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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, 1996.
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)
[LOGO]
DELAWARE 36-2041256
- -------------------------------------------------- --------------------------------------------------
(State or other jurisdiction of incorporation (I.R.S. employer identification no.)
or organization)
150 NORTH MICHIGAN AVENUE, CHICAGO, ILLINOIS 60601
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(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
12 5/8% Senior Notes due July 15, 1998 New York Stock Exchange
11 7/8% Senior Notes due December 1, 1998 New York Stock Exchange
11% Senior Subordinated Notes due August 15,
1999 New York Stock Exchange
9 7/8% Senior Notes due February 1, 2001 New York Stock Exchange
10 3/4% Senior Subordinated Debentures due
April 1, 2002 New York Stock Exchange
10 3/4% First Mortgage Notes due October 1,
2002 New York Stock Exchange
11 1/2% Senior Notes due October 1, 2004 New York Stock Exchange
6 3/4% Convertible Subordinated Debentures
due February 15, 2007 New York Stock Exchange
Rating Adjustable Senior Notes due August 1,
2016 New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE.
Indicate by check mark whether the Registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months, and (2) has been
subject to such filing requirements for the past 90 days.
Yes _X No ___
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of the Registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K. ( )
The aggregate market value as of March 20, 1997 of the voting common
stock held by non-affiliates of the Registrant was approximately
$1,094,000,000.
The number of shares of common stock outstanding at March 20, 1997 was
99,319,186.
The Proxy Statement, to be filed on or before April 30, 1997, for the
Annual Meeting of Stockholders scheduled May 13, 1997 is partially
incorporated by reference into Part III, Items 10, 11, 12 and 13; and
Part IV, Item 14, excluding the sections entitled "Compensation
Committee Report on Executive Compensation" and "Performance Graph."
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PART I
ITEM 1. BUSINESS
(a) GENERAL DEVELOPMENT OF BUSINESS
The information relating to the general development of the Registrant's
business for the year ended December 31, 1996, is incorporated herein by
reference to Item 7--Management's Discussion and Analysis of Financial Condition
and Results of Operations ("MD&A") included in this report, under the section
entitled "Financial Condition and Liquidity," pages 14 -18, and to the Financial
Statements, included in this report, under Notes to the Consolidated Financial
Statements, "Note 3--Joint Ventures, Acquisitions and Investments," pages 34-35,
"Note 16--Related Party Transactions," page 49, and "Note 19--Segment and
Geographic Information," pages 51-53.
Except where the context clearly indicates otherwise, the terms "Registrant"
and "Company" as hereinafter used refer to Stone Container Corporation together
with its consolidated subsidiaries.
(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
Effective with the November 1, 1995 amalgamation of Stone-Consolidated
Corporation with Rainy River Forest Products Inc. discussed in Note 4 of the
Consolidated Financial Statements included in this report, the Registrant began
reporting Stone-Consolidated as a non-consolidated affiliate in accordance with
the equity method of accounting. As a result of this de-consolidation of
Stone-Consolidated and the integrated nature of the Registrant's principal
consolidated operations, the Registrant now operates in a single business--the
production and sale of commodity pulp, paper and packaging products.
Accordingly, effective in 1996, business segment reporting is no longer
applicable. Financial information relating to the Registrant's historical
industry segments, for the year ended December 31, 1995 is incorporated herein
by reference to the Financial Statements included in this report, under Notes to
the Consolidated Financial Statements, "Note 19--Segment and Geographic
Information," pages 51-53.
(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 "Results of Operations,"
pages 12-14, "Investing Activities," page 17, and "Environmental Issues," pages
17-18, and to the Financial Statements, included in this report, under Notes to
the Consolidated Financial Statements, "Note 3--Joint Ventures, Acquisitions and
Investments," pages 34-35, and "Note 19--Segment and Geographic Information,"
pages 51-53.
1
PROFILE
KEY PRODUCTS Markets Industry Position
CONTAINERBOARD AND A broad range of manufacturers of consumable and Industry leader
CORRUGATED CONTAINERS durable goods and other manufacturers of
corrugated containers.
KRAFT PAPER AND BAGS AND Industrial and consumer bags sold to the food, Industry leader
SACKS agricultural, chemical and cement industries,
among others. Retail bags and sacks sold to
supermarket chains and other retailers of
consumable products.
BOXBOARD, FOLDING Manufacturers of consumable goods, especially A major position in Europe (FCP Group); a
CARTONS AND OTHER food, beverage and tobacco products, and other box nominal position in North America
manufacturers.
PUBLICATION PAPERS Newspaper publishers, commercial printers, and Industry leader, through its
producers of advertising materials, magazines, non-consolidated affiliate,
directories and computer papers. Stone-Consolidated Corporation
MARKET PULP Manufacturers of paper products, including fine A major position
papers, photographic papers, tissue and newsprint.
1996 PRODUCTION AND SHIPMENT STATISTICS
MILL PRODUCTION* (thousands of short tons)
Containerboard................................................................................ 4,591
Kraft Paper................................................................................... 439
Market Pulp................................................................................... 1,009
Publication Papers............................................................................ 1,269
Boxboard and Other............................................................................ 88
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Total....................................................................................... 7,396
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CONTAINERBOARD AND KRAFT PAPER CONVERTED* (thousands of short tons)............................. 4,326
WASTEPAPER RECOVERED AND RECYCLED (thousands of short tons)..................................... 2,992
CONVERTED PRODUCT SHIPMENTS*
Corrugated Containers (billions of square feet)............................................... 53.1
Paper Bags and Sacks (thousands of short tons)................................................ 538
Folding Cartons (thousands of short tons)..................................................... 88
Flexible Packaging (thousands of short tons).................................................. 16
NUMBER OF MANUFACTURING FACILITIES (including certain affiliates)
Paperboard, Paper and Pulp Mills.............................................................. 31
Converting Plants............................................................................. 164
Sawmills...................................................................................... 7
Packaging Machinery Plants.................................................................... 2
Preprint Plants............................................................................... 2
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Total....................................................................................... 206
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*Includes certain affiliates on an equity ownership basis.
2
The major markets in which the Company sells its principal products are
highly competitive. Its products compete with similar products manufactured by
others and, in some instances, with products manufactured from other materials.
Areas of competition include price, innovation, quality and service. The
Company's business is affected by cyclical industry conditions and economic
factors such as industry capacity, growth in the economy, interest rates,
unemployment levels and fluctuations in foreign currency exchange rates.
Wood fiber and recycled fiber, the principal raw materials used in the
manufacture of the Company's products, are purchased in highly competitive,
price sensitive markets. These raw materials have historically exhibited price
and demand cyclicality. In addition, the supply and price of wood fiber in
particular, is dependent upon a variety of factors over which the Company has no
control, including environmental and conservation regulations, natural
disasters, such as forest fires and hurricanes, and weather.
The Company purchases or cuts a variety of species of timber from which the
Company utilizes wood fiber depending upon the product being manufactured and
each mill's geographic location. A decrease in the supply of wood fiber has
caused, and will likely continue to cause, higher wood fiber costs in some of
the regions in which the Company procures wood. In addition, the increase in
demand for products manufactured, in whole or in part, from recycled fiber has
from time to time caused a tightness in the supply of recycled fiber and at
those times a significant increase in the cost of such fiber used in the
manufacture of recycled containerboard and related products. The Company's paper
and paper packaging products use a large volume of recycled fiber. While the
Company has not experienced any significant difficulty in obtaining wood fiber
and recycled fiber in economic proximity to its mills, there can be no
assurances that this will continue to be the case for any or all of its mills.
At December 31, 1996, the Company owned approximately 2 thousand and 137
thousand acres of private fee timberland in the United States and Canada,
respectively.
The Company's business is not dependent upon a single customer or upon a
small number of major customers. The loss of any one customer would not have a
material adverse effect on the Company.
Backlogs are not a significant factor in the industry in which the Company
operates; most orders placed with the Company are for delivery within 60 days or
less.
The Company expenses research and development expenditures as incurred.
Research and development costs were $9 million and $11 million for 1996 and
1995, respectively.
The Company owns patents, licenses, trademarks and tradenames on products.
The loss of any patent, license, trademark or tradename would not have a
material adverse effect on the Company's operations.
As of December 31, 1996, the Registrant had approximately 24,200 employees,
of whom approximately 19,700 were employees of U.S. operations and the remainder
were employees of foreign operations. Of those in the United States,
approximately 12,800 are union employees.
(d) FINANCIAL INFORMATION ABOUT FOREIGN AND
DOMESTIC OPERATIONS AND EXPORT SALES
Financial information relating to the Registrant's foreign and domestic
operations and export sales for the year ended December 31, 1996, is
incorporated herein by reference to the Financial Statements, included in this
report, under Notes to the Consolidated Financial Statements, "Note 19--Segment
and Geographic Information," pages 51-53. The Company's results are affected by
economic conditions in certain foreign countries and by fluctuations in foreign
exchange rates.
ITEM 2. PROPERTIES
The Registrant, including its subsidiaries and affiliates, maintains
manufacturing facilities and sales offices throughout North America, Europe,
Central and South America, Australia and Asia. A listing of such worldwide
facilities as of December 31, 1996 is provided on pages 5-6 of this report.
3
The approximate annual production capacity of the Company's mills is
summarized in the following table:
(IN THOUSANDS OF SHORT TONS) DECEMBER 31, 1996 1995
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United States (1)................................. 6,041 5,611
Canada (2)(3)..................................... 2,174 2,164
Europe (3)........................................ 643 505
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8,858 8,280
------ ------
------ ------
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(1) Includes 50 percent of the Florida Coast mill for 1996.
(2) Includes 45 percent of the Celgar mill.
(3) Includes 46.6 percent of Stone-Consolidated Corporation.
All mills and converting facilities are owned, or partially owned through
investments in other companies, by the Registrant, except for 51 converting
plants in the United States, which are leased.
The Registrant owns certain properties that have been mortgaged or otherwise
encumbered. These properties include 12 paper mills and 76 corrugated container
plants, including those subject to a leasehold mortgage.
The Registrant's properties and facilities are properly equipped with
machinery suitable for their use. Such facilities and related equipment are well
maintained and adequate for the Registrant's current operations.
Additional information relating to the Registrant's properties for the year
ended December 31, 1996 is incorporated herein by reference to the Financial
Statements, included in this report, under the Notes to the Consolidated
Financial Statements, "Note 3--Joint Ventures, Acquisitions and Investments"
pages 34-35, "Note 4--Subsidiary Issuance of Stock," page 35, "Note
11--Long-term Debt," pages 42-44, and "Note 13--Long-term Leases," page 46.
4
WORLDWIDE FACILITIES
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UNITED STATES
ALABAMA
Birmingham (corrugated container)
ARIZONA
Eagar (forest products)
Glendale (corrugated container)
*Phoenix (bag)
Snowflake (paperboard/paper/pulp)
Snowflake (paperboard/paper/pulp)
The Apache Railway
Company
ARKANSAS
Jacksonville (bag)
(Little Rock)
Little Rock (corrugated container)
Rogers (corrugated container)
CALIFORNIA
City of Industry (corrugated container)
(Los Angeles)
Fullerton (corrugated container)
Los Angeles (bag)
Salinas (corrugated container)
San Jose (corrugated container)
Santa Fe Springs (corrugated container, 2)
COLORADO
Denver (corrugated container)
CONNECTICUT
Portland (corrugated container)
Torrington (corrugated container)
Uncasville (paperboard/paper/pulp)
FLORIDA
Cantonment (bag)
(Pensacola)
Jacksonville (paperboard/paper/pulp); (corrugated container)
Panama City (paperboard/paper/pulp)
*Port St. Joe (paperboard/paper/pulp)
*Yulee (bag)
Orlando (corrugated container)
Packaging Systems
Jacksonville (corrugated container)
Preprint
GEORGIA
Atlanta (corrugated container, 3)
Port Wentworth (paperboard/paper/pulp)
Atlanta (paperboard/paper/pulp)
Technology and
Engineering Center
ILLINOIS
*Alsip (bag)
Bedford Park (corrugated container)
(Chicago)
Bloomington (corrugated container)
Cameo (corrugated container)
(Chicago)
Danville (corrugated container)
*Herrin (corrugated container)
Joliet (corrugated container)
Naperville (corrugated container)
(Chicago)
North Chicago (corrugated container)
*Plainfield (bag)
Quincy (bag)
*Zion (corrugated container)
Burr Ridge (paperboard/paper/pulp)
Technology and Engineering
Center
Westmont (corrugated container)
Marketing and Technical
Center
INDIANA
Columbus (corrugated container)
Fowler (bag)
Mishawaka (corrugated container)
South Bend (corrugated container)
IOWA
Des Moines (corrugated container); (bag)
Keokuk (corrugated container)
Sioux City (corrugated container)
KANSAS
Kansas City (corrugated container)
KENTUCKY
Louisville (corrugated container); (bag)
LOUISIANA
Arcadia (bag)
Hodge (paperboard/paper/pulp)
*Hodge (bag)
New Orleans (corrugated container)
MASSACHUSETTS
Mansfield (corrugated container)
Westfield (corrugated container)
MICHIGAN
*Detroit (corrugated container)
Grand Rapids (bag)
Ontonagon (paperboard/paper/pulp)
*Melvindale (corrugated container)
(Detroit)
MINNESOTA
Minneapolis (corrugated container)
Rochester (corrugated container)
St. Cloud (corrugated container)
St. Paul (corrugated container)
Minneapolis (corrugated container)
Preprint
MISSISSIPPI
Jackson (corrugated container)
Tupelo (corrugated container, 2)
MISSOURI
Blue Springs (corrugated container)
Kansas City (bag)
Liberty (corrugated container)
(Kansas City)
Springfield (corrugated container)
St. Joseph (corrugated container)
St. Louis (corrugated container)
MONTANA
Missoula (paperboard/paper/pulp)
NEBRASKA
Omaha (corrugated container)
NEW JERSEY
*Elizabeth (bag)
Teterboro (corrugated container)
NEW YORK
Buffalo (corrugated container)
*Walden (bag)
NORTH CAROLINA
Charlotte (corrugated container)
Lexington (corrugated container)
Raleigh (corrugated container)
NORTH DAKOTA
Fargo (corrugated container)
OHIO
Cincinnati (corrugated container)
Coshocton (paperboard/paper/pulp)
Jefferson (corrugated container)
Mansfield (corrugated container)
Marietta (corrugated container)
New Philadelphia (bag)
OKLAHOMA
Oklahoma City (corrugated container)
Sand Springs (corrugated container)
(Tulsa)
PENNSYLVANIA
Philadelphia (corrugated container, 2)
Williamsport (corrugated container)
York (paperboard/paper/pulp)
SOUTH CAROLINA
Columbia (corrugated container)
Florence (paperboard/paper/pulp)
Fountain Inn (corrugated container)
Orangeburg (forest products)
SOUTH DAKOTA
Sioux Falls (corrugated container)
TENNESSEE
Chattanooga (corrugated container)
Collierville (corrugated container)
(Memphis)
Nashville (corrugated container)
TEXAS
Dallas (corrugated container)
El Paso (corrugated container, 2); (folding carton)
Grand Prairie (corrugated container)
(Dallas)
Houston (corrugated container)
Temple (corrugated container)
Tyler (corrugated container)
UTAH
Salt Lake City (bag)
Salt Lake City (bag)
Bag Packaging Systems
VIRGINIA
Hopewell (paperboard/paper/pulp)
Martinsville (corrugated container)
Richmond (corrugated container, 2)
*Richmond (bag)
WASHINGTON
SEATTLE (CORRUGATED CONTAINER)
*Tacoma (paperboard/paper/pulp)
WEST VIRGINIA
Wellsburg (bag)
WISCONSIN
Beloit (corrugated container)
Germantown (corrugated container)
(Milwaukee)
Neenah (corrugated container)
CANADA
ALBERTA
*Calgary (corrugated container)
*Edmonton (corrugated container)
BRITISH COLUMBIA
*Castlegar (paperboard/paper/pulp)
*New Westminster (corrugated container)
MANITOBA
*Winnipeg (corrugated container)
NEW BRUNSWICK
Bathurst (paperboard/paper/pulp); (forest products)
*Saint John (corrugated container)
NOVA SCOTIA
*Dartmouth (corrugated container)
ONTARIO
*Etobicoke (corrugated container)
*Ft. Frances (paperboard/paper/pulp)
*Guelph (corrugated container)
*Kenora (paperboard/paper/pulp)
*Pembroke (corrugated container)
*Rexdale (corrugated container)
*Whitby (corrugated container)
PRINCE EDWARD ISLAND
*Summerside (corrugated container)
5
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QUEBEC
*Grand-Mere (paperboard/paper/pulp)
*La Baie (paperboard/paper/pulp)
*La Tuque (forest products, 2)
New Richmond (paperboard/paper/pulp)
Portage-du-Fort (paperboard/paper/pulp)
*Roberval (forest products)
*Saint-Fulgence (forest products)
*Saint-Laurent (corrugated container)
*Shawinigan (paperboard/paper/pulp)
*Trois-Rivieres (paperboard/paper/pulp)
*Ville Mont-Royal (corrugated container)
*Grand-Mere (paperboard/paper/pulp)
Research Center
SASKATCHEWAN
*Regina (corrugated container)
MEXICO
Monterrey (corrugated container)
Queretaro (corrugated container)
EUROPE
GERMANY
*Augsburg (folding carton)
*Bremen (folding carton)
Delitzsch (corrugated container)
Dusseldorf (corrugated container)
*Frankfurt (folding carton)
Germersheim (corrugated container)
Hamburg (corrugated container)
Heppenheim (corrugated container)
Hoya (paperboard/paper/pulp)
Julich (corrugated container)
Lauenburg (corrugated container)
Lubbecke (corrugated container)
Neuburg (corrugated container)
Plattling (corrugated container)
Viersen (paperboard/paper/pulp)
Waren (corrugated container)
Hamburg
Institute for Package
and Corporate Design
UNITED KINGDOM
*Chesterfield (folding carton)
*Ellesmere Port (paperboard/paper/pulp)
NETHERLANDS
*Sneek (folding carton)
BELGIUM
Ghlin (corrugated container)
Groot-Bijgaarden (corrugated container)
FRANCE
*Bordeaux (folding carton)
*Cholet (folding carton)
Molieres-Sur-Ceze (corrugated container)
Nimes (corrugated container)
*Soissons (folding carton)
*Strasbourg (folding carton)
*Valenciennes (corrugated container)
SPAIN
Cordoba (paperboard/paper/pulp); (corrugated container)
Madrid (corrugated container)
Seville (corrugated container)
AUSTRALIA
Melbourne (corrugated container)
Sydney (corrugated container)
ASIA
CHINA
*Shanghai (corrugated container)
*Beijing (joint venture office)
JAPAN
*Tokyo (joint venture office)
CENTRAL AND SOUTH AMERICA
ARGENTINA
*Bernal (Buenos Aires) (joint venture office); (corrugated container)
*Mendoza (corrugated container)
CHILE
*San Francisco (Santiago) (corrugated container)
COSTA RICA
Palmar Norte (forest products)
San Jose (forest products)
Administrative Office
VENEZUELA
*Maracay (other, 2)
*Miranda (other)
*Moron (paperboard/paper/pulp); (bag)
*Puerto Ordaz (joint venture office)
*Valencia (paperboard/paper/pulp); (corrugated container); (bag)
CORPORATE HEADQUARTERS
Chicago, Illinois
*affiliates
6
ITEM 3. LEGAL PROCEEDINGS
In November 1990, the U.S. Environmental Protection Agency ("EPA") announced
its decision to list two bodies of water in Arizona, Dry Lake and Twin Lakes, as
"waters of the United States" impacted by toxic pollutant discharges under
Section 304(l) of the federal Clean Water Act. These bodies of water had been
used by the Company's Snowflake, Arizona pulp and paperboard mill for the
evaporation of its process wastewater. The Company has vigorously disputed the
application of the Clean Water Act to these two privately owned evaporation
ponds. The Company has implemented a plan to use its wastewater to irrigate a
biomass plantation and discontinue using Dry Lake to evaporate wastewater. The
parties have been negotiating a consent decree to resolve this matter which
currently is expected to include civil penalties in the amount of $375,000.
On October 27, 1992, the Florida Department of Environmental Regulation,
predecessor to the Department of Environmental Protection ("DEP"), filed a civil
complaint in the Fourteenth Judicial Circuit Court of Bay County, Florida
against the Company seeking injunctive relief, an unspecified amount of fines
and civil penalties, and other relief based on alleged groundwater contamination
at the Company's Panama City, Florida pulp and paperboard mill. In addition, the
complaint alleges operation of a solid waste facility without a permit and
discrepancies in hazardous waste shipping manifests. Because of uncertainties in
the interpretation and application of DEP's rules, it is premature to assess the
Company's potential liability, if any, in the event of an adverse ruling. At the
parties' request, the case has been placed in abeyance pending the conclusion of
a related administrative proceeding petitioned by the Company in June 1992
following DEP's proposal to deny the Company a permit renewal to continue
operating its wastewater pretreatment facility at the mill site. The
administrative proceeding has been referred to a hearing officer for an
administrative hearing on the consolidated issues of compliance with a prior
consent order, denial of the permit renewal, completion of a contamination
assessment and denial of a sodium exemption. The consolidated cases were abated
at the parties' request and extensive settlement negotiations are being
conducted between the parties. The Company intends to vigorously assert its
entitlement to the permit renewal and to defend against the groundwater
contamination and unpermitted facility allegations in the event that a
settlement cannot be reached.
On April 20, 1994, Carolina Power & Light ("CP&L") commenced proceedings
against the Company before the Federal Energy Regulatory Commission ("FERC")
(the "FERC Proceeding") and in the United States District Court for the Eastern
District of North Carolina (the "Federal Court Action"). Both proceedings relate
to the Company's electric cogeneration facility located at its Florence, South
Carolina mill (the "Facility") and the Company's Electric Power Purchase
Agreement (the "Agreement") with CP&L.
In the FERC Proceeding, CP&L alleges that the Facility lost its qualifying
facility ("QF") certification under the Public Utility Regulatory Policy Act of
1978 on August 13, 1991, when the Agreement, pursuant to which CP&L purchases
electricity generated by the Facility, was amended to reflect the Company's
election under the Agreement to switch to a "buy-all/sell-all mode of
operation." As a result, CP&L alleges the Company became a "public utility" on
August 13, 1991 subject to FERC regulation under the Federal Power Act. CP&L has
also requested that the FERC determine the "just and reasonable rate" for sales
of electric energy and capacity from the Facility since August 13, 1991 and to
order the Company to refund any amounts paid in excess of that rate, plus
interest and penalties.
In its answer filed with the FERC on June 2, 1994, the Company stated that
its power sales to CP&L fully complied with the FERC's regulations. The Company
also requested that the FERC waive compliance with any applicable FERC
regulations in the event that the FERC should determine, contrary to the
Company's position, that the Company has not complied with the FERC's
regulations in any respect. CP&L has also filed several other pleadings to which
the Company has responded. If the FERC were to determine that the Company had
become a "public utility," the Company's issuance of securities and incurrence
of debt after the date that it became a "public utility" could be subject to the
jurisdiction and approval of the FERC unless the FERC granted a waiver. In the
absence of such a waiver, certain other activities and contracts of the Company
after such date could also be subject to additional federal and state regulatory
requirements, and defaults might be created under certain existing agreements.
Based on past administrative practice of the FERC in granting waivers of certain
other regulations, the Company believes that it is likely that such a waiver
would be granted by the FERC in the event that such a waiver became necessary.
In the Federal Court Action, CP&L has requested declaratory judgments that
sales of electric energy and capacity under the Agreement since August 13, 1991
are subject to a just and reasonable rate to be determined by the FERC and that
the Agreement has been terminated as a result of the Company's failure to
maintain the Facility's QF status and the invalidity of the Agreement's rate
provisions. CP&L has also sought damages for breach of contract and for
purchases in excess of the just and reasonable rate to be determined by the
FERC. On June 9, 1994, the Company moved to dismiss CP&L's Federal Court Action
on the principal grounds that any proceedings in the United States
7
District Court are premature unless and until the FERC Proceeding is finally
resolved. On September 20, 1994, the United States District Court stayed the
Federal Court action pending the outcome of the FERC proceeding.
The two proceedings are in their preliminary stages and no assurance can be
provided as to the timing of the decisions or the outcome of either of them. The
Company intends to contest these actions vigorously.
On September 30, 1994, the EPA, Region IV, issued an Administrative Order
("Order") to the Company's Panama City Mill pursuant to Section 3008(h) of the
Federal Resource Conservation and Recovery Act ("RCRA"), 42 U.S.C. Section
6928(h)(l). The Order required the Company to perform a RCRA Facility
Investigation at the Panama City Mill together with confirmatory sampling,
interim corrective measures and any other activities necessary to correct
alleged actual or threatened releases of hazardous substances or hazardous
constituents at or from the Panama City Mill. The Company filed a protest and
requested a hearing to contest the EPA's RCRA Section 3008(h) jurisdiction over
the Panama City Mill. The Company believes that the Panama City Mill is not
currently a RCRA facility. The corrective measures mandated by the Order
required the Company to conduct extensive groundwater and soil sampling and
analyses. In early 1996 the EPA issued another Order to the mill pursuant to
Section 3013 of RCRA ("Section 3013 Order") incorporating certain sampling and
analysis activities which the Company had proposed in settlement negotiations
and requiring additional sampling and analysis. In its response to the Section
3013 Order the Company agreed to implement all of the proposed activities except
dioxin sampling. The parties have been engaged in extensive settlement
negotiations with respect to both Orders. The Company does not know at this time
the likelihood of success in challenging the Orders. Notwithstanding the success
in challenging the Orders, an owner of property adjacent to the Panama City Mill
is currently subject to extensive clean-up under RCRA, and the EPA is empowered
to require clean-up for materials discharged from the property which may have
migrated onto the Panama City Mill's property. The Company does not yet know the
extent, if any, of such adjacent property owner's responsibility to remediate
contamination, if any, at the Panama City Mill site.
On January 22, 1996, the United States of America filed a suit against the
Company in the United States District Court for the District of Montana seeking
injunctive relief and an unspecified amount in civil penalties based on the
alleged failure of the Company to comply with certain provisions of the Clean
Air Act ("CAA"), its implementing regulations, and the Montana State
Implementation Plan at the Company's Missoula, Montana kraft pulp mill, (the
"Missoula Mill"). The complaint specifically alleges that the Company exceeded
the 20% opacity limitation for recovery boiler emissions; failed to properly set
the span on a recovery boiler continuous emissions monitor; and concealed the
emission of an air contaminant by improperly venting non-condensible gasses. The
statutory penalty for violations of the CAA is $25,000 per day for each day of
violation. The Company has engaged in extensive negotiations with EPA and the
United States Department of Justice to settle this matter while vigorously
contesting the allegations. While it is premature to predict the outcome of this
matter at this time, negotiators for the Company and the United States have
reached an agreement in principle to settle this case, which currently is
expected to include a penalty of $300,000.
In a related matter, on November 27, 1995, the Company received notice from
several environmental groups that they intended to file citizens suits under the
CAA, the Federal Water Pollution Control Act ("CWA") and the Emergency Planning
and Community Right-to-Know Act ("EPCRA") against the Company based on alleged
violations of those Acts at the Missoula Mill. In December, 1995,
representatives of the Company met with representatives of the groups that sent
the notice to discuss the Company's position that the majority of the alleged
violations were not in excess of applicable permit limits or were excused
because they occurred during reported malfunctions, start-up or shutdown
conditions. On January 29, 1996, a Complaint was filed by the Montana Coalition
for Health, Environmental and Economic Rights Inc., Cold Mountain, Cold Rivers,
Inc. and Native Forest Network, Inc. (collectively "Plaintiffs") in the United
States District Court for the District of Montana alleging numerous violations
of the provisions of the CAA, the CWA and the EPCRA. On February 7, 1996,
Plaintiffs filed an Amended Complaint seeking (1) a declaratory judgment that
the Company has violated Section 301(a) of the CWA, Section 502(a) of the CAA
and Section 313 of the EPCRA; (2) injunctive relief enjoining the Company from
operating the Missoula Mill in a manner as will result in further violations of
the CAA, CWA and EPCRA; and (3) civil penalties of $25,000 per day for each day
of alleged violation. The Company has engaged in negotiations with Plaintiffs to
settle this matter, and in December 1996 the parties reached an agreement in
principle, which is currently expected to include a penalty of $100,000. No
assurance can be given that a definitive settlement agreement will be entered
into by the parties or approved by the Court.
In addition, the Registrant is from time to time subject to litigation and
governmental proceedings regarding environmental matters in which injunctive
and/or monetary relief is sought. The Company has been named as a potentially
responsible party ("PRP") at a number of sites which are the subject of remedial
activity under the federal Comprehensive Environmental Response, Compensation
and Liability Act of 1980 ("CERCLA" or "Superfund") or
8
comparable state laws. Although the Company is subject to joint and several
liability imposed under Superfund, at most of the multi-PRP sites there are
organized groups of PRPs and costs are being shared among PRPs.
The Registrant is involved in contractual disputes, administrative and legal
proceedings and investigations of various types. Although any litigation,
proceeding or investigation has an element of uncertainty, the Registrant
believes that the outcome of any proceeding, lawsuit or claim which is pending
or threatened, or all of them combined, would not have a material adverse effect
on its consolidated financial position, results of operations or liquidity.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
(a) PRINCIPAL MARKET, STOCK PRICE AND DIVIDEND INFORMATION
Information relating to the principal market, stock price and dividend
information for the Registrant's Common and Preferred Stock and related
stockholder matters, for the year ended December 31, 1996, is incorporated
herein by reference to the MD&A, included in this report, under the sections
entitled "Common and Series E Cumulative Preferred Stock--Cash Dividends, Market
and Price Range," page 18 and "Financial Condition and Liquidity," pages 14-18,
and to the Financial Statements, included in this report, under Notes to the
Consolidated Financial Statements, "Note 11--Long-term Debt," pages 42-44, "Note
14--Preferred Stock," page 46, "Note 15--Common Stock," pages 47-49 and "Note
20--Summary of Quarterly Data (unaudited)," page 54.
(b) APPROXIMATE NUMBER OF HOLDERS OF COMMON STOCK
There were approximately 6,378 holders of record of the Registrant's common
stock, as of March 20, 1997.
ITEM 6. SELECTED FINANCIAL DATA
In addition to the table set forth on pages 10-11 of this report, selected
financial data of the Registrant is incorporated herein by reference to the
Financial Statements, included in this report, under Notes to the Consolidated
Financial Statements, "Note 1--Summary of Significant Accounting Policies,"
pages 33-34, and "Note 3--Joint Ventures, Acquisitions and Investments," pages
34-35.
9
SELECTED FINANCIAL DATA
(DOLLARS IN MILLIONS EXCEPT PER SHARE) 1996 1995(b) 1994 1993 1992 1991 1990
- ---------------------------------------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
SUMMARY OF OPERATIONS
Net sales............................... $ 5,141.8 $7,351.2 $ 5,748.7 $ 5,059.6 $ 5,520.7 $ 5,384.3 $ 5,755.9
Cost of products sold................... 4,085.4 5,168.9 4,564.3 4,223.5 4,473.7 4,287.2 4,421.9
Selling, general and administrative
expenses............................... 596.2 608.5 568.2 512.2 543.5 522.8 495.5
Depreciation and amortization........... 314.8 371.8 358.9 346.8 329.2 273.5 257.0
Interest expense........................ 413.5 460.3 456.0 426.7 386.1 397.4 421.7
Income (loss) before income taxes,
minority interest, extraordinary
charges and cumulative effects of
accounting changes..................... (189.1) 794.7 (163.1) (463.3) (224.0) (12.2) 194.1
(Provision) credit for income taxes..... 66.0 (320.9) 35.5 147.7 59.4 (31.1) (92.8)
Minority interest....................... .6 (29.3) (1.2) (3.6) (5.3) (5.8) (5.9)
Income (loss) before extraordinary
charges and cumulative effects of
accounting changes..................... (122.5) 444.5 (128.8) (319.2) (169.9) (49.1) 95.4
Extraordinary charges from early
extinguishments of debt................ (3.7) (189.0) (61.6) -- -- -- --
Cumulative effects of accounting
changes................................ -- -- (14.2) (39.5) (99.5) -- --
Net income (loss)....................... (126.2) 255.5 (204.6) (358.7) (269.4) (49.1) 95.4
---------- ---------- ---------- ---------- ---------- ---------- ----------
PER SHARE OF COMMON STOCK (a)
PRIMARY:
Income (loss) before extraordinary
charges and cumulative effects of
accounting changes..................... (1.32) 4.64 (1.60) (4.59) (2.49) (.78) 1.56
Extraordinary charges from early
extinguishments of debt................ (.03) (2.01) (.70) -- -- -- --
Cumulative effects of accounting
changes................................ -- -- (.16) (.56) (1.40) -- --
Net income (loss)--Primary.............. (1.35) 2.63 (2.46) (5.15) (3.89) (.78) 1.56
FULLY DILUTED:
Income (loss) before extraordinary
charges and cumulative effects of
accounting changes..................... (j) 3.89 (j) (j) (j) (j) (j)
Extraordinary charges from early
extinguishments of debt................ (j) (1.65) (j) (j) (j) (j) (j)
Cumulative effects of accounting
changes................................ (j) -- (j) (j) (j) (j) (j)
Net income--Fully diluted............... (j) 2.24 (j) (j) (j) (j) (j)
Dividends and distributions paid........ .60 .30 -- -- .35 .71 .71
Common stockholders' equity (end of
year).................................. 6.85 8.98 5.90 6.91 13.91 22.12 24.34
Price range of common shares--N.Y.S.E.
High.................................. 17.38 24.63 21.13 19.50 32.63 26.00 25.25
Low................................... 12.13 12.50 9.63 6.38 12.50 9.00 8.13
Average common shares outstanding (in
millions):
Primary............................... 99.2 94.1 88.2 71.2 71.0 63.2 61.3
Fully diluted......................... (j) 114.7 (j) (j) (j) (j) (j)
---------- ---------- ---------- ---------- ---------- ---------- ----------
FINANCIAL POSITION AT END OF YEAR
Current assets.......................... $ 1,561.2 $1,682.9 $ 1,816.9 $ 1,753.2 $ 1,701.8 $ 1,685.3 $ 1,586.0
Current liabilities..................... 889.2 701.7 1,031.5 943.5 944.8 914.8 1,146.5
Working capital......................... 672.0 981.2 785.4 809.7 757.0 770.5 439.5
Property, plant and equipment--net...... 2,633.7 2,635.8 3,359.0 3,386.4 3,703.2 3,520.2 3,364.0
Total assets............................ 6,353.8 6,398.9 7,004.9 6,836.7 7,027.0 6,902.9 6,690.0
Long-term debt.......................... 3,951.1 3,885.1 4,431.9 4,268.4 4,105.1 4,046.4 3,680.5
Deferred taxes.......................... 410.2 493.1 381.4 470.6 685.2 263.9 262.7
Redeemable preferred stock.............. -- -- -- 42.3 36.3 31.1 26.6
Minority interest (i)................... 4.3 .7 221.8 234.5 .2 3.8 8.0
Stockholders' equity.................... 795.2 1,005.3 648.1 607.1 1,102.7 1,537.5 1,460.5
---------- ---------- ---------- ---------- ---------- ---------- ----------
ADDITIONAL INFORMATION
Paperboard, paper and market pulp:
Produced (thousand short tons) (e).... 7,396 7,980 7,928 7,475 7,517 7,365 7,447
Converted (thousand short tons) (e)... 4,326 4,355 4,477 4,354 4,373 4,228 4,241
Corrugated shipments (billion square
feet) (e).............................. 53.1 53.0 54.10 52.48 51.67 49.18 47.16
Employees (end of year--in thousands)... 24.2 25.9 29.1 29.0 31.2 31.8 32.3
Capital expenditures.................... $ 250.8 $ 386.5 $ 232.6 $ 149.7 $ 281.4 $ 430.1 $ 552.0
Net cash/funds provided by (used in)
operating activities (f)............... $ 287.6 $ 961.7 $ 72.3 $ (129.1) $ 120.9 $ 247.2 $ 468.6
Working capital ratio................... 1.8/1 2.4/1 1.8/1 1.9/1 1.8/1 1.8/1 1.4/1
Percent long-term debt/total
capitalization (g)..................... 76.6% 72.2% 78.0% 75.9% 69.2% 68.8% 67.7%
Return on beginning common stockholders'
equity (h)............................. (13.7%) 83.4% (26.2%) (32.3%) (11.1%) (3.4%) 7.1%
Pretax margin........................... (3.7%) 10.4% (2.9%) (9.2%) (4.2%) (.3%) 3.3%
After-tax margin........................ (2.5%) 3.5% (3.6%) (7.1%) (4.9%) (.9%) 1.7%
---------- ---------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN MILLIONS EXCEPT PER SHARE) 1989(c) 1988 1987(c) 1986(c)
- ---------------------------------------- ---------- ---------- ---------- ----------
SUMMARY OF OPERATIONS
Net sales............................... $5,329.7 $ 3,742.5 $3,232.9 $2,032.3
Cost of products sold................... 3,893.8 2,618.0 2,347.8 1,564.6
Selling, general and administrative
expenses............................... 474.5 351.1 343.8 241.2
Depreciation and amortization........... 237.1 148.1 138.7 92.3
Interest expense........................ 344.7 108.3 131.1 85.3
Income (loss) before income taxes,
minority interest, extraordinary
charges and cumulative effects of
accounting changes..................... 481.8 549.7 283.5 59.7
(Provision) credit for income taxes..... (195.2) (207.7) (122.1) (24.3)
Minority interest....................... (.8) (.2) (.1) --
Income (loss) before extraordinary
charges and cumulative effects of
accounting changes..................... 285.8 341.8 161.3 35.4
Extraordinary charges from early
extinguishments of debt................ -- -- -- --
Cumulative effects of accounting
changes................................ -- -- -- --
Net income (loss)....................... 285.8 341.8 161.3 35.4
---------- ---------- ---------- ----------
PER SHARE OF COMMON STOCK (a)
PRIMARY:
Income (loss) before extraordinary
charges and cumulative effects of
accounting changes..................... 4.67 5.58 2.79 .73
Extraordinary charges from early
extinguishments of debt................ -- -- -- --
Cumulative effects of accounting
changes................................ -- -- -- --
Net income (loss)--Primary.............. 4.67 5.58 2.79 .73
FULLY DILUTED:
Income (loss) before extraordinary
charges and cumulative effects of
accounting changes..................... (j) (j) 2.65 (j)
Extraordinary charges from early
extinguishments of debt................ (j) (j) -- (j)
Cumulative effects of accounting
changes................................ (j) (j) -- (j)
Net income--Fully diluted............... (j) (j) 2.65 (j)
Dividends and distributions paid........ .70 .35 .25 .19
Common stockholders' equity (end of
year).................................. 22.50 17.73 12.40 9.92(d)
Price range of common shares--N.Y.S.E.
High.................................. 36.38 39.50 39.83 20.00
Low................................... 22.13 20.67 15.33 11.38
Average common shares outstanding (in
millions):
Primary............................... 61.2 61.3 57.9 48.8
Fully diluted......................... (j) (j) 60.9 (j)
---------- ---------- ---------- ----------
FINANCIAL POSITION AT END OF YEAR
Current assets.......................... $1,687.0 $ 865.7 $ 737.4 $ 530.4
Current liabilities..................... 1,072.6 408.3 334.9 203.4
Working capital......................... 614.4 457.4 402.5 327.0
Property, plant and equipment--net...... 2,977.9 1,276.0 1,300.0 924.4
Total assets............................ 6,253.7 2,395.0 2,286.1 1,523.6
Long-term debt.......................... 3,536.9 765.1 1,070.5 767.0
Deferred taxes.......................... 185.6 140.3 120.4 69.9
Redeemable preferred stock.............. 22.7 -- 1.5 1.5
Minority interest (i)................... 9.7 .3 .2 --
Stockholders' equity.................... 1,347.6 1,063.6 740.3 481.8
---------- ---------- ---------- ----------
ADDITIONAL INFORMATION
Paperboard, paper and market pulp:
Produced (thousand short tons) (e).... 6,772 4,729 4,373 3,154
Converted (thousand short tons) (e)... 3,930 3,344 2,998 2,495
Corrugated shipments (billion square
feet) (e).............................. 41.56 34.47 32.09 25.95
Employees (end of year--in thousands)... 32.6 20.7 18.8 15.5
Capital expenditures.................... $ 501.7 $ 136.6 $ 105.7 $ 63.3
Net cash/funds provided by (used in)
operating activities (f)............... $ 370.9 $ 454.1 $ 298.3 $ 166.7
Working capital ratio................... 1.6/1 2.1/1 2.2/1 2.6/1
Percent long-term debt/total
capitalization (g)..................... 69.3% 38.9% 55.4% 58.1%
Return on beginning common stockholders'
equity (h)............................. 26.9% 46.2% 41.8% 10.2%
Pretax margin........................... 9.0% 14.7% 8.8% 2.9%
After-tax margin........................ 5.4% 9.1% 5.0% 1.7%
---------- ---------- ---------- ----------
10
- ---------
NOTES TO SELECTED FINANCIAL DATA
(a) Amounts per average common share and average common shares outstanding have
been adjusted to reflect the 2 percent stock dividend in 1992, the 3-for-2
stock split in 1988 and the 2-for-1 stock split in 1987. The price range of
common shares outstanding has been adjusted only to reflect the previously
mentioned stock splits.
(b) On November 1, 1995, Stone-Consolidated Corporation, a Canadian subsidiary
of the Company, amalgamated its operations with Rainy River Forest Products,
Inc. a Toronto-based Canadian pulp and paper company. As a result of the
amalgamation, the Company's equity ownership in Stone-Consolidated
Corporation was reduced from 74.6 percent to 46.6 percent and accordingly,
effective November 1, 1995, the Company began reporting Stone-Consolidated
Corporation as a non-consolidated affiliate in accordance with the equity
method of accounting.
(c) The Company made major acquisitions in 1989, 1987 and 1986.
(d) For 1986, calculation assumes conversion of convertible preferred stock and
convertible subordinated debentures which were converted/redeemed in 1987.
(e) Includes certain non-consolidated affiliates.
(f) Certain prior year amounts have been restated to conform to current year
presentation.
(g) Represents the percentage of long-term debt to the sum of long-term debt,
stockholders' equity, redeemable preferred stock, minority interest and
deferred taxes.
(h) 1996, 1995, 1994, 1993 and 1992 return on beginning common stockholders'
equity calculated using the income (loss) before the extraordinary charges
and cumulative effects of accounting changes.
(i) For 1994 and 1993, includes the Company's 25.4 percent minority interest
liability in the common shares of Stone-Consolidated.
(j) Fully diluted amounts and average common shares outstanding have not been
presented as amounts are either anti-dilutive or, when compared to primary
earnings per share, the potential dilution effect is less than 3 percent.
Furthermore, from 1988 through 1991, fully diluted amounts were not
applicable because the Company did not have any convertible securities
outstanding.
11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Effective November 1, 1995, the Company began reporting Stone-Consolidated
as a non-consolidated affiliate in accordance with the equity method of
accounting (the "SCI de-consolidation"). Prior to such date the Company reported
Stone-Consolidated as a consolidated subsidiary. See also Note 4 to the
Consolidated Financial Statements.
Provided below is certain financial data for 1996, 1995 and 1994. Also
provided, for comparative purposes only, is supplemental restated financial data
for 1995 and 1994 assuming that the historical financial results of Stone-
Consolidated were reported by the Company in accordance with the equity method
of accounting effective January 1, 1994.
YEAR ENDED DECEMBER 31,
------------------------------------------
ACTUAL RESTATED
------------------------ ----------------
(IN MILLIONS) 1996 1995 1994 1995 1994
- -------------------------------------------------- ------ ------- ------ ------- ------
Net sales......................................... $5,142 $7,351 $5,749 $6,459 $4,898
Depreciation and amortization..................... 315 372 359 315 290
Interest expense.................................. 414 460 456 432 416
Equity income (loss) from affiliates.............. 63 20 (8) 104 (18)
Income (loss) before income taxes, minority
interest and extraordinary charges............... (189) 795 (163) 704 (159)
Net income (loss)................................. $ (126) $ 256 $ (205) $ 256 $ (205)
1996 COMPARED WITH 1995
In 1996, the Company incurred a loss before extraordinary charges from the
early extinguishments of debt of $122 million, or $1.32 per share of common
stock. The Company recorded extraordinary charges from the early extinguishments
of debt totaling $4 million, net of income tax benefit, or $.03 per share of
common stock resulting in a net loss for 1996 of $126 million, or $1.35 per
share of common stock. In 1995, the Company reported income before extraordinary
charges from the early extinguishments of debt of $445 million, or $4.64 per
share of common stock on a primary basis and $3.89 per share of common stock on
a fully diluted basis. The Company recorded extraordinary charges from the early
extinguishments of debt totaling $189 million, net of income tax benefit, or
$2.01 per share on a primary basis and $1.65 per share on a fully diluted basis,
resulting in net income for 1995 of $256 million, or $2.63 per share of common
stock on a primary basis and $2.24 per share of common stock on a fully diluted
basis.
The net loss for 1996 represents a significant decrease from the net
earnings of 1995. This decrease resulted from substantially lower operating
margins primarily attributable to significantly lower average selling prices for
most of the Company's products. Additionally, the Company's 1996 results include
a non-recurring $5 million pretax loss associated with the sale of certain
assets and foreign exchange transaction losses of $.5 million as compared with
foreign exchange transaction gains of $8 million in 1995. Furthermore, the
Company recorded an income tax benefit of $66 million on a pretax loss of $189
million in 1996 as compared with a 1995 income tax provision of $321 million on
pretax earnings of $795 million. The Company's effective income tax rates for
both years reflect the impact of non-deductible amortization of intangibles.
PRODUCT LINE SALES DATA
NET SALES
-------------------------------
(IN MILLIONS) YEAR ENDED DECEMBER 31, 1996 1995 1994
- -------------------------------------------------------- --------- --------- ---------
Paperboard and corrugated containers.................... $ 3,662 $ 4,444 $ 3,450
Kraft paper and paper bags and sacks.................... 713 802 679
Market pulp............................................. 330 750 305
Net sales of Stone-Consolidated (a)..................... -- 892 851
Other................................................... 437 463 464
--------- --------- ---------
Total net sales....................................... $ 5,142 $ 7,351 $ 5,749
--------- --------- ---------
--------- --------- ---------
- ---------
(a) Primarily newsprint and groundwood paper.
12
Net sales for 1996 decreased $2.2 billion from 1995. Net sales for 1995
included $892 million of sales of Stone-Consolidated. Excluding the effect of
Stone-Consolidated, sales for 1996 decreased approximately $1.3 billion or 20.4
percent from 1995.
Net sales of paperboard and corrugated containers, kraft paper and paper
bags and sacks, and market pulp decreased 17.6 percent, 11.1 percent and 56.0
percent, respectively, from 1995 mainly due to sharply lower selling prices.
Additionally, a 21 percent reduction in market pulp sales volume also
contributed to the sales decrease. Corrugated container sales volume of 53.1
billion square feet, including the proportionate share of the Company's
non-consolidated affiliates, was virtually unchanged from that of the prior
year, while paperboard and kraft paper volume improved modestly.
The decrease in sales for paper bags and sacks was primarily attributable to
the de-consolidation of the Company's retail bag packaging operations effective
with the July 12, 1996 contribution of such operations, together with those of
Gaylord Container Corporation to form S&G Packaging Company L.L.C., a joint
venture that the Company reports as a non-consolidated affiliate under the
equity method of accounting. Net sales of industrial paper bags and sacks
increased 2 percent from 1995 as modest price improvement more than offset a
slight volume decrease.
As previously mentioned, the Company began reporting Stone-Consolidated as a
non-consolidated affiliate under the equity method of accounting effective
November 1, 1995. Largely as a result of this, equity earnings increased to
$63.2 million in 1996 from $19.9 million in 1995. However, 1996 equity earnings
decreased approximately $40.6 million when compared to equity earnings for 1995
on a restated basis (restated to reflect Stone-Consolidated historical results
as those of a non-consolidated affiliate under the equity method of accounting
effective January 1, 1995). This decrease was mainly due to reduced operating
margins at Stone-Consolidated primarily attributable to lower average selling
prices for newsprint and groundwood papers.
The Company continues to incur substantial interest expense due to its
significant level of indebtedness. Interest expense decreased in 1996 to $414
million from $460 million in 1995. This decrease was partially due to the SCI
de-consolidation as interest expense for 1995 included approximately $28 million
of Stone-Consolidated's interest expense. The remainder of the decrease
primarily reflects the effect of lower average outstanding borrowings in 1996 as
compared with 1995.
1995 COMPARED WITH 1994
In 1995, the Company reported income before extraordinary charges from the
early extinguishments of debt of $445 million, or $4.64 per share of common
stock on a primary basis and $3.89 per share of common stock on a fully diluted
basis. The Company recorded extraordinary charges from the early extinguishments
of debt totaling $189 million, net of income tax benefit, or $2.01 per share on
a primary basis and $1.65 per share on a fully diluted basis, resulting in net
income for 1995 of $256 million, or $2.63 per share of common stock on a primary
basis and $2.24 per share of common stock on a fully diluted basis. In 1994, the
Company incurred a loss before extraordinary charges from the early
extinguishments of debt and the cumulative effect of a change in the accounting
for postemployment benefits of $129 million, or $1.60 per share of common stock.
The Company recorded extraordinary charges from the early extinguishments of
debt totaling $62 million, net of income tax benefits, or $.70 per share of
common stock and a one-time, non-cash charge of $14 million, net of income tax
benefit, or $.16 per share of common stock, to reflect the cumulative effect of
adopting Statement of Financial Accounting Standard No. 112, "Employers'
Accounting for Postemployment Benefits", resulting in a net loss for 1994 of
$205 million, or $2.46 per share of common stock.
The improved sales and earnings for 1995 over 1994 reflected significantly
higher average selling prices for the Company's products. As a result of the
higher average selling prices, net sales increased to $7.4 billion in 1995, a 28
percent increase over 1994 net sales of $5.7 billion. Net sales of paperboard
and corrugated containers, kraft paper and paper bags and sacks increased 28.8
percent and 18.1 percent, respectively, over 1994. These increases reflected the
higher selling prices which more than offset a reduction in sales volume for
these products. Sales volumes for containerboard, corrugated containers and for
paper bags and sacks decreased approximately 8 percent, 2 percent and 12
percent, respectively from 1994. Net sales of kraft paper increased 58.2 percent
over 1994 reflecting both increased sales volume and higher selling prices. Net
sales of newsprint and groundwood paper for 1995 increased 14.6 percent over
1994 as significantly higher average selling prices more than offset a decrease
in volume mainly attributable to the SCI de-consolidation. Net sales of market
pulp increased to $750 million in 1995 from $305 million in 1994. Approximately
$163 million of the market pulp sales increase resulted from the inclusion of
sales for Stone Venepal (Celgar) Pulp, Inc. ("SVCPI"), which effective December
31, 1994, became a consolidated subsidiary when the Company increased its
ownership in SVCPI from 50 to 90 percent. Excluding the effect of SVCPI, sales
of
13
market pulp increased $282 million over 1994 mainly due to significantly higher
average selling prices, although a 22 percent volume improvement also
contributed to the sales increase.
Partially offsetting the effect on earnings of the improved product pricing
for 1995 over 1994, was an increase in recycled fiber costs of approximately
$145 million which occurred primarily as a result of an industry shortage for
this raw material. The 1995 results were also unfavorably impacted by an
after-tax charge of approximately $8 million related to Stone-Consolidated's
acquisition of Rainy River and by an increase in interest expense primarily
resulting from higher interest rates associated with the Company's indebtedness.
The 1995 results included foreign currency transaction gains of $8 million,
whereas the 1994 results included a non-recurring $22 million involuntary
conversion gain related to a digester accident at the Company's Panama City,
Florida, pulp and paperboard mill and foreign currency transaction losses of $16
million. Additionally, the Company recorded an income tax provision of $321
million in 1995 compared to a 1994 income tax benefit of $35 million reflecting
the tax effect of the increased pretax earnings for 1995 over 1994.
FINANCIAL CONDITION AND LIQUIDITY
The Company's working capital ratio was 1.8 to 1 at December 31, 1996 and
2.4 to 1 at December 31, 1995. This decrease was primarily due to the increase
in current maturities of the Company's indebtedness. The Company's long-term
debt to total capitalization ratio was 76.6 percent at December 31, 1996 and
72.2 percent at December 31, 1995. Capitalization, for purposes of this ratio,
includes long-term debt (which includes debt of certain consolidated affiliates
which is non-recourse to the Company), deferred income taxes and stockholders'
equity.
On March 22, 1996, the Company and its bank group amended and restated the
Company's bank credit agreement to, among other things, provide for an
additional senior secured term loan facility of $190 million and a supplemental
revolving credit facility of $110 million. Subsequently in 1996, the Company and
its bank group further amended the credit agreement to, among other things,
permit the Company to contribute its retail packaging assets into a joint
venture with Gaylord Container Corporation (see Note 3) and ease certain
financial covenant requirements (including the interest coverage and
indebtedness ratio requirements). At December 31, 1996, the Company's bank
credit agreement, as amended, provides for three senior secured term loans
aggregating $763 million which mature through October 1, 2003 and a $560 million
senior secured revolving credit facility commitment maturing May 15, 1999
(collectively the "Credit Agreement"). At March 20, 1997, the Company had
borrowing availability of approximately $249 million (net of letters of credit
which reduce the amount available to be borrowed) under its revolving credit
facilities. The term loans and revolving credit facility had weighted average
interest rates for the year ended December 31, 1996 of 8.7 percent and 8.9
percent, respectively. The weighted average rates do not include the effect of
the amortization of deferred debt issuance costs.
The term loan portions of the Credit Agreement provide for mandatory
prepayments from sales of certain assets, certain debt financing and a
percentage of excess cash flow (as defined). The Company's bank lenders, at the
Company's request, may at their option, waive the receipt of certain mandatory
prepayments. In 1996, the Company received consents from a majority of its
holders to waive mandatory repayment requirements from excess cash flow (as
defined) on no less than 80 percent of each of the Company's term loans until
September 1997. Any mandatory and voluntary prepayments are allocated against
the term loan amortizations in inverse order of maturity. Any mandatory
prepayments from sales of collateral, unless replacement collateral is provided,
will be applied ratably to the term loans and revolving credit facility,
permanently reducing the loan commitments under the Credit Agreement. The Credit
Agreement also contains cross-default provisions to the indebtedness of $10
million or more of the Company and certain subsidiaries. The Credit Agreement no
longer has a cross-acceleration provision in the event of an acceleration of the
non-recourse debt of Stone Venepal (Celgar) Pulp, Inc. ("SVCPI").
The Credit Agreement contains covenants that include, among other things,
the maintenance of certain financial tests and ratios. Unless operating results
improve, the Company may be required to seek covenant relief from its bank group
during 1997. Although no assurance can be given, the Company believes such
relief, if sought, would be granted.
The Company's various Senior Note Indentures under which approximately $2.0
billion of debt is outstanding contains provisions which require the Company to
maintain a minimum Subordinated Capital Base (as defined) of $1 billion. In the
event of a failure to maintain such minimum amount for two successive quarters
the Company would be required to semi-annually offer to purchase 10 percent of
such outstanding indebtedness at par until the minimum Subordinated Capital Base
is again attained. In the event that the Company's Credit Agreement has
outstanding amounts in excess of that outstanding under the Senior Note
Indentures, and would not permit the offer to repurchase, then the Company would
be required to increase the rates on the Notes by 50 basis points per quarter up
to a
14
maximum of 200 basis points until the minimum Subordinated Capital Base is
attained. The Company's Subordinated Capital Base was $1,040 million at December
31, 1996. It is anticipated that the minimum Subordinated Capital Base will fall
below the required levels in the first quarter of 1997 and unless results
improve in the second quarter of 1997, the required level of Subordinated
Capital Base will not be met in the second quarter of 1997. As a result of this,
the Company plans to issue securities which will increase the Subordinated
Capital Base to required levels by June 30, 1997. There is however no assurance
that the Company will achieve such financings.
OUTLOOK:
The Company incurred a net loss of $126 million in 1996 primarily due to
sharply lower selling prices for the majority of the Company's products in
conjunction with significant interest expense on its indebtedness. Currently,
industry conditions have resulted in continued downward pressure on product
prices and the Company will report a first quarter 1997 net loss.
The Company's primary capital requirements consist of debt service and
capital expenditures, including capital investment for compliance with certain
environmental legislation requirements and ongoing maintenance expenditures and
improvements. The Company is highly leveraged, and while highly leveraged, will
incur substantial ongoing interest expense. The Company has debt amortizations
of $194 million of principal plus interest of approximately $412 million due in
1997. In the event that operating cash flows and borrowing availability under
its revolving credit facilities or from other financing sources do not provide
sufficient liquidity for the Company to meet its 1997 debt service requirements,
the Company will be required to pursue other alternatives to improve liquidity,
including cost reductions, sales of assets, the deferral of certain capital
expenditures and/or obtaining additional sources of funds. Beginning in 1998 and
continuing thereafter, the Company will be required to make significantly
increased principal re-payments on its existing indebtedness. The Company has
debt amortizations of approximately $432 million in 1998, $410 million in 1999
and $484 million in 2000. In the event that the Company is unable to generate
sufficient cash flows to fully meet such debt service requirements, the Company
will seek to refinance significant portions of this indebtedness and use a
substantial portion of its sources of liquidity including availabilities under
its revolving credit facilities to repay such indebtedness. Further, the Company
may be required to pursue other alternatives to improve liquidity, including
cost reductions, sales of assets, the deferral of certain capital expenditures
and/or obtaining additional sources of funds.
On January 27, 1997 the Company filed a $1 billion shelf registration with
the Securities and Exchange Commission providing for the issuance of equity
and/or debt securities.
Wood fiber and recycled fiber, the principal raw materials used in the
manufacture of the Company's products, are purchased in highly competitive,
price sensitive markets. These raw materials have historically exhibited price
and demand cyclicality. In addition, the supply and price of wood fiber in
particular, is dependent upon a variety of factors over which the Company has no
control, including environmental and conservation regulations, natural
disasters, such as forest fires and hurricanes, and weather. The Company
purchases or cuts a variety of species of timber from which the Company utilizes
wood fiber depending upon the product being manufactured and each mill's
geographic location. A decrease in the supply of wood fiber has caused, and will
likely continue to cause, higher wood fiber costs in some of the regions in
which the Company procures wood. In addition, the increase in demand of products
manufactured, in whole or in part, from recycled fiber has from time to time
caused a tightness in supply of recycled fiber and at those times a significant
increase in the cost of such fiber used in the manufacture of recycled
containerboard and related products. Such costs are likely to continue to
fluctuate based upon demand/supply characteristics. While the Company has not
experienced any significant difficulty in obtaining wood fiber and recycled
fiber in economic proximity to its mills, there can be no assurances that this
will continue to be the case for any or all of its mills.
On February 14, 1997, Stone-Consolidated, a 46.6 percent owned
non-consolidated affiliate of the Company, and Abitibi-Price Inc., announced a
merger agreement to amalgamate under Canadian law the two companies to create
Abitibi-Consolidated, Inc. The transaction, which is subject to shareholder and
regulatory approval, is expected to close in the second quarter of 1997.
Abitibi-Consolidated, Inc. would be a significant manufacturer and marketer of
publication grade papers with combined revenues approximating $4.9 billion
(CDN). Upon completion of the transaction, the Company would own approximately
25 percent of the common equity of Abitibi-Consolidated, Inc.
15
CASH FLOWS FROM OPERATIONS:
The following table shows, for the last three years, the net cash provided
by operating activities:
YEAR ENDED DECEMBER 31,
-----------------------
(IN MILLIONS) 1996 1995
- -------------------------------------------------------------------------------------------------- --------- ------------
Net income (loss)................................................................................. $ (126) $ 256
Depreciation and amortization..................................................................... 315 372
Deferred taxes.................................................................................... (88) 214
Extraordinary charges from early extinguishments of debt.......................................... 4 189
Cumulative effect of accounting change............................................................ -- --
(Increase) decrease in accounts and notes receivable--net......................................... 185 (81)
(Increase) decrease in inventories................................................................ (51) (146)
(Increase) decrease in other current assets....................................................... 15 22
Increase in accounts payable and other current liabilities........................................ 56 62
Other............................................................................................. (22) 74(a)
--------- ------
Net cash provided by operating activities......................................................... $ 288 $ 962
--------- ------
--------- ------
(IN MILLIONS) 1994
- -------------------------------------------------------------------------------------------------- ---------
Net income (loss)................................................................................. $ (205)
Depreciation and amortization..................................................................... 359
Deferred taxes.................................................................................... (55)
Extraordinary charges from early extinguishments of debt.......................................... 62
Cumulative effect of accounting change............................................................ 14
(Increase) decrease in accounts and notes receivable--net......................................... (176)
(Increase) decrease in inventories................................................................ 30
(Increase) decrease in other current assets....................................................... (46)
Increase in accounts payable and other current liabilities........................................ 87
Other............................................................................................. 2
---------
Net cash provided by operating activities......................................................... $ 72
---------
---------
- ---------
(a) Includes minority interest expense of $29 million.
The Company's 1996 operating cash flow of $288 million was not sufficient to
fully fund the Company's capital expenditures and investing activities. As a
result the Company increased its indebtedness to meet cash flow needs.
The 1996 decrease in accounts and notes receivable reflects lower average
selling prices for the Company's products, while the 1995 increase primarily
reflects higher average selling prices for the Company's products.
The increase in inventories for 1996 and 1995 primarily reflects an increase
in the quantity of paperstock levels as a result of weak demand.
The increase in accounts payable and other current liabilities in 1996 and
1995 was due primarily to the timing of payments.
FINANCING ACTIVITIES:
The following summarizes the Company's primary financing activities in 1996:
- On December 16, 1996, Stone Receivables Corporation redeemed $50 million
of its floating rate notes.
- On September 16, 1996, the Company purchased and retired $222 million
principal amount of its 11 1/2 percent Senior Subordinated Notes due 1999.
Earlier in the year, the Company purchased $8 million of the 11 1/2
percent Senior Subordinated Notes on the open market.
- On August 16, 1996, Stone Container Finance Company of Canada, a
newly-formed, wholly-owned subsidiary of the Company, sold $200 million
principal amount of 11 1/2 percent Senior Notes due August 15, 2006 (the
"SCFCC Notes"). On July 24, 1996, the Company sold $125 million principal
amount of 11 7/8 percent Rating Adjustable Senior Notes due August 1, 2016
("Rating Adjustable Senior Notes"). The net proceeds received from the
sales of the SCFCC Notes and the Rating Adjustable Senior Notes were used
by the Company to purchase and retire the remaining $222 million of the
11 1/2 percent Senior Subordinated Notes referred to above and to provide
funds for general corporate purposes.
- On April 25, 1996, the Company issued $33 million aggregate principal
amount of tax-exempt, industrial development revenue bonds at 7 1/4
percent. The proceeds from the issuance have been and will be used to
acquire, construct and install certain solid waste disposal components of
the Company's containerboard mill facilities located in Snowflake, Arizona
and Port Wentworth, Georgia.
- On March 22, 1996, the Company borrowed $190 million under a senior
secured term loan facility provided under its Credit Agreement. The
proceeds of the term loan were used to repay indebtedness outstanding
under the Company's $450 million revolving credit facility (without a
corresponding reduction in commitments) and provide additional liquidity
in the form of cash.
See also Note 11 to the Consolidated Financial Statements.
16
INVESTING ACTIVITIES:
The following summarizes the Company's primary 1996 investing activities:
- Capital expenditures for 1996 totaled approximately $251 million. The
Company's capital expenditures for 1997 are budgeted at approximately $164
million.
- On November 29, 1996, the Company acquired Graficarton S.A., a Spanish
company that operates a recycled containerboard mill in Cordoba and
corrugated container plants in Cordoba, Madrid and Seville, Spain.
Additionally, on November 30, 1996, Stone acquired 50 percent of Cartonex
Bernal S.A., a company that operates a containerboard mill and two
corrugated container plants in Argentina, and on November 26, 1996
acquired 50 percent of Corrupac S.A., a corrugated box manufacturer in
Chile.
- On September 11, 1996, the Company sold the majority of its U.S. wood
products assets to U.S. Forest Industries, Inc. for cash and long-term
promissory notes.
- On July 12, 1996, the Company and Gaylord Container Corporation entered
into a joint venture whereby the retail packaging businesses of these two
companies were combined to form S&G.
- On May 30, 1996, the Company entered into a joint venture agreement with
Four M Corporation to purchase a paperboard mill located in Port St. Joe,
Florida, from St. Joe Paper Company for $185 million plus applicable
working capital.
- Additionally, on March 14, 1996, the Company purchased approximately $40
million of convertible debt securities of Financiere Carton Papier
("FCP"), a non-consolidated affiliate of the Company.
See also Note 3 to the Consolidated Financial Statements.
ENVIRONMENTAL ISSUES:
The Company's operations are subject to extensive environmental regulation
by federal, state and local authorities in the United States and regulatory
authorities with jurisdiction over its foreign operations. The Company has, in
the past, made significant capital expenditures to comply with water, air and
solid and hazardous waste regulations and expects to make significant
expenditures in the future. Capital expenditures for environmental control
equipment and facilities were approximately $46 million in 1996, and the Company
anticipates that 1997 and 1998 environmental capital expenditures will
approximate $33 million and $43 million, respectively. The majority of the 1998
expenditures relate to amounts that the Company currently anticipates will be
required once final "cluster rules" described below are adopted. Although
capital expenditures for environmental control equipment and facilities and
compliance costs in future years will depend on legislative and technological
developments which cannot be predicted at this time, such costs could increase
when final "cluster rules" are adopted and as other environmental regulations
become more stringent. Environmental control expenditures include projects
which, in addition to meeting environmental concerns, yield certain benefits to
the Company in the form of increased capacity and production cost savings. In
addition to capital expenditures for environmental control equipment and
facilities, other expenditures incurred to maintain environmental regulatory
compliance (including any remediation) represent ongoing costs to the Company.
In December 1993, the U.S. Environmental Protection Agency (the "EPA")
issued a proposed rule affecting the pulp and paper industry. These proposed
regulations, informally known as the "cluster rules", would make more stringent
requirements for discharge of wastewaters under the Clean Water Act and would
impose new requirements on air emissions under the Clean Air Act. Pulp and paper
manufacturers (including the Company) have submitted extensive comments to the
EPA on the proposed regulations in support of the position that requirements
under the proposed regulations are unnecessarily complex, burdensome and
environmentally unjustified. Estimates, based on currently proposed regulations,
indicate that the Company could be required to make capital expenditures of
$350-$450 million through 1998 in order to meet the requirements of the
regulations, although it is likely this range will decrease upon finalization of
the rules. While it cannot be predicted with certainty, it appears as though the
final cluster rules which are currently expected to be issued in 1997, will be
modified to reduce certain requirements. Assuming that the anticipated reduced
requirements are promulgated as the Company expects, the Company currently
believes it would be required to make capital expenditures of approximately
$200-250 million during the period of 1998 through 2006 in order to meet the
requirements of the anticipated regulations. Also, additional operating expense
will be incurred as capital installations required by the cluster rules are put
into service. Such incremental expense will ultimately increase to as much as
$20 million per year by the year 2006. The ultimate financial impact of the
regulations cannot be precisely estimated at this time but will be affected by
several factors, including the actual requirements
17
imposed under the final rules, advancements in control process technologies,
possible reconfiguration of mills and inflation.
In addition, the Company is from time to time subject to litigation and
governmental proceedings regarding environmental matters in which injunctive
and/or monetary relief is sought. The Company has been named as a potentially
responsible party ("PRP") at a number of sites which are the subject of remedial
activity under the federal Comprehensive Environmental Response, Compensation
and Liability Act of 1980 ("CERCLA" or "Superfund") or comparable state laws.
Although the Company is subject to joint and several liability imposed under
Superfund, at most of the multi-PRP sites there are organized groups of PRPs and
costs are being shared among PRPs. Future environmental regulations, including
the final "cluster rules", may have an unpredictable adverse effect on the
Company's operations and earnings, but they are not expected to adversely affect
the Company's competitive position.
COMMON AND SERIES E CUMULATIVE PREFERRED STOCK -- CASH DIVIDENDS, MARKET AND
PRICE RANGE
The Company has restrictions on the payment of cash dividends on its common
stock under certain of the Company's indentures and under its Credit Agreement.
Common stock cash dividends cannot be declared and paid in the event the Company
has any accumulated preferred stock dividend arrearage or there is no
availability in the dividend pool under the Credit Agreement or under the Senior
Subordinated Indentures dated March 15, 1992 (the "Senior Subordinated
Indenture") relating to the Company's 10 3/4 percent Senior Subordinated Notes
due June 15, 1997, its 11 percent Senior Subordinated Notes due August 15, 1999
and its 10 3/4 percent Senior Subordinated Debentures due April 1, 2002.
Additionally, preferred and common stock dividends cannot be declared and paid
in the event the Company's total stockholders' equity falls below $750 million.
The Company paid cash dividends of $0.60 and $0.30 per share on its common stock
in 1996 and 1995, respectively.
The Company paid cash dividends of $1.75 and $2.625 per share on its Series
E Cumulative Preferred Stock in 1996 and 1995, respectively. The declaration of
dividends by the Board of Directors is subject to, among other things, the
Company's ability to comply with financial covenants contained in the Company's
Credit Agreement and in its Senior Subordinated Indenture. In the event the
Company has six quarterly dividends which remain unpaid on the Series E
Cumulative Preferred Stock, the holders of the Series E Cumulative Preferred
Stock would have the right to elect two members to the Company's Board of
Directors until the accumulated dividends on such Series E Cumulative Preferred
Stock have been declared and paid or set apart for payment. Irrespective of the
amount available in the dividend pool under the Credit Agreement, the Credit
Agreement permits dividends to be paid on the Series E Cumulative Preferred
Stock if there is an available dividend pool under the Senior Subordinated
Indenture. At December 31, 1996 the amounts available in the dividend pool under
the Credit Agreement and under the Senior Subordinated Indenture were
approximately $46 million and $50 million, respectively. On January 27, 1997 the
Board of Directors of the Company declared a cash dividend of $0.4375 per share
on the Company's Series E Cumulative Preferred Stock which was paid February 17,
1997, to shareholders of record February 7, 1997. The Board of Directors did not
declare a dividend on the Company's common stock. It is expected that the
Company's dividend pool will not be sufficient to declare a Series E Preferred
Stock dividend in May 1997.
SERIES E CUMULATIVE
COMMON STOCK PREFERRED STOCK
------------------------------------------ ------------------------------------------
1996 1995 1996 1995
-------------------- -------------------- -------------------- --------------------
Quarter High Low High Low High Low High Low
- ----------------------------------------- --------- --------- --------- --------- --------- --------- --------- ---------
1st...................................... $ 15.88 $ 12.38 $ 24.50 $ 16.88 $ 21.75 $ 18.50 $ 22.63 $ 16.88
2nd...................................... 17.38 13.50 24.00 16.25 21.00 18.88 24.25 21.00
3rd...................................... 15.88 12.13 24.63 18.88 20.63 18.63 24.88 20.63
4th...................................... 16.25 13.63 19.00 12.50 20.50 18.00 21.88 17.13
Year..................................... 17.38 12.13 24.63 12.50 21.75 18.00 24.88 16.88
--------- --------- --------- --------- --------- --------- --------- ---------
There were approximately 6,502 common stockholders and 419 preferred
stockholders of record at December 31, 1996.
18
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Registrant's financial statements required by Item 8, together with the
report thereon of the independent accountants dated February 10, 1997 are set
forth on pages 28-54 of this report. The financial statement schedules listed
under Item 14(a)2, together with the report thereon of the independent
accountants dated February 10, 1997 are set forth on pages 55 and 56 of this
report and should be read in conjunction with the financial statements.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information relating to the Registrant's Directors and Executive Officers is
incorporated herein by reference to the Proxy Statement, to be filed on or
before April 30, 1997, for the Annual Meeting of Stockholders scheduled May 13,
1997, under the captions "Nominees for Directors," "Information as to Directors
and Executive Officers" and "Directors--Certain Transactions."
ITEM 11. EXECUTIVE COMPENSATION
Information relating to the Registrant's executive compensation is
incorporated herein by reference to the Proxy Statement, to be filed on or
before April 30, 1997, for the Annual Meeting of Stockholders scheduled May 13,
1997, under the caption "Compensation," excluding the section thereunder
entitled "Compensation Committee Report on Executive Compensation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Information relating to certain beneficial ownership of the Registrant's
common stock is incorporated herein by reference to the Proxy Statement, to be
filed on or before April 30, 1997, for the Annual Meeting of Stockholders
scheduled May 13, 1997, under the captions "Nominees for Directors" and
"Security Ownership by Certain Beneficial Owners and Management--Security
Ownership by Certain Beneficial Owners."
SECURITY OWNERSHIP OF MANAGEMENT
Information relating to ownership of the Registrant's equity securities by
Directors and Executive Officers is incorporated herein by reference to the
Proxy Statement, to be filed on or before April 30, 1997, for the Annual Meeting
of Stockholders scheduled May 13, 1997, under the captions "Nominees for
Directors" and "Security Ownership by Certain Beneficial Owners and
Management--Security Ownership by Management."
CHANGES IN CONTROL
The Registrant knows of no contractual arrangements which may, at a
subsequent date, result in a change in control of the Registrant.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information related to certain relationships and related transactions is
incorporated herein by reference to the Proxy Statement, to be filed on or
before April 30, 1997, for the Annual Meeting of Stockholders scheduled May 13,
1997, under the caption "Directors--Certain Transactions."
19
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) DOCUMENTS FILED AS PART OF THIS REPORT
1. FINANCIAL STATEMENTS. The Registrant's financial statements, for
the year ended December 31, 1996, together with the Report of Independent
Accountants are set forth on pages 28-54 of this report. The supplemental
financial information listed and appearing hereafter should be read in
conjunction with the Financial Statements included in this report.
2. FINANCIAL STATEMENT SCHEDULES. The following are included in Part
IV of this report for each of the years ended December 31, 1996, 1995 and
1994 as applicable:
Page
----
Report of Independent Accountants on Financial Statement Schedule..... 55
Valuation and Qualifying Accounts and Reserves (Schedule II).......... 56
Financial Statements of Stone-Consolidated Corporation................ *
- ---------
* To be filed as an amendment to this Report on or before June 30, 1997.
Financial statement schedules not included in this report have been omitted,
either because they are not applicable or because the required information is
shown in the financial statements or notes thereto, included in this report. At
December 31, 1996, the Company had outstanding non-interest bearing loans
receivable of $270,000 to Randolph Read, Senior Vice President--Chief Financial
and Planning Officer, and $300,000 to Harold Wright, Senior Vice President and
General Manager, North American Containerboard, Paper and Pulp. Mr. Read's loan
is repayable on demand pursuant to request by the Company. Mr. Wright's loan is
due in 2002.
3. EXHIBITS. The exhibits required to be filed by Item 601 of
Regulation S-K are listed under the caption "Exhibits" in Item 14(c).
(b) REPORTS ON FORM 8-K
A Report on Form 8-K dated May 16, 1996 was filed under Item 5--Other
Events.
A Report on Form 8-K dated June 28, 1996 was filed under Item 5--Other
Events.
A Report on Form 8-K dated July 19, 1996 was filed under Item 5--Other
Events.
A Report on Form 8-K dated July 25, 1996 was filed under Item 5--Other
Events.
A Report on Form 8-K dated December 18, 1996 was filed under Item 5--Other
Events and Item 7--Exhibits.
20
(c) EXHIBITS
3(a) Restated Certificate of Incorporation of the Company, filed as Exhibit 3(a) to the Company's
Registration Statement on Form S-1, Registration Number 33-54769, is hereby incorporated by
reference.
3(b) By-laws of the Company, as amended October 2, 1995, filed as Exhibit 3 to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1995, is hereby incorporated
by reference.
4(a) Specimen certificate representing Common Stock, $.01 par value, filed as Exhibit 4(a) to the
Company's Annual Report on Form 10-K for the year ended December 31, 1987, is hereby
incorporated by reference.
4(b) Specimen certificate representing the $1.75 Series E Cumulative Convertible Exchangeable
Preferred Stock, filed as Exhibit 4(g) to the Company's Registration Statement on Form S-3,
Registration Number 33-45374, is hereby incorporated by reference.
4(c) Rights Agreement, dated as of July 25, 1988, between the Company and The First National Bank
of Chicago, filed as Exhibit 1 to the Company's Registration Statement on Form 8-A dated July
27, 1988, is hereby incorporated by reference.
4(d) Amendment to Rights Agreement, dated as of July 23, 1990, between the Company and The First
National Bank of Chicago, filed as Exhibit 1A to the Company's Form 8 dated August 2, 1990
amending the Company's Registration Statement on Form 8-A dated July 27, 1988, is hereby
incorporated by reference.
4(e) Amendment to Rights Agreement dated as of May 16, 1996 between the Company and First Chicago
Trust Company of New York, filed as Exhibit 1 to the Company's Form 8 dated June 8, 1996
amending the Company's Registration Statement on Form 8 dated August 2, 1990 amending the
Company's Registration Statement on Form 8-A dated July 27, 1988, as amended, is hereby
incorporated by reference.
4(f) Amended and Restated Credit Agreement ("Credit Agreement") dated as of March 22, 1996 among
the Company, the financial institutions signatory thereto, Bankers Trust Company, as agent
(the "Agent"), and Bank of America National Trust & Savings Association, The Bank of New York,
The Bank of Nova Scotia, Caisse Nationale de Credit Agricole, Chemical Bank, The Chase
Manhattan Bank, N.A., Dresdner Bank AG-Chicago and Grand Cayman Branches, The First National
Bank of Chicago, The Long-Term Credit Bank of Japan, Ltd., NationsBank of North Carolina,
N.A., The Sumitomo Bank, Ltd., Chicago Branch and The Toronto-Dominion Bank, as co-agents (the
"Co-Agents"), is hereby incorporated by reference.
4(g) First Amendment of Credit Agreement dated as of June 20, 1996 among the Company, the financial
institutions signatory thereto and Bankers Trust Company, as Agent (the "Agent"), filed as
Exhibit 4(s) to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30,
1996, is hereby incorporated by reference.
4(h) Second Amendment of Credit Agreement dated as of December 18, 1996 among the Company, the
financial institutions signatory thereto and Bankers Trust Company, as Agent (the "Agent"),
filed as Exhibit 4 to the Company's Current Report on Form 8-K dated December 18, 1996, is
hereby incorporated by reference.
4(i) Indenture dated as of July 24, 1996 between the Company and The Bank of New York, as Trustee,
relating to the Rating Adjustable Senior Notes due 2016, filed as Exhibit 4.1to the Company's
Registration Statement on Form S-4, Registration Number 333-12155, is hereby incorporated by
reference.
4(j) First Supplemental Indenture dated July 24, 1996 between the Company and The Bank of New York,
as Trustee, relating to the Rating Adjustable Senior Notes due 2016, filed as Exhibit 4.2 to
the Company's Registration Statement on Form S-4, Registration Number 333-12155, is hereby
incorporated by reference.
4(k) Indenture dated as of October 12, 1994 between the Company and Norwest Bank Minnesota, N.A.,
as Trustee, relating to the 10 3/4 percent First Mortgage Notes due October 1, 2002, filed as
Exhibit 4(b) to the Company's Quarterly Report on Form 10-Q for the quarter ended September
30, 1994, is hereby incorporated by reference.
21
4(l) Indenture dated as of October 12, 1994 between the Company and The Bank of New York, as
Trustee, relating to the 11 1/2 percent Senior Notes due October 1, 2004, filed as Exhibit
4(c) to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1994,
is hereby incorporated by reference.
4(m) Indenture, dated as of February 15, 1992, between the Company and The Bank of New York, as
Trustee, relating to the Company's 6 3/4 percent Convertible Subordinated Debentures due
February 15, 2007, filed as Exhibit 4(p) to the Company's Registration Statement on Form S-3,
Registration Number 33-45978, is hereby incorporated by reference.
4(n) Senior Subordinated Indenture, dated as of March 15, 1992, between the Company, and The Bank
of New York, as Trustee, filed as Exhibit 4(a) to the Company's Registration Statement Form
S-3, Registration Number 33-46764, is hereby incorporated by reference.
4(o) Indenture dated as of June 15, 1993, between the Company and Norwest Bank Minnesota, National
Association, as Trustee, relating to the Company's 8 7/8 percent Convertible Senior
Subordinated Notes due 2000, filed as Exhibit 4(a) to the Company's Registration Statement on
Form S-3, Registration Number 33-66086, is hereby incorporated by reference.
4(p) Indenture, dated as of November 1, 1991, between the Company and The Bank of New York, as
Trustee, relating to the Company's Senior Debt Securities, filed as Exhibit 4(u) to the
Company's Registration Statement on Form S-3, Registration Number 33-45374, is hereby
incorporated by reference.
4(q) First Supplemental Indenture dated as of June 23, 1993, between the Company and The Bank of
New York, as Trustee, relating to the Indenture, dated as of November 1, 1991, between the
Company and The Bank of New York, as Trustee, filed as Exhibit 4(aa) to the Company's
Registration Statement on Form S-3, Registration Number 33-66086, is hereby incorporated by
reference.
4(r) Second Supplemental Indenture dated as of February 1, 1994, between the Company and the Bank
of New York, as Trustee, relating to the Indenture, dated as of November 1, 1991, as amended,
filed as Exhibit 4.2 to the Company's Current Report on Form 8-K, dated January 24, 1994, is
hereby incorporated by reference.
4(s) Master Trust Indenture and Security Agreement dated as of March 14, 1995, among Stone
Receivables Corporation, the Company, as Servicer, Marine Midland Bank, as Trustee, and
Bankers Trust Company, as Administrative Agent, relating to the accounts receivable
securitization program, is hereby incorporated by reference.
4(t) Series 1995-1 Supplement dated as of March 14, 1995, to the Master Trust Indenture and
Security Agreement dated as of March 14, 1995, among Stone Receivables Corporation, the
Company, as Servicer, Marine Midland Bank, as Trustee, and Bankers Trust Company, as
Administrative Agent, relating to the accounts receivable securitization program, is hereby
incorporated by reference.
4(u) Indenture dated as of August 16, 1996 between Stone Container Finance Company of Canada (the
"Issuer"), the Company, as guarantor, and The Bank of New York, as Trustee, relating to the
Issuer's 11 1/2 percent Senior Notes due 2006.**
Indentures with respect to other long-term debt, none of which exceeds 10 percent of the total
assets of the Company and its subsidiaries on a consolidated basis, are not attached. (The
Registrant agrees to furnish a copy of such documents to the Commission upon request).
4(v) Guaranty, dated October 7, 1983, between the Company and The Continental Group, Inc., filed as
Exhibit 4(h) to the Company's Registration Statement on Form S-3, Registration Number
33-36218, is hereby incorporated by reference.
4(w) Amendment No. 1 to Guaranty, dated as of June 1, 1996, among Continental Holdings, Inc.,
Continental Group, Inc. and the Company, filed as Exhibit 4(r) to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1996, is hereby incorporated by reference.
10(a) Management Incentive Plan, filed as Exhibit 10(b) to the Company's Annual Report on Form 10-K
for the year ended December 31, 1980, is hereby incorporated by reference.*
22
10(b) Unfunded Deferred Director Fee Plan, filed as Exhibit 10(d) to the Company's Annual Report on
Form 10-K for the year ended December 31, 1981, is hereby incorporated by reference.*
10(c) Form of "Stone Container Corporation Compensation Agreement" between the Company and its
directors that elect to participate, filed as Exhibit 10(e) to the Company's Annual Report on
Form 10-K for the year ended December 31, 1988, is hereby incorporated by reference.*
10(d) Stone Container Corporation 1982 Incentive Stock Option Plan, filed as Appendix A to the
Prospectus included in the Company's Form S-8 Registration Statement, Registration Number
2-79221, effective September 27, 1982, is hereby incorporated by reference.*
10(e) Stone Container Corporation 1993 Stock Option Plan, filed as Appendix A to the Company's Proxy
Statement dated as of April 10, 1992, is hereby incorporated by reference.*
10(f) Stone Container Corporation Deferred Income Savings Plan, conformed to reflect amendment
effective as of January 1, 1990, filed as Exhibit 4(i) to the Company's Form S-8 Registration
Statement, Registration Number 33-33784, filed March 9, 1990, is hereby incorporated by
reference.*
10(g) Stone Container Corporation 1992 Long-Term Incentive Program, filed as Exhibit A to the
Company's Proxy Statement dated as of April 11, 1991, is hereby incorporated by reference.*
10(h) Stone Container Corporation 1995 Long-Term Incentive Plan, filed as Exhibit A to the Company's
Proxy Statement dated as of April 7, 1995, is hereby incorporated by reference.*
10(i) Stone Container Corporation 1995 Key Executive Officer Short-term Incentive Plan, filed as
Exhibit B to the Company's Proxy Statement dated as of April 7, 1995, is hereby incorporated
by reference.*
10(j) Form of Severance Agreement, dated July 22, 1996, entered into between the Company and Roger
W. Stone.*-**
10(k) Form of Severance Agreement, dated July 22, 1996, entered into between the Company and John D.
Bence, Thomas W. Cadden, Matthew S. Kaplan, Randolph C. Read and Harold D. Wright.*-**
10(l) Form of Severance Agreement, dated July 22, 1996, entered into between the Company and all
other executive and divisional officers of the Company.*-**
11 Computation of Primary and Fully Diluted Net Income (Loss) Per Common Share.**
12 Computation of Ratios of Earnings to Fixed Charges.**
21 Subsidiaries of the Company.**
23 Consent of Independent Accountants.**
27 Financial Data Schedule.**
- ------------------------
* Management contract or compensatory plan or arrangement
** Filed herewith
(d) SEPARATE FINANCIAL STATEMENTS OF AFFILIATES
Stone-Consolidated Corporation, a 46.6 percent owned affiliate of the
Company, qualifies as a significant subsidiary under Rule 3-09 of Regulation
S-X. The December 31, 1996 separate financial statements of Stone-Consolidated
Corporation, a foreign business, will be filed as an amendment to this Report,
as required, on or before June 30, 1997.
23
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
------------------------------------------------------- March 24, 1997
Roger W. Stone
CHAIRMAN OF THE BOARD OF DIRECTORS AND PRESIDENT
(CHIEF EXECUTIVE OFFICER)
RANDOLPH C. READ
------------------------------------------------------- March 24, 1997
Randolph C. Read
SENIOR VICE PRESIDENT
(CHIEF FINANCIAL AND PLANNING OFFICER)
THOMAS P. CUTILLETTA
------------------------------------------------------- March 24, 1997
Thomas P. Cutilletta
SENIOR VICE PRESIDENT, ADMINISTRATION AND
CORPORATE CONTROLLER (PRINCIPAL ACCOUNTING OFFICER)
24
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.
WILLIAM F. ALDINGER, III JERRY K. PEARLMAN
- ------------------------------------------ ------------------------------------------
William F. Aldinger, III Jerry K. Pearlman
DIRECTOR March 24, 1997 DIRECTOR March 24, 1997
RICHARD A. GIESEN RICHARD J. RASKIN
- ------------------------------------------ ------------------------------------------
Richard A. Giesen Richard J. Raskin
DIRECTOR March 24, 1997 DIRECTOR March 24, 1997
JAMES J. GLASSER ALAN STONE
- ------------------------------------------ ------------------------------------------
James J. Glasser Alan Stone
DIRECTOR March 24, 1997 DIRECTOR March 24, 1997
JACK M. GREENBERG AVERY J. STONE
- ------------------------------------------ ------------------------------------------
Jack M. Greenberg Avery J. Stone
DIRECTOR March 24, 1997 DIRECTOR March 24, 1997
GEORGE D. KENNEDY IRA N. STONE
- ------------------------------------------ ------------------------------------------
George D. Kennedy Ira N. Stone
DIRECTOR March 24, 1997 DIRECTOR March 24, 1997
HOWARD C. MILLER, JR. JAMES H. STONE
- ------------------------------------------ ------------------------------------------
Howard C. Miller, Jr. James H. Stone
DIRECTOR March 24, 1997 DIRECTOR March 24, 1997
JOHN D. NICHOLS ROGER W. STONE
- ------------------------------------------ ------------------------------------------
John D. Nichols Roger W. Stone
DIRECTOR March 24, 1997 DIRECTOR March 24, 1997
25
INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM: PAGE
- ------------------------------------------------------------------------- -----
Financial Statements:
Management's Responsibility for the Financial Statements............... 27
Report of Independent Accountants...................................... 28
Consolidated Statements of Operations.................................. 29
Consolidated Balance Sheets............................................ 30
Consolidated Statements of Cash Flows.................................. 31
Consolidated Statements of Stockholders' Equity........................ 32
Notes to the Consolidated Financial Statements......................... 33
Financial Statement Schedules:
Report of Independent Accountants on Financial Statement Schedule...... 55
Valuation and Qualifying Accounts and Reserves (Schedule II)........... 56
26
Management's Responsibility for the Financial Statements
The management of Stone Container Corporation is responsible for insuring that
the financial statements and other information in this report give a fair and
accurate financial picture of the Company. In preparing this material, we make
informed judgments and estimates that conform with generally accepted accounting
principles.
We have developed a system of internal controls which is designed to provide
reasonable assurance that the books and records accurately reflect the
transactions of the Company and that the Company's established policies and
procedures are followed properly. The concept of reasonable assurance recognizes
that the cost of a control procedure should not exceed the expected benefits.
Our system is augmented by written policies and procedures, a comprehensive
internal audit program, and the selection and training of qualified personnel.
The Company engages Price Waterhouse LLP, who are responsible for performing an
independent audit of the financial statements. Their audit includes obtaining an
understanding of the Company's accounting systems and procedures to the extent
required by generally accepted auditing standards and testing them as they deem
necessary.
An audit committee of Stone Container's directors, who are not employees of the
Company, meet periodically to review internal financial controls and procedures.
The audit committee and our independent accountants have unrestricted access to
each other, with or without the presence of management representatives.
ROGER W. STONE
Chairman of the Board of Directors and President
(Chief Executive Officer)
RANDOLPH C. READ
Senior Vice President
(Chief Financial and Planning Officer)
THOMAS P. CUTILLETTA
Senior Vice President, Administration and Corporate Controller
(Principal Accounting Officer)
27
Report of Independent Accountants
To the Board of Directors
and Stockholders of
Stone Container Corporation
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of cash flows and of stockholders' equity
present fairly, in all material respects, the financial position of Stone
Container Corporation and its subsidiaries at December 31, 1996 and 1995, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 1996, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
As discussed in Note 1 to the consolidated financial statements, the Company
changed its method of accounting for postemployment benefits effective January
1, 1994.
PRICE WATERHOUSE LLP
Chicago, Illinois
February 10, 1997, except as to Note 2,
which is as of February 14, 1997.
28
STONE CONTAINER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions except per share)
YEAR ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
---------- ---------- ----------
SALES
Net sales................................................................ $ 5,141.8 $ 7,351.2 $ 5,748.7
---------- ---------- ----------
COST AND EXPENSES
Cost of products sold.................................................... 4,085.4 5,168.9 4,564.3
Selling, general and administrative expenses............................. 596.2 608.5 568.2
Depreciation and amortization............................................ 314.8 371.8 358.9
Equity (income) loss from affiliates..................................... (63.2) (19.9) 7.7
Other operating (income) expense-net..................................... 5.4 -- (34.4)
Other (income) expense-net............................................... (21.2) (33.1) (8.9)
---------- ---------- ----------
Income before interest expense, income taxes, minority interest,
extraordinary charges and cumulative effect of accounting change....... 224.4 1,255.0 292.9
Interest expense......................................................... (413.5) (460.3) (456.0)
---------- ---------- ----------
Income (loss) before income taxes, minority interest, extraordinary
charges and cumulative effect of accounting change..................... (189.1) 794.7 (163.1)
(Provision) credit for income taxes...................................... 66.0 (320.9) 35.5
Minority interest........................................................ .6 (29.3) (1.2)
---------- ---------- ----------
NET INCOME (LOSS)
Income (loss) before extraordinary charges and cumulative effect of
accounting change...................................................... (122.5) 444.5 (128.8)
Extraordinary charges from early extinguishments of debt (net of income
tax benefits).......................................................... (3.7) (189.0) (61.6)
Cumulative effect of accounting change (net of income tax benefit)....... -- -- (14.2)
---------- ---------- ----------
Net income (loss)........................................................ (126.2) 255.5 (204.6)
Preferred stock dividends................................................ (8.1) (8.1) (8.1)
Redemption premium of redeemable preferred stock of a consolidated
affiliate.............................................................. -- -- (4.0)
---------- ---------- ----------
Net income (loss) applicable to common shares............................ $ (134.3) $ 247.4 $ (216.7)
---------- ---------- ----------
---------- ---------- ----------
PER SHARE OF COMMON STOCK:
PRIMARY:
Income (loss) before extraordinary charges and cumulative effect of
accounting change...................................................... $ (1.32) $ 4.64 $ (1.60)
Extraordinary charges from early extinguishments of debt................. (.03) (2.01) (.70)
Cumulative effect of accounting change................................... -- -- (.16)
---------- ---------- ----------
Net income (loss)........................................................ $ (1.35) $ 2.63 $ (2.46)
---------- ---------- ----------
---------- ---------- ----------
FULLY DILUTED:
Income before extraordinary charges and cumulative effect of accounting
change................................................................. $ * $ 3.89 $ *
Extraordinary charges from early extinguishments of debt................. * (1.65) *
Cumulative effect of accounting change................................... -- -- *
---------- ---------- ----------
Net income............................................................... $ * $ 2.24 $ *
---------- ---------- ----------
---------- ---------- ----------
- ---------
* Fully diluted earnings per share not applicable because the amounts are
anti-dilutive.
The accompanying notes are an integral part of these statements.
29
STONE CONTAINER CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in millions)
DECEMBER 31,
----------------------
1996 1995
---------- ----------
ASSETS
Current assets:
Cash and cash equivalents............................................................................. $ 112.6 $ 40.3
Accounts and notes receivable (less allowances of $24.3 and $22.1).................................... 572.8 743.0
Inventories........................................................................................... 741.6 733.3
Other................................................................................................. 134.2 166.3
---------- ----------
Total current assets................................................................................ 1,561.2 1,682.9
---------- ----------
Property, plant and equipment........................................................................... 4,939.1 4,750.0
Accumulated depreciation and amortization............................................................... (2,305.4) (2,114.2)
---------- ----------
Property, plant and equipment--net.................................................................. 2,633.7 2,635.8
Timberlands............................................................................................. 34.6 57.7
Goodwill................................................................................................ 485.4 545.5
Investment in equity of non-consolidated affiliates..................................................... 1,198.2 1,109.4
Other................................................................................................... 440.7 367.6
---------- ----------
Total assets........................................................................................ $ 6,353.8 $ 6,398.9
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable...................................................................................... $ 363.8 $ 347.9
Current maturities of senior and subordinated long-term debt.......................................... 186.7 27.1
Notes payable and current maturities of non-recourse debt of consolidated affiliates.................. 21.9 29.3
Income taxes.......................................................................................... 15.1 .8
Accrued and other current liabilities................................................................. 301.7 296.6
---------- ----------
Total current liabilities........................................................................... 889.2 701.7
---------- ----------
Senior long-term debt................................................................................. 3,269.6 2,807.3
Subordinated debt..................................................................................... 422.3 809.2
Non-recourse debt of consolidated affiliates.......................................................... 259.2 268.6
Other long-term liabilities........................................................................... 308.1 313.7
Deferred taxes........................................................................................ 410.2 493.1
Commitments and contingencies (Note 18).................................................................
Stockholders' equity:
Series E preferred stock.............................................................................. 115.0 115.0
Common stock (99.3 and 99.1 shares outstanding)....................................................... 954.8 953.1
Retained earnings (accumulated deficit)............................................................... (94.2) 97.8
Foreign currency translation adjustment............................................................... (178.8) (156.9)
Unamortized expense of restricted stock plan.......................................................... (1.6) (3.7)
---------- ----------
Total stockholders' equity.......................................................................... 795.2 1,005.3
---------- ----------
Total liabilities and stockholders' equity.......................................................... $ 6,353.8 $ 6,398.9
---------- ----------
---------- ----------
The accompanying notes are an integral part of these statements.
30
STONE CONTAINER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
YEAR ENDED DECEMBER 31,
---------------------------------
1996 1995 1994
--------- --------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)............................................................................ $ (126.2) $ 255.5 $ (204.6)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating
activities:
Depreciation and amortization............................................................ 314.8 371.8 358.9
Deferred taxes........................................................................... (88.1) 213.6 (54.6)
Foreign currency transaction (gains) losses.............................................. .5 (8.1) 15.8
Equity (income) loss from affiliates..................................................... (63.2) (19.9) 7.7
Extraordinary charges from early extinguishments of debt................................. 3.7 189.0 61.6
Cumulative effect of accounting change................................................... -- -- 14.2
Other--net............................................................................... 41.1 102.1 (21.3)
Changes in current assets and liabilities--net of adjustments for acquisitions and
dispositions:
(Increase) decrease in accounts and notes receivable--net................................ 185.1 (80.8) (175.7)
(Increase) decrease in inventories....................................................... (51.4) (145.5) 29.7
(Increase) decrease in other current assets.............................................. 15.0 21.7 (45.9)
Increase in accounts payable and other current liabilities............................... 56.3 62.3 86.5
--------- --------- -----------
Net cash provided by operating activities.................................................... 287.6 961.7 72.3
--------- --------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Debt repayments.............................................................................. (376.2) (826.3) (1,655.8)
Payments by consolidated affiliates on non-recourse debt..................................... (18.9) (146.1) (429.3)
Borrowings................................................................................... 587.7 515.8 1,871.0
Non-recourse borrowings of consolidated affiliates........................................... 2.6 4.2 8.4
Proceeds from issuance of common stock....................................................... .4 1.7 276.3
Redemption of redeemable preferred stock of a consolidated affiliate......................... -- -- (52.6)
Refund of letter of credit................................................................... -- -- 13.5
Cash dividends............................................................................... (67.6) (41.5) (8.1)
--------- --------- -----------
Net cash provided by (used in) financing activities.......................................... 128.0 (492.2) 23.4
--------- --------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures......................................................................... (250.8) (386.5) (232.6)
Payments made for businesses acquired........................................................ (107.2) (56.7) (24.5)
Proceeds from sales of assets................................................................ 53.1 20.3 36.5
Purchase of securities of a non-consolidated affiliate....................................... (39.6) -- --
Effect on cash of de-consolidation of Stone-Consolidated..................................... -- (113.1) --
Other--net................................................................................... 2.9 (9.1) (14.4)
--------- --------- -----------
Net cash used in investing activities........................................................ (341.6) (545.1) (235.0)
--------- --------- -----------
Effect of exchange rate changes on cash...................................................... (1.7) 7.3 .5
--------- --------- -----------
NET CASH FLOWS
Net increase (decrease) in cash and cash equivalents......................................... 72.3 (68.3) (138.8)
Cash and cash equivalents, beginning of period............................................... 40.3 108.6 247.4
--------- --------- -----------
Cash and cash equivalents, end of period..................................................... $ 112.6 $ 40.3 $ 108.6
--------- --------- -----------
--------- --------- -----------
- ---------
See Note 5 regarding non-cash financing and investing activities and
supplemental cash flow information.
The accompanying notes are an integral part of these statements.
31
STONE CONTAINER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in millions except per share)
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1996 1995 1994
--------------- --------------- ----------------
AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES
------- ------ ------- ------ -------- ------
PREFERRED STOCK
Balance at January 1 and December 31.................................. $ 115.0 4.6 $ 115.0 4.6 $ 115.0 4.6
------ ------ ------
------ ------ ------
COMMON STOCK
Balance at January 1.................................................. 953.1 99.1 849.1 90.4 574.3 71.2
Issuance of common stock:
Debt conversions.................................................... 1.3 .1 180.4 8.5 -- --
Public offering..................................................... -- -- -- -- 276.3 19.0
Exercise of stock options........................................... .4 .1 1.7 .1 .1 --
Restricted stock plan............................................... -- -- 2.1 .1 2.4 .2
Redemption premium of redeemable preferred stock
of a consolidated affiliate........................................ -- -- -- -- (4.0) --
Subsidiary issuance of stock.......................................... -- -- (80.2) -- -- --
------- ------ ------- ------ -------- ------
Balance at December 31................................................ 954.8 99.3 953.1 99.1 849.1 90.4
------- ------ ------- ------ -------- ------
------ ------ ------
RETAINED EARNINGS (ACCUMULATED DEFICIT)
Balance at January 1.................................................. 97.8 (96.3) 101.6
Net income (loss)..................................................... (126.2) 255.5 (204.6)
Cash dividends:
Preferred stock*.................................................... (8.1) (12.1) (8.1)
Common stock*....................................................... (59.5) (29.4) --
Decrease (increase) in minimum pension liability in excess of
unrecognized prior service cost...................................... 1.8 (19.9) 14.8
------- ------- --------
Balance at December 31................................................ (94.2) 97.8 (96.3)
------- ------- --------
FOREIGN CURRENCY TRANSLATION ADJUSTMENT
Balance at January 1.................................................. (156.9) (215.2) (179.0)
Adjustment from translation of foreign currency statements............ (21.9) 58.3 (36.2)
------- ------- --------
Balance at December 31................................................ (178.8) (156.9) (215.2)
------- ------- --------
UNAMORTIZED EXPENSE OF RESTRICTED STOCK PLAN
Balance at January 1.................................................. (3.7) (4.5) (4.8)
Issuance of shares.................................................... -- (2.0) (2.4)
Amortization of expense............................................... 2.1 2.8 2.7
------- ------- --------
Balance at December 31................................................ (1.6) (3.7) (4.5)
------- ------- --------
Total stockholders' equity at December 31............................. $ 795.2 $1,005.3 $ 648.1
------- ------- --------
------- ------- --------
- ---------
* Cash dividends paid on common stock were $.60 per share in 1996 and $.30 in
1995. No cash dividends on common stock were paid in 1994. Cash dividends paid
on preferred stock were $1.75 per share in 1996, $2.625 per share in 1995 and
$1.75 per share in 1994.
The accompanying notes are an integral part of these statements.
32
STONE CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of the Company
and all subsidiaries that are more than 50 percent owned except for S&G
Packaging Company, L.L.C. which is accounted for under the equity method. All
significant intercompany accounts and transactions have been eliminated.
Investments in non-consolidated affiliated companies are primarily accounted for
by the equity method. The consolidated financial statements are prepared in
conformity with generally accepted accounting principles which require the use
of management estimates. Changes in such estimates may affect amounts reported
in future periods.
PER SHARE DATA:
Net income (loss) per common share is computed by dividing the net income
(loss) applicable to common shares by the weighted average number of common
shares outstanding during each year. The weighted average number of common
shares outstanding on a primary basis was 99,176,935 in 1996, 94,131,569 in 1995
and 88,195,190 in 1994.
Net income per fully diluted common share is computed after making the
necessary adjustments to net income and to the weighted average number of common
shares outstanding to reflect the assumed conversion of any dilutive convertible
securities not considered common stock equivalents. The weighted average number
of common shares outstanding on a fully diluted basis in 1995 was 114,674,021.
RECLASSIFICATIONS:
Certain prior year amounts have been reclassified to conform with the
current year presentation in the Consolidated Balance Sheets and Consolidated
Statements of Cash Flows.
CASH AND CASH EQUIVALENTS:
The Company considers all highly liquid short-term investments with original
maturities of three months or less to be cash equivalents and, therefore,
includes such investments as cash and cash equivalents in its financial
statements.
INVENTORIES:
Inventories are stated at the lower of cost or market. The primary methods
used to determine inventory costs are the last-in-first-out ("LIFO") method and
the average cost method.
PROPERTY, PLANT, EQUIPMENT AND DEPRECIATION:
Property, plant and equipment is stated at cost. Expenditures for
maintenance and repairs are charged to income as incurred. Additions,
improvements and major replacements are capitalized. The cost and accumulated
depreciation related to assets sold or retired are removed from the accounts and
any gain or loss is credited or charged to income.
For financial reporting purposes, depreciation and amortization is provided
on the straight-line method over the estimated useful lives of depreciable
assets, or over the duration of the lease for certain capitalized leases, based
on the following annual rates:
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.
GOODWILL AND OTHER ASSETS:
Goodwill is amortized on a straight-line basis over 40 years and is recorded
net of accumulated amortization of approximately $122 million and $116 million
at December 31, 1996 and 1995, respectively. The Company assesses at
33
STONE CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
each balance sheet date whether there has been a permanent impairment in the
value of goodwill. This is accomplished by determining whether projected
undiscounted future cash flows from operations exceed the net book value of
goodwill as of the assessment date. Such projections reflect price, volume and
cost assumptions.
Deferred debt issuance costs are amortized over the expected life of the
related debt using the interest method. Start-up costs on major projects are
capitalized and amortized over a five-year period. Other long-term assets
include approximately $35 million and $47 million of unamortized deferred
start-up costs at December 31, 1996 and 1995, respectively.
SUBSIDIARY ISSUANCE OF STOCK:
When a subsidiary issues stock, the Company records the difference relating
to the carrying amount per share and the issuance price per share as an
adjustment to common stock in those instances in which the Company has
determined that the difference does not represent a permanent impairment.
FOREIGN CURRENCY TRANSLATION:
The functional currency for the majority of the Company's foreign operations
is the applicable local currency. Accordingly, assets and liabilities are
translated at the exchange rate in effect at the balance sheet date, and income
and expenses are translated at average exchange rates prevailing during the
year. Translation gains or losses are accumulated as a separate component of
stockholders' equity entitled Foreign Currency Translation Adjustment. Foreign
currency transaction gains or losses are credited or charged to income. The
functional currency for foreign operations operating in highly inflationary
economies is the U.S. dollar and any gains or losses are credited or charged to
income.
FOREIGN CURRENCY AND FINANCIAL INSTRUMENTS:
The Company has utilized various financial instruments to reduce certain of
its foreign currency and/or interest rate exposures. Premiums received and fees
paid on the financial instruments are deferred and amortized over the period of
the agreements. Gains and losses or interest received and paid on the
instruments are recorded as foreign exchange transaction gains or losses or as
interest in the Consolidated Statements of Operations.
POSTEMPLOYMENT BENEFITS:
Effective January 1, 1994, the Company adopted Statement of Financial
Accounting Standards No. 112 and recorded its catch-up obligation (approximately
$24 million) by recognizing a one-time, non-cash charge of $14.2 million, net of
income tax benefit, as a cumulative effect of an accounting change.
IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF:
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of" ("SFAS 121"), which requires
that long-lived assets be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. The adoption SFAS 121 did not have a material effect on the
Company's financial statements.
NOTE 2--SUBSEQUENT EVENT
On February 14, 1997 Stone-Consolidated, a 46.6 percent owned
non-consolidated affiliate of the Company, and Abitibi-Price Inc., announced
that they have agreed to amalgamate under Canadian law the two companies to
create Abitibi-Consolidated, Inc. The transaction, which is subject to
shareholder and regulatory approval, is expected to close in the second quarter
of 1997. Abitibi-Consolidated, Inc. would be a significant manufacturer and
marketer of publication grade papers with combined revenues approximating $4.9
billion (CDN). Upon completion of the transaction, the Company would own
approximately 25 percent of the common equity of Abitibi-Consolidated, Inc.
NOTE 3--JOINT VENTURES, ACQUISITIONS AND INVESTMENTS
On May 30, 1996, the Company entered into a joint venture with Four M
Corporation ("Four M") to form Florida Coast Paper Company, L.L.C. ("Florida
Coast") to purchase a paperboard mill located in Port St. Joe, Florida, from St.
Joe Paper Company for $185 million plus applicable working capital. As part of
the transaction, Florida Coast sold, through a private placement, debt of
approximately $165 million. Pursuant to an exchange offer, such privately-placed
34
STONE CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 3--JOINT VENTURES, ACQUISITIONS AND INVESTMENTS (CONTINUED)
debt was exchanged for registered notes identical to the privately-placed notes.
The Company accounts for its investment in Florida Coast under the equity
method. Concurrent with the formation of the joint venture, the Company and Four
M entered into output purchase agreements with Florida Coast which require each
of the joint venture partners to purchase 50 percent of the production of
Florida Coast. The output purchase agreements also require the Company and Four
M to equally share in the funding of certain cash flow deficits of Florida
Coast.
On July 12, 1996, the Company and Gaylord Container Corporation entered into
a joint venture whereby the retail bag packaging businesses of these two
companies were contributed to form S&G Packaging Company, L.L.C. ("S&G"). The
Company accounts for its interest in S&G under the equity method. S&G produces
paper grocery bags and sacks, handle sacks and variety bags, with estimated
annual sales in excess of $300 million and serves supermarkets, quick service
restaurants, paper distributors and non-food mass merchandisers throughout North
America and the Caribbean.
On March 14, 1996, the Company purchased approximately $40 million of
convertible debt securities of Financiere Carton Papier ("FCP"), a
non-consolidated affiliate of the Company. The securities are not convertible
into FCP common stock until March 1999. If the company converted the securities
into FCP common stock, the Company would own approximately 80 percent of the
outstanding shares of FCP.
NOTE 4--SUBSIDIARY ISSUANCE OF STOCK
On November 1, 1995, Stone-Consolidated Corporation, a Canadian subsidiary
of the Company, amalgamated its operations (the "Amalgamation") with Rainy River
Forest Products Inc. ("Rainy River"), a Toronto-based Canadian pulp and paper
company. The combination of Stone-Consolidated Corporation and Rainy River to
form the amalgamated entity ("Amalco") was accounted for as the acquisition of
Rainy River by Stone-Consolidated Corporation. Therefore, the purchase method of
accounting was used by Stone-Consolidated Corporation to account for the
business combination. Amalco continues under the name of Stone-Consolidated
Corporation ("Stone-Consolidated"). As a result of the issuance of common shares
by Stone-Consolidated associated with the Amalgamation, the Company's equity
ownership in Stone-Consolidated was reduced from 74.6 percent to 46.6 percent.
The Company recorded in 1995 a charge of approximately $80 million to common
stock related to the excess carrying value per common share over the issuance
price per common share associated with the shares issued. Effective November 1,
1995, the Company began reporting Stone-Consolidated as a non-consolidated
affiliate in accordance with the equity method of accounting.
NOTE 5--ADDITIONAL CASH FLOW STATEMENT INFORMATION
The Company's non-cash investing and financing activities and cash payments
(receipts) for interest and income taxes were as follows:
YEAR ENDED DECEMBER 31,
---------------------------
(IN MILLIONS) 1996 1995 1994
- ---------------------------------------------------------------------- ------- ------- -------
Note receivable received as partial consideration for sale of
assets............................................................... $ 32.7 $ -- $ 1.3
Capital lease obligations incurred.................................... 5.0 2.3 2.4
Assumption of debt of consolidated affiliates......................... 5.0 -- --
Issuance of common stock as partial consideration to extinguish
debt................................................................. 1.3 180.4 --
Assumption of non-recourse debt of affiliates......................... -- 15.0 115.0
Short-term note receivable recorded as partial consideration from sale
of an investment..................................................... -- -- 7.8
Conversion of investment in an affiliate into a note receivable....... -- -- 3.2
------- ------- -------
------- ------- -------
Cash paid (received) during the year for:
Interest (net of capitalization).................................... $ 383.1 $ 443.7 $ 373.7
Income taxes (net of refunds)....................................... 4.8 125.5 (4.1)
------- ------- -------
------- ------- -------
In 1995, the other-net component of net cash provided from operating
activities included minority interest expense of $29.3 million.
35
STONE CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 6--INVENTORIES
Inventories are summarized as follows:
DECEMBER 31,
-----------------
(IN MILLIONS) 1996 1995
- ------------------------------------------------------------ ------- -------
Raw materials and supplies.................................. $ 255.3 $ 287.5
Paperstock.................................................. 378.1 358.8
Work in process............................................. 19.5 23.1
Finished products........................................... 105.1 123.1
------- -------
758.0 792.5
Excess of current cost over LIFO inventory value............ (16.4) (59.2)
------- -------
Total inventories........................................... $ 741.6 $ 733.3
------- -------
------- -------
Inventories costed by the LIFO, FIFO and average cost methods represented
approximately 39 percent, 7 percent and 54 percent, respectively, of total
inventories at December 31, 1996 and approximately 42 percent, 8 percent and 50
percent, respectively, of total inventories at December 31, 1995.
NOTE 7--PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is summarized as follows:
DECEMBER 31,
---------------------
(IN MILLIONS) 1996 1995
- ------------------------------------------------------------ --------- ---------
Machinery and equipment..................................... $ 4,053.2 $ 3,888.4
Buildings and leasehold improvements........................ 656.5 630.7
Land and land improvements.................................. 122.4 107.0
Construction in progress.................................... 107.0 123.9
--------- ---------
Total property, plant and equipment......................... 4,939.1 4,750.0
Accumulated depreciation and amortization................... (2,305.4) (2,114.2)
--------- ---------
Total property, plant and equipment--net.................... $ 2,633.7 $ 2,635.8
--------- ---------
--------- ---------
Property, plant and equipment includes capitalized leases of $21.0 million
and $18.7 million and related accumulated amortization of $5.6 million and $7.0
million at December 31, 1996 and 1995, respectively.
36
STONE CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 8--SUMMARIZED FINANCIAL INFORMATION OF NON-CONSOLIDATED AFFILIATES
Combined summarized financial information for the Company's non-consolidated
affiliates that are accounted for under the equity method of accounting is
presented below:
YEAR ENDED DECEMBER 31,
----------------------------
(IN MILLIONS) 1996 1995
- ------------------------------------------------------------------------------ ------------- -------------
Results of operations:(a)
Net sales................................................................... $ 3,059.9 $ 1,472.9
Income before income taxes, minority interest and extraordinary charges..... 207.8 67.7
Net income.................................................................. 151.4 45.3
------------- -------------
DECEMBER 31,
----------------------------
(IN MILLIONS) 1996 1995
- ------------------------------------------------------------------------------ ------------- -------------
Financial position:
Current assets.............................................................. $ 1,084.8 $ 924.8
Non-current assets.......................................................... 3,515.6 3,091.7
Current liabilities......................................................... 668.0 692.9
Non-current liabilities..................................................... 1,302.9 979.5
Stockholders' equity........................................................ 2,629.5 2,344.1
------------- -------------
- ---------
(a) Includes results for each affiliate for the period it was accounted for
under the equity method. Consolidated retained earnings included
approximately $42 million which represents undistributed earnings accounted
for by the equity method at December 31, 1996.
NOTE 9--INCOME TAXES
The Company provides for income taxes in accordance with the liability
method of accounting for income taxes. Under the liability method, deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between financial statement carrying amounts of
existing assets and liabilities and their respective tax bases.
The (provision) credit for income taxes consists of the following:
YEAR ENDED DECEMBER 31,
-----------------------------
(IN MILLIONS) 1996 1995 1994
- -------------------------------------------------- -------- ------- --------
Currently (payable) refundable:
Federal......................................... $ (2.0) $ (59.6) $ --
State........................................... (.3) (10.5) (1.1)
Foreign......................................... (19.8) (37.2) (18.0)
-------- ------- --------
(22.1) (107.3) (19.1)
Deferred:
Federal......................................... 64.1 (80.9) 45.3
State........................................... 13.0 (26.2) 1.1
Foreign......................................... 11.0 (106.5) 8.2
-------- ------- --------
88.1 (213.6) 54.6
-------- ------- --------
Total (provision) credit for income taxes......... $ 66.0 $(320.9) $ 35.5
-------- ------- --------
-------- ------- --------
37
STONE CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 9--INCOME TAXES (CONTINUED)
The income tax (provision) credit at the federal statutory rate is
reconciled to the (provision) credit for income taxes as follows:
YEAR ENDED DECEMBER 31,
-----------------------------
(IN MILLIONS) 1996 1995 1994
- ---------------------------------------------------------------------- -------- ------- --------
Federal income tax (provision) credit at federal statutory rate....... $ 66.2 $(278.1) $ 57.1
Additional (taxes) credits resulting from:
Non-deductible amortization of intangibles.......................... (6.8) (8.8) (9.0)
Equity earnings of affiliates, net of tax........................... 18.7 1.4 (3.7)
State income taxes, net of federal income tax effect................ 8.3 (23.9) --
Valuation allowance adjustment...................................... (10.1) -- --
Minimum taxes-foreign jurisdictions................................. (4.9) (7.8) (5.8)
Permanent differences on assets sold................................ (3.5) -- --
Expenses not deductible in foreign jurisdictions.................... -- -- (4.3)
Other--net.......................................................... (1.9) (3.7) 1.2
-------- ------- --------
(Provision) credit for income taxes................................... $ 66.0 $(320.9) $ 35.5
-------- ------- --------
-------- ------- --------
The components of the net deferred tax liability as of December 31, 1996 and
1995 were as follows:
YEAR ENDED DECEMBER
31,
-------------------
(IN MILLIONS) 1996 1995
- ---------------------------------------------------------------------- -------- --------
Deferred tax assets:
Carryforwards....................................................... $ 191.3 $ 127.3
Compensation-related accruals....................................... 43.4 39.5
Extraordinary charges from early extinguishments of debt............ 2.4 4.9
Minimum pension liability........................................... 16.3 14.9
Reserves............................................................ 52.3 43.7
Deferred gain....................................................... 22.7 23.0
Other............................................................... 10.6 12.4
-------- --------
339.0 265.7
Valuation allowance................................................... (10.1) (1.2)
-------- --------
Total deferred tax asset.............................................. 328.9 264.5
Deferred tax liabilities:
Depreciation and amortization....................................... (639.4) (652.1)
Start-up costs...................................................... (7.8) (11.5)
LIFO reserve........................................................ (19.3) (15.8)
Pension............................................................. (7.2) (7.8)
Other............................................................... (48.6) (54.2)
-------- --------
Total deferred tax liability.......................................... (722.3) (741.4)
-------- --------
Deferred tax liability--net........................................... $ (393.4) $ (476.9)
-------- --------
-------- --------
38
STONE CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 9--INCOME TAXES (CONTINUED)
The components of the income (loss) before income taxes, minority interest,
extraordinary charges and cumulative effect of accounting change are:
YEAR ENDED DECEMBER 31,
------------------------------
(IN MILLIONS) 1996 1995 1994
- ---------------------------------------------------------------------- -------- -------- --------
United States......................................................... $ (207.8) $ 455.8 $ (126.6)
Foreign............................................................... 18.7 338.9 (36.5)
-------- -------- --------
Income (loss) before income taxes, minority interest, extraordinary
charges and cumulative effect of accounting change................... $ (189.1) $ 794.7 $ (163.1)
-------- -------- --------
-------- -------- --------
At December 31, 1996, the Company had approximately $219 million of net
operating loss carryforwards for U.S. federal tax purposes. To the extent not
utilized, the U.S. federal net operating losses will expire in 2011. Further,
the Company had approximately $725 million of net operating loss carryforwards
for U.S. state tax purposes (which represents approximately $49 million of
deferred tax assets), which to the extent not utilized, expire in 1997 through
2011. The Company also had approximately $57 million of alternative minimum tax
credit carryforwards for U.S. federal tax purposes which are available
indefinitely.
NOTE 10--PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS
The Company has contributory and noncontributory pension plans for the
benefit of most salaried and certain hourly employees. The funding policy for
the plans, with the exception of the Company's salaried supplemental unfunded
plans and the Company's German subsidiary's unfunded plan, is to annually
contribute the statutory required minimum. The salaried pension plans provide
benefits based on a formula that takes into account each participant's estimated
final average earnings. The hourly pension plans provide benefits under a flat
benefit formula. The salaried and hourly plans provide reduced benefits for
early retirement. The salaried plans take into account offsets for governmental
benefits.
Net pension expense for the combined pension plans includes the following
components:
YEAR ENDED DECEMBER 31,
-------------------------
(IN MILLIONS) 1996 1995 1994
- ---------------------------------------------------------- ------ ------- ------
Service cost--benefits earned during the period........... $ 17.7 $ 17.0 $ 21.5
Interest cost on projected benefit obligations............ 42.9 63.5 63.5
Actual return on plan assets.............................. (47.6) (100.0) (13.7)
Net amortization and deferral............................. 20.4 51.7 (37.5)
------ ------- ------
Net pension expense....................................... $ 33.4 $ 32.2 $ 33.8
------ ------- ------
------ ------- ------
39
STONE CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 10--PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS (CONTINUED)
The following table sets forth the funded status of the Company's pension
plans and the amounts recorded in the Consolidated Balance Sheets:
DECEMBER 31,
------------------------------------------
1996 1995
--------------------------- ------------
ASSETS ACCUMULATED ASSETS
EXCEED BENEFITS EXCEED
ACCUMULATED EXCEED ACCUMULATED
(IN MILLIONS) BENEFITS ASSETS BENEFITS
- -------------------------------------------------------------------------------- ------------ ------------ ------------
Actuarial present value of benefit obligations:
Vested benefits............................................................... $ (57.0) $ (460.5) $ (59.5)
Non-vested benefits........................................................... (9.5) (21.9) (2.1)
------ ------------ ------
Accumulated benefit obligation................................................ (66.5) (482.4) (61.6)
Effect of increase in compensation levels..................................... (4.7) (54.1) (2.3)
------ ------------ ------
Projected benefit obligation for service rendered through December 31........... (71.2) (536.5) (63.9)
Plan assets at fair value, primarily stocks, bonds,
fixed investment contracts, real estate and
mutual funds which invest in listed stocks
and bonds..................................................................... 72.4 320.9 64.4
------ ------------ ------
Plan assets in excess of (less than) projected benefits obligation.............. 1.2 (215.6) .5
Unrecognized prior service cost................................................. 3.7 19.0 2.8
Unrecognized net actuarial loss................................................. 3.3 93.3 14.4
Adjustment required to recognize minimum liability.............................. -- (69.7) --
------ ------------ ------
Net prepaid (accrual)........................................................... $ 8.2 $ (173.0) $ 17.7
------ ------------ ------
------ ------------ ------
ACCUMULATED
BENEFITS
EXCEED
(IN MILLIONS) ASSETS
- -------------------------------------------------------------------------------- ------------
Actuarial present value of benefit obligations:
Vested benefits............................................................... $ (422.1)
Non-vested benefits........................................................... (32.4)
------------
Accumulated benefit obligation................................................ (454.5)
Effect of increase in compensation levels..................................... (59.6)
------------
Projected benefit obligation for service rendered through December 31........... (514.1)
Plan assets at fair value, primarily stocks, bonds,
fixed investment contracts, real estate and
mutual funds which invest in listed stocks
and bonds..................................................................... 286.6
------------
Plan assets in excess of (less than) projected benefits obligation.............. (227.5)
Unrecognized prior service cost................................................. 22.1
Unrecognized net actuarial loss................................................. 96.2
Adjustment required to recognize minimum liability.............................. (68.3)
------------
Net prepaid (accrual)........................................................... $ (177.5)
------------
------------
The Company has recorded an additional minimum liability for underfunded
plans representing the excess of the unfunded accumulated benefit obligation
over previously recorded liabilities. The additional minimum liability at
December 31, 1996 of $69.7 million is recorded as a long-term liability with an
offsetting intangible asset of $19.1 million and a charge to stockholders'
equity of $31.5 million, net of a tax benefit of $19.1 million. In addition, at
December 31, 1996, the Company had a cumulative net charge to retained earnings
of $11.1 million representing its share of the net charges to retained earnings
recorded by certain non-consolidated affiliates associated with their additional
minimum liabilities. At December 31, 1995, the additional minimum liability of
$68.3 million was recorded as a long-term liability with an offsetting
intangible asset of $21.6 million and a charge to stockholders' equity of $29.0
million, net of a tax benefit of $17.7 million. Also, at December 31, 1995, the
Company had a cumulative net charge to retained earnings of $15.4 million
representing its share of the net charges to retained earnings recorded by
certain non-consolidated affiliates associated with their additional minimum
liabilities.
The weighted average discount rates used in determining the actuarial
present value of the projected benefit obligations at December 31, 1996 and 1995
were 7.75 percent and 7.5 percent, respectively. The rate of increase in future
compensation levels used in determining the actuarial present value of the
projected benefit obligations was 4.0 percent for 1996 and 1995. The expected
long-term rate of return on assets was 11 percent for 1996 and 1995. The change
in the weighted average discount rates and the adoption of a different mortality
table for the valuation of its U.S. plans during 1996 had the net effect of
decreasing the total projected benefit obligation at December 31, 1996 by $3.5
million.
Certain domestic operations of the Company participate in various
multi-employer union-administered defined benefit pension plans that principally
cover production workers. Pension expense under these plans was $5.2 million,
$5.5 million and $5.2 million for 1996, 1995 and 1994, respectively.
40
STONE CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 10--PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS (CONTINUED)
In addition to providing pension benefits, the Company provides certain
retiree health care and life insurance benefits covering substantially all U.S.
salaried and hourly employees and certain Canadian employees. Net periodic
postretirement benefit costs for 1996, 1995 and 1994 included the following
components:
YEAR ENDED DECEMBER 31,
-------------------------------
(IN MILLIONS) 1996 1995 1994
- --------------------------------------------------------------------------------------- --------- --------- ---------
Service cost--benefits attributed to service during the period......................... $ 1.0 $ .8 $ 1.5
Interest cost on accumulated postretirement benefit obligation......................... 4.6 6.6 6.0
Net amortization and deferral.......................................................... .4 .7 .9
--- --- ---
Net periodic postretirement benefit cost............................................... $ 6.0 $ 8.1 $ 8.4
--- --- ---
--- --- ---
The following table sets forth the components of the Company's accumulated
postretirement benefit obligation and the amount recorded in the Consolidated
Balance Sheets:
DECEMBER 31, 1996 DECEMBER 31, 1995
------------------------------ -----------------------------
(IN MILLIONS) U.S. FOREIGN TOTAL U.S. FOREIGN TOTAL
- ------------------------------ -------- --------- -------- -------- -------- ---------
Accumulated postretirement
benefit obligation:
Retirees.................... $ 17.7 $ 11.7 $ 29.4 $ 31.6 $ 10.6 $ 42.2
Active employees--fully
eligible.................. 18.4 .9 19.3 16.0 .8 16.8
Other active employees...... 15.0 1.3 16.3 15.8 1.2 17.0
-------- --------- -------- -------- -------- ---------
Total accumulated
postretirement benefit
obligation.................. 51.1 13.9 65.0 63.4 12.6 76.0
Unrecognized net loss......... (9.6) (2.4) (12.0) (21.5) (1.2 ) (22.7)
-------- --------- -------- -------- -------- ---------
Postretirement benefit
obligation.................. $ 41.5 $ 11.5 $ 53.0 $ 41.9 $ 11.4 $ 53.3
-------- --------- -------- -------- -------- ---------
-------- --------- -------- -------- -------- ---------
The Company has not currently funded any of its accumulated postretirement
benefit obligation.
The discount rates used in determining the accumulated postretirement
benefit obligation were 7.75 percent at December 31, 1996 and 7.5 percent at
December 31, 1995. The change in the discount rate and the adoption of a new
mortality table had the net effect of increasing the total accumulated
postretirement benefit obligation at December 31, 1996 by $1.1 million. The
assumed health care cost trend rates for substantially all employees used in
measuring the accumulated postretirement benefit obligation ranged from 6.0
percent to 11.0 percent at December 31, 1996 and 7.0 percent to 12.0 percent at
December 31, 1995, decreasing to ultimate rates of 5.5 percent to 8.0 percent.
If the health care cost trend rate assumptions were increased by 1 percent, the
total accumulated postretirement benefit obligation at December 31, 1996 and
1995 would have increased by $5.7 million and $6.8 million, respectively. The
effect of a 1 percent increase in the health care cost trend rate assumptions on
the net periodic postretirement benefit costs for 1996 and 1995 would be
immaterial.
At December 31, 1996, the Company had approximately 6,400 retirees and
24,200 active employees of which approximately 3,400 and 19,700, respectively,
were employees of U.S. operations.
41
STONE CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 11--LONG-TERM DEBT
Long-term debt consists of the following:
DECEMBER 31,
----------------------
(IN MILLIONS) 1996 1995
- ------------------------------------------------------------------------------------- --------- ---------
SENIOR DEBT:
9.875% senior notes due February 1, 2001............................................. $ 573.7 $ 573.7
10.75% first mortgage notes due October 1, 2002 (less unamortized debt discount of
$2.6 and $2.9)..................................................................... 497.4 497.1
Term loan (8.6% and 9.2% weighted average rates) payable in five semiannual
installments of $2.0 on April 1 and October 1 of each year through April 1, 1999,
$190.0 on October 1, 1999 and $176.0 on April 1, 2000.............................. 376.0 380.0
Additional term loans (8.9% and 9.3% weighted average rates) payable in twelve
semiannual payments of $2.0 on April 1 and October 1 of each year through 2002,
$181.3 on April 1, 2003 and $182.3 on October 1, 2003.............................. 387.0 200.0
Revolving credit facility (8.9% and 9.4% weighted average rates) due May 15, 1999.... 50.0 53.0
11.875% senior notes due December 1, 1998 (less unamortized debt discount of $.5 and
$.7)............................................................................... 239.5 239.3
11.5% senior notes due August 15, 2006............................................... 200.0 --
11.5% senior notes due October 1, 2004 (less unamortized debt discount of $1.2 and
$1.3).............................................................................. 198.8 198.7
12.625% senior notes due July 15, 1998............................................... 150.0 150.0
11.875% rating adjustable senior notes due August 1, 2016............................ 125.0 --
5.375% to 9.55% fixed rate utility systems and pollution control revenue bonds,
payable in varying annual sinking fund payments through the year 2010 and varying
principal payments through the year 2026 (less unamortized debt discount of $5.7
and $6.4).......................................................................... 229.6 199.1
Floating rate receivables-backed notes (5.9% and 6.4% weighted average rates) due
December 15, 2000.................................................................. 210.0 260.0
5.0% to 8.8% term loans payable in varying amounts through 2003...................... 23.8 31.1
Other (including obligations under capitalized leases of $10.5 and $10.5)............ 45.5 52.4
--------- ---------
3,306.3 2,834.4
Less: current maturities............................................................. (36.7) (27.1)
--------- ---------
Total senior long-term debt........................................................ 3,269.6 2,807.3
--------- ---------
SUBORDINATED DEBT:
11.5% senior subordinated notes...................................................... -- 230.0
10.75% senior subordinated debentures maturing on April 1, 2002 (less unamortized
debt discount of $.7 and $.7)...................................................... 199.3 199.3
10.75% senior subordinated notes maturing on June 15, 1997........................... 150.0 150.0
11.0% senior subordinated notes maturing on August 15, 1999.......................... 119.4 125.0
8.875% convertible senior subordinated notes (convertible at $11.55 per share)
maturing on July 15, 2000 (less unamortized debt discount of $.2 and $.3).......... 58.4 59.7
6.75% convertible subordinated debentures (convertible at $33.94 per share) maturing
on February 15, 2007............................................................... 45.2 45.2
--------- ---------
572.3 809.2
Less: current maturities............................................................. (150.0) --
--------- ---------
Total subordinated debt............................................................ 422.3 809.2
--------- ---------
NON-RECOURSE DEBT OF CONSOLIDATED AFFILIATES:
SVCPI credit facilities (6.4% and 7.7% weighted average rates) payable in semiannual
installments beginning July 31, 1997 of $8.5 through July 31, 1998 and $14.1
thereafter through January 31, 2002 with a final payment of $138.3 on December 31,
2002............................................................................... 262.8 276.6
Other................................................................................ 7.4 12.0
--------- ---------
270.2 288.6
Less: current maturities............................................................. (11.0) (20.0)
--------- ---------
Total non-recourse debt of consolidated affiliates................................. 259.2 268.6
--------- ---------
Total long-term debt................................................................. $ 3,951.1 $ 3,885.1
--------- ---------
--------- ---------
42
STONE CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 11--LONG-TERM DEBT (CONTINUED)
On March 22, 1996, the Company and its bank group amended and restated the
Company's bank credit agreement to, among other things, provide for an
additional senior secured term loan facility of $190 million and a supplemental
revolving credit facility of $110 million. Subsequently in 1996, the Company and
its bank group further amended the credit agreement to, among other things,
permit the Company to contribute its retail packaging assets into a joint
venture with Gaylord Container Corporation (see Note 3) and ease certain
financial covenant requirements (including the interest coverage and
indebtedness ratio requirements). At December 31, 1996, the Company's bank
credit agreement, as amended, provides for three senior secured term loans
aggregating $763 million which mature through October 1, 2003 and a $560 million
senior secured revolving credit facility commitment maturing May 15, 1999
(collectively the "Credit Agreement"). The Credit Agreement no longer has a
cross-acceleration provision in the event of an acceleration of the non-recourse
debt of Stone Venepal (Celgar) Pulp, Inc. ("SVCPI").
On July 24, 1996, the Company, in a private placement, sold $125 million
principal amount of 11 7/8 percent Rating Adjustable Senior Notes due 2016
("Rating Adjustable Senior Notes"). Interest, which is payable semi-annually
commencing February 1, 1997, can be adjusted from time to time by reference to
the credit rating assigned to the Rating Adjustable Senior Notes by Moody's
Investors Service, Inc. and/or Standard and Poor's Corporation. Subsequently, on
November 8, 1996, pursuant to an exchange offer, the holders of the privately
placed debt exchanged such notes for registered notes. On August 16, 1996, Stone
Container Finance Company of Canada ("SCFCC"), a newly-formed, wholly owned
subsidiary of the Company, sold $200 million principal amount of 11 1/2 percent
Senior Notes due August 15, 2006 (the "SCFCC Notes"). Interest on the SCFCC
Notes is payable semi-annually commencing February 15, 1997. Payment of the
principal and interest on the SCFCC Notes is guaranteed by the Company. The net
proceeds received from the sales of the Rating Adjustable Senior Notes and the
SCFCC Notes were used by the Company to purchase and retire the remaining $222
million principal amount of its 11 1/2 percent Senior Subordinated Notes on
September 16, 1996 and to provide funds for general corporate purposes. Earlier
in the year, the Company purchased $8 million of the 11 1/2 percent Senior
Subordinated Notes on the open market.
During the third and fourth quarters of 1995, in separate, independently
negotiated transactions, the Company purchased and retired $190 million
principal amount of its 8 7/8 percent Convertible Senior Subordinated Notes (the
"Convertible Senior Subordinated Notes"). The aggregate value paid by the
Company to purchase and retire the $190 million Convertible Senior Subordinated
Notes was approximately $370 million comprised of approximately $190 million
cash (which was equal to the face value of the Convertible Senior Subordinated
Notes purchased) and the issuance of approximately 8.5 million shares of common
stock valued at approximately $180 million. The Convertible Senior Subordinated
Notes purchased and retired were convertible into approximately 16.5 million
common shares. Although the Company issued approximately 8.5 million shares of
common stock, total common shares on a fully diluted basis were reduced by
approximately 8 million common shares.
As a result of certain debt prepayments and repurchases (including the 1995
purchase of $190 million principal amount of Convertible Senior Subordinated
Notes), the Company's results reflect extraordinary charges from the early
extinguishments of debt of $3.7 million (net of income tax benefit of $2.4
million), $189.0 million (net of income tax benefit of $4.9 million) and $61.6
million (net of income tax benefit of $36.5 million) for 1996, 1995 and 1994,
respectively.
At December 31, 1996, the $819.5 million of borrowings and accrued interest
outstanding under the Credit Agreement were secured by property, plant and
equipment with a net book value of $1.5 billion, and by a lien on certain of the
Company's inventories. Additionally, other loan agreements with a balance of
$1.0 billion were collateralized by approximately $490.7 million of property,
plant and equipment--net and an investment and by $310.3 million of cash,
accounts receivable and inventories.
The Company pays a 1/2 percent commitment fee on the unused portions of its
revolving credit facility. The Credit Agreement contains covenants that include,
among other things, the maintenance of certain financial tests and ratios.
Unless operating results improve, the Company may be required to seek covenant
relief from its bank group during 1997. Although no assurance can be given, the
Company believes such relief, if sought, would be granted. Additionally, the
term loan portions of the Credit Agreement provide for mandatory prepayments
from sales of certain assets, certain debt financings and a percentage of excess
cash flow (as defined). The Company's bank lenders, at the Company's request,
may at their option waive the receipt of certain mandatory prepayments. In 1996,
the Company
43
STONE CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 11--LONG-TERM DEBT (CONTINUED)
received consents from a majority of its holders to waive mandatory repayment
requirements from excess cash flow (as defined) on no less than 80 percent of
each of the Company's term loans until September 1997. Any mandatory and
voluntary prepayments are allocated against the term loan amortizations in
inverse order of maturity. Mandatory prepayments from sales of collateral,
unless replacement collateral is provided, will be applied ratably to the term
loans and revolving credit facility, permanently reducing the loan commitments
under the Credit Agreement. The Credit Agreement also contains cross-default
provisions to the indebtedness of $10 million or more of the Company and certain
subsidiaries.
The Company's various Senior Note Indentures under which approximately $2.0
billion of debt is outstanding contains provisions which require the Company to
maintain a minimum Subordinated Capital Base (as defined) of $1 billion. In the
event of a failure to maintain such minimum amount for two successive quarters
the Company would be required to semi-annually offer to purchase 10 percent of
such outstanding indebtedness at par until the minimum Subordinated Capital Base
is again attained. In the event that the Company's Credit Agreement had
outstanding amounts in excess of that outstanding under the Senior Note
Indentures, and would not permit the offer to repurchase, then the Company would
be required to increase the rates on the Notes by 50 basis points per quarter up
to a maximum of 200 basis points until the minimum Subordinated Capital Base is
attained. The Company's Subordinated Capital Base was $1,040 million at December
31, 1996. It is anticipated that the minimum Subordinated Capital Base will fall
below the required levels in the first quarter of 1997 and unless results
improve in the second quarter of 1997, the required level of Subordinated
Capital Base will not be met in the second quarter of 1997. As a result of this,
the Company plans to issue securities which will increase the Subordinated
Capital Base to required levels by June 30, 1997. There is however no assurance
that the Company will achieve such financings.
The Company has an accounts receivable securitization program whereby Stone
Receivables Corporation purchases, on an ongoing basis, certain of the accounts
receivable of the Company. The initial accounts receivable under the program
were purchased with the net proceeds received from the issuance of $260 million
of floating-rate notes by Stone Receivables Corporation in March 1995. The
purchased accounts receivable are solely the assets of Stone Receivables
Corporation, which is a wholly owned but separate corporate entity of the
Company with its own separate creditors. In the event of a liquidation of Stone
Receivables Corporation, such creditors would be entitled to satisfy their
claims from Stone Receivables Corporation prior to any distribution to the
Company. On December 16, 1996, Stone Receivables Corporation redeemed $50
million principal of its $260 million floating-rate notes. At December 31, 1996,
the Company's Consolidated Balance Sheet included $213 million of Stone
Receivables Corporation accounts receivable under the program and $210 million
of borrowings under the program. At December 31, 1995, the Company's
Consolidated Balance Sheet included $302 million of Stone Receivables
Corporation accounts receivable under the program and $260 million of borrowings
under the program.
The amounts of long-term debt outstanding at December 31, 1996 maturing
during the next five years are as follows:
(IN MILLIONS)
- --------------------------------------------------------------------
1997................................................................ $ 193.6
1998................................................................ 431.9
1999................................................................ 409.5
2000................................................................ 483.5
2001................................................................ 622.7
Thereafter.......................................................... 1,997.1
See also first three paragraphs included in the "Outlook" section of the
MD&A. Amounts payable under capitalized lease agreements are excluded from the
above tabulation. See Note 13--"Long-term Leases" for capitalized lease
maturities.
44
STONE CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 12--FINANCIAL INSTRUMENTS
At December 31, 1996 and 1995, the carrying values and fair values of the
Company's financial instruments are listed below:
DECEMBER 31,
---------------------------------------------
1996 1995
--------------------- ---------------------
CARRYING FAIR CARRYING FAIR
(IN MILLIONS) AMOUNT VALUE AMOUNT VALUE
- ------------------------------------------------------------ --------- --------- --------- ---------
Notes receivable and long-term investments.................. $ 147.8 $ 136.7 $ 112.9 $ 102.9
Indebtedness................................................ 4,138.3 4,246.1 3,921.6 3,985.3
Interest rate swaps in receivable (payable) position........ (.1) (9.8) (.2) (1.9)
The fair values of notes receivable and certain investments are based on
discounted future cash flows or the applicable quoted market price. The fair
value of the Company's debt is estimated based on the quoted market price for
the same or similar issues. The fair value of interest-rate swap agreements are
obtained from dealer quotes. These values represent the estimated amount the
Company would pay to terminate agreements, taking into consideration the current
interest rate and market conditions. These financial instruments are not held
for trading purposes.
The Company is party to two interest-rate swap contracts with a duration of
five and ten years to manage interest rate exposures on $250 million of certain
fixed rate indebtedness. The separate contracts have the effect of converting
the fixed rate of interest into a floating interest rate on $100 million of the
9 7/8 percent Senior Notes and on $150 million of the 11 1/2 percent Senior
Notes. These interest-rate swap contracts were entered into in order to balance
the Company's fixed-rate and floating-rate debt portfolios. Under the
interest-rate swaps, the Company agrees with the other party to exchange, at
specified intervals, the difference between fixed-rate and floating-rate
interest amounts calculated by reference to an agreed notional principal amount.
While the Company is exposed to credit loss on its interest-rate swaps in the
event of nonperformance by the counterparties to such swaps, management believes
that such nonperformance is unlikely to occur given the financial resources of
the counterparties.
The following table indicates the weighted average receive rate and pay rate
during 1996 relating to the interest-rate swaps outstanding at December 31, 1996
and 1995:
1996 1995
------- -------
Interest-rate swap--notional amount (in millions)................... $ 150.0 $ 150.0
Average receive rate (fixed by contract terms).................... 5.7% 5.8%
Average pay rate.................................................. 5.5% 6.2%
Interest-rate swap--notional amount (in millions)................... $ 100.0 $ 100.0
Average receive rate (fixed by contract terms).................... 5.6% 5.6%
Average pay rate.................................................. 5.6% 5.6%
The average pay rate for both interest-rate swaps is the six month LIBOR.
45
STONE CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 13--LONG-TERM LEASES
The Company leases certain of its facilities and equipment under leases
expiring through the year 2023.
Future minimum lease payments under capitalized leases and their present
value at December 31, 1996 and future minimum rental commitments (exclusive of
real estate taxes and other expenses) under operating leases having initial or
remaining non-cancellable terms in excess of one year are reflected below:
CAPITALIZED OPERATING
(IN MILLIONS) LEASES LEASES
- -------------------------------------------------------------------- --------- ---------
1997................................................................ $ 4.8 $ 86.3
1998................................................................ 3.4 75.2
1999................................................................ 2.0 63.5
2000................................................................ .4 52.1
2001................................................................ .4 46.1
Thereafter.......................................................... 1.2 192.4
--------- ---------
Total minimum lease payments........................................ 12.2 $ 515.6
---------
---------
Less: Imputed interest.............................................. 1.7
---------
Present value of future minimum lease payments...................... $ 10.5
---------
---------
Rent expense for operating leases, including leases having a duration of
less than one year, was approximately $108 million in 1996, $103 million in 1995
and $87 million in 1994.
NOTE 14--PREFERRED STOCK
The Company has authorized 10 million shares of Preferred Stock. At December
31, 1996, the Company has issued and outstanding 4.6 million shares of $1.75
Series E Cumulative Convertible Exchangeable Preferred Stock (the "Series E
Cumulative Preferred Stock"), $.01 par value. Shares of preferred stock can be
issued in series with varying terms as determined by the Board of Directors.
Dividends on the Series E Cumulative Preferred Stock are payable quarterly when
declared by the Company's Board of Directors. The Series E Cumulative Preferred
Stock is convertible, at the option of the holder at any time, into shares of
the Company's common stock at a conversion price of $33.94 per share of common
stock, subject to adjustment under certain conditions. The Series E Cumulative
Preferred Stock may alternatively be exchanged, at the option of the Company,
for the Company's 7 percent Convertible Subordinated Exchange Debentures due
February 15, 2007 in a principal amount equal to $25.00 per share of Series E
Cumulative Preferred Stock so exchanged. Additionally, the Series E Cumulative
Preferred Stock is redeemable at the option of the Company, in whole or from
time to time in part, commencing February 16, 1996.
The Company paid cash dividends of $1.75 per share on the Series E
Cumulative Preferred Stock in 1996 and $2.625 per share in 1995. The declaration
of dividends by the Board of Directors is subject to, among other things, the
Company's ability to comply with financial covenants contained in the Company's
Credit Agreement and in its Senior Subordinated Indenture. In the event the
Company has six quarterly dividends that remain unpaid on the Series E
Cumulative Preferred Stock, the holders of the Series E Cumulative Preferred
Stock would have the right to elect two members to the Company's Board of
Directors until the accumulated dividends on such Series E Cumulative Preferred
Stock have been declared and paid or set apart for payment. Irrespective of the
amount available in the dividend pool under the Credit Agreement, the Credit
Agreement permits dividends to be paid on the Series E Cumulative Preferred
Stock if there is an available dividend pool under the Company's Senior
Subordinated Indenture dated March 15, 1992 (the "Senior Subordinated
Indenture") relating to its 10 3/4 percent Senior Subordinated Notes, its 11
percent Senior Subordinated Notes and its 10 3/4 percent Senior Subordinated
Debentures. At December 31, 1996 the amounts available in the dividend pool
under the Credit Agreement and under the Senior Subordinated Indenture were
approximately $46 million and $50 million, respectively.
46
STONE CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 15--COMMON STOCK
The Company has authorized 200,000,000 shares of common stock, $.01 par
value, of which 99,297,021 shares were outstanding at December 31, 1996.
In 1995, the Company issued approximately 8.5 million shares of common stock
related to the extinguishment of debt and in 1994 sold approximately 19 million
shares of common stock.
The Company has restrictions on the payment of cash dividends on its common
stock under certain of the Company's Indentures and under its Credit Agreement.
Common stock cash dividends cannot be declared and paid in the event the Company
has any accumulated preferred stock dividend arrearages or there is no
availability in the dividend pool under the Credit Agreement or under the Senior
Subordinated Indenture. Additionally, preferred and common stock cash dividends
cannot be declared and paid in the event the Company's total stockholders'
equity falls below $750 million. See also Note 14. The Company paid cash
dividends of $0.60 and $0.30 per share on its common stock in 1996 and 1995,
respectively.
STOCK RIGHTS:
Each outstanding share of the Company's common stock carries a stock
purchase right ("Right"). Each Right entitles the holder to purchase from the
Company one one-hundredth of a share of Series D Junior Participating Preferred
Stock, par value $.01 per share, at a purchase price of $130 subject to
adjustment under certain circumstances. The Rights expire August 8, 1998 unless
extended or earlier redeemed by the Company.
The Rights will be exercisable only if a person or group, subject to certain
exceptions, acquires 15 percent or more of the Company's common stock or
announces a tender offer, the consummation of which would result in ownership by
such person or group of 15 percent or more of the Company's common stock. The
Company can redeem the Rights at the rate of $.01 per Right at any time before
the tenth business day (subject to extension) after a 15 percent position is
acquired.
If the Company is acquired in a merger or other business combination
transaction, each Right will entitle its holder (other than the acquiring person
or group) to purchase, at the Right's then-current exercise price, a number of
the acquiring company's shares of common stock having a market value at that
time of twice the Right's then-current exercise price.
In addition, in the event that a 15 percent or greater stockholder acquires
the Company by means of a reverse merger in which the Company and its common
stock survive, or engages in self-dealing transactions with the Company, each
holder of a Right (other than the acquiring person or group) will be entitled to
purchase the number of shares of the Company's common stock having a market
value of twice the then-current exercise price of the Right.
STOCK OWNERSHIP AND OPTION PLANS:
The Company's stockholders approved a Stock Option Plan, effective January
1, 1993 (the "1993 Plan"), which authorized 1,530,000 shares of common stock and
provided for the issuance of either incentive stock options or non-qualified
stock options for the purchase of common shares at prices not less than 100
percent of the market value of such shares on the date of grant. Options granted
under the 1993 Plan are exercisable, in whole or in part, after one year but no
later than ten years from the date of the respective grant. On May 9, 1995, the
stockholders approved the 1995 Long-term Incentive Plan (the "1995 Plan") which
permits the Company to issue incentive stock options, non-qualified stock
options, stock appreciation rights, restricted stock, bonus stock and
performance shares. Under the 1995 Plan, the annual amount of common stock
available for grant, other than for incentive stock options, will be limited to
1 1/2 percent of the outstanding shares of common stock as of the beginning of
each year plus a carryover from prior years if such 1 1/2 percent is not
granted. In no event shall any stock options be exercised later than ten years
from the respective grant date.
47
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, 1994....................................................................... 546,031 $ 8.74-29.29
Granted......................................................................................... 670,000 13.38
Exercised....................................................................................... (9,691) 8.74-13.38
Cancelled....................................................................................... (162,528) 8.74-29.29
----------- ---------------
Outstanding December 31, 1994..................................................................... 1,043,812 8.74-29.29
Granted......................................................................................... 1,037,900 18.00-22.13
Exercised....................................................................................... (134,860) 8.74-21.20
Cancelled....................................................................................... (49,890) 13.38-29.29
----------- ---------------
Outstanding December 31, 1995..................................................................... 1,896,962 13.38-29.29
Granted......................................................................................... 1,980,721 13.38
Exercised....................................................................................... (30,000) 13.38
Cancelled....................................................................................... (97,147) 13.38-29.29
----------- ---------------
Outstanding December 31, 1996..................................................................... 3,750,536 13.38-29.29
-----------
-----------
Options exercisable at December 31,
1996............................................................................................ 1,003,890 13.38-29.29
1995............................................................................................ 881,262 13.38-29.29
1994............................................................................................ 395,285 8.74-29.29
Options available for grant at December 31,
1996............................................................................................ 805,932
1995............................................................................................ 1,227,066
1994............................................................................................ 882,000
The Company's previous Long-term Incentive Plan, which had been adopted in
1992 (the "1992 Plan") and provided for contingent awards of restricted shares
of common stock and cash to certain key employees, was replaced by the 1995
Plan. The payment of the cash portion of awards granted under the 1992 Plan will
depend on the extent to which the Company has met certain long-term performance
goals as established by a committee of outside directors. The compensation
related to this program is amortized over the related five-year restricted
periods. Under the 1992 Plan, 1,800,000 shares had been reserved for issuance,
of which 133,176 and 249,655 shares were granted in 1995 and 1994, respectively.
The Company applies APB Opinion 25 and related Interpretations in accounting
for its plans. Accordingly, no recognition is given to stock options until they
are exercised, at which time the option price received is credited to common
stock. The charge to compensation cost related to the restricted shares was $1.5
million, $3.8 million and $3.6 million for 1996, 1995 and 1994, respectively. In
1996, prior cash awards that were accrued have been deemed to be not payable due
to the financial results of the Company.
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123"), by electing to continue to apply the intrinsic value-based method of
accounting for stock-based compensation. Had compensation cost been determined
on the basis of fair value pursuant to SFAS 123, net income and earnings per
share would have been reduced as follows:
1996 1995
------------------------- -------------------------
AS REPORTED PRO FORMA AS REPORTED PRO FORMA
------------ ----------- ------------ -----------
Net income......................................................... $ (126.2) $ (130.0) $ 255.5 $ 254.2
Primary earnings per share......................................... (1.35) (1.39) 2.63 2.61
Fully diluted earnings per share................................... n/a n/a 2.24 2.23
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions: for grants in both years a dividend yield of 4.2 percent; expected
48
STONE CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 15--COMMON STOCK (CONTINUED)
lives of 6 years; and expected volatility of 47 percent; for grants made in 1996
and 1995 risk free interest rates of 5.5 percent and 7.2 percent, respectively.
NOTE 16--RELATED PARTY TRANSACTIONS
The Company sold paperboard, market pulp and fiber to and purchased
containerboard and kraft paper from various non-consolidated affiliates. Such
transactions were primarily at market prices. The Company also paid a commission
fee to Stone-Consolidated pursuant to a sales agency agreement expiring December
31, 2004 and paid fees for services rendered by Stone-Consolidated. The amounts
included in the table below include transactions with Stone-Consolidated since
November 1, 1995, with Florida Coast since June 1, 1996 and with S&G since July
12, 1996. (See also Note 3).
The following table summarizes the Company's related party transactions with
its non-consolidated affiliates for each year presented:
YEAR ENDED DECEMBER 31,
-------------------------------
(IN MILLIONS) 1996 1995 1994
- ---------------------------------------------------------------------------------------- --------- --------- ---------
Net sales to/(purchases from)........................................................... $ 183.0 $ 211.2 $ 147.1
Net receivable from/(payable to)........................................................ 45.9 40.5 37.9
Commissions and fees for services received.............................................. 10.4 2.3 --
The Company had outstanding loans and interest receivable from
non-consolidated affiliates of approximately $44.4 million and $9.9 million at
December 31, 1996 and 1995, respectively. Additionally, the Company held
securities of a non-consolidated affiliate of approximately $40.0 million at
December 31, 1996.
NOTE 17--ADDITIONAL INFORMATION RELATING TO THE CONSOLIDATED FINANCIAL
STATEMENTS
OTHER OPERATING (INCOME) EXPENSE, NET:
The major components of other operating (income) expense--net are as
follows:
YEAR ENDED DECEMBER 31,
-------------------------------
(IN MILLIONS) 1996 1995 1994
- --------------------------------------------------------------------------------------------- --------- --------- ---------
(Gains) losses on sales of investments or assets............................................. $ 5.4 $ -- $ (13.8)
Gain from an involuntary conversion at a paper mill.......................................... -- -- (22.0)
Other........................................................................................ -- -- 1.4
--------- --------- ---------
Total other operating (income) expense--net.................................................. $ 5.4 $ -- $ (34.4)
--------- --------- ---------
--------- --------- ---------
OTHER (INCOME) EXPENSE, NET:
The major components of other (income) expense--net are as follows:
YEAR ENDED DECEMBER 31,
-------------------------------
(IN MILLIONS) 1996 1995 1994
- ----------------------------------------------------------------------------------------- --------- --------- ---------
Interest income.......................................................................... $ (16.1) $ (15.5) $ (20.9)
Foreign currency transaction (gains) losses.............................................. .5 (8.1) 15.8
Other.................................................................................... (5.6) (9.5) (3.8)
--------- --------- ---------
Total other (income) expense--net........................................................ $ (21.2) $ (33.1) $ (8.9)
--------- --------- ---------
--------- --------- ---------
INTEREST EXPENSE:
YEAR ENDED DECEMBER 31,
-------------------------------
(IN MILLIONS) 1996 1995 1994
- ---------------------------------------------------------------------------------------- --------- --------- ---------
Total interest cost incurred............................................................ $ 425.2 $ 473.5 $ 460.7
Interest capitalized.................................................................... (11.7) (13.2) (4.7)
--------- --------- ---------
Interest expense........................................................................ $ 413.5 $ 460.3 $ 456.0
--------- --------- ---------
--------- --------- ---------
49
STONE CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 17--ADDITIONAL INFORMATION RELATING TO THE CONSOLIDATED FINANCIAL
STATEMENTS (CONTINUED)
PROVISION FOR DOUBTFUL ACCOUNTS AND NOTES RECEIVABLE:
Selling, general and administrative expenses include provisions for doubtful
accounts and notes receivable of $5.5 million for 1996, $6.7 million for 1995
and $6.6 million for 1994.
ASSETS HELD FOR SALE:
The Company has ceased operations of certain non-core wood products
facilities and is liquidating such assets as appropriate opportunities are
presented. These net assets which are included in other current assets in the
Consolidated Balance Sheets aggregated approximately $18 million and $32 million
at December 31, 1996 and 1995, respectively.
INSURANCE RECEIVABLE:
As a result of the 1994 Panama City digester accident, the Company is
seeking recovery from its insurance carriers for both the losses to property and
the losses as result of business interruption. A partial recovery of
approximately $31 million has been received by the Company from certain
carriers, claims of approximately $9 million have been committed to be paid and
claims of approximately $43 million covering the remaining portion of such
losses are still pending.
LONG-TERM NOTE RECEIVABLE:
The Company had a net receivable from a domestic customer of approximately
$58 million and $74 million at December 31, 1996 and 1995, respectively. Of
these amounts, approximately $44 million and $61 million, respectively, are
included in other long-term assets with the remaining amounts reflected in
accounts and notes receivable in the Company's Consolidated Balance Sheets. This
seven year interest bearing note receivable requires quarterly payments which
commenced in the first quarter of 1995.
ACCRUED AND OTHER CURRENT LIABILITIES:
The major components of accrued and other current liabilities are as
follows:
DECEMBER 31,
--------------------
(IN MILLIONS) 1996 1995
- ----------------------------------------------------------------------------------------------- --------- ---------
Accrued interest............................................................................... $ 93.4 $ 88.1
Accrued payroll, related taxes and employee benefits........................................... 70.8 87.7
Other.......................................................................................... 137.5 120.8
--------- ---------
Total accrued and other current liabilities.................................................... $ 301.7 $ 296.6
--------- ---------
--------- ---------
OTHER LONG-TERM LIABILITIES:
Included in other long-term liabilities at December 31, 1996 and 1995 is
approximately $36 million and $42 million, respectively, of deferred income
relating to the October 1992 sale of an energy contract at the Company's
Hopewell mill. This amount is being amortized over a 12-year period.
NOTE 18--COMMITMENTS AND CONTINGENCIES
At December 31, 1996, the Company had commitments outstanding for capital
expenditures under purchase orders and contracts of approximately $14 million.
SVCPI (which is a 90 percent owned indirect subsidiary of the Company) and
CITIC B.C. each own 50 percent of the assets comprising the Celgar Pulp mill
located in Castlegar, British Columbia. Each of SVCPI and CITIC B.C. borrowed
equal amounts of money from a group of banks (the "Lenders") to finance the
expansion of the Celgar mill. The assets of the mill are cross collateralized
supporting the loans of CITIC B.C. and SVCPI. In June 1996, CITIC B.C. defaulted
on its loan and as a result the Lenders gave CITIC B.C. and SVCPI a notice of
termination of CITIC B.C.'s loan.
SVCPI elected to give the Lenders notice that, pursuant to the loan
agreement, it would elect to purchase CITIC B.C.'s share of the Celgar mill
assets or find a third party buyer. The purchase by SVCPI would include the
assumption of CITIC B.C.'s debt. The notice by SVCPI imposed a six month
moratorium on the Lenders from pursuing their rights.
50
STONE CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 18--COMMITMENTS AND CONTINGENCIES (CONTINUED)
On January 18, 1997, SCVPI cured the CITIC B.C. default and gave notice to take
possession of the assets owned by CITIC B.C. CITIC B.C. initiated a suit to
enjoin SVCPI from such action. Currently, the joint venture partners are
arbitrating a dispute over whether or not SVCPI had the right to give notice to
take possession of the mill.
The Company's operations are subject to extensive environmental regulation
by federal, state and local authorities in the United States and regulatory
authorities with jurisdiction over its foreign operations. The Company has in
the past made significant capital expenditures to comply with water, air and
solid and hazardous waste regulations and expects to make significant
expenditures in the future. Capital expenditures for environmental control
equipment and facilities were approximately $46 million in 1996, and the Company
anticipates that 1997 and 1998 environmental capital expenditures will
approximate $33 million and $43 million, respectively. The majority of the 1998
expenditures relate to the amounts that the Company currently anticipates will
be required once final "cluster rules" described in "Environmental Issues" on
pages 17-18 of the MD&A are adopted. Although capital expenditures for
environmental control equipment and facilities and compliance costs in future
years will depend on legislative and technological developments that cannot be
predicted at this time, the Company anticipates that these costs will increase
when final "cluster rules" are adopted and as other environmental regulations
become more stringent. See also "Environmental Issues" on pages 17-18 of the
MD&A for further environmental matters.
Refer to Notes 11, 12 and 13 for further discussion of the Company's debt,
hedging and lease commitments.
Additionally, the Company is involved in certain litigation primarily
arising in the normal course of business. In the opinion of management, the
Company's liability under any pending litigation would not materially affect its
financial condition, results of operations or liquidity.
NOTE 19--SEGMENT AND GEOGRAPHIC INFORMATION
BUSINESS SEGMENTS:
As a result of the November 1995 de-consolidation of Stone-Consolidated (see
Note 4) and the integrated nature of the Company's principal consolidated
operations, the Company now operates in a single business--the production and
sale of commodity pulp, paper and packaging products. Accordingly, business
segment reporting is no longer presented.
Financial information by business segment for prior years is summarized as
follows:
DEPRECIATION
INCOME AND CAPITAL
(IN MILLIONS) SALES (LOSS)(1) AMORTIZATION ASSETS EXPENDITURES
- -------------------------------------------------------- ---------- ------------- ------------- ------------- ------------
1995
- --------------------------------------------------------
Paperboard and paper packaging.......................... $ 5,405.8 $ 943.6 $ 203.5 $ 3,536.2 $ 198.3
White paper and other................................... 2,010.6 367.7 158.4 1,347.2 183.2
Intersegment sales(4)................................... (65.2)
---------- ------------- ------------- ------------- ------------
7,351.2 1,311.3 361.9 4,883.4 381.5
Interest expense........................................ (460.3)
Foreign currency gains.................................. 8.1
General corporate....................................... (64.4)(2) 9.9 1,515.5(3) 5.0
---------- ------------- ------------- ------------- ------------
Total................................................... $ 7,351.2 $ 794.7 $ 371.8 $ 6,398.9 $ 386.5
---------- ------------- ------------- ------------- ------------
---------- ------------- ------------- ------------- ------------
51
STONE CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 19--SEGMENT AND GEOGRAPHIC INFORMATION (CONTINUED)
DEPRECIATION
INCOME AND CAPITAL
SALES (LOSS)(1) AMORTIZATION ASSETS EXPENDITURES
---------- ------------- ------------- ------------- ------------
1994
- --------------------------------------------------------
Paperboard and paper packaging.......................... $ 4,241.5 $ 354.2 $ 199.1 $ 3,440.1 $ 114.6
White paper and other................................... 1,549.6 25.4 147.3 2,884.4 114.0
Intersegment sales(4)................................... (42.4)
---------- ------------- ------------- ------------- ------------
5,748.7 379.6 346.4 6,324.5 228.6
Interest expense........................................ (456.0)
Foreign currency losses................................. (15.8)
General corporate....................................... (70.9)(2) 12.5 680.4(3) 4.0
---------- ------------- ------------- ------------- ------------
Total................................................... $ 5,748.7 $ (163.1) $ 358.9 $ 7,004.9 $ 232.6
---------- ------------- ------------- ------------- ------------
---------- ------------- ------------- ------------- ------------
- ---------
(1) Income (loss) before taxes, minority interest, extraordinary charges and
cumulative effect of accounting change.
(2) Included equity in net income (loss) of non-consolidated vertically
integrated affiliates as follows: Paperboard and paper packaging segment
$4.2 in 1995 and $(1.4) in 1994 and White paper and other segment $15.7 in
1995, and $(6.3) in 1994.
(3) Included investments in non-consolidated vertically integrated affiliates as
follows: Paperboard and paper packaging segment $85.8 in 1995 and $82.7 in
1994 and White paper and other segment $1,010.4 in 1995 and $263.1 in 1994.
(4) Intersegment sales were accounted for at transfer prices which approximate
market prices.
GEOGRAPHIC SEGMENTS:
The table below provides financial information for the Company's operations
based on the region in which the operations are located.
TRADE INTER-AREA TOTAL INCOME
(IN MILLIONS) SALES SALES SALES (LOSS)(3) ASSETS
- ------------------------------------------------------- --------- ---------- --------- ---------- ----------
1996
- -------------------------------------------------------
United States.......................................... $ 4,223.5 $ 33.0 $ 4,256.5 $ 243.7 $2,961.2
Canada................................................. 309.6 54.5 364.1 (15.1) 916.4
Europe and other....................................... 608.7 -- 608.7 15.9 669.8
--------- ---------- --------- ---------- ----------
5,141.8 87.5 5,229.3 244.5 4,547.4
Interest expense....................................... (413.5)
Foreign currency transaction losses.................... (.5)
General corporate...................................... (19.6)(1) 1,806.4(2)
Inter-area eliminations................................ (87.5) (87.5) --
--------- ---------- --------- ---------- ----------
Total.................................................. $ 5,141.8 $ -- $ 5,141.8 $ (189.1) $6,353.8
--------- ---------- --------- ---------- ----------
--------- ---------- --------- ---------- ----------
52
STONE CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 19--SEGMENT AND GEOGRAPHIC INFORMATION (CONTINUED)
TRADE INTER-AREA TOTAL INCOME
(IN MILLIONS) SALES SALES SALES (LOSS)(3) ASSETS
- ------------------------------------------------------- --------- ---------- --------- ---------- ----------
1995
- -------------------------------------------------------
United States.......................................... $ 5,238.7 $ 46.1 $ 5,284.8 $ 941.9 $3,313.4
Canada................................................. 1,276.8 60.2 1,337.0 334.3 942.5
Europe and other....................................... 835.7 -- 835.7 35.1 627.5
--------- ---------- --------- ---------- ----------
7,351.2 106.3 7,457.5 1,311.3 4,883.4
Interest expense....................................... (460.3)
Foreign currency transaction gains..................... 8.1
General corporate...................................... (64.4)(1) 1,515.5(2)
Inter-area eliminations................................ (106.3) (106.3) --
--------- ---------- --------- ---------- ----------
Total.................................................. $ 7,351.2 $ -- $ 7,351.2 $ 794.7 $6,398.9
--------- ---------- --------- ---------- ----------
--------- ---------- --------- ---------- ----------
TRADE INTER-AREA TOTAL INCOME
(IN MILLIONS) SALES SALES SALES (LOSS)(3) ASSETS
- ------------------------------------------------------- --------- ---------- --------- ---------- ----------
1994
- -------------------------------------------------------
United States.......................................... $ 4,187.7 $ 23.9 $ 4,211.6 $ 344.0 $3,393.8
Canada................................................. 942.0 36.0 978.0 20.3 2,152.8
Europe................................................. 619.0 -- 619.0 15.3 777.9
--------- ---------- --------- ---------- ----------
5,748.7 59.9 5,808.6 379.6 6,324.5
Interest expense....................................... (456.0)
Foreign currency transaction losses.................... (15.8)
General corporate...................................... (70.9)(1) 680.4(2)
Inter-area eliminations................................ (59.9) (59.9) --
--------- ---------- --------- ---------- ----------
Total.................................................. $ 5,748.7 $ -- $ 5,748.7 $ (163.1) $7,004.9
--------- ---------- --------- ---------- ----------
--------- ---------- --------- ---------- ----------
- ---------
(1) Includes equity in net income (loss) of non-consolidated vertically
integrated affiliates as follows: United States $(2.0) in 1996, $3.5 in 1995
and $.6 in 1994; Canada $74.5 in 1996, $28.6 in 1995 and $(2.3) in 1994; and
other $(9.3) in 1996, $(12.2) in 1995 and $(6.0) in 1994.
(2) Includes investments in non-consolidated vertically integrated affiliates as
follows: United States $37.4 in 1996, $9.8 in 1995 and $1.5 in 1994; Canada
$1,077.9 in 1996, $1,022.3 in 1995 and $295.2 in 1994; and other $69.8 in
1996, $64.1 in 1995 and $49.1 in 1994.
(3) Income (loss) before taxes, minority interest, extraordinary charges and
cumulative effect of accounting change.
The Company's export sales from the United States were approximately $470
million, $839 million and $476 million for 1996, 1995 and 1994,
respectively.
53
STONE CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 20--SUMMARY OF QUARTERLY DATA (UNAUDITED)
The following table summarizes quarterly financial data for 1996 and 1995:
QUARTER YEAR
---------------------------------------------- ----------
(IN MILLIONS EXCEPT PER SHARE) FIRST SECOND THIRD FOURTH
- ------------------------------------------------------------------ ---------- ---------- ---------- ----------
1996
- ------------------------------------------------------------------
Net sales......................................................... $ 1,321.5 $ 1,282.3 $ 1,295.1 $ 1,242.9 $ 5,141.8
Cost of products sold............................................. 972.2 1,013.0 1,037.1 1,063.1 4,085.4
Depreciation and amortization..................................... 79.0 79.0 78.2 78.6 314.8
Income (loss) before extraordinary charges........................ 32.4 (21.1) (47.7) (86.1) (122.5)
Extraordinary charges from early extinguishments of debt.......... -- -- (3.3) (.3) (3.7)
---------- ---------- ---------- ---------- ----------
Net income (loss)................................................. 32.4 (21.1) (51.0) (86.4) (126.2)
---------- ---------- ---------- ---------- ----------
Per share of common stock--primary:
Income (loss) before extraordinary charges........................ .31 (.23) (.50) (.89) (1.32)
Extraordinary charges from early extinguishments of debt.......... -- -- (.03) -- (.03)
---------- ---------- ---------- ---------- ----------
Net income (loss)--primary........................................ .31 (.23) (.53) (.89) (1.35)
---------- ---------- ---------- ---------- ----------
Net income--fully diluted......................................... .30 * * * *
---------- ---------- ---------- ---------- ----------
Cash dividends per common share................................... .15 .15 .15 .15 .60
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
QUARTER YEAR
---------------------------------------------- ----------
(IN MILLIONS EXCEPT PER SHARE) FIRST SECOND THIRD FOURTH(1)
- ------------------------------------------------------------------ ---------- ---------- ---------- ----------
1995
- ------------------------------------------------------------------
Net sales......................................................... $ 1,819.3 $ 1,963.6 $ 1,924.0 $ 1,644.4 $ 7,351.2
Cost of products sold............................................. 1,288.7 1,382.8 1,330.4 1,167.0 5,168.9
Depreciation and amortization..................................... 96.0 92.7 97.1 86.1 371.8
Income before extraordinary charges............................... 96.8 131.0 129.0 87.7 444.5
Extraordinary charges from early extinguishments of debt.......... -- (3.1) (177.9) (8.0) (189.0)
---------- ---------- ---------- ---------- ----------
Net income (loss)................................................. 96.8 127.9 (48.9) 79.7 255.5
---------- ---------- ---------- ---------- ----------
Per share of common stock--primary:
Income before extraordinary charges............................... 1.04 1.42 1.32 .86 4.64
Extraordinary charges from early extinguishments of debt.......... -- (.03) (1.85) (.08) (2.01)
---------- ---------- ---------- ---------- ----------
Net income (loss)--primary........................................ 1.04 1.39 (.53) .78 2.63
---------- ---------- ---------- ---------- ----------
Per share of common stock--fully diluted:
Income before extraordinary charges............................... .85 1.12 1.12 .80 3.89
Extraordinary charges from early extinguishments of debt.......... -- (.03) (1.57) (.07) (1.65)
---------- ---------- ---------- ---------- ----------
Net income (loss)--fully diluted.................................. .85 1.09 (.45) .73 2.24
---------- ---------- ---------- ---------- ----------
Cash dividends per common share................................... -- -- .15 .15 .30
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
- ---------
(1) As a result of the Amalgamation discussed in Note 4, the Company, effective
November 1, 1995, began reporting Stone-Consolidated under the equity method
of accounting.
* Fully diluted earnings per share are not disclosed because the amounts are
anti-dilutive.
54
Report of Independent Accountants on
Financial Statement Schedule
-----------------------------------
To the Board of Directors of
Stone Container Corporation
Our audits of the consolidated financial statements referred to in our report
dated February 10, 1997, except as to Note 2, which is as of February 14, 1997,
appearing in this Annual Report on Form 10-K (such report contains an
explanatory paragraph referring to the change in accounting method discussed in
Note 1 to the Company's consolidated financial statements) also included an
audit of the Financial Statement Schedule listed and appearing in Item 14(a)2 of
this Form 10-K. In our opinion, the Financial Statement Schedule presents
fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements.
PRICE WATERHOUSE LLP
Chicago, Illinois
February 10, 1997, except as to Note 2,
which is as of February 14, 1997.
55
STONE CONTAINER CORPORATION AND SUBSIDIARIES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(IN MILLIONS)
COLUMN C
COLUMN B -----------
----------- ADDITIONS
BALANCE CHARGED
COLUMN A AT TO COSTS COLUMN D
- --------------------------------------------------------------------------------- BEGINNING AND -----------
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS
- --------------------------------------------------------------------------------- ----------- ----------- -----------
Allowance for doubtful accounts and notes and sales returns and allowances:
Year ended December 31, 1996................................................... $ 22.1 $ 14.9 $ 12.7
Year ended December 31, 1995................................................... $ 20.2 $ 14.6 $ 12.7
Year ended December 31, 1994................................................... $ 19.3 $ 13.0 $ 12.1
COLUMN E
-----------
COLUMN A BALANCE
- --------------------------------------------------------------------------------- AT END OF
DESCRIPTION PERIOD
- --------------------------------------------------------------------------------- -----------
Allowance for doubtful accounts and notes and sales returns and allowances:
Year ended December 31, 1996................................................... $ 24.3
Year ended December 31, 1995................................................... $ 22.1
Year ended December 31, 1994................................................... $ 20.2
56