<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report (Date of
earliest event reported): May 13, 1997
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Stone Container Corporation
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(Exact name of registrant as specified in its charter)
Delaware 1-3439 36-2041256
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(State or other (Commission (IRS Employer
jurisdiction of File Number) Identification No.)
incorporation)
150 North Michigan Avenue, Chicago, Illinois 60601
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number,
including area code: (312) 346-6600
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N/A
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(Former name or former address, if changed since last report.)
<PAGE>
ITEM 5. OTHER EVENTS
On May 13, 1997, Stone Container Corporation (the "Company") issued a
press release announcing its planned offering (the "Offering") of $250,000,000
aggregate principal amount of Units, each consisting of one Series B 10 3/4%
Senior Subordinated Debenture due 2002 and one Supplemental Interest Certificate
attached thereto (representing an additional amount of interest to be paid on
the outstanding principal amount of the Debenture to be determined at pricing).
The press release is attached as Exhibit 99.1 hereto and is incorporated by
reference herein.
On May 13, 1997, the Company issued a press release announcing $700
million of funding plans. The press release is attached as Exhibit 99.2 hereto
and is incorporated by reference herein.
The Company's Preliminary Prospectus Supplement issued May 13, 1997
to the Prospectus dated February 5, 1997 relating to the Offering includes a
description of certain recent developments and risk factors relating to the
Offering, which descriptions are attached as Exhibit 99.3 hereto and are
incorporated by reference herein.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(c) Exhibits
The exhibits accompanying this report are listed in the accompanying
Exhibit Index.
-2-
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Company has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
STONE CONTAINER CORPORATION
By: /s/ LESLIE T. LEDERER
-----------------------------------
Leslie T. Lederer
Vice President, Secretary
and Counsel
Date: May 13, 1997
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<PAGE>
EXHIBIT INDEX
The following exhibit is filed herewith as noted below:
Exhibit No. Exhibit
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99.1 Press release issued by Stone Container Corporation dated
May 13, 1997
99.2 Press release issued by Stone Container Corporation dated
May 13, 1997
99.3 Description of Recent Developments and Risk Factors from the
Company's Preliminary Prospectus Supplement issued May 13,
1997
99.4 Form T-1 Statement of Eligibility under the Trust Indenture
Act of 1939 of Bank of New York.
-4-
<PAGE>
[LETTERHEAD]
FOR MORE INFORMATION CONTACT:
RANDOLPH C. READ IRA N. STONE
SENIOR VICE PRESIDENT - CHIEF SENIOR VICE PRESIDENT - CHIEF MARKETING,
FINANCIAL & PLANNING OFFICER COMMUNICATIONS & PUBLIC AFFAIRS OFFICER
312/580-4604 312/580-4608
For Immediate Release:
- ----------------------
STONE CONTAINER ANNOUNCES FINANCING
CHICAGO, May 13, 1997 -- Stone Container Corporation announced today that it
is offering ("Offering") $250,000,000 aggregate principal amount of Units,
each consisting of one Series B 10 3/4 percent Senior Subordinated Debenture
due 2002 and one related Supplemental Interest Certificate attached thereto
(representing an additional amount of interest to be paid on the outstanding
principal amount of the Debenture to be determined at pricing). The
Supplemental Interest Certificate is not detachable from, and will trade only
together with, the Debenture.
The Offering is being underwritten and lead by Donaldson, Lufkin & Jenrette
Securities Corporation and BT Securities Corporation. It is anticipated that
the Offering will commence later this week. The Offering will be used to
refinance $150 million principal amount of the Company's 10 3/4 percent
Senior Subordinated Notes due June 15, 1997 and the balance will be used to
fund capital expenditures as incurred.
This press release shall not constitute an offer to sell or the solicitation
of an offer to buy, nor shall there be any sales of Units in any state in
which such offer, solicitation or sale would be unlawful prior to
registration or qualification under the securities law of any such state.
<PAGE>
STONE--Page 2
Stone Container Corporation is a multinational pulp, paper and paper
packaging company. Its product line includes containerboard, corrugated
containers, kraft paper, paper bags and sacks, market pulp and, through its
investment in Stone-Consolidated Corporation, publication papers.
Headquartered in Chicago, the company has manufacturing facilities and sales
offices in North America, Europe, Central and South America, Australia and
Asia.
<PAGE>
[LETTERHEAD]
FOR MORE INFORMATION CONTACT:
RANDOLPH C. READ IRA N. STONE
SENIOR VICE PRESIDENT - CHIEF FINANCIAL SENIOR VICE PRESIDENT - CHIEF
& PLANNING OFFICER COMMUNICATIONS & PUBLIC AFFAIRS OFFICER
(312) 580-4604 (312) 580-4608
STONE CONTAINER ANNOUNCES
$700 MILLION OF FUNDING PLANS
- $250 MILLION OF SUBORDINATED INDEBTEDNESS
- $200 MILLION SENIOR SECURED TERM LOAN
- $95 MILLION MORTGAGE FINANCING
- DM 170 MILLION GERMAN FINANCING
- OTHER ASSET REDUCTIONS AND FINANCING OF $65 MILLION
CHICAGO, May 13, 1997 -- Stone Container Corporation announced today that it
is implementing a funding program that is designed to address the Company's
near-term capital, financing and debt amortization needs, as well as to
increase the Company's subordinated capital base to in excess of $1 billion.
The program, totaling over $700 million, will include:
- - The offering of $250 million of senior subordinated debt due 2002.
- - An underwritten $200 million of a senior secured term loan due 2003.
- - A $95 million mortgage financing commitment on certain of the Company's box
plants.
- - A financing in Germany totaling DM170 million (US $100 million) due through
2004.
- - A $16 million tax exempt financing with a 30-year maturity.
- - Inventory reductions associated with mill downtime expected to reduce
inventories by over $50 million in the near term, available for liquidity.
--more--
<PAGE>
STONE--Page 2
Roger W. Stone, Chairman, President, and Chief Executive Officer commented:
"This significant program immediately addresses the financing and debt
amortization needs of our Company in the near term and restores appropriate
liquidity for the Company."
$250 MILLION SUBORDINATED DEBT: The Company also separately announced the
offering of a $250 million senior subordinated debt financing.
$200 MILLION SENIOR SECURED TERM LOAN: The Company received a commitment for
a $200 million Senior Secured Term Loan due 2003. The term loan is fully
underwritten by Bankers Trust Company.
$95 MILLION MORTGAGE FINANCING: The Company has received a commitment,
subject to confirming due diligence, to fund a $95 million mortgage financing
secured by certain of the Company's corrugated container facilities. The
financing has a 25 year amortization with remaining principal due in 2007.
170 MILLION DEUTSCHE MARK BANK FINANCING: The Company has entered into an
engagement agreement with Dresdner Bank, AG to lead a German bank group
financing due 2004 totaling DM170 million (US $100 million).
$16 MILLION TAX EXEMPT FINANCING: The Company has engaged Morgan Stanley &
Co., Inc. to place a $16 million tax exempt financing due 2027.
INVENTORY REDUCTIONS: As a result of the previously announced mill downtime,
the Company will reduce inventory levels by approximately $50 million, which
will be available for liquidity in the near term.
Randolph C. Read, Senior Vice President and Chief Financial and Planning
Officer, stated, "We have developed this comprehensive program to address the
current financing needs of the Company. These fundings will provide the
Company, along with our current lines of credit, with cash availability of
almost $900 million, while at the same time bringing the Company's
subordinated capital base to over $1 billion."
Stone Container further announced that it intends to schedule a bank meeting
with its lenders under its Credit Agreement, at which it will present various
amendments to that agreement. Those amendments are expected to include
obtaining approval regarding use of proceeds for most of the financings
described above. It is expected that most of the financings will be completed
by June 30, 1997.
--more--
<PAGE>
STONE--Page 3
The Company is currently considering various options regarding the sale or
monetization of certain assets of the Company that, if successfully
completed, could result in a significant reduction of its indebtedness. No
assurance can be given that any such transaction or transactions will be
completed or implemented by the Company.
This communication shall not constitute an offer to sell or the solicitation
of an offer to buy nor shall there be any sale of securities referred to
herein in any state in which such offer, solicitation and sale would be
unlawful prior to registration or qualification under the securities laws of
any such state.
Stone Container Corporation is a multinational paper, paper packaging, and
pulp company. Its product line includes containerboard, corrugated containers,
kraft paper, paper bags and sacks, market pulp and, through its investment in
Stone-Consolidated Corporation, newsprint and groundwood papers.
Headquartered in Chicago, the Company has manufacturing facilities and sales
offices in North America, Europe, Central and South America, Australia and
Asia.
# # #
<PAGE>
RISK FACTORS
ABILITY OF THE COMPANY TO MAKE PAYMENTS
The Company's ability to make interest and principal payments under the
Units depends upon the Company's future performance, which is subject to many
factors, several of which are beyond the Company's control. The Company's 1996
operating cash flow of $288 million was not sufficient to fully fund the
Company's debt service requirements, capital expenditures and investing
activities. If prices do not improve for the Company's products, the Company's
operating cash flows will not fully fund its expected 1997 debt service and
capital expenditure requirements. See "--Significant Leverage and Debt Service
Requirements." The future financial condition and liquidity of the Company could
be adversely affected by, among other things, demand for and sale prices of
paper products, cost of raw materials and other production costs, competition,
general economic developments affecting the Company, future access to credit
markets to finance operations and debt service requirements and refinance
existing indebtedness, environmental and other regulations and other
developments that cannot now be foreseen. Such factors may materially and
adversely affect the ability of the Company to make payments with respect to the
Units.
SIGNIFICANT LEVERAGE AND DEBT SERVICE REQUIREMENTS
In addition to its debt service obligations under the Units, the Company has
significant debt service obligations with respect to its other indebtedness. As
a result of indebtedness incurred by the Company to (i) finance the 1989
acquisition of Stone Container (Canada) Inc. (formerly known as Consolidated-
Bathurst, Inc.) and (ii) fund debt service obligations and fund operating losses
incurred since 1989, the Company is highly leveraged. The Company's long-term
indebtedness and long-term debt to total capitalization ratio were approximately
$4.1 billion and 80.6%, respectively, at March 31, 1997, without including the
Company's obligations under the Units. Capitalization, for purposes of this
ratio, includes long-term debt, deferred income taxes and stockholders' equity.
At May 1, 1997, the Company had borrowing availability under its revolving
credit facilities of approximately $187 million.
As of March 31, 1997, the Company has debt amortization requirements for the
remainder of 1997 of $182.5 million of principal plus interest of approximately
$305 million (based upon the amount of outstanding indebtedness as of March 31,
1997). The principal amounts of long-term debt (excluding capitalized lease
obligations) outstanding at March 31, 1997 and maturing through 2001 and
thereafter are as follows:
<TABLE>
<CAPTION>
THE COMPANY
(EXCLUDING NON-RECOURSE
NON-RECOURSE INDEBTEDNESS OF
INDEBTEDNESS OF CERTAIN CONSOLIDATED
(IN MILLIONS) CERTAIN SUBSIDIARIES) SUBSIDIARIES(1) TOTAL
<S> <C> <C> <C>
1997 (from April 1 to December 31)............. $ 172.3 $ 10.2 $ 182.5
1998........................................... 412.1 18.9 431.0
1999........................................... 658.9(2) 28.6 687.5(2)
2000........................................... 455.2 28.2 483.4
2001........................................... 594.4 28.2 622.6
Thereafter..................................... 1,844.6(3) 151.9 1,996.5(3)
</TABLE>
- ------------------------------
(1) Includes indebtedness (current and long-term) of Stone Venepal (Celgar) Pulp
Inc. of $261.7 million (representing approximately 50% of the aggregate
indebtedness associated with the Celgar Mill) and Fowler Specialty
Packaging, Inc. of $4.3 million, all of which is non-recourse to Stone
Container Corporation. See "Recent Developments--Celgar Pulp Mill."
(2) The revolving credit facility and the supplemental revolving credit facility
under the Company's Credit Agreement mature in May 1999. This amount
includes $331 million outstanding under the revolving credit facilities as
of May 1, 1997, but does not assume any incremental borrowings that may be
outstanding under the revolving credit facilities of the Credit Agreement as
of its expiration.
(3) Does not include the $250 million principal amount of Units offered hereby.
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 obligations, including its debt
service requirements, the Company will either seek to refinance significant
portions of its indebtedness or sell or otherwise monetize certain of its
assets. The Company's financial flexibility and ability to incur additional
indebtedness and, in certain cases, refinance outstanding indebtedness is
limited or restricted under the provisions of the Credit Agreement, the
indentures relating to certain of its Senior
<PAGE>
Indebtedness (the "Senior Indentures") and certain of its other Financial
Obligations (as defined below). Without additional financings or an improvement
in operating results, the Company may be required to pursue other alternatives
to improve liquidity, including cost reductions, sales or monetizations of
assets, deferral of certain discretionary capital expenditures and/or obtaining
additional sources of funds, if available. No assurance can be given that such
measures, if required, would generate the liquidity required by the Company to
operate its business and service its debt obligations, including those with
respect to the Units.
The Company is a party to, and in certain instances is subject to the terms
and provisions of, various significant financial agreements, mortgages,
indentures, instruments, facilities, guarantees and other arrangements
(collectively, the "Financial Obligations"). Certain of the Financial
Obligations evidence indebtedness that is secured by a substantial portion of
the assets of the Company. As of March 31, 1997, approximately $2.4 billion or
approximately 51% of the Company's total indebtedness (including commitments
under its revolving credit facilities) was secured by pledges of, security
interests in and mortgages of the Company's assets, including a substantial
portion of its accounts receivable. All indebtedness under the Credit Agreement,
including borrowings under the revolving credit facilities, is secured by
property, plant and equipment of the Company.
CYCLICALITY, OPERATING LOSSES AND PRICING
The markets for paper, packaging products and market pulp sold by the
Company are highly sensitive to changes in capacity of the paper industry and
cyclical changes in the economy, all of which can significantly impact demand
for and selling prices of the Company's products and thereby the Company's
operating results and financial condition. All of the Company's product lines
suffered declining product prices from 1990 through the third quarter of 1993,
which contributed to the net losses incurred by the Company in each of the four
years from 1991 through 1994. Improved economic conditions and demand/ supply
characteristics in the paper industry enabled the Company to implement price
increases for most of its products beginning in October 1993. Pricing continued
to improve in 1994 and through the third quarter of 1995. However, due to
imbalance in the demand/supply relationship for containerboard, corrugated
containers and market pulp during the third and fourth quarters of 1995,
industry containerboard and market pulp inventories rose during that time. As a
result of that imbalance, containerboard and market pulp prices began declining
during the fourth quarter of 1995, with such price declines continuing through
1996 and, for most of the Company's products, the first quarter of 1997. In
addition, prices for newsprint, which is the primary product of
Stone-Consolidated, have also declined and remain below levels achieved during
the last cycle. The Company took market-related downtime at certain of its mills
in 1995 and 1996 and has taken and will take further downtime in 1997.
The Company recorded a net loss of $126.2 million in 1996, which represented
a significant decrease from the $255.5 million of net earnings in 1995. In
addition, the Company recorded a net loss of $96.7 million for the first quarter
of 1997, as compared to net income of $32.4 million for the first quarter of
1996, and for the second quarter of 1997 the Company will report a net loss and
expects operating cash flow to remain weak. The Company also recorded net losses
of $204.6 million, $358.7 million and $269.4 million in 1994, 1993 and 1992,
respectively. Unless and until demand and prices increase, the Company will
continue to incur net losses. The Company's highly leveraged capital structure
makes it vulnerable during industry down cycles, which adversely affects its
financial flexibility and available sources of liquidity and, as a result,
adversely affect its ability to service its debt obligations, including payment
with respect to the Units.
CREDIT AGREEMENT RESTRICTIONS
Borrowings under the Credit Agreement are secured by a substantial portion
of the assets of the Company. The Credit Agreement contains covenants that
include, among other things, the maintenance of certain financial tests and
ratios consisting of an indebtedness ratio and a minimum interest coverage
ratio. The Credit Agreement also contains certain restrictions and limitations,
including those on capital expenditures, changes in control, payment of
dividends, sales of assets, lease payments, investments, additional
indebtedness, liens, repurchases or prepayments of certain indebtedness,
guarantees of indebtedness, mergers and purchases of stock and assets. The
Credit Agreement also contains cross-default provisions to indebtedness of $10
million or more of the Company and certain subsidiaries. Additionally,
<PAGE>
the term loan portion of the Credit Agreement, subject to certain exceptions,
provides for mandatory prepayments from sales of certain assets, certain debt
financings and a percentage of Excess Cash Flow (as defined in the Credit
Agreement).
The Company is required to maintain compliance with the prescribed financial
ratio tests, including indebtedness ratio and interest coverage ratio tests, and
other requirements contained in the Credit Agreement. At March 31, 1997, the
Company's indebtedness ratio and interest coverage ratio were .82 to 1 and .84
to 1, respectively. See "Credit Agreement--Covenants" in the accompanying
Prospectus for a description of the prescribed financial ratio tests. The
Company has begun the process of seeking covenant relief from its bank lenders
prior to June 30, 1997. Failure to maintain compliance with such financial ratio
tests or other requirements under the Credit Agreement, in the absence of a
waiver or amendment, would result in an event of default and could lead to
acceleration of the obligations under the Credit Agreement. There can be no
assurance, however, that the Company's bank lenders will grant such relief. See
"--Significant Leverage and Debt Service Requirements" herein and "Credit
Agreement" in the accompanying Prospectus.
SENIOR INDENTURE RESTRICTIONS; MINIMUM SUBORDINATED CAPITAL BASE REQUIREMENT
Pursuant to the Company's various Senior Indentures, under which an
aggregate of approximately $2.0 billion of debt was outstanding at March 31,
1997, the ability of the Company to incur additional indebtedness or additional
liens is subject to prescribed limitations. As a result of the cash flow
performance of the Company, the permitted debt baskets have been significantly
utilized thereby limiting future liquidity options. In addition, sales of
certain assets will further reduce certain debt baskets.
The Senior Indentures also provide that in the event that the Company's
Subordinated Capital Base is less than $1 billion (the "Minimum Subordinated
Capital Base") at the end of each of any two consecutive fiscal quarters, the
Company would be required to make a semi-annual offer to purchase at par (a
"Deficiency Offer") 10% of the aggregate principal amount of such Senior
Indebtedness outstanding under the Senior Indentures until the Company's Minimum
Subordinated Capital Base is again attained. The Credit Agreement does not
permit borrowings under the revolving credit facilities in order to repurchase
indebtedness pursuant to a Deficiency Offer. In the event that provisions of the
Credit Agreement would not permit a Deficiency Offer, the Company would be
required to increase the rates on such Senior Indebtedness by 50 basis points
per quarter up to a maximum of 200 basis points until the Minimum Subordinated
Capital Base is again attained. See "Particular Terms of the Senior Debt
Securities--Certain Covenants--Maintenance of Subordinated Capital Base" in the
accompanying Prospectus.
The Company's Subordinated Capital Base was approximately $900 million at
March 31, 1997. The issuance of the Units is currently expected to increase the
Subordinated Capital Base to a level above the Minimum Subordinated Capital Base
for the quarter ending June 30, 1997. There is, however, no assurance that the
Company can achieve or maintain the Minimum Subordinated Capital Base in the
future, as losses serve to decrease Consolidated Net Worth (as defined in the
Senior Indentures), a component of the Subordinated Capital Base.
MINIMUM NET WORTH
The Senior Subordinated Indenture provides that if the Company's Net Worth
(as defined in the Senior Subordinated Indenture) is below $500 million at the
end of any two consecutive fiscal quarters, then (i) the interest rate on each
series of securities issued thereunder shall be reset to a specified amount over
the particular treasury rate identified in such series (but only if such reset
rate is greater than the initial interest rate of such series) and (ii) the
interest rate of such series shall increase by 50 basis points on each
succeeding interest payment date up to a maximum of 200 basis points (the
"Minimum Net Worth Interest Rate Adjustment"). Once the Company's Net Worth
returns to at least $500 million, the interest rate on such series shall return
to its initial rate as of the first day of the second following fiscal quarter.
As of March 31, 1997, the aggregate outstanding principal amount of securities
subject to the Minimum Net Worth Interest Rate Adjustment was $469 million (does
not include the aggregate amount of Units to be offered hereby).
<PAGE>
The Company's Net Worth was $795.2 million at December 31, 1996 and $654.8
million at March 31, 1997. In the event that the Company subsequently incurs net
losses, the Company's Net Worth would be correspondingly reduced. See
"Description of Units--Minimum Net Worth Interest Rate Adjustment" herein and
"Particular Terms of the Senior Subordinated Debt Securities--Certain
Covenants--Minimum Net Worth Interest Rate Adjustment" in the accompanying
Prospectus.
FIBER SUPPLY AND PRICING
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. The Company purchases or cuts a variety of species of
timber from which the Company utilizes wood fiber. The supply and price of wood
fiber in particular are dependent upon a variety of factors over which the
Company has no control, including environmental and conservation regulations,
natural disasters, such as forest fires and hurricanes, and weather. In
addition, an increase in demand for the Company's and the paper industry's
products would result in greater demand for raw materials, and, coupled with
decreased sources of supply, could translate into higher raw material prices,
including a significant increase in the costs of recycled fiber.
The cost of recycled fiber is highly volatile. Over the past two years,
prices of old corrugated containers ("OCC"), the primary source of recycled
fiber, had risen to levels as high as $200 per ton and dropped to levels as low
as $15 per ton. Currently the price of OCC is $55-$80 per ton. It is possible
that the increase in capacity of mills utilizing recycled fiber may cause the
price of OCC to rise. In addition, increased utilization of recycled fiber may
cause decreased sources of supply. While the Company has not experienced any
significant difficulty in obtaining wood fiber and recycled fiber for its mills,
there can be no assurance that this will continue to be the case for any or all
of its mills. See "Business--Fiber Supply."
COMPETITION
The paper, packaging products and market pulp produced by the Company are
sold in highly competitive markets. The Company faces competition from a variety
of sources, including other companies attempting to expand production through
the use of greater recycled fiber content products and products manufactured
from other materials. The Company competes directly with a number of such other
producers, many of which have financial and other resources greater than those
of the Company and are able to better withstand the adverse nature of the
current business cycle. See "Business--Markets and Competition."
ENVIRONMENTAL MATTERS
The Company's operations are subject to extensive environmental regulation
by federal, state and local authorities in the United States and regulatory
authorities with jurisdiction over its foreign operations. The Company has, in
the past, made significant capital expenditures to comply with water, air and
solid and hazardous waste regulations and expects to make significant
expenditures in the future. Capital expenditures for environmental control
equipment and facilities were approximately $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. 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 proposed rules 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
<PAGE>
complex, burdensome and environmentally unjustified. Estimates, based on the
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
imposed under the final rules, advancements in control process technologies,
possible reconfiguration of mills and inflation.
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. See "Business--Legal Proceedings." 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.
SUBORDINATION OF THE UNITS
The Units will be senior subordinated unsecured obligations of the Company
and will (i) be subordinated in right of payment to all existing and future
Senior Indebtedness of the Company, including the indebtedness under the Credit
Agreement and the Company's $239 million outstanding principal amount of 11 7/8%
Senior Notes due 1998, $150 million outstanding principal amount of 12 5/8%
Senior Notes due 1998, $574 million outstanding principal amount of 9 7/8%
Senior Notes due 2001, $497 million outstanding principal amount of 10 3/4%
First Mortgage Notes due 2002 (the "First Mortgage Notes"), $199 million
outstanding principal amount of 11 1/2% Senior Notes due 2004, the $125 million
outstanding principal amount of Rating Adjustable Senior Notes due 2016 and the
Company's guaranty of $200 million outstanding principal amount of 11 1/2%
Senior Notes due 2006 of Stone Container Finance Company of Canada, (ii) be
senior in right of payment to all existing and future Junior Subordinated
Indebtedness of the Company, including the Company's $45 million outstanding
principal amount of 6 3/4% Convertible Subordinated Debentures due 2007, and
(iii) rank PARI PASSU with its $150 million outstanding principal amount of
10 3/4% Senior Subordinated Notes due 1997, $119 million outstanding principal
amount of 11% Senior Subordinated Notes due 1999, $199 million outstanding
principal amount of 10 3/4% Senior Subordinated Debentures due 2002 and $58
million outstanding principal amount of 8 7/8% Convertible Senior Subordinated
Notes due 2000. As of March 31, 1997, the total amount of outstanding Senior
Indebtedness of the Company was approximately $3.6 billion. See "Recent
Developments--Other Financings and Working Capital Changes."
A substantial portion of the Company's assets currently secure borrowings
outstanding under the Credit Agreement. At May 1, 1997, the Company had $1.1
billion outstanding under the Credit Agreement. The Company's First Mortgage
Notes, of which there was $497 million outstanding as of March 31, 1997, are
secured by four of the Company's mills and related assets. In the event of the
Company's insolvency or liquidation, the claims of the lenders under the Credit
Agreement would have to be satisfied out of the collateral securing borrowings
under the Credit Agreement before any such assets would be available to pay
claims of holders of the Units. Similarly, the holders of the First Mortgage
Notes would have to be satisfied out of the collateral under the indenture and
related security documents with respect to the First Mortgage Notes before any
such assets would be available to pay claims of holders of the Units. If the
lenders under the Credit Agreement and/or the First Mortgage Note trustee under
the First Mortgage Note indenture and the related security documents should
foreclose on their respective collateral, no assurance can be given that there
will be sufficient assets available in the Company to pay
<PAGE>
amounts due with respect to the Units. In addition, obligations of the Company's
subsidiaries, including trade payables of any such subsidiaries, will represent
prior claims with respect to the assets and earnings of such subsidiaries.
FUTURE ACCESS TO THE CAPITAL MARKETS
On April 18, 1997, Moody's Investors Service, Inc. downgraded the Company's
senior unsecured debt rating from B1 to B2 and senior subordinated debt rating
from B2 to B3. On April 25, 1997, Standard & Poor's Corporation downgraded the
Company's senior unsecured debt rating from B+ to B and subordinated debt rating
from B to B-. In addition, giving effect to the offering of the Units, the
Company will have sold debt securities on a number of occasions in the last
twelve months for total proceeds in excess of $600 million. No assurance can be
given regarding the Company's ability to access the capital markets in the
future. See "--Credit Agreement Restrictions" and "--Senior Indenture
Restrictions; Minimum Subordinated Capital Base Requirements."
CHANGE OF CONTROL
Upon the occurrence of a Change of Control, and subject to the prior rights
of certain lenders under Specified Bank Debt, the Company is required to offer
to purchase each holder's Units at a purchase price equal to 101% of the
aggregate principal amount thereof, plus accrued and unpaid interest, if any, to
the date of purchase. In the event of a highly leveraged transaction,
reorganization, restructuring, merger or similar transaction involving the
Company falling outside the definition of Change of Control, the Change of
Control provisions would afford no protection to the holders of the Units. See
"Description of Units-- Change of Control" herein and "Particular Terms of the
Senior Subordinated Debt Securities--Change of Control" in the accompanying
Prospectus. There can be no assurance that the Company would have sufficient
funds to pay the required purchase price for all Units tendered by the holders
thereof in the event of a Change of Control. Neither the Board of Directors of
the Company nor the Senior Subordinated Trustee may waive the Change of Control
provisions.
LACK OF PUBLIC MARKET
Prior to this offering, there has been no market for the Units. The
Underwriters have informed the Company that they currently intend to make a
market in the Units as permitted by applicable laws and regulations; however,
the Underwriters are not obligated to do so and may discontinue market making at
any time without notice. There can be no assurance as to the development of any
market for the Units, or as to the liquidity of any market that may develop for
the Units. The Units could trade at prices that may be lower than their initial
offering price as a result of many factors, including prevailing interest rates,
the Company's operating results and the markets for similar debt securities.
<PAGE>
RECENT DEVELOPMENTS
RESULTS OF OPERATIONS
The Company recorded a net loss of $96.7 million for the first quarter of
1997, as compared with net income of $32.4 million for the first quarter of
1996, and for the second quarter of 1997 the Company will report a net loss and
expects operating cash flow to remain weak. Sales for the first quarter of 1997
were $1.18 billion, compared to $1.32 billion for the first quarter of 1996
(first quarter 1996 results included approximately $59 million of retail bag
sales, now reported as part of S&G Packaging Company, L.L.C., a non-consolidated
affiliate of the Company). The first quarter 1997 net loss resulted, in part,
from low operating margins primarily attributable to significantly lower average
selling prices for most of the Company's products.
STONE-CONSOLIDATED--ABITIBI-PRICE
On February 14, 1997, Stone-Consolidated and Abitibi-Price Inc. announced
that they have agreed to amalgamate the two companies under Canadian law to
create Abitibi-Consolidated Inc. The Company currently owns approximately 46.6%
of the common stock of Stone Consolidated. The transaction is scheduled to close
in the second quarter of 1997 subject to certain conditions, including approval
of the shareholders of each of Stone-Consolidated and Abitibi Price Inc. and
receipt of requisite regulatory approvals. Following the amalgamation, the
Company would own approximately 25% of the common stock of Abitibi-Consolidated
Inc., which would be a significant manufacturer and marketer of publication
grade papers with combined annual revenues on a pro forma basis of approximately
Cdn. $4.7 billion. As of May 1, 1997, the Company's interest in
Stone-Consolidated had a market value of approximately US $820 million, based on
the per share price as reported by the Toronto Stock Exchange and the prevailing
exchange rate at such time.
CELGAR PULP MILL
In April 1997, Stone Venepal (Celgar) Pulp, Inc. ("SVCPI"), a 90% owned
subsidiary of the Company, acquired the assets comprising the remaining 50%
interest (the "Additional Celgar Assets") in the Celgar pulp mill (the "Celgar
Mill") in Castlegar, British Columbia from CITIC B.C. Inc. ("CITIC"), an
indirect subsidiary of China International Trust Investment Corporation of
Beijing, People's Republic of China. The Company now owns a 90% interest in the
Celgar Mill. SVCPI acquired the Additional Celgar Assets in exchange for the
assumption of the portion of the Celgar Mill's indebtedness owed by CITIC. See
"Risk Factors--Significant Leverage and Debt Service Requirements." Such
indebtedness is non-recourse to Stone Container Corporation. The Company is in
discussions with a third party to sell 50% of the Company's interest in the
Celgar Mill.
DIVIDENDS
On January 27, 1997, the Company announced that it would not pay its first
quarter cash dividend on its Common Stock and on March 26, 1997, the Company
announced that it would not declare the May quarterly dividend on its Series E
Cumulative Convertible Exchangeable Preferred Stock, each due to restrictions
contained in the Company's Credit Agreement and certain of the Company's
indentures, as well as the Company's desire to reduce its outstanding
indebtedness.
OTHER FINANCINGS AND WORKING CAPITAL CHANGES
The Company has entered into an underwritten commitment for $200 million of
senior secured debt to be incorporated into the Credit Agreement (the "Series E
Tranche"). In addition, the Company is actively in the process of effecting
certain financings, which include a secured loan from Dresdner Bank AG to the
Company's German subsidiary denominated in deutsche marks, a box plant mortgage
financing and a tax exempt 30-year financing expected to be underwritten by
Morgan Stanley & Co. Incorporated. The Company currently expects that these
activities, together with the Series E Tranche, will generate aggregate net
proceeds in excess of US $400 million. The Company's use of such proceeds (for
uses other than repayment of Credit Agreement indebtedness) may be restricted
pursuant to the terms of the Credit Agreement. The Company is in discussions
with its bank group to remove or modify such restrictions so that such proceeds
may be used for general corporate purposes. The Company's ability to consummate
<PAGE>
these transactions and financings is subject to certain conditions beyond the
control of the Company, including market conditions and, in certain
circumstances, amendments under the Credit Agreement. Therefore, no assurance
can be given that such transactions can be fully or timely implemented or that
the Company will receive the expected funds therefrom. In addition, inventory
reductions associated with mill downtime are expected to reduce inventories by
approximately $50 million.
ASSET SALES/MONETIZATIONS
The Company is currently considering various options regarding the sale or
monetization of certain assets of the Company that, if successfully completed,
could result in a significant reduction of its indebtedness. No assurance can be
given that any such transaction or transactions will be completed or implemented
by the Company.
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
FORM T-1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
STATEMENT OF ELIGIBILITY
UNDER THE TRUST INDENTURE ACT OF 1939 OF A
CORPORATION DESIGNATED TO ACT AS TRUSTEE
CHECK IF AN APPLICATION TO DETERMINE
ELIGIBILITY OF A TRUSTEE PURSUANT TO
SECTION 305(b)(2) |__|
-------------------------
THE BANK OF NEW YORK
(Exact name of trustee as specified in its charter)
New York 13-5160382
(State of incorporation (I.R.S. employer
if not a U.S. national bank) identification no.)
48 Wall Street, New York, N.Y. 10286
(Address of principal executive offices) (Zip code)
-------------------------
STONE CONTAINER CORPORATION
(Exact name of obligor as specified in its charter)
Delaware 36-2041256
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
150 North Michigan Avenue
Chicago, Illinois 60601
(Address of principal executive offices) (Zip code)
-------------------------
Debt Securities
(Title of the indenture securities)
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
1. GENERAL INFORMATION. FURNISH THE FOLLOWING INFORMATION AS TO THE TRUSTEE:
(a) NAME AND ADDRESS OF EACH EXAMINING OR SUPERVISING AUTHORITY TO WHICH
IT IS SUBJECT.
- --------------------------------------------------------------------------------
Name Address
- --------------------------------------------------------------------------------
Superintendent of Banks of the State of 2 Rector Street, New York,
New York N.Y. 10006, and Albany, N.Y.
12203
Federal Reserve Bank of New York 33 Liberty Plaza, New York,
N.Y. 10045
Federal Deposit Insurance Corporation Washington, D.C. 20429
New York Clearing House Association New York, New York 10005
(b) WHETHER IT IS AUTHORIZED TO EXERCISE CORPORATE TRUST POWERS.
Yes.
2. AFFILIATIONS WITH OBLIGOR.
IF THE OBLIGOR IS AN AFFILIATE OF THE TRUSTEE, DESCRIBE EACH SUCH
AFFILIATION.
None.
16. LIST OF EXHIBITS.
EXHIBITS IDENTIFIED IN PARENTHESES BELOW, ON FILE WITH THE COMMISSION, ARE
INCORPORATED HEREIN BY REFERENCE AS AN EXHIBIT HERETO, PURSUANT TO RULE
7A-29 UNDER THE TRUST INDENTURE ACT OF 1939 (THE "ACT") AND 17 C.F.R.
229.10(d).
1. A copy of the Organization Certificate of The Bank of New York
(formerly Irving Trust Company) as now in effect, which contains the
authority to commence business and a grant of powers to exercise
corporate trust powers. (Exhibit 1 to Amendment No. 1 to Form T-1
filed with Registration Statement No. 33-6215, Exhibits 1a and 1b to
Form T-1 filed with Registration Statement No. 33-21672 and Exhibit 1
to Form T-1 filed with Registration Statement No. 33-29637.)
4. A copy of the existing By-laws of the Trustee. (Exhibit 4 to Form T-1
filed with Registration Statement No. 33-31019.)
-2-
<PAGE>
6. The consent of the Trustee required by Section 321(b) of the Act.
(Exhibit 6 to Form T-1 filed with Registration Statement No.
33-44051.)
7. A copy of the latest report of condition of the Trustee published
pursuant to law or to the requirements of its supervising or examining
authority.
-3-
<PAGE>
SIGNATURE
Pursuant to the requirements of the Act, the Trustee, The Bank of New York,
a corporation organized and existing under the laws of the State of New York,
has duly caused this statement of eligibility to be signed on its behalf by the
undersigned, thereunto duly authorized, all in The City of New York, and State
of New York, on the 7th day of May, 1997.
THE BANK OF NEW YORK
By: /s/ Mary LaGumina
-------------------------------
Name: MARY LAGUMINA
Title: ASSISTANT VICE PRESIDENT
<PAGE>
EXHIBIT 7
Consolidated Report of Condition of
THE BANK OF NEW YORK
of 48 Wall Street, New York, N.Y. 10286
And Foreign and Domestic Subsidiaries,
a member of the Federal Reserve System, at the close of business September 30,
1996, published in accordance with a call made by the Federal Reserve Bank of
this District pursuant to the provisions of the Federal Reserve Act.
Dollar Amounts
ASSETS in Thousands
Cash and balances due from depos-
itory institutions:
Noninterest-bearing balances and
currency and coin .................. $ 4,404,522
Interest-bearing balances .......... 732,833
Securities:
Held-to-maturity securities ........ 789,964
Available-for-sale securities ...... 2,005,509
Federal funds sold in domestic offices
of the bank:
Federal funds sold ................... 3,364,838
Loans and lease financing
receivables:
Loans and leases, net of unearned
income ........................... 28,728,602
LESS: Allowance for loan and
lease losses ..................... 584,525
LESS: Allocated transfer risk
reserve........................... 429
Loans and leases, net of unearned
income, allowance, and reserve.... 28,143,648
Assets held in trading accounts ...... 1,004,242
Premises and fixed assets (including
capitalized leases) ................ 605,668
Other real estate owned .............. 41,238
Investments in unconsolidated
subsidiaries and associated
companies .......................... 205,031
Customers' liability to this bank on
acceptances outstanding ............ 949,154
Intangible assets .................... 490,524
Other assets ......................... 1,305,839
-----------
Total assets ......................... $44,043,010
-----------
-----------
LIABILITIES
Deposits:
In domestic offices ................ $20,441,318
Noninterest-bearing ................ 8,158,472
Interest-bearing ................... 12,282,846
In foreign offices, Edge and
Agreement subsidiaries, and IBFs ... 11,710,903
Noninterest-bearing ................ 46,182
Interest-bearing .................. 11,664,721
Federal funds purchased in
domestic offices of the
bank:
Federal funds purchased ............ 1,565,288
Demand notes issued to the U.S.
Treasury ........................... 293,186
Trading liabilities .................. 826,856
Other borrowed money:
With original maturity of one year
or less .......................... 2,103,443
With original maturity of more than
one year ......................... 20,766
Bank's liability on acceptances exe-
cuted and outstanding .............. 951,116
Subordinated notes and debentures .... 1,020,400
Other liabilities .................... 1,522,884
-----------
Total liabilities .................... 40,456,160
-----------
-----------
EQUITY CAPITAL
Common stock ......................... 942,284
Surplus .............................. 525,666
Undivided profits and capital
reserves ........................... 2,129,376
Net unrealized holding gains
(losses) on available-for-sale
securities ......................... ( 2,073)
Cumulative foreign currency transla-
tion adjustments ................... ( 8,403)
-----------
Total equity capital ................. 3,586,850
-----------
Total liabilities and equity
capital ............................ $44,043,010
-----------
-----------
I, Robert E. Keilman, Senior Vice President and Comptroller of the
above-named bank do hereby declare that this Report of Condition has been
prepared in conformance with the instructions issued by the Board of Governors
of the Federal Reserve System and is true to the best of my knowledge and
belief.
Robert E. Keilman
We, the undersigned directors, attest to the correctness of this Report of
Condition and declare that it has been examined by us and to the best of our
knowledge and belief has been prepared in conformance with the instructions
issued by the Board of Governors of the Federal Reserve System and is true and
correct.
J. Carter Bacot
Thomas A. Renyi Directors
Alan R. Griffith
