the Executive is clearly entitled and shall pay
the remainder of such payments (together with interest on the unpaid
remainder (or on all such payments to the extent the Company fails to
make such payments when due) at 120% of the rate provided in section
1274(b)(2)(B) of the Code) as soon as the amount thereof can be
determined but in no event later than the thirtieth (30th) day after
the Date of Termination. In the event that the amount of the
estimated payments exceeds the amount subsequently determined to have
been due, such excess shall constitute a loan by the Company to the
Executive, payable on the fifth (5th) business day after demand by the
Company (together with interest at 120% of the rate provided in
section 1274(b)(2)(B) of the Code). At the time

<PAGE>

that payments are made under this Section, the Company shall provide the
Executive with a written statement setting forth the manner in which
such payments were calculated and the basis for such calculations
including, without limitation, any opinions or other advice the
Company has received from Tax Counsel, the Auditor or other advisors
or consultants (and any such opinions or advice which are in writing
shall be attached to the statement).

7. TERMINATION PROCEDURES AND COMPENSATION DURING DISPUTE.

<PAGE>

held for the purpose of considering such termination (after reasonable
notice to the Executive and an opportunity for the Executive, together
with the Executive's counsel, to be heard before the Board) finding
that, in the good faith opinion of the Board, the Executive was guilty
of conduct set forth in clause (i) or (ii) of the definition of Cause
herein, and specifying the particulars thereof in detail.

7.3 DISPUTE CONCERNING TERMINATION. If within fifteen (15) days after
any Notice of Termination is given, or, if later, prior to the Date of
Termination (as determined without regard to this Section 7.3), the
party receiving such Notice of Termination notifies the other party that
a dispute exists concerning the termination, the Date of Termination
shall be extended until the earlier of (i) the date on which the Term
ends or (ii) the date on which the dispute is finally resolved, either
by mutual written agreement of the parties or by a final judgment, order
or decree of an arbitrator or a court of competent jurisdiction (which
is not appealable or with respect to which the time for appeal therefrom
has expired and no appeal has been perfected); provided, however, that
the Date of Termination shall be extended by a notice of dispute given
by the Executive only if such notice is given in good faith and the
Executive pursues the resolution of such dispute with reasonable
diligence.
11

<PAGE>

9. SUCCESSORS; BINDING AGREEMENT.

<PAGE>

To the Company:

Stone Container Corporation
150 N. Michigan Avenue
Chicago, Illinois 60601
Attention: General Counsel

<PAGE>

13. COUNTERPARTS. This Agreement may be executed in several
counterparts, each of which shall be deemed to be an original but all of
which together will constitute one and the same instrument.

14. SETTLEMENT OF DISPUTES; ARBITRATION.

<PAGE>

15. DEFINITIONS. For purposes of this Agreement, the following terms
shall have the meanings indicated below:

(A) "Affiliate" shall have the meaning set forth in Rule 12b-2
promulgated under Section 12 of the Exchange Act.

(B) "Auditor" shall have the meaning set forth in Section 6.2 hereof.

(D) "Beneficial Owner" shall have the meaning set forth in Rule 13d-3
under the Exchange Act.

(E) "Board" shall mean the Board of Directors of the Company.

<PAGE>

(G) A "Change in Control" shall be deemed to have occurred if the
event set forth in any one of the following paragraphs shall have
occurred:

<PAGE>

(H) "Code" shall mean the Internal Revenue Code of 1986, as amended
from time to time.

(K) "Date of Termination" shall have the meaning set forth in Section
7.2 hereof.

<PAGE>

(M) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended from time to time.

(N) "Excise Tax" shall mean any excise tax imposed under section 4999
of the Code.

(O) "Executive" shall mean the individual named in the first
paragraph of this Agreement.

(II) a reduction by the Company in the Executive's annual base
salary as in effect on the date hereof or as the same may be
increased from time to time except for across-the-board salary
reductions similarly affecting all executives of the Company and
all executives of any Person in control of the Company;

<PAGE>

(VII) any purported termination of the Executive's employment which is
not effected pursuant to a Notice of Termination satisfying the
requirements of Section 7.1 hereof; for purposes of this
Agreement, no such purported termination shall be effective.The
Executive's right to terminate the Executive's employment for
Good Reason shall not be affected by the Executive's incapacity
due to physical or mental illness. The Executive's continued
employment shall not constitute consent to, or a waiver of rights
with respect to, any act or failure to act constituting Good
Reason hereunder.

For purposes of any determination regarding the existence of Good
Reason, any claim by the Executive that Good Reason exists shall
be presumed to be correct unless the Company establishes to the
Committee by clear and convincing evidence that Good Reason does
not exist.

(Q) "Notice of Termination" shall have the meaning set forth in
Section 7.1 hereof.

<PAGE>

(T) "Potential Change in Control" shall be deemed to have occurred if
the event set forth in any one of the following paragraphs shall
have occurred:

(I) the Company enters into an agreement, the consummation of
which would result in the occurrence of a Change in Control;

(II) the Company or any Person publicly announces an intention to
take or to consider taking actions which, if consummated, would
constitute a Change in Control;

(III) any Person becomes the Beneficial Owner, directly or
indirectly, of securities of the Company representing 10% or
more of either the then outstanding shares of common stock of
the Company or the combined voting power of the Company's then
outstanding securities (not including in the securities
beneficially owned by such Person any securities acquired
directly from the Company or its affiliates); or

<PAGE>

(IV) the Board adopts a resolution to the effect that, for
purposes of this Agreement, a Potential Change in Control has
occurred.

(V) "Severance Payments" shall mean those payments described in
Section 6.1 hereof.

(W) "Term" shall mean the period of time described in Section 2
hereof (including any extension, continuation or termination
described therein).

(X) "Total Payments" shall mean those payments so described in
Section 6.2 hereof.

<PAGE>

STONE CONTAINER CORPORATION

By: _______________________________________________________
Name: Thomas P. Cutilletta
Title: Senior Vice President,
Administration & Corporate Controller

By: _______________________________________________________
[Signature]

Name & Address:
_________________________________________________

_________________________________________________

_________________________________________________
(Please print)

<PAGE>
EXHIBIT 11

STONE CONTAINER CORPORATION

COMPUTATION OF PRIMARY AND FULLY DILUTED
NET INCOME (LOSS) PER SHARE

(in millions, except per share)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
PRIMARY EARNINGS PER SHARE
- ---------------------------------------------------------------------------------------
Shares of Common Stock:
Weighted average number of common shares outstanding................................. 99.2 94.1 88.2
--------- --------- ---------
Primary Weighted Average Shares Outstanding............................................ 99.2 94.1 88.2
--------- --------- ---------
--------- --------- ---------
Net Income (Loss)...................................................................... $ (126.2) $ 255.5 $ (204.6)
Less: Series E Cumulative Convertible Exchangeable Preferred Stock dividend............ (8.1) (8.1) (8.1)
Redemption premium on redeemable preferred stock of a consolidated affiliate...... -- -- (4.0)
--------- --------- ---------
Net income (loss) used in computing primary net income (loss) per common share......... $ (134.3) $ 247.4 $ (216.7)
--------- --------- ---------
--------- --------- ---------
Primary Earnings Per Share............................................................. $ (1.35) $ 2.63 $ (2.46)
--------- --------- ---------
--------- --------- ---------

FULLY DILUTED EARNINGS PER SHARE
- ---------------------------------------------------------------------------------------
Shares of Common Stock:
Weighted average number of common shares outstanding................................. 99.2 94.1 88.2
Dilutive effect of options and warrants.............................................. -- -- .1
Addition from assumed conversion of 8.875% convertible senior subordinated notes..... 5.2 15.2 21.6
Addition from assumed conversion of 6.75% convertible subordinated debentures........ 1.3 2.0 3.4
Addition from assumed conversion of Series E Cumulative Convertible Exchangeable
Preferred Stock.................................................................... 3.4 3.4 3.4
--------- --------- ---------
Fully Diluted Weighted Average Shares Outstanding...................................... 109.1 114.7 116.7
--------- --------- ---------
--------- --------- ---------
Net Income (Loss)...................................................................... $ (126.2) $ 255.5 $ (204.6)
Less: Series E Cumulative Convertible Exchangeable Preferred Stock dividend............ (8.1) (8.1) (8.1)
Income adjustment associated with assumed conversion of Stone-Consolidated
Corporation Corporation 8% convertible subordinated debentures................... -- (10.6) --
Redemption premium on redeemable preferred stock of a consolidated affiliate...... -- -- (4.0)
Add back: Interest on 8.875% convertible senior subordinated notes..................... 3.2 9.5 13.5
Interest on 6.75% convertible subordinated debentures........................ 1.9 2.8 4.7
Income adjustment associated with assumed conversion of Stone-Consolidated
Corporation 8% convertible subordinated debentures........................... -- -- 6.9
Series E Cumulative Convertible Exchangeable Preferred Stock dividend........ 8.1 8.1 8.1
--------- --------- ---------
Net income (loss) used in computing fully diluted net income (loss) per common share... $ (121.1) $ 257.2 $ (183.5)
--------- --------- ---------
--------- --------- ---------
Fully Diluted Earnings Per Share (A)................................................... $ (1.11) $ 2.24 $ (1.57)
--------- --------- ---------
--------- --------- ---------
</TABLE>

- ---------

(A) Fully diluted earnings per share for 1996 and 1994 are not disclosed in the
consolidated financial statements because the amounts are anti-dilutive.

<PAGE>

EXHIBIT 12
STONE CONTAINER CORPORATION
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES

<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(IN MILLIONS) 1992 1993 1994 1995 1996
- ------------ -------- -------- -------- ------- --------
Income (loss) before extraordinary
charges and cumulative effects of
accounting changes. . . . . . . . . . $(169.9) $(319.2) $(128.8) $444.5 $(122.5)
Income tax provision (credit). . . . . (59.4) (147.7) (35.5) 320.9 (66.0)
Minority interest in consolidated
subsidiaries. . . . . . . . . . . . . 5.3 3.6 1.2 29.3 (.6)
Preferred stock dividend requirements
of majority owned subsidiary. . . . . (4.7) (5.7) (9.4) -- --
Undistributed (earnings) loss of non-
consolidated subsidiaries . . . . . . 6.0 13.3 9.1 (9.0) (48.6)
Capitalized interest . . . . . . . . . (47.4) (10.8) (4.7) (13.2) (11.7)
-------- -------- -------- ------- --------
(270.1) (466.5) (168.1) 772.5 (249.4)
-------- -------- -------- ------- --------
-------- -------- -------- ------- --------

Fixed charges:
Interest charges (expensed and
capitalized), amortization of debt
discount and debt fees on all
indebtedness . . . . . . . . . . . . 433.5 437.5 460.7 473.5 425.2
Interest cost portion of rental
expenses (33-1/3%) . . . . . . . . . 27.8 27.4 29.1 35.4 36.0
Preferred stock dividend requirements
of majority owned subsidiary . . . . 4.7 5.7 9.4 -- --
-------- -------- -------- ------- --------
Total fixed charges 466.0 470.6 499.2 508.9 461.2
-------- -------- -------- ------- --------
-------- -------- -------- ------- --------

Earnings before income taxes,
undistributed (earnings) loss of
non-consolidated subsidiaries,
minority interest and fixed charges
(excluding capitalized interest). . . $ 195.9 $ 4.1 $ 331.1 $ 1,281.4 $ 211.8
-------- -------- -------- ------- --------

Ratio of earnings to fixed charges (D) (C) (B) 2.52 (A)
-------- -------- -------- ------- --------
-------- -------- -------- ------- --------
</TABLE>

(A) The Company's earnings for the year ended December 31, 1996 were
insufficient to cover fixed charges by $249.4 million.

(B) The Company's earnings for the year ended December 31, 1994 were
insufficient to cover fixed charges by $168.1 million. Earnings for 1994
included a non-recurring pretax gain of $22.0 million relating to an
involuntary conversion at the Company's Panama City, Florida pulp and
paperboard mill. If such a nonrecurring event had not occurred, earnings
would have been insufficient to cover the fixed charges by $190.1 million.

(C) The Company's earnings for the year ended December 31, 1993 were
insufficient to cover fixed charges by $466.5 million. Earnings for 1993
included a non-recurring pretax gain of $35.4 million from the sale of the
Company's 49 percent equity interest in Empaques de Carton Titan, S.A. If
such a non-recurring event had not occurred, earnings would have been
insufficient to cover fixed charges by $501.9 million.

(D) The Company's earnings for the year ended December 31, 1992 were
insufficient to cover fixed charges by $270.1 million.

<PAGE>

EXHIBIT 21

SUBSIDIARIES OF THE REGISTRANT

Organized Under Percentage
the Laws of Ownership
----------- ---------
CONSOLIDATED SUBSIDIARIES:
- --------------------------
A.H. Julius Rohde GmbH. . . . . . . . . . . . . . Germany 100%
Apache Railway Corporation. . . . . . . . . . . . Arizona 100%
Atlanta & Saint Andrews Bay Railroad Company. . . Florida 100%
Baie Holdings Limited (NPL) . . . . . . . . . . . Canada 100%
Cameo Container Corporation . . . . . . . . . . . Illinois 100%
Cartomills, S.A.. . . . . . . . . . . . . . . . . Belgium 100%
Cartomills France S.A.R.L.. . . . . . . . . . . . France 100%
Cartonnages Robert Delubac S.A.R.L. . . . . . . . France 99.8%
Cousins Leasing Corporation . . . . . . . . . . . New York 100%
DST Design Service Team GmbH. . . . . . . . . . . Germany 100%
Europa Carton AG. . . . . . . . . . . . . . . . . Germany 100%
Europapel, S.A. . . . . . . . . . . . . . . . . . Spain 93.1%
Eurotrend Gesellschaft Gmbh.. . . . . . . . . . . Germany 100%
Fowler Specialty Packaging, Inc.. . . . . . . . . Delaware 100%
Gamache Exploration & Mining Co. Ltd (NPL). . . . Canada 100%
Graficarton, S.A. . . . . . . . . . . . . . . . . Spain 94.7%
Grundstrucks-Verwaltungsgesellschaft Altona mbh . Germany 95%
IFP Packungsgestaltung GmbH . . . . . . . . . . . Germany 100%
IDENTITY Institute fur Corporate Design GmbH. . . Germany 100%
Indonesian Container Investments Corporation. . . British Virgin Islands 100%
Inversiones Stone de Argentina (BVI) Ltd. . . . . British Virgin Islands 100%
Inversiones Stone de Chile (BVI) Ltd. . . . . . . British Virgin Islands 100%
Leasing-Kontor Fur Investitionsguter GmbH . . . . Germany 100%
Orangeburg Trucking, Inc. . . . . . . . . . . . . South Carolina 100%
Oxford Holdings, Inc. . . . . . . . . . . . . . . Delaware 100%
Societe Emballages des Cevennes, S.A. . . . . . . France 99.8%
Societe Europeenne de Carton S.A.R.L. . . . . . . France 100%
Southwest Forest Insurance Company, Ltd.. . . . . Bermuda 100%
Speditions-Gesellschaft Visurgis mbh. . . . . . . Germany 100%
SSJ Corporation . . . . . . . . . . . . . . . . . Delaware 100%
Ston Forestal, S.A. . . . . . . . . . . . . . . . Costa Rica 100%
Ston Forestal Panama S.A. . . . . . . . . . . . . Panama 100%
Stone Communications Corporation. . . . . . . . . Delaware 100%
Stone Connecticut Paperboard Properties, Inc. . . Delaware 100%
Stone Container Administradora
Argentina (BVI) Ltd. . . . . . . . . . . . British Virgin Islands 100%
Stone Container Asia Corporation. . . . . . . . . Delaware 100%
Stone Container Australia Pty., Ltd.. . . . . . . Australia 100%
Stone Container (Canada) Inc. . . . . . . . . . . Canada 100%
Stone Container (China) Corporation . . . . . . . British Virgin Islands 100%
Stone Container de Mexico S.A. de C.V.. . . . . . Mexico 100%
Stone Container Espana, S.A.. . . . . . . . . . . Spain 100%
Stone Container Finance Company of Canada . . . . Nova Scotia 100%
Stone Container GmbH. . . . . . . . . . . . . . . Germany 100%

<PAGE>
Organized Under Percentage
the Laws of Ownership
----------- ---------
CONSOLIDATED SUBSIDIARIES:
- --------------------------
Stone Container International Corporation . . . . U.S. Virgin Islands 100%
Stone Container Latin America Corporation . . . . Delaware 100%
Stone Papers, Inc.. . . . . . . . . . . . . . . . Delaware 100%
Stone Receivables Corporation . . . . . . . . . . Delaware 100%
Stone/River House Australian Investments, Inc.. . Delaware 100%
Stone Venepal (Celgar) Pulp Inc.. . . . . . . . . Canada 90%
Stone-Ven Investments, Inc. . . . . . . . . . . . Delaware 100%
Strong-Robinette Bag Company, Inc.. . . . . . . . Virginia 100%
WWG Weser-Werstoff-Gesellschaft mbH . . . . . . . Germany 51%
Wellpappenwerk Waren GmbH . . . . . . . . . . . . Germany 100%
2736551 Canada Inc. . . . . . . . . . . . . . . . Canada 100%

NON-CONSOLIDATED ENTITIES:
- -------------------------
Aspamill, Inc.. . . . . . . . . . . . . . . . . . Canada 45%
Associated Paper Mills (Ontario) Limited. . . . . Canada 45%
Bridgewater Paper Company Limited . . . . . . . . England 46.6%
Bridgewater Paper Leasing Limited . . . . . . . . England 46.6%
Bridgewater Newsprint Limited . . . . . . . . . . England 46.6%
Cartonex Bernal S.A.. . . . . . . . . . . . . . . Argentina 50%
Cartonex S.A. I.C.F.Y.F. . . . . . . . . . . . . Argentina 50%
Corrupac S.A. . . . . . . . . . . . . . . . . . . Chile 50%
Cartonnages MGC S.A.. . . . . . . . . . . . . . . France 50%
Cheshire Recycling Limited. . . . . . . . . . . . England 46.6%
Compagnie d'Estacades de La Cascapedia, Inc.. . . Canada 50%
Compagnie de Flottage due St. Maurice Limitee . . Canada 36.3%
Estrella de Osa S.A.. . . . . . . . . . . . . . . Costa Rica 49%
Financiere Carton Papier. . . . . . . . . . . . . France 50%
Florida Coast Paper Company, LLC. . . . . . . . . Delaware 50%
Florida Coast Paper Corporation . . . . . . . . . Delaware 50%
Florida Coast Paper Finance Corporation . . . . . Delaware 50%
Florida Coast Paper Holding Company, LLC. . . . . Delaware 50%
GfA-Gesellschaft fur Altpapier und Rohstoffe mbh. Germany 33.3%
ICO Inc.. . . . . . . . . . . . . . . . . . . . . Canada 42%
Indupa Vertriebgesellschaft mbh & Co. KG. . . . . Germany 50%
Indupa Grundstucksgesellschaft mbh. . . . . . . . Germany 50%
Interstate Packaging Corporation. . . . . . . . . New York 50%
Laimbeer Packaging Company LLC. . . . . . . . . . Delaware 50%
L & M Corrugated Container Corporation. . . . . . Illinois 50%
MacMillan Bathurst. . . . . . . . . . . . . . . . Canada 50%
MacMillan Bathurst Inc. . . . . . . . . . . . . . Canada 50%
Mannkraft Corporation . . . . . . . . . . . . . . Pennsylvania 49%
Maritime Containers Limited . . . . . . . . . . . Canada 35%
ORPACK-Stone Corporation. . . . . . . . . . . . . Delaware 49%
Paper Recycling International, L.P. . . . . . . . Delaware 50%
Paroco Rohstoffverwertung GmbH. . . . . . . . . . Germany 49%
Produits Forestiers Petit Paris Inc.. . . . . . . Canada 23.3%
Rohstoffhandel Kiel GmbH. . . . . . . . . . . . . Germany 37.5%
Rosenbloom Group Inc. . . . . . . . . . . . . . . Canada 45%

<PAGE>
Organized Under Percentage
the Laws of Ownership
----------- ---------
NON-CONSOLIDATED SUBSIDIARIES:
- ------------------------------
S&G Packaging Company, LLC. . . . . . . . . . . . Delaware 65%
Scieries Saugenay Limitee.. . . . . . . . . . . . Canada 23.3%
Shanghai Stone Millennium Packaging and
Paper Co. Ltd. . . . . . . . . . . . . . . . China 50%
Stirling Fibre (Holdings) Limited . . . . . . . . England 46.6%
Stirling Fibre Limited. . . . . . . . . . . . . . England 46.6%
Stirling Recycling Limited. . . . . . . . . . . . England 46.6%
Stone-Billerud S.A. . . . . . . . . . . . . . . . Switzerland 50%
Stone-Consolidated Corporation. . . . . . . . . . Canada 46.6%
Stone-Consolidated (Europe) S.A.. . . . . . . . . Belgium 46.6%
Stone-Consolidated (US) Corporation . . . . . . . Delaware 46.6%
Stone Container (Hong Kong) Limited . . . . . . . Hong Kong 50%
Stone Container Japan Co., Ltd. . . . . . . . . . Japan 50%
Tradepak Internacional S.A. de C.V. . . . . . . . Mexico 35.9%
Tradepak International, Inc.. . . . . . . . . . . Delaware 35.9%
Trans-Seal Corporation. . . . . . . . . . . . . . Japan 50%
Venepal S.A.C.A.. . . . . . . . . . . . . . . . . Venezuela 19.7%
Venepal-Stone Forestal, S.A.. . . . . . . . . . . Venezuela 49%
Vertriebsgesellschaft Rohstoffhandel Kiel GmbH. . Germany 37.5%

<PAGE>
EXHIBIT 23

Consent of Independent Accountants
---------------------------------

We hereby consent to the incorporation by reference in the Prospectus
constituting part of the Registration Statements on Form S-3 (Nos. 33-66086 and
333-20467) and in the Registration Statements on Form S-8 (Nos. 2-79221,
33-33784, 33-56345, 33-59189 and 33-66132) of Stone Container Corporation of our
report dated February 10, 1997, except as to Note 2, which is as of February 14,
1997, appearing in this Annual Report on Form 10-K. We also consent to the
incorporation by reference of our report on the Financial Statement Schedule,
which appears in this Form 10-K.

PRICE WATERHOUSE LLP

Chicago, Illinois
March 24, 1997

<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM STONE CONTAINER
CORPORATION AND SUBSIDIARIES' DECEMBER 31, 1996 CONSOLIDATED BALANCE SHEET AND
CONSOLIDATED OPERATIONS AND RETAINED EARNINGS AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 113
<SECURITIES> 0
<RECEIVABLES> 597
<ALLOWANCES> 24
<INVENTORY> 742
<CURRENT-ASSETS> 1561
<PP&E> 4939
<DEPRECIATION> 2305
<TOTAL-ASSETS> 6354
<CURRENT-LIABILITIES> 889
<BONDS> 3951
0
115
<COMMON> 955
<OTHER-SE> (275)
<TOTAL-LIABILITY-AND-EQUITY> 6354
<SALES> 5142
<TOTAL-REVENUES> 5142
<CGS> 4085
<TOTAL-COSTS> 4996
<OTHER-EXPENSES> (79)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 414
<INCOME-PRETAX> (189)
<INCOME-TAX> (66)
<INCOME-CONTINUING> (122)
<DISCONTINUED> 0
<EXTRAORDINARY> (4)
<CHANGES> 0
<NET-INCOME> (126)
<EPS-PRIMARY> (1.35)
<EPS-DILUTED> (1.35)

</TABLE>