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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, 1993.
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________ to ________________.
Commission file number 1-3439
STONE CONTAINER CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 36-2041256
- -------------------------------------------- ---------------------------------------
(State or other jurisdiction of (I.R.S. employer identification no.)
incorporation
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:
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
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
11 1/2% Senior Subordinated Notes due
September 1, 1999 New York Stock Exchange
12 1/8% Subordinated Debentures due
September 15, 2001 (Southwest Forest
Industries, Inc.) New York Stock Exchange
10 3/4% Senior Subordinated Debentures due
April 1, 2002 New York Stock Exchange
6 3/4% Convertible Subordinated Debentures
due February 15, 2007 New York Stock Exchange
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. (X)
The aggregate market value as of March 1, 1994 of the voting common
stock held by non-affiliates of the Registrant was approximately
$1,227,000,000.
The number of shares of common stock outstanding at March 1, 1994 was
90,392,433.
The Proxy Statement, to be filed on or before April 30, 1994, for the
Annual Meeting of Stockholders scheduled May 10, 1994 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" and "Performance Graph."
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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, 1993, 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 sections
entitled "Financial Condition and Liquidity," pages 15-22, and to the Financial
Statements, included in this report, under Notes to the Consolidated Financial
Statements, "Note 2--Subsequent Events," page 39, "Note
3--Acquisitions/Mergers/Dispositions," pages 39-40, "Note 4--Public Offering of
Subsidiary Stock," page 40, "Note 16--Related Party Transactions," pages 58-59,
and "Note 19--Segment Information," pages 62-64.
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
Financial information relating to the Registrant's industry segments, for
the year ended December 31, 1993, is incorporated herein by reference to the
MD&A, included in this report, under the section entitled "Results of
Operations," pages 11-15, and to the Financial Statements, included in this
report, under Notes to the Consolidated Financial Statements, "Note 19--Segment
Information," pages 62-64.
(C) NARRATIVE DESCRIPTION OF BUSINESS
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 "General," page 11,
"Results of Operations," pages 11-15, "Investing Activities," page 21, and
"Environmental Issues," pages 21-22, and to the Financial Statements, included
in this report, under Notes to the Consolidated Financial Statements, "Note
3--Acquisitions/Mergers/Dispositions," pages 39-40, "Note 4--Public Offering of
Subsidiary Stock," page 40, and "Note 19--Segment Information," pages 62-64.
1
PROFILE
A) PAPERBOARD AND PAPER PACKAGING:
1) CONTAINERBOARD AND CORRUGATED CONTAINERS:
MARKETS:
A board range of manufacturers of consumable and durable goods and
other manufacturers of corrugated containers.
INDUSTRY POSITION: Industry leader
MANUFACTURING FACILITIES: Production at 17 mills
Converting at 120 plants
1993 PRODUCTION & SHIPMENTS:
4.388 million short tons of containerboard produced
52.5 billion square feet of corrugated containers shipped
2) KRAFT PAPER AND BAGS AND SACKS:
MARKETS:
Supermarket chains and other retailers of consumable products.
Industrial and consumer bags sold to the food, agricultural,
chemical and cement industries, among others.
INDUSTRY POSITION: Industry leader
MANUFACTURING FACILITIES: Production at 5 mills
Converting at 18 plants
1993 PRODUCTION & SHIPMENTS:
500 thousand short tons of kraft paper produced
613 thousand short tons of paper bags and sacks shipped
3) BOXBOARD, FOLDING CARTONS AND OTHER:
MARKETS:
Manufacturers of consumable goods, especially food, beverage and
tobacco products, and other box manufacturers.
INDUSTRY POSITION: A major position in Europe; a nominal position
in North America
MANUFACTURING FACILITIES: Production at 2 mills
Converting at 10 plants
1993 PRODUCTION & SHIPMENTS:
81 thousand short tons of boxboard and other paperboard
produced
92 thousand short tons of folding cartons and partitions
shipped
B) WHITE PAPER AND PULP:
1) NEWSPRINT
MARKETS:
Newspaper publishers and commercial printers.
INDUSTRY POSITION: A major position
MANUFACTURING FACILITIES: Production at 5 mills
1993 PRODUCTION & SHIPMENTS:
1.312 million short tons produced
2) UNCOATED GROUNDWOOD PAPER
MARKETS:
Producers of advertising materials, magazines, directories and
computer papers.
INDUSTRY POSITION: A major position
MANUFACTURING FACILITIES: Production at 2 mills
1993 PRODUCTION & SHIPMENTS:
461 thousand short tons produced
3) MARKET PULP
MARKETS:
Manufacturers of paper products, including fine papers,
photographic papers, tissue and newsprint.
INDUSTRY POSITION: A major position
MANUFACTURING FACILITIES: Production at 6 mills
1993 PRODUCTION & SHIPMENTS:
733 thousand short tons produced
C) WOOD PRODUCTS:
1) LUMBER, PLYWOOD AND VENEER:
MARKETS:
Construction and furniture industries.
INDUSTRY POSITION: A moderate position in North America
MANUFACTURING FACILITIES: Production at 17 mills
1993 PRODUCTION & SHIPMENTS:
581 million board feet of lumber produced
425 million square feet of plywood and veneer produced
Wood fiber and waste paper constitute the basic raw materials from
which the Company's principal products are made. The Company's wood
procurement operations provide wood fiber for the Company's mills.
Wood fiber resources are generally available within economic proximity
of the Registrant's mills and the Registrant has not experienced any
significant difficulty in obtaining such resources, although the
supply of timber in the United States continues to decrease due to
environmental concerns in the Pacific Northwest. At December 31, 1993,
the Company owned approximately 11 thousand and 339 thousand acres of
private fee timberland in the United States and Canada, respectively.
2
The Registrant'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 Registrant.
The Registrant's business is affected by cyclical industry conditions and
economic factors affecting its products. These conditions and factors affect the
prices which the Registrant is able to charge for its products. Export sales may
be affected by fluctuations in foreign exchange rates.
Backlogs are not a significant factor in the industry in which the
Registrant operates; most orders placed with the Registrant are for delivery
within 60 days or less.
The major markets in which the Registrant sells its principal products are
highly competitive. Its products compete with similar products produced by
others and, in some instances, with products produced from other materials.
Areas of competition include price, innovation, quality and service.
The Registrant owns patents, licenses, trademarks and tradenames on
products. The loss of any patent, license, trademark and tradename would not
have a material adverse effect on the Registrant's operations.
As of December 31, 1993, the Registrant had approximately 29,000 employees,
of whom approximately 21,100 were employees of U.S. operations and the remainder
were employees of foreign operations. Of those in the United States,
approximately 12,300 are union employees.
(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, 1993, is
incorporated herein by reference to the Financial Statements, included in this
report, under Notes to the Consolidated Financial Statements, "Note 19--Segment
Information," pages 62-64. The Company's results are affected by economic
conditions in certain foreign countries and fluctuations in foreign exchange
rates, particularly in the white paper and pulp segment, where the majority of
such operations of the Company are conducted in Canada and the United Kingdom.
ITEM 2. PROPERTIES
The Registrant, including its subsidiaries and affiliates, maintains
manufacturing facilities and sales offices throughout North America, Continental
Europe and the United Kingdom, as well as sales offices in Japan and China. A
listing of such worldwide facilities as of December 31, 1993 is provided on
pages 5-6 of this report.
The approximate annual production capacity of the Company's mills is
summarized in the following table:
PAPERBOARD AND WHITE PAPER
PAPER PACKAGING AND PULP TOTAL
DECEMBER 31, (IN ----------------- ----------------- -----------------
THOUSANDS OF SHORT TONS) 1993 1992 1993 1992 1993 1992
- ------------------------------ ------ ------ ------ ------ ------ ------
United States (1)............. 4,583 4,572 853 847 5,436 5,419
Canada (2)(3)................. 429 436 1,832 1,783 2,261 2,219
Europe(3)..................... 314 310 307 306 621 616
Other (4)..................... -- 58 -- -- -- 58
------ ------ ------ ------ ------ ------
5,326 5,376 2,992 2,936 8,318 8,312
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
- ---------
(1) Includes 100 percent of the Seminole Kraft Corporation ("Seminole") and
Stone Savannah River Pulp & Paper Corporation ("Stone Savannah River")
mills.
(2) Includes 25 percent of the Celgar mill.
(3) Includes 100 percent of Stone-Consolidated Corporation
(Stone-Consolidated).
(4) Includes 49 percent of the Empaques de Carton Titan, S.A., ("Titan") mill
at December 31, 1992.
All mills and converting facilities are owned, or partially owned through
investments in other companies, by the Registrant, except for 45 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, 9 bag plants and 45
corrugated container plants, including those subject to a leasehold mortgage.
3
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, 1993 is incorporated herein by reference to the Financial
Statements, included in this report, under the Notes to the Consolidated
Financial Statements, "Note 3--Acquisitions/Mergers/Dispositions," pages 39-40,
"Note 4--Public Offering of Subsidiary Stock," page 40, "Note 10--Long-term
Debt," pages 47-53, and "Note 13--Long-term Leases," pages 54-55.
4
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)
-Happy Camp (forest products)
-Los Angeles (bag)
-Salinas (corrugated container)
-San Jose (corrugated container)
-Santa Fe Springs (corrugated container, 2)
COLORADO
-Denver (corrugated container)
-South Fork (forest products)
CONNECTICUT
-Portland (corrugated container)
-Torrington (corrugated container)
-Uncasville (paperboard/paper/pulp)
FLORIDA
-Cantonment (bag)
(Pensacola)
-Graceville (forest products)
-Jacksonville (paperboard/paper/pulp)
-Panama City (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
-Bedford Park (corrugated container)
(Chicago)
-Bloomington (corrugated container)
-Cameo (corrugated container)
(Chicago)
-Danville (corrugated container)
-Herrin (affiliate); (corrugated container)
-Joliet (corrugated container)
-Naperville (corrugated container)
(Chicago)
-North Chicago (corrugated container)
-Plainfield (bag)
-Quincy (bag)
-Zion (affiliate); (corrugated container)
-Burr Ridge (paperboard/paper/pulp)
Techonolgy and Engineering Center
-Oak Brook (corrugated container)
Marketing and Technical Center
INDIANA
-Columbus (corrugated container)
-Indianapolis (corrugated container)
-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 (bag), (paperboard/paper/pulp)
-New Orleans (corrugated container)
MARYLAND
-Savage (bag)
(Baltimore)
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), (bag)
-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 MEXICO
-Reserve (forest products)
NEW YORK
-Buffalo (corrugated container)
NORTH CAROLINA
-Charlotte (corrugated container)
-Lexington (corrugated container)
-Raleigh (corrugated container)
NORTH DAKOTA
-Fargo (corrugated container)
-Grand Forks (bag)
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)
OREGON
-Albany (forest products)
-Grants Pass (forest products)
-Medford (forest products)
-Springfield (forest products)
-White City (forest products)
PENNSYLVANIA
-Philadelphia (corrugated container, 2)
-Williamsport (corrugated container)
-York (paperboard/paper/pulp)
SOUTH CAROLINA
-Columbia (corrugated container), (forest products)
-Florence (paperboard/paper/pulp)
-Fountain Inn (corrugated container)
-Orangeburg (forest products)
SOUTH DAKOTA
-Sioux Falls (corrugated container)
TENNESSEE
-Chattanooga (corrugated container)
-Collierville (corrugated contaier)
(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), (bag)
WEST VIRGINIA
-Wellsburg (bag)
WISCONSIN
-Beloit (corrugated container)
-Germantown (corrugated container)
(Milwaukee)
-Neenah (corrugated container)
5
CANADA:
ALBERTA
-Calgary (affiliate); (corrugated container)
-Edmonton (affiliate); (corrugated container)
BRITISH COLUMBIA
-Castlegar (affiliate); (paperboard/paper/pulp)
-New Westminster (affiliate); (corrugated container)
MANITOBA
-Winnepeg (affiliate); (corrugated container)
NEW BRUNSWICK
-Bathurst (paperboard/paper/pulp); (forest products)
-Saint John (affiliate); (corrugated container)
NOVA SCOTIA
*Dartmouth (corrugated container)
ONTARIO
-Etobicoke (affiliate); (corrugated container)
-Guelph (affiliate); (corrugated container)
-Pembroke (affiliate); (corrugated container)
-Rexdale (affiliate); (corrugated container)
-Whitby (affiliate); (corrugated container)
QUEBEC
-Chibougamau (forest products)
-Grand-Mere (paperboard/paper/pulp)
-LaBaie (paperboard/paper/pulp)
-New Richmond (paperboard/paper/pulp)
-Portage-du-Fort (paperboard/paper/pulp)
-Roberval (forest products)
-Saint-Fulgence (forest products)
-Saint-Laurent (affiliate); (corrugaed container)
-Shawinigan (paperboard/paper/pulp)
-Trois-Rivieres (paperboard/paper/pulp)
-Ville Mont-Royal (affiliate); (corrugated container)
-Grand-Mere (paperboard/paper/pulp)
Research Center
SASKATCHEWAN
-Regina (affiliate); (corrugated container)
GERMANY:
-Augsburg (affiliate); (folding carton)
-Bremen (affiliate); (folding carton)
-Dusseldorf (corrugated container)
-Frankfurt (affiliate); (folding carton)
-Germersheim (corrugated container)
-Hamburg (corrugated container)
-Heppenheim (affiliate) (folding carton)
-Hoya (paperboard/paper/pulp)
-Julich (corrugated container)
-Lauenburg (corrugated container)
-Lubbecke (corrugated container)
-Neuburg (corrugated container)
-Platting (corrugated container)
-Viersen (paperboard/paper/pulp)
-Waren (corrugated container)
-Hamburg
Institute for Package and Corporate Design
UNITED KINGDOM:
-Ellesmere Port (paperboard/paper/pulp)
NETHERLANDS:
-Sneek (affiliate); (folding carton)
BELGIUM:
-Ghlin (corrugated container)
-Grand-Bigard (corrugated container)
FRANCE:
-Bordeaux (affiliate); (folding carton)
-Cholet (affiliate); (folding carton)
-Molieres-Sur-Ceze (corrugated container)
-Nimes (corrugated container)
-Soissons (affiliate); (folding carton)
-Strasbourg (affiliate); (folding carton)
COSTA RICA:
-Palmar Norte (forest products)
-San Jose (forest products)
Administrative Office
VENEZUELA
-Puerto Ordaz (forest products)
Administrative Office
CORPORATE HEADQUARTERS:
-Chicago, Illinois
FAR EAST OFFICES:
-Beijing, China
TOKYO, JAPAN
Stone Container
Japan Company, Ltd.
6
ITEM 3. LEGAL PROCEEDINGS
In November 1988, the Legal Environmental Assistance Foundation ("LEAF")
filed a citizens suit in the U.S. District Court for the Northern District of
Florida against the Board of County Commissioners of Bay County, Florida (the
"County") pursuant to Section 505 of the Clean Water Act. The Registrant's
Panama City, Florida mill is one of the parties which contracts to utilize the
County's wastewater treatment facility. The suit sought declaratory and
injunctive relief in connection with alleged violations by the County of its
wastewater treatment facility's National Pollutant Discharge Elimination
Standards ("NPDES") discharge permit conditions. In September 1990, LEAF amended
its complaint to include a request for an unspecified amount of penalties as
provided by statute. If any penalties are ultimately assessed or agreed to by
the County in this matter, the Registrant anticipates that the County would
claim an undetermined portion of such penalties as the liability of the
Registrant pursuant to the warranty and indemnification language contained in a
March 20, 1979 Water Treatment and Disposal Service agreement between the County
and Southwest Forest Industries, Inc., the Registrant's predecessor in interest.
On March 9, 1993, the Court issued its Order granting the County's Motion For
Summary Judgment. In its Order, the Court concluded that the suit was moot
because LEAF's amended complaint requesting civil penalties was filed after the
County had brought its facilities into compliance with the applicable permit
limits. On February 14, 1994, the district court's decision was affirmed by the
U.S. Court of Appeals for the Eleventh Circuit.
On October 27, 1992, the Florida Department of Environmental Regulation
("DER") filed a civil complaint in the Fourteenth Judicial Circuit Court of Bay
County, Florida against the Company seeking injunctive relief, an unspecified
amount of fines and civil penalties, and other relief based on alleged
groundwater contamination at the Company's Panama City, Florida pulp and paper
mill site. In addition, the complaint alleges operation of a solid waste
facility without a permit and discrepancies in hazardous waste shipping
manifests. Because of uncertainties in the interpretation and application for
DER's rules, it is premature to assess the Company's potential liability, if
any, in the event of an adverse ruling. At the parties' request, the case has
been placed in abeyance pending the conclusion of a related administrative
proceeding petitioned by the Company following DER's proposal to deny the
Company a permit renewal to continue operating its wastewater pretreatment
facility at the mill site. The administrative proceeding has been referred to a
hearing officer for an evidentiary 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. All issues were
deferred until May 16, 1994 in order to allow additional studies to be
performed. The Company intends to vigorously assert its entitlement to the
permit renewal and to defend against the groundwater contamination and
unpermitted facility allegations.
In November 1990, the 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 have been
used by the Company's Snowflake, Arizona pulp and paper mill for the evaporation
of its process wastewater. EPA is preparing a draft consent decree to resolve
the alleged past unpermitted discharges which will include EPA's proposal that
the Company pay civil penalties in the amount of $900,000. The Company has
vigorously disputed the application of the Clean Water Act to these two
privately owned evaporation ponds. The Company has proposed to EPA a plan to
convert its Snowflake, Arizona mill's wastewater management system to a tree
farm irrigation system. EPA has indicated an interest in this proposal and
discussions are ongoing. It is premature to predict either the outcome of the
negotiations with EPA or the amount of penalties which will eventually be
assessed.
By letter dated January 4, 1994, the Company was advised by the Water
Management Division of the U.S. Environmental Protection Agency, Region 9 (EPA)
that EPA was seeking penalties in the amount of $125,000 for violations of
discharge limits and monitoring requirements of the applicable NPDES permit at
the Company's Flagstaff, Arizona Sawmill during the period from January 1990
through December 1992. The Company is investigating the matter and intends to
negotiate with EPA a reduced penalty amount. EPA has advised that if a prompt
settlement cannot be reached it will refer the matter to the Department of
Justice for the filing of a civil suit.
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 or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
7
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, 1993, 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 22 and "Financial Condition and Liquidity," pages 15-22,
and to the Financial Statements, included in this report, under Notes to the
Consolidated Financial Statements, "Note 10--Long-term Debt," pages 47-53, "Note
14--Preferred Stock," pages 55-56, "Note 15--Common Stock," pages 56-58 and
"Note 20--Summary of Quarterly Data (unaudited)," page 65.
(B) APPROXIMATE NUMBER OF HOLDERS OF COMMON STOCK
There were approximately 6,822 holders of record of the Registrant's common
stock, as of March 1, 1994.
ITEM 6. SELECTED FINANCIAL DATA
In addition to the table set forth on pages 9-10 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 37-39, and "Note 3--Acquisitions/Mergers/Dispositions," pages 39-40.
8
SELECTED FINANCIAL DATA
(DOLLARS IN MILLIONS EXCEPT PER SHARE) 1993 1992 1991 1990 1989(B) 1988 1987(B)
- ---------------------------------------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
SUMMARY OF OPERATIONS
Net sales............................... $ 5,059.6 $ 5,520.7 $ 5,384.3 $ 5,755.9 $5,329.7 $ 3,742.5 $3,232.9
Cost of products sold................... 4,223.5 4,473.7 4,287.2 4,421.9 3,893.8 2,618.0 2,347.8
Selling, general and administrative
expenses............................... 512.2 543.5 522.8 495.5 474.5 351.1 343.8
Depreciation and amortization........... 346.8 329.2 273.5 257.0 237.1 148.1 138.7
Interest expense........................ 426.7 386.1 397.4 421.7 344.7 108.3 131.1
Income (loss) before income taxes and
cumulative effects of accounting
changes................................ (466.9) (229.3) (18.0) 188.2 481.0 549.5 283.4
Provision (credit) for income taxes..... (147.7) (59.4) 31.1 92.8 195.2 207.7 122.1
Cumulative effect of change in
accounting for postretirement
benefits............................... (39.5) -- -- -- -- -- --
Cumulative effect of change in
accounting for income taxes............ -- (99.5) -- -- -- -- --
Net income (loss)....................... (358.7) (269.4) (49.1) 95.4 285.8 341.8 161.3
---------- ---------- ---------- ---------- ---------- ---------- ----------
PER SHARE OF COMMON STOCK (A)
Income (loss) before cumulative effects
of accounting changes.................. (4.59) (2.49) (.78) 1.56 4.67 5.58 2.79
Cumulative effect of change in
accounting for postretirement
benefits............................... (.56) -- -- -- -- -- --
Cumulative effect of change in
accounting for income taxes............ -- (1.40) -- -- -- -- --
Net income (loss):
Primary............................... (5.15) (3.89) (.78) 1.56 4.67 5.58 2.79
Fully diluted......................... (5.15) (3.89) (.78) 1.56 4.67 5.58 2.65
Dividends and distributions paid........ -- .35 .71 .71 .70 .35 .25
Common stockholders' equity (end of
year).................................. 6.91 13.91 22.12 24.34 22.50 17.73 12.40
Price range of common shares-N.Y.S.E.:
High.................................. 19.50 32.63 26.00 25.25 36.38 39.50 39.83
Low................................... 6.38 12.50 9.00 8.13 22.13 20.67 15.33
Average common shares outstanding (in
millions):
Primary............................... 71.2 71.0 63.2 61.3 61.2 61.3 57.9
Fully diluted......................... 71.2 71.0 63.2 61.3 61.2 61.3 60.9
---------- ---------- ---------- ---------- ---------- ---------- ----------
FINANCIAL POSITION AT END OF YEAR
Current assets.......................... $ 1,753.2 $ 1,701.8 $ 1,685.3 $ 1,586.0 $1,687.0 $ 865.7 $ 737.4
Current liabilities..................... 943.5 944.8 914.8 1,146.5 1,072.6 408.3 334.9
Working capital......................... 809.7 757.0 770.5 439.5 614.4 457.4 402.5
Property, plant and equipment-net....... 3,386.4 3,703.2 3,520.2 3,364.0 2,977.9 1,276.0 1,300.0
Total assets............................ 6,836.7 7,027.0 6,902.9 6,690.0 6,253.7 2,395.0 2,286.1
Long-term debt.......................... 4,268.4 4,105.1 4,046.4 3,680.5 3,536.9 765.1 1,070.5
Deferred taxes.......................... 470.6 685.2 263.9 262.7 185.6 140.3 120.4
Redeemable preferred stock.............. 42.3 36.3 31.1 26.6 22.7 -- 1.5
Minority interest (h)................... 234.5 .2 3.8 8.0 9.7 .3 .2
Stockholders' equity.................... 607.1 1,102.7 1,537.5 1,460.5 1,347.6 1,063.6 740.3
---------- ---------- ---------- ---------- ---------- ---------- ----------
ADDITIONAL INFORMATION
Paperboard, paper and market pulp:
Produced (thousand short tons) (d).... 7,475 7,517 7,365 7,447 6,772 4,729 4,373
Converted (thousand short tons) (d)... 4,354 4,373 4,228 4,241 3,930 3,344 2,998
Corrugated shipments (billion square
feet) (d).............................. 52.48 51.67 49.18 47.16 41.56 34.47 32.09
Employees (end of year-in thousands).... 29.0 31.2 31.8 32.3 32.6 20.7 18.8
Capital expenditures.................... $ 149.7 $ 281.4 $ 430.1 $ 552.0 $ 501.7 $ 136.6 $ 105.7
Net cash/funds provided by (used in)
operating activities (e)............... $ (212.7) $ 85.6 $ 210.5 $ 451.5 $ 315.2 $ 453.6 $ 277.8
Working capital ratio................... 1.9/1 1.8/1 1.8/1 1.4/1 1.6/1 2.1/1 2.2/1
Percent long-term debt/total
capitalization (f)..................... 75.9% 69.2% 68.8% 67.7% 69.3% 38.9% 55.4%
Return on beginning common stockholders'
equity (g)............................. (32.3%) (11.1%) (3.4%) 7.1% 26.9% 46.2% 41.8%
Pretax margin........................... (9.2%) (4.2%) (.3%) 3.3% 9.0% 14.7% 8.8%
After tax margin........................ (7.1%) (4.9%) (.9%) 1.7% 5.4% 9.1% 5.0%
---------- ---------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN MILLIONS EXCEPT PER SHARE) 1986(B) 1985 1984 1983(B)
- ---------------------------------------- ---------- ---------- ---------- ----------
SUMMARY OF OPERATIONS
Net sales............................... $2,032.3 $ 1,229.1 $ 1,244.4 $ 655.8
Cost of products sold................... 1,564.6 944.1 924.9 526.0
Selling, general and administrative
expenses............................... 241.2 157.0 147.6 83.4
Depreciation and amortization........... 92.3 67.8 64.4 34.2
Interest expense........................ 85.3 63.3 59.3 24.9
Income (loss) before income taxes and
cumulative effects of accounting
changes................................ 59.7 1.5 55.3 (8.3)
Provision (credit) for income taxes..... 24.3 (2.3) 21.7 (5.4)
Cumulative effect of change in
accounting for postretirement
benefits............................... -- -- -- --
Cumulative effect of change in
accounting for income taxes............ -- -- -- --
Net income (loss)....................... 35.4 3.8 33.7 (2.9)
---------- ---------- ---------- ----------
PER SHARE OF COMMON STOCK (A)
Income (loss) before cumulative effects
of accounting changes.................. .73 .09 .78 (.09)
Cumulative effect of change in
accounting for postretirement
benefits............................... -- -- -- --
Cumulative effect of change in
accounting for income taxes............ -- -- -- --
Net income (loss):
Primary............................... .73 .09 .78 (.09)
Fully diluted......................... .73 .09 .78 (.09)
Dividends and distributions paid........ .19 .19 .19 .19
Common stockholders' equity (end of
year).................................. 9.92(c) 7.08 7.18 6.59
Price range of common shares-N.Y.S.E.:
High.................................. 20.00 13.17 14.42 15.00
Low................................... 11.38 8.00 8.58 6.75
Average common shares outstanding (in
millions):
Primary............................... 48.8 42.3 43.1 33.8
Fully diluted......................... 48.8 42.3 43.1 33.8
---------- ---------- ---------- ----------
FINANCIAL POSITION AT END OF YEAR
Current assets.......................... $ 530.4 $ 320.2 $ 323.3 $ 252.0
Current liabilities..................... 203.4 165.1 164.4 104.0
Working capital......................... 327.0 155.1 158.9 148.0
Property, plant and equipment-net....... 924.4 642.6 657.7 689.1
Total assets............................ 1,523.6 1,010.3 1,006.7 968.2
Long-term debt.......................... 767.0 493.3 482.8 548.2
Deferred taxes.......................... 69.9 49.2 55.8 38.0
Redeemable preferred stock.............. 1.5 8.0 8.5 7.6
Minority interest (h)................... -- -- -- --
Stockholders' equity.................... 481.8 294.7 295.1 270.3
---------- ---------- ---------- ----------
ADDITIONAL INFORMATION
Paperboard, paper and market pulp:
Produced (thousand short tons) (d).... 3,154 2,168 2,236 1,194
Converted (thousand short tons) (d)... 2,495 1,530 1,439 767
Corrugated shipments (billion square
feet) (d).............................. 25.95 15.19 14.46 8.58
Employees (end of year-in thousands).... 15.5 9.4 9.0 8.9
Capital expenditures.................... $ 63.3 $ 47.1 $ 41.9 $ 21.0
Net cash/funds provided by (used in)
operating activities (e)............... $ 160.7 $ 68.4 $ 116.9 $ 26.5
Working capital ratio................... 2.6/1 1.9/1 2.0/1 2.4/1
Percent long-term debt/total
capitalization (f)..................... 58.1% 58.4% 57.3% 63.4%
Return on beginning common stockholders'
equity (g)............................. 10.2% 1.1% 11.9% (2.6%)
Pretax margin........................... 2.9% .1% 4.4% (1.3%)
After tax margin........................ 1.7% .3% 2.7% (.4%)
---------- ---------- ---------- ----------
9
- ---------
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) The Company made major acquisitions in 1989, 1987, 1986 and 1983.
(c) For 1986, calculation assumes conversion of convertible preferred stock and
convertible subordinated debentures which were converted/redeemed in 1987.
(d) Includes non-consolidated affiliates.
(e) In accordance with Statement of Financial Accounting Standards No. 95,
"Statements of Cash Flows," the Company now discloses "Net cash provided by
(used in) operating activities." For years prior to 1986, "Net funds
provided by operations" are presented in this summary.
(f) Represents the percentage of long-term debt to the sum of long-term debt,
stockholders' equity, redeemable preferred stock, minority interest and
deferred taxes.
(g) 1993 and 1992 return on beginning common stockholders' equity calculated
using the loss before cumulative effects of accounting changes.
(h) For 1993, includes the Company's 25.4 percent minority interest liability in
the common shares of Stone-Consolidated.
10
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The Company's major products are containerboard and corrugated containers,
newsprint and market pulp. The markets for these products are highly competitive
and sensitive to changes in industry capacity and cyclical changes in the
economy that can significantly impact selling prices and the Company's
profitability. In recent years, price changes have had a greater impact on the
Company's sales and profitability than changes in sales volume. Although the
Company had experienced declining product pricing in all of its product lines
over the last several years, the Company believes that current market conditions
may permit the Company to realize improved product pricing for most of its
product lines during 1994. However, there is no assurance any such price
increases will be achieved. (See "Financial Condition and Liquidity--Outlook.")
As a result of the low average selling prices for the Company's products and
interest costs as a result of its highly leveraged capital structure, the
Company has incurred net losses in each of the last three years and will incur a
net loss for the first quarter of 1994. Such net losses have significantly
impaired the Company's liquidity and will continue to adversely affect the
Company until significant product price improvement is achieved. In 1993,
Management adopted a financial plan designed to enhance the Company's liquidity
and increase its financial flexibility by satisfying amortization requirements
under certain bank credit agreements of the Company and Stone Container (Canada)
Inc. ("Stone Canada"). The Company completed portions of this financial plan
during 1993 and in February of 1994. (See "Financial Condition and Liquidity"
for further details.)
RESULTS OF OPERATIONS
COMPARATIVE RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------
1993 1992 1991
----------------- ------------------ ------------------
PERCENT PERCENT PERCENT
OF NET OF NET OF NET
(DOLLARS IN MILLIONS) AMOUNT SALES AMOUNT SALES AMOUNT SALES
- -------------------------------------------------- ------ -------- ------- -------- ------- --------
Net sales......................................... $5,060 100.0% $ 5,521 100.0% $ 5,384 100.0%
Cost of products sold............................. 4,223 83.5 4,474 81.0 4,287 79.6
Selling, general and administrative expenses...... 512 10.1 544 9.9 523 9.7
Depreciation and amortization..................... 347 6.9 329 6.0 273 5.1
Equity (income) loss from affiliates.............. 12 .2 5 .1 (1) --
Other net operating (income) expense.............. 5 .1 13 .2 (63) (1.2)
------ -------- ------- -------- ------- --------
Income (loss) from operations..................... (39) (.8) 156 2.8 365 6.8
Interest expense.................................. (427) (8.4) (386) (6.9) (397) (7.4)
Other, net........................................ (1) -- 1 -- 14 .3
------ -------- ------- -------- ------- --------
Loss before income taxes and cumulative effects of
accounting changes............................... (467) (9.2) (229) (4.1) (18) (.3)
Provision (credit) for income taxes............... (148) (2.9) (59) (1.0) 31 .6
------ -------- ------- -------- ------- --------
Loss before cumulative effects of accounting
changes.......................................... (319) (6.3) (170) (3.1) (49) (.9)
Cumulative effect of change in accounting for
postretirement benefits.......................... (40) (.8) -- -- -- --
Cumulative effect of change in accounting for
income taxes..................................... -- -- (99) (1.8) -- --
------ -------- ------- -------- ------- --------
Net loss.......................................... $ (359) (7.1) $ (269) (4.9) $ (49) (.9)
------ -------- ------- -------- ------- --------
------ -------- ------- -------- ------- --------
1993 COMPARED WITH 1992
Net sales for 1993 were $5.1 billion, a decrease of 8.4 percent over 1992
net sales of $5.5 billion. Net sales decreased as a result of both reduced sales
volume and lower average selling prices for most of the Company's products. In
1993, the Company incurred a loss before the cumulative effect of a change in
the accounting for postretirement benefits other than pensions of $319 million,
or $4.59 per common share. The Company adopted Statement of Financial Accounting
Standards No. 106, "Accounting for Postretirement Benefits Other than Pensions"
("SFAS 106"), effective January 1, 1993, and recorded a one-time, non-cash
cumulative effect charge of $39.5 million
11
net of income taxes or $.56 per common share, resulting in a net loss of $359
million or $5.15 per common share. In 1992, the Company incurred a loss before
the cumulative effect of a change in the accounting for income taxes of $170
million, or $2.49 per common share. The adoption of Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"),
effective January 1, 1992, required a one-time, non-cash cumulative effect
charge of $99.5 million, or $1.40 per common share, resulting in a net loss of
$269 million or $3.89 per common share. The increase in the loss before the
cumulative effects of accounting changes primarily resulted from lower average
selling prices for most of the Company's products.
The 1993 results included a $35.4 million pretax gain from the sale of the
Company's 49 percent equity interest in Empaques de Carton Titan, S.A.,
("Titan") and the favorable effect of a reduction in an accrual relating to a
change in the Company's vacation pay policy. The earnings impact of these
non-recurring items was partially offset by the writedown of the carrying values
of certain Company assets. The 1993 results also reflect both an increase in
interest expense, primarily associated with a reduction in capitalized interest
caused by completion of capital projects, and foreign currency transaction
losses of $11.8 million. The 1992 results included foreign currency transaction
losses of $15.0 million and an $8.8 million pretax charge relating to the
writedown of investments. The Company recorded an income tax benefit of $147.7
million in 1993 as compared with an income tax benefit of $59.4 million in 1992.
The increase in the income tax benefit primarily reflects the tax effect
associated with the increased pretax loss for 1993 over 1992. Additionally,
deferred income taxes were provided for the retroactive increase in the U.S.
federal income tax rate, which was more than offset by the effects of an enacted
decrease in German and Canadian income tax rates. The Company's effective income
tax rates for both years reflect the impact of non-deductible depreciation and
amortization.
SEGMENT DATA
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------
1993 1992
---------------------- ------------------------
INCOME (LOSS) INCOME (LOSS)
BEFORE INCOME BEFORE INCOME
TAXES AND TAXES AND 1991
CUMULATIVE CUMULATIVE ------------------------
EFFECT OF AN EFFECT OF AN INCOME (LOSS)
NET ACCOUNTING NET ACCOUNTING NET BEFORE INCOME
(IN MILLIONS) SALES CHANGE SALES CHANGE SALES TAXES
- --------------------------------------------- ------ -------------- ------- -------------- ------- --------------
Paperboard and paper packaging............... $3,810 $ 206 $ 4,186 $ 322 $ 4,038 $ 356
White paper and pulp......................... 965 (194) 1,078 (87) 1,116 84
Other........................................ 331 37 303 12 275 (6)
Intersegment................................. (46) -- (46) -- (45) --
------ ------ ------- ------ ------- -----
5,060 49 5,521 247 5,384 434
Interest expense............................. (427) (386) (398)
Foreign currency transaction gains
(losses)................................... (12) (15) 5
General corporate and miscellaneous (net).... (77) (75) (59)
------ ------ ------- ------ ------- -----
Total........................................ $5,060 $ (467) $ 5,521 $ (229) $ 5,384 $ (18)
------ ------ ------- ------ ------- -----
------ ------ ------- ------ ------- -----
12
SEGMENT AND PRODUCT LINE SALES DATA
PERCENTAGE CHANGE
-------------------------------------------
1993 VS 1992 1992 VS 1991
NET SALES -------------------- -------------------
(DOLLARS IN MILLIONS) YEAR ENDED --------------------------- SALES SALES SALES SALES
DECEMBER 31, 1993 1992 1991 REVENUE VOLUME REVENUE VOLUME
- ------------------------------------------------------- ------- ------- ------- --------- ------- -------- -------
Paperboard and paper packaging:
Corrugated containers................................ $ 2,155 $ 2,234 $ 2,094 (3.5)% 1.4% 6.7% 4.1%
Paperboard and kraft paper........................... 901 1,032 996 (12.7) (5.1) 3.6 1.3
Paper bags and sacks................................. 579 634 677 (8.7) (11.0) (6.4) (6.3)
Folding cartons...................................... 60 178 166 (66.3) nm 7.2 .1
Other................................................ 115 108 105 6.5 nm 2.9 nm
------- ------- -------
Total paperboard and paper packaging............... 3,810 4,186 4,038 (9.0) nm 3.7 nm
------- ------- -------
White paper and pulp:
Newsprint............................................ 527 538 660 (2.0) .8 (18.5) (2.5)
Market pulp.......................................... 187 312 229 (40.0) (8.4) 36.2 30.3
Groundwood paper..................................... 243 219 227 11.0 19.4 (3.5) 9.8
Other................................................ 8 9 -- (11.1) nm nm nm
------- ------- -------
Total white paper and pulp......................... 965 1,078 1,116 (10.5) nm (3.4) nm
------- ------- -------
Other.................................................. 331 303 275 9.2 nm 10.2 nm
Intersegment........................................... (46) (46) (45) -- nm 2.2 nm
------- ------- -------
Total net sales.................................... $ 5,060 $ 5,521 $ 5,384 (8.4) nm 2.5 nm
------- ------- -------
------- ------- -------
nm = not meaningful
See Note 19 of the consolidated financial statements included in this report
for additional segment information.
PAPERBOARD AND PAPER PACKAGING:
The 1993 net sales for the paperboard and paper packaging segment decreased
9.0 percent compared to 1992. This decrease was due in part to the exclusion of
sales for the Company's European folding carton operations which in the early
part of 1993 were merged into a joint venture and accordingly are now accounted
for under the equity method of accounting. Sales from these operations were
approximately $178 million in 1992. Sales for 1993 were approximately $60
million prior to the merger in May. Excluding the effect of the folding carton
operations, 1993 net sales for the paperboard and paper packaging segment
decreased 6.4 percent.
Net sales of corrugated containers decreased 3.5 percent from 1992 primarily
due to lower average selling prices in 1993 which more than offset a slight
increase in sales volume. Net sales of paperboard decreased 11.9 percent from
1992 as a result of significantly lower average selling prices and declines in
sales volume. Net sales of kraft paper decreased 28.0 percent from 1992
primarily due to reduced sales volume.
Net sales for paper bags and sacks decreased from 1992 primarily due to
lower sales volume and a decrease in average selling prices for retail paper
bags which more than offset a modest increase in average selling prices for
industrial paper bags.
Operating income for the paperboard and paper packaging segment for 1993
decreased 35.9 percent from 1992 due to significantly lower operating margins,
primarily resulting from the lower average selling prices for corrugated
containers and containerboard. Operating income for this segment includes the
previously mentioned $35.4 million pretax gain from the sale of Titan and a
favorable effect of a reduction in an accrual resulting from a change in the
Company's vacation policy. The earnings impact from these non-recurring items
was partially offset by the writedowns of the carrying values of certain Company
assets.
WHITE PAPER AND PULP:
The 1993 net sales for the white paper and pulp segment decreased 10.5
percent, as significant sales declines for market pulp more than offset a sales
increase for groundwood paper. The sales declines for market pulp were primarily
attributable to significantly lower average selling prices which deteriorated
further in 1993 from the low average selling prices of 1992. Reduced sales
volume in 1993 also contributed to the lower market pulp sales. Newsprint sales
declined slightly in 1993 compared to 1992, primarily as a result of unfavorable
foreign exchange translation effects attributable to the stronger U.S. dollar,
which more than offset the benefits of higher average selling prices and a
slight volume increase. Net sales for groundwood paper increased 11 percent,
primarily as a result of significant volume increases which more than offset the
effects of slightly lower average selling prices.
13
The operating loss for the white paper and pulp segment for 1993 increased
significantly over 1992 due to reduced operating margins primarily resulting
from the significantly lower average selling prices for market pulp. Slightly
lower average selling prices for groundwood paper also contributed to the
reduced earnings, although to a much lesser extent. While average selling prices
for newsprint in 1993 improved over the depressed levels of 1992, (although such
prices declined in the fourth quarter of 1993 and in the first quarter of 1994),
and certain cost reductions have been implemented, the margins associated with
such improvements have only partially offset the effects of the lower average
selling prices for market pulp and groundwood paper.
OTHER:
Net sales and operating income for the other segment increased over 1992
mainly due to improved demand and a reduced supply of timber available to the
U.S. building industry. This resulted in increased sales volume and the
realization of higher average selling prices for certain of the Company's lumber
and wood products. However, shortages of timber available to be harvested due to
environmental concerns in the Pacific Northwest continue to keep raw material
costs high.
1992 COMPARED WITH 1991
Net sales for 1992 were $5.5 billion, an increase of 2.5 percent over 1991
net sales of $5.4 billion. Net sales rose primarily as a result of increased
sales volume, most of which was offset by reduced average selling prices for
certain of the Company's products. In 1992, the Company incurred a loss before
the cumulative effect of change in accounting for income taxes of $170 million,
or $2.49 per common share, compared to a loss of $49 million, or $.78 per common
share in 1991. The Company adopted SFAS 109, effective January 1, 1992, and
recorded a one-time, non-cash cumulative effect charge of $99.5 million or $1.40
per common share. All per share amounts have been adjusted to reflect a 2
percent common stock dividend issued September 15, 1992. The increase in the
loss before the cumulative effect of a change in accounting for income taxes
primarily resulted from lower average selling prices for newsprint and
groundwood paper in 1992 as compared with 1991. Additionally, continued low
average selling prices for the majority of the Company's other products
contributed to the net loss for 1992.
The 1992 results include foreign currency transaction losses of $15.0
million and an $8.8 million pretax charge relating to the writedown of
investments. The 1991 results included non-recurring pretax gains of $59.3
million and foreign currency transaction gains of $4.9 million. The Company
recorded an income tax benefit of $59.4 million in 1992 as compared with a $31.1
million income tax expense in 1991. This change primarily reflects the tax
effect associated with the increased pretax loss for 1992 over 1991. The
Company's effective income tax rates for both years reflect the impact of
non-deductible depreciation and amortization, together with taxes payable by
certain foreign subsidiaries at rates in excess of the U.S. statutory rate.
PAPERBOARD AND PAPER PACKAGING:
The 1992 net sales for the paperboard and paper packaging segment increased
3.7 percent as sales increases for corrugated containers, paperboard and folding
cartons more than offset sales declines for kraft paper and paper bags and
sacks.
Net sales of corrugated containers increased 6.7 percent over 1991,
primarily as a result of increased sales volume. Additionally, slightly higher
average selling prices in 1992 contributed to this increase. However, such
selling prices continued to remain at unsatisfactory levels.
Net sales of paperboard increased over 1991 mainly as a result of modestly
higher average selling prices. Such 1992 average paperboard selling prices were
still, however, at unsatisfactory levels. Slight volume increases also
contributed to the improved paperboard sales for 1992. Net sales of kraft paper
decreased 9.3 percent from 1991, primarily due to reduced sales volume.
Net sales of paper bags and sacks decreased from 1991 primarily due to lower
sales volume and a decrease in average selling prices for retail paper bags.
Operating income for the paperboard and paper packaging segment for 1992
decreased 9.5 percent, primarily as a result of the inclusion, in 1991, of a
non-recurring pretax gain of $17.5 million from an involuntary conversion
relating to a boiler explosion at the Company's Missoula, Montana linerboard
mill. Excluding this 1991 non-recurring item, 1992 operating income for this
segment would have decreased by 4.8 percent. This decrease is mainly
attributable to reduced operating margins resulting from continued low average
selling prices for the Company's paperboard and paper packaging products.
14
WHITE PAPER AND PULP:
The 1992 net sales for the white paper and pulp segment decreased 3.4
percent, as significant sales decreases for newsprint more than offset a
significant sales increase for market pulp. The significant decrease in
newsprint sales resulted primarily from lower average selling prices.
Additionally, reduced volume associated with market-related downtime contributed
to the lower sales of newsprint. Net sales for groundwood paper decreased
slightly as lower average selling prices more than offset volume increases for
this product. The increase in 1992 market pulp sales mainly resulted from volume
increases associated with sales generated from the Stone Savannah River mill,
which commenced market pulp operations in the fourth quarter of 1991.
Furthermore, while market pulp selling prices declined significantly in the
fourth quarter of 1992, the Company realized modestly higher average selling
prices for this product in 1992, as compared with the even more depressed
average selling prices of 1991.
Operating income for the white paper and pulp segment for 1992 decreased
significantly from 1991, primarily due to reduced operating margins resulting
from the significantly lower average selling prices for newsprint and groundwood
paper. The 1991 results included a non-recurring pretax gain of $41.8 million
resulting from the settlement and termination of a Canadian supply contract.
OTHER:
Net sales and operating income for the other segment increased over 1991
mainly due to improved demand and a tighter supply of timber available to the
U.S. building industry. This resulted in increased sales volume and the
realization of higher average selling prices for certain of the Company's lumber
and wood products. However, shortages of timber due to environmental concerns in
the Pacific Northwest continued to keep raw material costs high.
FINANCIAL CONDITION AND LIQUIDITY
The Company's working capital ratio was 1.9 to 1 at December 31, 1993 and
1.8 to 1 at December 31, 1992. The Company's long-term debt to total
capitalization ratio was 75.9 percent at December 31, 1993 and 69.2 percent at
December 31, 1992. Capitalization, for purposes of this ratio, includes
long-term debt (which includes debt of certain consolidated affiliates which is
non-recourse to the Company), deferred income taxes, redeemable preferred stock,
minority interest and stockholders' equity.
The Company and Stone-Canada, a wholly-owned subsidiary, have entered into
bank credit agreements (collectively, the "Credit Agreements") consisting of (i)
two term-loan facilities with outstanding borrowings in the aggregate of $877.7
million as of December 31, 1993, (ii) an additional term loan (the "Additional
Term Loan") with outstanding borrowings of $292.9 million at December 31, 1993
and (iii) two revolving credit facilities with aggregate commitments of $315.8
million and total outstanding borrowings of $263.8 million at December 31, 1993.
The Company is the borrower under one of the term loans, the Additional Term
Loan and one of the revolving credit facilities (collectively, the "U.S. Credit
Agreement") and Stone-Canada is the borrower under the other term loan and
revolving credit facility. Proceeds of the Additional Term Loan borrowings were
used solely to repay regularly scheduled amortization of term loans under the
U.S. Credit Agreement. At December 31, 1993, the Company had unused borrowing
availability of $52.0 million under the revolving credit facilities.
On February 3, 1994, under the Company's $1 billion shelf registration, the
Company sold $710 million principal amount of 9- 7/8 percent Senior Notes due
February 1, 2001 and 16.5 million shares of common stock for an additional
$251.6 million at $15.25 per common share. On February 17, 1993, the
underwriters elected to exercise their option to sell an additional 2.47 million
shares of common stock for an additional $37.7 million, also at $15.25 per
common share (collectively, with the February 3, 1994 offering, the
"Offerings"). The net proceeds from the Offerings of approximately $962 million
were used to (i) prepay approximately $652 million of 1995, 1996 and 1997
required amortization under the Company's Credit Agreements, including the
ratable amortization payment under the revolving credit facilities which had the
effect of reducing the total commitments thereunder to approximately $168
million; (ii) redeem the Company's 13- 5/8 percent Subordinated Notes due 1995
at a price equal to par, approximately $98 million principal amount, plus
accrued interest to the redemption date; (iii) repay approximately $136 million
of the outstanding borrowings under the Company's revolving credit facilities
without reducing the commitments thereunder; and (iv) provide liquidity in the
form of cash. At March 14, 1994, the Company had borrowings outstanding under
its term loans and Additional Term Loan of $467.5 million and $191.9 million,
respectively. The Company had no outstanding borrowings under its revolving
credit facilities at March 14, 1994 and had borrowing availability under its
revolving credit facilities of $168.2 million at such date.
The term loans (other than the Additional Term Loan) and the revolving
credit facilities had weighted average interest rates during 1993 of 8.3 percent
and 5.7 percent, respectively. The weighted average interest rate on the
Additional Term Loan was 6.3 percent for the year ended 1993. The weighted
average interest rates for certain
15
borrowings under the Credit Agreements reflect the impact of interest rate swap
and interest rate collar contracts which had the effect in 1993 of increasing
the effective borrowing rates over the contractual rates provided for such
facilities. These weighted average rates do not include the effects of the
amortization of deferred debt issuance costs. At December 31, 1993, the Company
was a party to an interest rate swap contract related to $150 million of U.S.
term loan borrowings which had the effect of fixing the interest rate at
approximately 12.9 percent. This swap expired on March 22, 1994. Refer to Note
10 of the consolidated financial statements, included in this report, for
information relating to the Company's repayment obligations with respect to its
borrowings outstanding under the Credit Agreements. See also "Outlook" included
in this section.
The Credit Agreements contain covenants that include, among other things,
requirements to maintain certain financial tests and ratios (including a minimum
current ratio, an indebtedness ratio, a minimum earnings before interest, taxes,
depreciation and amortization test ("EBITDA") and a tangible net worth test) and
certain restrictions and limitations, including those on capital expenditures,
changes in control, payment of dividends, sales of assets, lease payments,
investments, additional borrowings, mergers and purchases of stock and assets.
The Credit Agreements also contain cross-default provisions relating to the
non-recourse debt of its consolidated affiliate, Stone-Consolidated Corporation,
and cross-acceleration provisions relating to the non-recourse debt of the
consolidated affiliates, including Seminole Kraft Corporation ("Seminole") and
Stone Savannah River Pulp & Paper Corporation ("Stone Savannah River").
Additionally, the Credit Agreements provide for mandatory prepayments from sales
of certain assets, debt and equity financings and excess cash flows. These
prepayments along with voluntary prepayments are to be applied ratably to reduce
loan commitments under the Credit Agreements. The indebtedness under the Credit
Agreements is secured by a substantial portion of the assets of the Company. See
Note 10 of the consolidated financial statements for additional information
regarding the Credit Agreements.
The Credit Agreements limit in certain specific circumstances any further
investments by the Company in Stone-Consolidated Corporation, Seminole and Stone
Savannah River. Stone Savannah River and Seminole have incurred substantial
indebtedness in connection with project financings and are significantly
leveraged. As of December 31, 1993, Stone Savannah River had $402.6 million in
outstanding indebtedness (including $268.9 million in secured indebtedness owed
to bank lenders) and Seminole had $161.0 million in outstanding indebtedness
(including $120.6 million in secured indebtedness owed to bank lenders).
Emerging Issues Task Force Issue No. 86-30, "Classification of Obligations when
a Violation is Waived by the Creditor," requires a company to reclassify
long-term debt as current when a covenant violation has occurred at the balance
sheet date or would have occurred absent a loan modification and it is probable
that the borrower will not be able to comply with the same covenant at
measurement dates that are within the next twelve months. In November 1993,
Stone Savannah River received a waiver of its fixed-charges-coverage covenant
requirement as of December 31, 1993 and March 31, 1994. Management has prepared
projections that indicate that upon the expiration of the waiver Stone Savannah
River will not be in compliance with this covenant as of June 30, September 30,
and December 31, 1994. Consequently, approximately $237.9 million of Stone
Savannah River debt that otherwise would have been classified as long-term, has
been classified as current in the December 31, 1993 consolidated balance sheet.
Stone Savannah River intends to seek, prior to June 10, 1994, appropriate
financial covenant waivers or amendments from its bank group, although no
assurance can be given that such waivers or amendments will be obtained. Any
such failure to obtain covenant relief would result in a default under Stone
Savannah River's credit agreement and other indebtedness and, if any such
indebtedness were accelerated by the holders thereof, the lenders to the Company
under the Credit Agreements and various other of the Company's debt instruments
will be entitled to accelerate the indebtedness owed by the Company.
The Company has entered into separate output purchase agreements with each
of these subsidiaries which require the Company to purchase Seminole's
linerboard production at fixed prices until no later than September 1, 1994 and
Stone Savannah River's linerboard and market pulp production at fixed prices
until December 1994 and November 1995, respectively. After such dates, the
Company is required to purchase the respective production at market prices for
the remaining terms of these agreements. While the fixed prices in effect at
December 31, 1993 were higher than market prices at such date, the price
differentials have not had, nor are they expected to have, a significant impact
on the Company's results of operations or financial position. However, at the
time that the fixed price provisions of the output purchase agreements
terminate, such subsidiaries may need to undertake additional measures to meet
their debt service requirements, including obtaining additional sources of
funds, postponing or restructuring of debt service payments or refinancing the
indebtedness. In the event that such measures are required and are not
successful, and such indebtedness is accelerated by the respective lenders to
Stone Savannah River or Seminole, the lenders to the Company under the Credit
Agreements and various other of its debt instruments would be entitled to
accelerate the indebtedness owed by the Company.
16
The Company and its bank group have amended the Company's Credit Agreements
several times during the past three years. Such amendments provided among other
things, greater financial flexibility and/or relief from certain financial
covenants. In some instances, certain restrictions and limitations applicable to
the Credit Agreements were tightened.
The most recent amendment, which was executed in February of 1994 and became
effective upon the completion of the Offerings, provided, among other things,
for the following:
(i) Permitted the Company to apply up to $200 million of net proceeds from
the Offerings, which increased liquidity, as repayment of borrowings
under the revolving credit facilities of the Credit Agreements without
reducing the commitments thereunder and to the extent no balance was
outstanding under the revolving credit facilities, permitted the
Company to retain the balance of such $200 million of proceeds in cash.
(ii) Permitted the Company to redeem the Company's 13- 5/8 percent
Subordinated Notes maturing on June 1, 1995, from the proceeds received
from the Offerings at a price equal to par, approximately $98 million
principal amount, plus accrued interest to the redemption date.
(iii) Amended the required levels of EBITDA, (as defined in the Credit
Agreements), for certain specified periods to the following:
PERIODS EBITDA
- -------------------------------------------------- --------------
For the three months ended March 31, 1994......... $ 20 million
For the six months ended June 30, 1994............ $ 55 million
For the nine months ended September 30, 1994...... $111 million
For the twelve months ended December 31, 1994..... $180 million
For the twelve months ended March 31, 1995........ $226 million
The required level of EBITDA is scheduled to increase for each rolling
four quarter period thereafter until December 31, 1996, when the EBITDA
for the twelve months ended December 31, 1996 is required to be $822
million.
(iv) Reset to zero as of January 1, 1994, the dividend pool under the Credit
Agreements which permits payment of dividends on the Company's capital
stock and modifies the components used in calculating the ongoing
balance in the dividend pool. Effective January 1, 1994, dividend
payments on the Company's common stock and on certain preferred stock
issues cannot exceed the sum of (i) 75 percent of the consolidated net
income, (as defined in the Credit Agreements), of the Company from
January 1, 1994 to the date of payment of such dividends minus (ii) 100
percent of the consolidated net loss, (as defined in the Credit
Agreements), of the Company from January 1, 1994 to the date of payment
of such dividends, plus (iii) 100 percent of any net cash proceeds from
sales of common stock or certain preferred stock of the Company from
January 1, 1994 to any date of payment of such dividends (excluding the
proceeds from the Offerings for which no dividend credit was received
by the Company). Additionally, restrictions with respect to dividends
on the Series E Cumulative Preferred Stock now mirror the dividend
restrictions in the Company's Senior Subordinated Indenture dated as of
March 15, 1992.
(v) Replaced the existing cross-default provisions relating to obligations
of $10 million or more of the Company's separately financed
subsidiaries, Seminole and Stone Savannah River, with cross-acceleration
provisions.
(vi) Replaced the current prohibition of investments in Stone Venepal
Consolidated Pulp Inc. with restrictions substantially similar to the
restrictions applicable to the Company's subsidiaries, Stone Savannah
River and Seminole.
(vii) Maintains the monthly indebtedness ratio requirement, as defined in
the Credit Agreements, to be no higher than: 81.5 percent as of the
end of each month from December 31, 1993 and ending prior to March 31,
1995 and 81 percent as of the end of each month from March 31, 1995
and ending prior to June 30, 1995. The indebtedness ratio requirement
is scheduled to periodically decrease thereafter (from 80 percent on
June 30, 1995) until February 28, 1997, when the ratio limitation is
required to be 68 percent.
(viii) Maintains the Consolidated Tangible Net Worth (CTNW), (as defined in
the Credit Agreements), to be equal to or greater than 50 percent of
the highest CTNW for any quarter since the inception of the Credit
Agreements.
Additionally, at various times during the year, the Company amended and
restated its Credit Agreements which provided, among other things, to (i) extend
the maturity of the revolving credit facilities from March 1, 1994 to March 1,
17
1997 and reduce over a three-year period the revolving loan commitments; (ii)
revise various financial covenants to provide greater financial flexibility to
the Company; (iii) permit the Company to retain 25 percent of the net proceeds
from future sales of equity securities (which could be used to reduce revolving
credit borrowings without reducing the commitments thereunder); and (iv) permit
the Company to retain 50 percent (maximum $100 million in the aggregate) of the
net proceeds from any sale or disposition of its investment in certain joint
ventures or unconsolidated subsidiaries (which could be used to reduce revolving
credit borrowings without reducing the commitments thereunder). As part of these
amendments, the Company agreed (i) to pay certain fees and higher interest rate
margins and (ii) to mortgage or pledge additional collateral including a pledge
of the Stone-Consolidated common stock owned by the Company.
There can be no assurance that the Company will be able to achieve and
maintain compliance with the prescribed financial ratio tests or other
requirements of its Credit Agreements. Failure to achieve or maintain compliance
with such financial ratio tests or other requirements under the Credit
Agreements, in the absence of a waiver or amendment, would result in an event of
default and could lead to the acceleration of the obligations under the Credit
Agreements. The Company has successfully sought and received waivers and
amendments to its Credit Agreements on various occasions since entering into the
Credit Agreements. If further waivers or amendments are requested by the
Company, there can be no assurance that the Company's bank lenders will again
grant such requests. The failure to obtain any such waivers or amendments would
reduce the Company's flexibility to respond to adverse industry conditions and
could have a material adverse effect on the Company.
OUTLOOK:
Due to industry conditions during the past few years and interest costs as a
result of the Company's highly leveraged capital structure, the Company has
incurred net losses in each of the last three years and the Company will incur a
net loss for the first quarter of 1994. Such net losses have significantly
impaired the Company's liquidity and available sources of liquidity and will
continue to adversely affect the Company until significant product price
improvement is achieved.
The Company's containerboard and corrugated container product lines, which
represent a substantial portion of the Company's net sales, have generally
experienced pricing pressures during the past three years. Recently, however,
the Company has implemented a $25 per ton price increase for containerboard,
which had been announced for the fourth quarter of 1993. This increase did not,
however, restore prices for containerboard to the levels at the beginning of
1993. As a result of a further strengthening in demand, the Company announced
and began implementing another price increase of $30 per ton for containerboard
effective March 1, 1994. While the Company currently believes that it will
implement this most recent price increase during the first half of 1994, there
can be no assurance it will occur. In addition, price increases for corrugated
containers were effected during the fourth quarter of 1993 and the first quarter
of 1994. These recent price increases achieved in corrugated containers
represent restoration of prices to prior levels realized during 1993. While
there can be no assurance that prices will continue to increase or even be
maintained at present levels, the Company believes that the supply/demand
characteristics for containerboard and corrugated containers are improving which
could allow for further price restorations for these product lines.
Pricing conditions for newsprint, groundwood paper and market pulp have been
volatile in recent years. Additions to industry-wide capacity and declines in
demand for such products during the past three years led to supply/ demand
imbalances that have contributed to depressed prices for these products. While
the Company at certain times in 1993 realized modest price improvements for
newsprint, average selling prices declined in the fourth quarter of 1993 and in
the first quarter of 1994 and continue to remain low. In 1993, the Company
attempted to balance supply and demand by taking downtime at selected production
facilities. Independently, other industry participants also took downtime at
their various facilities. Such downtime helped to reduce industry inventory
levels and the Company recently announced a $47.95 per metric ton price increase
for newsprint effective March 1, 1994. There can be no assurance that this price
increase will be achieved. Other major North American producers have announced
similar price increases.
Also as a result of improvements in industry supply/demand characteristics,
the Company announced price increases for its various grades of market pulp
effective January 1, 1994 and March 1, 1994 which increased the transaction
price of market pulp by a least $90 per metric ton. While other producers have
announced similar price increases for market pulp, due to significant worldwide
competition in this product line, there can be no assurance that such price
increases will be achieved as scheduled.
The Company improved its liquidity and financial flexibility through the
completion of the Offerings in February of 1994. At March 14, 1994, the Company
had borrowing availability of $168.2 million under its revolving credit
facilities.
18
Notwithstanding these improvements in the Company's liquidity and financial
flexibility, unless the Company achieves substantial price increases beyond
year-end levels, the Company will continue to incur net losses and negative cash
flows from operating activities. Without such sustained substantial price
increases, the Company may exhaust all or substantially all of its cash
resources and borrowing availability under the revolving credit facilities. In
such event, the Company would be required to pursue other alternatives to
improve liquidity, including further cost reductions, sales of assets, the
deferral of certain capital expenditures, obtaining additional sources of funds
or pursuing the possible restructuring of its indebtedness. There can be no
assurance that such measures, if required, would generate the liquidity required
by the Company to operate its business and service its indebtedness. As
currently scheduled, beginning in 1996 and continuing thereafter, the Company
will be required to make significant amortization payments on its indebtedness
which will require the Company to raise sufficient funds from operations or
other sources or refinance or restructure maturing indebtedness. No assurance
can be given that the Company will be able to generate or raise such funds.
The Company, as part of its financial plan, had intended to sell an energy
supply agreement related to its Florence, South Carolina mill. Even though a
sale is still being investigated by the Company, the Company is no longer
pursuing the original transaction; however, the Company is currently
investigating alternative transactions.
CASH FLOWS FROM OPERATIONS:
The following table shows, for the last three years, the net cash provided
by (used in) operating activities:
(IN MILLIONS) 1993 1992 1991
- ----------------------------------------------------------------------------------- --------- --------- -----
Net loss........................................................................... $(359) $(269) $ (49)
Cumulative effect of change in accounting for postretirement benefits.............. 39 -- --
Cumulative effect of change in accounting for income taxes......................... -- 99 --
Depreciation and amortization...................................................... 347 329 274
Deferred taxes..................................................................... (134) (67) 22
Payment on settlement of interest rate swaps....................................... (33) -- --
Decrease (increase) in accounts and notes receivable--net.......................... 45 (67) 33
Decrease (increase) in inventories................................................. 29 11 (60)
Decrease (increase) in other current assets........................................ (9) 9 (75)
Increase (decrease) in accounts payable and other current liabilities.............. (60) (35) 59
Other.............................................................................. (78)(a) 76(b) 7
--------- --------- -----
Net cash provided by (used in) operating activities................................ $(213) $ 86 $ 211
--------- --------- -----
--------- --------- -----
- ---------
(a) Includes debt issuance costs of $84 million and an adjustment to remove
the effect of a $35 million gain from the sale of the Company's 49 percent
equity interest in Titan, partially offset by adjustments to remove the
effects of amortization of deferred debt issuance costs and a non-cash
charge of $19 million pertaining to the writedown of certain
decommissioned assets.
(b) Includes $54 million of cash received from the sale of an energy contract
in October 1992.
19
The results of operations for 1991 through 1993 have had a significant
adverse impact on the Company's cash flow. Borrowings in 1991, 1992 and 1993
have increased to meet cash flow needs.
During 1993, the Company entered into various financing and investing
activities designed to provide liquidity and enhance financial flexibility. See
"Financing activities" and "Investing activities."
The 1993 decrease in accounts and notes receivable reflects the timing of
receivable collections, lower average selling prices for a majority of the
Company's products and the writedown of certain receivables to net realizable
value. The increase in accounts and notes receivable for 1992 reflect an
increase in sales volume for certain of the Company's products during the latter
part of 1992 over 1991 and the timing of receivable collections resulting from
the continued slow recovery of the economy.
Inventories decreased in 1993 due primarily to a reduction in certain
paperstock and newsprint levels, partially attributable to market related
downtime. The decrease in inventories for 1992 resulted mainly from reductions
in certain paperstock levels due to increased sales volume during the latter
part of 1992 and market-related downtime.
The 1992 decrease in other current assets resulted mainly from the
collection of $43 million of cash related to the 1991 settlement and termination
of a Canadian supply contract.
The decreases in accounts payable and other current liabilities for 1993 and
1992 were due primarily to the timing of payments.
FINANCING ACTIVITIES:
The following summarizes the Company's significant financing activities in
1993:
- During 1993, outstanding borrowings under the Company's revolving credit
facilities increased approximately $6.8 million. The net increase takes
into account the financial transactions discussed below and those
transactions discussed in the "Investing activities" section following.
Borrowings and payments made on debt as presented in the Statement of Cash
Flows does not take into account certain repayments and subsequent
reborrowings under the revolving credit facilities which occurred as a
result of these transactions.
- In December 1993, Stone-Consolidated Corporation ("Stone-Consolidated"), a
newly created Canadian subsidiary, acquired the newsprint and uncoated
groundwood papers business of Stone Container (Canada) Inc.
("Stone-Canada") (formerly Stone-Consolidated Inc.) and sold $346.5
million of units in an initial public offering comprised of both common
stock and convertible subordinated debentures (the "Units Offering"). Each
unit was priced at $2,100 and consisted of 100 shares of common stock at
$10.50 per share and $1,050 principal amount of convertible subordinated
debentures. The convertible subordinated debentures mature December 31,
2003, bear interest at an annual rate of 8 percent and are convertible
beginning June 30, 1994, into 6.211 shares of common stock for each
Canadian $100 principal amount, representing a conversion price of $12.08
per share. Concurrent with the initial public offering, Stone-Consolidated
sold $225 million of senior secured notes in a public offering in the
United States. The senior secured notes mature December 15, 2000 and bear
interest at an annual rate of 10.25 percent.
As a result of the Units Offering, 16.5 million shares of common stock,
representing 25.4 percent of the total shares outstanding of
Stone-Consolidated, were sold to the public, resulting in the recording in
the Company's Consolidated Balance Sheet of a minority interest liability
of $236.7 million.
The Company used approximately $373 million of the net proceeds from the
sale of the Stone-Consolidated securities for repayment of commitments
under its Credit Agreements and the remainder for general corporate
purposes. As a result of the Units Offering, the Company recorded a charge
of $74.4 million to common stock related to the excess carrying value per
common share over the offering price per common share associated with the
shares issued.
- In December 1993, the Company sold two of its short-line railroads in a
transaction in which the Company has guaranteed to contract minimum
railroad services which will provide freight revenues to the railroads
over a 10 year period. The transaction has been accounted for as a
financing and accordingly, had no impact on the Company's 1993 net loss.
The Company received proceeds of approximately $28 million, of which
approximately $19 million was used to repay commitments under the Credit
Agreements.
- In the fourth quarter of 1993, the Company sold, prior to their expiration
date, certain of the U.S. dollar denominated interest rate and cross
currency swaps associated with the Credit Agreement borrowings of
Stone-Canada. The net proceeds totaled approximately $34.9 million, the
substantial portion of which was
20
used to repay borrowings under the revolving credit facilities of the
Credit Agreements, thereby restoring borrowing availability thereunder.
The sale of the swaps resulted in a deferred loss which will be amortized
over the remaining life of the underlying obligation.
- In July 1993, the Company sold $150 million principal amount of 12- 5/8
percent Senior Notes due July 15, 1998 and, in a private transaction, sold
$250 million principal amount of 8- 7/8 percent Convertible Senior
Subordinated Notes due July 15, 2000. The Company filed a shelf
registration statement declared effective August 13, 1993 registering the
8- 7/8 percent Convertible Senior Subordinated Notes for resale by the
holders thereof. The net proceeds of approximately $386 million received
from the sales of these notes were used by the Company to repay borrowings
without reducing commitments under the revolving credit facilities of its
Credit Agreements, thereby restoring borrowing availability thereunder.
INVESTING ACTIVITIES:
The following summarizes the Company's significant 1993 investing
activities:
- The Company sold its 49 percent equity interest in Titan. The net proceeds
were used to repay commitments under the Credit Agreements and for
repayment of borrowings under its revolving credit facilities without
reducing commitments, thereunder.
- During 1993, the Company increased its ownership in the common stock of
Stone Savannah River from 90.2 percent to 92.8 percent through the
purchase of an additional 6,152 common shares and through the receipt of
Series D Preferred Stock as a dividend in kind on Stone Savannah River's
Series B Preferred Stock and the election of its right to convert the
Series D Preferred Stock into 198,438 common shares.
- On May 6, 1993, the Company's wholly-owned German subsidiary, Europa
Carton A.G., ("Europa Carton"), completed a joint venture with Financiere
Carton Papier (FCP), a French company, to merge the folding carton
operations of Europa Carton with those of FCP ("FCP Group"). Under the
joint venture, FCP Group is owned equally by Europa Carton and the
shareholders of FCP immediately prior to the merger. The Company's
investment in the joint venture is being accounted for under the equity
method of accounting.
- Capital expenditures for 1993 totaled approximately $150 million
(including capitalized interest of approximately $9 million), of which
approximately $15 million was funded from existing project financings. The
Company's capital expenditures for 1994 are budgeted at approximately $190
million.
ENVIRONMENTAL ISSUES:
The Company's operations are subject to extensive environmental regulation
by federal, state and local authorities in the United States and regulatory
authorities with jurisdiction over its foreign operations. The Company has in
the past made significant capital expenditures to comply with water, air and
solid and hazardous waste regulations and expects to make significant
expenditures in the future. Capital expenditures for environmental control
equipment and facilities were approximately $28 million in 1993 and the Company
anticipates that 1994 and 1995 environmental capital expenditures will
approximate $71 million and $96 million, respectively. Included in these amounts
are capital expenditures for Stone-Consolidated which were approximately $5
million in 1993 and are anticipated to approximate $36 million in 1994 and $64
million in 1995. Although capital expenditures for environmental control
equipment and facilities and compliance costs in future years will depend on
legislative and technological developments which cannot be predicted at this
time, the Company anticipates that these costs are likely to increase as
environmental regulations become more stringent. Environmental control
expenditures include projects which, in addition to meeting environmental
concerns, yield certain benefits to the Company in the form of increased
capacity and production cost savings. In addition to capital expenditures for
environmental control equipment and facilities, other expenditures incurred to
maintain environmental regulatory compliance (including any remediation)
represent ongoing costs to the Company. On December 17, 1993, the Environmental
Protection Agency proposed regulations under the Clean Air Act and the Clean
Water Act for the pulp and paper industry which, if and when implemented, would
affect directly a number of the Company's facilities. Since the regulations have
only recently been proposed, the Company is currently unable to estimate the
nature or level of future expenditures that may be required to comply with such
regulations if the proposed regulations become final in some form. In addition,
the Company is from time to time subject to litigation and governmental
proceedings regarding environmental matters in which injunctive and/or monetary
relief is sought.
The Company has been named as a potentially responsible party ("PRP") at a
number of sites which are the subject of remedial activity under the
Comprehensive Environmental Response, Compensation and Liability Act of 1980
("CERCLA" or "Superfund") or comparable state laws. Although the Company is
subject to joint and several liability imposed under Superfund, at most of the
multi-PRP sites there are organized groups of PRPs and costs are
21
being shared among PRPs. Future environmental regulations, including the
December 17, 1993 regulations, may have an unpredictable adverse effect on the
Company's operations and earnings, but they are not expected to adversely affect
the Company's competitive position.
COMMON AND SERIES E CUMULATIVE PREFERRED STOCK--CASH DIVIDENDS, MARKET AND PRICE
RANGE
Due to limitations and restrictions imposed upon the Company under the
Credit Agreements, the Company did not declare or pay a cash dividend on its
shares of common stock during 1993 or in the third and fourth quarter of 1992.
Cash dividends paid per common share were $.35 for 1992 and $.71 for 1991. Cash
dividends paid per share on the Series E Cumulative Convertible Exchangeable
Preferred Stock (the "Series E Cumulative Preferred Stock") were $.875 for 1993
and $1.28 for 1992. Due to a restrictive provision in the Senior Subordinated
Indenture dated March 15, 1992 (the "Senior Subordinated Indenture") relating to
the Company's 10- 3/4 percent Senior Subordinated Notes 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, the Board of Directors did not
declare the scheduled August 15, 1993 or November 15, 1993 quarterly dividend of
$.4375 per share on the Series E Cumulative Preferred Stock, nor was it
permitted to declare or pay future dividends on the Series E Cumulative
Preferred Stock until the Company generated income, or effected certain sales of
capital stock, to replenish the dividend "pool" under various of its debt
instruments. As of December 31, 1993, accumulated dividends on the Series E
Cumulative Preferred Stock amounted to $4.0 million.
As a result of the Offerings, the dividend pool under the Senior
Subordinated Indenture was replenished from the sale of the common shares.
Pursuant to the most recent amendment to the Company's Credit Agreements, the
Company will be able, to the extent declared by the Board of Directors, to pay
dividends on the Series E Cumulative Preferred Stock to the extent permitted
under the Senior Subordinated Indenture. In the event the Company does not pay a
dividend on the Series E Cumulative Preferred Stock for six quarters, the
holders of the Series E Cumulative Preferred Stock would have the right to elect
two members to the Company's Board of Directors until the accumulated dividends
on such Series E Cumulative Preferred Stock have been declared and paid or set
apart for payment.
The Company's Common Stock and Series E Cumulative Preferred Stock are
traded on the New York Stock Exchange under the symbols "STO" and "STOPRE",
respectively. The quarterly and annual price ranges for the Company's Common
Stock and the Company's Series E Cumulative Preferred Stock were:
COMMON STOCK
------------------------------
1993 1992
-------------- --------------
Quarter High Low High Low
- --------------------------------------------------- ------ ------ ------ ------
1st................................................ $19.50 $12.63 $32.63 $24.50
2nd................................................ 14.00 6.38 29.38 22.50
3rd................................................ 9.25 6.50 25.38 14.38
4th................................................ 12.38 6.88 19.50 12.50
Year............................................... 19.50 6.38 32.63 12.50
------ ------ ------ ------
SERIES E CUMULATIVE
PREFERRED STOCK
------------------------------
1993 1992
-------------- --------------
Quarter High Low High Low
- --------------------------------------------------- ------ ------ ------ ------
1st................................................ $20.50 $17.50 $26.75 $23.75
2nd................................................ 19.00 10.50 26.50 22.50
3rd................................................ 17.63 8.75 24.38 18.00
4th................................................ 15.75 9.63 20.50 16.88
Year............................................... 20.50 8.75 26.75 16.88
------ ------ ------ ------
The 1992 amounts set forth in the table above have not been restated to
reflect the 2 percent common stock dividend paid by the Company on September 15,
1992. There were approximately 7,032 common stockholders and 535 preferred
stockholders of record at December 31, 1993.
ACCOUNTING STANDARDS CHANGES
In November 1992, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 112, "Employers' Accounting for
Postemployment Benefits" ("SFAS 112"), which requires accrual accounting for the
estimated costs of providing certain benefits to former or inactive employees
and the employees' beneficiaries and dependents after employment but before
retirement. The Company intends to adopt SFAS 112 by recognizing the catch-up
obligation for its worldwide operations as a cumulative effect of an accounting
change effective January 1, 1994 in the 1994 first quarter Statement of
Operations. The one-time, non-cash charge will be approximately $14 million, net
of income taxes.
22
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 March 23, 1994 are set forth
on pages 32-65 of this report. The financial statement schedules listed under
Item 14(a)2, together with the report thereon of the Independent Accountants
dated March 23, 1994 are set forth on pages 66-71 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, 1994, for the Annual Meeting of Stockholders scheduled May 10,
1994, under the captions, "Directors -- Nominees for Directors," "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, 1994, for the Annual Meeting of Stockholders scheduled May 10,
1994, under the caption "Compensation," excluding the section thereunder
entitled "Compensation Committee Report."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(A) 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, 1994, for the Annual Meeting of Stockholders
scheduled May 10, 1994, under the captions "Directors -- Nominees for Directors"
and "Security Ownership by Certain Beneficial Owners and Management--Security
Ownership by Certain Beneficial Owners."
(B) 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, 1994, for the Annual Meeting
of Stockholders scheduled May 10, 1994, under the captions "Directors --
Nominees for Directors" and "Security Ownership by Certain Beneficial Owners and
Management--Security Ownership by Management."
(C) 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, 1994, for the Annual Meeting of Stockholders scheduled May 10,
1994, under the caption "Directors -- Certain Transactions."
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, 1993, together with the Report of Independent
Accountants are set forth on pages 32-65 of this report. The supplemental
financial information listed and appearing hereafter should be read in
conjunction with the Financial Statements included in this report. Separate
financial statements of 50 percent or less owned persons accounted for by
the equity method have been omitted because they would not constitute a
significant subsidiary.
23
2. SUPPLEMENTAL FINANCIAL INFORMATION. The following are included in
Part IV of this report for each of the years ended December 31, 1993, 1992
and 1991 as applicable:
Page
-----
Report of Independent Accountants on Supplemental Financial Information............................... 66
Property, Plant and Equipment (Schedule V)............................................................ 68
Accumulated Depreciation and Amortization of Property, Plant and Equipment
(Schedule VI)........................................................................................ 69
Valuation and Qualifying Accounts and Reserves (Schedule VIII)........................................ 70
Short-term Borrowings (Schedule IX)................................................................... 70
Supplementary Income Statement Information (Schedule X)............................................... 70
Summarized Financial Information-Stone Southwest, Inc................................................. 71
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, 1993, the Company had outstanding loans receivable of $275,000 and
$250,000, respectively, to James Doughan, Executive Vice President of the
Company and President and Chief Executive Officer of Stone-Consolidated, and to
James B. Heider, Senior Vice President and General Manager, Containerboard and
Paper Division. Such loans bear no interest and are repayable on demand pursuant
to request by the Company.
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 October 15, 1993 was filed reporting under Item
5--Other Events, that the Company amended its Credit Agreement as of September
15, 1993, which amendment was filed as an exhibit to the Report on Form 8-K.
A Report on Form 8-K dated January 3, 1994 was filed reporting (i) under
Item 2--Acquisition or Disposition of Assets, that Stone-Consolidated
Corporation, an indirect Canadian subsidiary of the Company, sold in Canada in
an initial public offering both common stock and convertible subordinated
debentures and concurrently sold in the United States senior secured notes and;
(ii) under Item 5--Other Events, that the Company and its bank group entered
into an Amended and Restated Credit Agreement effective December 17, 1993 (the
"Third Restated Credit Agreement").
A Report on Form 8-K dated January 5, 1994 was filed reporting under Item
5--Other Events, with respect to certain amendments to the Credit Agreements and
disclosure relating to the Offerings, and other recent developments.
A Report on Form 8-K dated January 24, 1994 was filed reporting under Item
5--Other Events, that (i) the Company issued a press release on February 3, 1994
announcing its financial results for the fourth quarter of 1993 and for the year
ended December 31, 1993 and the recent developments concerning the Company's
issuance of common stock and senior unsecured notes and (ii) the Company amended
and received a waiver to its Credit Agreements as of January 24, 1994.
24
(C) EXHIBITS
2(a) Asset Acquisition Agreement dated December 17, 1993 between Stone-Consolidated Inc. (now Stone
Container (Canada) Inc.) and Stone-Consolidated Corporation and intervened to by the
Registrant, filed as Exhibit 2 to the Registrant's Current Report on Form 8-K dated January 3,
1994, is hereby incorporated by reference.
3(a) Certificate of Incorporation of the Registrant, as amended, filed as Exhibit 4(a) to the
Registrant's Registration Statement on Form S-8, Registration Number 33-33784, filed March 9,
1990, is hereby incorporated by reference.
3(b) Certificate of Amendment to Certificate of Incorporation of the Registrant dated May 11, 1993,
filed as Exhibit 4(e) to the Registrant's Registration Statement on Form S-3, Registration
Number 33-66086, filed on July 15, 1993, is hereby incorporated by reference.
3(c) Certificate of Increase of Series D Junior Participating Preferred Stock dated July 1, 1993,
filed as Exhibit 4(f) to the Registrant's Registration Statement on Form S-3, Registration
Number 33-66086, filed on July 15, 1993, is hereby incorporated by reference.
3(d) Certificate of Elimination of Series B Convertible Preferred Stock dated July 7, 1993, filed
as Exhibit 4(g) to the Registrant's Registration Statement on Form S-3, Registration Number
33-66086, filed on July 15, 1993, is hereby incorporated by reference.
3(e) By-laws of the Registrant, as amended, filed as Exhibit 3(e) to the Registrant's Annual Report
on Form 10-K for the year ended December 31, 1992, are hereby incorporated by reference.
3(f) Certificate of Designation for the Series D Junior Participating Preferred Stock, filed as
Exhibit 3(b) to the Registrant's Annual Report on Form 10-K for the year ended December 31,
1991, is hereby incorporated by reference.
3(g) Certificate of Designation for the $1.75 Series E Cumulative Convertible Exchangeable
Preferred Stock, filed as Exhibit 3(c) to the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1991, is hereby incorporated by reference.
3(h) Certificate of Designation for the Series F Cumulative Convertible Exchangeable Preferred
Stock, filed as Exhibit 4.2 to the Registrant's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1992, is hereby incorporated by reference.
4(a) Specimen certificate representing Common Stock, $.01 par value, filed as Exhibit 4(a) to the
Registrant'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 Registrant's Registration Statement on Form S-3,
Registration Number 33-45374, filed February 6, 1992, is hereby incorporated by reference.
4(c) Rights Agreement, dated as of July 25, 1988, between the Registrant and The First National
Bank of Chicago, filed as Exhibit 1 to the Registrant'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 Registrant and The First
National Bank of Chicago, filed as Exhibit 1A to the Registrant's Form 8 dated August 2, 1990
amending the Registrant's Registration Statement on Form 8-A dated July 27, 1988, is hereby
incorporated by reference.
25
4(e) Credit Agreement, dated as of March 1, 1989 (the "Canadian Term Loan Agreement"), among Stone
Container Corporation of Canada (now Stone Container (Canada) Inc.), the Banks named therein,
Bankers Trust Company, as agent for such Banks, and Citibank, N.A., Manufacturers Hanover
Trust Company (now Chemical Bank) and The First National Bank of Chicago, as co-agents for
such Banks, filed as Exhibit 28(b) to the Registrant's Current Report on Form 8-K dated March
2, 1989, filed on March 17, 1989, is hereby incorporated by reference.
4(f) Revolving Credit Agreement, dated as of March 1, 1989 (the "Canadian Revolver"), among Stone
Container Acquisition Corporation (now Stone Container (Canada) Inc.), the Banks named
therein, BT Bank of Canada, as administrative agent for such Banks, The Bank of Nova Scotia,
as payment agent for such Banks, and Bankers Trust Company, as collateral agent for such
Banks, filed as Exhibit 28(d) to the Registrant's Current Report on Form 8-K dated March 2,
1989, filed on March 17, 1989, is hereby incorporated by reference.
4(g) Third Amended and Restated U.S. Credit Agreement, dated as of March 1, 1989 and re-executed as
of October 5, 1993 (the "U.S. Credit Agreement"), among the Registrant, the Banks named
therein, Bankers Trust Company, as agent for the Banks under the U.S. Credit Agreement, and
Citibank, N.A., Manufacturers Hanover Trust Company (now Chemical Bank) and The First National
Bank of Chicago, as co-agents for the Banks under the U.S. Credit Agreement, filed as Exhibit
4(a) to the Registrant's Current Report on Form 8-K, dated January 3, 1994, is hereby
incorporated by reference.
4(h) First Amendment, Waiver and Consent dated as of December 29, 1993, among the Registrant, the
financial institutions named therein, Bankers Trust Company, as agent under the U.S. Credit
Agreement, Citibank, N.A., Chemical Bank (as successor to Manufacturers Hanover Trust Company)
and The First National Bank of Chicago, as co-agents under the U.S. Credit Agreement, filed as
Exhibit 4(b) to the Registrant's Current Report on Form 8-K, dated January 3, 1993, is hereby
incorporated by reference.
4(i) Second Amendment and Waiver dated as of January 24, 1994, among the Company, the financial
institutions named therein, Bankers Trust Company, as agent for the Banks under the U.S.
Credit Agreement, Citibank, N.A., Chemical Bank (as successor to Manufacturers Hanover Trust
Company) and The First National Bank of Chicago, as co-agents for the Banks under the U.S.
Credit Agreement, filed as Exhibit 4.1 to the Registrant's Current Report on Form 8-K, dated
January 24, 1994, is hereby incorporated by reference.
4(j) Indenture, dated as of September 15, 1986, relating to the 12- 1/8% Subordinated Debentures
due September 15, 2001 of Stone Southwest Corporation (now Stone Southwest, Inc.), between
Southwest Forest Industries, Inc. and Bankers Trust Company, as Trustee, together with the
First Supplemental Indenture, dated as of September 1, 1987, among Stone Container
Corporation, a Nevada corporation, the Registrant and National Westminster Bank USA, as
Trustee (which has been succeeded by Shawmut Bank, N.A., as Trustee), and the Second
Supplemental Indenture, dated as of December 14, 1987, among Stone Southwest Corporation, the
Registrant and National Westminster Bank USA, as Trustee (which has been succeeded by Shawmut
Bank, N.A., as Trustee), filed as Exhibit 4(i) to the Registrant's Registration Statement on
Form S-3, Registration Number 33-36218, filed on November 1, 1991, is hereby incorporated by
reference.
4(k) Indenture, dated as of September 1, 1989, between the Registrant and Bankers Trust Company, as
Trustee, relating to the Registrant's 11- 1/2% Senior Subordinated Notes due September 1,
1999, filed as Exhibit 4(n) to the Registrant's Registration Statement on Form S-3,
Registration Number 33-46764, filed March 27, 1992, is hereby incorporated by reference.
4(l) Indenture, dated as of February 15, 1992, between the Registrant and The Bank of New York, as
Trustee, relating to the Registrant's 6- 3/4% Convertible Subordinated Debentures due February
15, 2007, filed as Exhibit 4(p) to the Registrant's Registration Statement on Form S-3,
Registration Number 33-45978, filed on March 4, 1992, is hereby incorporated by reference.
26
4(m) Senior Subordinated Indenture, dated as of March 15, 1992, between the Registrant, and The
Bank of New York, as Trustee, filed as Exhibit 4(a) to the Registrant's Registration Statement
Form S-3, Registration Number 33-46764, filed on March 27, 1992, is hereby incorporated by
reference.
4(n) Indenture dated as of June 15, 1993 between the Registrant and Norwest Bank Minnesota,
National Association, as Trustee, relating to the Registrant's 8- 7/8% Convertible Senior
Subordinated Notes due 2000, filed as Exhibit 4(a) to the Registrant's Registration Statement
on Form S-3, Registration Number 33-66086, filed on July 15, 1993, is hereby incorporated by
reference.
4(o) Indenture, dated as of November 1, 1991, between the Registrant and The Bank of New York, as
Trustee, relating to the Registrant's Senior Debt Securities, filed as Exhibit 4(u) to the
Registrant's Registration Statement on Form S-3, Registration Number 33-45374, filed on
January 29, 1992, is hereby incorporated by reference.
4(p) First Supplemental Indenture dated as of June 23, 1993 between the Registrant and The Bank of
New York, as Trustee, relating to the Indenture, dated as of November 1, 1991, between the
Registrant and The Bank of New York, as Trustee, filed as Exhibit 4(aa) to the Registrant's
Registration Statement on Form S-3, Registration Number 33-66086, filed on July 15, 1993, is
hereby incorporated by reference.
4(q) Second Supplemental Indenture dated as of February 1, 1994 between the Registrant 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 Registrant's Current Report on Form 8-K, dated January 24, 1994,
is hereby incorporated herein by reference.
4(r) Indenture dated as of August 1, 1993 between the Registrant and Norwest Bank Minnesota,
National Association, as Trustee, relating to the Registrant's Senior Subordinated Debt
Securities, filed as Exhibit 4(a) to the Registrant's Form S-3 Registration Statement,
Registration Number 33-49857, filed July 30, 1993, is hereby incorporated by reference.
Indentures with respect to other long-term debt, none of which exceeds 10% of the total assets
of the Registrant 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(s) Guaranty, dated October 7, 1983, between the Registrant and The Continental Group, Inc., filed
as Exhibit 4(h) to the Registrant's Registration Statement on Form S-3, Registration Number
33-36218, filed on November 1, 1991, is hereby incorporated by reference.
10(a) Management Incentive Plan, incorporated by reference to Exhibit 10(b) to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1980.
10(b) Unfunded Deferred Director Fee Plan, incorporated by reference to Exhibit 10(d) to the
Registrant's Annual Report on Form 10-K for the year ended December 31, 1981.*
10(c) Form of "Stone Container Corporation Compensation Agreement" between the Registrant and its
directors that elect to participate, incorporated by reference to Exhibit 10(e) to the
Registrant's Annual Report on Form 10-K for the year ended December 31, 1988.
10(d) Stone Container Corporation 1982 Incentive Stock Option Plan, incorporated by reference to
Appendix A to the Prospectus included in the Registrant's Form S-8 Registration Statement,
Registration Number 2-79221, effective September 27, 1982.*
10(e) Stone Container Corporation 1993 Stock Option Plan, incorporated by reference to Appendix A to
the Registrant's Proxy Statement dated as of April 10, 1992.*
- ---------
* Management contract or compensatory plan or arrangement
27
10(f) Stone Container Corporation Deferred Income Savings Plan, conformed to reflect amendment
effective as of January 1, 1990, incorporated by reference to Exhibit 4(i) to Registrant's
Form S-8 Registration Statement, Registration Number 33-33784, filed March 9, 1990.*
10(g) Form of "Employee Continuity Agreement in the Event of a Change of Control" entered into with
all officers with 5 or more years of service with the Registrant, incorporated by reference to
Exhibit 10(j) to the Registrant's Annual Report on Form 10-K for the year ended December 31,
1988.*
10(h) Stone Container Corporation 1986 Long-Term Incentive Program, incorporated by reference to
Exhibit A to the Registrant's Proxy Statement dated as of April 5, 1985.*
10(i) Stone Container Corporation 1992 Long-Term Incentive Program, incorporated by reference to
Exhibit A to the Registrant's Proxy Statement dated as of April 11, 1991.*
10(j) Supplemental Retirement Income Agreement between Registrant and James Doughan dated as of
February 10, 1989, incorporated by reference to Exhibit 10(q) to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1988.*
12 Computation of Ratios of Earnings to Fixed Charges (filed herewith).
21 Subsidiaries of the Registrant (filed herewith).
- ---------
* Management contract or compensatory plan or arrangement
28
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.
STONE CONTAINER CORPORATION
By: ROGER W. STONE
Roger W. Stone March 29, 1994
CHAIRMAN OF THE BOARD OF DIRECTORS AND PRESIDENT
(CHIEF EXECUTIVE OFFICER)
ARNOLD F. BROOKSTONE
Arnold F. Brookstone March 29, 1994
EXECUTIVE VICE PRESIDENT
(CHIEF FINANCIAL AND PLANNING OFFICER)
THOMAS P. CUTILLETTA
Thomas P. Cutilletta March 29, 1994
SENIOR VICE PRESIDENT AND CORPORATE CONTROLLER
(PRINCIPAL ACCOUNTING OFFICER)
29
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.
RICHARD J. RASKIN
Dean L. Buntrock Richard J. Raskin
DIRECTOR March 29, 1994 DIRECTOR March 29, 1994
RICHARD A. GIESEN ALAN STONE
Richard A. Giesen Alan Stone
DIRECTOR March 29, 1994 DIRECTOR March 29, 1994
JAMES J. GLASSER AVERY J. STONE
James J. Glasser Avery J. Stone
DIRECTOR March 29, 1994 DIRECTOR March 29, 1994
GEORGE D. KENNEDY IRA N. STONE
George D. Kennedy Ira N. Stone
DIRECTOR March 29, 1994 DIRECTOR March 29, 1994
HOWARD C. MILLER, JR. JAMES H. STONE
Howard C. Miller, Jr. James H. Stone
DIRECTOR March 29, 1994 DIRECTOR March 29, 1994
JOHN D. NICHOLS ROGER W. STONE
John D. Nichols Roger W. Stone
DIRECTOR March 29, 1994 DIRECTOR March 29, 1994
JERRY K. PEARLMAN
Jerry K. Pearlman
DIRECTOR March 29, 1994
30
INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM: PAGE
- ---------------------------------------------------------------------- ------
Financial Statements:
Report of Independent Accountants................................... 32
Consolidated Statements of Operations............................... 33
Consolidated Balance Sheets......................................... 34
Consolidated Statements of Cash Flows............................... 35
Consolidated Statements of Stockholders' Equity..................... 36
Notes to the Consolidated Financial Statements...................... 37
Supplemental Financial Information:
Report of Independent Accountants on Supplemental Financial
Information........................................................ 66
Consent of Independent Accountants.................................. 67
Property, Plant and Equipment (Schedule V).......................... 68
Accumulated Depreciation and Amortization of Property, Plant and
Equipment (Schedule VI)............................................ 69
Valuation and Qualifying Accounts and Reserves (Schedule VIII)...... 70
Short-term Borrowings (Schedule IX)................................. 70
Supplementary Income Statement Information (Schedule X)............. 70
Summarized Financial Information--Stone Southwest Inc............... 71
31
Report of Independent Accountants
To the Board of Directors
and Stockholders of
Stone Container Corporation
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of cash flows and of stockholders' equity
present fairly, in all material respects, the financial position of Stone
Container Corporation and its subsidiaries at December 31, 1993 and 1992, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 1993, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
As discussed in Note 11 to the consolidated financial statements, the Company's
liquidity has been adversely affected by the net losses incurred in the past
three years. Recent financings and other transactions have improved liquidity;
however, improvements in cash flows from operations eventually will be
necessary. In addition, as discussed in Note 18, two of the Company's
subsidiaries may need to undertake additional measures to meet their separate
debt service requirements.
As discussed in Note 1 to the consolidated financial statements, the Company
changed its methods of accounting for income taxes and for postretirement
benefits other than pensions effective January 1, 1992 and 1993, respectively.
PRICE WATERHOUSE
Chicago, Illinois
March 23, 1994
32
STONE CONTAINER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions except per share)
YEAR ENDED DECEMBER 31,
---------------------------------
1993 1992 1991
--------- --------- ---------
SALES
Net sales................................................................................. $ 5,059.6 $ 5,520.7 $ 5,384.3
--------- --------- ---------
OPERATING COSTS AND EXPENSES
Cost of products sold..................................................................... 4,223.5 4,473.7 4,287.2
Selling, general and administrative expenses.............................................. 512.2 543.5 522.8
Depreciation and amortization............................................................. 346.8 329.2 273.5
Equity (income) loss from affiliates...................................................... 11.7 5.3 (1.1)
Other net operating (income) expense...................................................... 4.7 12.8 (62.8)
--------- --------- ---------
5,098.9 5,364.5 5,019.6
--------- --------- ---------
Income (loss) from operations............................................................. (39.3) 156.2 364.7
Interest expense.......................................................................... (426.7) (386.1) (397.4)
Other, net................................................................................ (.9) .6 14.7
--------- --------- ---------
Loss before income taxes and cumulative effects of accounting changes..................... (466.9) (229.3) (18.0)
Provision (credit) for income taxes....................................................... (147.7) (59.4) 31.1
--------- --------- ---------
NET LOSS
Loss before cumulative effects of accounting changes...................................... (319.2) (169.9) (49.1)
Cumulative effect of change in accounting for postretirement benefits (net of income taxes
of $23.3)................................................................................ (39.5) -- --
Cumulative effect of change in accounting for income taxes................................ -- (99.5) --
--------- --------- ---------
Net loss.................................................................................... (358.7) (269.4) (49.1)
Preferred stock dividends................................................................... (8.1) (6.9) --
--------- --------- ---------
Net loss applicable to common shares........................................................ $ (366.8) $ (276.3) $ (49.1)
--------- --------- ---------
--------- --------- ---------
NET LOSS PER COMMON SHARE*
Loss before cumulative effects of accounting changes...................................... (4.59) (2.49) (.78)
Cumulative effect of change in accounting for postretirement benefits..................... (.56) -- --
Cumulative effect of change in accounting for income taxes................................ -- (1.40) --
--------- --------- ---------
Net loss per common share................................................................... $ (5.15) $ (3.89) $ (.78)
--------- --------- ---------
--------- --------- ---------
- ---------
* Amounts per common share have been adjusted for the 2 percent common stock
dividend issued September 15, 1992.
The accompanying notes are an integral part of these statements.
33
STONE CONTAINER CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in millions)
DECEMBER 31,
-----------------------
1993 1992
---------- ----------
ASSETS
Current assets:
Cash and cash equivalents............................................................................ $ 247.4 $ 58.9
Accounts and notes receivable (less allowances of $19.3)............................................. 622.3 688.1
Inventories.......................................................................................... 719.4 785.3
Other................................................................................................ 164.1 169.5
---------- ----------
Total current assets............................................................................... 1,753.2 1,701.8
---------- ----------
Property, plant and equipment........................................................................ 5,240.7 5,365.1
Accumulated depreciation and amortization............................................................ (1,854.3) (1,661.9)
---------- ----------
Property, plant and equipment--net................................................................. 3,386.4 3,703.2
Timberlands.......................................................................................... 83.9 69.4
Goodwill............................................................................................. 910.5 983.5
Other................................................................................................ 702.7 569.1
---------- ----------
Total assets....................................................................................... $ 6,836.7 $ 7,027.0
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable........................................................................................ $ -- $ 33.0
Current maturities of senior and subordinated long-term debt......................................... 22.6 144.7
Current maturities of non-recourse debt of consolidated affiliates................................... 290.5 40.1
Accounts payable..................................................................................... 297.1 364.2
Income taxes......................................................................................... 47.6 62.2
Accrued and other current liabilities................................................................ 285.7 300.6
---------- ----------
Total current liabilities.......................................................................... 943.5 944.8
---------- ----------
Senior long-term debt................................................................................ 2,338.0 2,511.1
Subordinated debt.................................................................................... 1,257.8 1,019.2
Non-recourse debt of consolidated affiliates......................................................... 672.6 574.8
Other long-term liabilities.......................................................................... 270.3 152.7
Deferred taxes....................................................................................... 470.6 685.2
Redeemable preferred stock of consolidated affiliate................................................. 42.3 36.3
Minority interest.................................................................................... 234.5 .2
Commitments and contingencies (Note 18)..............................................................
Stockholders' equity:
Series E preferred stock............................................................................. 115.0 115.0
Common stock (71.2 and 71.0 shares outstanding)...................................................... 574.3 645.7
Retained earnings.................................................................................... 101.6 496.0
Foreign currency translation adjustment.............................................................. (179.0) (149.3)
Unamortized expense of restricted stock plan......................................................... (4.8) (4.7)
---------- ----------
Total stockholders' equity......................................................................... 607.1 1,102.7
---------- ----------
Total liabilities and stockholders' equity......................................................... $ 6,836.7 $ 7,027.0
---------- ----------
---------- ----------
The accompanying notes are an integral part of these statements.
34
STONE CONTAINER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
YEAR ENDED DECEMBER 31,
-------------------------------
1993 1992 1991
-------- --------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss...................................................................................... $ (358.7) $ (269.4) $ (49.1)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Cumulative effect of change in accounting for postretirement benefits....................... 39.5 -- --
Cumulative effect of change in accounting for income taxes.................................. -- 99.5 --
Depreciation and amortization............................................................... 346.8 329.2 273.5
Deferred taxes.............................................................................. (133.9) (67.5) 21.6
Foreign currency transaction losses (gains)................................................. 11.8 15.0 (4.9)
Payment on settlement of interest rate swaps................................................ (33.0) -- --
Other--net.................................................................................. (89.3) 60.6 12.3
Changes in current assets and liabilities--net of adjustments for divestitures and an
acquisition:
Decrease (increase) in accounts and notes receivable--net................................... 44.9 (66.6) 33.5
Decrease (increase) in inventories.......................................................... 28.9 10.5 (60.4)
Decrease (increase) in other current assets................................................. (9.3) 9.2 (75.2)
Increase (decrease) in accounts payable and other current liabilities....................... (60.4) (34.9) 59.2
-------- --------- --------
Net cash provided by (used in) operating activities....................................... (212.7) 85.6 210.5
-------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings.................................................................................... 611.4 1,024.8 753.0
Payments made on debt......................................................................... (698.1) (912.4) (795.9)
Non-recourse borrowings of consolidated affiliates............................................ 400.6 40.0 155.5
Payments by consolidated affiliates on non-recourse debt...................................... (55.0) (10.4) (34.4)
Proceeds from issuance of preferred stock..................................................... -- 111.0 --
Proceeds from issuance of common stock........................................................ -- .1 176.0
Proceeds from issuance of common stock of a consolidated subsidiary........................... 161.8 -- --
Proceeds from the settlement of cross currency swaps.......................................... 67.9 -- --
Cash dividends................................................................................ (4.0) (30.7) (44.7)
-------- --------- --------
Net cash provided by financing activities................................................. 484.6 222.4 209.5
-------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures:
Funded by project financings................................................................ (14.6) (79.1) (219.8)
Other....................................................................................... (135.1) (202.3) (210.3)
-------- --------- --------
Total capital expenditures................................................................ (149.7) (281.4) (430.1)
-------- --------- --------
Payments made for businesses acquired......................................................... (.1) (27.2) (18.8)
Proceeds from sales of assets................................................................. 106.0 9.5 22.1
Other--net.................................................................................... (40.7) (10.7) 13.7
-------- --------- --------
Net cash used in investing activities..................................................... (84.5) (309.8) (413.1)
-------- --------- --------
Effect of exchange rate changes on cash....................................................... 1.1 (3.4) 3.3
-------- --------- --------
NET CASH FLOWS
Net increase (decrease) in cash and cash equivalents.......................................... 188.5 (5.2) 10.2
Cash and cash equivalents, beginning of period................................................ 58.9 64.1 53.9
-------- --------- --------
Cash and cash equivalents, end of period...................................................... $ 247.4 $ 58.9 $ 64.1
-------- --------- --------
-------- --------- --------
- ---------
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.
35
STONE CONTAINER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in millions except per share)
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
1993 1992 1991
------------------ ------------------- -------------------
AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES
-------- ------- --------- ------- --------- -------
PREFERRED STOCK
Balance at January 1.................... $ 115.0 4.6 $ -- -- $ -- --
Issuance of preferred stock:
Public offering....................... -- -- 115.0 4.6 -- --
-------- ------- --------- ------- --------- -------
Balance at December 31.................. 115.0 4.6 115.0 4.6 -- --
-------- ------- --------- ------- --------- -------
------- ------- -------
COMMON STOCK
Balance at January 1.................... 645.7 71.0 613.2 69.5 435.7 60.0
Issuance of common stock:
Public offering....................... -- -- -- -- 174.7 9.2
Exercise of stock options............. -- -- .1 -- .1 --
Restricted stock plan................. 2.9 .2 2.8 .1 2.7 .3
Preferred stock conversion............ .1 -- -- -- -- --
2 percent common stock dividend....... -- -- 29.6 1.4 -- --
Public offering of subsidiary stock... (74.4) -- -- -- -- --
-------- ------- --------- ------- --------- -------
Balance at December 31.................. 574.3 71.2 645.7 71.0 613.2 69.5
-------- ------- --------- ------- --------- -------
------- ------- -------
RETAINED EARNINGS
Balance at January 1.................... 496.0 832.8 926.7
Net loss................................ (358.7) (269.4) (49.1)
Cash dividends:
Common stock*......................... -- (24.8) (44.7)
Preferred stock*...................... (4.0) (5.9) --
2 percent common stock dividend......... -- (29.6) --
Minimum pension liability in excess of
unrecognized prior service cost........ (31.7) (7.1) (.1)
-------- --------- ---------
Balance at December 31.................. 101.6 496.0 832.8
-------- --------- ---------
FOREIGN CURRENCY TRANSLATION ADJUSTMENT
Balance at January 1.................... (149.3) 95.5 101.5
Aggregate adjustment from translation of
foreign currency statements............ (29.7) (244.8) (6.0)
-------- --------- ---------
Balance at December 31.................. (179.0) (149.3) 95.5
-------- --------- ---------
UNAMORTIZED EXPENSE OF RESTRICTED STOCK
PLAN
Balance at January 1.................... (4.7) (4.0) (3.4)
Issuance of shares...................... (2.9) (2.8) (2.7)
Amortization of expense................. 2.8 2.1 2.1
-------- --------- ---------
Balance at December 31.................. (4.8) (4.7) (4.0)
-------- --------- ---------
Total stockholders' equity at December
31..................................... $ 607.1 $ 1,102.7 $ 1,537.5
-------- --------- ---------
-------- --------- ---------
- ---------
* Cash dividends paid on common stock, adjusted for the 2 percent stock dividend
issued September 15, 1992, were $.35 per share in 1992 and $.71 per share in
1991. No cash dividends on common stock were paid in 1993. Cash dividends paid
on preferred stock were $.875 per share in 1993 and $1.28 per share in 1992.
The accompanying notes are an integral part of these statements.
36
STONE CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of the Company
and all subsidiaries that are more than 50 percent owned. The Company's
subsidiary Cartomills, S.A. ("Cartomills") was also accounted for as a
consolidated subsidiary beginning October 31, 1990 upon the Company's
acquisition of 30 percent of the outstanding common stock of Cartomills. In
1992, the Company purchased the remaining 70 percent of the common stock of
Cartomills. All significant intercompany accounts and transactions have been
eliminated. Investments in non-consolidated affiliated companies are primarily
accounted for by the equity method.
PER SHARE DATA:
Net loss per common share is computed by dividing net loss applicable to
common shares by the weighted average number of common shares outstanding during
each year. The weighted average number of common shares outstanding was
71,162,646 in 1993, 70,986,564 in 1992 and 63,206,529 in 1991. Common stock
equivalent shares, issuable upon exercise of outstanding stock options, are
included in these calculations when they would have a dilutive effect on the per
share amounts. All amounts per common share and the weighted average number of
common shares outstanding have been adjusted for the 2 percent common stock
dividend issued September 15, 1992. Fully diluted earnings per share is not
disclosed because of the anti-dilutive effect of the Company's convertible
securities.
RECLASSIFICATIONS:
Certain prior year amounts have been restated to conform with the current
year presentation in the Consolidated Statements of Operations, the Consolidated
Balance Sheets and the Consolidated Statements of Cash Flows.
CASH AND CASH EQUIVALENTS:
The Company considers all highly liquid short-term investments with original
maturities of three months or less to be cash equivalents and, therefore,
includes such investments as cash and cash equivalents in its financial
statements.
INVENTORIES:
Inventories are stated at the lower of cost or market. The primary methods
used to determine inventory costs are the first-in-first-out ("FIFO") method,
the last-in-first-out ("LIFO") method and the average cost method.
PROPERTY, PLANT, EQUIPMENT AND DEPRECIATION:
Property, plant and equipment is stated at cost. Expenditures for
maintenance and repairs are charged to income as incurred. Additions,
improvements and major replacements are capitalized. The cost and accumulated
depreciation related to assets sold or retired are removed from the accounts and
any gain or loss is credited or charged to income.
For financial reporting purposes, depreciation and amortization is primarily
provided on the straight-line method over the estimated useful lives of
depreciable assets, or over the duration of the leases for capitalized leases,
based on the following annual rates:
TYPE OF ASSET RATES
- --------------------------------------------- -------------
Machinery and equipment...................... 5% to 33%
Buildings and leasehold improvements......... 2% to 10%
Land improvements............................ 4% to 7%
TIMBERLANDS:
Timberlands are stated at cost less accumulated cost of timber harvested.
The Company amortizes its private fee timber costs over the estimated total
fiber that will be available during the estimated growth cycle. Cost of non-fee
timber harvested is determined on the basis of timber removal rates and the
estimated volume of recoverable timber. The Company capitalizes interest costs
related to pre-merchantable timber.
INCOME TAXES:
Effective January 1, 1992, the Company adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"), which
required a change from the deferred method to the liability method of
37
STONE CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
accounting for income taxes. In connection with the adoption of SFAS 109, the
Company recorded a one-time, non-cash after-tax charge to its first quarter 1992
earnings of $99.5 million or $1.40 per share of common stock. This adjustment is
reported as a cumulative effect of a change in accounting principles in the
Company's Statements of Operations. Under the liability method, deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. SFAS 109
requires that assets and liabilities acquired in a business combination
accounted for under the purchase method of accounting be recorded at their gross
fair values, with a separate deferred tax balance recorded for the related tax
effects. Accordingly, effective with the adoption of SFAS 109, the Company's
property, plant and equipment increased by $331 million, resulting in increased
annual depreciation expense of approximately $28 million which is offset by
comparable reductions in deferred income tax expense as the related taxable
temporary differences reverse. The impact of the adoption of SFAS 109 on the
deferred income tax accounts as of January 1, 1992 was an increase in the
deferred tax liability of approximately $500 million and an increase in the
current deferred tax asset of approximately $18 million. Financial statements
for years prior to 1992 have not been restated.
GOODWILL AND OTHER ASSETS:
Goodwill is amortized on a straight-line basis over 40 years, and is
recorded net of accumulated amortization of approximately $129 million and $107
million at December 31, 1993 and 1992, respectively. The Company assesses at
each balance sheet date whether there has been a permanent impairment in the
value of goodwill. This is accomplished by determining whether projected
undiscounted future cash flows from operations exceed the net book value of
goodwill as of the assessment date. Such projections reflect price, volume and
cost assumptions. Additional factors considered by management in the preparation
of the projections and in assessing the value of goodwill include the effects of
obsolescence, demand, competition and other pertinent economic factors and
trends and prospects that may have an impact on the value or remaining useful
life of goodwill. Deferred debt issuance costs are amortized over the expected
life of the related debt using the interest method. Start-up costs on major
projects were capitalized and amortized over a ten-year period prior to October
1, 1993. Effective October 1, 1993, the Company changed its estimate of the
useful life of deferred start-up costs to a five-year period. The effect of this
change in estimate was to increase depreciation and amortization expense by
approximately $3.1 million and decrease net income by $2.0 million or $.02 per
common share. Other long-term assets include $80 million and $73 million of
unamortized deferred start-up costs at December 31, 1993 and 1992, respectively.
PUBLIC OFFERING OF SUBSIDIARY STOCK:
When the sale of subsidiary stock takes the form of a direct sale of its
unissued shares, the Company records the difference relating to the carrying
amount per share and the offering price per share as an adjustment to common
stock in those instances in which the Company has determined that the difference
does not represent a permanent impairment.
FOREIGN CURRENCY TRANSLATION:
The functional currency for the Company's foreign operations is the
applicable local currency. Accordingly, assets and liabilities are translated at
the exchange rate in effect at the balance sheet date and income and expenses
are translated at average exchange rates prevailing during the year. Translation
gains or losses are accumulated as a separate component of stockholders' equity
entitled Foreign Currency Translation Adjustment. Foreign currency transaction
gains or losses are credited or charged to income. These transaction gains or
losses arise primarily from the translation of monetary assets and liabilities
that are denominated in a currency other than the local currency.
FOREIGN CURRENCY AND INTEREST RATE HEDGES:
The Company utilizes various financial instruments to hedge its foreign
currency and interest rate exposures. Premiums received and fees paid on the
financial instruments are deferred and amortized over the period of the
agreements. Gains and losses on the instruments are used to offset the effects
of foreign exchange and interest rate fluctuations in the Statements of
Operations.
38
STONE CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS:
Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits
Other than Pensions" ("SFAS 106"), which required the Company to change from the
pay-as-you-go (cash) method to the accrual method of accounting for such
postretirement benefits (primarily health care and life insurance). Upon
adoption of SFAS 106, the Company recorded its catch-up accumulated
postretirement benefit obligation (approximately $62.8 million) by recognizing a
one-time, non-cash charge of $39.5 million, net of income taxes, as a cumulative
effect of an accounting change in its 1993 first quarter Statement of
Operations.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS:
In November 1992, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 112, "Employers' Accounting for
Postemployment Benefits" ("SFAS 112"), which requires accrual accounting for the
estimated costs of providing certain benefits to former or inactive employees
and the employees' beneficiaries and dependents after employment but before
retirement. The Company intends to adopt SFAS 112 by recognizing the catch-up
obligation for its worldwide operations as a cumulative effect of an accounting
change effective January 1, 1994 in the 1994 first quarter Statement of
Operations. The one-time, non-cash charge will be approximately $14 million, net
of income taxes.
NOTE 2--SUBSEQUENT EVENTS
On February 3, 1994, under the Company's $1 billion shelf registration, the
Company sold $710 million principal amount of 9- 7/8 percent Senior Notes due
February 1, 2001 and 16.5 million shares of common stock for an additional
$251.6 million at $15.25 per common share. On February 17, 1993, the
underwriters elected to exercise their option to sell an additional 2.47 million
shares of common stock for an additional $37.7 million, also at $15.25 per
common share (collectively, with the February 3, 1994 offering, the
"Offerings"). The net proceeds from the Offerings of approximately $962 million
were used to (i) prepay approximately $652 million of the 1995, 1996 and 1997
required amortization under the Company's bank credit agreements which includes
two term loan facilities, two revolving credit facilities and an additional term
loan (the "Credit Agreements") including the ratable amortization payment under
the revolving credit facilities which had the effect of reducing the total
commitments thereunder to approximately $168 million; (ii) redeem the Company's
13- 5/8 percent Subordinated Notes due 1995 at a price equal to par,
approximately $98 million principal amount, plus accrued interest to the
redemption date; (iii) repay approximately $136 million of the outstanding
borrowings under the Company's revolving credit facilities without reducing the
commitments thereunder; and (iv) provide liquidity in the form of cash. Had the
issuance of the common shares occurred on January 1, 1993, the Company's
weighted average number of common shares outstanding would have been 84,270,232
and the net loss per common share would have been $4.35 for the year ended
December 31, 1993.
NOTE 3--ACQUISITIONS/MERGERS/DISPOSITIONS
In December 1993, the Company sold two of its short-line railroads in a
transaction in which the Company has guaranteed to contract minimum railroad
services which will provide freight revenues to the railroads over a 10 year
period. The transaction has been accounted for as a financing and accordingly,
had no impact on the Company's 1993 net loss. The Company received proceeds of
approximately $28 million, of which approximately $19 million was used to repay
commitments under the Credit Agreements.
Also in December 1993, the Company sold its 49 percent equity interest in
Empaques de Carton Titan, S.A. ("Titan"). The net proceeds were used to repay
commitments under the Credit Agreements and for repayment of borrowings under
its revolving credit facilities without reducing commitments thereunder. The
sale resulted in a pre-tax gain of approximately $35.4 million.
On May 6, 1993, the Company's wholly-owned German subsidiary, Europa Carton
A.G., ("Europa Carton"), completed a joint venture with Financiere Carton Papier
(FCP), a French company, to merge the folding carton operations of Europa Carton
with those of FCP ("FCP Group"). Under the joint venture, FCP Group is owned
equally by Europa Carton and the shareholders of FCP immediately prior to the
merger. The Company's investment in the joint venture is being accounted for
under the equity method of accounting.
39
STONE CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 3--ACQUISITIONS/MERGERS/DISPOSITIONS (CONTINUED)
During 1993, the Company increased its ownership in the common stock of
Stone Savannah River Pulp & Paper Corporation ("Stone Savannah River") from 90.2
percent to 92.8 percent through the purchase of an additional 6,152 common
shares and through the receipt of Series D Preferred Stock as a dividend in kind
on Stone Savannah River's Series B Preferred Stock and the election of its right
to convert the Series D Preferred Stock into 198,438 common shares. The Company
had previously increased its ownership in the common stock of Stone Savannah
River from 50.0 percent to 90.2 percent by acquiring 321,502 shares during 1992
and 1991. Stone Savannah River operates a linerboard and market pulp mill in
Port Wentworth, Georgia.
In October and November 1992, the Company purchased the remaining 70.0
percent of the common stock (12,600 shares) of Cartomills, a Belgian company
that operates two corrugated container plants.
In June 1992, the Company acquired an additional 45,666 shares of Seminole
Kraft Corporation ("Seminole") common stock, thereby increasing its ownership in
the common stock of Seminole from 94.4 percent to 99.0 percent. The Company had
previously increased its ownership in the common stock of Seminole from 85.4
percent to 94.4 percent by purchasing 90,000 shares during 1991. Seminole
operates an unbleached recycled linerboard and kraft paper mill in Jacksonville,
Florida.
The Company also made a minor acquisition and a divestiture during the years
for which financial statements are presented which did not have a significant
impact on the Company's results of operations or financial condition.
NOTE 4--PUBLIC OFFERING OF SUBSIDIARY STOCK
In December 1993, Stone-Consolidated Corporation ("Stone-Consolidated"), a
newly created Canadian subsidiary, acquired the newsprint and uncoated
groundwood papers business of Stone Container (Canada) Inc. ("Stone-Canada")
(formerly Stone-Consolidated, Inc.) and sold $346.5 million of units in an
initial public offering comprised of both common stock and convertible
subordinated debentures (the "Units Offering"). Each unit was priced at $2,100
and consisted of 100 shares of common stock at $10.50 per share and $1,050
principal amount of convertible debentures. The convertible subordinated
debentures mature December 31, 2003, bear interest at an annual rate of 8
percent and are convertible beginning June 30, 1994, into 6.211 shares of common
stock for each Canadian $100 principal amount, representing a conversion price
of $12.08 per share. Concurrent with the initial public offering,
Stone-Consolidated sold $225 million of senior secured notes in a public
offering in the United States. The senior secured notes mature December 15, 2000
and bear interest at an annual rate of 10.25 percent.
As a result of the Units Offering, 16.5 million shares of common stock,
representing 25.4 percent of the total shares outstanding of Stone-Consolidated,
were sold to the public, resulting in the recording in the Company's
Consolidated Balance Sheet of a minority interest liability of $236.7 million.
The Company used approximately $373 million of the net proceeds from the
sale of the Stone-Consolidated securities for repayment of commitments under its
Credit Agreements and the remainder for general corporate purposes. As a result
of the Units Offering, the Company recorded a charge of $74.4 million to common
stock relating to the excess carrying value per common share over the offering
price per common share associated with the shares issued.
40
STONE CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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:
YEAR ENDED DECEMBER 31,
-------------------------------
(IN MILLIONS) 1993 1992 1991
- --------------------------------------------------------------------------------------------- --------- --------- ---------
Issuance of 2 percent common stock dividend.................................................. $ -- $ 29.6 $ --
Conversion of notes receivable into investments in an affiliate.............................. -- 7.3 --
Preferred stock dividends issued by a consolidated affiliate................................. 6.0 5.1 4.4
Capital lease obligations incurred........................................................... .3 4.3 --
Assumption of debt in connection with an acquisition......................................... -- 3.8 --
Note payable issued in exchange for common shares of a consolidated affiliate................ -- 1.1 --
Exchange of non-recourse debt of consolidated affiliate...................................... -- -- 12.5
Accrued liability converted to subordinated debt............................................. -- -- 9.8
--------- --------- ---------
--------- --------- ---------
Cash paid (received) during the year for:
Interest (net of capitalization)........................................................... $ 375.9 $ 355.6 $ 370.3
Income taxes (net of refunds).............................................................. (11.7) (1.9) 14.3
--------- --------- ---------
--------- --------- ---------
In 1993, the other-net component of net cash used in operating activities
included debt issuance costs of $84 million and an adjustment to remove the
effect of a $35 million gain from the sale of the Company's 49 percent equity
interest in Titan, partially offset by adjustments to remove the effects of
amortization of deferred debt issuance costs and a non-cash charge of $19
million pertaining to the writedown of certain decommissioned assets.
In 1992, the other-net component of net cash provided by operating
activities included $54 million of cash received from the sale of an energy
contract in October 1992.
NOTE 6--INVENTORIES
Inventories are summarized as follows:
DECEMBER 31,
--------------------
(IN MILLIONS) 1993 1992
- -------------------------------------------------------------------------------------- --------- ---------
Raw materials and supplies............................................................ $ 333.8 $ 345.9
Paperstock............................................................................ 284.2 316.6
Work in process....................................................................... 16.8 22.2
Finished products..................................................................... 99.5 119.3
--------- ---------
734.3 804.0
Excess of current cost over LIFO inventory value...................................... (14.9) (18.7)
--------- ---------
Total inventories..................................................................... $ 719.4 $ 785.3
--------- ---------
--------- ---------
At December 31, 1993 and 1992, the percentages of total inventories costed
by the LIFO, FIFO and average cost methods were as follows:
1993 1992
----- -----
LIFO.......................................................................................... 44% 42%
FIFO.......................................................................................... 6% 7%
Average Cost.................................................................................. 50% 51%
41
STONE CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 7--PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is summarized as follows:
DECEMBER 31,
------------------------
(IN MILLIONS) 1993 1992
- -------------------------------------------------------------------------------- ----------- -----------
Machinery and equipment......................................................... $ 4,398.7 $ 4,381.4
Buildings and leasehold improvements............................................ 675.0 668.4
Land and land improvements...................................................... 103.0 105.7
Construction in progress........................................................ 64.0 209.6
----------- -----------
Total property, plant and equipment............................................. 5,240.7 5,365.1
Accumulated depreciation and amortization....................................... (1,854.3) (1,661.9)
----------- -----------
Total property, plant and equipment--net........................................ $ 3,386.4 $ 3,703.2
----------- -----------
----------- -----------
Property, plant and equipment includes capitalized leases of $70.3 million
and $71.8 million and related accumulated amortization of $24.2 million and
$19.8 million at December 31, 1993 and 1992, respectively.
NOTE 8--INCOME TAXES
Effective January 1, 1992, the Company adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"), which
required a change from the deferred method to the liability method of accounting
for income taxes. In connection with the adoption of SFAS 109, the Company
recorded a one-time, non-cash after-tax charge to its first quarter 1992
earnings of $99.5 million or $1.40 per share of common stock. This adjustment is
reported as a cumulative effect of a change in accounting principles in the
Company's Statements of Operations. Under the liability method, deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. SFAS 109
requires that assets and liabilities acquired in a business combination
accounted for under the purchase method of accounting be recorded at their gross
fair values, with a separate deferred tax balance recorded for the related tax
effects.
The provision (credit) for income taxes consists of the following:
YEAR ENDED
DECEMBER 31,
--------------------------------
(IN MILLIONS) 1993 1992 1991
- ---------------------------------------------------------------------------- ---------- --------- ---------
Currently payable (refundable):
Federal................................................................... $ (28.4) $ (24.7) $ (7.2)
State..................................................................... 4.0 3.0 (3.1)
Foreign................................................................... 10.6 21.7 18.4
---------- --------- ---------
(13.8) -- 8.1
---------- --------- ---------
Deferred:
Federal................................................................... (45.4) 4.9 --
State..................................................................... (31.3) (10.8) .9
Foreign................................................................... (57.2) (53.5) 22.1
---------- --------- ---------
(133.9) (59.4) 23.0
---------- --------- ---------
Total provision (credit) for income taxes................................... $ (147.7) $ (59.4) $ 31.1
---------- --------- ---------
---------- --------- ---------
42
STONE CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 8--INCOME TAXES (CONTINUED)
The income tax (credit) at the federal statutory rate is reconciled to the
provision (credit) for income taxes as follows:
YEAR ENDED DECEMBER 31,
--------------------------------
(IN MILLIONS) 1993 1992 1991
- ---------------------------------------------------------------------------------------- ---------- --------- ---------
Federal income tax (credit) at federal statutory rate................................... $ (163.4) $ (78.0) $ (6.1)
Additional taxes (credits) resulting from:
Non-deductible depreciation and amortization of intangibles........................... 9.5 9.5 27.2
Foreign statutory rate decreases...................................................... (11.2) -- --
U.S. statutory rate increase.......................................................... 8.7 -- --
State income taxes, net of federal income tax effect.................................. (17.7) (5.1) (1.4)
Foreign income taxed at rates in excess of U.S. statutory rate........................ 4.3 6.1 10.0
Minimum taxes-foreign jurisdictions................................................... 3.6 4.6 4.3
Other-net............................................................................. 18.5 3.5 (2.9)
---------- --------- ---------
Provision (credit) for income taxes..................................................... $ (147.7) $ (59.4) $ 31.1
---------- --------- ---------
---------- --------- ---------
The components of the net deferred tax liability as of December 31, 1993 and
1992 were as follows:
DECEMBER 31,
--------------------
(IN MILLIONS) 1993 1992
- ---------------------------------------------------------------------------------------------- --------- ---------
Deferred tax assets:
Carryforwards............................................................................... $ 262.6 $ 125.9
Compensation-related accruals............................................................... 49.3 5.4
Reserves.................................................................................... 33.7 29.0
Deferred gain............................................................................... 26.2 20.3
Tax benefit transfers....................................................................... 8.8 12.7
Other....................................................................................... 11.6 18.4
--------- ---------
392.2 211.7
Valuation allowance........................................................................... (1.2) (1.2)
--------- ---------
Total deferred tax asset...................................................................... 391.0 210.5
Deferred tax liability:
Depreciation and amortization............................................................... (754.3) (779.5)
Start-up costs.............................................................................. (27.8) (27.9)
LIFO reserve................................................................................ (18.1) (8.1)
Pension..................................................................................... (12.5) (25.7)
Other....................................................................................... (35.2) (36.5)
--------- ---------
Total deferred tax liability.................................................................. (847.9) (877.7)
--------- ---------
Deferred tax liability--net................................................................... $ (456.9) $ (667.2)
--------- ---------
--------- ---------
43
STONE CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 8--INCOME TAXES (CONTINUED)
During 1991, deferred taxes were provided for significant timing differences
between revenue and expenses for tax and financial statement purposes. Following
is a summary of the significant components of the deferred tax provision:
YEAR ENDED
DECEMBER 31,
(IN MILLIONS) 1991
- ------------------------------------------------------- ---------------
Depreciation and amortization.......................... $ (2.4)
Acquisition related expenses........................... (2.9)
Capitalized interest................................... 12.4
Start-up costs......................................... 7.2
Pension costs.......................................... (.2)
Other--net............................................. 8.9
-----
Deferred income tax provision...................... $ 23.0
-----
-----
The components of the loss before income taxes and cumulative effects of
accounting changes are:
YEAR ENDED DECEMBER 31,
-------------------------------
(IN MILLIONS) 1993 1992 1991
- ------------------------------------------------------- --------- --------- ---------
United States.......................................... $ (315.1) $ (74.1) $ (39.0)
Foreign................................................ (151.8) (155.2) 21.0
--------- --------- ---------
Loss before income taxes and cumulative effects of
accounting changes.................................... $ (466.9) $ (229.3) $ (18.0)
--------- --------- ---------
--------- --------- ---------
As a result of certain acquisitions, the Company had, at December 31, 1993,
approximately $27 million of pre-acquisition net operating loss carryforwards
and approximately $5 million of investment tax credit carryforwards for federal
income tax purposes. To the extent not utilized, the carryforwards will expire
in the period commencing in the year 1996 and ending in the year 2004.
At December 31, 1993, Bridgewater Paper Company Ltd., which was acquired in
the 1989 Stone-Canada acquisition, had approximately $92 million of net
operating loss carryforwards for United Kingdom income tax purposes. These
losses are available indefinitely.
At December 31, 1993, the Company had approximately $252 million of net
operating loss carryforwards for U.S. tax purposes and, additionally,
approximately $236 million of net operating loss carryforwards for Canadian tax
purposes. To the extent not utilized, the U.S. net operating losses will expire
in 2007 and 2008 and the Canadian net operating losses will expire in 1998, 1999
and 2000. The Company also had approximately $11 million of alternative minimum
tax credit carryforwards for U.S. tax purposes which are available indefinitely.
NOTE 9--PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS
The Company has contributory and noncontributory pension plans for the
benefit of most salaried and certain hourly employees. The funding policy for
the plans, with the exception of the Company's salaried supplemental unfunded
plans and the Company's German subsidiary's unfunded plan, is to annually
contribute the statutory required minimum. The salaried pension plans provide
benefits based on a formula which takes into account each participant's
estimated final average earnings. The hourly pension plans provide benefits
under a flat benefit formula. The salaried and hourly plans provide reduced
benefits for early retirement. The salaried plans take into account offsets for
governmental benefits.
44
STONE CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 9--PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS (CONTINUED)
Net pension expense for the combined pension plans includes the following
components:
YEAR ENDED DECEMBER 31,
-------------------------------
(IN MILLIONS) 1993 1992 1991
- ------------------------------------------------------- --------- --------- ---------
Service cost--benefits earned during the period........ $ 17.4 $ 17.2 $ 15.6
Interest cost on projected benefit obligations......... 63.7 64.0 61.7
Actual return on plan assets........................... (91.9) (32.8) (86.5)
Net amortization and deferral.......................... 40.4 (26.6) 30.2
--------- --------- ---------
Net pension expense.................................... $ 29.6 $ 21.8 $ 21.0
--------- --------- ---------
--------- --------- ---------
The following table sets forth the funded status of the Company's pension
plans and the amounts recorded in the Consolidated Balance Sheets:
DECEMBER 31,
-----------------------------------------------------------------
1993 1992
------------------------------- -------------------------------
ASSETS EXCEED ACCUMULATED ASSETS EXCEED ACCUMULATED
ACCUMULATED BENEFITS EXCEED ACCUMULATED BENEFITS EXCEED
(IN MILLIONS) BENEFITS ASSETS BENEFITS ASSETS
- -------------------------------------------------- ------------- --------------- ------------- ---------------
Actuarial present value of benefit obligations:
Vested benefits................................. $ (185.0) $ (498.8) $ (465.0) $ (116.9)
Non-vested benefits............................. (11.4) (37.9) (34.4) (6.3)
------------- ------- ------------- -------
Accumulated benefit obligation.................. (196.4) (536.7) (499.4) (123.2)
Effect of increase in compensation levels....... (23.2) (76.6) (75.0) (14.1)
------------- ------- ------------- -------
Projected benefit obligation for service rendered
through December 31.............................. (219.6) (613.3) (574.4) (137.3)
Plan assets at fair value, primarily stocks,
bonds, guaranteed investment contracts, real
estate and mutual funds which invest in listed
stocks
and bonds........................................ 219.0 395.3 518.7 49.8
------------- ------- ------------- -------
Excess of projected benefit obligation over
plan assets...................................... (.6) (218.0) (55.7) (87.5)
Unrecognized prior service cost................... 4.6 29.4 14.5 6.8
Unrecognized net actuarial loss................... 39.4 127.3 96.1 5.6
Unrecognized net assets........................... -- -- (9.9) --
Adjustment required to recognize minimum
liability........................................ -- (92.4) -- (19.6)
------------- ------- ------------- -------
Net prepaid (accrual)............................. $ 43.4 $ (153.7) $ 45.0 $ (94.7)
------------- ------- ------------- -------
------------- ------- ------------- -------
In accordance with Statement of Financial Accounting Standards No. 87,
"Employer's Accounting for Pensions," the Company has recorded an additional
minimum liability for underfunded plans representing the excess of the unfunded
accumulated benefit obligation over previously recorded liabilities. The
additional minimum liability at December 31, 1993 of $92.4 million is recorded
as a long-term liability with an offsetting intangible asset of $29.4 million
and a charge to stockholders' equity of $39.6 million, net of a tax benefit of
$23.4 million. Of this additional minimum liability, $19.6 million was recorded
as a long-term liability at December 31, 1992 with an offsetting intangible
asset of $6.7 million and a charge to stockholders' equity of $7.9 million, net
of a tax benefit of $5.0 million.
The weighted average discount rate and the rate of increase in future
compensation levels used in determining the actuarial present value of the
projected benefit obligations was 7.5 percent for all U.S. and German operations
and 8.0 percent for Canadian and United Kingdom operations and 4.0 percent,
respectively, for 1993 and 9.0 percent and 4.5 to 5.0 percent, respectively, for
1992. The expected long-term rate of return on assets was 11 percent for 1993
and 1992. The change in the weighted average discount rates during 1993 had the
effect of increasing the total projected benefit obligation at December 31, 1993
by $108.8 million and the change in the rate of increase in future compensation
levels in 1993 had the effect of decreasing the projected benefit obligation by
$19.3 million.
45
STONE CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 9--PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS (CONTINUED)
Certain domestic operations of the Company participate in various
multi-employer union-administered defined benefit pension plans that principally
cover production workers. Pension expense under these plans was $5.1 million for
1993 and 1992 and $4.7 million for 1991.
In addition to providing pension benefits, the Company provides certain
retiree health care and life insurance benefits covering substantially all U.S.
salaried and hourly employees and certain Canadian employees. Employees become
eligible for such benefits if they are fully vested in one of the Company's
pension plans when they retire from the Company and they begin to draw
retirement benefits upon termination of service. Such retiree health care costs
were expensed as the claims were paid through December 31, 1992. However, as
discussed in Note 1--"Summary of Significant Accounting Policies," effective
January 1, 1993, the Company adopted SFAS 106, which required the Company to
accrue for its obligation to pay such postretirement health care costs during
the employees' years of service, as opposed to when such costs are actually
paid. The effect of SFAS 106 on income from operations is not material.
In conjunction with the adoption, the Company, effective January 1, 1993,
implemented cost saving provisions designed to reduce certain postretirement
health care and life insurance costs. Among other things, these provisions
provide for a cap on the Company's share of certain health care costs. Such
provisions do not apply to current retirees and those active employees age 55
and over who were eligible to retire as of December 31, 1992. Accordingly, the
Company is generally responsible for 50 percent of the claims of such
individuals.
Net worldwide periodic postretirement benefit cost for 1993 included the
following components:
(IN MILLIONS)
- -------------------------------------------------------
Service cost-benefits attributed to service during the
period................................................ $ 1.0
Interest cost on accumulated postretirement benefit
obligation............................................ 5.5
---
Net worldwide periodic postretirement benefit cost..... $ 6.5
---
---
Worldwide postretirement benefits costs for retired employees approximated
$4.7 million for 1992. Prior to 1992, the cost of providing such benefits for
retired employees was not readily separable from the cost of providing benefits
for active employees. On a combined basis, worldwide health care and life
insurance benefit cost for both active and retired employees approximated $76
million in 1991.
The following table sets forth the components of the Company's accumulated
postretirement benefit obligation and the amount recorded in the Consolidated
Balance Sheet at December 31, 1993:
(IN MILLIONS) U.S. FOREIGN TOTAL
- ------------------------------------------------------- --------- ----------- ---------
Accumulated postretirement benefit obligation:
Retirees............................................. $ 19.0 $ 22.5 $ 41.5
Active employees--fully eligible..................... 15.3 3.0 18.3
Other active employees............................... 15.5 2.6 18.1
--------- ----- ---------
Total accumulated postretirement benefit obligation.... 49.8 28.1 77.9
Unrecognized net loss.................................. (12.6) (2.1) (14.7)
--------- ----- ---------
Postretirement benefit liability....................... $ 37.2 $ 26.0 $ 63.2
--------- ----- ---------
--------- ----- ---------
The Company has not currently funded any of its accumulated postretirement
benefit obligation.
The discount rate used in determining the accumulated postretirement benefit
cost was 7.5 percent for U.S. and German operations and 8.0 percent for Canadian
and United Kingdom operations. The assumed health care cost trend rates for
substantially all employees used in measuring the accumulated postretirement
benefit obligation range from 7 percent to 15 percent decreasing to ultimate
rates of 5.5 percent to 8 percent. If the health care cost trend rate
assumptions were increased by 1 percent, the accumulated postretirement benefit
obligation at December 31, 1993 and the net periodic postretirement benefit cost
for the year ended December 31, 1993 would have increased by $6.5 million and
$0.6 million, respectively.
46
STONE CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 9--PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS (CONTINUED)
At December 31, 1993, the Company had approximately 8,300 retirees and
29,000 active employees of which approximately 3,000 and 21,100, respectively,
were employees of U.S. operations.
NOTE 10--LONG-TERM DEBT
Long-term debt consists of the following:
DECEMBER 31,
----------------------
(IN MILLIONS) 1993 1992
- -------------------------------------------------------------------------------------------------------- ---------- ----------
SENIOR DEBT:
Term loans (8.3% and 10.0% weighted average rates) payable $116.0 on March 31, 1995 and in semi-annual
installments of $116.7 on September 30, 1995, March 31 and September 30, 1996 and $411.6 on March 1,
1997................................................................................................... $ 877.7 $ 1,230.1
Additional term loan (6.3% and 7.0% weighted average rates) payable $38.7 on March 31, 1995 and in
semi-annual installments of $39.0 on September 30, 1995 and March 31, 1996 and $38.9 on September 30,
1996 and $137.3 on March 1, 1997....................................................................... 292.9 371.0
Revolving credit agreements (5.7% and 6.4% weighted average rates) due March 1, 1997.................... 263.8 257.0
11.875% senior notes due December 1, 1998 (less unamortized discount of $1.1 and $1.3).................. 238.9 238.7
12.625% senior notes due July 15, 1998.................................................................. 150.0 --
5.8% to 11.625% fixed rate utility systems and pollution control revenue bonds, payable in varying
annual sinking fund payments through the year 2010 and varying principal payments through the year 2016
(less unamortized debt discount of $7.8 and $8.6)...................................................... 203.5 206.2
Obligations under accounts receivable securitization programs (4.8% and 5.3% weighted average rates) due
September 15, 1995..................................................................................... 232.4 261.8
4.0% to 7.96% term loans payable in varying amounts through 1999........................................ 41.2 54.6
Obligations under capitalized leases.................................................................... 11.2 23.1
Cartomills 8.50% to 10.75% loans payable in varying installments through the year 1997.................. 5.1 7.1
Cartomills (4.74% weighted average rate), loan payable in annual installments through the year 1999..... 7.1 --
Floating rate revenue bonds (8.0% weighted average rates), payable in semi-annual installments of $.12
through 1996........................................................................................... .7 .9
Other................................................................................................... 31.2 5.3
---------- ----------
2,355.7 2,655.8
Less: current maturities................................................................................ (17.7) (144.7)
---------- ----------
Total senior long-term debt......................................................................... 2,338.0 2,511.1
---------- ----------
47
STONE CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 10--LONG-TERM DEBT (CONTINUED)
DECEMBER 31,
----------------------
(IN MILLIONS) 1993 1992
- -------------------------------------------------------------------------------------------------------- ---------- ----------
SUBORDINATED DEBT:
11.5% senior subordinated notes, payable in two annual sinking fund payments of $57.5 commencing
September 1, 1997 and maturing on September 1, 1999 with a lump sum payment of $115.0.................. 230.0 230.0
10.75% senior subordinated debentures maturing on April 1, 2002, (less unamortized debt discount of
$.9)................................................................................................... 199.1 199.1
8.875% convertible senior subordinated notes maturing on July 15, 2000 (less unamortized debt discount
of $1.5)............................................................................................... 248.5 --
10.75% senior subordinated notes maturing on June 15, 1997.............................................. 150.0 150.0
11.0% senior subordinated notes maturing on August 15, 1999............................................. 125.0 125.0
6.75% convertible subordinated debentures with annual sinking fund payments of $11.5 commencing on
February 15, 2002 and maturing on February 15, 2007 with a lump sum payment of $57.5................... 115.0 115.0
13.625% subordinated notes maturing on June 1, 1995 (less unamortized debt discount of $.2 and $.3)..... 98.1 98.0
12.125% subordinated debentures with annual sinking fund payments of $14.0 commencing on September 15,
1996 and maturing in the year 2001 with a lump sum payment of $70.0 (including unamortized debt premium
of $2.2 and $2.4 and net of $50.1 repurchased by the Company).......................................... 92.1 92.3
Subordinated note bearing an incremental borrowing rate adjusted annually (10.0% and 11.1% average
rates) payable on January 18, 1994..................................................................... 4.9 9.8
---------- ----------
1,262.7 1,019.2
Less: current maturities................................................................................ (4.9) --
---------- ----------
Total subordinated debt............................................................................. 1,257.8 1,019.2
---------- ----------
NON-RECOURSE DEBT OF CONSOLIDATED AFFILIATES:
Stone-Consolidated 10.25% senior secured notes due December 15, 2000.................................... 225.0 --
Stone-Consolidated 8% convertible subordinated debentures maturing on December 31, 2003................. 174.5 --
Stone Savannah River obligation under a senior credit facility (8.4% and 8.8% weighted average rates),
payable in varying amounts through the year 1998....................................................... 268.9 297.0
Stone Savannah River 5.375% to 10.25% fixed rate revenue bonds, payable in varying amounts through the
year 1997 and maturing in 2000 and 2010 (less unamortized debt discount of $.2 and $.2)................ 4.7 4.9
Stone Savannah River 14.125% senior subordinated notes due December 15, 2000 (less unamortized debt
discount of $1.0 and $1.1)............................................................................. 129.0 128.9
Seminole obligation under a senior credit facility (6.4% and 6.8% weighted average rates), payable in
varying amounts from 1993 through the year 2000........................................................ 120.6 122.0
Seminole senior notes maturing on December 31, 1993 (interest rate of 14.0%)............................ -- 15.0
Seminole obligation payable at 13.5% imputed interest rate (less unamortized debt discount of $2.4 and
$2.9).................................................................................................. 11.6 11.1
Seminole 13.5% subordinated notes due with annual sinking fund payments of $7.2 and maturing on October
15, 1996 with a lump sum payment of $14.4.............................................................. 28.8 36.0
---------- ----------
963.1 614.9
Less: current maturities................................................................................ (290.5) (40.1)
---------- ----------
Total non-recourse debt of consolidated affiliates.................................................. 672.6 574.8
---------- ----------
Total long-term debt.................................................................................... $ 4,268.4 $ 4,105.1
---------- ----------
---------- ----------
The Credit Agreements provided for a $400 million multiple-draw facility
(the "MDF") to supplement the revolving credit facility thereunder. The MDF had
substantially the same terms and conditions, including covenants, as the
48
STONE CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 10--LONG-TERM DEBT (CONTINUED)
Credit Agreements. Proceeds of MDF borrowings (approximately $371 million) were
required to be used solely to repay regularly scheduled amortization of term
loans under the Credit Agreements. The Company cancelled the remaining
commitment under the MDF in 1991. On October 1, 1992, the $371 million
outstanding under the MDF was converted to an Additional Term Loan (the "ATL").
Borrowings under the ATL are collateralized by an equal and ratable lien on the
existing collateral under the Credit Agreements.
The Credit Agreements permit the Company to choose among various interest
rate options, to specify the portion of the borrowings to be covered by specific
interest rate options and to specify the interest rate period to which the
interest rate options are to apply, subject to certain parameters. As a result
of the February 1994 amendment, interest rate options available to the Company
under term loans, ATL and revolving credit borrowings under the Credit
Agreements are (i) U.S. or Canadian prime rate plus a borrowing margin of 2
percent, (ii) CD rate plus a borrowing margin of 3 1/8 percent, (iii) Eurodollar
rate plus a borrowing margin of 3 percent and (iv) bankers' acceptance rate plus
a borrowing margin of 3 percent. Upon achievement of specified indebtedness
ratios and interest coverage ratios, the borrowing margins will be reduced.
Additionally, the Company pays a 3/8 percent commitment fee on the unused
portions of the revolving credit facilities. The weighted average rates as
reflected in the table do not include the effects of the amortization of
deferred debt issuance costs.
The Credit Agreements require that the Company hedge a portion of the U.S.
dollar-based borrowings to protect against increases in market interest rates.
Pursuant to that requirement, at December 31, 1993, the Company was a party to
an interest rate swap contract which had the effect of fixing the interest rate
at approximately 12.9 percent on $150 million of U.S. term loan borrowings. The
interest rate swap is scheduled to expire on March 22, 1994. During 1993, the
Company sold prior to their expiration date, certain of its U.S. dollar
denominated interest rate swaps and cross currency swaps associated with the
Credit Agreement borrowings of Stone-Canada. The net proceeds totaled
approximately $34.9 million, the substantial portion of which was used to repay
borrowings under the Company's revolving credit facilities.
At December 31, 1993, the $1.45 billion of borrowings and accrued interest
outstanding under the Credit Agreements and the ATL were secured by property,
plant and equipment with a net book value of $518.4 million and by common stock
of various subsidiaries of the Company representing net assets of approximately
$3.4 billion (including collateralized property, plant and equipment with a net
book value of $349.4 million) and by a lien on the Company's inventories.
Additionally, other loan agreements aggregating $646.0 million were
collateralized by approximately $1.56 billion of property, plant and
equipment-net.
Emerging Issues Task Force Issue No. 86-30, "Classification of Obligations
When a Violation is Waived by the Creditor," requires a company to reclassify
long-term debt as current when a covenant violation has occurred at the balance
sheet date or would have occurred absent a loan modification and it is probable
that the borrower will not be able to comply with the same covenant at
measurement dates that are within the next twelve months. In November 1993,
Stone Savannah River received a waiver of its fixed-charges-coverage covenant
requirement as of December 31, 1993 and March 31, 1994. Management has prepared
projections that indicate that upon the expiration of the waiver Stone Savannah
River will not be in compliance with this covenant as of June 30, September 30,
and December 31, 1994. Consequently, approximately $237.9 million of Stone
Savannah River debt that otherwise would have been classified as long-term has
been classified as current in the December 31, 1993 consolidated balance sheet.
Stone Savannah River intends to seek, prior to June 10, 1994, appropriate
financial covenant waivers or amendments from its bank group, although no
assurance can be given that such waivers or amendments will be obtained. Any
such failure to obtain covenant relief would result in a default under Stone
Savannah River's credit agreement and other indebtedness and, if any such
indebtedness was accelerated by the holders thereof, the lenders to the Company
under the Credit Agreements and various other of the Company's debt instruments
will be entitled to accelerate the indebtedness owed by the Company.
On July 6, 1993, the Company sold $150 million principal amount of 12- 5/8
percent Senior Notes due July 15, 1998 (the "12- 5/8 percent Senior Notes"). The
12- 5/8 percent Senior Notes are not redeemable by the Company prior to
maturity. Interest is payable semi-annually on January 15 and July 15,
commencing January 15, 1994.
Also on July 6, 1993, the Company sold, in a private transaction, $250
million principal amount of 8- 7/8 percent Convertible Senior Subordinated Notes
due July 15, 2000 (the "8- 7/8 percent Convertible Senior Subordinated
49
STONE CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 10--LONG-TERM DEBT (CONTINUED)
Notes"). The Company filed a shelf registration statement registering the 8- 7/8
percent Convertible Senior Subordinated Notes for resale by the holders thereof,
which was declared effective August 13, 1993. The 8- 7/8 percent Convertible
Senior Subordinated Notes are convertible, at the option of the holder, sixty
days following the date of original issuance and prior to maturity, into shares
of the Company's common stock at a conversion price of $11.55 per share of
common stock, subject to adjustment in certain events. Additionally, the 8- 7/8
percent Convertible Senior Subordinated Notes are redeemable, at the option of
the Company, in whole or in part, on and after July 15, 1998. Interest is
payable semi-annually on January 15 and July 15, commencing January 15, 1994.
The net proceeds of approximately $386 million received from the sales of
the 12- 5/8 percent Senior Notes and the 8- 7/8 percent Convertible Senior
Subordinated Notes were used by the Company to repay borrowings, without a
reduction of commitments under the revolving credit facilities of its Credit
Agreements, thereby restoring borrowing availability thereunder.
In December 1993, Stone-Consolidated sold $173.3 million of 8 percent
convertible subordinated debentures as part of the Units Offering. Concurrent
with the Units Offering, Stone-Consolidated sold $225 million of 10- 1/4 percent
Senior Secured Notes maturing on December 15, 2000 in a public offering in the
United States. See Note 4--"Public Offering of Subsidiary Stock," for further
details.
On February 20, 1992, the Company sold $115 million principal amount of
6- 3/4 percent Convertible Subordinated Debentures due February 15, 2007 (the
"6- 3/4 percent Subordinated Debentures"). The 6- 3/4 percent Subordinated
Debentures are convertible, at the option of the holder, at any time prior to
maturity, into shares of the Company's common stock at a conversion price of
$33.94 per share of common stock (adjusted for the 2 percent common stock
dividend issued September 15, 1992), subject to adjustment in certain events.
Additionally, the 6- 3/4 percent Subordinated Debentures are redeemable at the
option of the Company, in whole or from time to time in part, on and after
February 16, 1996. Interest is payable semi-annually on February 15 and August
15, commencing August 15, 1992. The net proceeds from the sale of the 6- 3/4
percent Subordinated Debentures were used to fully prepay the $59.5 million
sinking fund obligation due June 1, 1992, including accrued interest due
thereon, and to prepay $47.5 million of the $59.5 million sinking fund
obligation due June 1, 1993, including accrued interest due thereon, on the
Company's 13- 5/8 percent Subordinated Notes.
On March 18, 1992, the Company sold $200 million principal amount of 10- 3/4
percent Senior Subordinated Debentures due April 1, 2002 (the "10- 3/4 percent
Senior Subordinated Debentures"). The 10- 3/4 percent Senior Subordinated
Debentures are redeemable at the option of the Company, in whole or from time to
time in part, on and after April 1, 1997. Interest is payable semi-annually on
April 1 and October 1, commencing October 1, 1992. The net proceeds from these
debentures were used to fund future capital expenditures by the Company.
On June 25, 1992, the Company sold $150 million principal amount of 10- 3/4
percent Senior Subordinated Notes due June 15, 1997 (the "10- 3/4 percent Senior
Subordinated Notes"). The 10- 3/4 percent Senior Subordinated Notes are
redeemable at the option of the Company, in whole or from time to time in part,
on and after June 15, 1995. Interest is payable semi-annually on June 15 and
December 15, commencing December 15, 1992. The net proceeds of approximately
$147 million from the issuance of these notes were used to fund a partial
redemption of the Company's 13- 5/8 percent Subordinated Notes including accrued
interest due thereon.
On August 11, 1992, the Company sold $125 million principal amount of 11
percent Senior Subordinated Notes due August 15, 1999 (the "11 percent Senior
Subordinated Notes"). The 11 percent Senior Subordinated Notes are redeemable at
the option of the Company, in whole or from time to time in part, on and after
August 15, 1997. Interest is payable semi-annually on February 15 and August 15,
commencing February 15, 1993. The Company entered into a three-year interest
rate swap arrangement that has the effect of converting, for the first three
years, the fixed rate of interest on $100 million of the 11 percent Senior
Subordinated Notes into a floating interest rate. As a result of this swap
arrangement, the effective rate of interest for 1993 was 9.95 percent. While the
Company is exposed to credit loss on its interest rate swaps in the event of
nonperformance by the counterparties to such swaps, management believes that
such nonperformance is unlikely to occur. The Company used the net proceeds from
the issuance of the 11 percent Senior Subordinated Notes to partially repay
approximately $102 million and $20 million, respectively, under its revolving
credit facility and the March 1993 term loan amortization of its Credit
Agreement.
50
STONE CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 10--LONG-TERM DEBT (CONTINUED)
In 1992, Stone Financial Corporation ("Stone Fin") extended the maturity
date of the $185 million three-year revolving credit facility used to purchase
the accounts receivable for the first tranche of the Company's accounts
receivable securitization program to September 15, 1995 from September 15, 1994.
Stone Fin has the option, subject to bank consent, to extend the maturity date
of its credit facility beyond September 15, 1995.
Various interest rate options (LIBOR plus 1- 1/4 percent or Prime) are
available to Stone Fin under its credit facility. In accordance with the
provisions of this program, Stone Fin purchases (on an ongoing basis) certain of
the accounts receivable of Stone Delaware, Inc., Stone Corrugated, Inc., and
Stone Southwest, Inc., each of which is a wholly-owned subsidiary of the
Company. Such purchased accounts receivable are solely the assets of Stone Fin,
a wholly-owned but separate corporate entity of the Company, with its own
separate creditors. In the event of a liquidation of Stone Fin such creditors
would be entitled to satisfy their claims from Stone Fin's assets prior to any
distribution to the Company. At December 31, 1993 and 1992, the Company's
Consolidated Balance Sheets included $175.6 million and $160.3 million,
respectively of Stone Fin accounts receivable and $150.5 million and $146.3
million, respectively, of borrowings under the program.
On August 20, 1992, the Company completed the second tranche of its accounts
receivable securitization program through the sale of certain of its accounts
receivable to a newly formed wholly-owned subsidiary, Stone Fin II Receivables
Corporation ("Stone Fin II"). Stone Fin II purchased the accounts receivable
with proceeds from borrowings under a $180 million, three-year revolving credit
facility (due September 15, 1995) provided by South Shore Funding Corporation,
an unaffiliated financial organization. Stone Fin II has the option, subject to
bank consent, to extend the maturity date of its credit facility beyond
September 15, 1995.
Two interest rate options (LIBOR plus 1- 1/4 percent or Prime) are available
to Stone Fin II under its credit facility. In accordance with the provisions of
this program, Stone Fin II purchases (on an ongoing basis) certain of the
accounts receivable of Stone Consolidated Newsprint, Inc., Stone Packaging
Corporation, Stone Southwest, Inc. and Stone Bag Corporation, each of which is a
wholly-owned subsidiary of the Company. Such purchased accounts receivable are
solely the assets of Stone Fin II, a wholly-owned but separate corporate entity
of the Company, with its own separate creditors. In the event of a liquidation
of Stone Fin II, such creditors would be entitled to satisfy their claims from
Stone Fin II's assets prior to any distribution to the Company. The initial net
proceeds of approximately $100 million from this transaction were used by the
Company to complete the prepayment of its March 31, 1993 term loan installment
and partially prepay approximately $57 million of its $175 million term loan
installment due September 30, 1993. Subsequent proceeds from this securitization
program were used for general corporate purposes. At December 31, 1993 and 1992,
the Company's Consolidated Balance Sheets included $124.4 million and $152.6
million, respectively, of Stone Fin II accounts receivable and $81.9 million and
$115.5 million, respectively, of borrowings under the program.
In August and October 1992, the Company refinanced, in two separate issues,
$30 million and $35 million of tax-exempt revenue bonds, respectively. The $30
million bonds bear interest at a rate of 7- 7/8 percent and are due August 1,
2013. The $35 million bonds bear interest at a rate of 8- 1/4 percent and are
due June 1, 2016.
The following table provides, as of December 31, 1993, the actual and pro
forma amounts of long-term debt maturing during the next five years. The
maturities on a pro forma basis reflect the impact of the Offerings discussed in
Note 2 and the application of the net proceeds received therefrom, as if such
transaction had occurred as of December 31, 1993.
AS ADJUSTED
FOR THE
(IN MILLIONS) ACTUAL OFFERINGS
- -------------------------------------------------------------------------------- ---------- --------------
1994............................................................................ $ 308.4 $ 308.4
1995............................................................................ 710.5 270.2
1996............................................................................ 437.9 219.1
1997............................................................................ 946.4 732.2
1998............................................................................ 523.9 523.9
Thereafter...................................................................... 1,643.2 2,353.2
51
STONE CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 10--LONG-TERM DEBT (CONTINUED)
The 1995 maturities include $232.4 million outstanding under Stone Fin's and
Stone Fin II's revolving credit facilities. Stone Fin and Stone Fin II have the
option, subject to bank consents, to extend or refinance such obligations beyond
1995.
Amounts payable under capitalized lease agreements are excluded from the
above tabulation. See Note 13 for capitalized lease maturities.
The Credit Agreements contain covenants that include, among other things,
requirements to maintain certain financial tests and ratios (including a minimum
current ratio, an indebtedness ratio, a minimum earnings before interest, taxes,
depreciation and amortization test ("EBITDA") and a tangible net worth test) and
certain restrictions and limitations, including those on capital expenditures,
changes in control, payment of dividends, sales of assets, lease payments,
investments, additional borrowings, mergers and purchases of stock and assets.
The Credit Agreements also contain cross-default provisions relating to the
non-recourse debt of its consolidated affiliate, Stone-Consolidated Corporation,
and cross-acceleration provisions relating to the non-recourse debt of the
consolidated affiliates, including Seminole and Stone Savannah River (see Note
18). Additionally, the Company's Credit Agreements provide for mandatory
prepayments from sales of certain assets, debt and equity financings and excess
cash flows. These prepayments along with voluntary prepayments are to be applied
ratably to reduce loan commitments under the Credit Agreements. The indebtedness
under the Credit Agreements is secured by a substantial portion of the assets of
the Company.
The Company and its bank group have amended the Company's Credit Agreements
several times during the past three years. Such amendments provided among other
things, greater financial flexibility and/or relief from certain financial
covenants. In some instances, certain restrictions and limitations applicable to
the Credit Agreements were tightened. There can be no assurance that future
covenant relief will not be required or, if such relief is requested by the
Company, that it will be obtained from the banks' lenders.
The most recent amendment, which was executed in February of 1994 and became
effective upon the completion of the Offerings, as discussed in Note
2--"Subsequent Events," provided, among other things, for the following:
(i) Permitted the Company to apply up to $200 million of net proceeds from
the Offerings, which increased liquidity, as repayment of borrowings
under the revolving credit facilities of the Credit Agreements without
reducing the commitments thereunder and to the extent no balance was
outstanding under the revolving credit facilities, permitted the
Company to retain the balance of such $200 million of proceeds in cash.
(ii) Permitted the Company to redeem the Company's 13- 5/8 percent
Subordinated Notes maturing on June 1, 1995 from the proceeds received
from the Offerings at a price equal to par, approximately $98 million
principal amount, plus accrued interest to the redemption date.
(iii) Amended the required levels of EBITDA, (as defined in the Credit
Agreements), for certain specified periods to the following:
PERIODS EBITDA
- ----------------------------------------------------------------------------------- --------------
For the three months ended March 31, 1994 $ 20 million
For the six months ended June 30, 1994 $ 55 million
For the nine months ended September 30, 1994 $ 111 million
For the twelve months ended December 31, 1994 $ 180 million
For the twelve months ended March 31, 1995 $ 226 million
The required level of EBITDA is scheduled to increase for each rolling
four quarter period thereafter until December 31, 1996, when the EBITDA
for the twelve months ended December 31, 1996 is required to be $822
million.
(iv) Reset to zero as of January 1, 1994 the dividend pool under the Credit
Agreements which permits payment of dividends on the Company's capital
stock and modifies the components used in calculating the ongoing
balance in the dividend pool. Effective January 1, 1994, dividend
payments on the Company's common stock and on certain preferred stock
issues cannot exceed the sum of (i) 75 percent of the consolidated net
52
STONE CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 10--LONG-TERM DEBT (CONTINUED)
income, (as defined in the Credit Agreements), of the Company from
January 1, 1994 to the date of payment of such dividends, minus (ii)
100 percent of the consolidated net loss, (as defined in the Credit
Agreements), of the Company from January 1, 1994 to the date of payment
of such dividends, plus (iii) 100 percent of any net cash proceeds from
sales of common stock or certain preferred stock of the Company from
January 1, 1994 to any date of payment of such dividends (excluding the
proceeds from the Offerings for which no dividend credit was received
by the Company). Additionally, the restriction with respect to
dividends on Series E Cumulative Convertible Exchangeable Preferred
Stock (the "Series E Cumulative Preferred Stock") now mirror the
dividend restriction in the Company's Senior Subordinated Indenture
dated as of March 15, 1992.
(v) Replaced the existing cross-default provisions relating to obligations
of $10 million or more of the Company's separately financed
subsidiaries, Seminole and Stone Savannah River, with cross-acceleration
provisions.
(vi) Replaced the current prohibition of investments in Stone Venepal
Consolidated Pulp Inc. with restrictions substantially similar to the
restrictions applicable to the Company's subsidiaries, Stone Savannah
River and Seminole.
(vii) Maintains the monthly indebtedness ratio requirement, as defined in
the Credit Agreements, to be no higher than: 81.5 percent as of the
end of each month from December 31, 1993 and ending prior to March 31,
1995 and 81 percent as of the end of each month from March 31, 1995
and ending prior to June 30, 1995. The indebtedness ratio requirement
is scheduled to periodically decrease thereafter (from 80 percent on
June 30, 1995) until February 28, 1997, when the ratio limitation is
required to be 68 percent.
(viii) Maintains the Consolidated Tangible Net Worth requirement (CTNW), (as
defined in the Credit Agreements), to be equal to or greater than 50
percent of the highest CTNW for any quarter since the inception of
the Credit Agreements.
Additionally, at various times during the year, the Company amended and
restated its Credit Agreements which provided, among other things to, (i) extend
the maturity of the revolving credit facilities from March 1, 1994 to March 1,
1997 and reduce over a three-year period the revolving loan commitments; (ii)
revise various financial covenants to provide greater financial flexibility to
the Company; (iii) permit the Company to retain 25 percent of the net proceeds
from future sales of equity securities (which could be used to reduce revolving
credit borrowings without reducing the commitments thereunder); and (iv) permit
the Company to retain 50 percent (maximum $100 million in the aggregate) of the
net proceeds from any sale or disposition of its investment in certain joint
ventures or unconsolidated subsidiaries (which could be used to reduce revolving
credit borrowings without reducing the commitments thereunder). As part of these
amendments, the Company agreed (i) to pay certain fees and higher interest rate
margins and (ii) mortgage or pledge additional collateral including a pledge of
the Stone-Consolidated common stock owned by the Company.
There can be no assurance that the Company will be able to achieve and
maintain compliance with the prescribed financial ratio tests or other
requirements of its Credit Agreements. Failure to achieve or maintain compliance
with such financial ratio tests or other requirements under the Credit
Agreements, in the absence of a waiver or amendment, would result in an event of
default and could lead to the acceleration of the obligations under the Credit
Agreements. The Company has successfully sought and received waivers and
amendments to its Credit Agreements on various occasions since entering into the
Credit Agreements. If further waivers or amendments are requested by the
Company, there can be no assurance that the Company's bank lenders will again
grant such requests. The failure to obtain any such waivers or amendments would
reduce the Company's flexibility to respond to adverse industry conditions and
could have a material adverse effect on the Company.
NOTE 11--LIQUIDITY MATTERS
The Company's liquidity and financial flexibility is adversely affected by
the net losses incurred during the past three years. Recently, the Company has
improved its liquidity and financial flexibility through the completion of the
Offerings in February of 1994 as discussed in Note 2--"Subsequent Events." At
March 14, 1994 the Company had borrowing availability of $168.2 million under
its revolving credit facilities. Notwithstanding these improvements in the
Company's liquidity and financial flexibility, unless the Company achieves
substantial price increases beyond year-
53
STONE CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 11--LIQUIDITY MATTERS (CONTINUED)
end levels, the Company will continue to incur net losses and negative cash
flows from operating activities. Without such sustained substantial price
increases, the Company may exhaust all or substantially all of its cash
resources and borrowing availability under the revolving credit facilities. In
such event, the Company would be required to pursue other alternatives to
improve liquidity, including further cost reductions, sales of assets, the
deferral of certain capital expenditures, obtaining additional sources of funds
or pursuing the possible restructuring of its indebtedness. There can be no
assurance that such measures, if required, would generate the liquidity required
by the Company to operate its business and service its indebtedness. As
currently scheduled, beginning in 1996 and continuing thereafter, the Company
will be required to make significant amortization payments on its indebtedness
which will require the Company to raise sufficient cash from operations or other
sources or refinance or restructure maturing indebtedness. No assurance can be
given that the Company will be able to generate or raise such funds.
The Company, as part of its financial plan, had intended to sell an energy
supply agreement related to its Florence, South Carolina mill. Even though a
sale is still being investigated by the Company, the Company is no longer
pursuing the original transaction; however, the Company is currently
investigating alternative transactions.
NOTE 12--DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
At December 31, 1993 and 1992, the carrying values of the Company's
financial instruments approximate their fair values, except as noted below:
DECEMBER 31,
------------------------------------------
1993 1992
-------------------- --------------------
CARRYING CARRYING
(IN MILLIONS) AMOUNT FAIR VALUE AMOUNT FAIR VALUE
- -------------------------------------------------- -------- ---------- -------- ----------
Notes receivable and long-term investments........ $ 134.9 $ 118.1 $ 65.5 $ 51.1
Senior debt....................................... 2,344.5 2,362.8 2,623.5 2,635.3
Subordinated debt................................. 1,262.6 1,189.5 1,019.2 949.5
Non-recourse debt of consolidated affiliates...... 963.1 1,002.3 627.3 627.3
Standby letters of credit......................... -- 76.1 -- 68.9
Currency and interest rate hedges in payable
position......................................... 2.6 4.2 6.5 4.4
The fair values of notes receivable and certain investments are based on
discounted future cash flows or the applicable quoted market price. The fair
value of the Company's debt is estimated based on the quoted market prices for
the same or similar issues. The fair value of letters of credit represent the
face amount of the letters of credit adjusted for current rates. The fair value
of interest rate swap agreements are obtained from dealer quotes. These values
represent the estimated amount the Company would pay to terminate agreements,
taking into consideration the current interest rate and market conditions.
NOTE 13--LONG-TERM LEASES
The Company leases certain of its facilities and equipment under leases
expiring through the year 2023.
54
STONE CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 13--LONG-TERM LEASES (CONTINUED)
Future minimum lease payments under capitalized leases and their present
value at December 31, 1993, and future minimum rental commitments (net of
sublease rental income and exclusive of real estate taxes and other expenses)
under operating leases having initial or remaining non-cancellable terms in
excess of one year, are reflected below:
CAPITALIZED OPERATING
(IN MILLIONS) LEASES LEASES
- -------------------------------------------------- ----------- ---------
1994.............................................. $ 5.6 $ 73.2
1995.............................................. 2.7 64.0
1996.............................................. 2.0 52.2
1997.............................................. 1.2 45.3
1998.............................................. .3 40.8
Thereafter........................................ 2.0 148.6
----- ---------
Total minimum lease payments...................... 13.8 $ 424.1
---------
---------
Less: Imputed interest............................ (2.6)
-----
Present value of future minimum lease payments.... $ 11.2
-----
-----
Approximately $2.8 million of the total present value of future minimum
capital lease payments relates to a Stone-Consolidated newsprint mill. Minimum
lease payments for capitalized leases have not been reduced by minimum sublease
rental income of $1.6 million due in the future under a non-cancellable lease.
Rent expense for operating leases, including leases having a duration of
less than one year, was approximately $83 million in 1993, $84 million in 1992
and $81 million in 1991.
NOTE 14--PREFERRED STOCK
The Company has authorized 10,000,000 shares of preferred stock, $.01 par
value, of which 4,600,000 shares are outstanding at December 31, 1993. Shares of
preferred stock can be issued in series with varying terms as determined by the
Board of Directors.
On February 20, 1992, the Company issued 4,600,000 shares of $1.75 Series E
Cumulative Preferred Stock at $25.00 per share. Dividends on the Series E
Cumulative Preferred Stock are payable quarterly when, as and if declared by the
Company's Board of Directors. The Series E Cumulative Preferred Stock is
convertible, at the option of the holder at any time, into shares of the
Company's common stock at a conversion price of $33.94 per share of common stock
(adjusted for the 2 percent common stock dividend issued September 15, 1992),
subject to adjustment under certain conditions. The Series E Cumulative
Preferred Stock may alternatively be exchanged, at the option of the Company, on
any dividend payment date commencing February 15, 1994, for the Company's 7
percent Convertible Subordinated Exchange Debentures due February 15, 2007 (the
"Exchange Debentures") in a principal amount equal to $25.00 per share of Series
E Cumulative Preferred Stock so exchanged. The Exchange Debentures would be
virtually identical to the 6- 3/4 percent Subordinated Debentures, except that
the Exchange Debentures would bear interest at the rate of 7 percent per annum
and the interest payment dates would differ. Additionally, the Series E
Cumulative Preferred Stock is redeemable at the option of the Company, in whole
or from time to time in part, on and after February 16, 1996. The net proceeds
of $111 million from the sale of the Series E Cumulative Preferred Stock were
used to partially prepay the $175 million March 31, 1993 semi-annual term loan
amortization under the Credit Agreements.
The Company paid cash dividends during the first two quarters of 1993 on its
Series E Cumulative Preferred Stock. However, due to a restrictive provision in
the Senior Subordinated Indenture dated March 15, 1992 (the "Senior Subordinated
Indenture") relating to the Company's 10- 3/4 percent Senior Subordinated Notes,
its 11 percent Senior Subordinated Notes and its 10- 3/4 percent Senior
Subordinated Debentures, the Board of Directors did not declare the scheduled
August 15, 1993 or the November 15, 1993 quarterly dividend of $.4375 per share
on the Series E Cumulative Preferred Stock nor was it permitted to declare or
pay future dividends on the Series E Cumulative Preferred Stock until the
Company generated income, or effected certain sales of capital stock, to
replenish the dividend "pool" under various of its debt instruments. As of
December 31, 1993, accumulated dividends on the
55
STONE CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 14--PREFERRED STOCK (CONTINUED)
Series E Cumulative Preferred Stock amounted to $4.0 million. As a result of the
Offerings, the dividend pool under the Senior Subordinated Indenture was
replenished from the sale of the common shares. Pursuant to the most recent
amendment to the Company's Credit Agreements, the Company will be able, to the
extent declared by the Board of Directors, to pay dividends on the Series E
Cumulative Preferred Stock to the extent permitted under the Senior Subordinated
Indenture. In the event the Company does not pay a dividend on the Series E
Cumulative Preferred Stock for six quarters, the holders of the Series E
Cumulative Preferred Stock would have the right to elect two members to the
Company's Board of Directors until the accumulated dividends on such Series E
Cumulative Preferred Stock have been declared and paid or set apart for payment.
REDEEMABLE PREFERRED STOCK OF A CONSOLIDATED AFFILIATE:
The Company's Consolidated Balance Sheets include the Redeemable Series A
Preferred Stock (the "Series A Preferred Stock") of Stone Savannah River. Stone
Savannah River has authorized 650,000 shares of Series A Preferred Stock, of
which 637,900 shares and 548,500 shares, having a total liquidation preference
of $63.8 million and $54.9 million, were outstanding at December 31, 1993 and
1992, respectively. The Company owns one-third of the Series A Preferred Stock
and has eliminated such investment in consolidation.
The Series A Preferred Stock, $.01 par value, liquidation preference $100
per share, is cumulative with dividends of $15.375 per annum payable quarterly
when, as and if declared by Stone Savannah River's Board of Directors. On or
prior to December 15, 1993, dividends are payable through the issuance of
additional shares of Series A Preferred Stock; thereafter, such dividends are
payable in cash. Stock dividends of approximately $6.0 million in 1993, $5.1
million in 1992 and $4.4 million in 1991, representing approximately 60,000
shares, 51,000 shares and 44,000 shares, respectively, have been distributed to
shareholders other than the Company. Commencing December 15, 2001, Stone
Savannah River is required to redeem the Series A Preferred Stock at its
liquidation preference in no less than three annual installments. Additionally,
upon the occurrence of certain events, Stone Savannah River may be required to
redeem all of the Series A Preferred Stock at prices declining annually to 100
percent of the liquidation preference by December 15, 2001. The Series A
Preferred Stock is solely the obligation of Stone Savannah River and is without
recourse to the parent company.
SERIES F PREFERRED STOCK:
As a result of the agreement discussed in Note 18 between the Company and
Venezolana de Pulpa y Papel ("Venepal"), a Venezuelan pulp and paper company,
the Company has authorized 400,000 shares of 7 percent Series F Cumulative
Convertible Exchangeable Preferred Stock (the "Series F Preferred Stock"). The
Series F Preferred Stock, $.01 par value, liquidation preference $100 per share,
is cumulative with dividends of $7 per annum payable quarterly when, as and if
declared by the Company's Board of Directors and is convertible into shares of
the Company's common stock at a conversion price of $18.422, subject to
adjustment under certain conditions. The terms of the Series F Preferred Stock
are virtually identical to the Series E Preferred Stock, except for the
liquidation preference and the conversion rate. No shares of Series F Preferred
Stock have been issued to date.
NOTE 15--COMMON STOCK
The Company has authorized 200,000,000 shares of common stock, $.01 par
value, of which 71,174,587 shares were outstanding at December 31, 1993.
On September 15, 1992, the Company issued a 2 percent stock dividend to
common stockholders of record August 25, 1992. The stock dividend was effected
by the issuance of one share of common stock for every 50 shares of common stock
held. Accordingly, all amounts per common share and weighted average number of
common shares for all periods included in the consolidated financial statements
have been retroactively adjusted to reflect this stock dividend.
STOCK RIGHTS:
Each outstanding share of the Company's common stock carries a stock
purchase right ("Right"). Each Right entitles the holder to purchase from the
Company one one-hundredth of a share of Series D Junior Participating Preferred
Stock, par value $.01 per share, at a purchase price of $130 subject to
adjustment under certain circumstances. The Rights expire August 8, 1998 unless
extended or earlier redeemed by the Company.
56
STONE CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 15--COMMON STOCK (CONTINUED)
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:
In 1982, the Company adopted an Incentive Stock Option Plan under which
options are granted to key employees who are not participants in the Company's
Long-Term Incentive Program described below. This plan expired on March 21, 1992
and upon its expiration, the Board of Directors adopted a 1993 Plan, effective
January 1, 1993. The provisions under the 1993 Plan are similar to the 1982
Plan, with 1,530,000 shares of common stock authorized except that under the new
plan the Company may issue either incentive stock options or non-qualified stock
options. Options under these plans provide for the purchase of common shares at
prices not less than 100 percent of the market value of such shares on the date
of grant. The options are exercisable, in whole or in part, after one year but
no later than ten years from the date of the respective grant. No accounting
recognition is given to stock options until they are exercised, at which time
the option price received is credited to common stock.
57
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:
OPTION OPTION PRICE
SHARES PER SHARE*
----------- --------------
Outstanding January 1, 1991............................ 574,833 $4.98-29.28
Granted.............................................. -- --
Exercised............................................ (9,998) 6.01-8.74
Cancelled............................................ -- --
----------- --------------
Outstanding December 31, 1991.......................... 564,835 4.98-29.28
Granted.............................................. -- --
Exercised............................................ (22,950) 4.98-29.28
Adjustment for 2 percent stock dividend.............. 10,707 8.74-29.28
Cancelled............................................ (6,561) 6.01
----------- --------------
Outstanding December 31, 1992.......................... 546,031 8.74-29.28
Granted.............................................. -- --
Exercised............................................ -- --
Cancelled............................................ -- --
----------- --------------
Outstanding December 31, 1993.......................... 546,031 8.74-29.28
-----------
-----------
Options exercisable at December 31,
1993................................................. 546,031 8.74-29.29
1992................................................. 546,031 8.74-29.28
Options available for grant at December 31,
1993................................................. 1,530,000
1992................................................. 1,530,000
- ---------
* Adjusted for the 2 percent stock dividend issued September 15, 1992.
Additionally, the Company's Long-Term Incentive Program provides for
contingent awards of restricted shares of common stock and cash to certain key
employees. The payment of the cash portion of the awards granted will depend on
the extent to which the Company has met certain long-term performance goals as
established by a committee of outside directors. The compensation related to
this program is amortized over the related five-year restricted periods. The
charge (credit) to compensation expense under this plan was $(1.2) million, $3.6
million and $4.7 million in 1993, 1992 and 1991, respectively. In 1993, prior
cash awards that were accrued have been deemed to be not payable due to the
financial results of the Company. Under this plan, 1,800,000 shares have been
reserved for issuance, of which 186,253, 120,834 and 238,546 shares were granted
in 1993, 1992 and 1991, respectively. At December 31, 1993, there were 951,761
shares available for grant.
NOTE 16--RELATED PARTY TRANSACTIONS
The Company sells linerboard and corrugating medium to MacMillan Bathurst, a
50 percent owned non-consolidated affiliate and to Titan, a 49 percent owned
non-consolidated affiliate. As discussed in Note 3, the Company sold its 49
percent interest in Titan in December 1993. Additionally, the Company purchases
market pulp from Stone Venepal Consolidated Pulp Inc. ("Stone Venepal
Consolidated"), a 50 percent owned non-consolidated affiliate of the Company.
Stone Venepal Consolidated owns 50 percent of the Celgar Pulp Company, which
operates a market pulp mill in British Columbia. The Company also sells boxboard
to FCP, a 50 percent owned non-consolidated affiliate. Transactions under all of
these agreements are primarily at market prices.
58
STONE CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 16--RELATED PARTY TRANSACTIONS (CONTINUED)
The following table summarizes the transactions between the Company and its
non-consolidated affiliates and the payable and receivable balances outstanding
at the end of each year.
YEAR ENDED DECEMBER
31,
-------------------
(IN MILLIONS) 1993 1992 1991
- -------------------------------------------------- ----- ----- -----
MacMillan Bathurst:
Sales to........................................ $77.4 $67.3 $79.4
Net receivable from............................. 9.9 9.8 6.1
Titan:
Sales to........................................ $18.3 $13.4 $16.1
Net receivable from............................. (a) 12.8 14.3
Management fee from............................. 1.0 1.0 .8
FCP Group:
Sales to........................................ $ 4.3 (b) (b)
Stone Venepal Consolidated:
Purchases from.................................. $ 1.4 $ .5 $ 1.1
Net payable to.................................. .7 .2 --
- ---------
(a) Not applicable as equity investment in Titan was sold in December 1993.
(b) Not applicable for 1992 and 1991 as FCP Group was formed in 1993.
NOTE 17--ADDITIONAL INFORMATION RELATING TO THE CONSOLIDATED FINANCIAL
STATEMENTS
OTHER NET OPERATING (INCOME) EXPENSE:
The major components of other net operating (income) expense are as follows:
YEAR ENDED DECEMBER 31,
-----------------------
(IN MILLIONS) 1993 1992 1991
- -------------------------------------------------- ------ ----- -------
Writedown of decommissioned assets................ $ 19.2 $ 4.0 $ 4.0
Gain from an involuntary conversion at a paper
mill............................................. -- -- (17.5)
Loss on writedown of investments.................. 3.4 8.8 --
Gains on sales of investments or assets........... (40.7) -- (7.4)
Loss from sale of business........................ -- -- 1.5
Gain from settlement and termination of Canadian
supply contract.................................. -- -- (41.8)
Writedown of certain receivables to net realizable
value............................................ 14.2 -- --
Other............................................. 8.6 -- (1.6)
------ ----- -------
Total other net operating (income) expense........ $ 4.7 $12.8 $ (62.8)
------ ----- -------
------ ----- -------
INTEREST EXPENSE:
YEAR ENDED DECEMBER 31,
---------------------------
(IN MILLIONS) 1993 1992 1991
- -------------------------------------------------- ------- ------- -------
Total interest cost incurred...................... $ 437.5 $ 433.5 $ 479.3
Interest capitalized.............................. (10.8) (47.4) (81.9)
------- ------- -------
Interest expense.................................. $ 426.7 $ 386.1 $ 397.4
------- ------- -------
------- ------- -------
PROVISION FOR DOUBTFUL ACCOUNTS AND NOTES RECEIVABLE:
Selling, general and administrative expenses include provisions for doubtful
accounts and notes receivable of $12.2 million for 1993, $8.3 million for 1992
and $7.1 million for 1991.
59
STONE CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 17--ADDITIONAL INFORMATION RELATING TO THE CONSOLIDATED FINANCIAL
STATEMENTS (CONTINUED)
OTHER, NET:
The major components of other, net are as follows:
YEAR ENDED DECEMBER 31,
---------------------------
(IN MILLIONS) 1993 1992 1991
- ---------------------------------------- ------- ------- -------
Interest income......................... $ 11.2 $ 11.5 $ 8.4
Dividend income......................... .4 .8 1.0
Foreign currency transaction gains
(losses)............................... (11.8) (15.0) 4.9
Minority interest expense............... (3.6) (5.3) (5.8)
Other................................... 2.9 8.6 6.2
------- ------- -------
Total other, net........................ $ (.9) $ .6 $ 14.7
------- ------- -------
------- ------- -------
INVESTMENTS IN NON-CONSOLIDATED AFFILIATES:
The Company had investments in non-consolidated affiliates of $107.2 million
and $131.9 million at December 31, 1993 and 1992, respectively. These amounts
are included in other long-term assets in the Company's Consolidated Balance
Sheets. See Note 16 for discussion of the transactions between the Company and
its major non-consolidated affiliates.
ACCRUED AND OTHER CURRENT LIABILITIES:
The major components of accrued and other current liabilities are as
follows:
YEAR ENDED
DECEMBER 31,
--------------
(IN MILLIONS) 1993 1992
- ---------------------------------------- ------ ------
Accrued interest........................ $ 68.2 $ 60.4
Accrued payroll, related taxes and
employee benefits...................... 85.8 105.5
Other................................... 131.7 134.7
------ ------
Total accrued and other current
liabilities............................ $285.7 $300.6
------ ------
------ ------
OTHER LONG-TERM LIABILITIES:
Included in other long-term liabilities at December 31, 1993 and 1992 is
approximately $52.3 million and $57.8 million, respectively, of deferred income
relating to the October 1992 sale of an energy contract at the Company's
Hopewell mill. This amount is being amortized over a 12 year period.
NOTE 18--COMMITMENTS AND CONTINGENCIES
At December 31, 1993, the Company, excluding Stone Savannah River and
Seminole, had commitments outstanding for capital expenditures under purchase
orders and contracts of approximately $20.3 million of which $8.3 million
relates to Stone-Consolidated. Stone Savannah River and Seminole had, at
December 31, 1993, commitments outstanding for capital expenditures of
approximately $4.9 million in the aggregate.
The Company has a 50 percent equity interest in Stone Venepal Consolidated
Pulp Inc. ("Stone Venepal Consolidated"), which in turn has a 50 percent
undivided interest in the assets and liabilities of a joint venture which owns
the Celgar pulp mill located at Castlegar, British Columbia. Venepal owns the
other 50 percent equity interest in Stone Venepal Consolidated. On February 12,
1991, Stone Venepal Consolidated entered into a $350 million (Canadian) bank
credit agreement for the purpose of financing its 50 percent share of a major
improvement and expansion project at the Castlegar mill. Additionally, the
Company entered into a Completion Financing Agreement for the purpose of funding
part of the project costs that were incurred in excess of the primary borrowing
facility, up to a maximum of $50 million (Canadian) in the aggregate. At
December 31, 1993, the Company has paid $37.5 million (Canadian) under the
Completion Financing Agreement which is the maximum amount the Company has
determined it will be required to contribute.
On October 30, 1992, the Company and Venepal entered into an agreement
whereby Venepal's investment in the Celgar pulp mill, represented by Venepal's
ownership of 50 percent of the outstanding common stock of Stone
60
STONE CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 18--COMMITMENTS AND CONTINGENCIES (CONTINUED)
Venepal Consolidated can be exchanged for the Company's Series F Preferred Stock
(see Note 14). The exchange would occur at Venepal's option as a result of
certain specific conditions relating to the operations of the Celgar pulp mill.
None of these conditions as of December 31, 1993 have occurred that would
trigger the exchange. The Company may, at its option, elect to honor the
contingent exchange obligation with a cash payment to Venepal. Based upon
Venepal's initial investment in Stone Venepal Consolidated, 212,903 shares of
Series F Preferred Stock, liquidation preference $100 per share, would be issued
in the event Venepal elected its exchange option. Further, if the Series F
Preferred shares were converted to the Company's common stock at the conversion
price of $18.422, an additional 1,155,703 shares of common stock would be
issued. Venepal's interest in Stone Venepal Consolidated replaces the equity
ownership formerly held by Power Corporation of Canada.
The Credit Agreements limit in certain specific circumstances any further
investments by the Company in Stone-Consolidated Corporation, Seminole and Stone
Savannah River. Stone Savannah River and Seminole have incurred substantial
indebtedness in connection with project financings and are significantly
leveraged. As of December 31, 1993, Stone Savannah River had $402.6 million in
outstanding indebtedness (including $268.9 million in secured indebtedness owed
to bank lenders) and Seminole had $161.0 million in outstanding indebtedness
(including $120.6 million in secured indebtedness owed to bank lenders). The
Company has entered into separate output purchase agreements with each of these
subsidiaries which require the Company to purchase Seminole's linerboard
production at fixed prices until no later than September 1, 1994 and Stone
Savannah River's linerboard and market pulp production at fixed prices until
December 1994 and November 1995, respectively. After such dates, the Company is
required to purchase the respective production at market prices for the
remaining terms of these agreements. While the fixed prices in effect at
December 31, 1993 were higher than market prices at such date, the price
differentials have not had, nor are they expected to have, a significant impact
on the Company's results of operations or financial position. However, at the
time that the fixed price provisions of the output purchase agreements
terminate, such subsidiaries may need to undertake additional measures to meet
their debt service requirements, including obtaining additional sources of
funds, postponing or restructuring of debt service payments or refinancing the
indebtedness. In the event that such measures are required and are not
successful, and such indebtedness is accelerated by the respective lenders to
Stone Savannah River or Seminole, the lenders to the Company under the Credit
Agreements and various other of its debt instruments would be entitled to
accelerate the indebtedness owed by the Company.
Under certain timber contracts, title passes as the timber is cut. These are
considered to be commitments and are not recorded until the timber is removed.
At December 31, 1993 commitments on such contracts, which run through 1997, were
approximately $16.8 million.
The Company's operations are subject to extensive environmental regulation
by federal, state and local authorities in the United States and regulatory
authorities with jurisdiction over its foreign operations. The Company has in
the past made significant capital expenditures to comply with water, air and
solid and hazardous waste regulations and expects to make significant
expenditures in the future. Capital expenditures for environmental control
equipment and facilities were approximately $28 million in 1993 and the Company
anticipates that 1994 and 1995 environmental capital expenditures will
approximate $71 million and $96 million, respectively. Included in these amounts
are capital expenditures for Stone-Consolidated which were approximately $5
million in 1993 and are anticipated to approximate $36 million in 1994 and $64
million in 1995. Although capital expenditures for environmental control
equipment and facilities and compliance costs in future years will depend on
legislative and technological developments which cannot be predicted at this
time, the Company anticipates that these costs are likely to increase as
environmental regulations become more stringent. Environmental control
expenditures include projects which, in addition to meeting environmental
concerns, yield certain benefits to the Company in the form of increased
capacity and production cost savings. In addition to capital expenditures for
environmental control equipment and facilities, other expenditures incurred to
maintain environmental regulatory compliance (including any remediation)
represent ongoing costs to the Company. On December 17, 1993, the Environmental
Protection Agency proposed regulations under the Clean Air Act and the Clean
Water Act for the pulp and paper industry, which if and when implemented, would
affect directly a number of the Company's facilities. Since the regulations have
only recently been proposed, the Company is currently unable to estimate the
nature or level of future expenditures that
61
STONE CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 18--COMMITMENTS AND CONTINGENCIES (CONTINUED)
may be required to comply with such regulations if the proposed regulations
become final in some form. In addition, the Company is from time to time subject
to litigation and governmental proceedings regarding environmental matters in
which injunctive and/or monetary relief is sought.
The Company has been named as a potentially responsible party ("PRP") at a
number of sites which are the subject of remedial activity under the
Comprehensive Environmental Response, Compensation and Liability Act of 1980
("CERCLA" or "Superfund") or comparable state laws. Although the Company is
subject to joint and several liability imposed under Superfund, at most of the
multi-PRP sites there are organized groups of PRPs and costs are being shared
among PRPs. Future environmental regulations, including the December 17, 1993
regulations, may have an unpredictable adverse effect on the Company's
operations and earnings, but they are not expected to adversely affect the
Company's competitive position.
The Company has entered into a purchase agreement with a certain party in
which the Company has agreed to purchase annually 90,000 tons of linerboard at
specified prices over a ten year period. Commencement of this agreement is
contingent upon the completion of a manufacturing facility by the other party.
Refer to Notes 10 and 13 for further discussion of the Company's debt,
hedging and lease commitments.
Additionally, the Company is involved in certain litigation primarily
arising in the normal course of business. In the opinion of management, the
Company's liability under any pending litigation would not materially affect its
financial condition or results of operations.
NOTE 19--SEGMENT INFORMATION
BUSINESS SEGMENTS:
The Company operates principally in two business segments. The paperboard
and paper packaging segment is comprised primarily of facilities that produce
containerboard, kraft paper, boxboard, corrugated containers and paper bags and
sacks. The white paper and pulp segment consists of facilities that manufacture
and sell newsprint, groundwood paper and market pulp. The Company has other
operations, primarily consisting of wood products operations, flexible packaging
operations and railroad operations. Intersegment sales are accounted for at
transfer prices which approximate market prices.
Operating profit includes all costs and expenses directly related to the
segment involved. The corporate portion of operating profit includes corporate
general and administrative expenses and equity income (loss) of non-consolidated
affiliates.
Assets are assigned to segments based on use. Corporate assets primarily
consist of cash and cash equivalents, fixed assets, certain deferred charges and
investments in non-consolidated affiliates.
62
STONE CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 19--SEGMENT INFORMATION (CONTINUED)
Financial information by business segment is summarized as follows:
(IN MILLIONS) 1993 1992 1991
- ----------------------------------------------------------------- ------------ ------------ ------------
SALES:
Paperboard and paper packaging................................... $3,810.1 $4,185.7 $4,037.7
White paper and pulp............................................. 965.0 1,078.3 1,115.8
Other............................................................ 330.6 303.0 275.3
Intersegment..................................................... (46.1) (46.3) (44.5)
------------ ------------ ------------
Total sales.................................................... $5,059.6 $5,520.7 $5,384.3
------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES AND CUMULATIVE EFFECTS OF
ACCOUNTING CHANGES:
Paperboard and paper packaging................................... $ 206.4 $ 322.1 $ 355.8
White paper and pulp............................................. (194.2) (87.0) 84.1
Other............................................................ 36.4 12.0 (6.0)
------------ ------------ ------------
48.6 247.1 433.9
Interest expense................................................. (426.7) (386.1) (397.4)
Foreign currency transaction gains (losses)...................... (11.8) (15.0) 4.9
General corporate................................................ (77.0)(1) (75.3)(1) (59.4)(1)
------------ ------------ ------------
Loss before income taxes and cumulative effects of accounting
changes....................................................... $ (466.9) $ (229.3) $ (18.0)
------------ ------------ ------------
DEPRECIATION AND AMORTIZATION:
Paperboard and paper packaging................................... $ 179.5 $ 173.3 $ 154.5
White paper and pulp............................................. 135.8 123.6 88.8
Other 20.9 24.3 23.0
General corporate................................................ 10.6 8.0 7.2
------------ ------------ ------------
Total depreciation and amortization............................ $ 346.8 $ 329.2 $ 273.5
------------ ------------ ------------
ASSETS:
Paperboard and paper packaging................................... $3,436.5 $3,516.3 $3,728.5
White paper and pulp............................................. 2,632.8 2,763.4 2,459.9
Other............................................................ 344.6 379.6 383.4
General corporate................................................ 422.8(2) 367.7(2) 331.1(2)
------------ ------------ ------------
Total assets................................................... $6,836.7 $7,027.0 $6,902.9
------------ ------------ ------------
CAPITAL EXPENDITURES:
Paperboard and paper packaging................................... $ 100.7 $ 177.1 $ 322.6
White paper and pulp............................................. 44.2 98.6 100.6
Other............................................................ 1.5 4.8 4.4
General corporate................................................ 3.3 .9 2.5
------------ ------------ ------------
Total capital expenditures..................................... $ 149.7 $ 281.4 $ 430.1
------------ ------------ ------------
- ---------
(1) Includes equity in net income (loss) of non-consolidated vertically
integrated affiliates as follows: Paperboard and paper packaging
segment--$(5.2) in 1993, $(3.3) in 1992 and $2.4 in 1991; White paper and
pulp segment-- $(2.5) in 1993, $(2.7) in 1992 and $(1.5) in 1991; and
other--$(4.0) in 1993, $.7 in 1992 and $.2 in 1991.
(2) Includes investments in non-consolidated vertically integrated affiliates
as follows: Paperboard and paper packaging segment--$33.6 in 1993, $42.2 in
1992 and $38.6 in 1991; White paper and pulp segment--$27.8 in 1993, $29.4
in 1992 and $26.2 in 1991; and other--$45.8 in 1993, $2.2 in 1992 and $1.3
in 1991.
63
STONE CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 19--SEGMENT INFORMATION (CONTINUED)
GEOGRAPHIC SEGMENTS:
The chart below provides financial information for the Company's operations
based on the region in which the operations are located.
INCOME (LOSS) BEFORE
INCOME TAXES AND
TRADE INTER-AREA TOTAL CUMULATIVE EFFECT OF
(IN MILLIONS) SALES SALES SALES AN ACCOUNTING CHANGE ASSETS
- ------------------------------------- -------- ----------- --------- ------------------------ ------------
1993
United States........................ $3,678.2 $ 16.4 $ 3,694.6 $ 112.0 $ 3,256.8
Canada............................... 756.2 16.9 773.1 (69.5) 2,374.8
Europe............................... 625.2 1.7 626.9 6.1 782.3
-------- ----------- --------- -------- ------------
5,059.6 35.0 5,094.6 48.6 6,413.9
Interest expense..................... (426.7)
Foreign currency transaction
losses.............................. (11.8)
General corporate.................... (77.0)(1) 422.8(2)
Inter-area eliminations.............. (35.0) (35.0) --
-------- ----------- --------- -------- ------------
Total................................ $5,059.6 $ -- $ 5,059.6 $ (466.9) $ 6,836.7
-------- ----------- --------- -------- ------------
-------- ----------- --------- -------- ------------
INCOME (LOSS) BEFORE
INCOME TAXES AND
TRADE INTER-AREA TOTAL CUMULATIVE EFFECT OF
(IN MILLIONS) SALES SALES SALES AN ACCOUNTING CHANGE ASSETS
- ------------------------------------- -------- ----------- --------- ------------------------ ------------
1992
United States........................ $3,908.5 $ 28.9 $ 3,937.4 $ 300.3 $ 3,406.0
Canada............................... 770.4 20.0 790.4 (97.3) 2,375.6
Europe............................... 841.8 5.1 846.9 44.1 877.7
-------- ----------- --------- -------- ------------
5,520.7 54.0 5,574.7 247.1 6,659.3
Interest expense..................... (386.1)
Foreign currency transaction
losses.............................. (15.0)
General corporate.................... (75.3)(1) 367.7(2)
Inter-area eliminations.............. (54.0) (54.0) --
-------- ----------- --------- -------- ------------
Total................................ $5,520.7 $ -- $ 5,520.7 $ (229.3) $ 7,027.0
-------- ----------- --------- -------- ------------
-------- ----------- --------- -------- ------------
INCOME (LOSS) BEFORE
INCOME TAXES AND
TRADE INTER-AREA TOTAL CUMULATIVE EFFECT OF
(IN MILLIONS) SALES SALES SALES AN ACCOUNTING CHANGE ASSETS
- ------------------------------------- -------- ----------- --------- ------------------------ ------------
1991
United States........................ $3,700.0 $ 29.8 $ 3,729.8 $ 335.2 $ 3,277.5
Canada............................... 870.6 24.6 895.2 13.8 2,389.8
Europe............................... 813.7 -- 813.7 84.9 904.5
-------- ----------- --------- -------- ------------
5,384.3 54.4 5,438.7 433.9 6,571.8
Interest expense..................... (397.4)
Foreign currency transaction gains... 4.9
General corporate.................... (59.4)(1) 331.1(2)
Inter-area eliminations.............. (54.4) (54.4) --
-------- ----------- --------- -------- ------------
Total................................ $5,384.3 $ -- $ 5,384.3 $ (18.0) $ 6,902.9
-------- ----------- --------- -------- ------------
-------- ----------- --------- -------- ------------
- ---------
(1) Includes equity in net income (loss) of non-consolidated vertically
integrated affiliates as follows: United States-- $(1.0) in 1993, $(1.2)
in 1992 and $(.1) in 1991; Canada--$(3.0) in 1993, $(3.0) in 1992 and
$(.6) in 1991; and other--$(7.7) in 1993, $(1.1) in 1992 and $1.8 in 1991.
(2) Includes investments in non-consolidated vertically integrated affiliates
as follows: United States--$ -- in 1993, $4.7 in 1992 and $1.2 in 1991;
Canada--$63.0 in 1993, $68.7 in 1992 and $64.9 in 1991; and other--$44.2
in 1993, $.4 in 1992 and $ -- in 1991.
The Company's export sales from the United States were $341 million, $428
million and $330 million for 1993, 1992 and 1991, respectively.
64
STONE CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 20--SUMMARY OF QUARTERLY DATA (UNAUDITED)
The following table summarizes quarterly financial data for 1993 and 1992:
QUARTER
---------------------------------------------
(IN MILLIONS EXCEPT PER SHARE) FIRST(2) SECOND THIRD FOURTH(1) YEAR
- ------------------------------------------------------------ --------- --------- --------- --------- ---------
1993
- ------------------------------------------------------------
Net sales................................................... $ 1,306.3 $ 1,267.6 $ 1,242.6 $ 1,243.1 $ 5,059.6
Cost of products sold....................................... 1,070.3 1,050.3 1,058.9 1,044.1 4,223.5
Depreciation and amortization............................... 87.1 88.8 81.2 89.7 346.8
Loss before cumulative effect of an accounting change....... (62.7) (71.6) (99.2) (85.8) (319.2)
Cumulative effect of change in accounting for postretirement
benefits................................................... (39.5) -- -- -- (39.5)
Net loss.................................................... (102.2) (71.6) (99.2) (85.8) (358.7)
--------- --------- --------- --------- ---------
Per share of common stock:
Loss before cumulative effect of an accounting change..... (.91) (1.03) (1.42) (1.23) (4.59)
Cumulative effect of change in accounting for
postretirement benefits.................................. (.56) -- -- -- (.56)
--------- --------- --------- --------- ---------
Net loss.................................................. (1.47) (1.03) (1.42) (1.23) (5.15)
--------- --------- --------- --------- ---------
Cash dividends per common share............................. -- -- -- -- --
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
1992
- ------------------------------------------------------------
Net sales................................................... $ 1,354.3 $ 1,371.1 $ 1,464.6 $ 1,330.7 $ 5,520.7
Cost of products sold....................................... 1,084.2 1,107.8 1,193.3 1,088.4 4,473.7
Depreciation and amortization............................... 77.8 82.4 87.1 81.9 329.2
Loss before cumulative effect of an accounting change....... (9.3) (40.7) (43.2) (76.7) (169.9)
Cumulative effect of change in accounting for income
taxes...................................................... (99.5) -- -- -- (99.5)
Net loss.................................................... (108.8) (40.7) (43.2) (76.7) (269.4)
--------- --------- --------- --------- ---------
Per share of common stock:
Loss before cumulative effect of an accounting change..... (.15) (.60) (.64) (1.10) (2.49)
Cumulative effect of change in accounting for income
taxes.................................................... (1.40) -- -- -- (1.40)
--------- --------- --------- --------- ---------
Net loss.................................................. (1.55) (.60) (.64) (1.10) (3.89)
--------- --------- --------- --------- ---------
Cash dividends per common share............................. .17 .18 -- -- .35
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
(1) The fourth quarter of 1993 includes a pre-tax gain of approximately $35.4
million from the sale of the Company's 49 percent equity interest in Titan
and a reduction in an accrual resulting from a change in the Company's
vacation pay policy which were partially offset by the writedown of the
carrying values of certain Company assets. The fourth quarter of 1992 was
unfavorably impacted by a roll-back of linerboard price increases which
resulted in the issuance of customer credits in the fourth quarter
pertaining to third quarter 1992 billings. Price increases are invoiced for
shipments on or after the effective date of the price increase. In certain
circumstances the Company, as a result of competitive pressures, may issue
credits for the previously billed price increases. When it becomes probable
that a price increase will not be successful or will be delayed, the
Company accrues for possible credits to be issued.
(2) The Company adopted SFAS 106 effective January 1, 1993 and SFAS 109
effective January 1, 1992.
(3) Amounts per common share have been adjusted for the 2 percent common stock
dividend issued September 15, 1992.
65
Report of Independent Accountants on
_Supplemental Financial Information_
To the Board of Directors of
Stone Container Corporation
Our audits of the consolidated financial statements referred to in our report
dated March 23, 1994 appearing on page 32 of this Annual Report on Form 10-K
(such report contains explanatory paragraphs referring to (i) certain liquidity
matters discussed in Notes 11 and 18 to the Company's consolidated financial
statements; and (ii) the change in accounting methods discussed in Note 1 to the
Company's consolidated financial statements) also included an audit of the
Supplemental Financial Information listed and appearing in Item 14(a)2 of this
Form 10-K. In our opinion, this Supplemental Financial Information presents
fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements.
PRICE WATERHOUSE
Chicago, Illinois
March 23, 1994
66
Consent of Independent Accountants
We hereby consent to the incorporation by reference in the Prospectus
constituting part of the Registration Statement on Form S-3 (No. 33-66086) and
in the Registration Statements on Form S-8 (Nos. 2-79221, 33-33784, 33-38295 and
33-66132) of Stone Container Corporation of our report dated March 23, 1994
appearing on page 32 of this Annual Report on Form 10-K. We also consent to the
incorporation by reference of our report on the Supplemental Financial
Information, which appears on page 66 of this Form 10-K.
PRICE WATERHOUSE
Chicago, Illinois
March 23, 1994
67
STONE CONTAINER CORPORATION AND SUBSIDIARIES
SCHEDULE V--PROPERTY, PLANT AND EQUIPMENT (A)
(IN MILLIONS)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F
- ---------------------------------------- ---------- --------- ----------- ------------ ----------
BALANCE AT BALANCE AT
BEGINNING ADDITIONS OTHER END OF
CLASSIFICATION OF PERIOD AT COST RETIREMENTS CHANGES PERIOD
- ---------------------------------------- ---------- --------- ----------- ------------ ----------
For the year ended December 31, 1993:
Machinery and equipment............... $ 4,381.4 $ 257.4 $ 31.7 $ (208.4) $ 4,398.7
Building and leasehold improvements... 668.4 28.0 4.8 (16.6) 675.0
Land and land improvements............ 105.7 5.8 .8 (7.7) 103.0
Construction in progress.............. 209.6 (141.5) .2 (3.9) 64.0
---------- --------- ----- ------------ ----------
Total............................. $ 5,365.1 $ 149.7 $ 37.5 $ (236.6)(B) $ 5,240.7
Timberlands........................... 72.5 24.5 6.9 (2.5)(D) 87.6
---------- --------- ----- ------------ ----------
Total............................. $ 5,437.6 $ 174.2 $ 44.4 $ (239.1) $ 5,328.3
---------- --------- ----- ------------ ----------
---------- --------- ----- ------------ ----------
For the year ended December 31, 1992:
Machinery and equipment............... $ 3,548.8 $ 577.4 $ 13.0 $ 268.2 $ 4,381.4
Building and leasehold improvements... 579.5 111.6 .4 (22.3) 668.4
Land and land improvements............ 67.3 9.9 .2 28.7 105.7
Construction in progress.............. 631.0 (417.5) -- (3.9) 209.6
---------- --------- ----- ------------ ----------
Total............................. $ 4,826.6 $ 281.4 $ 13.6 $ 270.7(C) $ 5,365.1
Timberlands........................... 52.2 22.0 9.9 8.2(E) 72.5
---------- --------- ----- ------------ ----------
Total............................. $ 4,878.8 $ 303.4 $ 23.5 $ 278.9 $ 5,437.6
---------- --------- ----- ------------ ----------
---------- --------- ----- ------------ ----------
For the year ended December 31, 1991:
Machinery and equipment............... $ 3,083.6 $ 523.0 $ 43.1 $ (14.7) $ 3,548.8
Building and leasehold improvements... 549.3 44.8 7.1 (7.5) 579.5
Land and land improvements............ 65.3 1.3 2.1 2.8 67.3
Construction in progress.............. 756.9 (139.0) .3 13.4 631.0
---------- --------- ----- ------------ ----------
Total............................. $ 4,455.1 $ 430.1 $ 52.6 $ (6.0)(D) $ 4,826.6
Timberlands........................... 49.2 13.2 10.4 .2(D) 52.2
---------- --------- ----- ------------ ----------
Total............................. $ 4,504.3 $ 443.3 $ 63.0 $ (5.8) $ 4,878.8
---------- --------- ----- ------------ ----------
---------- --------- ----- ------------ ----------
- ---------
(A) Information relating to the rates used in computing annual depreciation
and amortization is incorporated by reference to the Notes to the
Financial Statements, included in this report, under Notes to the
Consolidated Financial Statements, "Note 1--Summary of Significant
Accounting Policies", pages 37-39.
(B) Primarily represents the effects of foreign currency translation, the
write-off of certain decommissioned assets and the transfer of assets for
the Company's European folding carton operations which in the early part
of 1993 was merged into a joint venture and accordingly is now accounted
for under the equity method.
(C) Primarily represents the effects of foreign currency translation, assets
purchased in the acquisition of Societe Emballages des Cevennes, S.A.,
write-up adjustments as a result of the adoption of Statement of Financial
Accounting Standards No. 109 "Accounting for Income Taxes," ("SFAS 109")
as of January 1, 1992 and reclassifications among property categories.
(D) Primarily represents the effects of foreign currency translation.
(E) Represents the effects of foreign currency translation and the adjustment
as a result of the adoption of SFAS 109.
68
STONE CONTAINER CORPORATION AND SUBSIDIARIES
SCHEDULE VI--ACCUMULATED DEPRECIATION AND AMORTIZATION
OF PROPERTY, PLANT AND EQUIPMENT
(IN MILLIONS)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F
- -------------------------------------------------- ---------- --------- ----------- -------------- ----------
ADDITIONS
CHARGED
BALANCE AT TO BALANCE AT
BEGINNING COSTS AND END OF
CLASSIFICATION OF PERIOD EXPENSES RETIREMENTS OTHER CHANGES PERIOD
- -------------------------------------------------- ---------- --------- ----------- -------------- ----------
For the year ended December 31, 1993:
Machinery and equipment......................... $ 1,488.0 $ 267.3 $ 22.3 $ (80.1) $ 1,652.9
Building and leasehold improvements............. 160.3 31.6 3.0 (3.8) 185.1
Land and land improvements...................... 13.6 2.9 .2 -- 16.3
---------- --------- ----- ------ ----------
Total....................................... 1,661.9 301.8 25.5 (83.9)(A) 1,854.3
Timberlands..................................... 3.1 .6 -- -- 3.7
---------- --------- ----- ------ ----------
Total....................................... $ 1,665.0 $ 302.4 $ 25.5 $ (83.9) $ 1,858.0
---------- --------- ----- ------ ----------
---------- --------- ----- ------ ----------
For the year ended December 31, 1992:
Machinery and equipment......................... $ 1,171.4 $ 263.3 $ 7.4 $ 60.7 $ 1,488.0
Building and leasehold improvements............. 126.4 33.0 .1 1.0 160.3
Land and land improvements...................... 8.6 2.4 .1 2.7 13.6
---------- --------- ----- ------ ----------
Total....................................... 1,306.4 298.7 7.6 64.4(B) 1,661.9
Timberlands..................................... 1.3 .7 -- 1.1(D) 3.1
---------- --------- ----- ------ ----------
Total....................................... $ 1,307.7 $ 299.4 $ 7.6 $ 65.5 $ 1,665.0
---------- --------- ----- ------ ----------
---------- --------- ----- ------ ----------
For the year ended December 31, 1991:
Machinery and equipment......................... $ 988.5 $ 208.7 $ 19.0 $ (6.8) $ 1,171.4
Building and leasehold improvements............. 96.6 27.4 4.6 7.0 126.4
Land and land improvements...................... 6.0 2.1 .7 1.2 8.6
---------- --------- ----- ------ ----------
Total....................................... 1,091.1 238.2 24.3 1.4(C) 1,306.4
Timberlands..................................... .8 .5 -- -- 1.3
---------- --------- ----- ------ ----------
Total....................................... $ 1,091.9 $ 238.7 $ 24.3 $ 1.4 $ 1,307.7
---------- --------- ----- ------ ----------
---------- --------- ----- ------ ----------
- ---------
(A) Primarily represents the effects of foreign currency translation, the
write-off of certain decommissioned assets and the transfer of assets for
the Company's European folding carton operations which in the early part
of 1993 was merged into a joint venture and accordingly is now accounted
for under the equity method.
(B) Primarily represents the effects of foreign currency translation, write-up
adjustments as a result of the adoption of Statement of Financial
Accounting Standards No. 109 "Accounting for Income Taxes," ("SFAS 109")
as of January 1, 1992 and reclassifications among property categories.
(C) Primarily represents the effects of foreign currency translation and
reclassifications among property categories.
(D) Represents the adjustment as a result of the adoption of SFAS 109.
69
STONE CONTAINER CORPORATION AND SUBSIDIARIES
SCHEDULE VIII--VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(IN MILLIONS)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- -------------------------------------------------- ---------- ---------- ---------- ----------
ADDITIONS
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND END OF
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS PERIOD
- -------------------------------------------------- ---------- ---------- ---------- ----------
Allowance for doubtful accounts and notes and
sales returns and allowances:
Year ended December 31, 1993.................... $ 19.3 $ 29.2 $ 29.2 $ 19.3
Year ended December 31, 1992.................... $ 15.6 $ 14.3 $ 10.6 $ 19.3
Year ended December 31, 1991.................... $ 13.5 $ 13.0 $ 10.9 $ 15.6
SCHEDULE IX--SHORT-TERM BORROWINGS
(IN MILLIONS)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F
- -------------------------------------------------- --------- -------- ----------- ----------- -------------
MAXIMUM AVERAGE WEIGHTED
WEIGHTED AMOUNT AMOUNT AVERAGE
BALANCE AVERAGE OUTSTANDING OUTSTANDING INTEREST RATE
CATEGORY OF AGGREGATE AT END OF INTEREST DURING THE DURING THE DURING THE
SHORT-TERM BORROWINGS PERIOD RATE PERIOD PERIOD PERIOD(A)
- -------------------------------------------------- --------- -------- ----------- ----------- -------------
Notes payable to banks:
Year ended December 31, 1993.................... $ -- --% $ 34.0 $ 19.8 6.5%
Year ended December 31, 1992.................... $ 33.0 8.1% $ 50.1 $ 37.1 8.0%
Year ended December 31, 1991.................... $ 19.1 10.3% $ 19.3 $ 16.4 10.2%
- ---------
(A) Weighted average interest rate for the year is determined by dividing the
average daily interest expense by the total average borrowings for the
year.
SCHEDULE X--SUPPLEMENTARY INCOME STATEMENT INFORMATION
(IN MILLIONS)
COLUMN A COLUMN B
- -------------------------------------------------- ----------------------
CHARGED TO COSTS AND
EXPENSES,
YEAR ENDED DECEMBER
31,
----------------------
1993 1992 1991
------ ------ ------
Maintenance and repairs........................... $385.5 $428.5 $399.8
70
STONE CONTAINER CORPORATION AND SUBSIDIARIES
SUMMARIZED FINANCIAL INFORMATION--STONE SOUTHWEST, INC.
Shown below is consolidated, summarized financial information for Stone
Southwest, Inc. (formerly known as Southwest Forest Industries, Inc.). The
summarized financial information for Stone Southwest, Inc. ("Stone Southwest")
does not include purchase accounting adjustments or the impact of the debt
incurred to finance the acquisition of Stone Southwest:
YEAR ENDED DECEMBER 31,
---------------------------------
(IN MILLIONS) 1993 1992 1991
- -------------------------------------------------- --------- --------- ---------
Net sales......................................... $ 1,660.1 $ 1,755.9 $ 1,860.9
Cost of products sold and depreciation............ 1,396.6 1,390.7 1,488.8
Income (loss) before cumulative effects of
accounting changes............................... (12.6) 57.7 46.8
Cumulative effect of change in accounting for
postretirement benefits.......................... (8.3) -- --
Cumulative effect of change in accounting for
income taxes..................................... -- (27.2) --
Net income (loss)................................. (20.8) 30.5 46.8
DECEMBER 31,
---------------------
(IN MILLIONS) 1993 1992
- -------------------------------------------------- --------- ---------
Current assets.................................... $ 360.9 $ 357.1
Noncurrent assets*................................ 1,600.5 1,674.6
Current liabilities............................... 141.3 212.7
Noncurrent liabilities and obligations............ 395.8 369.2
- ---------
* Includes $857.4 and $915.8 due from the Registrant at December 31, 1993 and
1992, respectively.
71