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, 1995.
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
- --------------------------------------------------------------------------------------------------------
(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
11 1/2% Senior Subordinated Notes due
September 1, 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
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 22, 1996 of the voting common
stock held by non-affiliates of the Registrant was approximately
$1,221,000,000.
The number of shares of common stock outstanding at March 22, 1996 was
99,150,002.
The Proxy Statement, to be filed on or before April 30, 1996, for the
Annual Meeting of Stockholders scheduled May 14, 1996 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, 1995, is incorporated herein by
reference to Item 7--Management's Discussion and Analysis of Financial Condition
and Results of Operations ("MD&A") included in this report, under the sections
entitled "Financial Condition and Liquidity," pages 16-20, and to the Financial
Statements, included in this report, under Notes to the Consolidated Financial
Statements, "Note 2--Acquisitions/Dispositions," page 37, "Note 3--Subsidiary
Issuance of Stock," page 37, "Note 15--Related Party Transactions," pages 48-49,
and "Note 18--Segment 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
Financial information relating to the Registrant's industry segments, for
the year ended December 31, 1995, is incorporated herein by reference to the
MD&A, included in this report, under the section entitled "Results of
Operations," pages 12-16, and to the Financial Statements, included in this
report, under Notes to the Consolidated Financial Statements, "Note 18--Segment
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 12-16, "Investing Activities," page 19, and "Environmental Issues," pages
19-20, and to the Financial Statements, included in this report, under Notes to
the Consolidated Financial Statements, "Note 2--Acquisitions/Dispositions," page
37, and "Note 18--Segment Information," pages 51-53.
1
PROFILE
Industry Position
KEY PRODUCTS Markets
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 Supermarket chains and other retailers of Industry leader
SACKS consumable products. Industrial and consumer bags
sold to the food, agricultural, chemical and
cement industries, among others.
BOXBOARD AND FOLDING Manufacturers of consumable goods, especially A major position in Europe; a nominal
CARTONS food, beverage and tobacco products, and other box position in North America
manufacturers.
NEWSPRINT Newspaper publishers and commercial printers. Industry leader, through its
non-consolidated affiliate,
Stone-Consolidated Corporation
UNCOATED GROUNDWOOD Producers of advertising materials, magazines, Industry leader, through its
PAPER directories and computer papers. non-consolidated affiliate,
Stone-Consolidated Corporation
MARKET PULP Manufacturers of paper products, including fine A major position
papers, photographic papers, tissue and newsprint.
LUMBER, PLYWOOD AND Construction and furniture industries. A moderate position in North America
VENEER
1995 PRODUCTION AND SHIPMENT STATISTICS
MILL PRODUCTION* (thousands of short tons)
Containerboard................................................................................ 4,623
Kraft Paper................................................................................... 385
Market Pulp................................................................................... 1,083
Newsprint..................................................................................... 1,269
Groundwood Paper.............................................................................. 505
Boxboard and Other............................................................................ 115
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Total....................................................................................... 7,980
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CONTAINERBOARD AND KRAFT PAPER CONVERTED* (thousands of short tons)............................. 4,355
WASTEPAPER RECOVERED AND RECYCLED (thousands of short tons)..................................... 2,615
CONVERTED PRODUCT SHIPMENTS*
Corrugated Containers (billions of square feet)............................................... 53.0
Paper Bags and Sacks (thousands of short tons)................................................ 574
Folding Cartons (thousands of short tons)..................................................... 94
Flexible Packaging (thousands of short tons).................................................. 16
Lumber (millions of board feet produced)...................................................... 446
Plywood and Veneer (millions of square feet produced)......................................... 244
NUMBER OF MANUFACTURING FACILITIES (including certain affiliates)
Paperboard, Paper and Pulp Mills.............................................................. 26
Converting Plants............................................................................. 159
Packaging Machinery Plants.................................................................... 2
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Total....................................................................................... 187
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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 fibre and recycled fibre, 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 fibre 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 fibre depending upon the product being manufactured and
each mill's geographic location. A decrease in the supply of wood fibre has
caused, and will likely continue to cause, higher wood fibre 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 fibre has
from time to time caused a tightness in the supply of recycled fibre and at
those times a significant increase in the cost of such fibre used in the
manufacture of recycled containerboard and related products. The Company's
paperboard and paper packaging products use a large volume of recycled fibre.
While the Company has not experienced any significant difficulty in obtaining
wood fibre and recycled fibre 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, 1995, the Company owned approximately 9 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 for 1995 and 1994 were $11 million for each year.
The Company owns patents, licenses, trademarks and tradenames on products.
The loss of any patent, license, trademark and tradename would not have a
material adverse effect on the Company's operations.
As of December 31, 1995, the Registrant had approximately 25,900 employees,
of whom approximately 21,700 were employees of U.S. operations and the remainder
were employees of foreign operations. Of those in the United States,
approximately 14,000 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, 1995, is
incorporated herein by reference to the Financial Statements, included in this
report, under Notes to the Consolidated Financial Statements, "Note 18--Segment
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,
Latin America, Australia and the Far East. A listing of such worldwide
facilities as of December 31, 1995 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:
PAPERBOARD AND WHITE PAPER
PAPER PACKAGING AND OTHER TOTAL
---------------- -------------- ----------------
(IN THOUSANDS OF SHORT TONS) DECEMBER 31, 1995 1994 1995 1994 1995 1994
- -------------------------------------------------- ------ ------ ------ ------ ------ ------
United States (1)................................. 4,711 4,665 900 873 5,611 5,538
Canada (2)(3)..................................... 440 434 1,724 1,923 2,164 2,357
Europe (3)........................................ 371 351 134 299 505 650
------ ------ ------ ------ ------ ------
5,522 5,450 2,758 3,095 8,280 8,545
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
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(1) Includes 100 percent of the Seminole Kraft Corporation ("Seminole") mill.
(2) Includes 45 percent of the Celgar mill. Effective December 31, 1994, the
Company indirectly acquired an additional 20 percent of the Celgar mill,
thereby increasing its ownership interest from 25 percent to 45 percent.
(3) Includes 100 percent of Stone-Consolidated Corporation for 1994 and 46.6
percent for 1995. Effective November 1, 1995, Stone-Consolidated Corporation
became a non-consolidated affiliate as a result of the Company reducing its
equity ownership in Stone-Consolidated Corporation to 46.6 percent. See Note
3 to the Consolidated Financial Statements.
All mills and converting facilities are owned, or partially owned through
investments in other companies, by the Registrant, except for 46 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, 1995 is incorporated herein by reference to the Financial
Statements, included in this report, under the Notes to the Consolidated
Financial Statements, "Note 2--Acquisitions/Dispositions," page 37, "Note
3--Subsidiary Issuance of Stock," page 37, "Note 10--Long-term Debt," pages
43-45, and "Note 12--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)
South Fork (forest products)
CONNECTICUT
Portland (corrugated container)
Torrington (corrugated container)
Uncasville (paperboard/paper/pulp)
FLORIDA
Cantonment (bag)
(Pensacola)
Graceville (forest products)
Jacksonville (paperboard/paper/pulp); (corrugated container)
Panama City (paperboard/paper/pulp)
Yulee (bag)
Orlando (corrugated container)
Packaging Systems
Jacksonville (corrugated container)
Preprint
GEORGIA
Atlanta (corrugated container, 3)
Port Wentworth (paperboard/paper/pulp)
Atlanta (paperboard/paper/pulp)
Technology and
Engineering Center
ILLINOIS
Bedford Park (corrugated container)
(Chicago)
Bloomington (corrugated container)
Cameo (corrugated container)
(Chicago)
Danville (corrugated container)
*Herrin (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
Oakbrook (corrugated container)
Marketing and Technical
Center
INDIANA
Columbus (corrugated container)
Mishawaka (corrugated container)
South Bend (corrugated container)
IOWA
Des Moines (corrugated container); (bag)
Keokuk (corrugated container)
Sioux City (corrugated container)
KANSAS
Kansas City (corrugated container)
KENTUCKY
Louisville (corrugated container); (bag)
LOUISIANA
Arcadia (bag)
Hodge (bag); (paperboard/paper/pulp)
New Orleans (corrugated container)
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 MEXICO
Reserve (forest products)
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)
OREGON
Grants Pass (forest products)
Medford (forest products)
White City (forest products)
PENNSYLVANIA
Philadelphia (corrugated container, 2)
Williamsport (corrugated container)
York (paperboard/paper/pulp)
SOUTH CAROLINA
Columbia (corrugated container); (forest products)
Florence (paperboard/paper/pulp)
Fountain Inn (corrugated container)
Orangeburg (forest products)
SOUTH DAKOTA
Sioux Falls (corrugated container)
TENNESSEE
Chattanooga (corrugated container)
Collierville (corrugated 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); (bag)
WASHINGTON
*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
- -----------------------
QUEBEC
*Grand-Mere (paperboard/paper/pulp)
*La Baie (paperboard/paper/pulp)
*La Tuque (forest products)
New Richmond (paperboard/paper/pulp)
Portage-du-Fort (paperboard/paper/pulp)
*Roberval (forest products)
*Saint-Fulgence (forest products)
*Saint-Laurent (forest products)
*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)
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)
AUSTRALIA
Melbourne (corrugated container)
Sydney (corrugated container)
ASIA
CHINA
*Shanghai (corrugated container)
*Beijing (joint venture office)
JAPAN
Tokyo, Japan (joint venture office)
*Stone Container Japan Company, Ltd.
CENTRAL AND SOUTH AMERICA
COSTA RICA
Palmar Norte (forest products)
San Jose (forest products)
Administrative Office
VENEZUELA
*Puerto Ordaz (joint venture office)
OTHER
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 have been
used by the Company's Snowflake, Arizona pulp and paperboard mill for the
evaporation of its process wastewater. The EPA is preparing a draft consent
decree to resolve the alleged past unpermitted discharges which will include the
EPA's proposal that the Company pay civil penalties in the amount of $900,000.
The Company has vigorously disputed the application of the Clean Water Act to
these two privately owned evaporation ponds. The Company has begun
implementation of a plan to use its wastewater to irrigate a biomass plantation
and discontinue using Dry Lake to evaporate wastewater. It is premature to
predict the amount of penalties, if any, that will eventually be assessed.
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.
As a result of the April 13, 1994 digester rupture at the Company's Panama
City, Florida pulp and paperboard mill (the "Panama City Mill"), the
Occupational Safety and Health Administration ("OSHA") conducted an
investigation at the Panama City Mill which resulted in the issuance by OSHA of
citations with fines totaling $1,072,000. In October 1994, Company
representatives met informally with OSHA representatives to discuss the
citations and related fines. As a result of that meeting, the Company filed a
notice of contest, and thereafter the Secretary of Labor filed a complaint with
the Occupational Safety and Health Review Commission to enforce the citations.
The matter was resolved on February 8, 1996, when the Company and OSHA entered
into a Stipulation and Notice of Dismissal whereby the Company agreed, without
admitting liability, to pay a reduced penalty of $690,000, and OSHA agreed to
withdraw and delete the characterization of the citations relating to the
digester violations at the Panama City Mill.
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,
7
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 judgements 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 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.
Section6928(h)(l). The Order requires 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 has filed a protest
and requested a hearing to contest the EPA's RCRA Section 3008(h) jurisdiction
over the Panama City Mill and the parties have been engaged in extensive
settlement negotiations. The Company believes that the Panama City Mill is not
currently a RCRA facility. The corrective measures mandated by the Order would
require the Company to conduct extensive groundwater and soil sampling and
analyses. The Company does not know at this time the likelihood of success in
challenging the Order. Notwithstanding the success in challenging the Order, 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.
In July 1994, the State of Ohio Environmental Protection Agency ("OEPA")
informed the Company of OEPA's intent to initiate an enforcement action against
the Company's paperboard mill in Coshocton, Ohio (the "Coshocton Mill") for
alleged violations of the Coshocton Mill's wastewater discharge permit. The
matter was settled on October 18, 1995 by way of an administrative consent order
pursuant to which the Company, without admitting liability, agreed to pay a
civil penalty in the amount of $100,000 and to perform certain supplemental
environmental projects.
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 is reviewing the matter with counsel to assess its
potential liability. It is premature to predict the outcome of this matter at
this time.
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 judgement that
the Company has violated Section 301(a) of the CWA, Section 502(a) of the CAA
and Section 313 of the
8
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 intends to vigorously contest the allegations.
In December 1992, Environment Canada promulgated regulations under the
Fisheries Act which required pulp and paper mills to meet certain effluent
quality standards by December 31, 1995. The Company's Bathurst, New Brunswick
mill was required to upgrade its secondary treatment system in order to meet the
new effluent standards with respect to toxicity levels. Because of the shutdown
of the mill from January 28, 1996 to February 25, 1996, the Company has been
unable to conduct tests to confirm its compliance with the regulations. The
Company intends to conduct the necessary tests to demonstrate compliance after a
sufficient build up of biomass in the mill's effluent has been achieved
following the most recent start-up of the mill.
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 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, 1995, 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," pages 20-21 and "Financial Condition and Liquidity," pages
16-20, and to the Financial Statements, included in this report, under Notes to
the Consolidated Financial Statements, "Note 10--Long-term Debt," pages 43-45,
"Note 13--Preferred Stock," pages 46-47, "Note 14--Common Stock," pages 47-48
and "Note 19--Summary of Quarterly Data (unaudited)," page 54.
(b) APPROXIMATE NUMBER OF HOLDERS OF COMMON STOCK
There were approximately 6,515 holders of record of the Registrant's common
stock, as of March 22, 1996.
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 35-37, and "Note 2--Acquisitions/Dispositions," page 37.
9
SELECTED FINANCIAL DATA
(DOLLARS IN MILLIONS EXCEPT PER SHARE) 1995(b) 1994 1993 1992 1991 1990 1989(c)
- ---------------------------------------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
SUMMARY OF OPERATIONS
Net sales............................... $7,351.2 $ 5,748.7 $ 5,059.6 $ 5,520.7 $ 5,384.3 $ 5,755.9 $5,329.7
Cost of products sold................... 5,168.9 4,564.3 4,223.5 4,473.7 4,287.2 4,421.9 3,893.8
Selling, general and administrative
expenses............................... 608.5 568.2 512.2 543.5 522.8 495.5 474.5
Depreciation and amortization........... 371.8 358.9 346.8 329.2 273.5 257.0 237.1
Interest expense........................ 460.3 456.0 426.7 386.1 397.4 421.7 344.7
Income (loss) before income taxes,
minority interest, extraordinary
charges and cumulative effects of
accounting changes..................... 794.7 (163.1) (463.3) (224.0) (12.2) 194.1 481.8
(Provision) credit for income taxes..... (320.9) 35.5 147.7 59.4 (31.1) (92.8) (195.2)
Minority interest....................... (29.3) (1.2) (3.6) (5.3) (5.8) (5.9) (.8)
Income (loss) before extraordinary
charges and cumulative effects of
accounting changes..................... 444.5 (128.8) (319.2) (169.9) (49.1) 95.4 285.8
Extraordinary charges from early
extinguishments of debt................ (189.0) (61.6) -- -- -- -- --
Cumulative effects of accounting
changes................................ -- (14.2) (39.5) (99.5) -- -- --
Net income (loss)....................... 255.5 (204.6) (358.7) (269.4) (49.1) 95.4 285.8
---------- ---------- ---------- ---------- ---------- ---------- ----------
PER SHARE OF COMMON STOCK (a)
PRIMARY:
Income (loss) before extraordinary
charges and cumulative effects of
accounting changes..................... 4.64 (1.60) (4.59) (2.49) (.78) 1.56 4.67
Extraordinary charges from early
extinguishments of debt................ (2.01) (.70) -- -- -- -- --
Cumulative effects of accounting
changes................................ -- (.16) (.56) (1.40) -- -- --
Net income (loss)--Primary.............. 2.63 (2.46) (5.15) (3.89) (.78) 1.56 4.67
FULLY DILUTED:
Income (loss) before extraordinary
charges and cumulative effects of
accounting changes..................... 3.89 (j) (j) (j) (j) (j) (j)
Extraordinary charges from early
extinguishments of debt................ (1.65) (j) (j) (j) (j) (j) (j)
Cumulative effects of accounting
changes................................ -- (j) (j) (j) (j) (j) (j)
Net income--Fully diluted............... 2.24 (j) (j) (j) (j) (j) (j)
Dividends and distributions paid........ .30 -- -- .35 .71 .71 .70
Common stockholders' equity (end of
year).................................. 8.98 5.90 6.91 13.91 22.12 24.34 22.50
Price range of common shares--N.Y.S.E.
High.................................. 24.63 21.13 19.50 32.63 26.00 25.25 36.38
Low................................... 12.50 9.63 6.38 12.50 9.00 8.13 22.13
Average common shares outstanding (in
millions):
Primary............................... 94.1 88.2 71.2 71.0 63.2 61.3 61.2
Fully diluted......................... 114.7 (j) (j) (j) (j) (j) (j)
---------- ---------- ---------- ---------- ---------- ---------- ----------
FINANCIAL POSITION AT END OF YEAR
Current assets.......................... $1,682.9 $ 1,816.9 $ 1,753.2 $ 1,701.8 $ 1,685.3 $ 1,586.0 $1,687.0
Current liabilities..................... 701.7 1,031.5 943.5 944.8 914.8 1,146.5 1,072.6
Working capital......................... 981.2 785.4 809.7 757.0 770.5 439.5 614.4
Property, plant and equipment--net...... 2,635.8 3,359.0 3,386.4 3,703.2 3,520.2 3,364.0 2,977.9
Total assets............................ 6,398.9 7,004.9 6,836.7 7,027.0 6,902.9 6,690.0 6,253.7
Long-term debt.......................... 3,885.1 4,431.9 4,268.4 4,105.1 4,046.4 3,680.5 3,536.9
Deferred taxes.......................... 493.1 381.4 470.6 685.2 263.9 262.7 185.6
Redeemable preferred stock.............. -- -- 42.3 36.3 31.1 26.6 22.7
Minority interest (i)................... .7 221.8 234.5 .2 3.8 8.0 9.7
Stockholders' equity.................... 1,005.3 648.1 607.1 1,102.7 1,537.5 1,460.5 1,347.6
---------- ---------- ---------- ---------- ---------- ---------- ----------
ADDITIONAL INFORMATION
Paperboard, paper and market pulp:
Produced (thousand short tons) (e).... 7,980 7,928 7,475 7,517 7,365 7,447 6,772
Converted (thousand short tons) (e)... 4,355 4,477 4,354 4,373 4,228 4,241 3,930
Corrugated shipments (billion square
feet) (e).............................. 53.0 54.10 52.48 51.67 49.18 47.16 41.56
Employees (end of year-in thousands).... 25.9 29.1 29.0 31.2 31.8 32.3 32.6
Capital expenditures.................... $ 386.5 $ 232.6 $ 149.7 $ 281.4 $ 430.1 $ 552.0 $ 501.7
Net cash/funds provided by (used in)
operating activities (f)............... $ 961.7 $ 72.3 $ (129.1) $ 120.9 $ 247.2 $ 468.6 $ 370.9
Working capital ratio................... 2.4/1 1.8/1 1.9/1 1.8/1 1.8/1 1.4/1 1.6/1
Percent long-term debt/total
capitalization (g)..................... 72.2% 78.0% 75.9% 69.2% 68.8% 67.7% 69.3%
Return on beginning common stockholders'
equity (h)............................. 83.4% (26.2%) (32.3%) (11.1%) (3.4%) 7.1% 26.9%
Pretax margin........................... 10.4% (2.9%) (9.2%) (4.2%) (.3%) 3.3% 9.0%
After-tax margin........................ 3.5% (3.6%) (7.1%) (4.9%) (.9%) 1.7% 5.4%
---------- ---------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN MILLIONS EXCEPT PER SHARE) 1988 1987(c) 1986(c) 1985
- ---------------------------------------- ---------- ---------- ---------- ----------
SUMMARY OF OPERATIONS
Net sales............................... $ 3,742.5 $3,232.9 $2,032.3 $ 1,229.1
Cost of products sold................... 2,618.0 2,347.8 1,564.6 944.1
Selling, general and administrative
expenses............................... 351.1 343.8 241.2 157.0
Depreciation and amortization........... 148.1 138.7 92.3 67.8
Interest expense........................ 108.3 131.1 85.3 63.3
Income (loss) before income taxes,
minority interest, extraordinary
charges and cumulative effects of
accounting changes..................... 549.7 283.5 59.7 1.5
(Provision) credit for income taxes..... (207.7) (122.1) (24.3) 2.3
Minority interest....................... (.2) (.1) -- --
Income (loss) before extraordinary
charges and cumulative effects of
accounting changes..................... 341.8 161.3 35.4 3.8
Extraordinary charges from early
extinguishments of debt................ -- -- -- --
Cumulative effects of accounting
changes................................ -- -- -- --
Net income (loss)....................... 341.8 161.3 35.4 3.8
---------- ---------- ---------- ----------
PER SHARE OF COMMON STOCK (a)
PRIMARY:
Income (loss) before extraordinary
charges and cumulative effects of
accounting changes..................... 5.58 2.79 .73 .09
Extraordinary charges from early
extinguishments of debt................ -- -- -- --
Cumulative effects of accounting
changes................................ -- -- -- --
Net income (loss)--Primary.............. 5.58 2.79 .73 .09
FULLY DILUTED:
Income (loss) before extraordinary
charges and cumulative effects of
accounting changes..................... (j) 2.65 (j) (j)
Extraordinary charges from early
extinguishments of debt................ (j) -- (j) (j)
Cumulative effects of accounting
changes................................ (j) -- (j) (j)
Net income--Fully diluted............... (j) 2.65 (j) (j)
Dividends and distributions paid........ .35 .25 .19 .19
Common stockholders' equity (end of
year).................................. 17.73 12.40 9.92(d) 7.08
Price range of common shares--N.Y.S.E.
High.................................. 39.50 39.83 20.00 13.17
Low................................... 20.67 15.33 11.38 8.00
Average common shares outstanding (in
millions):
Primary............................... 61.3 57.9 48.8 42.3
Fully diluted......................... (j) 60.9 (j) (j)
---------- ---------- ---------- ----------
FINANCIAL POSITION AT END OF YEAR
Current assets.......................... $ 865.7 $ 737.4 $ 530.4 $ 320.2
Current liabilities..................... 408.3 334.9 203.4 165.1
Working capital......................... 457.4 402.5 327.0 155.1
Property, plant and equipment--net...... 1,276.0 1,300.0 924.4 642.6
Total assets............................ 2,395.0 2,286.1 1,523.6 1,010.3
Long-term debt.......................... 765.1 1,070.5 767.0 493.3
Deferred taxes.......................... 140.3 120.4 69.9 49.2
Redeemable preferred stock.............. -- 1.5 1.5 8.0
Minority interest (i)................... .3 .2 -- --
Stockholders' equity.................... 1,063.6 740.3 481.8 294.7
---------- ---------- ---------- ----------
ADDITIONAL INFORMATION
Paperboard, paper and market pulp:
Produced (thousand short tons) (e).... 4,729 4,373 3,154 2,168
Converted (thousand short tons) (e)... 3,344 2,998 2,495 1,530
Corrugated shipments (billion square
feet) (e).............................. 34.47 32.09 25.95 15.19
Employees (end of year-in thousands).... 20.7 18.8 15.5 9.4
Capital expenditures.................... $ 136.6 $ 105.7 $ 63.3 $ 47.1
Net cash/funds provided by (used in)
operating activities (f)............... $ 454.1 $ 298.3 $ 166.7 $ 79.6
Working capital ratio................... 2.1/1 2.2/1 2.6/1 1.9/1
Percent long-term debt/total
capitalization (g)..................... 38.9% 55.4% 58.1% 58.4%
Return on beginning common stockholders'
equity (h)............................. 46.2% 41.8% 10.2% 1.1%
Pretax margin........................... 14.7% 8.8% 2.9% .1%
After-tax margin........................ 9.1% 5.0% 1.7% .3%
---------- ---------- ---------- ----------
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) In accordance with Statement of Financial Accounting Standards No. 95,
"Statements of Cash Flows," the Company now discloses "Net cash provided by
(used in) operating activities." For years prior to 1986, "Net funds
provided by operations" are presented in this summary. 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) 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
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 amalgamated company will continue under the name of
Stone-Consolidated Corporation ("Stone-Consolidated"). As a result of the
Amalgamation, the Company's equity ownership in Stone-Consolidated was reduced
from 74.6 percent to 46.6 percent, and accordingly, 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 Corporation as a
consolidated subsidiary. See also Note 3 to the Consolidated Financial
Statements.
RESULTS OF OPERATIONS
COMPARATIVE RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1995 1994 1993
--------------- --------------- ---------------
PERCENT PERCENT PERCENT
OF NET OF NET OF NET
(DOLLARS IN MILLIONS) AMOUNT SALES AMOUNT SALES AMOUNT SALES
- -------------------------------------------------- ------ ------- ------ ------- ------ -------
Net sales......................................... $7,351 100.0% $5,749 100.0% $5,060 100.0%
Cost of products sold............................. 5,169 70.3 4,564 79.4 4,223 83.5
Selling, general and administrative expenses...... 608 8.3 568 9.9 512 10.1
Depreciation and amortization..................... 372 5.1 359 6.2 347 6.9
Equity (income) loss from affiliates.............. (20) (.3) 8 .1 12 .2
Other operating (income) expense--net............. -- -- (34) (.6) 5 .1
Other (income) expense--net....................... (33) (.5) (9) (.1) (3) (.1)
------ ------- ------ ------- ------ -------
Income (loss) before interest expense, income
taxes, minority interest, extraordinary charges
and cumulative effects of accounting changes..... 1,255 17.1 293 5.1 (36) (.7)
Interest expense.................................. (460) (6.3) (456) (7.9) (427) (8.4)
------ ------- ------ ------- ------ -------
Income (loss) before income taxes, minority
interest, extraordinary charges and cumulative
effects of accounting changes.................... 795 10.8 (163) (2.8) (463) (9.1)
(Provision) credit for income taxes............... (321) (4.3) 35 .6 148 2.9
Minority interest................................. (29) (.4) (1) -- (4) (.1)
------ ------- ------ ------- ------ -------
Income (loss) before extraordinary charges and
cumulative effects of accounting changes......... 445 6.1 (129) (2.2) (319) (6.3)
Extraordinary charges from early extinguishments
of debt.......................................... (189) (2.6) (62) (1.1) -- --
Cumulative effects of accounting changes.......... -- -- (14) (.3) (40) (.8)
------ ------- ------ ------- ------ -------
Net income (loss)................................. $ 256 3.5 $ (205) (3.6) $ (359) (7.1)
------ ------- ------ ------- ------ -------
------ ------- ------ ------- ------ -------
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 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. See
"Financial Condition and Liquidity--Financing Activities" for a further
discussion of the extraordinary charges from the early extinguishments of debt.
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 extinguishment 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
12
common stock, to reflect the cumulative effect of adopting Statement of
Financial Accounting Standard No. 112, "Employers' Accounting for Postemployment
Benefits" ("SFAS 112"), resulting in a net loss for 1994 of $205 million, or
$2.46 per share of common stock.
The improved results for 1995 over 1994 primarily reflect 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. Partially offsetting the
effect on earnings of the higher average selling prices, however, was an
increase in recycled fibre 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 Corporation's acquisition of Rainy
River and by an increase in interest expense primarily as a result of higher
interest rates associated with the Company's indebtedness. The 1995 results
include 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.
SEGMENT DATA
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------------
1994
------------------------
INCOME 1993
(LOSS) ------------------------
BEFORE INCOME INCOME
TAXES, (LOSS)
1995 MINORITY BEFORE INCOME
----------------------------- INTEREST, TAXES,
INCOME EXTRAORDINARY MINORITY
BEFORE INCOME CHARGES AND INTEREST AND
TAXES, MINORITY CUMULATIVE CUMULATIVE
INTEREST AND EFFECT OF AN EFFECT OF AN
NET EXTRAORDINARY NET ACCOUNTING NET ACCOUNTING
(IN MILLIONS) SALES CHARGES SALES CHANGE SALES CHANGE
- --------------------------------------------- ------ --------------------- ------- -------------- ------- --------------
Paperboard and paper packaging............... $5,406 $ 944 $ 4,241 $ 354 $ 3,810 $ 207
White paper and other........................ 2,010 367 1,550 26 1,296 (158)
Intersegment................................. (65) -- (42) -- (46) --
------ ------ ------- ------ ------- ------
7,351 1,311 5,749 380 5,060 49
Interest expense............................. (460) (456) (427)
Foreign currency transaction gains
(losses)................................... 8 (16) (12)
General corporate and miscellaneous (net).... (64) (71) (73)
------ ------ ------- ------ ------- ------
Total........................................ $7,351 $ 795 $ 5,749 $ (163) $ 5,060 $ (463)
------ ------ ------- ------ ------- ------
------ ------ ------- ------ ------- ------
13
SEGMENT AND PRODUCT LINE SALES DATA
NET SALES
-------------------------------
(DOLLARS IN MILLIONS) YEAR ENDED DECEMBER 31, 1995 1994 1993
- -------------------------------------------------------- --------- --------- ---------
Paperboard and paper packaging:
Corrugated containers................................. $ 3,078 $ 2,433 $ 2,155
Paperboard and kraft paper............................ 1,426 1,055 901
Paper bags and sacks.................................. 743 641 579
Folding cartons....................................... -- -- 60
Other................................................. 159 112 115
--------- --------- ---------
Total paperboard and paper packaging................ 5,406 4,241 3,810
--------- --------- ---------
White paper and other:
Newsprint and groundwood paper........................ 1,012 883 770
Market pulp........................................... 750 305 187
Other................................................. 248 362 339
--------- --------- ---------
Total white paper and other......................... 2,010 1,550 1,296
--------- --------- ---------
Intersegment............................................ (65) (42) (46)
--------- --------- ---------
Total net sales..................................... $ 7,351 $ 5,749 $ 5,060
--------- --------- ---------
--------- --------- ---------
See Note 18 of the Consolidated Financial Statements included in this report
for additional segment information.
PAPERBOARD AND PAPER PACKAGING:
The 1995 net sales for the paperboard and paper packaging segment increased
27.5 percent over 1994 reflecting sales increases for all product lines within
this segment. These sales increases primarily resulted from significantly higher
average selling prices which more than offset reduced volume.
Net sales of corrugated containers, paperboard and paper bags and sacks
increased 26.5 percent, 34.3 percent and 15.9 percent, respectively, over 1994.
These increases reflect significantly higher average 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 average selling prices.
Operating income for the paperboard and paper packaging segment for 1995
increased $590 million over 1994 due to improved operating margins primarily as
a result of the higher average selling prices for the Company's paperboard and
paper packaging products. Operating income for 1994 includes a pretax gain of
approximately $11 million which represented the segment's portion of the
previously mentioned involuntary conversion gain.
WHITE PAPER AND OTHER:
The 1995 net sales for the white paper and other segment increased 29.7
percent over 1994 despite the fact that only ten months of sales of
Stone-Consolidated are included in the 1995 amounts as a result of the SCI de-
consolidation. 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's common stock from 50 percent to 90 percent.
SVCPI had previously been accounted for in accordance with the equity method of
accounting. Excluding the effect of SVCPI, sales of 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.
Operating income for the white paper and other segment for 1995 increased
$341 million over 1994 due to improved operating margins resulting primarily
from the significantly higher average selling prices for market pulp and for
newsprint and groundwood paper. Operating income for 1994 included a pretax gain
of approximately $11 million which represented the segment's portion of the
previously mentioned involuntary conversion gain.
14
1994 COMPARED WITH 1993
Net sales for 1994 were $5.7 billion, an increase of 13.6 percent over 1993
net sales of $5.1 billion. Net sales increased as a result of both increased
sales volume and higher average selling prices for most of the Company's
products. 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 SFAS 112, resulting in a net loss for 1994 of $205
million, or $2.46 per share of common stock. In 1993, the Company incurred a
loss before the cumulative effect of a change in the accounting for
postretirement benefits other than pensions of $319 million, or $4.59 per share
of common stock. The Company adopted Statement of Financial Accounting Standards
No. 106, "Accounting for Postretirement Benefits Other than Pensions" ("SFAS
106"), effective January 1, 1993 and recorded a one-time, non-cash cumulative
effect charge of $40 million, net of income tax benefit, or $.56 per share of
common stock, resulting in a net loss of $359 million, or $5.15 per share of
common stock.
The improved results for 1994 over 1993 primarily reflect improved product
pricing for most of the Company's products which more than offset a substantial
increase in recycled fibre costs, higher interest expense and a decrease in the
income tax benefit. The Company incurred a significant increase in recycled
fibre costs for 1994 over 1993 mainly as a result of a shortage for this raw
material. The 1994 results were also unfavorably impacted by an increase in
interest expense, primarily as a result of higher interest rates, and by foreign
currency transaction losses of $16 million. The 1993 results included foreign
currency transaction losses of $12 million. The 1994 results included the
previously mentioned $22 million pretax involuntary conversion gain, whereas the
1993 results included a $35 million pretax gain from the sale of the Company's
49 percent equity interest in Empaques de Carton Titan, S.A. ("Titan") and the
favorable effect of a reduction in an accrual relating to a change in the
Company's vacation pay policy. The Company recorded an income tax benefit of $35
million in 1994 as compared with an income tax benefit of $148 million in 1993.
The decrease in the income tax benefit primarily reflects the tax effect
associated with the lower pretax loss for 1994 as compared with 1993.
PAPERBOARD AND PAPER PACKAGING:
The 1994 net sales for the paperboard and paper packaging segment increased
11.3 percent over 1993 reflecting sales increases for virtually every product
line within the segment. Net sales for 1993 included sales for the Company's
European folding carton operations, which in the early part of 1993 were merged
into a joint venture and, accordingly, are now accounted for under the equity
method of accounting. Sales from these operations prior to the merger in May of
1993 were approximately $60 million. Excluding the effect of the folding carton
operations, 1994 net sales increased 13.1 percent from the prior year.
Net sales of corrugated containers and paperboard increased 12.9 percent and
17.7 percent, respectively, over 1993. These increases reflect both increased
sales volume and higher average selling prices.
Also, reflecting volume increases and higher average selling prices, net
sales for paper bags and sacks increased 10.7 percent over 1993. Additionally,
net sales of kraft paper increased 2.2 percent over 1993 solely as a result of
increased sales volume.
Operating income for the paperboard and paper packaging segment for 1994
increased $147 million, or 70.8 percent over 1993, due to improved operating
margins primarily as a result of higher average selling prices and improved
sales volumes for corrugated containers, containerboard and paper bags and
sacks. Operating income for 1994 included a pretax gain of approximately $11
million which represents the segment's portion of the previously mentioned
involuntary conversion gain. Operating income for 1993 included a $35 million
pretax gain from the sale of Titan and a favorable effect of a reduction in an
accrual resulting from a change in the Company's vacation policy. The earnings
impact from these 1993 non-recurring items were partially offset by the
writedowns of the carrying values of certain Company assets.
WHITE PAPER AND OTHER:
The 1994 net sales for the white paper and other segment increased 19.6
percent as a result of sales increases for market pulp and for newsprint and
groundwood paper. The sales increase for market pulp of 63.1 percent over 1993
primarily reflects significantly higher average selling prices, although
improved volume also contributed to the increase. Net sales of newsprint and
groundwood paper increased 14.7 percent in 1994 over 1993 primarily as a result
15
of increased sales volume, with higher average selling prices also contributing
to the increase. The increased sales volume and higher average selling prices
for newsprint and groundwood paper more than offset unfavorable foreign exchange
translation effects attributable to the stronger U.S. dollar.
Operating income for the white paper and other segment for 1994 was $25
million compared to an operating loss in 1993 of $159 million. This significant
improvement in operating income was mainly attributable to improved operating
margins primarily resulting from the significantly higher average selling prices
for market pulp and, to a lesser extent, to the increased volume and higher
average selling prices for newsprint and groundwood paper. Additionally,
operating income for 1994 included a pretax gain of approximately $11 million
which represents the segment's portion of the previously mentioned involuntary
conversion gain.
FINANCIAL CONDITION AND LIQUIDITY
The Company's working capital ratio was 2.4 to 1 at December 31, 1995 and
1.8 to 1 at December 31, 1994. The Company's long-term debt to total
capitalization ratio was 72.2 percent at December 31, 1995 and 78.0 percent at
December 31, 1994. 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, minority interest and
stockholders' equity.
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. No significant debt maturities or
amortization obligations are due until June 1997.
On March 22, 1996, the Company and its bank group amended the Company's bank
credit agreement to, among other things, provide for an additional senior
secured term loan facility of $190 million maturing through October 1, 2003 and
a supplemental revolving credit facility of $110 million maturing May 15, 1999.
Additionally, the Company received a waiver from the requirement to make
mandatory repayment of its term loans from excess cash flow (as defined) until
September 1997. The amended credit agreement also removed the cross-acceleration
provisions to the non-recourse debt of SVCPI. The additional funds provided by
these new facilities were used to repay indebtedness outstanding under the
Company's $450 million revolving credit facility under the bank credit
agreement. The Company's bank credit agreement, as amended, consists of a $400
million senior secured term loan facility maturing through April 1, 2000, a $200
million senior secured term loan facility maturing through October 1, 2003, the
$190 million senior secured term loan facility, a $450 million senior secured
revolving credit facility commitment maturing May 15, 1999, which includes a $25
million swing-line sub-facility, and the supplemental $110 million revolving
credit facility (the "Credit Agreement"). At March 22, 1996, the Company had
borrowing availability of approximately $442 million (net of letters of credit
which reduce the amount available to be borrowed) under its revolving credit
facilities. The term loans and the $450 million revolving credit facility had
weighted average interest rates for the year ended December 31, 1995 of 9.2
percent and 9.4 percent, respectively. The weighted average rates do not include
the effect of the amortization of deferred debt issuance costs. In March of
1995, the Company refinanced its accounts receivable securitization program with
a new $310 million facility comprised of $260 million of floating-rate notes due
in 2000 and a five-year $50 million revolving credit facility. As of March 22,
1996, the Company had no outstanding borrowings under this revolving credit
facility. See also "Financing Activities."
The Credit Agreement contains covenants that include, among other things,
the maintenance of certain financial tests and ratios. 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 optional
request, may at their option, waive the receipt of certain mandatory
prepayments. 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.
OUTLOOK:
The Company's current year operations provided significant cash flow from
which $440 million of indebtedness was repaid. As a result, the Company has
improved its liquidity and financial flexibility. The increased cash flow
occurred primarily as a result of prices for the Company's products increasing
to historically high levels with a correspondingly high capacity utilization
rate. Beginning in late 1995, demand for containerboard and market pulp
dramatically diminished and the Company, in order to prevent excessive increases
in inventory, took downtime at
16
various of its mills in the third and fourth quarters of 1995. Currently,
conditions have not improved and the Company is forecasting further downtime for
its mills in the first and second quarters of 1996. Pricing for the Company's
products has continued to decline from historical highs as a result of further
reduction in demand and the introduction of new industry capacity, particularly
for containerboard. It is anticipated that economic activity will increase to a
level to absorb this new capacity. Prices and shipments for market pulp,
however, have declined significantly since the beginning of the year and it is
expected that these declines will have a substantial, adverse impact on the
Company's operating results for the first quarter of 1996. The Company cannot at
this time forecast when demand will increase to offset the current excess supply
in the containerboard and market pulp industry. Notwithstanding the improvement
in the Company's liquidity and financial flexibility, the Company will be
required in the future to generate sufficient cash flows to fully meet the
Company's debt service requirements. The Company has debt amortizations of $260
million in 1997 and $487 million in 1998, with an additional $532 million of
debt maturing in each of 1999 and 2000. In the event that the Company is unable
to generate sufficient operating cash flows to fully meet such debt service
requirements, it is anticipated that the Company would refinance portions of
this indebtedness and/or use a substantial portion of its cash resources and
borrowing availabilities under its revolving credit facilities to repay such
indebtedness. No assurances can be given that such sources will be available in
sufficient amounts for such requirements.
Wood fibre and recycled fibre, 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 fibre 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 fibre depending upon the product being manufactured and each mill's
geographic location. A decrease in the supply of wood fibre has caused, and will
likely continue to cause, higher wood fibre 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 fibre has from time to time
caused a tightness in supply of recycled fibre and at those times a significant
increase in the cost of such fibre used in the manufacture of recycled
containerboard and related products. As a result, the cost of recycled fibre
increased significantly in 1995 and, although it has moderated from the peak
levels of 1995, such costs are likely to continue to fluctuate based upon
demand/supply characteristics. Given the volatility of the recycled fibre
market, there can be no assurance that such costs will not reach the peak levels
of 1995. The Company's paperboard and paper packaging products use a large
volume of recycled fibre. While the Company has not experienced any significant
difficulty in obtaining wood fibre and recycled fibre 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 November 2, 1995, the Company announced that it has agreed to enter into
a joint venture agreement with Four M Corporation (Box USA) to purchase a
paperboard mill located in Port St. Joe, Florida, from St. Joe Paper Company for
$185 million plus applicable working capital. Under the joint venture agreement,
the Company would make a 50 percent common equity investment in the joint
venture with a commitment to purchase equity of the joint venture. It is
anticipated that the purchase by the joint venture would close in the second
quarter of 1996. The completion of the transaction is contingent upon a number
of conditions, including the termination of the Hart-Scott-Rodino waiting period
and the placement of non-recourse financing anticipated to approximate $165
million. Upon completion of the transaction, the joint venture would be highly
leveraged. The mill has the capacity to produce approximately 500,000 short tons
per year, split almost evenly between mottled white and kraft linerboard.
17
CASH FLOWS FROM OPERATIONS:
The following table shows, for the last three years, the net cash provided
by (used in) operating activities:
YEAR ENDED DECEMBER 31,
--------------------------
(IN MILLIONS) 1995 1994 1993
- ------------------------------------------------------------------------------------- --------- ------ ------
Net income (loss).................................................................... $ 256 $ (205) $ (359)
Depreciation and amortization........................................................ 372 359 347
Deferred taxes....................................................................... 214 (55) (134)
Extraordinary charges from early extinguishments of debt............................. 189 62 --
Cumulative effects of accounting changes............................................. -- 14 39
Payment on settlement of interest rate swaps......................................... -- -- (33)
(Increase) decrease in accounts and notes receivable--net............................ (81) (176) 45
(Increase) decrease in inventories................................................... (146) 30 29
(Increase) decrease in other current assets.......................................... 22 (46) (9)
Increase (decrease) in accounts payable and other current liabilities................ 62 87 (60)
Other................................................................................ 74(a) 2 6
--------- ------ ------
Net cash provided by (used in) operating activities.................................. $ 962 $ 72 $ (129)
--------- ------ ------
--------- ------ ------
- ---------
(a) Includes minority interest expense of $29 million.
The Company generated significant operating cash flow during 1995 which,
among other things, allowed for the Company to repay $440 million of
indebtedness. In 1994 and 1993 operating cash flows were insufficient requiring
the Company to increase its indebtedness in order to meet cash needs.
The SCI de-consolidation reduced the Company's consolidated working capital
accounts by approximately $250 million, including a reduction in cash of
approximately $113 million. The working capital changes in the above table have
been adjusted to eliminate the impact of the SCI de-consolidation. Additionally,
certain of the non-current asset and liability accounts included in the
consolidated balance sheet decreased substantially from December 31, 1994 as a
result of the SCI de-consolidation. Significant related decreases include
reductions in the property, plant and equipment--net, goodwill and non-recourse
debt of consolidated affiliates accounts of approximately $864 million, $339
million and $397 million, respectively. The following explanations focus on
variations that were not attributable to the SCI de-consolidation.
The 1995 increase in accounts and notes receivable primarily reflects higher
average selling prices for the Company's products. The 1994 increase in accounts
and notes receivable primarily reflects increased sales volume and higher
average selling prices for the majority of the Company's products.
The increase in inventories for 1995 primarily reflects higher costs and an
increase in the quantity of paperstock levels as a result of recent weakening in
demand. The decrease in inventories for 1994 primarily reflects a reduction in
quantities of certain paperstock levels due to increased sales volume.
The 1995 decrease in other current assets resulted mainly from the
collection of a portion of the insurance claim receivable associated with the
1994 digester accident. The 1994 increase in other current assets resulted
mainly from the recording of the previously mentioned insurance claim, partially
offset by the receipt of an income tax refund.
The increase in accounts payable and other current liabilities in 1995 was
due primarily to the timing of payments. The increase in accounts payable for
1994 was due primarily to the timing of payments, while the increase in accrued
and other current liabilities mainly reflects an increase in accrued interest
primarily associated with interest on the Company's 9 7/8 percent Senior Notes,
10 3/4 percent First Mortgage Notes and the 11 1/2 percent Senior Notes, which
is payable semiannually at various dates throughout the year.
FINANCING ACTIVITIES:
The Company reduced its total indebtedness during 1995 by $803 million, $397
million of which resulted from the SCI de-consolidation. The following
summarizes the Company's significant financing activities in 1995:
- In August 1995, the Company and its bank group amended and restated its
Credit Agreement to provide for an additional $200 million senior secured
term loan facility, the proceeds of which were used to partially fund the
repurchase of certain indebtedness.
18
- During the 1995 third and fourth quarters, in separate, independently
negotiated transactions, the Company purchased and retired $190 million
principal amount of its 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. Funding for the cash
portion of the purchases of the Convertible Senior Subordinated Notes and
the other open market purchases was financed primarily from bank
borrowings. Also in 1995, the Company repurchased approximately $136
million of its 9 7/8 percent Senior Notes and $70 million of its 6 3/4
percent Convertible Subordinated Debentures and redeemed the remaining $90
million principal amount of its 12 1/8 percent Subordinated Debentures.
- During the second quarter of 1995, the Company repaid all the indebtedness
outstanding under and terminated Seminole Kraft Corporation's ("Seminole")
bank credit agreement and redeemed Seminole's 13 1/2 percent Subordinated
Notes for approximately $123 million. The Company had previously acquired
the remaining 1 percent of the common stock of Seminole in March 1995,
thereby making it a wholly owned subsidiary of the Company.
- In March 1995, the Company, through its wholly owned subsidiary Stone
Receivables Corporation, completed the refinancing of the obligations
relating to its account receivable securitization program with a new $310
million accounts receivable securitization program consisting of $260
million of floating-rate notes due in 2000 (the "Notes") together with a
five-year $50 million revolving credit facility (collectively, the "March
1995 Refinancing"). The March 1995 Refinancing permits the Company to sell
certain of its accounts receivable to Stone Receivables Corporation, which
purchases such receivables under the program. The initial accounts
receivable under the program were purchased with the net proceeds received
from the issuance of the Notes. The purchased accounts receivable are
solely the assets of Stone Receivables Corporation, a wholly owned
subsidiary of the Company, with its own borrowings. In the event of a
liquidation of Stone Receivables Corporation, such borrowings would be
satisfied from the assets of Stone Receivables Corporation prior to any
distribution to the Company. At December 31, 1995, the Company's
Consolidated Balance Sheet included approximately $302 million of accounts
receivable under the program and $260 million of borrowings under the
program.
Primarily as a result of the debt repurchases and prepayments mentioned
above, the Company recorded extraordinary charges from the early extinguishments
of debt of $189 million in 1995 as compared with extraordinary charges of $62
million associated with early extinguishments of debt in 1994.
INVESTING ACTIVITIES:
The following summarizes the Company's primary 1995 investing activities:
- Capital expenditures for 1995 totaled approximately $387 million. The
Company's capital expenditures for 1996 are budgeted at approximately $270
million.
- In November 1995, the Company acquired approximately 32 percent of the
outstanding voting common stock (approximately 21 percent of the total
outstanding common stock) of Venepal, S.A.C.A., a Venezuelan pulp, paper
and paper products company. The Company's investment is accounted for
under the equity method of accounting. Also in 1995, the Company acquired
100 percent of the outstanding common stock of River House Packaging Pty.,
Ltd. (which was subsequently renamed Stone Container Australia Pty.,
Ltd.), an Australia-based corrugated container company.
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 $36 million in 1995, and the Company
anticipates that 1996 and 1997 environmental capital expenditures will
approximate $61 million and $16 million, respectively (exclusive of any
potential expenditures which may be required if the proposed "cluster rules"
described below are adopted). Although capital expenditures
19
for environmental control equipment and facilities and compliance costs in
future years will depend on legislative and technological developments which
cannot be predicted at this time, the Company anticipates that these costs will
increase when final "cluster rules," as described below, 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. The EPA has indicated that it may reopen the
comment period on the proposed regulations to allow review and comment on new
data that the industry will submit to the agency on the industry's air toxic
emissions. It cannot be predicted at this time whether the EPA will modify the
requirements in the final regulations which are currently scheduled to be issued
in 1996, with compliance required within three years from such date. The Company
is considering and evaluating the potential impact of the rules, as proposed, on
its operating and capital expenditures over the next several years. Estimates,
based on currently proposed regulations, indicate that the Company could be
required to make capital expenditures of $350-$450 million during the period of
1996 through 1998 in order to meet the requirements of the regulations, although
it is possible this range could decrease upon finalization of the rules. In
addition, annual operating expenses would increase by as much as $20 million
beginning in 1998. The ultimate financial impact of the regulations cannot be
accurately estimated at this time but will be affected by several factors,
including the actual requirements imposed under the final rule, advancements in
control process technologies, possible reconfiguration of mills and inflation.
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 percent 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 is reviewing the matter
with counsel to assess its potential liability. It is premature to predict the
outcome of this matter at this time.
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 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. On September 13, 1995 and December
13, 1995, the Company paid quarterly cash dividends of $0.15 per share on the
Company's common stock. On January 22, 1996, the Company's Board of Directors
declared a quarterly cash dividend of $0.15 per share on the Company's common
stock which was paid on March 13, 1996 to shareholders of record on February 23,
1996.
20
The Company paid cash dividends of $2.625 and $1.75 per share on the Series
E Cumulative Preferred Stock during 1995 and 1994, respectively, bringing the
Company current on its dividend requirements for these securities at December
31, 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 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.
COMMON STOCK
------------------------------
1995 1994
-------------- --------------
Quarter High Low High Low
- --------------------------------------------------------------------------- ------ ------ ------ ------
1st........................................................................ $24.50 $16.88 $16.88 $ 9.63
2nd........................................................................ 24.00 16.25 16.63 12.25
3rd........................................................................ 24.63 18.88 21.13 14.50
4th........................................................................ 19.00 12.50 20.50 14.63
Year....................................................................... 24.63 12.50 21.13 9.63
------ ------ ------ ------
SERIES E CUMULATIVE
PREFERRED STOCK
------------------------------
1995 1994
-------------- --------------
Quarter High Low High Low
- --------------------------------------------------------------------------- ------ ------ ------ ------
1st........................................................................ $22.63 $16.88 $19.50 $15.25
2nd........................................................................ 24.25 21.00 20.63 17.38
3rd........................................................................ 24.88 20.63 20.88 17.50
4th........................................................................ 21.88 17.13 19.88 16.63
Year....................................................................... 24.88 16.88 20.88 15.25
------ ------ ------ ------
There were approximately 6,395 common stockholders and 366 preferred
stockholders of record at December 31, 1995.
ACCOUNTING STANDARDS CHANGES
In March 1995, the Financial Accounting Standards Board ("FASB") issued
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. SFAS 121 stipulates that in the event the
carrying amount of any asset in question exceeds the future undiscounted cash
flows expected from the use and eventual disposition of the asset, then an
impairment loss represented by any excess carrying value over the fair value of
the asset must be recognized. As required, the Company will adopt SFAS 121
effective January 1, 1996. Based on preliminary analysis, management currently
believes that the adoption of SFAS 121 will not materially affect the Company's
results of operations or financial position. See also Note 1--"Summary of
Significant Accounting Policies" to the Consolidated Financial Statements.
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 5, 1996 are set forth on pages 30-54 of this report.
The financial statement schedules listed under Item 14(a)2, together with the
report thereon of the independent accountants dated February 5, 1996 are set
forth on pages 55 and 57 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, 1996, for the Annual Meeting of Stockholders scheduled May 14,
1996, 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, 1996, for the Annual Meeting of Stockholders scheduled May 14,
1996, under the caption "Compensation," excluding the section thereunder
entitled "Compensation Committee Report on Executive Compensation."
21
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a) SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Information relating to certain beneficial ownership of the Registrant's
common stock is incorporated herein by reference to the Proxy Statement, to be
filed on or before April 30, 1996, for the Annual Meeting of Stockholders
scheduled May 14, 1996, under the captions "Nominees for Directors" and
"Security Ownership by Certain Beneficial Owners and Management--Security
Ownership by Certain Beneficial Owners."
(b) SECURITY OWNERSHIP OF MANAGEMENT
Information relating to ownership of the Registrant's equity securities by
Directors and Executive Officers is incorporated herein by reference to the
Proxy Statement, to be filed on or before April 30, 1996, for the Annual Meeting
of Stockholders scheduled May 14, 1996, under the captions "Nominees for
Directors" and "Security Ownership by Certain Beneficial Owners and
Management--Security Ownership by Management."
(c) CHANGES IN CONTROL
The Registrant knows of no contractual arrangements which may, at a
subsequent date, result in a change in control of the Registrant.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information related to certain relationships and related transactions is
incorporated herein by reference to the Proxy Statement, to be filed on or
before April 30, 1996, for the Annual Meeting of Stockholders scheduled May 14,
1996, under the caption "Directors--Certain Transactions."
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) DOCUMENTS FILED AS PART OF THIS REPORT
1. FINANCIAL STATEMENTS. The Registrant's financial statements, for
the year ended December 31, 1995, together with the Report of Independent
Accountants are set forth on pages 30-54 of this report. The supplemental
financial information listed and appearing hereafter should be read in
conjunction with the Financial Statements included in this report. Separate
financial statements of 50 percent or less owned persons accounted for by
the equity method have been omitted because the registrant's proportionate
share of the income from continuing operations before income taxes of each
such company is less than 20 percent of the consolidated amount, and the
investment in and advances to each company is less than 20 percent of
consolidated total assets.
2. FINANCIAL STATEMENT SCHEDULES. The following are included in Part
IV of this report for each of the years ended December 31, 1995, 1994 and
1993 as applicable:
Page
------
Report of Independent Accountants on Financial Statement
Schedule................................................... 55
Valuation and Qualifying Accounts and Reserves (Schedule
II)........................................................ 57
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, 1995, the Company had outstanding loans receivable of $275,000 and
$175,000, respectively, to James Doughan, President and Chief Executive Officer
of Stone-Consolidated Corporation, and to James B. Heider, Senior Vice President
and General Manager, Containerboard and Paper Division. Upon the resignation of
Mr. Heider in 1996, his loan due to the Company was repaid. The remaining loan
bears no interest and is repayable on demand pursuant to request by the Company.
3. EXHIBITS. The exhibits required to be filed by Item 601 of
Regulation S-K are listed under the caption "Exhibits" in Item 14(c).
22
(b) REPORTS ON FORM 8-K
A Report on Form 8-K dated February 16, 1995 was filed reporting under Item
5--Other Events, stating that the Company issued a press release on February 6,
1995 announcing its financial results for the fourth quarter of 1994 and for the
year ended December 31, 1994.
A Report on Form 8-K dated September 8, 1995 was filed under Item 5--Other
Events, stating that the Company issued a press release on August 31, 1995
announcing the removal of 180,000 tons of production from seven mills during the
third quarter.
A Report on Form 8-K dated November 7, 1995 was filed under Item 5--Other
Events, stating that the Company issued a press release on October 23, 1995
announcing its financial results for the third quarter of 1995 and for the nine
months ended September 30, 1995.
A Report on Form 8-K dated November 9, 1995 was filed reporting under Item
2--Acquisition or Disposition of Assets, stating that Stone-Consolidated
Corporation, a previous 74.6 percent owned Canadian subsidiary of the Company,
amalgamated its operations with Rainy River Forest Products Inc., a
Toronto-based Canadian pulp and paper company. The amalgamated entity ("Amalco")
will continue under the name Stone-Consolidated Corporation. As a result of the
amalgamation, the Company's equity ownership in Stone-Consolidated Corporation
was reduced from 74.6 percent to approximately 46.6 percent. Stone-Consolidated
Corporation will begin to be reported by the Company under the equity method of
accounting effective November 1, 1995.
(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) 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").**
- ---------
** Filed herewith
23
4(f) 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.
4(g) 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(h) Indenture, dated as of September 1, 1989, between the Company and
Bankers Trust Company, as Trustee, relating to the Company's 11 1/2%
Senior Subordinated Notes due September 1, 1999, filed as Exhibit 4(n)
to the Company's Registration Statement on Form S-3, Registration
Number 33-46764, is hereby incorporated by reference.
4(i) 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%
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(j) 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(k) 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% 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(l) 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(m) 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(n) 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(o) 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.**
4(p) 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.**
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).
- ---------
** Filed herewith
24
4(q) 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.
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.*
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) Form of "Employee Continuity Agreement in the Event of a Change of
Control" entered into with all officers with 5 or more years of
service with the Company, filed as Exhibit 10(j) to the Company's
Annual Report on Form 10-K for the year ended December 31, 1988, is
hereby incorporated by reference.*
10(h) Stone Container Corporation 1986 Long-Term Incentive Program, filed as
Exhibit A to the Company's Proxy Statement dated as of April 5, 1985,
is hereby incorporated by reference.*
10(i) 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(j) Supplemental Retirement Income Agreement between Company and James
Doughan dated as of February 10, 1989, filed as Exhibit 10(q) to the
Company's Annual Report on Form 10-K for the year ended December 31,
1988, is hereby incorporated by reference.*
10(k) 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(l) 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.*
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.**
27 Financial Data Schedule.**
<FN>
- ---------
* Management contract or compensatory plan or arrangement
** Filed herewith
25
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 27, 1996
Roger W. Stone
CHAIRMAN OF THE BOARD OF DIRECTORS AND PRESIDENT
(CHIEF EXECUTIVE OFFICER)
RANDOLPH C. READ
------------------------------------------------------- March 27, 1996
Randolph C. Read
SENIOR VICE PRESIDENT
(CHIEF FINANCIAL AND PLANNING OFFICER)
THOMAS P. CUTILLETTA
------------------------------------------------------- March 27, 1996
Thomas P. Cutilletta
SENIOR VICE PRESIDENT, ADMINISTRATION AND CORPORATE CONTROLLER (PRINCIPAL
ACCOUNTING OFFICER)
26
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 27, 1996 DIRECTOR March 27, 1996
RICHARD A. GIESEN RICHARD J. RASKIN
- ------------------------------------------ ------------------------------------------
Richard A. Giesen Richard J. Raskin
DIRECTOR March 27, 1996 DIRECTOR March 27, 1996
JAMES J. GLASSER ALAN STONE
- ------------------------------------------ ------------------------------------------
James J. Glasser Alan Stone
DIRECTOR March 27, 1996 DIRECTOR March 27, 1996
JACK M. GREENBERG AVERY J. STONE
- ------------------------------------------ ------------------------------------------
Jack M. Greenberg Avery J. Stone
DIRECTOR March 27, 1996 DIRECTOR March 27, 1996
GEORGE D. KENNEDY IRA N. STONE
- ------------------------------------------ ------------------------------------------
George D. Kennedy Ira N. Stone
DIRECTOR March 27, 1996 DIRECTOR March 27, 1996
HOWARD C. MILLER, JR. JAMES H. STONE
- ------------------------------------------ ------------------------------------------
Howard C. Miller, Jr. James H. Stone
DIRECTOR March 27, 1996 DIRECTOR March 27, 1996
JOHN D. NICHOLS ROGER W. STONE
- ------------------------------------------ ------------------------------------------
John D. Nichols Roger W. Stone
DIRECTOR March 27, 1996 DIRECTOR March 27, 1996
27
INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM: PAGE
- ---------------------------------------------------------------------- -----
Financial Statements:
Management's Responsibility for the Financial Statements............ 29
Report of Independent Accountants................................... 30
Consolidated Statements of Operations............................... 31
Consolidated Balance Sheets......................................... 32
Consolidated Statements of Cash Flows............................... 33
Consolidated Statements of Stockholders' Equity..................... 34
Notes to the Consolidated Financial Statements...................... 35
Financial Statement Schedules:
Report of Independent Accountants on Financial Statement Schedule... 55
Consent of Independent Accountants.................................. 56
Valuation and Qualifying Accounts and Reserves (Schedule II)........ 57
28
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 report, which appears
herein, is based on 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)
29
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, 1995 and 1994, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 1995, 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 methods of accounting for postretirement benefits other than
pensions and for postemployment benefits effective January 1, 1993 and 1994,
respectively.
PRICE WATERHOUSE LLP
Chicago, Illinois
February 5, 1996
30
STONE CONTAINER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions except per share)
YEAR ENDED DECEMBER 31,
----------------------------------
1995 1994 1993
---------- ---------- ----------
SALES
Net sales................................................................ $ 7,351.2 $ 5,748.7 $ 5,059.6
---------- ---------- ----------
COST AND EXPENSES
Cost of products sold.................................................... 5,168.9 4,564.3 4,223.5
Selling, general and administrative expenses............................. 608.5 568.2 512.2
Depreciation and amortization............................................ 371.8 358.9 346.8
Equity (income) loss from affiliates..................................... (19.9) 7.7 11.7
Other operating (income) expense--net.................................... -- (34.4) 4.7
Other (income) expense--net.............................................. (33.1) (8.9) (2.7)
---------- ---------- ----------
Income (loss) before interest expense, income taxes, minority interest,
extraordinary charges and cumulative effects of accounting changes...... 1,255.0 292.9 (36.6)
Interest expense......................................................... (460.3) (456.0) (426.7)
---------- ---------- ----------
Income (loss) before income taxes, minority interest, extraordinary
charges and cumulative effects of accounting changes.................... 794.7 (163.1) (463.3)
(Provision) credit for income taxes...................................... (320.9) 35.5 147.7
Minority interest........................................................ (29.3) (1.2) (3.6)
---------- ---------- ----------
NET INCOME (LOSS)
Income (loss) before extraordinary charges and cumulative effects of
accounting changes...................................................... 444.5 (128.8) (319.2)
Extraordinary charges from early extinguishments of debt (net of income
tax benefits)........................................................... (189.0) (61.6) --
Cumulative effects of accounting changes (net of income tax benefits).... -- (14.2) (39.5)
---------- ---------- ----------
Net income (loss)........................................................ 255.5 (204.6) (358.7)
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............................ $ 247.4 $ (216.7) $ (366.8)
---------- ---------- ----------
---------- ---------- ----------
PER SHARE OF COMMON STOCK:
PRIMARY:
Income (loss) before extraordinary charges and cumulative effects of
accounting changes...................................................... $ 4.64 $ (1.60) $ (4.59)
Extraordinary charges from early extinguishments of debt................. (2.01) (.70) --
Cumulative effects of accounting changes................................. -- (.16) (.56)
---------- ---------- ----------
Net income (loss)........................................................ $ 2.63 $ (2.46) $ (5.15)
---------- ---------- ----------
---------- ---------- ----------
FULLY DILUTED:
Income (loss) before extraordinary charges and cumulative effects of
accounting changes...................................................... $ 3.89 $ * $ *
Extraordinary charges from early extinguishments of debt................. (1.65) * *
Cumulative effects of accounting changes................................. -- * *
---------- ---------- ----------
Net income (loss)........................................................ $ 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.
31
STONE CONTAINER CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in millions)
DECEMBER 31,
----------------------
1995 1994
---------- ----------
ASSETS
Current assets:
Cash and cash equivalents............................................................................. $ 40.3 $ 108.6
Accounts and notes receivable (less allowances of $22.1 and $20.2).................................... 743.0 824.5
Inventories........................................................................................... 733.3 673.1
Other................................................................................................. 166.3 210.7
---------- ----------
Total current assets................................................................................ 1,682.9 1,816.9
---------- ----------
Property, plant and equipment......................................................................... 4,750.0 5,465.5
Accumulated depreciation and amortization............................................................. (2,114.2) (2,106.5)
---------- ----------
Property, plant and equipment--net.................................................................. 2,635.8 3,359.0
Timberlands........................................................................................... 57.7 75.1
Goodwill.............................................................................................. 545.5 860.2
Investment in non-consolidated affiliates............................................................. 1,096.2 345.8
Other................................................................................................. 380.8 547.9
---------- ----------
Total assets........................................................................................ $ 6,398.9 $ 7,004.9
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable...................................................................................... $ 347.9 $ 328.0
Current maturities of senior and subordinated long-term debt.......................................... 27.1 276.1
Notes payable and current maturities of non-recourse debt of consolidated affiliates.................. 29.3 36.5
Income taxes.......................................................................................... .8 35.2
Accrued and other current liabilities................................................................. 296.6 355.7
---------- ----------
Total current liabilities........................................................................... 701.7 1,031.5
---------- ----------
Senior long-term debt................................................................................. 2,807.3 2,488.5
Subordinated debt..................................................................................... 809.2 1,159.6
Non-recourse debt of consolidated affiliates.......................................................... 268.6 783.8
Other long-term liabilities........................................................................... 313.0 290.2
Deferred taxes........................................................................................ 493.1 381.4
Minority interest..................................................................................... .7 221.8
Commitments and contingencies (Note 17)...............................................................
Stockholders' equity:
Series E preferred stock.............................................................................. 115.0 115.0
Common stock (99.1 and 90.4 shares outstanding)....................................................... 953.1 849.1
Retained earnings (accumulated deficit)............................................................... 97.8 (96.3)
Foreign currency translation adjustment............................................................... (156.9) (215.2)
Unamortized expense of restricted stock plan.......................................................... (3.7) (4.5)
---------- ----------
Total stockholders' equity.......................................................................... 1,005.3 648.1
---------- ----------
Total liabilities and stockholders' equity.......................................................... $ 6,398.9 $ 7,004.9
---------- ----------
---------- ----------
The accompanying notes are an integral part of these statements.
32
STONE CONTAINER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
YEAR ENDED DECEMBER 31,
---------------------------------
1995 1994 1993
--------- ----------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)............................................................................ $ 255.5 $ (204.6) $ (358.7)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating
activities:
Depreciation and amortization............................................................ 371.8 358.9 346.8
Deferred taxes........................................................................... 213.6 (54.6) (133.9)
Foreign currency transaction (gains) losses.............................................. (8.1) 15.8 11.8
Payment on settlement of interest-rate swaps............................................. -- -- (33.0)
Extraordinary charges from early extinguishments of debt................................. 189.0 61.6 --
Cumulative effects of accounting changes................................................. -- 14.2 39.5
Other--net............................................................................... 82.2 (13.6) (5.7)
Changes in current assets and liabilities--net of adjustments for acquisitions and
dispositions:
(Increase) decrease in accounts and notes receivable--net................................ (80.8) (175.7) 44.9
(Increase) decrease in inventories....................................................... (145.5) 29.7 28.9
(Increase) decrease in other current assets.............................................. 21.7 (45.9) (9.3)
Increase (decrease) in accounts payable and other current liabilities.................... 62.3 86.5 (60.4)
--------- ----------- ---------
Net cash provided by (used in) operating activities.......................................... 961.7 72.3 (129.1)
--------- ----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Debt repayments.............................................................................. (826.3) (1,655.8) (698.1)
Payments by consolidated affiliates on non-recourse debt..................................... (146.1) (429.3) (55.0)
Borrowings................................................................................... 515.8 1,871.0 527.8
Non-recourse borrowings of consolidated affiliates........................................... 4.2 8.4 400.6
Proceeds from issuance of common stock....................................................... 1.7 276.3 --
Proceeds from issuance of common stock of a consolidated subsidiary.......................... -- -- 161.8
Redemption of redeemable preferred stock of a consolidated affiliate......................... -- (52.6) --
Refund of letter of credit................................................................... -- 13.5 --
Proceeds from the settlement of cross currency swaps......................................... -- -- 67.9
Cash dividends............................................................................... (41.5) (8.1) (4.0)
--------- ----------- ---------
Net cash (used in) provided by financing activities.......................................... (492.2) 23.4 401.0
--------- ----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures......................................................................... (386.5) (232.6) (149.7)
Payments made for businesses acquired........................................................ (56.7) (24.5) (.1)
Proceeds from sales of assets................................................................ 20.3 36.5 106.0
Effect on cash of de-consolidation of Stone-Consolidated..................................... (113.1) -- --
Other--net................................................................................... (9.1) (14.4) (40.7)
--------- ----------- ---------
Net cash used in investing activities........................................................ (545.1) (235.0) (84.5)
--------- ----------- ---------
Effect of exchange rate changes on cash...................................................... 7.3 .5 1.1
--------- ----------- ---------
NET CASH FLOWS
Net increase (decrease) in cash and cash equivalents......................................... (68.3) (138.8) 188.5
Cash and cash equivalents, beginning of period............................................... 108.6 247.4 58.9
--------- ----------- ---------
Cash and cash equivalents, end of period..................................................... $ 40.3 $ 108.6 $ 247.4
--------- ----------- ---------
--------- ----------- ---------
- ---------
See Note 4 regarding non-cash financing and investing activities and
supplemental cash flow information.
The accompanying notes are an integral part of these statements.
33
STONE CONTAINER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in millions except per share)
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1995 1994 1993
--------------- --------------- ----------------
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.................................................. 849.1 90.4 574.3 71.2 645.7 71.0
Issuance of common stock:
Debt conversions.................................................... 180.4 8.5 -- -- -- --
Public offering..................................................... -- -- 276.3 19.0 -- --
Exercise of stock options........................................... 1.8 .1 .1 -- .1 --
Restricted stock plan............................................... 2.0 .1 2.4 .2 2.9 .2
Redemption premium of redeemable preferred stock of a consolidated
affiliate.......................................................... -- -- (4.0) -- -- --
Subsidiary issuance of stock.......................................... (80.2) -- -- -- (74.4) --
------- ------ ------- ------ -------- ------
Balance at December 31................................................ 953.1 99.1 849.1 90.4 574.3 71.2
------- ------ ------- ------ -------- ------
------ ------ ------
RETAINED EARNINGS (ACCUMULATED DEFICIT)
Balance at January 1.................................................. (96.3) 101.6 496.0
Net income (loss)..................................................... 255.5 (204.6) (358.7)
Cash dividends:
Preferred stock*.................................................... (12.1) (8.1) (4.0)
Common stock*....................................................... (29.4) -- --
Decrease (increase) in minimum pension liability in excess of
unrecognized prior service cost...................................... (19.9) 14.8 (31.7)
------- ------- --------
Balance at December 31................................................ 97.8 (96.3) 101.6
------- ------- --------
FOREIGN CURRENCY TRANSLATION ADJUSTMENT
Balance at January 1.................................................. (215.2) (179.0) (149.3)
Adjustment from translation of foreign currency statements............ 58.3 (36.2) (29.7)
------- ------- --------
Balance at December 31................................................ (156.9) (215.2) (179.0)
------- ------- --------
UNAMORTIZED EXPENSE OF RESTRICTED STOCK PLAN
Balance at January 1.................................................. (4.5) (4.8) (4.7)
Issuance of shares.................................................... (2.0) (2.4) (2.9)
Amortization of expense............................................... 2.8 2.7 2.8
------- ------- --------
Balance at December 31................................................ (3.7) (4.5) (4.8)
------- ------- --------
Total stockholders' equity at December 31............................. $1,005.3 $ 648.1 $ 607.1
------- ------- --------
------- ------- --------
- ---------
* Cash dividends paid on common stock were $.30 per share in 1995. No cash
dividends on common stock were paid in 1994 or in 1993. Cash dividends paid on
preferred stock were $2.625 per share in 1995, $1.75 per share in 1994 and
$.875 per share in 1993.
The accompanying notes are an integral part of these statements.
34
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. 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 94,131,569 in 1995, 88,195,190 in 1994
and 71,162,646 in 1993.
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
fibre 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 $116 million and $147 million
at December 31, 1995 and 1994, respectively. The Company assesses at
35
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 $47 million and $68 million of unamortized deferred
start-up costs at December 31, 1995 and 1994, 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 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.
FOREIGN CURRENCY AND FINANCIAL INSTRUMENTS:
The Company has utilized various financial instruments to reduce certain of
its foreign currency and/or interest rate exposures. The Company does not hold
or issue financial instruments for trading purposes. 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.
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS:
Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 106 and recorded its catch-up accumulated
postretirement benefit obligation (approximately $63 million) by recognizing a
one-time, non-cash charge of $39.5 million, net of income tax benefit, as a
cumulative effect of an accounting change.
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.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS:
In March 1995, the Financial Accounting Standards Board ("FASB") issued
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. SFAS 121 stipulates that in the event the
carrying amount of any asset in question exceeds the future undiscounted cash
flows expected from the use and eventual disposition of the asset, then an
impairment loss represented by any excess carrying value over the fair value of
the asset must be recognized. As required, the Company will adopt SFAS 121
effective January 1, 1996. Based on preliminary analysis, management currently
believes that the adoption of SFAS 121 will not materially affect the Company's
results of operations or financial position.
In October 1995, the FASB issued Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), which
encourages companies to apply a fair value based method of accounting for
stock-based compensation plans. Alternatively, companies are permitted to apply
the intrinsic value-based method currently prescribed under Accounting
Principles Board Opinion No. 25, provided certain pro forma disclosures are
36
STONE CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
made. SFAS 123 is required to be adopted in 1996. The Company intends to
continue to apply the intrinsic value-based method of accounting and provide the
pro forma disclosure requirements in the notes to the 1996 consolidated
financial statements.
NOTE 2--ACQUISITIONS/DISPOSITIONS
In November 1995, the Company acquired approximately 32 percent of the
outstanding voting common stock (approximately 21 percent of the total
outstanding common stock) of Venepal, S.A.C.A., a Venezuelan pulp, paper and
paper products company. The Company's investment is accounted for under the
equity method of accounting. Additionally, in 1995 the Company acquired 100
percent of the outstanding common stock of River House Packaging Pty., Ltd.
(which was subsequently renamed Stone Container Australia Pty., Ltd.), an
Australia-based corrugated container company.
In December 1994, the Company acquired an additional 40 percent of the
common stock of Stone Venepal (Celgar) Pulp Inc. ("SVCPI"), previously a 50
percent-owned nonconsolidated affiliate, thereby increasing the Company's
ownership interest to 90 percent. As a result of this transaction, SVCPI is now
accounted for as a consolidated subsidiary. Additionally, this transaction
indirectly increased the Company's ownership interest in the Celgar pulp mill
located in Castlegar, British Columbia, from 25 percent to 45 percent, as SVCPI
has a 50 percent joint venture interest in the Celgar pulp mill. In December
1993, the Company sold its 49 percent equity interest in Empaques de Carton
Titan.
NOTE 3--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 will continue 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.
In December 1993, Stone-Consolidated Corporation, then a newly created
Canadian subsidiary, acquired the newsprint and uncoated groundwood papers
business of Stone Container (Canada) Inc. and sold $346.5 million of units in an
initial public offering comprised of both common stock and convertible
subordinated debentures (the "Units Offering"). As a result of the Units
Offering, the Company recorded in 1993 a charge of approximately $74 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.
37
STONE CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 4--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) 1995 1994 1993
- ---------------------------------------------------------------------- ------- ------- -------
Issuance of common stock as partial consideration to extinguish
debt................................................................. $ 180.4 $ -- $ --
Assumption of non-recourse debt of affiliates......................... 15.0 115.0 --
Capital lease obligations incurred.................................... 2.3 2.4 .3
Short-term note receivable recorded as partial consideration from sale
of an investment..................................................... -- 7.8 --
Preferred stock dividends issued by a consolidated affiliate.......... -- -- 6.0
Conversion of investment in an affiliate into a note receivable....... -- 3.2 --
Note receivable received from sale of assets.......................... -- 1.3 --
------- ------- -------
------- ------- -------
Cash paid (received) during the year for:
Interest (net of capitalization).................................... $ 443.7 $ 373.7 $ 375.9
Income taxes (net of refunds)....................................... 125.5 (4.1) (11.7)
------- ------- -------
------- ------- -------
In 1995, the other-net component of net cash provided from operating
activities included minority interest expense of $29.3 million.
NOTE 5--INVENTORIES
Inventories are summarized as follows:
DECEMBER 31,
-----------------
(IN MILLIONS) 1995 1994
- ------------------------------------------------------------ ------- -------
Raw materials and supplies.................................. $ 287.5 $ 306.9
Paperstock.................................................. 358.8 263.4
Work in process............................................. 23.1 21.4
Finished products........................................... 123.1 116.1
------- -------
792.5 707.8
Excess of current cost over LIFO inventory value............ (59.2) (34.7)
------- -------
Total inventories........................................... $ 733.3 $ 673.1
------- -------
------- -------
Inventories costed by the LIFO, FIFO and average cost methods represented
approximately 42 percent, 8 percent and 50 percent, respectively, of total
inventories at December 31, 1995 and approximately 42 percent, 7 percent and 51
percent, respectively, of total inventories at December 31, 1994.
NOTE 6--PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is summarized as follows:
DECEMBER 31,
---------------------
(IN MILLIONS) 1995 1994
- ------------------------------------------------------------ --------- ---------
Machinery and equipment..................................... $ 3,888.4 $ 4,554.1
Buildings and leasehold improvements........................ 630.7 687.0
Land and land improvements.................................. 107.0 102.0
Construction in progress.................................... 123.9 122.4
--------- ---------
Total property, plant and equipment......................... 4,750.0 5,465.5
Accumulated depreciation and amortization................... (2,114.2) (2,106.5)
--------- ---------
Total property, plant and equipment--net.................... $ 2,635.8 $ 3,359.0
--------- ---------
--------- ---------
38
STONE CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 6--PROPERTY, PLANT AND EQUIPMENT (CONTINUED)
Property, plant and equipment includes capitalized leases of $10.5 million
and $13.8 million and related accumulated amortization of $7.0 million and $5.3
million at December 31, 1995 and 1994, respectively.
NOTE 7--SUMMARIZED FINANCIAL INFORMATION OF NON-CONSOLIDATED AFFILIATES
At December 31, 1995, the Company's share of the total combined assets of
its non-consolidated affiliates accounted for under the equity method of
accounting were greater than 10 percent of the Company's consolidated total
assets. Therefore, summarized 1995 financial information for these
non-consolidated affiliates is presented below. At December 31, 1994 and 1993,
combined financial information of the Company's non-consolidated affiliates did
not meet the required thresholds and therefore summarized financial information
is not presented.
Combined summarized financial information for the Company's non-consolidated
affiliates which are 50 percent or less owned and accounted for under the equity
method of accounting is as follows:
YEAR ENDED
DECEMBER 31,
(IN MILLIONS) 1995
- ---------------------------------------------------------------------------------------------- -------------
Results of operations:
Net sales................................................................................... $ 1,472.9
Income before extraordinary charges......................................................... 68.5
Net income.................................................................................. 46.1
-------------
DECEMBER 31,
(IN MILLIONS) 1995
- ---------------------------------------------------------------------------------------------- -------------
Financial position:
Current assets.............................................................................. $ 924.8
Non-current assets.......................................................................... 3,102.7
Current liabilities......................................................................... 619.6
Non-current liabilities..................................................................... 794.8
Stockholders' equity........................................................................ 2,613.1
-------------
NOTE 8--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) 1995 1994 1993
- -------------------------------------------------- -------- ------- --------
Currently (payable) refundable:
Federal......................................... $ (59.6) $ -- $ 28.4
State........................................... (10.5) (1.1) (4.0)
Foreign......................................... (37.2) (18.0) (10.6)
-------- ------- --------
(107.3) (19.1) 13.8
Deferred:
Federal......................................... (80.9) 45.3 45.4
State........................................... (26.2) 1.1 31.3
Foreign......................................... (106.5) 8.2 57.2
-------- ------- --------
(213.6) 54.6 133.9
-------- ------- --------
Total (provision) credit for income taxes......... $ (320.9) $ 35.5 $ 147.7
-------- ------- --------
-------- ------- --------
39
STONE CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 8--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) 1995 1994 1993
- ---------------------------------------------------------------------- -------- ------- --------
Federal income tax (provision) credit at federal statutory rate....... $ (278.1) $ 57.1 $ 162.2
Additional (taxes) credits resulting from:
Non-deductible depreciation and amortization of intangibles......... (8.8) (9.0) (9.5)
Expenses not deductible in foreign jurisdictions.................... -- (4.3) (.7)
Foreign statutory rate (increase) decreases......................... -- (1.8) 11.2
U.S. statutory rate increase........................................ -- -- (8.7)
State income taxes, net of federal income tax effect................ (23.8) -- 17.7
Minimum taxes-foreign jurisdictions................................. (7.8) (5.8) (3.6)
Other-net........................................................... (2.4) (.7) (20.9)
-------- ------- --------
(Provision) credit for income taxes................................... $ (320.9) $ 35.5 $ 147.7
-------- ------- --------
-------- ------- --------
The components of the net deferred tax liability as of December 31, 1995 and
1994 were as follows:
DECEMBER 31,
-------------------
(IN MILLIONS) 1995 1994
- ---------------------------------------------------------------------- -------- --------
Deferred tax assets:
Carryforwards....................................................... $ 127.3 $ 280.5
Compensation-related accruals....................................... 39.5 49.1
Extraordinary charges from early extinguishments of debt............ 4.9 35.9
Reserves............................................................ 43.7 38.3
Deferred gain....................................................... 23.0 24.8
Other............................................................... 27.3 21.8
-------- --------
265.7 450.4
Valuation allowance................................................... (1.2) (1.2)
-------- --------
Total deferred tax asset.............................................. 264.5 449.2
Deferred tax liabilities:
Depreciation and amortization....................................... (652.1) (715.2)
Start-up costs...................................................... (11.5) (20.7)
LIFO reserve........................................................ (15.8) (19.6)
Pension............................................................. (7.8) (16.0)
Other............................................................... (54.2) (52.6)
-------- --------
Total deferred tax liability.......................................... (741.4) (824.1)
-------- --------
Deferred tax liability--net........................................... $ (476.9) $ (374.9)
-------- --------
-------- --------
The components of the income (loss) before income taxes, minority interest,
extraordinary charges and cumulative effects of accounting changes are:
YEAR ENDED DECEMBER 31,
------------------------------
(IN MILLIONS) 1995 1994 1993
- ---------------------------------------------------------------------- -------- -------- --------
United States......................................................... $ 455.8 $ (126.6) $ (310.8)
Foreign............................................................... 338.9 (36.5) (152.5)
-------- -------- --------
Income (loss) before income taxes, minority interest, extraordinary
charges and cumulative effects of accounting changes................. $ 794.7 $ (163.1) $ (463.3)
-------- -------- --------
-------- -------- --------
At December 31, 1995, the Company had approximately $44 million of net
operating loss carryforwards for U.S. federal tax purposes and, additionally,
approximately $42 million of net operating loss carryforwards for Canadian tax
purposes. To the extent not utilized, the U.S. federal net operating losses will
expire in 2009, and the Canadian net operating losses will expire in 2000.
Further, the Company had approximately $737 million of net operating loss
40
STONE CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 8--INCOME TAXES (CONTINUED)
carryforwards for U.S. state tax purposes (which represents approximately $39
million of deferred tax assets), which to the extent not utilized, expire in
1996 through 2009. The Company also had approximately $64 million of alternative
minimum tax credit carryforwards for U.S. federal tax purposes which are
available indefinitely.
NOTE 9--PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS
The Company has contributory and noncontributory pension plans for the
benefit of most salaried and certain hourly employees. The funding policy for
the plans, with the exception of the Company's salaried supplemental unfunded
plans and the Company's German subsidiary's unfunded plan, is to annually
contribute the statutory required minimum. The salaried pension plans provide
benefits based on a formula 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) 1995 1994 1993
- ---------------------------------------------------------------------- ------- ------- -------
Service cost--benefits earned during the period....................... $ 17.0 $ 21.5 $ 17.4
Interest cost on projected benefit obligations........................ 63.5 63.5 63.7
Actual return on plan assets.......................................... (100.0) (13.7) (91.9)
Net amortization and deferral......................................... 51.7 (37.5) 40.4
------- ------- -------
Net pension expense................................................... $ 32.2 $ 33.8 $ 29.6
------- ------- -------
------- ------- -------
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,
-----------------------------------------------------------------
1995 1994
------------------------------- -------------------------------
ASSETS EXCEED ACCUMULATED ASSETS EXCEED ACCUMULATED
ACCUMULATED BENEFITS EXCEED ACCUMULATED BENEFITS EXCEED
(IN MILLIONS) BENEFITS ASSETS BENEFITS ASSETS
- -------------------------------------------------- ------------- --------------- ------------- ---------------
Actuarial present value of benefit obligations:
Vested benefits................................. $ (59.5) $ (422.1) $ (167.7) $ (469.1)
Non-vested benefits............................. (2.1) (32.4) (7.3) (40.8)
------------- ------- ------------- -------
Accumulated benefit obligation.................. (61.6) (454.5) (175.0) (509.9)
Effect of increase in compensation levels....... (2.3) (59.6) (19.9) (57.5)
------------- ------- ------------- -------
Projected benefit obligation for service rendered
through December 31.............................. (63.9) (514.1) (194.9) (567.4)
Plan assets at fair value, primarily stocks,
bonds, guaranteed investment contracts, real
estate and mutual funds which invest in listed
stocks
and bonds........................................ 64.4 286.6 192.9 385.2
------------- ------- ------------- -------
Plan assets in excess of (less than) projected
benefits obligation.............................. .5 (227.5) (2.0) (182.2)
Unrecognized prior service cost................... 2.8 22.1 8.3 29.0
Unrecognized net actuarial loss................... 14.4 96.2 36.3 70.8
Adjustment required to recognize minimum
liability........................................ -- (68.3) -- (63.4)
------------- ------- ------------- -------
Net prepaid (accrual)............................. $ 17.7 $ (177.5) $ 42.6 $ (145.8)
------------- ------- ------------- -------
------------- ------- ------------- -------
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, 1995 of $68.3 million is 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. In addition, the
Company
41
STONE CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 9--PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS (CONTINUED)
recorded a charge to retained earnings of $4.7 million representing its share of
the charges to retained earnings associated with the additional minimum pension
liabilities recorded by certain non-consolidated affiliates. At December 31,
1994, the additional minimum liability of $63.4 million was recorded as a
long-term liability with an offsetting intangible asset of $25.8 million and a
charge to stockholders' equity of $23.7 million, net of a tax benefit of $13.9
million.
The weighted average discount rates used in determining the actuarial
present value of the projected benefit obligations at December 31, 1995 and 1994
were 7.5 percent and 9.0 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 1995 and 1994. The expected
long-term rate of return on assets was 11 percent for 1995 and 1994. The change
in the weighted average discount rates during 1995 had the effect of increasing
the total projected benefit obligation at December 31, 1995 by $89.7 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 $5.5 million,
$5.2 million and $5.1 million for 1995, 1994 and 1993, respectively.
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 1995, 1994 and 1993 included the following
components:
(IN MILLIONS) 1995 1994 1993
- ---------------------------------------------------------------- ----- ----- -----
Service cost-benefits attributed to service during the period... $ .8 $ 1.5 $ 1.0
Interest cost on accumulated postretirement benefit
obligation..................................................... 6.6 6.0 5.5
Net amortization and deferral................................... .7 .9 --
----- ----- -----
Net periodic postretirement benefit cost........................ $ 8.1 $ 8.4 $ 6.5
----- ----- -----
----- ----- -----
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, 1995 DECEMBER 31, 1994
------------------------ ---------------------------
(IN MILLIONS) U.S. FOREIGN TOTAL U.S. FOREIGN TOTAL
- ---------------------------------------------------------------------- ----- ------- ------- ------- ------- -------
Accumulated postretirement benefit obligation:
Retirees............................................................ $31.6 $10.6 $ 42.2 $ 15.9 $21.5 $ 37.4
Active employees--fully eligible.................................... 16.0 .8 16.8 14.7 2.0 16.7
Other active employees.............................................. 15.8 1.2 17.0 14.7 3.7 18.4
----- ------- ------- ------- ------- -------
Total accumulated postretirement benefit obligation................... 63.4 12.6 76.0 45.3 27.2 72.5
Unrecognized net loss................................................. (21.5) (1.2) (22.7) (5.5) (2.1) (7.6)
----- ------- ------- ------- ------- -------
Postretirement benefit obligation..................................... $41.9 $11.4 $ 53.3 $ 39.8 $25.1 $ 64.9
----- ------- ------- ------- ------- -------
----- ------- ------- ------- ------- -------
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 7.5 percent at December 31, 1995 and 9.0 percent at
December 31, 1994. The change in the discount rate had the effect of increasing
the total accumulated postretirement benefit obligation at December 31, 1995 by
$9.3 million. The assumed health care cost trend rates for substantially all
employees used in measuring the accumulated postretirement benefit obligation
ranged from 7.0 percent to 12.0 percent at December 31, 1995 and 7.0 percent to
13.0 percent at December 31, 1994, 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, 1995 and 1994 would have increased by $6.8 million and $5.6 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 1995 and
1994 would be immaterial.
At December 31, 1995, the Company had approximately 6,800 retirees and
25,900 active employees of which approximately 3,700 and 21,700, respectively,
were employees of U.S. operations.
42
STONE CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10--LONG-TERM DEBT
Long-term debt consists of the following:
DECEMBER 31,
----------------------
(IN MILLIONS) 1995 1994
- ----------------------------------------------------------------------------------------------------------- ---------- ----------
SENIOR DEBT:
9.875% senior notes due February 1, 2001................................................................... $ 573.7 $ 710.0
10.75% first mortgage notes due October 1, 2002 (less unamortized debt discount of $2.9 and $3.2).......... 497.1 496.8
Term loan (9.2% and 8.6% weighted average rates) payable in nine 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... 380.0 400.0
Additional term loan (9.3% weighted average rate) payable in fourteen semiannual payments of $1.0 on April
1 and October 1 of each year through 2002, $93.0 on April 1, 2003 and $93.0 on October 1, 2003............ 200.0 --
Revolving credit facility (9.4% and 8.3% weighted average rates) due May 15, 1999.......................... 53.0 23.0
11.875% senior notes due December 1, 1998 (less unamortized discount of $.7 and $.9)....................... 239.3 239.1
11.5% senior notes due October 1, 2004 (less unamortized debt discount of $1.3 and $1.4)................... 198.7 198.6
12.625% senior notes due July 15, 1998..................................................................... 150.0 150.0
5.375% to 11.625% fixed rate utility systems and pollution control revenue bonds, payable in varying annual
sinking fund payments through the year 2010 and varying principal payments through the year 2016 (less
unamortized debt discount of $6.4 and $7.2)............................................................... 199.1 206.2
Floating rate receivables-backed notes (6.4% weighted average rate) due December 15, 2000.................. 260.0 --
Obligations under accounts receivable securitization programs (7.0% and 5.6% weighted average rates)....... -- 253.8
4.0% to 7.96% term loans payable in varying amounts through 1999........................................... 31.1 37.2
Other (including obligations under capitalized leases of $10.5 and $9.0)................................... 52.4 49.9
---------- ----------
2,834.4 2,764.6
Less: current maturities................................................................................... (27.1) (276.1)
---------- ----------
Total senior long-term debt.............................................................................. 2,807.3 2,488.5
---------- ----------
SUBORDINATED DEBT:
11.5% senior subordinated notes, payable in two annual sinking fund payments of $57.5 commencing September
1, 1997 and maturing on September 1, 1999 with a lump sum payment of $115.0............................... 230.0 230.0
10.75% senior subordinated debentures maturing on April 1, 2002 (less unamortized debt discount of $.7 and
$.8)...................................................................................................... 199.3 199.2
8.875% convertible senior subordinated notes (convertible at $11.55 per share) maturing on July 15, 2000
(less unamortized debt discount of $.3 and $1.4).......................................................... 59.7 248.6
10.75% senior subordinated notes maturing on June 15, 1997................................................. 150.0 150.0
11.0% senior subordinated notes maturing on August 15, 1999................................................ 125.0 125.0
6.75% convertible subordinated debentures (convertible at $33.94 per share) maturing on February 15,
2007...................................................................................................... 45.2 115.0
12.125% subordinated debentures............................................................................ -- 91.8
---------- ----------
809.2 1,159.6
Less: current maturities................................................................................... -- --
---------- ----------
Total subordinated debt................................................................................ 809.2 1,159.6
---------- ----------
NON-RECOURSE DEBT OF CONSOLIDATED AFFILIATES:
SVCPI credit facilities (7.7% and 7.1% weighted average rates) payable in semiannual installments of $8.5
through July 31, 1998 and $14.2 thereafter through January 31, 2002 with a final payment of $126.5 on
December 31, 2002......................................................................................... 276.6 280.2
Other...................................................................................................... 12.0 532.8
---------- ----------
288.6 813.0
Less: current maturities................................................................................... (20.0) (29.2)
---------- ----------
Total non-recourse debt of consolidated affiliates..................................................... 268.6 783.8
---------- ----------
Total long-term debt....................................................................................... $ 3,885.1 $ 4,431.9
---------- ----------
---------- ----------
43
STONE CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 10--LONG-TERM DEBT (CONTINUED)
During the third and fourth quarters of 1995, in separate, independently
negotiated transactions, the Company purchased and retired $190 million
principal amounts 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. Funding for the cash portion of the
purchases of the Convertible Senior Subordinated Notes was financed primarily
from bank borrowings.
Supplemental primary earnings per share before extraordinary charges for the
year ended December 31, 1995 was $4.43 per share of common stock, and
supplemental primary net income per share for the year ended December 31, 1995
was $2.53 per share of common stock, assuming the common stock issued pursuant
to the purchases of the Convertible Senior Subordinated Notes existed as of the
beginning of the year.
In August 1995, the Company and its bank group amended and restated its bank
credit agreement (the "Credit Agreement") to provide for an additional $200
million senior secured term loan facility. The Credit Agreement also consists of
a $400 million senior secured term loan maturing through April 1, 2000 and a
$450 million senior secured revolving credit facility commitment maturing May
15, 1999, which includes a $25 million swing-line sub-facility maturing May 15,
1999 (any borrowings under the swing-line sub-facility would reduce the
borrowing availability under the revolving credit facility). Permitted uses for
the borrowings under the additional term loan were to partially fund the
repurchase of various of the Company's debt securities.
During the second quarter of 1995, the Company repaid all the indebtedness
outstanding under and terminated Seminole's bank credit agreement and redeemed
Seminole's 13 1/2 percent Subordinated Notes aggregating approximately $123
million. The Company had previously acquired the remaining 1 percent of the
common stock of Seminole in March 1995, thereby making it a wholly owned
subsidiary of the Company.
In March 1995, the Company, through its wholly owned subsidiary Stone
Receivables Corporation, completed the refinancing of the obligations relating
to its accounts receivable securitization program with a new $310 million
accounts receivable securitization program consisting of $260 million of
floating-rate notes due in 2000 (the "Notes") together with a five-year $50
million revolving credit facility. In accordance with the program, 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 the Notes.
The purchased accounts receivables are solely the assets of Stone Receivables
Corporation, which is wholly owned but a 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. 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. At December 31, 1994,
the Company's Consolidated Balance Sheet included $226 million and $100 million,
respectively, of Stone Financial Corporation and Stone Fin II Receivables
Corporation accounts receivable under the program and $188 million and $66
million, respectively, of borrowings under the program.
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 $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 1995
and 1994, respectively.
At December 31, 1995, the $640.6 million of borrowings and accrued interest
outstanding under the Credit Agreement were secured by property, plant and
equipment with a net book value of $1.3 billion, and by a lien on certain of the
Company's inventories. Additionally, other loan agreements with a balance of
$1.1 billion were collateralized by approximately $507.7 million of property,
plant and equipment--net and an investment and by $343.6 million of cash,
accounts receivable and inventories.
44
STONE CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 10--LONG-TERM DEBT (CONTINUED)
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.
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 optional request, may at their option waive the receipt of certain
mandatory prepayments. In July 1995, the Company received a waiver of its
mandatory prepayments of excess cash flow (as defined) for required payments
under its initial term loan for four quarters beginning with the 1995 second
quarter payment. 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, as well as cross-acceleration
provisions to the non-recourse debt of $10 million or more of SVCPI. At December
31, 1995, SVCPI had approximately $286 million in secured indebtedness owed to
bank lenders, including short-term notes payable. Such debt is solely the
obligation of SVCPI and is without recourse to the Company. The Credit Agreement
allows, under certain specific circumstances, for the Company to make further
investments in SVCPI.
The amounts of long-term debt outstanding at December 31, 1995 maturing
during the next five years are as follows:
(IN MILLIONS)
- ------------------------------------------------------------------------------------------------------
1996.................................................................................................. $ 43.8
1997.................................................................................................. 259.7
1998.................................................................................................. 487.2
1999.................................................................................................. 532.3
2000.................................................................................................. 532.5
Thereafter............................................................................................ 2,066.2
Amounts payable under capitalized lease agreements are excluded from the
above tabulation. See Note 12-- "Long-term Leases" for capitalized lease
maturities.
NOTE 11--FINANCIAL INSTRUMENTS
At December 31, 1995 and 1994, the carrying values and fair values of the
Company's financial instruments are listed below:
DECEMBER 31,
-------------------------------------
1995 1994
----------------- ------------------
CARRYING FAIR CARRYING FAIR
(IN MILLIONS) AMOUNT VALUE AMOUNT VALUE
- ---------------------------------------- ------- -------- -------- --------
Notes receivable and long-term
investments............................ $ 112.9 $ 102.9 $ 149.5 $ 138.6
Indebtedness............................ 3,921.6 3,985.3 4,728.2 4,871.2
Interest rate swaps in receivable
(payable) position..................... (.2) (1.9) .4 (33.3)
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. The Company does not hold or issue
financial instruments 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
45
STONE CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 11--FINANCIAL INSTRUMENTS (CONTINUED)
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 1995 relating to the interest-rate swaps outstanding at December 31, 1995
and 1994:
1995 1994
------- -------
Interest-rate swap--notional amount (in
millions).............................. $ 150.0 $ 150.0
Average receive rate (fixed by
contract terms)...................... 5.9% 6.0%
Average pay rate...................... 6.2% 4.4%
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...................... 5.8% 4.5%
The average pay rate for both interest-rate swaps is the six month LIBOR.
NOTE 12--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, 1995 and future minimum rental commitments (net of
sublease rental income and exclusive of real estate taxes and other expenses)
under operating leases having initial or remaining non-cancellable terms in
excess of one year are reflected below:
CAPITALIZED OPERATING
(IN MILLIONS) LEASES LEASES
- ---------------------------------------- ------------ ---------
1996.................................... $ 4.0 $ 76.3
1997.................................... 3.2 68.3
1998.................................... 1.8 57.0
1999.................................... 1.9 47.1
2000.................................... .3 38.1
Thereafter.............................. 1.4 190.6
------ ---------
Total minimum lease payments............ 12.6 $ 477.4
---------
---------
Less: Imputed interest.................. 2.1
------
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 $103 million in 1995, $87 million in 1994
and $83 million in 1993.
NOTE 13--PREFERRED STOCK
The Company has authorized 10,000,000 shares of Preferred Stock. At December
31, 1995, 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.
46
STONE CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 13--PREFERRED STOCK (CONTINUED)
The Company paid cash dividends of $2.625 and $1.75 per share on the Series
E Cumulative Preferred Stock during 1995 and 1994, respectively, bringing the
Company current on its dividend requirements for these securities at December
31, 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 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. 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 Senior Subordinated
Indenture.
NOTE 14--COMMON STOCK
The Company has authorized 200,000,000 shares of common stock, $.01 par
value, of which 99,135,771 shares were outstanding at December 31, 1995.
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. On September 13, 1995
and December 13, 1995, the Company paid quarterly cash dividends of $0.15 per
share on its common stock.
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
47
STONE CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 14--COMMON STOCK (CONTINUED)
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. No
accounting recognition is given to stock options until they are exercised, at
which time the option price received is credited to common stock.
Transactions under the stock option plans are summarized as follows:
OPTION OPTION PRICE
SHARES PER SHARE
--------- ------------
Outstanding January 1, 1993............................ 546,031 $ 8.74-29.29
Granted.............................................. -- --
Exercised............................................ -- --
Cancelled............................................ -- --
--------- ------------
Outstanding December 31, 1993.......................... 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
---------
---------
Options exercisable at December 31,
1995................................................. 881,262 13.38-29.29
1994................................................. 395,285 8.74-29.29
Options available for grant at December 31,
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. The charge (credit) to compensation expense under this plan was $3.8
million, $3.6 million and $(1.2) million for 1995, 1994 and 1993, respectively.
In 1993, prior cash awards that were accrued have been deemed to be not payable
due to the financial results of the Company. Under the 1992 Plan, 1,800,000
shares had been reserved for issuance, of which 133,176, 249,655 and 186,253
shares were granted in 1995, 1994 and 1993, respectively.
NOTE 15--RELATED PARTY TRANSACTIONS
The Company sold paperboard, market pulp and waste paper to various
non-consolidated affiliates. Additionally, the Company purchased kraft paper
from and sold market pulp to Stone-Consolidated. 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 following table include transactions with Stone-Consolidated
since November 1, 1995.
48
STONE CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15--RELATED PARTY TRANSACTIONS (CONTINUED)
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) 1995 1994 1993
- ---------------------------------------- ------- ------- -------
Net sales to/(purchases from)........... $ 211.2 $ 147.1 $ 120.3
Net receivable from/(payable to)........ 40.5 37.9 18.2
Commissions and fees for services
rendered............................... 1.1 -- --
The Company had outstanding loans and interest receivable from a
non-consolidated affiliate of approximately $9.9 million and $4.0 million at
December 31, 1995 and 1994, respectively.
NOTE 16--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) 1995 1994 1993
- ---------------------------------------- ------- ------- -------
Gain from an involuntary conversion at a
paper mill............................. $ -- $ (22.0) $ --
Gains on sales of investments or
assets................................. -- (13.8) (40.7)
Writedown of decommissioned assets...... -- -- 19.2
Writedown of certain receivables to net
realizable value....................... -- -- 14.2
Other................................... -- 1.4 12.0
------- ------- -------
Total other operating (income)
expense--net........................... $ -- $ (34.4) $ 4.7
------- ------- -------
------- ------- -------
OTHER (INCOME) EXPENSE, NET:
The major components of other (income) expense--net are as follows:
YEAR ENDED DECEMBER 31,
-------------------------------
(IN MILLIONS) 1995 1994 1993
- --------------------------------------------------------------------------------------- --------- --------- ---------
Interest income........................................................................ $ (15.5) $ (20.9) $ (11.2)
Foreign currency transaction (gains) losses............................................ (8.1) 15.8 11.8
Other.................................................................................. (9.5) (3.8) (3.3)
--------- --------- ---------
Total other (income) expense--net...................................................... $ (33.1) $ (8.9) $ (2.7)
--------- --------- ---------
--------- --------- ---------
INTEREST EXPENSE:
YEAR ENDED DECEMBER 31,
-------------------------------
(IN MILLIONS) 1995 1994 1993
- ---------------------------------------------------------------------------------------- --------- --------- ---------
Total interest cost incurred............................................................ $ 473.5 $ 460.7 $ 437.5
Interest capitalized.................................................................... (13.2) (4.7) (10.8)
--------- --------- ---------
Interest expense........................................................................ $ 460.3 $ 456.0 $ 426.7
--------- --------- ---------
--------- --------- ---------
PROVISION FOR DOUBTFUL ACCOUNTS AND NOTES RECEIVABLE:
Selling, general and administrative expenses include provisions for doubtful
accounts and notes receivable of $6.7 million for 1995, $6.6 million for 1994
and $12.2 million for 1993.
ASSETS HELD FOR SALE:
The Company ceased operations of certain wood products facilities in the
Pacific Northwest during 1994 and is in the process of divesting the assets of
these facilities. Accordingly, such net assets of approximately $32 million and
$56 million are included in other current assets within the December 31, 1995
and 1994 Consolidated Balance Sheets, respectively.
49
STONE CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 16--ADDITIONAL INFORMATION RELATING TO THE CONSOLIDATED FINANCIAL
STATEMENTS (CONTINUED)
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.
Management believes the receivable recorded on the Company's Consolidated
Balance Sheet is fully recoverable.
LONG-TERM NOTE RECEIVABLE:
The Company had a net receivable from a domestic customer of approximately
$74 million and $90 million at December 31, 1995 and 1994, respectively. Of
these amounts, approximately $61 million and $77 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. The Company believes this note
receivable, which is partially guaranteed by a third party, is fully
recoverable.
ACCRUED AND OTHER CURRENT LIABILITIES:
The major components of accrued and other current liabilities are as
follows:
DECEMBER 31,
--------------------
(IN MILLIONS) 1995 1994
- ------------------------------------------------------------------------------------------------ --------- ---------
Accrued interest................................................................................ $ 88.1 $ 110.8
Accrued payroll, related taxes and employee benefits............................................ 87.7 98.8
Other........................................................................................... 120.8 146.1
--------- ---------
Total accrued and other current liabilities..................................................... $ 296.6 $ 355.7
--------- ---------
--------- ---------
OTHER LONG-TERM LIABILITIES:
Included in other long-term liabilities at December 31, 1995 and 1994 is
approximately $42.0 million and $47.0 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 17--COMMITMENTS AND CONTINGENCIES
At December 31, 1995, the Company had commitments outstanding for capital
expenditures under purchase orders and contracts of approximately $51 million.
On May 6, 1993, the Company's wholly owned German subsidiary, Europa Carton
A.G., ("Europa Carton"), completed a joint venture with Financiere Carton
Papier, a French company, to merge the folding carton operations of Europa
Carton with those of Financiere Carton Papier (collectively "FCP"). Under the
joint venture, FCP is owned equally by Europa Carton and the former shareholders
of Financiere Carton Papier. The Company's investment in the joint venture is
being accounted for under the equity method of accounting. The Company has
entered into an agreement with FCP whereby the Company will loan up to $40
million to FCP in the form of convertible securities. The securities would not
be convertible into FCP common stock until three years from the date of
issuance. In the event that the Company would convert the securities into common
stock, the Company would own approximately 80 percent of the outstanding shares
of FCP.
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 $36 million in 1995, and the Company
anticipates that 1996 and 1997 environmental capital expenditures will
approximate $61 million and $16 million, respectively (exclusive of any
potential expenditures which may be required if the proposed "cluster rules"
described in "Environmental Issues" on pages 19-20 of the
50
STONE CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 17--COMMITMENTS AND CONTINGENCIES (CONTINUED)
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 which 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 19-20 of the MD&A for further
environmental matters.
Refer to Notes 10, 11 and 12 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 18--SEGMENT INFORMATION
BUSINESS SEGMENTS:
The Company operates principally in two business segments. The paperboard
and paper packaging segment is comprised primarily of facilities that produce
containerboard, kraft paper, boxboard, corrugated containers and paper bags and
sacks. The white paper and other segment consists primarily of facilities that
manufacture and sell newsprint, groundwood paper and market pulp. Intersegment
sales are accounted for at transfer prices which approximate market prices.
Operating profit includes all costs and expenses directly related to the
segment involved. The corporate portion of operating profit includes corporate
general and administrative expenses and equity income (loss) of non-consolidated
affiliates.
Assets are assigned to segments based on use. Corporate assets primarily
consist of cash and cash equivalents, fixed assets, certain deferred charges and
investments in non-consolidated affiliates.
51
STONE CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 18--SEGMENT INFORMATION (CONTINUED)
Financial information by business segment is summarized as follows:
(IN MILLIONS) 1995 1994 1993
- ---------------------------------------- ----------- ----------- -----------
SALES:
Paperboard and paper packaging.......... $5,405.8 $4,241.5 $3,810.1
White paper and other................... 2,010.6 1,549.6 1,295.6
Intersegment............................ (65.2) (42.4) (46.1)
----------- ----------- -----------
Total sales........................... $7,351.2 $5,748.7 $5,059.6
----------- ----------- -----------
----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES,
MINORITY INTEREST, EXTRAORDINARY
CHARGES AND CUMULATIVE EFFECTS OF
ACCOUNTING CHANGES:
Paperboard and paper packaging.......... $ 943.6 $ 354.2 $ 207.4
White paper and other................... 367.7 25.4 (158.8)
----------- ----------- -----------
1,311.3 379.6 48.6
Interest expense........................ (460.3) (456.0) (426.7)
Foreign currency transaction gains
(losses)............................... 8.1 (15.8) (11.8)
General corporate....................... (64.4)(1) (70.9)(1) (73.4)(1)
----------- ----------- -----------
Income (loss) before income taxes,
minority interest, extraordinary
charges and cumulative effects of
accounting changes................... $ 794.7 $ (163.1) $ (463.3)
----------- ----------- -----------
----------- ----------- -----------
DEPRECIATION AND AMORTIZATION:
Paperboard and paper packaging.......... $ 203.5 $ 199.1 $ 179.5
White paper and other................... 158.4 147.3 156.7
General corporate....................... 9.9 12.5 10.6
----------- ----------- -----------
Total depreciation and amortization... $ 371.8 $ 358.9 $ 346.8
----------- ----------- -----------
----------- ----------- -----------
ASSETS:
Paperboard and paper packaging.......... $3,536.2 $3,440.1 $3,436.5
White paper and other................... 1,347.2 2,884.4 2,977.4
General corporate....................... 1,515.5(2) 680.4(2) 422.8(2)
----------- ----------- -----------
Total assets.......................... $6,398.9 $7,004.9 $6,836.7
----------- ----------- -----------
----------- ----------- -----------
CAPITAL EXPENDITURES:
Paperboard and paper packaging.......... $ 198.3 $ 114.6 $ 100.7
White paper and other................... 183.2 114.0 45.7
General corporate....................... 5.0 4.0 3.3
----------- ----------- -----------
Total capital expenditures............ $ 386.5 $ 232.6 $ 149.7
----------- ----------- -----------
----------- ----------- -----------
- ---------
(1) Includes equity in net income (loss) of non-consolidated vertically
integrated affiliates as follows: Paperboard and paper packaging segment
$4.2 in 1995, $(1.4) in 1994 and $(9.2) in 1993 and White paper and other
segment $15.7 in 1995, $(6.3) in 1994 and $(2.5) in 1993.
(2) Includes investments in non-consolidated vertically integrated affiliates as
follows: Paperboard and paper packaging segment $85.8 in 1995, $82.7 in 1994
and $77.7 in 1993 and White paper and other segment $1,010.4 in 1995, $263.1
in 1994 and $29.5 in 1993.
52
STONE CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 18--SEGMENT INFORMATION (CONTINUED)
GEOGRAPHIC SEGMENTS:
The chart below provides financial information for the Company's operations
based on the region in which the operations are located.
INCOME BEFORE INCOME
TAXES, MINORITY
TRADE INTER-AREA INTEREST AND
(IN MILLIONS) SALES SALES TOTAL SALES EXTRAORDINARY CHARGES 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
--------- ----------- ------------ ---------- ------------
--------- ----------- ------------ ---------- ------------
INCOME (LOSS) BEFORE
INCOME TAXES,
MINORITY INTEREST,
EXTRAORDINARY CHARGES
AND CUMULATIVE EFFECT
TRADE INTER-AREA OF AN ACCOUNTING
(IN MILLIONS) SALES SALES TOTAL SALES CHANGE 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
--------- ----------- ------------ ---------- ------------
--------- ----------- ------------ ---------- ------------
INCOME (LOSS)
BEFORE INCOME TAXES,
MINORITY INTEREST AND
TRADE INTER-AREA CUMULATIVE EFFECT OF
(IN MILLIONS) SALES SALES TOTAL SALES AN ACCOUNTING CHANGE ASSETS
- ------------------------------------------------------ --------- ----------- ------------ --------------------- ------------
1993
- ------------------------------------------------------
United States......................................... $ 3,678.2 $ 16.4 $ 3,694.6 $ 107.1 $ 3,256.8
Canada................................................ 756.2 16.9 773.1 (62.3) 2,374.8
Europe................................................ 625.2 1.7 626.9 3.8 782.3
--------- ----------- ------------ ---------- ------------
5,059.6 35.0 5,094.6 48.6 6,413.9
Interest expense...................................... (426.7)
Foreign currency transaction losses................... (11.8)
General corporate..................................... (73.4)(1) 422.8(2)
Inter-area eliminations............................... (35.0) (35.0) --
--------- ----------- ------------ ---------- ------------
Total................................................. $ 5,059.6 $ -- $ 5,059.6 $ (463.3) $ 6,836.7
--------- ----------- ------------ ---------- ------------
--------- ----------- ------------ ---------- ------------
- ------------
(1) Includes equity in net income (loss) of non-consolidated vertically
integrated affiliates as follows: United States $3.5 in 1995, $.6 in 1994
and $(1.0) in 1993; Canada $28.6 in 1995, $(2.3) in 1994 and $(3.0) in 1993;
and other $(12.2) in 1995, $(6.0) in 1994 and $(7.7) in 1993.
(2) Includes investments in non-consolidated vertically integrated affiliates as
follows: United States $9.8 in 1995, $1.5 in 1994 and $--in 1993; Canada
$1,048.1 in 1995, $295.2 in 1994 and $63.0 in 1993; and other $38.3 in 1995,
$49.1 in 1994 and $44.2 in 1993.
The Company's export sales from the United States were approximately $839
million, $476 million and $341 million for 1995, 1994 and 1993, respectively.
53
STONE CONTAINER CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 19--SUMMARY OF QUARTERLY DATA (UNAUDITED)
The following table summarizes quarterly financial data for 1995 and 1994:
QUARTER
----------------------------------------------
(IN MILLIONS EXCEPT PER SHARE) FIRST SECOND THIRD FOURTH(1) YEAR
- -------------------------------------------------------------------- ---------- ---------- ---------- ---------- ----------
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
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
FIRST(2) SECOND THIRD(3) FOURTH
---------- ---------- ---------- ----------
1994
- --------------------------------------------------------------------
Net sales........................................................... $ 1,290.8 $ 1,354.3 $ 1,482.2 $ 1,621.4 $ 5,748.7
Cost of products sold............................................... 1,067.1 1,116.9 1,183.4 1,197.0 4,564.3
Depreciation and amortization....................................... 89.3 88.5 89.7 91.3 358.9
Income (loss) before extraordinary charges and cumulative effect of
an accounting change............................................... (78.9) (50.8) (28.9) 29.8 (128.8)
Extraordinary charges from early extinguishments of debt............ (16.8) -- (44.8) -- (61.6)
Cumulative effect of change in accounting for postemployment
benefits........................................................... (14.2) -- -- -- (14.2)
Net income (loss)................................................... (109.9) (50.8) (73.7) 29.8 (204.6)
---------- ---------- ---------- ---------- ----------
Per share of common stock:
Income (loss) before extraordinary charges and cumulative effect of
an accounting change............................................... (.99) (.58) (.38) .31 (1.60)
Extraordinary charges from early extinguishments of debt............ (.21) -- (.50) -- (.70)
Cumulative effect of change in accounting for postemployment
benefits........................................................... (.17) -- -- -- (.16)
---------- ---------- ---------- ---------- ----------
Net income (loss)--primary.......................................... (1.37) (.58) (.88) .31 (2.46)
---------- ---------- ---------- ---------- ----------
Net income (loss)--fully diluted.................................... * * * .28 *
---------- ---------- ---------- ---------- ----------
Cash dividends per common share..................................... -- -- -- -- --
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
- ---------
(1) As a result of the Amalgamation discussed in Note 3, the Company, effective
November 1, 1995, began reporting Stone-Consolidated under the equity method
of accounting.
(2) The Company adopted SFAS 112 effective January 1, 1994.
(3) Amounts per share of common stock have been adjusted for the redemption
premium on redeemable preferred stock of a consolidated affiliate.
* 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 5, 1996 appearing on page 30 of this Annual Report on Form 10-K
(such report contains an explanatory paragraph referring to the change in
accounting methods 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 5, 1996
55
Consent of Independent Accountants
---------------------------------
We hereby consent to the incorporation by reference in the Prospectus
constituting part of the Registration Statement on Form S-3 (No. 33-66086) and
in the Registration Statements on Form S-8 (Nos. 2-79221, 33-33784, 33-56345,
33-59189 and 33-66132) of Stone Container Corporation of our report dated
February 5, 1996 appearing on page 30 of this Annual Report on Form 10-K. We
also consent to the incorporation by reference of our report on the Financial
Statement Schedule, which appears on page 55 of this Form 10-K.
PRICE WATERHOUSE LLP
Chicago, Illinois
March 27, 1996
56
STONE CONTAINER CORPORATION AND SUBSIDIARIES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(IN MILLIONS)
COLUMN C
COLUMN B ----------- COLUMN E
----------- ADDITIONS -----------
COLUMN A BALANCE AT CHARGED TO COLUMN D BALANCE AT
- -------------------------------------------------------------------------------- BEGINNING COSTS AND ----------- END OF
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS PERIOD
- -------------------------------------------------------------------------------- ----------- ----------- ----------- -----------
Allowance for doubtful accounts and notes and sales returns and allowances:
Year ended December 31, 1995.................................................. $ 20.2 $ 14.6 $ 12.7 $ 22.1
Year ended December 31, 1994.................................................. $ 19.3 $ 13.0 $ 12.1 $ 20.2
Year ended December 31, 1993.................................................. $ 19.3 $ 29.2 $ 29.2 $ 19.3
57