-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DqYdqneOVXvqHOwAK+vut9cM5rm5LKQkm6Cw702guplaJ/uxDSeDlgjl+K1nbF9M m/1i1c1mFAY8YPTXvIBEDA== 0000094610-97-000007.txt : 19970604 0000094610-97-000007.hdr.sgml : 19970604 ACCESSION NUMBER: 0000094610-97-000007 CONFORMED SUBMISSION TYPE: 10-K405/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970603 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: STONE CONTAINER CORP CENTRAL INDEX KEY: 0000094610 STANDARD INDUSTRIAL CLASSIFICATION: PAPERBOARD MILLS [2631] IRS NUMBER: 362041256 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405/A SEC ACT: SEC FILE NUMBER: 001-03439 FILM NUMBER: 97618395 BUSINESS ADDRESS: STREET 1: 150 N MICHIGAN AVE CITY: CHICAGO STATE: IL ZIP: 60601 BUSINESS PHONE: 3123466600 MAIL ADDRESS: STREET 1: 18TH FL, CORPORATE ACCOUNTING STREET 2: 150 N MICHIGAN AVE CITY: CHICAGO STATE: IL ZIP: 60601 10-K405/A 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-K/A (X) Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 1996. or ( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from _______________ to ________________. Commission file number 1-3439 STONE CONTAINER CORPORATION (Exact name of registrant as specified in its charter) Delaware 36-2041256 (State or other jurisdiction of (I.R.S. employer incorporation or organization) identification no.) 150 North Michigan Avenue, Chicago, Illinois 60601 (Address of principal executive offices) (Zip code) Registrant's telephone number: 312 346-6600 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange on Title of each class which registered Common Stock New York Stock Exchange Rights to purchase Series D Preferred Stock New York Stock Exchange $1.75 Series E Cumulative Convertible Exchangeable Preferred Stock New York Stock Exchange 10-3/4% Senior Subordinated Notes due June 15, 1997 New York Stock Exchange 12-5/8% Senior Notes due July 15, 1998 New York Stock Exchange 11-7/8% Senior Notes due December 1, 1998 New York Stock Exchange 11% Senior Subordinated Notes due August 15, 1999 New York Stock Exchange 9-7/8% Senior Notes due February 1, 2001 New York Stock Exchange 10-3/4% Senior Subordinated Debentures due April 1, 2002 New York Stock Exchange 10-3/4% First Mortgage Notes due October 1, 2002 New York Stock Exchange 11-1/2% Senior Notes due October 1, 2004 New York Stock Exchange 6-3/4% Convertible Subordinated Debentures due February 15, 2007 New York Stock Exchange Rating Adjustable Senior Notes due August 1, 2016 New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None. Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. YES X NO_____ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ( X ) The aggregate market value as of March 20, 1997 of the voting common stock held by non-affiliates of the Registrant was approximately $1,094,000,000. The number of shares of common stock outstanding at March 20, 1997 was 99,319,186. The Proxy Statement, to be filed on or before April 30, 1997, for the Annual Meeting of Stockholders scheduled May 13, 1997 is partially incorporated by reference into Part III, Items 10, 11, 12 and 13; and Part IV, Item 14, excluding the sections entitled "Compensation Committee Report on Executive Compensation" and "Performance Graph." The registrant hereby amends the following items, financial statements, exhibits or other portions of its Annual Report for 1996 on Form 10-K as set forth in the pages attached hereto. PART IV Item 14(a)2. Financial Statement Schedules Financial Statements of Stone-Consolidated Corporation Item 14(d). Separate Financial Statements of Affiliates STONE-CONSOLIDATED CORPORATION AUDITED FINANCIAL STATEMENTS AUDITORS' REPORT To the Shareholders of Stone-Consolidated Corporation We have audited the consolidated balance sheets of Stone- Consolidated Corporation as at December 31, 1996 and 1995 and the consolidated statements of operations, changes in financial position and shareholders' equity for each of the years in the three-year period ended December 31, 1996. 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 in accordance with generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of Stone- Consolidated Corporation as at December 31, 1996 and 1995 and the results of its operations and the changes in its financial position for each of the years in the three-year period ended December 31, 1996 in accordance with generally accepted accounting principles in Canada. January 24, 1997 (Signed) Price Waterhouse (except for Note 20 which is as of February 14, 1997) Chartered Accountants Montreal, Quebec, Canada STONE-CONSOLIDATED CORPORATION CONSOLIDATED BALANCE SHEETS (in thousands of Canadian dollars)
1996 1995 December 31 ASSETS Current assets Cash and short-term deposits.................... $ 27,083 $ 16,251 Accounts receivable Trade.......................................... 291,606 380,024 Other.......................................... 67,246 34,030 Inventories (Note 4)............................ 317,638 207,753 Other........................................... 13,076 7,394 Total current assets.............................. 716,649 645,452 Property, plant and equipment(Note 5)............. 2,237,325 2,054,283 Timberlands....................................... 24,555 25,039 Goodwill less amortization (Note 2)............... 755,587 752,418 Other assets (Note 6)............................. 156,342 142,663 Total assets...................................... $3,890,458 $3,619,855 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Accounts payable.................................. $ 249,309 $ 254,639 Income taxes...................................... 14,580 4,955 Accrued and other current liabilities............. 93,489 90,032 Current maturities of long-term debt.............. 84,664 60,000 Redeemable Class A preferred shares (Note 7)...... -- 100,000 Total current liabilities......................... 442,042 509,626 Long-term debt (Note 8).......................... 770,424 712,342 Deferred taxes (Note 9)........................... 351,220 263,442 Total liabilities................................. 1,563,686 1,485,410 Commitments and contingencies (Note 14) Shareholders' equity Stated capital (Note 10).......................... 1,956,591 1,956,424 Retained earnings................................. 334,272 169,965 Foreign currency translation adjustment........... 35,909 8,056 Total shareholders'equity......................... 2,326,772 2,134,445 Total liabilities and shareholders'equity......... $3,890,458 $3,619,855 Approved by the Board (Signed) James Doughan (Signed) Jean Van Neste See accompanying notes to the consolidated financial statements.
STONE-CONSOLIDATED CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands of Canadian dollars, except per share amounts)
1996 1995 1994 Year ended December 31 (Restated (Restated _ Note 2) _Note 2) Net sales Manufactured products............ $1,956,043 $1,661,395 $1,091,316 Brokered products................ 330,395 66,802 -- 2,286,438 1,728,197 1,091,316 Cost of products sold Manufactured products............ 1,438,715 1,156,426 939,507 Brokered products................ 316,763 63,799 -- 1,755,478 1,220,225 939,507 Selling, general and administrative expenses......... 65,758 43,318 31,934 Depreciation and amortization.... 175,564 105,321 93,546 Other operating income(Note 11).. (33,546) (13,651) (11,426) 1,963,254 1,355,213 1,053,561 Income from operations 323,184 372,984 37,755 Redemption expenses (Note 3)..... -- (40,644) -- Other income (expense)........... 5,194 (1,019) 5,882 Interest expense on long-term debt............................ (71,565) (40,776) (42,449) Interest income.................. 6,896 8,605 6,852 Income before income taxes....... 263,709 299,150 8,040 Provision for income taxes Note 9)........................ 99,402 108,380 7,682 Net income....................... $ 164,307 $ 190,770 $ 358 Net income (loss) per common share (Note 12)................. $ 1.58 $ 2.59 $ (0.12) See accompanying notes to the consolidated financial statements.
STONE-CONSOLIDATED CORPORATION CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITION (in thousands of Canadian dollars)
1996 1995 1994 Year ended December 31 (Restated (Restated _ Note 2) _Note 2) Operating activities Net income........................ $ 164,307 $ 190,770 $ 358 Items not requiring (providing) cash Depreciation and amortization..... 175,564 105,321 93,546 Deferred income taxes............. 74,620 96,305 2,780 Other............................. -- (1,432) (3,692) Changes in non-cash working capital.......................... (54,935) (63,724) (72,523) Interest on equity element of convertible debentures........... -- (10,700) (12,000) Net cash provided by operations... 359,556 316,540 8,469 Investing activities Acquisitions of businesses........ (33,409) (746,889) -- Capital expenditures.............. (293,177) (257,243) (95,317) Other............................. 10,160 17,919 (1,991) Net cash used in investing activities...................... (316,426) (986,213) (97,308) Financing activities Issuance of common shares........ 167 674,647 -- Issuance of redeemable preferred shares.......................... -- 500,000 -- Redemption of redeemable preferred shares.......................... (100,000) (400,000) -- Redemption of convertible debentures...................... -- (500,288) -- Issuance of debt................. 376,784 391,749 -- Payment of debt.................. (309,249) (85,000) (3,875) Net cash (used in) provided by financing activities............ (32,298) 581,108 (3,875) Net increase (decrease) in cash... 10,832 (88,565) (92,714) Cash balance, beginning of year... 16,251 104,816 197,530 Cash balance, end of year......... $ 27,083 $ 16,251 $ 104,816 Cash includes cash and short-term deposits. See accompanying notes to the consolidated financial statements.
STONE-CONSOLIDATED CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (in thousands of Canadian dollars)
1996 1995 1994 Year ended December 31 (Restated (Restated _ Note 2) _Note 2) Common shares Balance at beginning of year....... $1,956,424 $1,281,777 $1,281,777 Issuance of common shares (Note 10) 167 674,647 -- Balance at end of year............. 1,956,591 1,956,424 1,281,777 Retained earnings (deficit) Balance at beginning of year....... 169,965 (13,505) (5,663) Net income for the year............ 164,307 190,770 358 Interest on equity element of convertible debentures, net of deferred income taxes of $3,400 in 1995 and $3,800 in 1994. -- (7,300) (8,200) Balance at end of year............. 334,272 169,965 (13,505) Foreign currency translation adjustment Balance at beginning of year....... 8,056 15,274 (12,907) Net effect of changes in exchange rates............................ 27,853 (7,218) 28,181 Balance at end of year............. 35,909 8,056 15,274 Shareholders' equity............... $2,326,772 $2,134,445 $1,283,546 See accompanying notes to the consolidated financial statements.
STONE-CONSOLIDATED CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996 (in thousands of Canadian dollars, unless otherwise noted) 1. Nature of operations Stone-Consolidated Corporation and its subsidiaries (the "Company") manufacture and market newsprint, uncoated groundwood papers, market pulp and lumber. The Company has seven fully integrated production facilities in Quebec, Ontario and Washington (U.S.A.) and one newsprint mill in the United Kingdom. The Company's principal markets are the United States, Western Europe, Canada and Asia. 2. Summary of significant accounting policies The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Formation Stone-Consolidated Corporation was incorporated under the Canada Business Corporations Act ("CBCA") on June 22, 1993. On December 17, 1993, the Company acquired the assets, principally comprised of the newsprint and uncoated groundwood papers business, of Stone Container (Canada) Inc. ("Stone Canada"). These assets are carried in the accounts of the Company at the historical book value in the financial records of Stone Canada. On November 1, 1995, the Company acquired Rainy River Forest Products Inc. ("Rainy River"). Rainy River and the Company were amalgamated and continued as one corporation under the CBCA. For further details of the amalgamation, refer to Note 3. Principles of consolidation The consolidated financial statements include the accounts of Stone-Consolidated Corporation and all of its subsidiaries. All significant inter-company items are eliminated. Foreign currency translation For Canadian operations and integrated foreign subsidiaries, assets and liabilities denominated in foreign currencies are translated into Canadian dollars at exchange rates prevailing at the balance sheet date for monetary items and at exchange rates prevailing at the transaction dates for non-monetary items. Income and expenses are translated at average rates prevailing during the year. Exchange gains or losses are included in income except for unrealized gains or losses on translation of foreign long-term debt which are deferred and amortized over the remaining term of the related obligation. For self-sustaining foreign subsidiaries, all assets and liabilities are translated into Canadian dollars at the exchange rates prevailing at the balance sheet date and all income and expenses are translated at average exchange rates prevailing during the year. Foreign currency translation adjustments are deferred in the shareholders' equity section of the balance sheet. The US$110,000 senior secured notes are considered to be an effective hedge of the Company's net investment in a U.S. subsidiary. Accordingly, the gains or losses arising from the translation of this foreign currency denominated long-term debt are deferred in the shareholders' equity section of the balance sheet. The Company seeks to manage the foreign exchange risks arising from movements in exchange rates between the Canadian and U.S. dollar principally on its U.S. dollar denominated revenues. When appropriate, the Company purchases U.S. dollar put options, at a cost, to fix specific minimum exchange rates on conversion of U.S. dollars. The Company records these options at market value and any gains or losses are included in income. Inventories Inventories are stated at the lower of cost and net realizable value. The average cost method is used for all inventories. Cost of wood and finished products includes raw materials and supplies, direct labour and an allocation of overhead. Provision is made for slow-moving and obsolete inventories. Property, plant and equipment, timberlands and depreciation Property, plant and equipment is stated at cost, which includes capitalized interest. Timberlands are stated at cost less accumulated cost of timber harvested. 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. Depreciation on plant and equipment is provided for on a straight-line basis over the expected lives of the assets using the following annual rates: Machinery and equipment.................................. 5% - 6 1/4% Buildings................................................ 2-1/2% Goodwill and other assets Goodwill is amortized on a straight-line basis over 40 years. Goodwill is recorded net of accumulated amortization of $115,469 and $92,544 at December 31, 1996 and 1995, respectively. Annually, the Company assesses 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 assets acquired and goodwill as of the assessment date. Such projections reflect price, volume and cost assumptions. Additional factors considered by management in the preparation of the projections and in assessing the value of goodwill include the effects of obsolescence, demand, competition and other pertinent economic factors, and trends and prospects that may have an impact on the value or remaining useful life of goodwill. Deferred financing costs are amortized over the expected life of the related debt using the straight-line method. Pre-production costs on major projects are deferred and amortized over a period of five years. Pensions and other post-retirement and post-employment benefits The cost of the pension benefits earned by the employees is determined using for the most part the projected benefit method prorated on services. The net pension expense reflects the current service cost, the interest on the actuarial surplus or unfunded liability and the amortization over the estimated average remaining service life of the employees of (i) the actuarial surplus or unfunded liability and (ii) experience gains or losses. Other post-retirement (health care, dental care and life insurance) and post-employment (short- and long-term disability) benefits are accounted for on a "pay-as-you-go" basis. Coverage is provided to salaried employees for post-retirement benefits and to all employees for post-employment benefits. Income taxes Income taxes are recorded using the deferral method of accounting. Deferred income taxes shown in the financial statements result principally from differences between depreciation and capital cost allowance claimed for tax purposes. Environmental remediation and compliance Environmental expenditures resulting in additions to property, plant and equipment that increase useful lives are capitalized, while other environmental expenditures are charged to expense. Liabilities are recorded when assessments and/or remedial efforts are probable and the cost can be reasonably estimated. Change in accounting policy Effective in 1996, the Company retroactively adopted new accounting recommendations of the Canadian Institute of Chartered Accountants on the presentation and disclosure of financial instruments. The new accounting recommendations require the convertible debentures issued by the Company in 1993 to be split between a debt element and an equity element. The debt element was determined using the present value of the interest payments up to January 1, 1999 (date at which the convertible debentures are redeemable at the option of the Company without any restrictions), while the remaining portion of the principal amount of convertible debentures was presented in shareholders' equity. The interest expense related to the debt element was charged to income and the interest expense related to the equity element was charged to retained earnings, net of income taxes. This change results in an increase in net income for the years ended December 31, 1995 and 1994 of $7.3 million and $8.2 million, respectively, with no effect on retained earnings. There is no effect on net income for the year ended December 31, 1996 or on the balance sheets as at December 31, 1996 and 1995 as on November 1, 1995, the convertible debentures were converted into common shares. 3. Acquisitions of businesses Acquisitions (1996) During 1996, the Company acquired, for approximately $22 million, an 82% interest in a sawmill near La Tuque, Quebec and a 20% interest in a sawmill located near Quebec City. The Company has also invested approximately $11 million as its 21% share of the investment in a joint venture to construct and operate an oriented strand board mill located near Fort Frances, Ontario. Acquisition of Rainy River (1995) On November 1, 1995, the Company and Rainy River amalgamated and continued as one corporation under the name "Stone-Consolidated Corporation". Rainy River was a manufacturer and seller of newsprint, uncoated groundwood papers and market pulp. It owned and operated three integrated pulp and paper mills located in Kenora and Fort Frances, Ontario and Tacoma, Washington (U.S.A.). The amalgamation was accounted for as the acquisition of Rainy River by the Company. The purchase method of accounting was used to account for the business combination and the results of operations of Rainy River are included from the date of acquisition. The non-recurring redemption expenses of $40,644 consist primarily of $36,960 relating to the payment of $160 per $1,000 principal amount of debentures of the Company. The impact of these expenses on net income per common share is $0.37. Allocation of purchase price Assets acquired at assigned value Working capital........................................ $ 93,939 Fixed assets........................................... 843,553 Goodwill............................................... 292,338 Other.................................................. 16,811 1,246,641 Liabilities assumed Long-term debt......................................... 148,225 Deferred income taxes.................................. 98,413 Convertible debentures................................. 269,288 515,926 Net assets acquired at fair value........................... $ 730,715 Consideration Issuance of 11,938,165 common shares........................ $ 216,295 Issuance of 23,255,814 redeemable preferred shares.......... 500,000 Cash........................................................ 14,420 $ 730,715 The following pro forma selected financial information shows the results of the Company as though the acquisition of Rainy River had been made as of January 1, 1995 and 1994 respectively. Pro forma Pro forma 1995 1994 (unaudited) Net sales.............................. $2,690,460 $1,900,520 Income from operations................. $ 520,784 $ 1,033 Net income (loss)*..................... $ 258,126 $ (86,961) Net income (loss) per common share (in dollars).......................... $ 2.41 $ (0.92) * Includes non-recurring redemption expenses of $40,644 before provision for income taxes. The above pro forma financial information is not necessarily indicative of the actual results of operations that would have occurred had the purchase actually been made at the beginning of 1995 and 1994. Acquisition of Stirling Fibre (Holdings) Limited (1995) In July 1995, the U.K. subsidiary purchased all of the shares of Stirling Fibre (Holdings) Limited for approximately $16 million. Located in central Scotland, Stirling Fibre is one of the largest independent waste paper merchants and processors in the U.K. 4. Inventories 1996 1995 Wood.................................... $ 43,257 $ 45,761 Raw materials and supplies.............. 115,235 111,264 Finished products...................... 159,146 50,728 $317,638 $207,753 5. Property, plant and equipment Cost Accumulated Net depreciation 1996 Land and land improvements. $ 21,427 $ -- $ 21,427 Building and leasehold improvements.............. 407,472 57,495 349,977 Machinery and equipment.... 2,308,533 580,121 1,728,412 Construction in progress... 137,509 -- 137,509 $2,874,941 $637,616 $2,237,325 Cost Accumulated Net depreciation 1995 Land and land improvements......... $ 16,526 $ -- $ 16,526 Building and leasehold improvements......... 371,895 38,662 333,233 Machinery and equipment........... 1,862,956 431,140 1,431,816 Construction in progress............. 272,708 -- 272,708 $2,524,085 $469,802 $2,054,283 Environmental capital expenditures for the years ended December 31, 1996 and 1995 were $16 million and $85 million respectively. Interest capitalized on major additions for the years ended December 31, 1996, 1995 and 1994 was $5,828, $9,435 and $700 respectively. 6. Other assets 1996 1995 Deferred pension costs..................... $ 90,558 $ 73,938 Pre-production costs....................... 10,916 8,972 Non-current receivables.................... 15,509 15,450 Deferred financing costs................... 16,167 20,342 Deferred exchange losses................... 4,299 4,130 Other...................................... 18,893 19,831 $156,342 $142,663 7. Redeemable Class A preferred shares The redeemable Class A preferred shares were issuable in series. On November 1, 1995, 23,255,814 Series 1 redeemable Class A preferred shares were issued. These shares were entitled to cumulative cash dividends accruing from day to day at a rate of 8% per annum, calculated daily at $21.50 per share. Dividends are recorded as interest expense. The market value of these shares as at December 31, 1995 was not materially different from book value. Number of Stated Number of Stated shares value shares value 1996 1995 Outstanding _ beginning of year.. 4,651,178 $ 100,000 -- $ -- Issuance of shares to acquire Rainy River............. -- -- 23,255,814 500,000 Redeemed and cancelled......... 4,651,178 100,000 18,604,636 400,000 Outstanding _ end of year.............. -- -- $ 4,651,178 $ 100,000 8. Long-term debt 1996 1995 Senior secured notes US$225 million due 2000........................ $308,160 $307,170 US$110 million due 2001........................ 150,656 150,172 Term facility due 2000........................... 239,979 300,000 Revolving credit facility due 2000............... 98,000 15,000 Reducing credit facility due 2000................ 29,750 -- Others........................................... 28,543 -- 855,088 772,342 Less: Current maturities......................... 84,664 60,000 $770,424 $712,342 Senior secured notes The senior secured notes due 2000 are secured by a first ranking lien on the Company's mills located in Shawinigan, Grand-Mere and La Baie, Quebec. These notes bear interest at 10.25% per annum and are not redeemable at the option of the Company prior to December 15, 1998. The senior secured notes due 2001 are secured by a first ranking lien on the Company's mill at Fort Frances, Ontario. These notes bear interest at 10.75% per annum and are not redeemable at the option of the Company prior to October 15, 1999. Both senior notes may be redeemed in whole or in part during specific periods and under specific circumstances. The Company may be obligated to repurchase the senior notes if certain specific events occur under the indentures. The indentures governing the notes contain certain covenants that, among other things, limit the type and amount of additional indebtedness that may be incurred by the Company and certain of its subsidiaries and impose limitations on investments, sales or transfers of assets, dividends and other payments, the creation of liens, sale-leaseback transactions, transactions with affiliates, and mergers. Term facility The term facility of $300 million is unsecured and is repayable in quarterly payments of $15 million. In addition, the term facility has mandatory and voluntary prepayment provisions, including the mandatory prepayment of 50% of "excess cash flow" up to a maximum of $50 million per year. Interest rates or stamping fees, as the case may be, on the term facility are as follows: (i) during the first year, at the prime or base rate, plus 1.125% per year and, in respect of London Interbank Offer Rate (LIBOR) loans or bankers' acceptances, plus 1.75% per year; and (ii) from the second to the fifth years, subject to credit ratings, at the prime or base rate, plus 0.125% to 1.375% per year and, in respect of LIBOR loans or bankers' acceptances, plus 0.625% to 2.125% per year. Revolving credit facility The revolving credit facility is a $300-million five-year credit facility secured by eligible accounts receivable and eligible inventories. Interest rates or stamping fees, as the case may be, on the revolving facility are as follows: (i) during the first year, subject to credit ratings, at the prime or base rate, as the case may be, plus 0.875% per year and, in respect of LIBOR loans or bankers' acceptances, plus 1.50% per year; and (ii) from the second to the fifth years, subject to credit ratings, at the prime or base rate, plus 0% to 1.125% per year and, in respect of LIBOR loans or bankers' acceptances, plus 0.50% to 1.875% per year. Reducing credit facility The reducing credit facility is a $35 -million five-year credit facility secured by a first ranking lien on property, plant and equipment of the Company's sawmills. The credit facility is payable in quarterly instalments and bears interest at either prime rate, LIBOR advance rate or bankers' acceptance rate. Minimum payments Minimum payments on long-term debt for each of the next five years are as follows: 1997 $ 84,914 1998 $ 69,213 1999 $ 69,334 2000 $478,324 2001 $151,276 9. Income taxes The provision for income taxes consists of the following: 1996 1995 1994 Current _ Canada................. $ 19,191 $ 4,491 $ 3,436 _ U.S.A ................. 5,556 7,351 1,416 _ U.K. .................. 35 233 50 24,782 12,075 4,902 Deferred _ Canada................ 58,769 93,125 3,178 _ U.S.A. ............... (670) -- -- _ U.K. ................. 16,521 3,180 (398) 74,620 96,305 2,780 Total provision for income taxes.. $ 99,402 $108,380 $ 7,682 The income tax at the combined Canadian federal and provincial income tax rate is reconciled to the provision for income taxes as follows: 1996 1995 1994 Income tax at combined Canadian federal and provincial income tax rate............................ $102,055 $115,053 $ 3,055 Manufacturing and processing profits deduction........................... (12,138) (16,127) (482) Non-deductible amortization of goodwill............................ 7,545 4,363 4,292 Large corporations tax............... 6,705 4,489 3,436 Difference in tax rates for foreign subsidiaries........................ (2,108) (371) 129 Non-taxable income................... (3,809) (557) (2,465) Other-net............................ 1,152 1,530 (283) Provision for income taxes........... $ 99,402 $108,380 $ 7,682 The components of the deferred taxes are: 1996 1995 Deferred tax assets Loss carryforwards............................... $ 22,621 $ 38,160 Deferred tax liabilities Depreciation and amortization.................... 343,958 272,496 Pre-production costs.............................. 2,513 2,872 Pension........................................... 31,028 25,273 Other............................................. (3,658) 961 Total deferred tax liability...................... 373,841 301,602 Deferred tax liability-net........................ $351,220 $263,442 The loss carryforwards relate to approximately $68.5 million of net operating losses of the U.K. subsidiary and are available indefinitely for U.K. income tax purposes. The income before income taxes consists of the following: 1996 1995 1994 Canada........................... $202,878 $271,041 $6,520 U.S.A. .......................... 12,594 18,534 3,987 U.K. ............................ 48,237 9,575 (2,467) Income before income taxes....... $263,709 $299,150 $8,040 10. Stated capital The amalgamated company created on November 1, 1995 under the plan of arrangement as described in Note 3 has the same authorized share capital as Stone-Consolidated Corporation prior to the amalgamation. Authorized The authorized share capital of the Company consists of an unlimited number of common shares and an unlimited number of preferred shares issuable in series, in each case without nominal or par value. For preferred shares issued and outstanding, refer to Note 7. Issued Common shares Number of Stated Number of Stated shares value shares value 1996 1995 Outstanding_ beginning of year.. 103,996,769 $1,956,424 65,000,100 $1,281,777 Conversion of debentures.......... -- -- 27,044,693 458,142 Issuance of shares to acquire Rainy River. -- -- 11,938,165 216,295 Exercise of options.. 11,151 167 13,811 210 Outstanding _ end of year............... 104,007,920 $1,956,591 103,996,769 $1,956,424 The Company has an employee share option plan for its key employees. Options may be granted for the purchase of up to 10% of the issued and outstanding common shares. A total of 6,500,100 common shares have initially been reserved for issuance under the option plan. The options granted in 1994 vested on the first anniversary date of the date of grant. One-quarter of the options granted in 1995 and 1996 vest on each of the first, second, third and fourth anniversary dates of the date of grant. At December 31, 1996, 271,761 options are exercisable (1995 _ 128,791; 1994 _ nil). These options expire at various dates during the next 10 years. The weighted average remaining contractual life of all options outstanding at December 31, 1996 is approximately 8.5 years. Options are exercisable at prices ranging from $14.42 to $17.94 per common share. Changes in the number of common shares under option are summarized below: 1996 Weighted 1995 Weighted 1994 Weighted average average average exercise exercise exercise price price price Outstanding _ beginning of year.... 741,718 $16.47 85,000 $16.18 -- $ -- Granted..... 528,000 17.78 390,250 17.38 85,000 16.18 Exercised... (11,151) 15.15 (13,811) 15.20 -- -- Cancelled... (69,961) 15.30 (105,781) 15.15 -- -- Conversion.. -- -- 386,060 15.20 -- -- Outstanding _ end of year..... 1,188,606 $17.13 741,718 $16.47 85,000 $16.18 * Under the amalgamation in 1995, outstanding options for 371,211 common shares of Rainy River were converted into options for 386,060 of the Company's common shares. Of the 386,060 options, 195,220 were granted in 1994 and 190,840 in 1995. One-third of these options vest on each of the first, second and third anniversary dates of the date of grant. 11. Other operating income In July 1996, the Company suffered major damage to the water infrastructure at its Port Alfred mill. Other operating income includes an amount of $22.3 million reflecting the difference between the proceeds from insurance versus the historical net book value of the damaged assets. 12. Net income (loss) per common share Net income (loss) per common share is calculated based on the monthly average number of common shares outstanding during the year which was 104.0 million, 71.5 million and 65.0 million for 1996, 1995 and 1994, respectively. The potential exercise of employee stock options would not have a significant dilutive impact on the net income per common share for 1996 and 1995. For 1994, the fully diluted loss per common share has not been reported as it would result in a decrease of the loss per share. Income available to the common shareholders is calculated based on net income for the year less the interest on equity element of convertible debentures. 13. Related party transactions Stone Canada is the major shareholder (currently 46.6% and 74.6% prior to November 1, 1995) of the Company. The Company had transactions with Stone Canada with respect to purchases of pulp and transactions with Stone Canada's parent, Stone Container Corporation, with respect to certain sales of newsprint tonnage. The following table summarizes the transactions between the Company and related parties, which are in the normal course of business at normal trade terms: 1996 1995 1994 Sales to Stone Container Corporation and affiliates................. $32,227 $31,951 $82,363 Purchases from Stone Canada and affiliates..................... $14,513 $19,826 $14,707 Commissions from Stone Container Corporation.................... $10,829 $12,199 $7,700 Expenses charged to Stone Canada $4,200 $4,835 $8,181 Expenses charged by Stone Container Corporation......... $1,549 $3,672 $4,728 Included in net sales _ manufactured products Included in cost of products sold _ manufactured products Included in other operating income Included in selling, general and administrative expenses 14. Commitments and contingencies (a) At December 31, 1996, the future minimum rental commitments under operating leases having initial or remaining non-cancellable terms in excess of one year are reflected below: Operating leases 1997......................................... $ 9,525 1998......................................... 10,456 1999......................................... 4,587 2000......................................... 3,608 2001......................................... 2,807 Thereafter................................... 6,667 $37,650 (b) At December 31, 1996, outstanding commitments for capital expenditures under purchase orders and contracts amounted to approximately $58 million. (c) The Company currently estimates that capital expenditures of approximately $45 million will be required for environmental compliance during the two-year period ending December 31, 1998. Various lawsuits and claims are pending by and against the Company. It is the opinion of management supported by counsel that final determination of these claims will not have a material adverse effect on the financial position or the results of the Company. 15. Financial instruments Financial derivatives At December 31, 1996, the amount of U.S. dollar put options outstanding was US$8 million. Credit risk Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash, short-term deposits and accounts receivable. The Company does not believe it is subject to any significant concentration of credit risk. Cash and short-term deposits are held by major financial institutions. Accounts receivable are due from a large number of customers who are geographically dispersed. For accounts receivable, the Company performs periodic credit evaluations and typically does not charge interest or require collateral. Allowances are maintained for potential credit losses consistent with the credit risk, historical trends and other information. Fair value Carrying value Fair value Carrying value Fair value 1996 1995 Cash and short-term deposits... $27,083 $27,083 $16,251 $16,251 Long-term debt....... $855,088 $894,806 $772,342 $809,297 Redeemable Class A preferred shares.... $ -- -- $100,000 $100,000 Off-balance sheet U.S. dollar put options.... $300 $300 $451 $451 Due to their short-term maturity, the carrying values of cash and short-term deposits, accounts receivable and accounts payable are reasonable estimates of their fair values. The fair value of the redeemable Class A preferred shares is based on their quoted market value. The fair values of long-term debt are estimated based on rates currently available to the Company for long-term debt with similar terms. The fair value of financial derivatives reflects the estimated amounts that the Company would receive or pay to settle the contracts at the reporting date. Interest rate risk The Company's exposure to interest rate risk as at December 31, 1996 is as follows: Cash.........................Non-interest bearing Short-term deposits......... Floating interest rate Accounts receivable......... Non-interest bearing Accounts payable............ Non-interest bearing Long-term debt Senior notes ($458,816)... Fixed interest rate maturing in 2 to 5 years Other facilities ($396,272)Floating interest rate 16. Pension plans The Company either participates in or has defined benefit pension plans available to substantially all employees, which are funded, trusteed and principally contributory. The funding policy for the pension plans is to contribute annually the statutory required minimum. The pension plans provide reduced benefits for early retirement and take into account offsets for government pension benefits. Net pension expense includes the following components: 1996 1995 1994 Service cost-benefits earned during the year............................. $14,535 $6,321 $7,282 Interest cost on projected benefit obligations.......................... 54,483 40,607 36,579 Actual return on plan assets........... (122,945) (68,645) (11,676) Net amortization and deferral.......... 59,803 29,386 (25,440) Net pension expense.................... $5,876 $7,669 $6,745 The following table sets forth the funded status of the pension plans and the amount recorded in the balance sheet: 1996 1995 Actuarial present value of benefit obligations Vested benefits................................ $(612,687) $(606,849) Non-vested benefits............................ (61,067) (48,915) Accumulated benefit obligations................ (673,754) (655,764) Effect of increase in compensation levels...... (69,906) (80,864) Projected benefit obligations for services rendered...................................... (743,660) (736,628) Plan assets at fair value, primarily stocks, bonds and real estate........................ 787,601 670,904 Plan assets greater (less) than projected benefit obligations........................... 43,941 (65,724) Unrecognized net loss from actual experience different from that assumed and changes in assumptions................................... 46,617 139,662 Deferred pension costs......................... $90,558 $73,938 The weighted average discount rate used in determining the actuarial present value of the projected benefit obligations was 7.75% and 7.5% respectively for 1996 and 1995. The expected long-term rate of return on assets and the rate of increase in future compensation levels were 11% and 4% respectively for all years. The change in the weighted average discount rate had the effect of decreasing the total projected benefit obligations at December 31, 1996 by approximately $24.1 million. 17. Segment information (a) The Company's primary activity is the production and marketing of newsprint and uncoated groundwood papers. (b) The Company's manufacturing facilities are located in Canada, the United States and the United Kingdom. Canadian export sales were $1,372 million for 1996, $1,222 million for 1995 and $800 million for 1994. United Kingdom export sales were $63 million for 1996, $60 million for 1995 and $46 milion for 1994. United States export sales were $53 million for 1996 and $13 million for 1995. The table below provides information on the Company's operations based on the region in which the operations are located. 1996 1995 1994 Net sales from Canada......................... $1,586,581 $1,389,939 $921,501 United Kingdom................. 255,679 241,954 169,815 United States.................. 444,178 96,304 -- $2,286,438 $1,728,197 $1,091,316 Income before taxes Canada......................... $266,894 $331,557 $64,956 United Kingdom................. 48,319 7,752 (2,467) United States.................. 20,061 11,318 -- Interest expense............... (71,565) (51,477) (54,449) $263,709 $299,150 $8,040 Depreciation and amortization Canada......................... $144,609 $87,918 $79,009 United Kingdom................. 18,332 15,043 14,537 United States.................. 12,623 2,360 -- $175,564 $105,321 $93,546 Capital expenditures Canada......................... $243,338 $188,554 $87,498 United Kingdom................. 21,504 61,920 7,819 United States.................. 28,335 6,769 -- $293,177 $257,243 $95,317 Assets Canada......................... $3,175,158 $3,051,407 $1,807,707 United Kingdom................. 430,434 362,254 291,964 United States.................. 284,866 206,194 -- $3,890,458 $3,619,855 $2,099,671 18. Differences between Canadian and United States generally accepted accounting principles (GAAP) These consolidated financial statements have been prepared in accordance with generally accepted accounting principles in Canada (Canadian GAAP). In certain respects, Canadian GAAP differs from generally accepted accounting principles in the United States (U.S. GAAP). The following summary sets out the material adjustments to the Company's reported net earnings which would be made in order to conform with U.S. GAAP: 1996 1995 1994 Earnings adjustments Income before income taxes in accordance with Canadian GAAP.................... $263,709 $299,150 $8,040 Add (deduct) Currency translation (a)............... (237) 9,365 (16,734) Post-retirement benefits other than pensions and post-employment benefits (b).......................... (1,373) -- (1,480) Pension cost (c)....................... 3,739 2,909 3,023 Goodwill (e)........................... 312 -- -- Interest on equity element of convertible debentures (f)............ -- (10,700) (12,000) Income (loss) before income taxes in accordance with U.S. GAAP............. 266,150 300,724 (19,151) Provision for income taxes in accordance with Canadian GAAP......... 99,402 108,380 7,682 Add (deduct) Income tax on above adjustments........ 775 366 (8,661) Income tax rate adjustment............. (10,489) -- -- Provision (credit) for income taxes in accordance with U.S. GAAP............. 89,688 108,746 (979) Net income (loss) in accordance with U.S. GAAP............................. $176,462 $191,978 $(18,172) Net income (loss) per common share in accordance with U.S. GAAP (in dollars) $1.70 $2.68 $(0.28) The following summary sets out the material differences in the Company's balance sheet between accounting principles generally accepted in Canada and the United States: Canadian Adjustment U.S. Canadian Adjustment U.S. GAAP GAAP GAAP GAAP GAAP GAAP 1996 1995 Balance sheet components Goodwill (b, d, e).. $755,587 $(10,379) $745,208 $752,418 $(10,691) $741,727 Other assets (a, c). $156,342 $(18,725) $137,617 $142,663 $(38,688) $103,975 Deferred tax liability (a, b, c, d, e). $351,220 $(42,202) $309,018 $263,442 $(37,878) $225,564 Other long- term liability (b, c)....$ -- $ 28,070 $ 28,070 $ -- $ 26,697 $ 26,697 Shareholders' equity (a, b, c).. $2,326,772 $(14,973) $2,311,799 $2,134,445 $(38,198) $2,096,247 (a) Currency translation Under Canadian GAAP, unrealized exchange gains and losses on translation of long-term debt are deferred and amortized over the term of the debt. Under U.S. GAAP, such gains or losses are credited or charged to income. (b) Post-retirement benefits other than pensions and post-employment benefits Under Canadian GAAP, post-retirement benefits other than pensions are accounted for on a "pay-as-you-go" basis. Under U.S. GAAP, in accordance with Statement of Financial Accounting Standards No. 106, "Employer's Accounting for Post-retirement Benefits other than Pension", post-retirement benefits are accounted for on an accrual basis. The net post-retirement benefit cost would include the following components: 1996 1995 1994 Service cost-benefits attributed to service during the year......................... $ 575 $ 279 $ 309 Interest cost on accumulated post-retirement benefit obligation...................... 2,329 1,995 1,925 Net amortization and deferral............. 470 226 448 Net post-retirement benefit cost.......... $3,374 $2,500 $2,682 The discount rate used in determining the accumulated post-retirement benefit cost was 7.5% for 1996. The assumed health care cost trend rates for substantially all employees used in measuring the accumulated post-retirement benefit obligation range from 11% in 1996 decreasing by 1% per year to an ultimate rate of 8% per annum starting in 1999. If the health care cost trend rate assumptions were increased by 1%, the accumulated post-retirement benefit obligation at December 31, 1996 and 1995 would not be significantly different. The details of the accumulated post-retirement benefit obligation other than pensions are as follows: 1996 1995 Retirees.......................................... $20,691 $21,752 Active employees - fully eligible................. 3,020 2,868 Other active employees............................ 10,222 8,996 33,933 33,616 Unrecognized loss................................. (6,606) (7,662) Accumulated post-retirement benefit obligation.... $27,327 $25,954 The Company is not required to fund and has not funded any of its accumulated post-retirement benefit obligations. Under Canadian GAAP, post-employment benefits are accounted for on a "pay-as-you-go" basis. Under U.S. GAAP, Statement of Financial Accounting Standards No. 112, "Employer's Accounting for Post-employment Benefits", requires accrual accounting for the estimated cost of providing certain benefits to former or inactive employees, and the employees' beneficiaries and dependents after employment but before retirement. (c) Employer's Accounting for Pensions Under U.S. GAAP, in accordance with Statement of Financial Accounting Standards No. 87, "Employer's Accounting for Pensions", the Company would have recorded an additional minimum liability for underfunded plans representing the excess of the unfunded accumulated benefit obligation over the pension plan assets. At December 31, 1996 and 1995, the additional minimum liability would be $36.1 million and $53.6 million respectively, and would be recorded as a reduction of the deferred pension costs with an offsetting intangible asset of $12.0 million and $13.1 million respectively, and a charge to shareholders' equity of $16.2 million and $26.3 million respectively, net of a tax benefit of $7.9 million and $14.2 million respectively. In addition, amortization of experience gains and losses is included as a component of net pension cost only to the extent that the experience gains and losses exceed 10% of the greater of the projected benefit obligation or the market-related value of plan assets at the beginning of the year. (d) Accounting for income taxes Under U.S. GAAP, Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes", requires use of the liability method versus the deferred method prescribed under Canadian GAAP. The liability method requires the recognition of changes in statutory tax rates. Refer to (e) below for differences resulting from acquisition of Rainy River. (e) Purchase accounting The application of purchase accounting under Canadian and U.S. GAAP as it relates to the acquisition of Rainy River is not materially different except for (i) the recognition of a liability for post-retirement benefits other than pensions at the date of acquisition under U.S. GAAP and (ii) differences in accounting for income taxes. In 1995, the net effect of these two differences was to decrease goodwill recorded relating to the acquisition of Rainy River in the amount of $10,691, increase other long-term liabilities in the amount of $6,628, and decrease deferred tax liability in the amount of $17,319. (f) Under U.S. GAAP, the interest expense related to the principal amount of the convertible debentures is charged to income. Under Canadian GAAP, the interest expense, net of income taxes, related to the equity element of the convertible debentures is charged to retained earnings. Statement of changes in financial position Under U.S. GAAP, certain items included as financing and investing activities in the statement of changes in financial position do not result in cash flows and therefore should be excluded. For the year ended December 31, 1995, these items relate primarily to the acquisition of Rainy River. Under U.S. GAAP, these sections are presented as follows: 1995 Investing activities Acquisitions........................................... $(72,740) Capital expenditures................................... (257,243) Other-net.............................................. 17,919 Net cash used in investing activities.................. $(312,064) Financing activities Issuance of common shares-net.......................... $210 Redemption of redeemable preferred shares.............. (400,000) Issuance of debt, net of financing costs............... 391,749 Payment of debt........................................ (85,000) Net cash used in financing activities.................. $(93,041) 19. Additional disclosures required by U.S. GAAP Cash flows 1996 1995 1994 Cash paid during the year for Interest (net of capitalization). $71,565 $52,718 $40,742 Income taxes.................... $8,941 $11,494 $4,902 The net changes in non-cash working capital are as follows: 1996 1995 1994 (Increase) decrease in accounts receivable. $70,728 $(48,141) $(120,774) (Increase) decrease in inventories......... (93,596) (44,216) 39,668 Increase in other current assets........... (3,834) (626) (309) Increase (decrease) in accounts payable and other current liabilities................ (14,518) 28,714 6,166 Other-net.................................. (13,715) 545 2,726 $(54,935) $(63,724) $(72,523) Allowance for doubtful accounts The allowance for doubtful accounts is $4,673 and $4,618 at December 31, 1996 and 1995, respectively. Depreciation and amortization The components of depreciation and amortization are as follows: 1996 1995 1994 Property, plant and equipment........... $152,139 $88,681 $78,532 Goodwill................................ 21,609 14,756 13,412 Pre-production costs.................... 1,816 1,884 1,602 $175,564 $105,321 $93,546 Rental expense Rental expense under the Company's operating leases totalled $11,161, $8,975 and $7,846 for the years ended December 31, 1996, 1995 and 1994 respectively. Accrued and other current liabilities The major components of accrued and other current liabilities are as follows: 1996 1995 Accrued wages................................. $7,395 $8,658 Accrued interest.............................. 5,081 7,158 Accrued vacation pay.......................... 28,867 31,509 Taxes and stumpage dues....................... 23,176 10,259 Other......................................... 28,970 32,448 $93,489 $90,032 Selected pro forma financial information in accordance with U.S. GAAP The following is selected pro forma financial information of the Company as though the acquisition of Rainy River had been made as of January 1, 1995 and 1994, respectively. Refer to Note 3 for further details. Pro forma Pro forma 1995 1994 (unaudited) Net sales.......................... $2,690,460 $1,900,520 Net income (loss).................. $259,334 $(105,491) Net income (loss) per common share (in dollars)................ $2.49 $(1.01) The above pro forma financial information is not necessarily indicative of the actual results of operations that would have occurred had the purchase actually been made at the beginning of 1995 and 1994. 20. Subsequent event On February 14, 1997, the Boards of Directors of Abitibi-Price Inc. and the Company approved a merger arrangement to amalgamate Abitibi-Price Inc. and the Company. The new name of the combined Company is expected to be Abitibi-Consolidated Inc. Under the arrangement, each common share of Abitibi-Price Inc. will be exchanged for one common share of Abitibi-Consolidated Inc. and each common share of the Company will be exchanged for 1.0062 common shares of Abitibi-Consolidated Inc. The transaction is expected to close in the second quarter of 1997 subject to, among other things, necessary approvals from Canadian and U.S. regulatory authorities and from each company's shareholders. In addition, the Company's debt instruments contain restrictions and/or covenants that would be breached upon amalgamation. The Company intends to launch a tender offer bid to redeem both senior notes and remove all restrictions and covenants attached thereto. The term, revolving and reducing credit facilities will be replaced upon closing of the amalgamation. -----END PRIVACY-ENHANCED MESSAGE-----