-----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, Iu5xzZ5PN0LXjSDjmKL+2KhaPd8FYvF5Qf4I6a73aBy/bgn5SKYcfyOKY1BW86QC a23MbBP6WAtSLs5EuwwnCw== 0000912057-97-009908.txt : 19970325 0000912057-97-009908.hdr.sgml : 19970325 ACCESSION NUMBER: 0000912057-97-009908 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970324 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-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-03439 FILM NUMBER: 97561599 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-K 1 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ----------------------------------------------------------------------- FORM 10-K (X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1996. or ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________________ to ________________. Commission file number 1-3439 STONE CONTAINER CORPORATION (Exact name of registrant as specified in its charter) [LOGO] DELAWARE 36-2041256 - -------------------------------------------------- --------------------------------------------------
(State or other jurisdiction of incorporation (I.R.S. employer identification no.) or organization) 150 NORTH MICHIGAN AVENUE, CHICAGO, ILLINOIS 60601 - -------------------------------------------------------------------------------------------------------- (Address of principal executive offices) (Zip code) REGISTRANT'S TELEPHONE NUMBER: 312 346-6600 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE ON WHICH TITLE OF EACH CLASS REGISTERED - -------------------------------------------- --------------------------------------- Common Stock New York Stock Exchange Rights to purchase Series D Preferred Stock New York Stock Exchange $1.75 Series E Cumulative Convertible Exchangeable Preferred Stock New York Stock Exchange 10 3/4% Senior Subordinated Notes due June 15, 1997 New York Stock Exchange 12 5/8% Senior Notes due July 15, 1998 New York Stock Exchange 11 7/8% Senior Notes due December 1, 1998 New York Stock Exchange 11% Senior Subordinated Notes due August 15, 1999 New York Stock Exchange 9 7/8% Senior Notes due February 1, 2001 New York Stock Exchange 10 3/4% Senior Subordinated Debentures due April 1, 2002 New York Stock Exchange 10 3/4% First Mortgage Notes due October 1, 2002 New York Stock Exchange 11 1/2% Senior Notes due October 1, 2004 New York Stock Exchange 6 3/4% Convertible Subordinated Debentures due February 15, 2007 New York Stock Exchange Rating Adjustable Senior Notes due August 1, 2016 New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE. Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes _X No ___ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ( ) The aggregate market value as of March 20, 1997 of the voting common stock held by non-affiliates of the Registrant was approximately $1,094,000,000. The number of shares of common stock outstanding at March 20, 1997 was 99,319,186. The Proxy Statement, to be filed on or before April 30, 1997, for the Annual Meeting of Stockholders scheduled May 13, 1997 is partially incorporated by reference into Part III, Items 10, 11, 12 and 13; and Part IV, Item 14, excluding the sections entitled "Compensation Committee Report on Executive Compensation" and "Performance Graph." ----------------------------------------------------------------------- PART I ITEM 1. BUSINESS (a) GENERAL DEVELOPMENT OF BUSINESS The information relating to the general development of the Registrant's business for the year ended December 31, 1996, is incorporated herein by reference to Item 7--Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") included in this report, under the section entitled "Financial Condition and Liquidity," pages 14 -18, and to the Financial Statements, included in this report, under Notes to the Consolidated Financial Statements, "Note 3--Joint Ventures, Acquisitions and Investments," pages 34-35, "Note 16--Related Party Transactions," page 49, and "Note 19--Segment and Geographic Information," pages 51-53. Except where the context clearly indicates otherwise, the terms "Registrant" and "Company" as hereinafter used refer to Stone Container Corporation together with its consolidated subsidiaries. (b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS Effective with the November 1, 1995 amalgamation of Stone-Consolidated Corporation with Rainy River Forest Products Inc. discussed in Note 4 of the Consolidated Financial Statements included in this report, the Registrant began reporting Stone-Consolidated as a non-consolidated affiliate in accordance with the equity method of accounting. As a result of this de-consolidation of Stone-Consolidated and the integrated nature of the Registrant's principal consolidated operations, the Registrant now operates in a single business--the production and sale of commodity pulp, paper and packaging products. Accordingly, effective in 1996, business segment reporting is no longer applicable. Financial information relating to the Registrant's historical industry segments, for the year ended December 31, 1995 is incorporated herein by reference to the Financial Statements included in this report, under Notes to the Consolidated Financial Statements, "Note 19--Segment and Geographic Information," pages 51-53. (c) NARRATIVE DESCRIPTION OF BUSINESS Descriptive information relating to the Registrant's principal products, markets and industry ranking is outlined in the table entitled "Profile" on page 2 of this report and is also incorporated herein by reference to the MD&A, included in this report, under the sections entitled "Results of Operations," pages 12-14, "Investing Activities," page 17, and "Environmental Issues," pages 17-18, and to the Financial Statements, included in this report, under Notes to the Consolidated Financial Statements, "Note 3--Joint Ventures, Acquisitions and Investments," pages 34-35, and "Note 19--Segment and Geographic Information," pages 51-53. 1 PROFILE
KEY PRODUCTS Markets Industry Position CONTAINERBOARD AND A broad range of manufacturers of consumable and Industry leader CORRUGATED CONTAINERS durable goods and other manufacturers of corrugated containers. KRAFT PAPER AND BAGS AND Industrial and consumer bags sold to the food, Industry leader SACKS agricultural, chemical and cement industries, among others. Retail bags and sacks sold to supermarket chains and other retailers of consumable products. BOXBOARD, FOLDING Manufacturers of consumable goods, especially A major position in Europe (FCP Group); a CARTONS AND OTHER food, beverage and tobacco products, and other box nominal position in North America manufacturers. PUBLICATION PAPERS Newspaper publishers, commercial printers, and Industry leader, through its producers of advertising materials, magazines, non-consolidated affiliate, directories and computer papers. Stone-Consolidated Corporation MARKET PULP Manufacturers of paper products, including fine A major position papers, photographic papers, tissue and newsprint.
1996 PRODUCTION AND SHIPMENT STATISTICS MILL PRODUCTION* (thousands of short tons) Containerboard................................................................................ 4,591 Kraft Paper................................................................................... 439 Market Pulp................................................................................... 1,009 Publication Papers............................................................................ 1,269 Boxboard and Other............................................................................ 88 --------- Total....................................................................................... 7,396 --------- --------- CONTAINERBOARD AND KRAFT PAPER CONVERTED* (thousands of short tons)............................. 4,326 WASTEPAPER RECOVERED AND RECYCLED (thousands of short tons)..................................... 2,992 CONVERTED PRODUCT SHIPMENTS* Corrugated Containers (billions of square feet)............................................... 53.1 Paper Bags and Sacks (thousands of short tons)................................................ 538 Folding Cartons (thousands of short tons)..................................................... 88 Flexible Packaging (thousands of short tons).................................................. 16 NUMBER OF MANUFACTURING FACILITIES (including certain affiliates) Paperboard, Paper and Pulp Mills.............................................................. 31 Converting Plants............................................................................. 164 Sawmills...................................................................................... 7 Packaging Machinery Plants.................................................................... 2 Preprint Plants............................................................................... 2 --------- Total....................................................................................... 206 --------- ---------
*Includes certain affiliates on an equity ownership basis. 2 The major markets in which the Company sells its principal products are highly competitive. Its products compete with similar products manufactured by others and, in some instances, with products manufactured from other materials. Areas of competition include price, innovation, quality and service. The Company's business is affected by cyclical industry conditions and economic factors such as industry capacity, growth in the economy, interest rates, unemployment levels and fluctuations in foreign currency exchange rates. Wood fiber and recycled fiber, the principal raw materials used in the manufacture of the Company's products, are purchased in highly competitive, price sensitive markets. These raw materials have historically exhibited price and demand cyclicality. In addition, the supply and price of wood fiber in particular, is dependent upon a variety of factors over which the Company has no control, including environmental and conservation regulations, natural disasters, such as forest fires and hurricanes, and weather. The Company purchases or cuts a variety of species of timber from which the Company utilizes wood fiber depending upon the product being manufactured and each mill's geographic location. A decrease in the supply of wood fiber has caused, and will likely continue to cause, higher wood fiber costs in some of the regions in which the Company procures wood. In addition, the increase in demand for products manufactured, in whole or in part, from recycled fiber has from time to time caused a tightness in the supply of recycled fiber and at those times a significant increase in the cost of such fiber used in the manufacture of recycled containerboard and related products. The Company's paper and paper packaging products use a large volume of recycled fiber. While the Company has not experienced any significant difficulty in obtaining wood fiber and recycled fiber in economic proximity to its mills, there can be no assurances that this will continue to be the case for any or all of its mills. At December 31, 1996, the Company owned approximately 2 thousand and 137 thousand acres of private fee timberland in the United States and Canada, respectively. The Company's business is not dependent upon a single customer or upon a small number of major customers. The loss of any one customer would not have a material adverse effect on the Company. Backlogs are not a significant factor in the industry in which the Company operates; most orders placed with the Company are for delivery within 60 days or less. The Company expenses research and development expenditures as incurred. Research and development costs were $9 million and $11 million for 1996 and 1995, respectively. The Company owns patents, licenses, trademarks and tradenames on products. The loss of any patent, license, trademark or tradename would not have a material adverse effect on the Company's operations. As of December 31, 1996, the Registrant had approximately 24,200 employees, of whom approximately 19,700 were employees of U.S. operations and the remainder were employees of foreign operations. Of those in the United States, approximately 12,800 are union employees. (d) FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES Financial information relating to the Registrant's foreign and domestic operations and export sales for the year ended December 31, 1996, is incorporated herein by reference to the Financial Statements, included in this report, under Notes to the Consolidated Financial Statements, "Note 19--Segment and Geographic Information," pages 51-53. The Company's results are affected by economic conditions in certain foreign countries and by fluctuations in foreign exchange rates. ITEM 2. PROPERTIES The Registrant, including its subsidiaries and affiliates, maintains manufacturing facilities and sales offices throughout North America, Europe, Central and South America, Australia and Asia. A listing of such worldwide facilities as of December 31, 1996 is provided on pages 5-6 of this report. 3 The approximate annual production capacity of the Company's mills is summarized in the following table:
(IN THOUSANDS OF SHORT TONS) DECEMBER 31, 1996 1995 - -------------------------------------------------- ------ ------ United States (1)................................. 6,041 5,611 Canada (2)(3)..................................... 2,174 2,164 Europe (3)........................................ 643 505 ------ ------ 8,858 8,280 ------ ------ ------ ------
- --------- (1) Includes 50 percent of the Florida Coast mill for 1996. (2) Includes 45 percent of the Celgar mill. (3) Includes 46.6 percent of Stone-Consolidated Corporation. All mills and converting facilities are owned, or partially owned through investments in other companies, by the Registrant, except for 51 converting plants in the United States, which are leased. The Registrant owns certain properties that have been mortgaged or otherwise encumbered. These properties include 12 paper mills and 76 corrugated container plants, including those subject to a leasehold mortgage. The Registrant's properties and facilities are properly equipped with machinery suitable for their use. Such facilities and related equipment are well maintained and adequate for the Registrant's current operations. Additional information relating to the Registrant's properties for the year ended December 31, 1996 is incorporated herein by reference to the Financial Statements, included in this report, under the Notes to the Consolidated Financial Statements, "Note 3--Joint Ventures, Acquisitions and Investments" pages 34-35, "Note 4--Subsidiary Issuance of Stock," page 35, "Note 11--Long-term Debt," pages 42-44, and "Note 13--Long-term Leases," page 46. 4 WORLDWIDE FACILITIES - ---------------------------------------------------------------- UNITED STATES ALABAMA Birmingham (corrugated container) ARIZONA Eagar (forest products) Glendale (corrugated container) *Phoenix (bag) Snowflake (paperboard/paper/pulp) Snowflake (paperboard/paper/pulp) The Apache Railway Company ARKANSAS Jacksonville (bag) (Little Rock) Little Rock (corrugated container) Rogers (corrugated container) CALIFORNIA City of Industry (corrugated container) (Los Angeles) Fullerton (corrugated container) Los Angeles (bag) Salinas (corrugated container) San Jose (corrugated container) Santa Fe Springs (corrugated container, 2) COLORADO Denver (corrugated container) CONNECTICUT Portland (corrugated container) Torrington (corrugated container) Uncasville (paperboard/paper/pulp) FLORIDA Cantonment (bag) (Pensacola) Jacksonville (paperboard/paper/pulp); (corrugated container) Panama City (paperboard/paper/pulp) *Port St. Joe (paperboard/paper/pulp) *Yulee (bag) Orlando (corrugated container) Packaging Systems Jacksonville (corrugated container) Preprint GEORGIA Atlanta (corrugated container, 3) Port Wentworth (paperboard/paper/pulp) Atlanta (paperboard/paper/pulp) Technology and Engineering Center ILLINOIS *Alsip (bag) Bedford Park (corrugated container) (Chicago) Bloomington (corrugated container) Cameo (corrugated container) (Chicago) Danville (corrugated container) *Herrin (corrugated container) Joliet (corrugated container) Naperville (corrugated container) (Chicago) North Chicago (corrugated container) *Plainfield (bag) Quincy (bag) *Zion (corrugated container) Burr Ridge (paperboard/paper/pulp) Technology and Engineering Center Westmont (corrugated container) Marketing and Technical Center INDIANA Columbus (corrugated container) Fowler (bag) Mishawaka (corrugated container) South Bend (corrugated container) IOWA Des Moines (corrugated container); (bag) Keokuk (corrugated container) Sioux City (corrugated container) KANSAS Kansas City (corrugated container) KENTUCKY Louisville (corrugated container); (bag) LOUISIANA Arcadia (bag) Hodge (paperboard/paper/pulp) *Hodge (bag) New Orleans (corrugated container) MASSACHUSETTS Mansfield (corrugated container) Westfield (corrugated container) MICHIGAN *Detroit (corrugated container) Grand Rapids (bag) Ontonagon (paperboard/paper/pulp) *Melvindale (corrugated container) (Detroit) MINNESOTA Minneapolis (corrugated container) Rochester (corrugated container) St. Cloud (corrugated container) St. Paul (corrugated container) Minneapolis (corrugated container) Preprint MISSISSIPPI Jackson (corrugated container) Tupelo (corrugated container, 2) MISSOURI Blue Springs (corrugated container) Kansas City (bag) Liberty (corrugated container) (Kansas City) Springfield (corrugated container) St. Joseph (corrugated container) St. Louis (corrugated container) MONTANA Missoula (paperboard/paper/pulp) NEBRASKA Omaha (corrugated container) NEW JERSEY *Elizabeth (bag) Teterboro (corrugated container) NEW YORK Buffalo (corrugated container) *Walden (bag) NORTH CAROLINA Charlotte (corrugated container) Lexington (corrugated container) Raleigh (corrugated container) NORTH DAKOTA Fargo (corrugated container) OHIO Cincinnati (corrugated container) Coshocton (paperboard/paper/pulp) Jefferson (corrugated container) Mansfield (corrugated container) Marietta (corrugated container) New Philadelphia (bag) OKLAHOMA Oklahoma City (corrugated container) Sand Springs (corrugated container) (Tulsa) PENNSYLVANIA Philadelphia (corrugated container, 2) Williamsport (corrugated container) York (paperboard/paper/pulp) SOUTH CAROLINA Columbia (corrugated container) Florence (paperboard/paper/pulp) Fountain Inn (corrugated container) Orangeburg (forest products) SOUTH DAKOTA Sioux Falls (corrugated container) TENNESSEE Chattanooga (corrugated container) Collierville (corrugated container) (Memphis) Nashville (corrugated container) TEXAS Dallas (corrugated container) El Paso (corrugated container, 2); (folding carton) Grand Prairie (corrugated container) (Dallas) Houston (corrugated container) Temple (corrugated container) Tyler (corrugated container) UTAH Salt Lake City (bag) Salt Lake City (bag) Bag Packaging Systems VIRGINIA Hopewell (paperboard/paper/pulp) Martinsville (corrugated container) Richmond (corrugated container, 2) *Richmond (bag) WASHINGTON SEATTLE (CORRUGATED CONTAINER) *Tacoma (paperboard/paper/pulp) WEST VIRGINIA Wellsburg (bag) WISCONSIN Beloit (corrugated container) Germantown (corrugated container) (Milwaukee) Neenah (corrugated container) CANADA ALBERTA *Calgary (corrugated container) *Edmonton (corrugated container) BRITISH COLUMBIA *Castlegar (paperboard/paper/pulp) *New Westminster (corrugated container) MANITOBA *Winnipeg (corrugated container) NEW BRUNSWICK Bathurst (paperboard/paper/pulp); (forest products) *Saint John (corrugated container) NOVA SCOTIA *Dartmouth (corrugated container) ONTARIO *Etobicoke (corrugated container) *Ft. Frances (paperboard/paper/pulp) *Guelph (corrugated container) *Kenora (paperboard/paper/pulp) *Pembroke (corrugated container) *Rexdale (corrugated container) *Whitby (corrugated container) PRINCE EDWARD ISLAND *Summerside (corrugated container) 5 - ----------------------- QUEBEC *Grand-Mere (paperboard/paper/pulp) *La Baie (paperboard/paper/pulp) *La Tuque (forest products, 2) New Richmond (paperboard/paper/pulp) Portage-du-Fort (paperboard/paper/pulp) *Roberval (forest products) *Saint-Fulgence (forest products) *Saint-Laurent (corrugated container) *Shawinigan (paperboard/paper/pulp) *Trois-Rivieres (paperboard/paper/pulp) *Ville Mont-Royal (corrugated container) *Grand-Mere (paperboard/paper/pulp) Research Center SASKATCHEWAN *Regina (corrugated container) MEXICO Monterrey (corrugated container) Queretaro (corrugated container) EUROPE GERMANY *Augsburg (folding carton) *Bremen (folding carton) Delitzsch (corrugated container) Dusseldorf (corrugated container) *Frankfurt (folding carton) Germersheim (corrugated container) Hamburg (corrugated container) Heppenheim (corrugated container) Hoya (paperboard/paper/pulp) Julich (corrugated container) Lauenburg (corrugated container) Lubbecke (corrugated container) Neuburg (corrugated container) Plattling (corrugated container) Viersen (paperboard/paper/pulp) Waren (corrugated container) Hamburg Institute for Package and Corporate Design UNITED KINGDOM *Chesterfield (folding carton) *Ellesmere Port (paperboard/paper/pulp) NETHERLANDS *Sneek (folding carton) BELGIUM Ghlin (corrugated container) Groot-Bijgaarden (corrugated container) FRANCE *Bordeaux (folding carton) *Cholet (folding carton) Molieres-Sur-Ceze (corrugated container) Nimes (corrugated container) *Soissons (folding carton) *Strasbourg (folding carton) *Valenciennes (corrugated container) SPAIN Cordoba (paperboard/paper/pulp); (corrugated container) Madrid (corrugated container) Seville (corrugated container) AUSTRALIA Melbourne (corrugated container) Sydney (corrugated container) ASIA CHINA *Shanghai (corrugated container) *Beijing (joint venture office) JAPAN *Tokyo (joint venture office) CENTRAL AND SOUTH AMERICA ARGENTINA *Bernal (Buenos Aires) (joint venture office); (corrugated container) *Mendoza (corrugated container) CHILE *San Francisco (Santiago) (corrugated container) COSTA RICA Palmar Norte (forest products) San Jose (forest products) Administrative Office VENEZUELA *Maracay (other, 2) *Miranda (other) *Moron (paperboard/paper/pulp); (bag) *Puerto Ordaz (joint venture office) *Valencia (paperboard/paper/pulp); (corrugated container); (bag) CORPORATE HEADQUARTERS Chicago, Illinois *affiliates 6 ITEM 3. LEGAL PROCEEDINGS In November 1990, the U.S. Environmental Protection Agency ("EPA") announced its decision to list two bodies of water in Arizona, Dry Lake and Twin Lakes, as "waters of the United States" impacted by toxic pollutant discharges under Section 304(l) of the federal Clean Water Act. These bodies of water had been used by the Company's Snowflake, Arizona pulp and paperboard mill for the evaporation of its process wastewater. The Company has vigorously disputed the application of the Clean Water Act to these two privately owned evaporation ponds. The Company has implemented a plan to use its wastewater to irrigate a biomass plantation and discontinue using Dry Lake to evaporate wastewater. The parties have been negotiating a consent decree to resolve this matter which currently is expected to include civil penalties in the amount of $375,000. On October 27, 1992, the Florida Department of Environmental Regulation, predecessor to the Department of Environmental Protection ("DEP"), filed a civil complaint in the Fourteenth Judicial Circuit Court of Bay County, Florida against the Company seeking injunctive relief, an unspecified amount of fines and civil penalties, and other relief based on alleged groundwater contamination at the Company's Panama City, Florida pulp and paperboard mill. In addition, the complaint alleges operation of a solid waste facility without a permit and discrepancies in hazardous waste shipping manifests. Because of uncertainties in the interpretation and application of DEP's rules, it is premature to assess the Company's potential liability, if any, in the event of an adverse ruling. At the parties' request, the case has been placed in abeyance pending the conclusion of a related administrative proceeding petitioned by the Company in June 1992 following DEP's proposal to deny the Company a permit renewal to continue operating its wastewater pretreatment facility at the mill site. The administrative proceeding has been referred to a hearing officer for an administrative hearing on the consolidated issues of compliance with a prior consent order, denial of the permit renewal, completion of a contamination assessment and denial of a sodium exemption. The consolidated cases were abated at the parties' request and extensive settlement negotiations are being conducted between the parties. The Company intends to vigorously assert its entitlement to the permit renewal and to defend against the groundwater contamination and unpermitted facility allegations in the event that a settlement cannot be reached. On April 20, 1994, Carolina Power & Light ("CP&L") commenced proceedings against the Company before the Federal Energy Regulatory Commission ("FERC") (the "FERC Proceeding") and in the United States District Court for the Eastern District of North Carolina (the "Federal Court Action"). Both proceedings relate to the Company's electric cogeneration facility located at its Florence, South Carolina mill (the "Facility") and the Company's Electric Power Purchase Agreement (the "Agreement") with CP&L. In the FERC Proceeding, CP&L alleges that the Facility lost its qualifying facility ("QF") certification under the Public Utility Regulatory Policy Act of 1978 on August 13, 1991, when the Agreement, pursuant to which CP&L purchases electricity generated by the Facility, was amended to reflect the Company's election under the Agreement to switch to a "buy-all/sell-all mode of operation." As a result, CP&L alleges the Company became a "public utility" on August 13, 1991 subject to FERC regulation under the Federal Power Act. CP&L has also requested that the FERC determine the "just and reasonable rate" for sales of electric energy and capacity from the Facility since August 13, 1991 and to order the Company to refund any amounts paid in excess of that rate, plus interest and penalties. In its answer filed with the FERC on June 2, 1994, the Company stated that its power sales to CP&L fully complied with the FERC's regulations. The Company also requested that the FERC waive compliance with any applicable FERC regulations in the event that the FERC should determine, contrary to the Company's position, that the Company has not complied with the FERC's regulations in any respect. CP&L has also filed several other pleadings to which the Company has responded. If the FERC were to determine that the Company had become a "public utility," the Company's issuance of securities and incurrence of debt after the date that it became a "public utility" could be subject to the jurisdiction and approval of the FERC unless the FERC granted a waiver. In the absence of such a waiver, certain other activities and contracts of the Company after such date could also be subject to additional federal and state regulatory requirements, and defaults might be created under certain existing agreements. Based on past administrative practice of the FERC in granting waivers of certain other regulations, the Company believes that it is likely that such a waiver would be granted by the FERC in the event that such a waiver became necessary. In the Federal Court Action, CP&L has requested declaratory judgments that sales of electric energy and capacity under the Agreement since August 13, 1991 are subject to a just and reasonable rate to be determined by the FERC and that the Agreement has been terminated as a result of the Company's failure to maintain the Facility's QF status and the invalidity of the Agreement's rate provisions. CP&L has also sought damages for breach of contract and for purchases in excess of the just and reasonable rate to be determined by the FERC. On June 9, 1994, the Company moved to dismiss CP&L's Federal Court Action on the principal grounds that any proceedings in the United States 7 District Court are premature unless and until the FERC Proceeding is finally resolved. On September 20, 1994, the United States District Court stayed the Federal Court action pending the outcome of the FERC proceeding. The two proceedings are in their preliminary stages and no assurance can be provided as to the timing of the decisions or the outcome of either of them. The Company intends to contest these actions vigorously. On September 30, 1994, the EPA, Region IV, issued an Administrative Order ("Order") to the Company's Panama City Mill pursuant to Section 3008(h) of the Federal Resource Conservation and Recovery Act ("RCRA"), 42 U.S.C. Section 6928(h)(l). The Order required the Company to perform a RCRA Facility Investigation at the Panama City Mill together with confirmatory sampling, interim corrective measures and any other activities necessary to correct alleged actual or threatened releases of hazardous substances or hazardous constituents at or from the Panama City Mill. The Company filed a protest and requested a hearing to contest the EPA's RCRA Section 3008(h) jurisdiction over the Panama City Mill. The Company believes that the Panama City Mill is not currently a RCRA facility. The corrective measures mandated by the Order required the Company to conduct extensive groundwater and soil sampling and analyses. In early 1996 the EPA issued another Order to the mill pursuant to Section 3013 of RCRA ("Section 3013 Order") incorporating certain sampling and analysis activities which the Company had proposed in settlement negotiations and requiring additional sampling and analysis. In its response to the Section 3013 Order the Company agreed to implement all of the proposed activities except dioxin sampling. The parties have been engaged in extensive settlement negotiations with respect to both Orders. The Company does not know at this time the likelihood of success in challenging the Orders. Notwithstanding the success in challenging the Orders, an owner of property adjacent to the Panama City Mill is currently subject to extensive clean-up under RCRA, and the EPA is empowered to require clean-up for materials discharged from the property which may have migrated onto the Panama City Mill's property. The Company does not yet know the extent, if any, of such adjacent property owner's responsibility to remediate contamination, if any, at the Panama City Mill site. On January 22, 1996, the United States of America filed a suit against the Company in the United States District Court for the District of Montana seeking injunctive relief and an unspecified amount in civil penalties based on the alleged failure of the Company to comply with certain provisions of the Clean Air Act ("CAA"), its implementing regulations, and the Montana State Implementation Plan at the Company's Missoula, Montana kraft pulp mill, (the "Missoula Mill"). The complaint specifically alleges that the Company exceeded the 20% opacity limitation for recovery boiler emissions; failed to properly set the span on a recovery boiler continuous emissions monitor; and concealed the emission of an air contaminant by improperly venting non-condensible gasses. The statutory penalty for violations of the CAA is $25,000 per day for each day of violation. The Company has engaged in extensive negotiations with EPA and the United States Department of Justice to settle this matter while vigorously contesting the allegations. While it is premature to predict the outcome of this matter at this time, negotiators for the Company and the United States have reached an agreement in principle to settle this case, which currently is expected to include a penalty of $300,000. In a related matter, on November 27, 1995, the Company received notice from several environmental groups that they intended to file citizens suits under the CAA, the Federal Water Pollution Control Act ("CWA") and the Emergency Planning and Community Right-to-Know Act ("EPCRA") against the Company based on alleged violations of those Acts at the Missoula Mill. In December, 1995, representatives of the Company met with representatives of the groups that sent the notice to discuss the Company's position that the majority of the alleged violations were not in excess of applicable permit limits or were excused because they occurred during reported malfunctions, start-up or shutdown conditions. On January 29, 1996, a Complaint was filed by the Montana Coalition for Health, Environmental and Economic Rights Inc., Cold Mountain, Cold Rivers, Inc. and Native Forest Network, Inc. (collectively "Plaintiffs") in the United States District Court for the District of Montana alleging numerous violations of the provisions of the CAA, the CWA and the EPCRA. On February 7, 1996, Plaintiffs filed an Amended Complaint seeking (1) a declaratory judgment that the Company has violated Section 301(a) of the CWA, Section 502(a) of the CAA and Section 313 of the EPCRA; (2) injunctive relief enjoining the Company from operating the Missoula Mill in a manner as will result in further violations of the CAA, CWA and EPCRA; and (3) civil penalties of $25,000 per day for each day of alleged violation. The Company has engaged in negotiations with Plaintiffs to settle this matter, and in December 1996 the parties reached an agreement in principle, which is currently expected to include a penalty of $100,000. No assurance can be given that a definitive settlement agreement will be entered into by the parties or approved by the Court. In addition, the Registrant is from time to time subject to litigation and governmental proceedings regarding environmental matters in which injunctive and/or monetary relief is sought. The Company has been named as a potentially responsible party ("PRP") at a number of sites which are the subject of remedial activity under the federal Comprehensive Environmental Response, Compensation and Liability Act of 1980 ("CERCLA" or "Superfund") or 8 comparable state laws. Although the Company is subject to joint and several liability imposed under Superfund, at most of the multi-PRP sites there are organized groups of PRPs and costs are being shared among PRPs. The Registrant is involved in contractual disputes, administrative and legal proceedings and investigations of various types. Although any litigation, proceeding or investigation has an element of uncertainty, the Registrant believes that the outcome of any proceeding, lawsuit or claim which is pending or threatened, or all of them combined, would not have a material adverse effect on its consolidated financial position, results of operations or liquidity. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS (a) PRINCIPAL MARKET, STOCK PRICE AND DIVIDEND INFORMATION Information relating to the principal market, stock price and dividend information for the Registrant's Common and Preferred Stock and related stockholder matters, for the year ended December 31, 1996, is incorporated herein by reference to the MD&A, included in this report, under the sections entitled "Common and Series E Cumulative Preferred Stock--Cash Dividends, Market and Price Range," page 18 and "Financial Condition and Liquidity," pages 14-18, and to the Financial Statements, included in this report, under Notes to the Consolidated Financial Statements, "Note 11--Long-term Debt," pages 42-44, "Note 14--Preferred Stock," page 46, "Note 15--Common Stock," pages 47-49 and "Note 20--Summary of Quarterly Data (unaudited)," page 54. (b) APPROXIMATE NUMBER OF HOLDERS OF COMMON STOCK There were approximately 6,378 holders of record of the Registrant's common stock, as of March 20, 1997. ITEM 6. SELECTED FINANCIAL DATA In addition to the table set forth on pages 10-11 of this report, selected financial data of the Registrant is incorporated herein by reference to the Financial Statements, included in this report, under Notes to the Consolidated Financial Statements, "Note 1--Summary of Significant Accounting Policies," pages 33-34, and "Note 3--Joint Ventures, Acquisitions and Investments," pages 34-35. 9 SELECTED FINANCIAL DATA
(DOLLARS IN MILLIONS EXCEPT PER SHARE) 1996 1995(b) 1994 1993 1992 1991 1990 - ---------------------------------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- SUMMARY OF OPERATIONS Net sales............................... $ 5,141.8 $7,351.2 $ 5,748.7 $ 5,059.6 $ 5,520.7 $ 5,384.3 $ 5,755.9 Cost of products sold................... 4,085.4 5,168.9 4,564.3 4,223.5 4,473.7 4,287.2 4,421.9 Selling, general and administrative expenses............................... 596.2 608.5 568.2 512.2 543.5 522.8 495.5 Depreciation and amortization........... 314.8 371.8 358.9 346.8 329.2 273.5 257.0 Interest expense........................ 413.5 460.3 456.0 426.7 386.1 397.4 421.7 Income (loss) before income taxes, minority interest, extraordinary charges and cumulative effects of accounting changes..................... (189.1) 794.7 (163.1) (463.3) (224.0) (12.2) 194.1 (Provision) credit for income taxes..... 66.0 (320.9) 35.5 147.7 59.4 (31.1) (92.8) Minority interest....................... .6 (29.3) (1.2) (3.6) (5.3) (5.8) (5.9) Income (loss) before extraordinary charges and cumulative effects of accounting changes..................... (122.5) 444.5 (128.8) (319.2) (169.9) (49.1) 95.4 Extraordinary charges from early extinguishments of debt................ (3.7) (189.0) (61.6) -- -- -- -- Cumulative effects of accounting changes................................ -- -- (14.2) (39.5) (99.5) -- -- Net income (loss)....................... (126.2) 255.5 (204.6) (358.7) (269.4) (49.1) 95.4 ---------- ---------- ---------- ---------- ---------- ---------- ---------- PER SHARE OF COMMON STOCK (a) PRIMARY: Income (loss) before extraordinary charges and cumulative effects of accounting changes..................... (1.32) 4.64 (1.60) (4.59) (2.49) (.78) 1.56 Extraordinary charges from early extinguishments of debt................ (.03) (2.01) (.70) -- -- -- -- Cumulative effects of accounting changes................................ -- -- (.16) (.56) (1.40) -- -- Net income (loss)--Primary.............. (1.35) 2.63 (2.46) (5.15) (3.89) (.78) 1.56 FULLY DILUTED: Income (loss) before extraordinary charges and cumulative effects of accounting changes..................... (j) 3.89 (j) (j) (j) (j) (j) Extraordinary charges from early extinguishments of debt................ (j) (1.65) (j) (j) (j) (j) (j) Cumulative effects of accounting changes................................ (j) -- (j) (j) (j) (j) (j) Net income--Fully diluted............... (j) 2.24 (j) (j) (j) (j) (j) Dividends and distributions paid........ .60 .30 -- -- .35 .71 .71 Common stockholders' equity (end of year).................................. 6.85 8.98 5.90 6.91 13.91 22.12 24.34 Price range of common shares--N.Y.S.E. High.................................. 17.38 24.63 21.13 19.50 32.63 26.00 25.25 Low................................... 12.13 12.50 9.63 6.38 12.50 9.00 8.13 Average common shares outstanding (in millions): Primary............................... 99.2 94.1 88.2 71.2 71.0 63.2 61.3 Fully diluted......................... (j) 114.7 (j) (j) (j) (j) (j) ---------- ---------- ---------- ---------- ---------- ---------- ---------- FINANCIAL POSITION AT END OF YEAR Current assets.......................... $ 1,561.2 $1,682.9 $ 1,816.9 $ 1,753.2 $ 1,701.8 $ 1,685.3 $ 1,586.0 Current liabilities..................... 889.2 701.7 1,031.5 943.5 944.8 914.8 1,146.5 Working capital......................... 672.0 981.2 785.4 809.7 757.0 770.5 439.5 Property, plant and equipment--net...... 2,633.7 2,635.8 3,359.0 3,386.4 3,703.2 3,520.2 3,364.0 Total assets............................ 6,353.8 6,398.9 7,004.9 6,836.7 7,027.0 6,902.9 6,690.0 Long-term debt.......................... 3,951.1 3,885.1 4,431.9 4,268.4 4,105.1 4,046.4 3,680.5 Deferred taxes.......................... 410.2 493.1 381.4 470.6 685.2 263.9 262.7 Redeemable preferred stock.............. -- -- -- 42.3 36.3 31.1 26.6 Minority interest (i)................... 4.3 .7 221.8 234.5 .2 3.8 8.0 Stockholders' equity.................... 795.2 1,005.3 648.1 607.1 1,102.7 1,537.5 1,460.5 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ADDITIONAL INFORMATION Paperboard, paper and market pulp: Produced (thousand short tons) (e).... 7,396 7,980 7,928 7,475 7,517 7,365 7,447 Converted (thousand short tons) (e)... 4,326 4,355 4,477 4,354 4,373 4,228 4,241 Corrugated shipments (billion square feet) (e).............................. 53.1 53.0 54.10 52.48 51.67 49.18 47.16 Employees (end of year--in thousands)... 24.2 25.9 29.1 29.0 31.2 31.8 32.3 Capital expenditures.................... $ 250.8 $ 386.5 $ 232.6 $ 149.7 $ 281.4 $ 430.1 $ 552.0 Net cash/funds provided by (used in) operating activities (f)............... $ 287.6 $ 961.7 $ 72.3 $ (129.1) $ 120.9 $ 247.2 $ 468.6 Working capital ratio................... 1.8/1 2.4/1 1.8/1 1.9/1 1.8/1 1.8/1 1.4/1 Percent long-term debt/total capitalization (g)..................... 76.6% 72.2% 78.0% 75.9% 69.2% 68.8% 67.7% Return on beginning common stockholders' equity (h)............................. (13.7%) 83.4% (26.2%) (32.3%) (11.1%) (3.4%) 7.1% Pretax margin........................... (3.7%) 10.4% (2.9%) (9.2%) (4.2%) (.3%) 3.3% After-tax margin........................ (2.5%) 3.5% (3.6%) (7.1%) (4.9%) (.9%) 1.7% ---------- ---------- ---------- ---------- ---------- ---------- ---------- (DOLLARS IN MILLIONS EXCEPT PER SHARE) 1989(c) 1988 1987(c) 1986(c) - ---------------------------------------- ---------- ---------- ---------- ---------- SUMMARY OF OPERATIONS Net sales............................... $5,329.7 $ 3,742.5 $3,232.9 $2,032.3 Cost of products sold................... 3,893.8 2,618.0 2,347.8 1,564.6 Selling, general and administrative expenses............................... 474.5 351.1 343.8 241.2 Depreciation and amortization........... 237.1 148.1 138.7 92.3 Interest expense........................ 344.7 108.3 131.1 85.3 Income (loss) before income taxes, minority interest, extraordinary charges and cumulative effects of accounting changes..................... 481.8 549.7 283.5 59.7 (Provision) credit for income taxes..... (195.2) (207.7) (122.1) (24.3) Minority interest....................... (.8) (.2) (.1) -- Income (loss) before extraordinary charges and cumulative effects of accounting changes..................... 285.8 341.8 161.3 35.4 Extraordinary charges from early extinguishments of debt................ -- -- -- -- Cumulative effects of accounting changes................................ -- -- -- -- Net income (loss)....................... 285.8 341.8 161.3 35.4 ---------- ---------- ---------- ---------- PER SHARE OF COMMON STOCK (a) PRIMARY: Income (loss) before extraordinary charges and cumulative effects of accounting changes..................... 4.67 5.58 2.79 .73 Extraordinary charges from early extinguishments of debt................ -- -- -- -- Cumulative effects of accounting changes................................ -- -- -- -- Net income (loss)--Primary.............. 4.67 5.58 2.79 .73 FULLY DILUTED: Income (loss) before extraordinary charges and cumulative effects of accounting changes..................... (j) (j) 2.65 (j) Extraordinary charges from early extinguishments of debt................ (j) (j) -- (j) Cumulative effects of accounting changes................................ (j) (j) -- (j) Net income--Fully diluted............... (j) (j) 2.65 (j) Dividends and distributions paid........ .70 .35 .25 .19 Common stockholders' equity (end of year).................................. 22.50 17.73 12.40 9.92(d) Price range of common shares--N.Y.S.E. High.................................. 36.38 39.50 39.83 20.00 Low................................... 22.13 20.67 15.33 11.38 Average common shares outstanding (in millions): Primary............................... 61.2 61.3 57.9 48.8 Fully diluted......................... (j) (j) 60.9 (j) ---------- ---------- ---------- ---------- FINANCIAL POSITION AT END OF YEAR Current assets.......................... $1,687.0 $ 865.7 $ 737.4 $ 530.4 Current liabilities..................... 1,072.6 408.3 334.9 203.4 Working capital......................... 614.4 457.4 402.5 327.0 Property, plant and equipment--net...... 2,977.9 1,276.0 1,300.0 924.4 Total assets............................ 6,253.7 2,395.0 2,286.1 1,523.6 Long-term debt.......................... 3,536.9 765.1 1,070.5 767.0 Deferred taxes.......................... 185.6 140.3 120.4 69.9 Redeemable preferred stock.............. 22.7 -- 1.5 1.5 Minority interest (i)................... 9.7 .3 .2 -- Stockholders' equity.................... 1,347.6 1,063.6 740.3 481.8 ---------- ---------- ---------- ---------- ADDITIONAL INFORMATION Paperboard, paper and market pulp: Produced (thousand short tons) (e).... 6,772 4,729 4,373 3,154 Converted (thousand short tons) (e)... 3,930 3,344 2,998 2,495 Corrugated shipments (billion square feet) (e).............................. 41.56 34.47 32.09 25.95 Employees (end of year--in thousands)... 32.6 20.7 18.8 15.5 Capital expenditures.................... $ 501.7 $ 136.6 $ 105.7 $ 63.3 Net cash/funds provided by (used in) operating activities (f)............... $ 370.9 $ 454.1 $ 298.3 $ 166.7 Working capital ratio................... 1.6/1 2.1/1 2.2/1 2.6/1 Percent long-term debt/total capitalization (g)..................... 69.3% 38.9% 55.4% 58.1% Return on beginning common stockholders' equity (h)............................. 26.9% 46.2% 41.8% 10.2% Pretax margin........................... 9.0% 14.7% 8.8% 2.9% After-tax margin........................ 5.4% 9.1% 5.0% 1.7% ---------- ---------- ---------- ----------
10 - --------- NOTES TO SELECTED FINANCIAL DATA (a) Amounts per average common share and average common shares outstanding have been adjusted to reflect the 2 percent stock dividend in 1992, the 3-for-2 stock split in 1988 and the 2-for-1 stock split in 1987. The price range of common shares outstanding has been adjusted only to reflect the previously mentioned stock splits. (b) On November 1, 1995, Stone-Consolidated Corporation, a Canadian subsidiary of the Company, amalgamated its operations with Rainy River Forest Products, Inc. a Toronto-based Canadian pulp and paper company. As a result of the amalgamation, the Company's equity ownership in Stone-Consolidated Corporation was reduced from 74.6 percent to 46.6 percent and accordingly, effective November 1, 1995, the Company began reporting Stone-Consolidated Corporation as a non-consolidated affiliate in accordance with the equity method of accounting. (c) The Company made major acquisitions in 1989, 1987 and 1986. (d) For 1986, calculation assumes conversion of convertible preferred stock and convertible subordinated debentures which were converted/redeemed in 1987. (e) Includes certain non-consolidated affiliates. (f) Certain prior year amounts have been restated to conform to current year presentation. (g) Represents the percentage of long-term debt to the sum of long-term debt, stockholders' equity, redeemable preferred stock, minority interest and deferred taxes. (h) 1996, 1995, 1994, 1993 and 1992 return on beginning common stockholders' equity calculated using the income (loss) before the extraordinary charges and cumulative effects of accounting changes. (i) For 1994 and 1993, includes the Company's 25.4 percent minority interest liability in the common shares of Stone-Consolidated. (j) Fully diluted amounts and average common shares outstanding have not been presented as amounts are either anti-dilutive or, when compared to primary earnings per share, the potential dilution effect is less than 3 percent. Furthermore, from 1988 through 1991, fully diluted amounts were not applicable because the Company did not have any convertible securities outstanding. 11 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Effective November 1, 1995, the Company began reporting Stone-Consolidated as a non-consolidated affiliate in accordance with the equity method of accounting (the "SCI de-consolidation"). Prior to such date the Company reported Stone-Consolidated as a consolidated subsidiary. See also Note 4 to the Consolidated Financial Statements. Provided below is certain financial data for 1996, 1995 and 1994. Also provided, for comparative purposes only, is supplemental restated financial data for 1995 and 1994 assuming that the historical financial results of Stone- Consolidated were reported by the Company in accordance with the equity method of accounting effective January 1, 1994.
YEAR ENDED DECEMBER 31, ------------------------------------------ ACTUAL RESTATED ------------------------ ---------------- (IN MILLIONS) 1996 1995 1994 1995 1994 - -------------------------------------------------- ------ ------- ------ ------- ------ Net sales......................................... $5,142 $7,351 $5,749 $6,459 $4,898 Depreciation and amortization..................... 315 372 359 315 290 Interest expense.................................. 414 460 456 432 416 Equity income (loss) from affiliates.............. 63 20 (8) 104 (18) Income (loss) before income taxes, minority interest and extraordinary charges............... (189) 795 (163) 704 (159) Net income (loss)................................. $ (126) $ 256 $ (205) $ 256 $ (205)
1996 COMPARED WITH 1995 In 1996, the Company incurred a loss before extraordinary charges from the early extinguishments of debt of $122 million, or $1.32 per share of common stock. The Company recorded extraordinary charges from the early extinguishments of debt totaling $4 million, net of income tax benefit, or $.03 per share of common stock resulting in a net loss for 1996 of $126 million, or $1.35 per share of common stock. In 1995, the Company reported income before extraordinary charges from the early extinguishments of debt of $445 million, or $4.64 per share of common stock on a primary basis and $3.89 per share of common stock on a fully diluted basis. The Company recorded extraordinary charges from the early extinguishments of debt totaling $189 million, net of income tax benefit, or $2.01 per share on a primary basis and $1.65 per share on a fully diluted basis, resulting in net income for 1995 of $256 million, or $2.63 per share of common stock on a primary basis and $2.24 per share of common stock on a fully diluted basis. The net loss for 1996 represents a significant decrease from the net earnings of 1995. This decrease resulted from substantially lower operating margins primarily attributable to significantly lower average selling prices for most of the Company's products. Additionally, the Company's 1996 results include a non-recurring $5 million pretax loss associated with the sale of certain assets and foreign exchange transaction losses of $.5 million as compared with foreign exchange transaction gains of $8 million in 1995. Furthermore, the Company recorded an income tax benefit of $66 million on a pretax loss of $189 million in 1996 as compared with a 1995 income tax provision of $321 million on pretax earnings of $795 million. The Company's effective income tax rates for both years reflect the impact of non-deductible amortization of intangibles. PRODUCT LINE SALES DATA
NET SALES ------------------------------- (IN MILLIONS) YEAR ENDED DECEMBER 31, 1996 1995 1994 - -------------------------------------------------------- --------- --------- --------- Paperboard and corrugated containers.................... $ 3,662 $ 4,444 $ 3,450 Kraft paper and paper bags and sacks.................... 713 802 679 Market pulp............................................. 330 750 305 Net sales of Stone-Consolidated (a)..................... -- 892 851 Other................................................... 437 463 464 --------- --------- --------- Total net sales....................................... $ 5,142 $ 7,351 $ 5,749 --------- --------- --------- --------- --------- ---------
- --------- (a) Primarily newsprint and groundwood paper. 12 Net sales for 1996 decreased $2.2 billion from 1995. Net sales for 1995 included $892 million of sales of Stone-Consolidated. Excluding the effect of Stone-Consolidated, sales for 1996 decreased approximately $1.3 billion or 20.4 percent from 1995. Net sales of paperboard and corrugated containers, kraft paper and paper bags and sacks, and market pulp decreased 17.6 percent, 11.1 percent and 56.0 percent, respectively, from 1995 mainly due to sharply lower selling prices. Additionally, a 21 percent reduction in market pulp sales volume also contributed to the sales decrease. Corrugated container sales volume of 53.1 billion square feet, including the proportionate share of the Company's non-consolidated affiliates, was virtually unchanged from that of the prior year, while paperboard and kraft paper volume improved modestly. The decrease in sales for paper bags and sacks was primarily attributable to the de-consolidation of the Company's retail bag packaging operations effective with the July 12, 1996 contribution of such operations, together with those of Gaylord Container Corporation to form S&G Packaging Company L.L.C., a joint venture that the Company reports as a non-consolidated affiliate under the equity method of accounting. Net sales of industrial paper bags and sacks increased 2 percent from 1995 as modest price improvement more than offset a slight volume decrease. As previously mentioned, the Company began reporting Stone-Consolidated as a non-consolidated affiliate under the equity method of accounting effective November 1, 1995. Largely as a result of this, equity earnings increased to $63.2 million in 1996 from $19.9 million in 1995. However, 1996 equity earnings decreased approximately $40.6 million when compared to equity earnings for 1995 on a restated basis (restated to reflect Stone-Consolidated historical results as those of a non-consolidated affiliate under the equity method of accounting effective January 1, 1995). This decrease was mainly due to reduced operating margins at Stone-Consolidated primarily attributable to lower average selling prices for newsprint and groundwood papers. The Company continues to incur substantial interest expense due to its significant level of indebtedness. Interest expense decreased in 1996 to $414 million from $460 million in 1995. This decrease was partially due to the SCI de-consolidation as interest expense for 1995 included approximately $28 million of Stone-Consolidated's interest expense. The remainder of the decrease primarily reflects the effect of lower average outstanding borrowings in 1996 as compared with 1995. 1995 COMPARED WITH 1994 In 1995, the Company reported income before extraordinary charges from the early extinguishments of debt of $445 million, or $4.64 per share of common stock on a primary basis and $3.89 per share of common stock on a fully diluted basis. The Company recorded extraordinary charges from the early extinguishments of debt totaling $189 million, net of income tax benefit, or $2.01 per share on a primary basis and $1.65 per share on a fully diluted basis, resulting in net income for 1995 of $256 million, or $2.63 per share of common stock on a primary basis and $2.24 per share of common stock on a fully diluted basis. In 1994, the Company incurred a loss before extraordinary charges from the early extinguishments of debt and the cumulative effect of a change in the accounting for postemployment benefits of $129 million, or $1.60 per share of common stock. The Company recorded extraordinary charges from the early extinguishments of debt totaling $62 million, net of income tax benefits, or $.70 per share of common stock and a one-time, non-cash charge of $14 million, net of income tax benefit, or $.16 per share of common stock, to reflect the cumulative effect of adopting Statement of Financial Accounting Standard No. 112, "Employers' Accounting for Postemployment Benefits", resulting in a net loss for 1994 of $205 million, or $2.46 per share of common stock. The improved sales and earnings for 1995 over 1994 reflected significantly higher average selling prices for the Company's products. As a result of the higher average selling prices, net sales increased to $7.4 billion in 1995, a 28 percent increase over 1994 net sales of $5.7 billion. Net sales of paperboard and corrugated containers, kraft paper and paper bags and sacks increased 28.8 percent and 18.1 percent, respectively, over 1994. These increases reflected the higher selling prices which more than offset a reduction in sales volume for these products. Sales volumes for containerboard, corrugated containers and for paper bags and sacks decreased approximately 8 percent, 2 percent and 12 percent, respectively from 1994. Net sales of kraft paper increased 58.2 percent over 1994 reflecting both increased sales volume and higher selling prices. Net sales of newsprint and groundwood paper for 1995 increased 14.6 percent over 1994 as significantly higher average selling prices more than offset a decrease in volume mainly attributable to the SCI de-consolidation. Net sales of market pulp increased to $750 million in 1995 from $305 million in 1994. Approximately $163 million of the market pulp sales increase resulted from the inclusion of sales for Stone Venepal (Celgar) Pulp, Inc. ("SVCPI"), which effective December 31, 1994, became a consolidated subsidiary when the Company increased its ownership in SVCPI from 50 to 90 percent. Excluding the effect of SVCPI, sales of 13 market pulp increased $282 million over 1994 mainly due to significantly higher average selling prices, although a 22 percent volume improvement also contributed to the sales increase. Partially offsetting the effect on earnings of the improved product pricing for 1995 over 1994, was an increase in recycled fiber costs of approximately $145 million which occurred primarily as a result of an industry shortage for this raw material. The 1995 results were also unfavorably impacted by an after-tax charge of approximately $8 million related to Stone-Consolidated's acquisition of Rainy River and by an increase in interest expense primarily resulting from higher interest rates associated with the Company's indebtedness. The 1995 results included foreign currency transaction gains of $8 million, whereas the 1994 results included a non-recurring $22 million involuntary conversion gain related to a digester accident at the Company's Panama City, Florida, pulp and paperboard mill and foreign currency transaction losses of $16 million. Additionally, the Company recorded an income tax provision of $321 million in 1995 compared to a 1994 income tax benefit of $35 million reflecting the tax effect of the increased pretax earnings for 1995 over 1994. FINANCIAL CONDITION AND LIQUIDITY The Company's working capital ratio was 1.8 to 1 at December 31, 1996 and 2.4 to 1 at December 31, 1995. This decrease was primarily due to the increase in current maturities of the Company's indebtedness. The Company's long-term debt to total capitalization ratio was 76.6 percent at December 31, 1996 and 72.2 percent at December 31, 1995. Capitalization, for purposes of this ratio, includes long-term debt (which includes debt of certain consolidated affiliates which is non-recourse to the Company), deferred income taxes and stockholders' equity. On March 22, 1996, the Company and its bank group amended and restated the Company's bank credit agreement to, among other things, provide for an additional senior secured term loan facility of $190 million and a supplemental revolving credit facility of $110 million. Subsequently in 1996, the Company and its bank group further amended the credit agreement to, among other things, permit the Company to contribute its retail packaging assets into a joint venture with Gaylord Container Corporation (see Note 3) and ease certain financial covenant requirements (including the interest coverage and indebtedness ratio requirements). At December 31, 1996, the Company's bank credit agreement, as amended, provides for three senior secured term loans aggregating $763 million which mature through October 1, 2003 and a $560 million senior secured revolving credit facility commitment maturing May 15, 1999 (collectively the "Credit Agreement"). At March 20, 1997, the Company had borrowing availability of approximately $249 million (net of letters of credit which reduce the amount available to be borrowed) under its revolving credit facilities. The term loans and revolving credit facility had weighted average interest rates for the year ended December 31, 1996 of 8.7 percent and 8.9 percent, respectively. The weighted average rates do not include the effect of the amortization of deferred debt issuance costs. The term loan portions of the Credit Agreement provide for mandatory prepayments from sales of certain assets, certain debt financing and a percentage of excess cash flow (as defined). The Company's bank lenders, at the Company's request, may at their option, waive the receipt of certain mandatory prepayments. In 1996, the Company received consents from a majority of its holders to waive mandatory repayment requirements from excess cash flow (as defined) on no less than 80 percent of each of the Company's term loans until September 1997. Any mandatory and voluntary prepayments are allocated against the term loan amortizations in inverse order of maturity. Any mandatory prepayments from sales of collateral, unless replacement collateral is provided, will be applied ratably to the term loans and revolving credit facility, permanently reducing the loan commitments under the Credit Agreement. The Credit Agreement also contains cross-default provisions to the indebtedness of $10 million or more of the Company and certain subsidiaries. The Credit Agreement no longer has a cross-acceleration provision in the event of an acceleration of the non-recourse debt of Stone Venepal (Celgar) Pulp, Inc. ("SVCPI"). The Credit Agreement contains covenants that include, among other things, the maintenance of certain financial tests and ratios. Unless operating results improve, the Company may be required to seek covenant relief from its bank group during 1997. Although no assurance can be given, the Company believes such relief, if sought, would be granted. The Company's various Senior Note Indentures under which approximately $2.0 billion of debt is outstanding contains provisions which require the Company to maintain a minimum Subordinated Capital Base (as defined) of $1 billion. In the event of a failure to maintain such minimum amount for two successive quarters the Company would be required to semi-annually offer to purchase 10 percent of such outstanding indebtedness at par until the minimum Subordinated Capital Base is again attained. In the event that the Company's Credit Agreement has outstanding amounts in excess of that outstanding under the Senior Note Indentures, and would not permit the offer to repurchase, then the Company would be required to increase the rates on the Notes by 50 basis points per quarter up to a 14 maximum of 200 basis points until the minimum Subordinated Capital Base is attained. The Company's Subordinated Capital Base was $1,040 million at December 31, 1996. It is anticipated that the minimum Subordinated Capital Base will fall below the required levels in the first quarter of 1997 and unless results improve in the second quarter of 1997, the required level of Subordinated Capital Base will not be met in the second quarter of 1997. As a result of this, the Company plans to issue securities which will increase the Subordinated Capital Base to required levels by June 30, 1997. There is however no assurance that the Company will achieve such financings. OUTLOOK: The Company incurred a net loss of $126 million in 1996 primarily due to sharply lower selling prices for the majority of the Company's products in conjunction with significant interest expense on its indebtedness. Currently, industry conditions have resulted in continued downward pressure on product prices and the Company will report a first quarter 1997 net loss. The Company's primary capital requirements consist of debt service and capital expenditures, including capital investment for compliance with certain environmental legislation requirements and ongoing maintenance expenditures and improvements. The Company is highly leveraged, and while highly leveraged, will incur substantial ongoing interest expense. The Company has debt amortizations of $194 million of principal plus interest of approximately $412 million due in 1997. In the event that operating cash flows and borrowing availability under its revolving credit facilities or from other financing sources do not provide sufficient liquidity for the Company to meet its 1997 debt service requirements, the Company will be required to pursue other alternatives to improve liquidity, including cost reductions, sales of assets, the deferral of certain capital expenditures and/or obtaining additional sources of funds. Beginning in 1998 and continuing thereafter, the Company will be required to make significantly increased principal re-payments on its existing indebtedness. The Company has debt amortizations of approximately $432 million in 1998, $410 million in 1999 and $484 million in 2000. In the event that the Company is unable to generate sufficient cash flows to fully meet such debt service requirements, the Company will seek to refinance significant portions of this indebtedness and use a substantial portion of its sources of liquidity including availabilities under its revolving credit facilities to repay such indebtedness. Further, the Company may be required to pursue other alternatives to improve liquidity, including cost reductions, sales of assets, the deferral of certain capital expenditures and/or obtaining additional sources of funds. On January 27, 1997 the Company filed a $1 billion shelf registration with the Securities and Exchange Commission providing for the issuance of equity and/or debt securities. Wood fiber and recycled fiber, the principal raw materials used in the manufacture of the Company's products, are purchased in highly competitive, price sensitive markets. These raw materials have historically exhibited price and demand cyclicality. In addition, the supply and price of wood fiber in particular, is dependent upon a variety of factors over which the Company has no control, including environmental and conservation regulations, natural disasters, such as forest fires and hurricanes, and weather. The Company purchases or cuts a variety of species of timber from which the Company utilizes wood fiber depending upon the product being manufactured and each mill's geographic location. A decrease in the supply of wood fiber has caused, and will likely continue to cause, higher wood fiber costs in some of the regions in which the Company procures wood. In addition, the increase in demand of products manufactured, in whole or in part, from recycled fiber has from time to time caused a tightness in supply of recycled fiber and at those times a significant increase in the cost of such fiber used in the manufacture of recycled containerboard and related products. Such costs are likely to continue to fluctuate based upon demand/supply characteristics. While the Company has not experienced any significant difficulty in obtaining wood fiber and recycled fiber in economic proximity to its mills, there can be no assurances that this will continue to be the case for any or all of its mills. On February 14, 1997, Stone-Consolidated, a 46.6 percent owned non-consolidated affiliate of the Company, and Abitibi-Price Inc., announced a merger agreement to amalgamate under Canadian law the two companies to create Abitibi-Consolidated, Inc. The transaction, which is subject to shareholder and regulatory approval, is expected to close in the second quarter of 1997. Abitibi-Consolidated, Inc. would be a significant manufacturer and marketer of publication grade papers with combined revenues approximating $4.9 billion (CDN). Upon completion of the transaction, the Company would own approximately 25 percent of the common equity of Abitibi-Consolidated, Inc. 15 CASH FLOWS FROM OPERATIONS: The following table shows, for the last three years, the net cash provided by operating activities:
YEAR ENDED DECEMBER 31, ----------------------- (IN MILLIONS) 1996 1995 - -------------------------------------------------------------------------------------------------- --------- ------------ Net income (loss)................................................................................. $ (126) $ 256 Depreciation and amortization..................................................................... 315 372 Deferred taxes.................................................................................... (88) 214 Extraordinary charges from early extinguishments of debt.......................................... 4 189 Cumulative effect of accounting change............................................................ -- -- (Increase) decrease in accounts and notes receivable--net......................................... 185 (81) (Increase) decrease in inventories................................................................ (51) (146) (Increase) decrease in other current assets....................................................... 15 22 Increase in accounts payable and other current liabilities........................................ 56 62 Other............................................................................................. (22) 74(a) --------- ------ Net cash provided by operating activities......................................................... $ 288 $ 962 --------- ------ --------- ------ (IN MILLIONS) 1994 - -------------------------------------------------------------------------------------------------- --------- Net income (loss)................................................................................. $ (205) Depreciation and amortization..................................................................... 359 Deferred taxes.................................................................................... (55) Extraordinary charges from early extinguishments of debt.......................................... 62 Cumulative effect of accounting change............................................................ 14 (Increase) decrease in accounts and notes receivable--net......................................... (176) (Increase) decrease in inventories................................................................ 30 (Increase) decrease in other current assets....................................................... (46) Increase in accounts payable and other current liabilities........................................ 87 Other............................................................................................. 2 --------- Net cash provided by operating activities......................................................... $ 72 --------- ---------
- --------- (a) Includes minority interest expense of $29 million. The Company's 1996 operating cash flow of $288 million was not sufficient to fully fund the Company's capital expenditures and investing activities. As a result the Company increased its indebtedness to meet cash flow needs. The 1996 decrease in accounts and notes receivable reflects lower average selling prices for the Company's products, while the 1995 increase primarily reflects higher average selling prices for the Company's products. The increase in inventories for 1996 and 1995 primarily reflects an increase in the quantity of paperstock levels as a result of weak demand. The increase in accounts payable and other current liabilities in 1996 and 1995 was due primarily to the timing of payments. FINANCING ACTIVITIES: The following summarizes the Company's primary financing activities in 1996: - On December 16, 1996, Stone Receivables Corporation redeemed $50 million of its floating rate notes. - On September 16, 1996, the Company purchased and retired $222 million principal amount of its 11 1/2 percent Senior Subordinated Notes due 1999. Earlier in the year, the Company purchased $8 million of the 11 1/2 percent Senior Subordinated Notes on the open market. - On August 16, 1996, Stone Container Finance Company of Canada, a newly-formed, wholly-owned subsidiary of the Company, sold $200 million principal amount of 11 1/2 percent Senior Notes due August 15, 2006 (the "SCFCC Notes"). On July 24, 1996, the Company sold $125 million principal amount of 11 7/8 percent Rating Adjustable Senior Notes due August 1, 2016 ("Rating Adjustable Senior Notes"). The net proceeds received from the sales of the SCFCC Notes and the Rating Adjustable Senior Notes were used by the Company to purchase and retire the remaining $222 million of the 11 1/2 percent Senior Subordinated Notes referred to above and to provide funds for general corporate purposes. - On April 25, 1996, the Company issued $33 million aggregate principal amount of tax-exempt, industrial development revenue bonds at 7 1/4 percent. The proceeds from the issuance have been and will be used to acquire, construct and install certain solid waste disposal components of the Company's containerboard mill facilities located in Snowflake, Arizona and Port Wentworth, Georgia. - On March 22, 1996, the Company borrowed $190 million under a senior secured term loan facility provided under its Credit Agreement. The proceeds of the term loan were used to repay indebtedness outstanding under the Company's $450 million revolving credit facility (without a corresponding reduction in commitments) and provide additional liquidity in the form of cash. See also Note 11 to the Consolidated Financial Statements. 16 INVESTING ACTIVITIES: The following summarizes the Company's primary 1996 investing activities: - Capital expenditures for 1996 totaled approximately $251 million. The Company's capital expenditures for 1997 are budgeted at approximately $164 million. - On November 29, 1996, the Company acquired Graficarton S.A., a Spanish company that operates a recycled containerboard mill in Cordoba and corrugated container plants in Cordoba, Madrid and Seville, Spain. Additionally, on November 30, 1996, Stone acquired 50 percent of Cartonex Bernal S.A., a company that operates a containerboard mill and two corrugated container plants in Argentina, and on November 26, 1996 acquired 50 percent of Corrupac S.A., a corrugated box manufacturer in Chile. - On September 11, 1996, the Company sold the majority of its U.S. wood products assets to U.S. Forest Industries, Inc. for cash and long-term promissory notes. - On July 12, 1996, the Company and Gaylord Container Corporation entered into a joint venture whereby the retail packaging businesses of these two companies were combined to form S&G. - On May 30, 1996, the Company entered into a joint venture agreement with Four M Corporation to purchase a paperboard mill located in Port St. Joe, Florida, from St. Joe Paper Company for $185 million plus applicable working capital. - Additionally, on March 14, 1996, the Company purchased approximately $40 million of convertible debt securities of Financiere Carton Papier ("FCP"), a non-consolidated affiliate of the Company. See also Note 3 to the Consolidated Financial Statements. ENVIRONMENTAL ISSUES: The Company's operations are subject to extensive environmental regulation by federal, state and local authorities in the United States and regulatory authorities with jurisdiction over its foreign operations. The Company has, in the past, made significant capital expenditures to comply with water, air and solid and hazardous waste regulations and expects to make significant expenditures in the future. Capital expenditures for environmental control equipment and facilities were approximately $46 million in 1996, and the Company anticipates that 1997 and 1998 environmental capital expenditures will approximate $33 million and $43 million, respectively. The majority of the 1998 expenditures relate to amounts that the Company currently anticipates will be required once final "cluster rules" described below are adopted. Although capital expenditures for environmental control equipment and facilities and compliance costs in future years will depend on legislative and technological developments which cannot be predicted at this time, such costs could increase when final "cluster rules" are adopted and as other environmental regulations become more stringent. Environmental control expenditures include projects which, in addition to meeting environmental concerns, yield certain benefits to the Company in the form of increased capacity and production cost savings. In addition to capital expenditures for environmental control equipment and facilities, other expenditures incurred to maintain environmental regulatory compliance (including any remediation) represent ongoing costs to the Company. In December 1993, the U.S. Environmental Protection Agency (the "EPA") issued a proposed rule affecting the pulp and paper industry. These proposed regulations, informally known as the "cluster rules", would make more stringent requirements for discharge of wastewaters under the Clean Water Act and would impose new requirements on air emissions under the Clean Air Act. Pulp and paper manufacturers (including the Company) have submitted extensive comments to the EPA on the proposed regulations in support of the position that requirements under the proposed regulations are unnecessarily complex, burdensome and environmentally unjustified. Estimates, based on currently proposed regulations, indicate that the Company could be required to make capital expenditures of $350-$450 million through 1998 in order to meet the requirements of the regulations, although it is likely this range will decrease upon finalization of the rules. While it cannot be predicted with certainty, it appears as though the final cluster rules which are currently expected to be issued in 1997, will be modified to reduce certain requirements. Assuming that the anticipated reduced requirements are promulgated as the Company expects, the Company currently believes it would be required to make capital expenditures of approximately $200-250 million during the period of 1998 through 2006 in order to meet the requirements of the anticipated regulations. Also, additional operating expense will be incurred as capital installations required by the cluster rules are put into service. Such incremental expense will ultimately increase to as much as $20 million per year by the year 2006. The ultimate financial impact of the regulations cannot be precisely estimated at this time but will be affected by several factors, including the actual requirements 17 imposed under the final rules, advancements in control process technologies, possible reconfiguration of mills and inflation. In addition, the Company is from time to time subject to litigation and governmental proceedings regarding environmental matters in which injunctive and/or monetary relief is sought. The Company has been named as a potentially responsible party ("PRP") at a number of sites which are the subject of remedial activity under the federal Comprehensive Environmental Response, Compensation and Liability Act of 1980 ("CERCLA" or "Superfund") or comparable state laws. Although the Company is subject to joint and several liability imposed under Superfund, at most of the multi-PRP sites there are organized groups of PRPs and costs are being shared among PRPs. Future environmental regulations, including the final "cluster rules", may have an unpredictable adverse effect on the Company's operations and earnings, but they are not expected to adversely affect the Company's competitive position. COMMON AND SERIES E CUMULATIVE PREFERRED STOCK -- CASH DIVIDENDS, MARKET AND PRICE RANGE The Company has restrictions on the payment of cash dividends on its common stock under certain of the Company's indentures and under its Credit Agreement. Common stock cash dividends cannot be declared and paid in the event the Company has any accumulated preferred stock dividend arrearage or there is no availability in the dividend pool under the Credit Agreement or under the Senior Subordinated Indentures dated March 15, 1992 (the "Senior Subordinated Indenture") relating to the Company's 10 3/4 percent Senior Subordinated Notes due June 15, 1997, its 11 percent Senior Subordinated Notes due August 15, 1999 and its 10 3/4 percent Senior Subordinated Debentures due April 1, 2002. Additionally, preferred and common stock dividends cannot be declared and paid in the event the Company's total stockholders' equity falls below $750 million. The Company paid cash dividends of $0.60 and $0.30 per share on its common stock in 1996 and 1995, respectively. The Company paid cash dividends of $1.75 and $2.625 per share on its Series E Cumulative Preferred Stock in 1996 and 1995, respectively. The declaration of dividends by the Board of Directors is subject to, among other things, the Company's ability to comply with financial covenants contained in the Company's Credit Agreement and in its Senior Subordinated Indenture. In the event the Company has six quarterly dividends which remain unpaid on the Series E Cumulative Preferred Stock, the holders of the Series E Cumulative Preferred Stock would have the right to elect two members to the Company's Board of Directors until the accumulated dividends on such Series E Cumulative Preferred Stock have been declared and paid or set apart for payment. Irrespective of the amount available in the dividend pool under the Credit Agreement, the Credit Agreement permits dividends to be paid on the Series E Cumulative Preferred Stock if there is an available dividend pool under the Senior Subordinated Indenture. At December 31, 1996 the amounts available in the dividend pool under the Credit Agreement and under the Senior Subordinated Indenture were approximately $46 million and $50 million, respectively. On January 27, 1997 the Board of Directors of the Company declared a cash dividend of $0.4375 per share on the Company's Series E Cumulative Preferred Stock which was paid February 17, 1997, to shareholders of record February 7, 1997. The Board of Directors did not declare a dividend on the Company's common stock. It is expected that the Company's dividend pool will not be sufficient to declare a Series E Preferred Stock dividend in May 1997.
SERIES E CUMULATIVE COMMON STOCK PREFERRED STOCK ------------------------------------------ ------------------------------------------ 1996 1995 1996 1995 -------------------- -------------------- -------------------- -------------------- Quarter High Low High Low High Low High Low - ----------------------------------------- --------- --------- --------- --------- --------- --------- --------- --------- 1st...................................... $ 15.88 $ 12.38 $ 24.50 $ 16.88 $ 21.75 $ 18.50 $ 22.63 $ 16.88 2nd...................................... 17.38 13.50 24.00 16.25 21.00 18.88 24.25 21.00 3rd...................................... 15.88 12.13 24.63 18.88 20.63 18.63 24.88 20.63 4th...................................... 16.25 13.63 19.00 12.50 20.50 18.00 21.88 17.13 Year..................................... 17.38 12.13 24.63 12.50 21.75 18.00 24.88 16.88 --------- --------- --------- --------- --------- --------- --------- ---------
There were approximately 6,502 common stockholders and 419 preferred stockholders of record at December 31, 1996. 18 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Registrant's financial statements required by Item 8, together with the report thereon of the independent accountants dated February 10, 1997 are set forth on pages 28-54 of this report. The financial statement schedules listed under Item 14(a)2, together with the report thereon of the independent accountants dated February 10, 1997 are set forth on pages 55 and 56 of this report and should be read in conjunction with the financial statements. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information relating to the Registrant's Directors and Executive Officers is incorporated herein by reference to the Proxy Statement, to be filed on or before April 30, 1997, for the Annual Meeting of Stockholders scheduled May 13, 1997, under the captions "Nominees for Directors," "Information as to Directors and Executive Officers" and "Directors--Certain Transactions." ITEM 11. EXECUTIVE COMPENSATION Information relating to the Registrant's executive compensation is incorporated herein by reference to the Proxy Statement, to be filed on or before April 30, 1997, for the Annual Meeting of Stockholders scheduled May 13, 1997, under the caption "Compensation," excluding the section thereunder entitled "Compensation Committee Report on Executive Compensation." ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS Information relating to certain beneficial ownership of the Registrant's common stock is incorporated herein by reference to the Proxy Statement, to be filed on or before April 30, 1997, for the Annual Meeting of Stockholders scheduled May 13, 1997, under the captions "Nominees for Directors" and "Security Ownership by Certain Beneficial Owners and Management--Security Ownership by Certain Beneficial Owners." SECURITY OWNERSHIP OF MANAGEMENT Information relating to ownership of the Registrant's equity securities by Directors and Executive Officers is incorporated herein by reference to the Proxy Statement, to be filed on or before April 30, 1997, for the Annual Meeting of Stockholders scheduled May 13, 1997, under the captions "Nominees for Directors" and "Security Ownership by Certain Beneficial Owners and Management--Security Ownership by Management." CHANGES IN CONTROL The Registrant knows of no contractual arrangements which may, at a subsequent date, result in a change in control of the Registrant. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information related to certain relationships and related transactions is incorporated herein by reference to the Proxy Statement, to be filed on or before April 30, 1997, for the Annual Meeting of Stockholders scheduled May 13, 1997, under the caption "Directors--Certain Transactions." 19 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) DOCUMENTS FILED AS PART OF THIS REPORT 1. FINANCIAL STATEMENTS. The Registrant's financial statements, for the year ended December 31, 1996, together with the Report of Independent Accountants are set forth on pages 28-54 of this report. The supplemental financial information listed and appearing hereafter should be read in conjunction with the Financial Statements included in this report. 2. FINANCIAL STATEMENT SCHEDULES. The following are included in Part IV of this report for each of the years ended December 31, 1996, 1995 and 1994 as applicable:
Page ---- Report of Independent Accountants on Financial Statement Schedule..... 55 Valuation and Qualifying Accounts and Reserves (Schedule II).......... 56 Financial Statements of Stone-Consolidated Corporation................ *
- --------- * To be filed as an amendment to this Report on or before June 30, 1997. Financial statement schedules not included in this report have been omitted, either because they are not applicable or because the required information is shown in the financial statements or notes thereto, included in this report. At December 31, 1996, the Company had outstanding non-interest bearing loans receivable of $270,000 to Randolph Read, Senior Vice President--Chief Financial and Planning Officer, and $300,000 to Harold Wright, Senior Vice President and General Manager, North American Containerboard, Paper and Pulp. Mr. Read's loan is repayable on demand pursuant to request by the Company. Mr. Wright's loan is due in 2002. 3. EXHIBITS. The exhibits required to be filed by Item 601 of Regulation S-K are listed under the caption "Exhibits" in Item 14(c). (b) REPORTS ON FORM 8-K A Report on Form 8-K dated May 16, 1996 was filed under Item 5--Other Events. A Report on Form 8-K dated June 28, 1996 was filed under Item 5--Other Events. A Report on Form 8-K dated July 19, 1996 was filed under Item 5--Other Events. A Report on Form 8-K dated July 25, 1996 was filed under Item 5--Other Events. A Report on Form 8-K dated December 18, 1996 was filed under Item 5--Other Events and Item 7--Exhibits. 20 (c) EXHIBITS 3(a) Restated Certificate of Incorporation of the Company, filed as Exhibit 3(a) to the Company's Registration Statement on Form S-1, Registration Number 33-54769, is hereby incorporated by reference. 3(b) By-laws of the Company, as amended October 2, 1995, filed as Exhibit 3 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1995, is hereby incorporated by reference. 4(a) Specimen certificate representing Common Stock, $.01 par value, filed as Exhibit 4(a) to the Company's Annual Report on Form 10-K for the year ended December 31, 1987, is hereby incorporated by reference. 4(b) Specimen certificate representing the $1.75 Series E Cumulative Convertible Exchangeable Preferred Stock, filed as Exhibit 4(g) to the Company's Registration Statement on Form S-3, Registration Number 33-45374, is hereby incorporated by reference. 4(c) Rights Agreement, dated as of July 25, 1988, between the Company and The First National Bank of Chicago, filed as Exhibit 1 to the Company's Registration Statement on Form 8-A dated July 27, 1988, is hereby incorporated by reference. 4(d) Amendment to Rights Agreement, dated as of July 23, 1990, between the Company and The First National Bank of Chicago, filed as Exhibit 1A to the Company's Form 8 dated August 2, 1990 amending the Company's Registration Statement on Form 8-A dated July 27, 1988, is hereby incorporated by reference. 4(e) Amendment to Rights Agreement dated as of May 16, 1996 between the Company and First Chicago Trust Company of New York, filed as Exhibit 1 to the Company's Form 8 dated June 8, 1996 amending the Company's Registration Statement on Form 8 dated August 2, 1990 amending the Company's Registration Statement on Form 8-A dated July 27, 1988, as amended, is hereby incorporated by reference. 4(f) Amended and Restated Credit Agreement ("Credit Agreement") dated as of March 22, 1996 among the Company, the financial institutions signatory thereto, Bankers Trust Company, as agent (the "Agent"), and Bank of America National Trust & Savings Association, The Bank of New York, The Bank of Nova Scotia, Caisse Nationale de Credit Agricole, Chemical Bank, The Chase Manhattan Bank, N.A., Dresdner Bank AG-Chicago and Grand Cayman Branches, The First National Bank of Chicago, The Long-Term Credit Bank of Japan, Ltd., NationsBank of North Carolina, N.A., The Sumitomo Bank, Ltd., Chicago Branch and The Toronto-Dominion Bank, as co-agents (the "Co-Agents"), is hereby incorporated by reference. 4(g) First Amendment of Credit Agreement dated as of June 20, 1996 among the Company, the financial institutions signatory thereto and Bankers Trust Company, as Agent (the "Agent"), filed as Exhibit 4(s) to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996, is hereby incorporated by reference. 4(h) Second Amendment of Credit Agreement dated as of December 18, 1996 among the Company, the financial institutions signatory thereto and Bankers Trust Company, as Agent (the "Agent"), filed as Exhibit 4 to the Company's Current Report on Form 8-K dated December 18, 1996, is hereby incorporated by reference. 4(i) Indenture dated as of July 24, 1996 between the Company and The Bank of New York, as Trustee, relating to the Rating Adjustable Senior Notes due 2016, filed as Exhibit 4.1to the Company's Registration Statement on Form S-4, Registration Number 333-12155, is hereby incorporated by reference. 4(j) First Supplemental Indenture dated July 24, 1996 between the Company and The Bank of New York, as Trustee, relating to the Rating Adjustable Senior Notes due 2016, filed as Exhibit 4.2 to the Company's Registration Statement on Form S-4, Registration Number 333-12155, is hereby incorporated by reference. 4(k) Indenture dated as of October 12, 1994 between the Company and Norwest Bank Minnesota, N.A., as Trustee, relating to the 10 3/4 percent First Mortgage Notes due October 1, 2002, filed as Exhibit 4(b) to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1994, is hereby incorporated by reference.
21 4(l) Indenture dated as of October 12, 1994 between the Company and The Bank of New York, as Trustee, relating to the 11 1/2 percent Senior Notes due October 1, 2004, filed as Exhibit 4(c) to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1994, is hereby incorporated by reference. 4(m) Indenture, dated as of February 15, 1992, between the Company and The Bank of New York, as Trustee, relating to the Company's 6 3/4 percent Convertible Subordinated Debentures due February 15, 2007, filed as Exhibit 4(p) to the Company's Registration Statement on Form S-3, Registration Number 33-45978, is hereby incorporated by reference. 4(n) Senior Subordinated Indenture, dated as of March 15, 1992, between the Company, and The Bank of New York, as Trustee, filed as Exhibit 4(a) to the Company's Registration Statement Form S-3, Registration Number 33-46764, is hereby incorporated by reference. 4(o) Indenture dated as of June 15, 1993, between the Company and Norwest Bank Minnesota, National Association, as Trustee, relating to the Company's 8 7/8 percent Convertible Senior Subordinated Notes due 2000, filed as Exhibit 4(a) to the Company's Registration Statement on Form S-3, Registration Number 33-66086, is hereby incorporated by reference. 4(p) Indenture, dated as of November 1, 1991, between the Company and The Bank of New York, as Trustee, relating to the Company's Senior Debt Securities, filed as Exhibit 4(u) to the Company's Registration Statement on Form S-3, Registration Number 33-45374, is hereby incorporated by reference. 4(q) First Supplemental Indenture dated as of June 23, 1993, between the Company and The Bank of New York, as Trustee, relating to the Indenture, dated as of November 1, 1991, between the Company and The Bank of New York, as Trustee, filed as Exhibit 4(aa) to the Company's Registration Statement on Form S-3, Registration Number 33-66086, is hereby incorporated by reference. 4(r) Second Supplemental Indenture dated as of February 1, 1994, between the Company and the Bank of New York, as Trustee, relating to the Indenture, dated as of November 1, 1991, as amended, filed as Exhibit 4.2 to the Company's Current Report on Form 8-K, dated January 24, 1994, is hereby incorporated by reference. 4(s) Master Trust Indenture and Security Agreement dated as of March 14, 1995, among Stone Receivables Corporation, the Company, as Servicer, Marine Midland Bank, as Trustee, and Bankers Trust Company, as Administrative Agent, relating to the accounts receivable securitization program, is hereby incorporated by reference. 4(t) Series 1995-1 Supplement dated as of March 14, 1995, to the Master Trust Indenture and Security Agreement dated as of March 14, 1995, among Stone Receivables Corporation, the Company, as Servicer, Marine Midland Bank, as Trustee, and Bankers Trust Company, as Administrative Agent, relating to the accounts receivable securitization program, is hereby incorporated by reference. 4(u) Indenture dated as of August 16, 1996 between Stone Container Finance Company of Canada (the "Issuer"), the Company, as guarantor, and The Bank of New York, as Trustee, relating to the Issuer's 11 1/2 percent Senior Notes due 2006.** Indentures with respect to other long-term debt, none of which exceeds 10 percent of the total assets of the Company and its subsidiaries on a consolidated basis, are not attached. (The Registrant agrees to furnish a copy of such documents to the Commission upon request). 4(v) Guaranty, dated October 7, 1983, between the Company and The Continental Group, Inc., filed as Exhibit 4(h) to the Company's Registration Statement on Form S-3, Registration Number 33-36218, is hereby incorporated by reference. 4(w) Amendment No. 1 to Guaranty, dated as of June 1, 1996, among Continental Holdings, Inc., Continental Group, Inc. and the Company, filed as Exhibit 4(r) to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996, is hereby incorporated by reference. 10(a) Management Incentive Plan, filed as Exhibit 10(b) to the Company's Annual Report on Form 10-K for the year ended December 31, 1980, is hereby incorporated by reference.*
22 10(b) Unfunded Deferred Director Fee Plan, filed as Exhibit 10(d) to the Company's Annual Report on Form 10-K for the year ended December 31, 1981, is hereby incorporated by reference.* 10(c) Form of "Stone Container Corporation Compensation Agreement" between the Company and its directors that elect to participate, filed as Exhibit 10(e) to the Company's Annual Report on Form 10-K for the year ended December 31, 1988, is hereby incorporated by reference.* 10(d) Stone Container Corporation 1982 Incentive Stock Option Plan, filed as Appendix A to the Prospectus included in the Company's Form S-8 Registration Statement, Registration Number 2-79221, effective September 27, 1982, is hereby incorporated by reference.* 10(e) Stone Container Corporation 1993 Stock Option Plan, filed as Appendix A to the Company's Proxy Statement dated as of April 10, 1992, is hereby incorporated by reference.* 10(f) Stone Container Corporation Deferred Income Savings Plan, conformed to reflect amendment effective as of January 1, 1990, filed as Exhibit 4(i) to the Company's Form S-8 Registration Statement, Registration Number 33-33784, filed March 9, 1990, is hereby incorporated by reference.* 10(g) Stone Container Corporation 1992 Long-Term Incentive Program, filed as Exhibit A to the Company's Proxy Statement dated as of April 11, 1991, is hereby incorporated by reference.* 10(h) Stone Container Corporation 1995 Long-Term Incentive Plan, filed as Exhibit A to the Company's Proxy Statement dated as of April 7, 1995, is hereby incorporated by reference.* 10(i) Stone Container Corporation 1995 Key Executive Officer Short-term Incentive Plan, filed as Exhibit B to the Company's Proxy Statement dated as of April 7, 1995, is hereby incorporated by reference.* 10(j) Form of Severance Agreement, dated July 22, 1996, entered into between the Company and Roger W. Stone.*-** 10(k) Form of Severance Agreement, dated July 22, 1996, entered into between the Company and John D. Bence, Thomas W. Cadden, Matthew S. Kaplan, Randolph C. Read and Harold D. Wright.*-** 10(l) Form of Severance Agreement, dated July 22, 1996, entered into between the Company and all other executive and divisional officers of the Company.*-** 11 Computation of Primary and Fully Diluted Net Income (Loss) Per Common Share.** 12 Computation of Ratios of Earnings to Fixed Charges.** 21 Subsidiaries of the Company.** 23 Consent of Independent Accountants.** 27 Financial Data Schedule.**
- ------------------------ * Management contract or compensatory plan or arrangement ** Filed herewith (d) SEPARATE FINANCIAL STATEMENTS OF AFFILIATES Stone-Consolidated Corporation, a 46.6 percent owned affiliate of the Company, qualifies as a significant subsidiary under Rule 3-09 of Regulation S-X. The December 31, 1996 separate financial statements of Stone-Consolidated Corporation, a foreign business, will be filed as an amendment to this Report, as required, on or before June 30, 1997. 23 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. STONE CONTAINER CORPORATION By: ROGER W. STONE ------------------------------------------------------- March 24, 1997 Roger W. Stone CHAIRMAN OF THE BOARD OF DIRECTORS AND PRESIDENT (CHIEF EXECUTIVE OFFICER) RANDOLPH C. READ ------------------------------------------------------- March 24, 1997 Randolph C. Read SENIOR VICE PRESIDENT (CHIEF FINANCIAL AND PLANNING OFFICER) THOMAS P. CUTILLETTA ------------------------------------------------------- March 24, 1997 Thomas P. Cutilletta SENIOR VICE PRESIDENT, ADMINISTRATION AND CORPORATE CONTROLLER (PRINCIPAL ACCOUNTING OFFICER)
24 SIGNATURES--(CONTINUED) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. WILLIAM F. ALDINGER, III JERRY K. PEARLMAN - ------------------------------------------ ------------------------------------------ William F. Aldinger, III Jerry K. Pearlman DIRECTOR March 24, 1997 DIRECTOR March 24, 1997 RICHARD A. GIESEN RICHARD J. RASKIN - ------------------------------------------ ------------------------------------------ Richard A. Giesen Richard J. Raskin DIRECTOR March 24, 1997 DIRECTOR March 24, 1997 JAMES J. GLASSER ALAN STONE - ------------------------------------------ ------------------------------------------ James J. Glasser Alan Stone DIRECTOR March 24, 1997 DIRECTOR March 24, 1997 JACK M. GREENBERG AVERY J. STONE - ------------------------------------------ ------------------------------------------ Jack M. Greenberg Avery J. Stone DIRECTOR March 24, 1997 DIRECTOR March 24, 1997 GEORGE D. KENNEDY IRA N. STONE - ------------------------------------------ ------------------------------------------ George D. Kennedy Ira N. Stone DIRECTOR March 24, 1997 DIRECTOR March 24, 1997 HOWARD C. MILLER, JR. JAMES H. STONE - ------------------------------------------ ------------------------------------------ Howard C. Miller, Jr. James H. Stone DIRECTOR March 24, 1997 DIRECTOR March 24, 1997 JOHN D. NICHOLS ROGER W. STONE - ------------------------------------------ ------------------------------------------ John D. Nichols Roger W. Stone DIRECTOR March 24, 1997 DIRECTOR March 24, 1997
25 INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM: PAGE - ------------------------------------------------------------------------- ----- Financial Statements: Management's Responsibility for the Financial Statements............... 27 Report of Independent Accountants...................................... 28 Consolidated Statements of Operations.................................. 29 Consolidated Balance Sheets............................................ 30 Consolidated Statements of Cash Flows.................................. 31 Consolidated Statements of Stockholders' Equity........................ 32 Notes to the Consolidated Financial Statements......................... 33 Financial Statement Schedules: Report of Independent Accountants on Financial Statement Schedule...... 55 Valuation and Qualifying Accounts and Reserves (Schedule II)........... 56
26 Management's Responsibility for the Financial Statements The management of Stone Container Corporation is responsible for insuring that the financial statements and other information in this report give a fair and accurate financial picture of the Company. In preparing this material, we make informed judgments and estimates that conform with generally accepted accounting principles. We have developed a system of internal controls which is designed to provide reasonable assurance that the books and records accurately reflect the transactions of the Company and that the Company's established policies and procedures are followed properly. The concept of reasonable assurance recognizes that the cost of a control procedure should not exceed the expected benefits. Our system is augmented by written policies and procedures, a comprehensive internal audit program, and the selection and training of qualified personnel. The Company engages Price Waterhouse LLP, who are responsible for performing an independent audit of the financial statements. Their audit includes obtaining an understanding of the Company's accounting systems and procedures to the extent required by generally accepted auditing standards and testing them as they deem necessary. An audit committee of Stone Container's directors, who are not employees of the Company, meet periodically to review internal financial controls and procedures. The audit committee and our independent accountants have unrestricted access to each other, with or without the presence of management representatives. ROGER W. STONE Chairman of the Board of Directors and President (Chief Executive Officer) RANDOLPH C. READ Senior Vice President (Chief Financial and Planning Officer) THOMAS P. CUTILLETTA Senior Vice President, Administration and Corporate Controller (Principal Accounting Officer) 27 Report of Independent Accountants To the Board of Directors and Stockholders of Stone Container Corporation In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of cash flows and of stockholders' equity present fairly, in all material respects, the financial position of Stone Container Corporation and its subsidiaries at December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for postemployment benefits effective January 1, 1994. PRICE WATERHOUSE LLP Chicago, Illinois February 10, 1997, except as to Note 2, which is as of February 14, 1997. 28 STONE CONTAINER CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (in millions except per share)
YEAR ENDED DECEMBER 31, ---------------------------------- 1996 1995 1994 ---------- ---------- ---------- SALES Net sales................................................................ $ 5,141.8 $ 7,351.2 $ 5,748.7 ---------- ---------- ---------- COST AND EXPENSES Cost of products sold.................................................... 4,085.4 5,168.9 4,564.3 Selling, general and administrative expenses............................. 596.2 608.5 568.2 Depreciation and amortization............................................ 314.8 371.8 358.9 Equity (income) loss from affiliates..................................... (63.2) (19.9) 7.7 Other operating (income) expense-net..................................... 5.4 -- (34.4) Other (income) expense-net............................................... (21.2) (33.1) (8.9) ---------- ---------- ---------- Income before interest expense, income taxes, minority interest, extraordinary charges and cumulative effect of accounting change....... 224.4 1,255.0 292.9 Interest expense......................................................... (413.5) (460.3) (456.0) ---------- ---------- ---------- Income (loss) before income taxes, minority interest, extraordinary charges and cumulative effect of accounting change..................... (189.1) 794.7 (163.1) (Provision) credit for income taxes...................................... 66.0 (320.9) 35.5 Minority interest........................................................ .6 (29.3) (1.2) ---------- ---------- ---------- NET INCOME (LOSS) Income (loss) before extraordinary charges and cumulative effect of accounting change...................................................... (122.5) 444.5 (128.8) Extraordinary charges from early extinguishments of debt (net of income tax benefits).......................................................... (3.7) (189.0) (61.6) Cumulative effect of accounting change (net of income tax benefit)....... -- -- (14.2) ---------- ---------- ---------- Net income (loss)........................................................ (126.2) 255.5 (204.6) Preferred stock dividends................................................ (8.1) (8.1) (8.1) Redemption premium of redeemable preferred stock of a consolidated affiliate.............................................................. -- -- (4.0) ---------- ---------- ---------- Net income (loss) applicable to common shares............................ $ (134.3) $ 247.4 $ (216.7) ---------- ---------- ---------- ---------- ---------- ---------- PER SHARE OF COMMON STOCK: PRIMARY: Income (loss) before extraordinary charges and cumulative effect of accounting change...................................................... $ (1.32) $ 4.64 $ (1.60) Extraordinary charges from early extinguishments of debt................. (.03) (2.01) (.70) Cumulative effect of accounting change................................... -- -- (.16) ---------- ---------- ---------- Net income (loss)........................................................ $ (1.35) $ 2.63 $ (2.46) ---------- ---------- ---------- ---------- ---------- ---------- FULLY DILUTED: Income before extraordinary charges and cumulative effect of accounting change................................................................. $ * $ 3.89 $ * Extraordinary charges from early extinguishments of debt................. * (1.65) * Cumulative effect of accounting change................................... -- -- * ---------- ---------- ---------- Net income............................................................... $ * $ 2.24 $ * ---------- ---------- ---------- ---------- ---------- ----------
- --------- * Fully diluted earnings per share not applicable because the amounts are anti-dilutive. The accompanying notes are an integral part of these statements. 29 STONE CONTAINER CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in millions)
DECEMBER 31, ---------------------- 1996 1995 ---------- ---------- ASSETS Current assets: Cash and cash equivalents............................................................................. $ 112.6 $ 40.3 Accounts and notes receivable (less allowances of $24.3 and $22.1).................................... 572.8 743.0 Inventories........................................................................................... 741.6 733.3 Other................................................................................................. 134.2 166.3 ---------- ---------- Total current assets................................................................................ 1,561.2 1,682.9 ---------- ---------- Property, plant and equipment........................................................................... 4,939.1 4,750.0 Accumulated depreciation and amortization............................................................... (2,305.4) (2,114.2) ---------- ---------- Property, plant and equipment--net.................................................................. 2,633.7 2,635.8 Timberlands............................................................................................. 34.6 57.7 Goodwill................................................................................................ 485.4 545.5 Investment in equity of non-consolidated affiliates..................................................... 1,198.2 1,109.4 Other................................................................................................... 440.7 367.6 ---------- ---------- Total assets........................................................................................ $ 6,353.8 $ 6,398.9 ---------- ---------- ---------- ---------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable...................................................................................... $ 363.8 $ 347.9 Current maturities of senior and subordinated long-term debt.......................................... 186.7 27.1 Notes payable and current maturities of non-recourse debt of consolidated affiliates.................. 21.9 29.3 Income taxes.......................................................................................... 15.1 .8 Accrued and other current liabilities................................................................. 301.7 296.6 ---------- ---------- Total current liabilities........................................................................... 889.2 701.7 ---------- ---------- Senior long-term debt................................................................................. 3,269.6 2,807.3 Subordinated debt..................................................................................... 422.3 809.2 Non-recourse debt of consolidated affiliates.......................................................... 259.2 268.6 Other long-term liabilities........................................................................... 308.1 313.7 Deferred taxes........................................................................................ 410.2 493.1 Commitments and contingencies (Note 18)................................................................. Stockholders' equity: Series E preferred stock.............................................................................. 115.0 115.0 Common stock (99.3 and 99.1 shares outstanding)....................................................... 954.8 953.1 Retained earnings (accumulated deficit)............................................................... (94.2) 97.8 Foreign currency translation adjustment............................................................... (178.8) (156.9) Unamortized expense of restricted stock plan.......................................................... (1.6) (3.7) ---------- ---------- Total stockholders' equity.......................................................................... 795.2 1,005.3 ---------- ---------- Total liabilities and stockholders' equity.......................................................... $ 6,353.8 $ 6,398.9 ---------- ---------- ---------- ----------
The accompanying notes are an integral part of these statements. 30 STONE CONTAINER CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in millions)
YEAR ENDED DECEMBER 31, --------------------------------- 1996 1995 1994 --------- --------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss)............................................................................ $ (126.2) $ 255.5 $ (204.6) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization............................................................ 314.8 371.8 358.9 Deferred taxes........................................................................... (88.1) 213.6 (54.6) Foreign currency transaction (gains) losses.............................................. .5 (8.1) 15.8 Equity (income) loss from affiliates..................................................... (63.2) (19.9) 7.7 Extraordinary charges from early extinguishments of debt................................. 3.7 189.0 61.6 Cumulative effect of accounting change................................................... -- -- 14.2 Other--net............................................................................... 41.1 102.1 (21.3) Changes in current assets and liabilities--net of adjustments for acquisitions and dispositions: (Increase) decrease in accounts and notes receivable--net................................ 185.1 (80.8) (175.7) (Increase) decrease in inventories....................................................... (51.4) (145.5) 29.7 (Increase) decrease in other current assets.............................................. 15.0 21.7 (45.9) Increase in accounts payable and other current liabilities............................... 56.3 62.3 86.5 --------- --------- ----------- Net cash provided by operating activities.................................................... 287.6 961.7 72.3 --------- --------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES Debt repayments.............................................................................. (376.2) (826.3) (1,655.8) Payments by consolidated affiliates on non-recourse debt..................................... (18.9) (146.1) (429.3) Borrowings................................................................................... 587.7 515.8 1,871.0 Non-recourse borrowings of consolidated affiliates........................................... 2.6 4.2 8.4 Proceeds from issuance of common stock....................................................... .4 1.7 276.3 Redemption of redeemable preferred stock of a consolidated affiliate......................... -- -- (52.6) Refund of letter of credit................................................................... -- -- 13.5 Cash dividends............................................................................... (67.6) (41.5) (8.1) --------- --------- ----------- Net cash provided by (used in) financing activities.......................................... 128.0 (492.2) 23.4 --------- --------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures......................................................................... (250.8) (386.5) (232.6) Payments made for businesses acquired........................................................ (107.2) (56.7) (24.5) Proceeds from sales of assets................................................................ 53.1 20.3 36.5 Purchase of securities of a non-consolidated affiliate....................................... (39.6) -- -- Effect on cash of de-consolidation of Stone-Consolidated..................................... -- (113.1) -- Other--net................................................................................... 2.9 (9.1) (14.4) --------- --------- ----------- Net cash used in investing activities........................................................ (341.6) (545.1) (235.0) --------- --------- ----------- Effect of exchange rate changes on cash...................................................... (1.7) 7.3 .5 --------- --------- ----------- NET CASH FLOWS Net increase (decrease) in cash and cash equivalents......................................... 72.3 (68.3) (138.8) Cash and cash equivalents, beginning of period............................................... 40.3 108.6 247.4 --------- --------- ----------- Cash and cash equivalents, end of period..................................................... $ 112.6 $ 40.3 $ 108.6 --------- --------- ----------- --------- --------- -----------
- --------- See Note 5 regarding non-cash financing and investing activities and supplemental cash flow information. The accompanying notes are an integral part of these statements. 31 STONE CONTAINER CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (in millions except per share)
YEAR ENDED DECEMBER 31, ---------------------------------------------------- 1996 1995 1994 --------------- --------------- ---------------- AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES ------- ------ ------- ------ -------- ------ PREFERRED STOCK Balance at January 1 and December 31.................................. $ 115.0 4.6 $ 115.0 4.6 $ 115.0 4.6 ------ ------ ------ ------ ------ ------ COMMON STOCK Balance at January 1.................................................. 953.1 99.1 849.1 90.4 574.3 71.2 Issuance of common stock: Debt conversions.................................................... 1.3 .1 180.4 8.5 -- -- Public offering..................................................... -- -- -- -- 276.3 19.0 Exercise of stock options........................................... .4 .1 1.7 .1 .1 -- Restricted stock plan............................................... -- -- 2.1 .1 2.4 .2 Redemption premium of redeemable preferred stock of a consolidated affiliate........................................ -- -- -- -- (4.0) -- Subsidiary issuance of stock.......................................... -- -- (80.2) -- -- -- ------- ------ ------- ------ -------- ------ Balance at December 31................................................ 954.8 99.3 953.1 99.1 849.1 90.4 ------- ------ ------- ------ -------- ------ ------ ------ ------ RETAINED EARNINGS (ACCUMULATED DEFICIT) Balance at January 1.................................................. 97.8 (96.3) 101.6 Net income (loss)..................................................... (126.2) 255.5 (204.6) Cash dividends: Preferred stock*.................................................... (8.1) (12.1) (8.1) Common stock*....................................................... (59.5) (29.4) -- Decrease (increase) in minimum pension liability in excess of unrecognized prior service cost...................................... 1.8 (19.9) 14.8 ------- ------- -------- Balance at December 31................................................ (94.2) 97.8 (96.3) ------- ------- -------- FOREIGN CURRENCY TRANSLATION ADJUSTMENT Balance at January 1.................................................. (156.9) (215.2) (179.0) Adjustment from translation of foreign currency statements............ (21.9) 58.3 (36.2) ------- ------- -------- Balance at December 31................................................ (178.8) (156.9) (215.2) ------- ------- -------- UNAMORTIZED EXPENSE OF RESTRICTED STOCK PLAN Balance at January 1.................................................. (3.7) (4.5) (4.8) Issuance of shares.................................................... -- (2.0) (2.4) Amortization of expense............................................... 2.1 2.8 2.7 ------- ------- -------- Balance at December 31................................................ (1.6) (3.7) (4.5) ------- ------- -------- Total stockholders' equity at December 31............................. $ 795.2 $1,005.3 $ 648.1 ------- ------- -------- ------- ------- --------
- --------- * Cash dividends paid on common stock were $.60 per share in 1996 and $.30 in 1995. No cash dividends on common stock were paid in 1994. Cash dividends paid on preferred stock were $1.75 per share in 1996, $2.625 per share in 1995 and $1.75 per share in 1994. The accompanying notes are an integral part of these statements. 32 STONE CONTAINER CORPORATION AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the accounts of the Company and all subsidiaries that are more than 50 percent owned except for S&G Packaging Company, L.L.C. which is accounted for under the equity method. All significant intercompany accounts and transactions have been eliminated. Investments in non-consolidated affiliated companies are primarily accounted for by the equity method. The consolidated financial statements are prepared in conformity with generally accepted accounting principles which require the use of management estimates. Changes in such estimates may affect amounts reported in future periods. PER SHARE DATA: Net income (loss) per common share is computed by dividing the net income (loss) applicable to common shares by the weighted average number of common shares outstanding during each year. The weighted average number of common shares outstanding on a primary basis was 99,176,935 in 1996, 94,131,569 in 1995 and 88,195,190 in 1994. Net income per fully diluted common share is computed after making the necessary adjustments to net income and to the weighted average number of common shares outstanding to reflect the assumed conversion of any dilutive convertible securities not considered common stock equivalents. The weighted average number of common shares outstanding on a fully diluted basis in 1995 was 114,674,021. RECLASSIFICATIONS: Certain prior year amounts have been reclassified to conform with the current year presentation in the Consolidated Balance Sheets and Consolidated Statements of Cash Flows. CASH AND CASH EQUIVALENTS: The Company considers all highly liquid short-term investments with original maturities of three months or less to be cash equivalents and, therefore, includes such investments as cash and cash equivalents in its financial statements. INVENTORIES: Inventories are stated at the lower of cost or market. The primary methods used to determine inventory costs are the last-in-first-out ("LIFO") method and the average cost method. PROPERTY, PLANT, EQUIPMENT AND DEPRECIATION: Property, plant and equipment is stated at cost. Expenditures for maintenance and repairs are charged to income as incurred. Additions, improvements and major replacements are capitalized. The cost and accumulated depreciation related to assets sold or retired are removed from the accounts and any gain or loss is credited or charged to income. For financial reporting purposes, depreciation and amortization is provided on the straight-line method over the estimated useful lives of depreciable assets, or over the duration of the lease for certain capitalized leases, based on the following annual rates:
TYPE OF ASSET RATES - --------------------------------------------- ------------- Machinery and equipment...................... 5% to 33% Buildings and leasehold improvements......... 2% to 10% Land improvements............................ 4% to 7%
TIMBERLANDS: Timberlands are stated at cost less accumulated cost of timber harvested. The Company amortizes its private fee timber costs over the estimated total fiber that will be available during the estimated growth cycle. Cost of non-fee timber harvested is determined on the basis of timber removal rates and the estimated volume of recoverable timber. The Company capitalizes interest costs related to pre-merchantable timber. GOODWILL AND OTHER ASSETS: Goodwill is amortized on a straight-line basis over 40 years and is recorded net of accumulated amortization of approximately $122 million and $116 million at December 31, 1996 and 1995, respectively. The Company assesses at 33 STONE CONTAINER CORPORATION AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) each balance sheet date whether there has been a permanent impairment in the value of goodwill. This is accomplished by determining whether projected undiscounted future cash flows from operations exceed the net book value of goodwill as of the assessment date. Such projections reflect price, volume and cost assumptions. Deferred debt issuance costs are amortized over the expected life of the related debt using the interest method. Start-up costs on major projects are capitalized and amortized over a five-year period. Other long-term assets include approximately $35 million and $47 million of unamortized deferred start-up costs at December 31, 1996 and 1995, respectively. SUBSIDIARY ISSUANCE OF STOCK: When a subsidiary issues stock, the Company records the difference relating to the carrying amount per share and the issuance price per share as an adjustment to common stock in those instances in which the Company has determined that the difference does not represent a permanent impairment. FOREIGN CURRENCY TRANSLATION: The functional currency for the majority of the Company's foreign operations is the applicable local currency. Accordingly, assets and liabilities are translated at the exchange rate in effect at the balance sheet date, and income and expenses are translated at average exchange rates prevailing during the year. Translation gains or losses are accumulated as a separate component of stockholders' equity entitled Foreign Currency Translation Adjustment. Foreign currency transaction gains or losses are credited or charged to income. The functional currency for foreign operations operating in highly inflationary economies is the U.S. dollar and any gains or losses are credited or charged to income. FOREIGN CURRENCY AND FINANCIAL INSTRUMENTS: The Company has utilized various financial instruments to reduce certain of its foreign currency and/or interest rate exposures. Premiums received and fees paid on the financial instruments are deferred and amortized over the period of the agreements. Gains and losses or interest received and paid on the instruments are recorded as foreign exchange transaction gains or losses or as interest in the Consolidated Statements of Operations. POSTEMPLOYMENT BENEFITS: Effective January 1, 1994, the Company adopted Statement of Financial Accounting Standards No. 112 and recorded its catch-up obligation (approximately $24 million) by recognizing a one-time, non-cash charge of $14.2 million, net of income tax benefit, as a cumulative effect of an accounting change. IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF: Effective January 1, 1996, the Company adopted Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" ("SFAS 121"), which requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The adoption SFAS 121 did not have a material effect on the Company's financial statements. NOTE 2--SUBSEQUENT EVENT On February 14, 1997 Stone-Consolidated, a 46.6 percent owned non-consolidated affiliate of the Company, and Abitibi-Price Inc., announced that they have agreed to amalgamate under Canadian law the two companies to create Abitibi-Consolidated, Inc. The transaction, which is subject to shareholder and regulatory approval, is expected to close in the second quarter of 1997. Abitibi-Consolidated, Inc. would be a significant manufacturer and marketer of publication grade papers with combined revenues approximating $4.9 billion (CDN). Upon completion of the transaction, the Company would own approximately 25 percent of the common equity of Abitibi-Consolidated, Inc. NOTE 3--JOINT VENTURES, ACQUISITIONS AND INVESTMENTS On May 30, 1996, the Company entered into a joint venture with Four M Corporation ("Four M") to form Florida Coast Paper Company, L.L.C. ("Florida Coast") to purchase a paperboard mill located in Port St. Joe, Florida, from St. Joe Paper Company for $185 million plus applicable working capital. As part of the transaction, Florida Coast sold, through a private placement, debt of approximately $165 million. Pursuant to an exchange offer, such privately-placed 34 STONE CONTAINER CORPORATION AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 3--JOINT VENTURES, ACQUISITIONS AND INVESTMENTS (CONTINUED) debt was exchanged for registered notes identical to the privately-placed notes. The Company accounts for its investment in Florida Coast under the equity method. Concurrent with the formation of the joint venture, the Company and Four M entered into output purchase agreements with Florida Coast which require each of the joint venture partners to purchase 50 percent of the production of Florida Coast. The output purchase agreements also require the Company and Four M to equally share in the funding of certain cash flow deficits of Florida Coast. On July 12, 1996, the Company and Gaylord Container Corporation entered into a joint venture whereby the retail bag packaging businesses of these two companies were contributed to form S&G Packaging Company, L.L.C. ("S&G"). The Company accounts for its interest in S&G under the equity method. S&G produces paper grocery bags and sacks, handle sacks and variety bags, with estimated annual sales in excess of $300 million and serves supermarkets, quick service restaurants, paper distributors and non-food mass merchandisers throughout North America and the Caribbean. On March 14, 1996, the Company purchased approximately $40 million of convertible debt securities of Financiere Carton Papier ("FCP"), a non-consolidated affiliate of the Company. The securities are not convertible into FCP common stock until March 1999. If the company converted the securities into FCP common stock, the Company would own approximately 80 percent of the outstanding shares of FCP. NOTE 4--SUBSIDIARY ISSUANCE OF STOCK On November 1, 1995, Stone-Consolidated Corporation, a Canadian subsidiary of the Company, amalgamated its operations (the "Amalgamation") with Rainy River Forest Products Inc. ("Rainy River"), a Toronto-based Canadian pulp and paper company. The combination of Stone-Consolidated Corporation and Rainy River to form the amalgamated entity ("Amalco") was accounted for as the acquisition of Rainy River by Stone-Consolidated Corporation. Therefore, the purchase method of accounting was used by Stone-Consolidated Corporation to account for the business combination. Amalco continues under the name of Stone-Consolidated Corporation ("Stone-Consolidated"). As a result of the issuance of common shares by Stone-Consolidated associated with the Amalgamation, the Company's equity ownership in Stone-Consolidated was reduced from 74.6 percent to 46.6 percent. The Company recorded in 1995 a charge of approximately $80 million to common stock related to the excess carrying value per common share over the issuance price per common share associated with the shares issued. Effective November 1, 1995, the Company began reporting Stone-Consolidated as a non-consolidated affiliate in accordance with the equity method of accounting. NOTE 5--ADDITIONAL CASH FLOW STATEMENT INFORMATION The Company's non-cash investing and financing activities and cash payments (receipts) for interest and income taxes were as follows:
YEAR ENDED DECEMBER 31, --------------------------- (IN MILLIONS) 1996 1995 1994 - ---------------------------------------------------------------------- ------- ------- ------- Note receivable received as partial consideration for sale of assets............................................................... $ 32.7 $ -- $ 1.3 Capital lease obligations incurred.................................... 5.0 2.3 2.4 Assumption of debt of consolidated affiliates......................... 5.0 -- -- Issuance of common stock as partial consideration to extinguish debt................................................................. 1.3 180.4 -- Assumption of non-recourse debt of affiliates......................... -- 15.0 115.0 Short-term note receivable recorded as partial consideration from sale of an investment..................................................... -- -- 7.8 Conversion of investment in an affiliate into a note receivable....... -- -- 3.2 ------- ------- ------- ------- ------- ------- Cash paid (received) during the year for: Interest (net of capitalization).................................... $ 383.1 $ 443.7 $ 373.7 Income taxes (net of refunds)....................................... 4.8 125.5 (4.1) ------- ------- ------- ------- ------- -------
In 1995, the other-net component of net cash provided from operating activities included minority interest expense of $29.3 million. 35 STONE CONTAINER CORPORATION AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 6--INVENTORIES Inventories are summarized as follows:
DECEMBER 31, ----------------- (IN MILLIONS) 1996 1995 - ------------------------------------------------------------ ------- ------- Raw materials and supplies.................................. $ 255.3 $ 287.5 Paperstock.................................................. 378.1 358.8 Work in process............................................. 19.5 23.1 Finished products........................................... 105.1 123.1 ------- ------- 758.0 792.5 Excess of current cost over LIFO inventory value............ (16.4) (59.2) ------- ------- Total inventories........................................... $ 741.6 $ 733.3 ------- ------- ------- -------
Inventories costed by the LIFO, FIFO and average cost methods represented approximately 39 percent, 7 percent and 54 percent, respectively, of total inventories at December 31, 1996 and approximately 42 percent, 8 percent and 50 percent, respectively, of total inventories at December 31, 1995. NOTE 7--PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment is summarized as follows:
DECEMBER 31, --------------------- (IN MILLIONS) 1996 1995 - ------------------------------------------------------------ --------- --------- Machinery and equipment..................................... $ 4,053.2 $ 3,888.4 Buildings and leasehold improvements........................ 656.5 630.7 Land and land improvements.................................. 122.4 107.0 Construction in progress.................................... 107.0 123.9 --------- --------- Total property, plant and equipment......................... 4,939.1 4,750.0 Accumulated depreciation and amortization................... (2,305.4) (2,114.2) --------- --------- Total property, plant and equipment--net.................... $ 2,633.7 $ 2,635.8 --------- --------- --------- ---------
Property, plant and equipment includes capitalized leases of $21.0 million and $18.7 million and related accumulated amortization of $5.6 million and $7.0 million at December 31, 1996 and 1995, respectively. 36 STONE CONTAINER CORPORATION AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 8--SUMMARIZED FINANCIAL INFORMATION OF NON-CONSOLIDATED AFFILIATES Combined summarized financial information for the Company's non-consolidated affiliates that are accounted for under the equity method of accounting is presented below:
YEAR ENDED DECEMBER 31, ---------------------------- (IN MILLIONS) 1996 1995 - ------------------------------------------------------------------------------ ------------- ------------- Results of operations:(a) Net sales................................................................... $ 3,059.9 $ 1,472.9 Income before income taxes, minority interest and extraordinary charges..... 207.8 67.7 Net income.................................................................. 151.4 45.3 ------------- ------------- DECEMBER 31, ---------------------------- (IN MILLIONS) 1996 1995 - ------------------------------------------------------------------------------ ------------- ------------- Financial position: Current assets.............................................................. $ 1,084.8 $ 924.8 Non-current assets.......................................................... 3,515.6 3,091.7 Current liabilities......................................................... 668.0 692.9 Non-current liabilities..................................................... 1,302.9 979.5 Stockholders' equity........................................................ 2,629.5 2,344.1 ------------- -------------
- --------- (a) Includes results for each affiliate for the period it was accounted for under the equity method. Consolidated retained earnings included approximately $42 million which represents undistributed earnings accounted for by the equity method at December 31, 1996. NOTE 9--INCOME TAXES The Company provides for income taxes in accordance with the liability method of accounting for income taxes. Under the liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases. The (provision) credit for income taxes consists of the following:
YEAR ENDED DECEMBER 31, ----------------------------- (IN MILLIONS) 1996 1995 1994 - -------------------------------------------------- -------- ------- -------- Currently (payable) refundable: Federal......................................... $ (2.0) $ (59.6) $ -- State........................................... (.3) (10.5) (1.1) Foreign......................................... (19.8) (37.2) (18.0) -------- ------- -------- (22.1) (107.3) (19.1) Deferred: Federal......................................... 64.1 (80.9) 45.3 State........................................... 13.0 (26.2) 1.1 Foreign......................................... 11.0 (106.5) 8.2 -------- ------- -------- 88.1 (213.6) 54.6 -------- ------- -------- Total (provision) credit for income taxes......... $ 66.0 $(320.9) $ 35.5 -------- ------- -------- -------- ------- --------
37 STONE CONTAINER CORPORATION AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 9--INCOME TAXES (CONTINUED) The income tax (provision) credit at the federal statutory rate is reconciled to the (provision) credit for income taxes as follows:
YEAR ENDED DECEMBER 31, ----------------------------- (IN MILLIONS) 1996 1995 1994 - ---------------------------------------------------------------------- -------- ------- -------- Federal income tax (provision) credit at federal statutory rate....... $ 66.2 $(278.1) $ 57.1 Additional (taxes) credits resulting from: Non-deductible amortization of intangibles.......................... (6.8) (8.8) (9.0) Equity earnings of affiliates, net of tax........................... 18.7 1.4 (3.7) State income taxes, net of federal income tax effect................ 8.3 (23.9) -- Valuation allowance adjustment...................................... (10.1) -- -- Minimum taxes-foreign jurisdictions................................. (4.9) (7.8) (5.8) Permanent differences on assets sold................................ (3.5) -- -- Expenses not deductible in foreign jurisdictions.................... -- -- (4.3) Other--net.......................................................... (1.9) (3.7) 1.2 -------- ------- -------- (Provision) credit for income taxes................................... $ 66.0 $(320.9) $ 35.5 -------- ------- -------- -------- ------- --------
The components of the net deferred tax liability as of December 31, 1996 and 1995 were as follows:
YEAR ENDED DECEMBER 31, ------------------- (IN MILLIONS) 1996 1995 - ---------------------------------------------------------------------- -------- -------- Deferred tax assets: Carryforwards....................................................... $ 191.3 $ 127.3 Compensation-related accruals....................................... 43.4 39.5 Extraordinary charges from early extinguishments of debt............ 2.4 4.9 Minimum pension liability........................................... 16.3 14.9 Reserves............................................................ 52.3 43.7 Deferred gain....................................................... 22.7 23.0 Other............................................................... 10.6 12.4 -------- -------- 339.0 265.7 Valuation allowance................................................... (10.1) (1.2) -------- -------- Total deferred tax asset.............................................. 328.9 264.5 Deferred tax liabilities: Depreciation and amortization....................................... (639.4) (652.1) Start-up costs...................................................... (7.8) (11.5) LIFO reserve........................................................ (19.3) (15.8) Pension............................................................. (7.2) (7.8) Other............................................................... (48.6) (54.2) -------- -------- Total deferred tax liability.......................................... (722.3) (741.4) -------- -------- Deferred tax liability--net........................................... $ (393.4) $ (476.9) -------- -------- -------- --------
38 STONE CONTAINER CORPORATION AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) NOTE 9--INCOME TAXES (CONTINUED) The components of the income (loss) before income taxes, minority interest, extraordinary charges and cumulative effect of accounting change are:
YEAR ENDED DECEMBER 31, ------------------------------ (IN MILLIONS) 1996 1995 1994 - ---------------------------------------------------------------------- -------- -------- -------- United States......................................................... $ (207.8) $ 455.8 $ (126.6) Foreign............................................................... 18.7 338.9 (36.5) -------- -------- -------- Income (loss) before income taxes, minority interest, extraordinary charges and cumulative effect of accounting change................... $ (189.1) $ 794.7 $ (163.1) -------- -------- -------- -------- -------- --------
At December 31, 1996, the Company had approximately $219 million of net operating loss carryforwards for U.S. federal tax purposes. To the extent not utilized, the U.S. federal net operating losses will expire in 2011. Further, the Company had approximately $725 million of net operating loss carryforwards for U.S. state tax purposes (which represents approximately $49 million of deferred tax assets), which to the extent not utilized, expire in 1997 through 2011. The Company also had approximately $57 million of alternative minimum tax credit carryforwards for U.S. federal tax purposes which are available indefinitely. NOTE 10--PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS The Company has contributory and noncontributory pension plans for the benefit of most salaried and certain hourly employees. The funding policy for the plans, with the exception of the Company's salaried supplemental unfunded plans and the Company's German subsidiary's unfunded plan, is to annually contribute the statutory required minimum. The salaried pension plans provide benefits based on a formula that takes into account each participant's estimated final average earnings. The hourly pension plans provide benefits under a flat benefit formula. The salaried and hourly plans provide reduced benefits for early retirement. The salaried plans take into account offsets for governmental benefits. Net pension expense for the combined pension plans includes the following components:
YEAR ENDED DECEMBER 31, ------------------------- (IN MILLIONS) 1996 1995 1994 - ---------------------------------------------------------- ------ ------- ------ Service cost--benefits earned during the period........... $ 17.7 $ 17.0 $ 21.5 Interest cost on projected benefit obligations............ 42.9 63.5 63.5 Actual return on plan assets.............................. (47.6) (100.0) (13.7) Net amortization and deferral............................. 20.4 51.7 (37.5) ------ ------- ------ Net pension expense....................................... $ 33.4 $ 32.2 $ 33.8 ------ ------- ------ ------ ------- ------
39 STONE CONTAINER CORPORATION AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 10--PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS (CONTINUED) The following table sets forth the funded status of the Company's pension plans and the amounts recorded in the Consolidated Balance Sheets:
DECEMBER 31, ------------------------------------------ 1996 1995 --------------------------- ------------ ASSETS ACCUMULATED ASSETS EXCEED BENEFITS EXCEED ACCUMULATED EXCEED ACCUMULATED (IN MILLIONS) BENEFITS ASSETS BENEFITS - -------------------------------------------------------------------------------- ------------ ------------ ------------ Actuarial present value of benefit obligations: Vested benefits............................................................... $ (57.0) $ (460.5) $ (59.5) Non-vested benefits........................................................... (9.5) (21.9) (2.1) ------ ------------ ------ Accumulated benefit obligation................................................ (66.5) (482.4) (61.6) Effect of increase in compensation levels..................................... (4.7) (54.1) (2.3) ------ ------------ ------ Projected benefit obligation for service rendered through December 31........... (71.2) (536.5) (63.9) Plan assets at fair value, primarily stocks, bonds, fixed investment contracts, real estate and mutual funds which invest in listed stocks and bonds..................................................................... 72.4 320.9 64.4 ------ ------------ ------ Plan assets in excess of (less than) projected benefits obligation.............. 1.2 (215.6) .5 Unrecognized prior service cost................................................. 3.7 19.0 2.8 Unrecognized net actuarial loss................................................. 3.3 93.3 14.4 Adjustment required to recognize minimum liability.............................. -- (69.7) -- ------ ------------ ------ Net prepaid (accrual)........................................................... $ 8.2 $ (173.0) $ 17.7 ------ ------------ ------ ------ ------------ ------ ACCUMULATED BENEFITS EXCEED (IN MILLIONS) ASSETS - -------------------------------------------------------------------------------- ------------ Actuarial present value of benefit obligations: Vested benefits............................................................... $ (422.1) Non-vested benefits........................................................... (32.4) ------------ Accumulated benefit obligation................................................ (454.5) Effect of increase in compensation levels..................................... (59.6) ------------ Projected benefit obligation for service rendered through December 31........... (514.1) Plan assets at fair value, primarily stocks, bonds, fixed investment contracts, real estate and mutual funds which invest in listed stocks and bonds..................................................................... 286.6 ------------ Plan assets in excess of (less than) projected benefits obligation.............. (227.5) Unrecognized prior service cost................................................. 22.1 Unrecognized net actuarial loss................................................. 96.2 Adjustment required to recognize minimum liability.............................. (68.3) ------------ Net prepaid (accrual)........................................................... $ (177.5) ------------ ------------
The Company has recorded an additional minimum liability for underfunded plans representing the excess of the unfunded accumulated benefit obligation over previously recorded liabilities. The additional minimum liability at December 31, 1996 of $69.7 million is recorded as a long-term liability with an offsetting intangible asset of $19.1 million and a charge to stockholders' equity of $31.5 million, net of a tax benefit of $19.1 million. In addition, at December 31, 1996, the Company had a cumulative net charge to retained earnings of $11.1 million representing its share of the net charges to retained earnings recorded by certain non-consolidated affiliates associated with their additional minimum liabilities. At December 31, 1995, the additional minimum liability of $68.3 million was recorded as a long-term liability with an offsetting intangible asset of $21.6 million and a charge to stockholders' equity of $29.0 million, net of a tax benefit of $17.7 million. Also, at December 31, 1995, the Company had a cumulative net charge to retained earnings of $15.4 million representing its share of the net charges to retained earnings recorded by certain non-consolidated affiliates associated with their additional minimum liabilities. The weighted average discount rates used in determining the actuarial present value of the projected benefit obligations at December 31, 1996 and 1995 were 7.75 percent and 7.5 percent, respectively. The rate of increase in future compensation levels used in determining the actuarial present value of the projected benefit obligations was 4.0 percent for 1996 and 1995. The expected long-term rate of return on assets was 11 percent for 1996 and 1995. The change in the weighted average discount rates and the adoption of a different mortality table for the valuation of its U.S. plans during 1996 had the net effect of decreasing the total projected benefit obligation at December 31, 1996 by $3.5 million. Certain domestic operations of the Company participate in various multi-employer union-administered defined benefit pension plans that principally cover production workers. Pension expense under these plans was $5.2 million, $5.5 million and $5.2 million for 1996, 1995 and 1994, respectively. 40 STONE CONTAINER CORPORATION AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 10--PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS (CONTINUED) In addition to providing pension benefits, the Company provides certain retiree health care and life insurance benefits covering substantially all U.S. salaried and hourly employees and certain Canadian employees. Net periodic postretirement benefit costs for 1996, 1995 and 1994 included the following components:
YEAR ENDED DECEMBER 31, ------------------------------- (IN MILLIONS) 1996 1995 1994 - --------------------------------------------------------------------------------------- --------- --------- --------- Service cost--benefits attributed to service during the period......................... $ 1.0 $ .8 $ 1.5 Interest cost on accumulated postretirement benefit obligation......................... 4.6 6.6 6.0 Net amortization and deferral.......................................................... .4 .7 .9 --- --- --- Net periodic postretirement benefit cost............................................... $ 6.0 $ 8.1 $ 8.4 --- --- --- --- --- ---
The following table sets forth the components of the Company's accumulated postretirement benefit obligation and the amount recorded in the Consolidated Balance Sheets:
DECEMBER 31, 1996 DECEMBER 31, 1995 ------------------------------ ----------------------------- (IN MILLIONS) U.S. FOREIGN TOTAL U.S. FOREIGN TOTAL - ------------------------------ -------- --------- -------- -------- -------- --------- Accumulated postretirement benefit obligation: Retirees.................... $ 17.7 $ 11.7 $ 29.4 $ 31.6 $ 10.6 $ 42.2 Active employees--fully eligible.................. 18.4 .9 19.3 16.0 .8 16.8 Other active employees...... 15.0 1.3 16.3 15.8 1.2 17.0 -------- --------- -------- -------- -------- --------- Total accumulated postretirement benefit obligation.................. 51.1 13.9 65.0 63.4 12.6 76.0 Unrecognized net loss......... (9.6) (2.4) (12.0) (21.5) (1.2 ) (22.7) -------- --------- -------- -------- -------- --------- Postretirement benefit obligation.................. $ 41.5 $ 11.5 $ 53.0 $ 41.9 $ 11.4 $ 53.3 -------- --------- -------- -------- -------- --------- -------- --------- -------- -------- -------- ---------
The Company has not currently funded any of its accumulated postretirement benefit obligation. The discount rates used in determining the accumulated postretirement benefit obligation were 7.75 percent at December 31, 1996 and 7.5 percent at December 31, 1995. The change in the discount rate and the adoption of a new mortality table had the net effect of increasing the total accumulated postretirement benefit obligation at December 31, 1996 by $1.1 million. The assumed health care cost trend rates for substantially all employees used in measuring the accumulated postretirement benefit obligation ranged from 6.0 percent to 11.0 percent at December 31, 1996 and 7.0 percent to 12.0 percent at December 31, 1995, decreasing to ultimate rates of 5.5 percent to 8.0 percent. If the health care cost trend rate assumptions were increased by 1 percent, the total accumulated postretirement benefit obligation at December 31, 1996 and 1995 would have increased by $5.7 million and $6.8 million, respectively. The effect of a 1 percent increase in the health care cost trend rate assumptions on the net periodic postretirement benefit costs for 1996 and 1995 would be immaterial. At December 31, 1996, the Company had approximately 6,400 retirees and 24,200 active employees of which approximately 3,400 and 19,700, respectively, were employees of U.S. operations. 41 STONE CONTAINER CORPORATION AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 11--LONG-TERM DEBT Long-term debt consists of the following:
DECEMBER 31, ---------------------- (IN MILLIONS) 1996 1995 - ------------------------------------------------------------------------------------- --------- --------- SENIOR DEBT: 9.875% senior notes due February 1, 2001............................................. $ 573.7 $ 573.7 10.75% first mortgage notes due October 1, 2002 (less unamortized debt discount of $2.6 and $2.9)..................................................................... 497.4 497.1 Term loan (8.6% and 9.2% weighted average rates) payable in five semiannual installments of $2.0 on April 1 and October 1 of each year through April 1, 1999, $190.0 on October 1, 1999 and $176.0 on April 1, 2000.............................. 376.0 380.0 Additional term loans (8.9% and 9.3% weighted average rates) payable in twelve semiannual payments of $2.0 on April 1 and October 1 of each year through 2002, $181.3 on April 1, 2003 and $182.3 on October 1, 2003.............................. 387.0 200.0 Revolving credit facility (8.9% and 9.4% weighted average rates) due May 15, 1999.... 50.0 53.0 11.875% senior notes due December 1, 1998 (less unamortized debt discount of $.5 and $.7)............................................................................... 239.5 239.3 11.5% senior notes due August 15, 2006............................................... 200.0 -- 11.5% senior notes due October 1, 2004 (less unamortized debt discount of $1.2 and $1.3).............................................................................. 198.8 198.7 12.625% senior notes due July 15, 1998............................................... 150.0 150.0 11.875% rating adjustable senior notes due August 1, 2016............................ 125.0 -- 5.375% to 9.55% fixed rate utility systems and pollution control revenue bonds, payable in varying annual sinking fund payments through the year 2010 and varying principal payments through the year 2026 (less unamortized debt discount of $5.7 and $6.4).......................................................................... 229.6 199.1 Floating rate receivables-backed notes (5.9% and 6.4% weighted average rates) due December 15, 2000.................................................................. 210.0 260.0 5.0% to 8.8% term loans payable in varying amounts through 2003...................... 23.8 31.1 Other (including obligations under capitalized leases of $10.5 and $10.5)............ 45.5 52.4 --------- --------- 3,306.3 2,834.4 Less: current maturities............................................................. (36.7) (27.1) --------- --------- Total senior long-term debt........................................................ 3,269.6 2,807.3 --------- --------- SUBORDINATED DEBT: 11.5% senior subordinated notes...................................................... -- 230.0 10.75% senior subordinated debentures maturing on April 1, 2002 (less unamortized debt discount of $.7 and $.7)...................................................... 199.3 199.3 10.75% senior subordinated notes maturing on June 15, 1997........................... 150.0 150.0 11.0% senior subordinated notes maturing on August 15, 1999.......................... 119.4 125.0 8.875% convertible senior subordinated notes (convertible at $11.55 per share) maturing on July 15, 2000 (less unamortized debt discount of $.2 and $.3).......... 58.4 59.7 6.75% convertible subordinated debentures (convertible at $33.94 per share) maturing on February 15, 2007............................................................... 45.2 45.2 --------- --------- 572.3 809.2 Less: current maturities............................................................. (150.0) -- --------- --------- Total subordinated debt............................................................ 422.3 809.2 --------- --------- NON-RECOURSE DEBT OF CONSOLIDATED AFFILIATES: SVCPI credit facilities (6.4% and 7.7% weighted average rates) payable in semiannual installments beginning July 31, 1997 of $8.5 through July 31, 1998 and $14.1 thereafter through January 31, 2002 with a final payment of $138.3 on December 31, 2002............................................................................... 262.8 276.6 Other................................................................................ 7.4 12.0 --------- --------- 270.2 288.6 Less: current maturities............................................................. (11.0) (20.0) --------- --------- Total non-recourse debt of consolidated affiliates................................. 259.2 268.6 --------- --------- Total long-term debt................................................................. $ 3,951.1 $ 3,885.1 --------- --------- --------- ---------
42 STONE CONTAINER CORPORATION AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 11--LONG-TERM DEBT (CONTINUED) On March 22, 1996, the Company and its bank group amended and restated the Company's bank credit agreement to, among other things, provide for an additional senior secured term loan facility of $190 million and a supplemental revolving credit facility of $110 million. Subsequently in 1996, the Company and its bank group further amended the credit agreement to, among other things, permit the Company to contribute its retail packaging assets into a joint venture with Gaylord Container Corporation (see Note 3) and ease certain financial covenant requirements (including the interest coverage and indebtedness ratio requirements). At December 31, 1996, the Company's bank credit agreement, as amended, provides for three senior secured term loans aggregating $763 million which mature through October 1, 2003 and a $560 million senior secured revolving credit facility commitment maturing May 15, 1999 (collectively the "Credit Agreement"). The Credit Agreement no longer has a cross-acceleration provision in the event of an acceleration of the non-recourse debt of Stone Venepal (Celgar) Pulp, Inc. ("SVCPI"). On July 24, 1996, the Company, in a private placement, sold $125 million principal amount of 11 7/8 percent Rating Adjustable Senior Notes due 2016 ("Rating Adjustable Senior Notes"). Interest, which is payable semi-annually commencing February 1, 1997, can be adjusted from time to time by reference to the credit rating assigned to the Rating Adjustable Senior Notes by Moody's Investors Service, Inc. and/or Standard and Poor's Corporation. Subsequently, on November 8, 1996, pursuant to an exchange offer, the holders of the privately placed debt exchanged such notes for registered notes. On August 16, 1996, Stone Container Finance Company of Canada ("SCFCC"), a newly-formed, wholly owned subsidiary of the Company, sold $200 million principal amount of 11 1/2 percent Senior Notes due August 15, 2006 (the "SCFCC Notes"). Interest on the SCFCC Notes is payable semi-annually commencing February 15, 1997. Payment of the principal and interest on the SCFCC Notes is guaranteed by the Company. The net proceeds received from the sales of the Rating Adjustable Senior Notes and the SCFCC Notes were used by the Company to purchase and retire the remaining $222 million principal amount of its 11 1/2 percent Senior Subordinated Notes on September 16, 1996 and to provide funds for general corporate purposes. Earlier in the year, the Company purchased $8 million of the 11 1/2 percent Senior Subordinated Notes on the open market. During the third and fourth quarters of 1995, in separate, independently negotiated transactions, the Company purchased and retired $190 million principal amount of its 8 7/8 percent Convertible Senior Subordinated Notes (the "Convertible Senior Subordinated Notes"). The aggregate value paid by the Company to purchase and retire the $190 million Convertible Senior Subordinated Notes was approximately $370 million comprised of approximately $190 million cash (which was equal to the face value of the Convertible Senior Subordinated Notes purchased) and the issuance of approximately 8.5 million shares of common stock valued at approximately $180 million. The Convertible Senior Subordinated Notes purchased and retired were convertible into approximately 16.5 million common shares. Although the Company issued approximately 8.5 million shares of common stock, total common shares on a fully diluted basis were reduced by approximately 8 million common shares. As a result of certain debt prepayments and repurchases (including the 1995 purchase of $190 million principal amount of Convertible Senior Subordinated Notes), the Company's results reflect extraordinary charges from the early extinguishments of debt of $3.7 million (net of income tax benefit of $2.4 million), $189.0 million (net of income tax benefit of $4.9 million) and $61.6 million (net of income tax benefit of $36.5 million) for 1996, 1995 and 1994, respectively. At December 31, 1996, the $819.5 million of borrowings and accrued interest outstanding under the Credit Agreement were secured by property, plant and equipment with a net book value of $1.5 billion, and by a lien on certain of the Company's inventories. Additionally, other loan agreements with a balance of $1.0 billion were collateralized by approximately $490.7 million of property, plant and equipment--net and an investment and by $310.3 million of cash, accounts receivable and inventories. The Company pays a 1/2 percent commitment fee on the unused portions of its revolving credit facility. The Credit Agreement contains covenants that include, among other things, the maintenance of certain financial tests and ratios. Unless operating results improve, the Company may be required to seek covenant relief from its bank group during 1997. Although no assurance can be given, the Company believes such relief, if sought, would be granted. Additionally, the term loan portions of the Credit Agreement provide for mandatory prepayments from sales of certain assets, certain debt financings and a percentage of excess cash flow (as defined). The Company's bank lenders, at the Company's request, may at their option waive the receipt of certain mandatory prepayments. In 1996, the Company 43 STONE CONTAINER CORPORATION AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 11--LONG-TERM DEBT (CONTINUED) received consents from a majority of its holders to waive mandatory repayment requirements from excess cash flow (as defined) on no less than 80 percent of each of the Company's term loans until September 1997. Any mandatory and voluntary prepayments are allocated against the term loan amortizations in inverse order of maturity. Mandatory prepayments from sales of collateral, unless replacement collateral is provided, will be applied ratably to the term loans and revolving credit facility, permanently reducing the loan commitments under the Credit Agreement. The Credit Agreement also contains cross-default provisions to the indebtedness of $10 million or more of the Company and certain subsidiaries. The Company's various Senior Note Indentures under which approximately $2.0 billion of debt is outstanding contains provisions which require the Company to maintain a minimum Subordinated Capital Base (as defined) of $1 billion. In the event of a failure to maintain such minimum amount for two successive quarters the Company would be required to semi-annually offer to purchase 10 percent of such outstanding indebtedness at par until the minimum Subordinated Capital Base is again attained. In the event that the Company's Credit Agreement had outstanding amounts in excess of that outstanding under the Senior Note Indentures, and would not permit the offer to repurchase, then the Company would be required to increase the rates on the Notes by 50 basis points per quarter up to a maximum of 200 basis points until the minimum Subordinated Capital Base is attained. The Company's Subordinated Capital Base was $1,040 million at December 31, 1996. It is anticipated that the minimum Subordinated Capital Base will fall below the required levels in the first quarter of 1997 and unless results improve in the second quarter of 1997, the required level of Subordinated Capital Base will not be met in the second quarter of 1997. As a result of this, the Company plans to issue securities which will increase the Subordinated Capital Base to required levels by June 30, 1997. There is however no assurance that the Company will achieve such financings. The Company has an accounts receivable securitization program whereby Stone Receivables Corporation purchases, on an ongoing basis, certain of the accounts receivable of the Company. The initial accounts receivable under the program were purchased with the net proceeds received from the issuance of $260 million of floating-rate notes by Stone Receivables Corporation in March 1995. The purchased accounts receivable are solely the assets of Stone Receivables Corporation, which is a wholly owned but separate corporate entity of the Company with its own separate creditors. In the event of a liquidation of Stone Receivables Corporation, such creditors would be entitled to satisfy their claims from Stone Receivables Corporation prior to any distribution to the Company. On December 16, 1996, Stone Receivables Corporation redeemed $50 million principal of its $260 million floating-rate notes. At December 31, 1996, the Company's Consolidated Balance Sheet included $213 million of Stone Receivables Corporation accounts receivable under the program and $210 million of borrowings under the program. At December 31, 1995, the Company's Consolidated Balance Sheet included $302 million of Stone Receivables Corporation accounts receivable under the program and $260 million of borrowings under the program. The amounts of long-term debt outstanding at December 31, 1996 maturing during the next five years are as follows:
(IN MILLIONS) - -------------------------------------------------------------------- 1997................................................................ $ 193.6 1998................................................................ 431.9 1999................................................................ 409.5 2000................................................................ 483.5 2001................................................................ 622.7 Thereafter.......................................................... 1,997.1
See also first three paragraphs included in the "Outlook" section of the MD&A. Amounts payable under capitalized lease agreements are excluded from the above tabulation. See Note 13--"Long-term Leases" for capitalized lease maturities. 44 STONE CONTAINER CORPORATION AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 12--FINANCIAL INSTRUMENTS At December 31, 1996 and 1995, the carrying values and fair values of the Company's financial instruments are listed below:
DECEMBER 31, --------------------------------------------- 1996 1995 --------------------- --------------------- CARRYING FAIR CARRYING FAIR (IN MILLIONS) AMOUNT VALUE AMOUNT VALUE - ------------------------------------------------------------ --------- --------- --------- --------- Notes receivable and long-term investments.................. $ 147.8 $ 136.7 $ 112.9 $ 102.9 Indebtedness................................................ 4,138.3 4,246.1 3,921.6 3,985.3 Interest rate swaps in receivable (payable) position........ (.1) (9.8) (.2) (1.9)
The fair values of notes receivable and certain investments are based on discounted future cash flows or the applicable quoted market price. The fair value of the Company's debt is estimated based on the quoted market price for the same or similar issues. The fair value of interest-rate swap agreements are obtained from dealer quotes. These values represent the estimated amount the Company would pay to terminate agreements, taking into consideration the current interest rate and market conditions. These financial instruments are not held for trading purposes. The Company is party to two interest-rate swap contracts with a duration of five and ten years to manage interest rate exposures on $250 million of certain fixed rate indebtedness. The separate contracts have the effect of converting the fixed rate of interest into a floating interest rate on $100 million of the 9 7/8 percent Senior Notes and on $150 million of the 11 1/2 percent Senior Notes. These interest-rate swap contracts were entered into in order to balance the Company's fixed-rate and floating-rate debt portfolios. Under the interest-rate swaps, the Company agrees with the other party to exchange, at specified intervals, the difference between fixed-rate and floating-rate interest amounts calculated by reference to an agreed notional principal amount. While the Company is exposed to credit loss on its interest-rate swaps in the event of nonperformance by the counterparties to such swaps, management believes that such nonperformance is unlikely to occur given the financial resources of the counterparties. The following table indicates the weighted average receive rate and pay rate during 1996 relating to the interest-rate swaps outstanding at December 31, 1996 and 1995:
1996 1995 ------- ------- Interest-rate swap--notional amount (in millions)................... $ 150.0 $ 150.0 Average receive rate (fixed by contract terms).................... 5.7% 5.8% Average pay rate.................................................. 5.5% 6.2% Interest-rate swap--notional amount (in millions)................... $ 100.0 $ 100.0 Average receive rate (fixed by contract terms).................... 5.6% 5.6% Average pay rate.................................................. 5.6% 5.6%
The average pay rate for both interest-rate swaps is the six month LIBOR. 45 STONE CONTAINER CORPORATION AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) NOTE 13--LONG-TERM LEASES The Company leases certain of its facilities and equipment under leases expiring through the year 2023. Future minimum lease payments under capitalized leases and their present value at December 31, 1996 and future minimum rental commitments (exclusive of real estate taxes and other expenses) under operating leases having initial or remaining non-cancellable terms in excess of one year are reflected below:
CAPITALIZED OPERATING (IN MILLIONS) LEASES LEASES - -------------------------------------------------------------------- --------- --------- 1997................................................................ $ 4.8 $ 86.3 1998................................................................ 3.4 75.2 1999................................................................ 2.0 63.5 2000................................................................ .4 52.1 2001................................................................ .4 46.1 Thereafter.......................................................... 1.2 192.4 --------- --------- Total minimum lease payments........................................ 12.2 $ 515.6 --------- --------- Less: Imputed interest.............................................. 1.7 --------- Present value of future minimum lease payments...................... $ 10.5 --------- ---------
Rent expense for operating leases, including leases having a duration of less than one year, was approximately $108 million in 1996, $103 million in 1995 and $87 million in 1994. NOTE 14--PREFERRED STOCK The Company has authorized 10 million shares of Preferred Stock. At December 31, 1996, the Company has issued and outstanding 4.6 million shares of $1.75 Series E Cumulative Convertible Exchangeable Preferred Stock (the "Series E Cumulative Preferred Stock"), $.01 par value. Shares of preferred stock can be issued in series with varying terms as determined by the Board of Directors. Dividends on the Series E Cumulative Preferred Stock are payable quarterly when declared by the Company's Board of Directors. The Series E Cumulative Preferred Stock is convertible, at the option of the holder at any time, into shares of the Company's common stock at a conversion price of $33.94 per share of common stock, subject to adjustment under certain conditions. The Series E Cumulative Preferred Stock may alternatively be exchanged, at the option of the Company, for the Company's 7 percent Convertible Subordinated Exchange Debentures due February 15, 2007 in a principal amount equal to $25.00 per share of Series E Cumulative Preferred Stock so exchanged. Additionally, the Series E Cumulative Preferred Stock is redeemable at the option of the Company, in whole or from time to time in part, commencing February 16, 1996. The Company paid cash dividends of $1.75 per share on the Series E Cumulative Preferred Stock in 1996 and $2.625 per share in 1995. The declaration of dividends by the Board of Directors is subject to, among other things, the Company's ability to comply with financial covenants contained in the Company's Credit Agreement and in its Senior Subordinated Indenture. In the event the Company has six quarterly dividends that remain unpaid on the Series E Cumulative Preferred Stock, the holders of the Series E Cumulative Preferred Stock would have the right to elect two members to the Company's Board of Directors until the accumulated dividends on such Series E Cumulative Preferred Stock have been declared and paid or set apart for payment. Irrespective of the amount available in the dividend pool under the Credit Agreement, the Credit Agreement permits dividends to be paid on the Series E Cumulative Preferred Stock if there is an available dividend pool under the Company's Senior Subordinated Indenture dated March 15, 1992 (the "Senior Subordinated Indenture") relating to its 10 3/4 percent Senior Subordinated Notes, its 11 percent Senior Subordinated Notes and its 10 3/4 percent Senior Subordinated Debentures. At December 31, 1996 the amounts available in the dividend pool under the Credit Agreement and under the Senior Subordinated Indenture were approximately $46 million and $50 million, respectively. 46 STONE CONTAINER CORPORATION AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 15--COMMON STOCK The Company has authorized 200,000,000 shares of common stock, $.01 par value, of which 99,297,021 shares were outstanding at December 31, 1996. In 1995, the Company issued approximately 8.5 million shares of common stock related to the extinguishment of debt and in 1994 sold approximately 19 million shares of common stock. The Company has restrictions on the payment of cash dividends on its common stock under certain of the Company's Indentures and under its Credit Agreement. Common stock cash dividends cannot be declared and paid in the event the Company has any accumulated preferred stock dividend arrearages or there is no availability in the dividend pool under the Credit Agreement or under the Senior Subordinated Indenture. Additionally, preferred and common stock cash dividends cannot be declared and paid in the event the Company's total stockholders' equity falls below $750 million. See also Note 14. The Company paid cash dividends of $0.60 and $0.30 per share on its common stock in 1996 and 1995, respectively. STOCK RIGHTS: Each outstanding share of the Company's common stock carries a stock purchase right ("Right"). Each Right entitles the holder to purchase from the Company one one-hundredth of a share of Series D Junior Participating Preferred Stock, par value $.01 per share, at a purchase price of $130 subject to adjustment under certain circumstances. The Rights expire August 8, 1998 unless extended or earlier redeemed by the Company. The Rights will be exercisable only if a person or group, subject to certain exceptions, acquires 15 percent or more of the Company's common stock or announces a tender offer, the consummation of which would result in ownership by such person or group of 15 percent or more of the Company's common stock. The Company can redeem the Rights at the rate of $.01 per Right at any time before the tenth business day (subject to extension) after a 15 percent position is acquired. If the Company is acquired in a merger or other business combination transaction, each Right will entitle its holder (other than the acquiring person or group) to purchase, at the Right's then-current exercise price, a number of the acquiring company's shares of common stock having a market value at that time of twice the Right's then-current exercise price. In addition, in the event that a 15 percent or greater stockholder acquires the Company by means of a reverse merger in which the Company and its common stock survive, or engages in self-dealing transactions with the Company, each holder of a Right (other than the acquiring person or group) will be entitled to purchase the number of shares of the Company's common stock having a market value of twice the then-current exercise price of the Right. STOCK OWNERSHIP AND OPTION PLANS: The Company's stockholders approved a Stock Option Plan, effective January 1, 1993 (the "1993 Plan"), which authorized 1,530,000 shares of common stock and provided for the issuance of either incentive stock options or non-qualified stock options for the purchase of common shares at prices not less than 100 percent of the market value of such shares on the date of grant. Options granted under the 1993 Plan are exercisable, in whole or in part, after one year but no later than ten years from the date of the respective grant. On May 9, 1995, the stockholders approved the 1995 Long-term Incentive Plan (the "1995 Plan") which permits the Company to issue incentive stock options, non-qualified stock options, stock appreciation rights, restricted stock, bonus stock and performance shares. Under the 1995 Plan, the annual amount of common stock available for grant, other than for incentive stock options, will be limited to 1 1/2 percent of the outstanding shares of common stock as of the beginning of each year plus a carryover from prior years if such 1 1/2 percent is not granted. In no event shall any stock options be exercised later than ten years from the respective grant date. 47 STONE CONTAINER CORPORATION AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 15--COMMON STOCK (CONTINUED) Transactions under the stock option plans are summarized as follows:
OPTION OPTION PRICE SHARES PER SHARE ----------- --------------- Outstanding January 1, 1994....................................................................... 546,031 $ 8.74-29.29 Granted......................................................................................... 670,000 13.38 Exercised....................................................................................... (9,691) 8.74-13.38 Cancelled....................................................................................... (162,528) 8.74-29.29 ----------- --------------- Outstanding December 31, 1994..................................................................... 1,043,812 8.74-29.29 Granted......................................................................................... 1,037,900 18.00-22.13 Exercised....................................................................................... (134,860) 8.74-21.20 Cancelled....................................................................................... (49,890) 13.38-29.29 ----------- --------------- Outstanding December 31, 1995..................................................................... 1,896,962 13.38-29.29 Granted......................................................................................... 1,980,721 13.38 Exercised....................................................................................... (30,000) 13.38 Cancelled....................................................................................... (97,147) 13.38-29.29 ----------- --------------- Outstanding December 31, 1996..................................................................... 3,750,536 13.38-29.29 ----------- ----------- Options exercisable at December 31, 1996............................................................................................ 1,003,890 13.38-29.29 1995............................................................................................ 881,262 13.38-29.29 1994............................................................................................ 395,285 8.74-29.29 Options available for grant at December 31, 1996............................................................................................ 805,932 1995............................................................................................ 1,227,066 1994............................................................................................ 882,000
The Company's previous Long-term Incentive Plan, which had been adopted in 1992 (the "1992 Plan") and provided for contingent awards of restricted shares of common stock and cash to certain key employees, was replaced by the 1995 Plan. The payment of the cash portion of awards granted under the 1992 Plan will depend on the extent to which the Company has met certain long-term performance goals as established by a committee of outside directors. The compensation related to this program is amortized over the related five-year restricted periods. Under the 1992 Plan, 1,800,000 shares had been reserved for issuance, of which 133,176 and 249,655 shares were granted in 1995 and 1994, respectively. The Company applies APB Opinion 25 and related Interpretations in accounting for its plans. Accordingly, no recognition is given to stock options until they are exercised, at which time the option price received is credited to common stock. The charge to compensation cost related to the restricted shares was $1.5 million, $3.8 million and $3.6 million for 1996, 1995 and 1994, respectively. In 1996, prior cash awards that were accrued have been deemed to be not payable due to the financial results of the Company. Effective January 1, 1996, the Company adopted Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), by electing to continue to apply the intrinsic value-based method of accounting for stock-based compensation. Had compensation cost been determined on the basis of fair value pursuant to SFAS 123, net income and earnings per share would have been reduced as follows:
1996 1995 ------------------------- ------------------------- AS REPORTED PRO FORMA AS REPORTED PRO FORMA ------------ ----------- ------------ ----------- Net income......................................................... $ (126.2) $ (130.0) $ 255.5 $ 254.2 Primary earnings per share......................................... (1.35) (1.39) 2.63 2.61 Fully diluted earnings per share................................... n/a n/a 2.24 2.23
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions: for grants in both years a dividend yield of 4.2 percent; expected 48 STONE CONTAINER CORPORATION AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 15--COMMON STOCK (CONTINUED) lives of 6 years; and expected volatility of 47 percent; for grants made in 1996 and 1995 risk free interest rates of 5.5 percent and 7.2 percent, respectively. NOTE 16--RELATED PARTY TRANSACTIONS The Company sold paperboard, market pulp and fiber to and purchased containerboard and kraft paper from various non-consolidated affiliates. Such transactions were primarily at market prices. The Company also paid a commission fee to Stone-Consolidated pursuant to a sales agency agreement expiring December 31, 2004 and paid fees for services rendered by Stone-Consolidated. The amounts included in the table below include transactions with Stone-Consolidated since November 1, 1995, with Florida Coast since June 1, 1996 and with S&G since July 12, 1996. (See also Note 3). The following table summarizes the Company's related party transactions with its non-consolidated affiliates for each year presented:
YEAR ENDED DECEMBER 31, ------------------------------- (IN MILLIONS) 1996 1995 1994 - ---------------------------------------------------------------------------------------- --------- --------- --------- Net sales to/(purchases from)........................................................... $ 183.0 $ 211.2 $ 147.1 Net receivable from/(payable to)........................................................ 45.9 40.5 37.9 Commissions and fees for services received.............................................. 10.4 2.3 --
The Company had outstanding loans and interest receivable from non-consolidated affiliates of approximately $44.4 million and $9.9 million at December 31, 1996 and 1995, respectively. Additionally, the Company held securities of a non-consolidated affiliate of approximately $40.0 million at December 31, 1996. NOTE 17--ADDITIONAL INFORMATION RELATING TO THE CONSOLIDATED FINANCIAL STATEMENTS OTHER OPERATING (INCOME) EXPENSE, NET: The major components of other operating (income) expense--net are as follows:
YEAR ENDED DECEMBER 31, ------------------------------- (IN MILLIONS) 1996 1995 1994 - --------------------------------------------------------------------------------------------- --------- --------- --------- (Gains) losses on sales of investments or assets............................................. $ 5.4 $ -- $ (13.8) Gain from an involuntary conversion at a paper mill.......................................... -- -- (22.0) Other........................................................................................ -- -- 1.4 --------- --------- --------- Total other operating (income) expense--net.................................................. $ 5.4 $ -- $ (34.4) --------- --------- --------- --------- --------- ---------
OTHER (INCOME) EXPENSE, NET: The major components of other (income) expense--net are as follows:
YEAR ENDED DECEMBER 31, ------------------------------- (IN MILLIONS) 1996 1995 1994 - ----------------------------------------------------------------------------------------- --------- --------- --------- Interest income.......................................................................... $ (16.1) $ (15.5) $ (20.9) Foreign currency transaction (gains) losses.............................................. .5 (8.1) 15.8 Other.................................................................................... (5.6) (9.5) (3.8) --------- --------- --------- Total other (income) expense--net........................................................ $ (21.2) $ (33.1) $ (8.9) --------- --------- --------- --------- --------- ---------
INTEREST EXPENSE:
YEAR ENDED DECEMBER 31, ------------------------------- (IN MILLIONS) 1996 1995 1994 - ---------------------------------------------------------------------------------------- --------- --------- --------- Total interest cost incurred............................................................ $ 425.2 $ 473.5 $ 460.7 Interest capitalized.................................................................... (11.7) (13.2) (4.7) --------- --------- --------- Interest expense........................................................................ $ 413.5 $ 460.3 $ 456.0 --------- --------- --------- --------- --------- ---------
49 STONE CONTAINER CORPORATION AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 17--ADDITIONAL INFORMATION RELATING TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) PROVISION FOR DOUBTFUL ACCOUNTS AND NOTES RECEIVABLE: Selling, general and administrative expenses include provisions for doubtful accounts and notes receivable of $5.5 million for 1996, $6.7 million for 1995 and $6.6 million for 1994. ASSETS HELD FOR SALE: The Company has ceased operations of certain non-core wood products facilities and is liquidating such assets as appropriate opportunities are presented. These net assets which are included in other current assets in the Consolidated Balance Sheets aggregated approximately $18 million and $32 million at December 31, 1996 and 1995, respectively. INSURANCE RECEIVABLE: As a result of the 1994 Panama City digester accident, the Company is seeking recovery from its insurance carriers for both the losses to property and the losses as result of business interruption. A partial recovery of approximately $31 million has been received by the Company from certain carriers, claims of approximately $9 million have been committed to be paid and claims of approximately $43 million covering the remaining portion of such losses are still pending. LONG-TERM NOTE RECEIVABLE: The Company had a net receivable from a domestic customer of approximately $58 million and $74 million at December 31, 1996 and 1995, respectively. Of these amounts, approximately $44 million and $61 million, respectively, are included in other long-term assets with the remaining amounts reflected in accounts and notes receivable in the Company's Consolidated Balance Sheets. This seven year interest bearing note receivable requires quarterly payments which commenced in the first quarter of 1995. ACCRUED AND OTHER CURRENT LIABILITIES: The major components of accrued and other current liabilities are as follows:
DECEMBER 31, -------------------- (IN MILLIONS) 1996 1995 - ----------------------------------------------------------------------------------------------- --------- --------- Accrued interest............................................................................... $ 93.4 $ 88.1 Accrued payroll, related taxes and employee benefits........................................... 70.8 87.7 Other.......................................................................................... 137.5 120.8 --------- --------- Total accrued and other current liabilities.................................................... $ 301.7 $ 296.6 --------- --------- --------- ---------
OTHER LONG-TERM LIABILITIES: Included in other long-term liabilities at December 31, 1996 and 1995 is approximately $36 million and $42 million, respectively, of deferred income relating to the October 1992 sale of an energy contract at the Company's Hopewell mill. This amount is being amortized over a 12-year period. NOTE 18--COMMITMENTS AND CONTINGENCIES At December 31, 1996, the Company had commitments outstanding for capital expenditures under purchase orders and contracts of approximately $14 million. SVCPI (which is a 90 percent owned indirect subsidiary of the Company) and CITIC B.C. each own 50 percent of the assets comprising the Celgar Pulp mill located in Castlegar, British Columbia. Each of SVCPI and CITIC B.C. borrowed equal amounts of money from a group of banks (the "Lenders") to finance the expansion of the Celgar mill. The assets of the mill are cross collateralized supporting the loans of CITIC B.C. and SVCPI. In June 1996, CITIC B.C. defaulted on its loan and as a result the Lenders gave CITIC B.C. and SVCPI a notice of termination of CITIC B.C.'s loan. SVCPI elected to give the Lenders notice that, pursuant to the loan agreement, it would elect to purchase CITIC B.C.'s share of the Celgar mill assets or find a third party buyer. The purchase by SVCPI would include the assumption of CITIC B.C.'s debt. The notice by SVCPI imposed a six month moratorium on the Lenders from pursuing their rights. 50 STONE CONTAINER CORPORATION AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 18--COMMITMENTS AND CONTINGENCIES (CONTINUED) On January 18, 1997, SCVPI cured the CITIC B.C. default and gave notice to take possession of the assets owned by CITIC B.C. CITIC B.C. initiated a suit to enjoin SVCPI from such action. Currently, the joint venture partners are arbitrating a dispute over whether or not SVCPI had the right to give notice to take possession of the mill. The Company's operations are subject to extensive environmental regulation by federal, state and local authorities in the United States and regulatory authorities with jurisdiction over its foreign operations. The Company has in the past made significant capital expenditures to comply with water, air and solid and hazardous waste regulations and expects to make significant expenditures in the future. Capital expenditures for environmental control equipment and facilities were approximately $46 million in 1996, and the Company anticipates that 1997 and 1998 environmental capital expenditures will approximate $33 million and $43 million, respectively. The majority of the 1998 expenditures relate to the amounts that the Company currently anticipates will be required once final "cluster rules" described in "Environmental Issues" on pages 17-18 of the MD&A are adopted. Although capital expenditures for environmental control equipment and facilities and compliance costs in future years will depend on legislative and technological developments that cannot be predicted at this time, the Company anticipates that these costs will increase when final "cluster rules" are adopted and as other environmental regulations become more stringent. See also "Environmental Issues" on pages 17-18 of the MD&A for further environmental matters. Refer to Notes 11, 12 and 13 for further discussion of the Company's debt, hedging and lease commitments. Additionally, the Company is involved in certain litigation primarily arising in the normal course of business. In the opinion of management, the Company's liability under any pending litigation would not materially affect its financial condition, results of operations or liquidity. NOTE 19--SEGMENT AND GEOGRAPHIC INFORMATION BUSINESS SEGMENTS: As a result of the November 1995 de-consolidation of Stone-Consolidated (see Note 4) and the integrated nature of the Company's principal consolidated operations, the Company now operates in a single business--the production and sale of commodity pulp, paper and packaging products. Accordingly, business segment reporting is no longer presented. Financial information by business segment for prior years is summarized as follows:
DEPRECIATION INCOME AND CAPITAL (IN MILLIONS) SALES (LOSS)(1) AMORTIZATION ASSETS EXPENDITURES - -------------------------------------------------------- ---------- ------------- ------------- ------------- ------------ 1995 - -------------------------------------------------------- Paperboard and paper packaging.......................... $ 5,405.8 $ 943.6 $ 203.5 $ 3,536.2 $ 198.3 White paper and other................................... 2,010.6 367.7 158.4 1,347.2 183.2 Intersegment sales(4)................................... (65.2) ---------- ------------- ------------- ------------- ------------ 7,351.2 1,311.3 361.9 4,883.4 381.5 Interest expense........................................ (460.3) Foreign currency gains.................................. 8.1 General corporate....................................... (64.4)(2) 9.9 1,515.5(3) 5.0 ---------- ------------- ------------- ------------- ------------ Total................................................... $ 7,351.2 $ 794.7 $ 371.8 $ 6,398.9 $ 386.5 ---------- ------------- ------------- ------------- ------------ ---------- ------------- ------------- ------------- ------------
51 STONE CONTAINER CORPORATION AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 19--SEGMENT AND GEOGRAPHIC INFORMATION (CONTINUED)
DEPRECIATION INCOME AND CAPITAL SALES (LOSS)(1) AMORTIZATION ASSETS EXPENDITURES ---------- ------------- ------------- ------------- ------------ 1994 - -------------------------------------------------------- Paperboard and paper packaging.......................... $ 4,241.5 $ 354.2 $ 199.1 $ 3,440.1 $ 114.6 White paper and other................................... 1,549.6 25.4 147.3 2,884.4 114.0 Intersegment sales(4)................................... (42.4) ---------- ------------- ------------- ------------- ------------ 5,748.7 379.6 346.4 6,324.5 228.6 Interest expense........................................ (456.0) Foreign currency losses................................. (15.8) General corporate....................................... (70.9)(2) 12.5 680.4(3) 4.0 ---------- ------------- ------------- ------------- ------------ Total................................................... $ 5,748.7 $ (163.1) $ 358.9 $ 7,004.9 $ 232.6 ---------- ------------- ------------- ------------- ------------ ---------- ------------- ------------- ------------- ------------
- --------- (1) Income (loss) before taxes, minority interest, extraordinary charges and cumulative effect of accounting change. (2) Included equity in net income (loss) of non-consolidated vertically integrated affiliates as follows: Paperboard and paper packaging segment $4.2 in 1995 and $(1.4) in 1994 and White paper and other segment $15.7 in 1995, and $(6.3) in 1994. (3) Included investments in non-consolidated vertically integrated affiliates as follows: Paperboard and paper packaging segment $85.8 in 1995 and $82.7 in 1994 and White paper and other segment $1,010.4 in 1995 and $263.1 in 1994. (4) Intersegment sales were accounted for at transfer prices which approximate market prices. GEOGRAPHIC SEGMENTS: The table below provides financial information for the Company's operations based on the region in which the operations are located.
TRADE INTER-AREA TOTAL INCOME (IN MILLIONS) SALES SALES SALES (LOSS)(3) ASSETS - ------------------------------------------------------- --------- ---------- --------- ---------- ---------- 1996 - ------------------------------------------------------- United States.......................................... $ 4,223.5 $ 33.0 $ 4,256.5 $ 243.7 $2,961.2 Canada................................................. 309.6 54.5 364.1 (15.1) 916.4 Europe and other....................................... 608.7 -- 608.7 15.9 669.8 --------- ---------- --------- ---------- ---------- 5,141.8 87.5 5,229.3 244.5 4,547.4 Interest expense....................................... (413.5) Foreign currency transaction losses.................... (.5) General corporate...................................... (19.6)(1) 1,806.4(2) Inter-area eliminations................................ (87.5) (87.5) -- --------- ---------- --------- ---------- ---------- Total.................................................. $ 5,141.8 $ -- $ 5,141.8 $ (189.1) $6,353.8 --------- ---------- --------- ---------- ---------- --------- ---------- --------- ---------- ----------
52 STONE CONTAINER CORPORATION AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 19--SEGMENT AND GEOGRAPHIC INFORMATION (CONTINUED)
TRADE INTER-AREA TOTAL INCOME (IN MILLIONS) SALES SALES SALES (LOSS)(3) ASSETS - ------------------------------------------------------- --------- ---------- --------- ---------- ---------- 1995 - ------------------------------------------------------- United States.......................................... $ 5,238.7 $ 46.1 $ 5,284.8 $ 941.9 $3,313.4 Canada................................................. 1,276.8 60.2 1,337.0 334.3 942.5 Europe and other....................................... 835.7 -- 835.7 35.1 627.5 --------- ---------- --------- ---------- ---------- 7,351.2 106.3 7,457.5 1,311.3 4,883.4 Interest expense....................................... (460.3) Foreign currency transaction gains..................... 8.1 General corporate...................................... (64.4)(1) 1,515.5(2) Inter-area eliminations................................ (106.3) (106.3) -- --------- ---------- --------- ---------- ---------- Total.................................................. $ 7,351.2 $ -- $ 7,351.2 $ 794.7 $6,398.9 --------- ---------- --------- ---------- ---------- --------- ---------- --------- ---------- ----------
TRADE INTER-AREA TOTAL INCOME (IN MILLIONS) SALES SALES SALES (LOSS)(3) ASSETS - ------------------------------------------------------- --------- ---------- --------- ---------- ---------- 1994 - ------------------------------------------------------- United States.......................................... $ 4,187.7 $ 23.9 $ 4,211.6 $ 344.0 $3,393.8 Canada................................................. 942.0 36.0 978.0 20.3 2,152.8 Europe................................................. 619.0 -- 619.0 15.3 777.9 --------- ---------- --------- ---------- ---------- 5,748.7 59.9 5,808.6 379.6 6,324.5 Interest expense....................................... (456.0) Foreign currency transaction losses.................... (15.8) General corporate...................................... (70.9)(1) 680.4(2) Inter-area eliminations................................ (59.9) (59.9) -- --------- ---------- --------- ---------- ---------- Total.................................................. $ 5,748.7 $ -- $ 5,748.7 $ (163.1) $7,004.9 --------- ---------- --------- ---------- ---------- --------- ---------- --------- ---------- ----------
- --------- (1) Includes equity in net income (loss) of non-consolidated vertically integrated affiliates as follows: United States $(2.0) in 1996, $3.5 in 1995 and $.6 in 1994; Canada $74.5 in 1996, $28.6 in 1995 and $(2.3) in 1994; and other $(9.3) in 1996, $(12.2) in 1995 and $(6.0) in 1994. (2) Includes investments in non-consolidated vertically integrated affiliates as follows: United States $37.4 in 1996, $9.8 in 1995 and $1.5 in 1994; Canada $1,077.9 in 1996, $1,022.3 in 1995 and $295.2 in 1994; and other $69.8 in 1996, $64.1 in 1995 and $49.1 in 1994. (3) Income (loss) before taxes, minority interest, extraordinary charges and cumulative effect of accounting change. The Company's export sales from the United States were approximately $470 million, $839 million and $476 million for 1996, 1995 and 1994, respectively. 53 STONE CONTAINER CORPORATION AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 20--SUMMARY OF QUARTERLY DATA (UNAUDITED) The following table summarizes quarterly financial data for 1996 and 1995:
QUARTER YEAR ---------------------------------------------- ---------- (IN MILLIONS EXCEPT PER SHARE) FIRST SECOND THIRD FOURTH - ------------------------------------------------------------------ ---------- ---------- ---------- ---------- 1996 - ------------------------------------------------------------------ Net sales......................................................... $ 1,321.5 $ 1,282.3 $ 1,295.1 $ 1,242.9 $ 5,141.8 Cost of products sold............................................. 972.2 1,013.0 1,037.1 1,063.1 4,085.4 Depreciation and amortization..................................... 79.0 79.0 78.2 78.6 314.8 Income (loss) before extraordinary charges........................ 32.4 (21.1) (47.7) (86.1) (122.5) Extraordinary charges from early extinguishments of debt.......... -- -- (3.3) (.3) (3.7) ---------- ---------- ---------- ---------- ---------- Net income (loss)................................................. 32.4 (21.1) (51.0) (86.4) (126.2) ---------- ---------- ---------- ---------- ---------- Per share of common stock--primary: Income (loss) before extraordinary charges........................ .31 (.23) (.50) (.89) (1.32) Extraordinary charges from early extinguishments of debt.......... -- -- (.03) -- (.03) ---------- ---------- ---------- ---------- ---------- Net income (loss)--primary........................................ .31 (.23) (.53) (.89) (1.35) ---------- ---------- ---------- ---------- ---------- Net income--fully diluted......................................... .30 * * * * ---------- ---------- ---------- ---------- ---------- Cash dividends per common share................................... .15 .15 .15 .15 .60 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
QUARTER YEAR ---------------------------------------------- ---------- (IN MILLIONS EXCEPT PER SHARE) FIRST SECOND THIRD FOURTH(1) - ------------------------------------------------------------------ ---------- ---------- ---------- ---------- 1995 - ------------------------------------------------------------------ Net sales......................................................... $ 1,819.3 $ 1,963.6 $ 1,924.0 $ 1,644.4 $ 7,351.2 Cost of products sold............................................. 1,288.7 1,382.8 1,330.4 1,167.0 5,168.9 Depreciation and amortization..................................... 96.0 92.7 97.1 86.1 371.8 Income before extraordinary charges............................... 96.8 131.0 129.0 87.7 444.5 Extraordinary charges from early extinguishments of debt.......... -- (3.1) (177.9) (8.0) (189.0) ---------- ---------- ---------- ---------- ---------- Net income (loss)................................................. 96.8 127.9 (48.9) 79.7 255.5 ---------- ---------- ---------- ---------- ---------- Per share of common stock--primary: Income before extraordinary charges............................... 1.04 1.42 1.32 .86 4.64 Extraordinary charges from early extinguishments of debt.......... -- (.03) (1.85) (.08) (2.01) ---------- ---------- ---------- ---------- ---------- Net income (loss)--primary........................................ 1.04 1.39 (.53) .78 2.63 ---------- ---------- ---------- ---------- ---------- Per share of common stock--fully diluted: Income before extraordinary charges............................... .85 1.12 1.12 .80 3.89 Extraordinary charges from early extinguishments of debt.......... -- (.03) (1.57) (.07) (1.65) ---------- ---------- ---------- ---------- ---------- Net income (loss)--fully diluted.................................. .85 1.09 (.45) .73 2.24 ---------- ---------- ---------- ---------- ---------- Cash dividends per common share................................... -- -- .15 .15 .30 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
- --------- (1) As a result of the Amalgamation discussed in Note 4, the Company, effective November 1, 1995, began reporting Stone-Consolidated under the equity method of accounting. * Fully diluted earnings per share are not disclosed because the amounts are anti-dilutive. 54 Report of Independent Accountants on Financial Statement Schedule ----------------------------------- To the Board of Directors of Stone Container Corporation Our audits of the consolidated financial statements referred to in our report dated February 10, 1997, except as to Note 2, which is as of February 14, 1997, appearing in this Annual Report on Form 10-K (such report contains an explanatory paragraph referring to the change in accounting method discussed in Note 1 to the Company's consolidated financial statements) also included an audit of the Financial Statement Schedule listed and appearing in Item 14(a)2 of this Form 10-K. In our opinion, the Financial Statement Schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. PRICE WATERHOUSE LLP Chicago, Illinois February 10, 1997, except as to Note 2, which is as of February 14, 1997. 55 STONE CONTAINER CORPORATION AND SUBSIDIARIES SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS AND RESERVES (IN MILLIONS)
COLUMN C COLUMN B ----------- ----------- ADDITIONS BALANCE CHARGED COLUMN A AT TO COSTS COLUMN D - --------------------------------------------------------------------------------- BEGINNING AND ----------- DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS - --------------------------------------------------------------------------------- ----------- ----------- ----------- Allowance for doubtful accounts and notes and sales returns and allowances: Year ended December 31, 1996................................................... $ 22.1 $ 14.9 $ 12.7 Year ended December 31, 1995................................................... $ 20.2 $ 14.6 $ 12.7 Year ended December 31, 1994................................................... $ 19.3 $ 13.0 $ 12.1 COLUMN E ----------- COLUMN A BALANCE - --------------------------------------------------------------------------------- AT END OF DESCRIPTION PERIOD - --------------------------------------------------------------------------------- ----------- Allowance for doubtful accounts and notes and sales returns and allowances: Year ended December 31, 1996................................................... $ 24.3 Year ended December 31, 1995................................................... $ 22.1 Year ended December 31, 1994................................................... $ 20.2
56 EX-4.(U) 2 EXHIBIT 4(U) STONE CONTAINER FINANCE COMPANY OF CANADA as Issuer and STONE CONTAINER CORPORATION, as Guarantor TO THE BANK OF NEW YORK, as Trustee ------------------- Indenture Dated as of August 16, 1996 ------------------- up to $200,000,000 11-1/2% Senior Notes due 2006 ------------------- TABLE OF CONTENTS(1) [To be Updated] PAGE Parties Recitals of the Company ARTICLE ONE Definitions and Other Provisions of General Application SECTION 101. Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1991 Indenture . . . . . . . . . . . . . . . . . . . . . . . . 2 1996 Senior Notes. . . . . . . . . . . . . . . . . . . . . . . 2 Acquiring Person . . . . . . . . . . . . . . . . . . . . . . . 2 Act. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Additional Amounts . . . . . . . . . . . . . . . . . . . . . . 3 Affiliate. . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Asset Disposition. . . . . . . . . . . . . . . . . . . . . . . 3 Asset Disposition Offer. . . . . . . . . . . . . . . . . . . . 3 Asset Disposition Offer Amount . . . . . . . . . . . . . . . . 3 Asset Disposition Payment Date . . . . . . . . . . . . . . . . 3 Assumption . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Authenticating Agent . . . . . . . . . . . . . . . . . . . . . 4 Authority. . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Bankruptcy Law . . . . . . . . . . . . . . . . . . . . . . . . 4 Board of Directors . . . . . . . . . . . . . . . . . . . . . . 4 Board Resolution . . . . . . . . . . . . . . . . . . . . . . . 4 Business Day . . . . . . . . . . . . . . . . . . . . . . . . . 4 Capital Stock. . . . . . . . . . . . . . . . . . . . . . . . . 4 Capitalized Lease Obligation . . . . . . . . . . . . . . . . . 4 Change of Control. . . . . . . . . . . . . . . . . . . . . . . 5 Change of Control Date; Change of Control Offer; Change of Control Payment Date . . . . . . . . . . . . . . . . . . . 5 Commission . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Commodities Agreement. . . . . . . . . . . . . . . . . . . . . 5 Company. . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Company Event of Default . . . . . . . . . . . . . . . . . . . 5 Company Request; Company Order . . . . . . . . . . . . . . . . 5 Consolidated Amortization Expense. . . . . . . . . . . . . . . 5 Consolidated Cash Flow Available for Fixed Charges . . . . . . 5 (1) NOTE: This table of contents shall not, for any purpose, be deemed to be a part of this Indenture. Consolidated Depreciation Expense. . . . . . . . . . . . . . . 5 Consolidated Free Cash Flow. . . . . . . . . . . . . . . . . . 6 Consolidated Income Tax Expense. . . . . . . . . . . . . . . . 6 Consolidated Interest Coverage Ratio . . . . . . . . . . . . . 6 Consolidated Interest Expense. . . . . . . . . . . . . . . . . 6 Consolidated Net Income. . . . . . . . . . . . . . . . . . . . 6 Consolidated Net Worth . . . . . . . . . . . . . . . . . . . . 7 Continental Guaranty . . . . . . . . . . . . . . . . . . . . . 7 Continuing Director. . . . . . . . . . . . . . . . . . . . . . 7 Corporate Trust Office . . . . . . . . . . . . . . . . . . . . 7 Corporation. . . . . . . . . . . . . . . . . . . . . . . . . . 7 Covenant Defeasance. . . . . . . . . . . . . . . . . . . . . . 7 Credit Agreements. . . . . . . . . . . . . . . . . . . . . . . 8 Currency Agreement . . . . . . . . . . . . . . . . . . . . . . 8 Custodian. . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Default. . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Defaulted Interest . . . . . . . . . . . . . . . . . . . . . . 8 Defeasance . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Deficiency Amount. . . . . . . . . . . . . . . . . . . . . . . 8 Deficiency Date. . . . . . . . . . . . . . . . . . . . . . . . 8 Deficiency Offer . . . . . . . . . . . . . . . . . . . . . . . 8 Deficiency Offer Amount. . . . . . . . . . . . . . . . . . . . 8 Deficiency Payment Date. . . . . . . . . . . . . . . . . . . . 8 Depositary . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Dollars; $ . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Event of Default . . . . . . . . . . . . . . . . . . . . . . . 9 Exchange Act . . . . . . . . . . . . . . . . . . . . . . . . . 9 First Mortgage Note Indenture. . . . . . . . . . . . . . . . . 9 First Mortgage Notes . . . . . . . . . . . . . . . . . . . . . 9 GAAP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Global Note. . . . . . . . . . . . . . . . . . . . . . . . . . 8 Global Note Holder . . . . . . . . . . . . . . . . . . . . . . 8 Guaranty . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Holder; Securityholder . . . . . . . . . . . . . . . . . . . . 9 Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . 9 Indenture. . . . . . . . . . . . . . . . . . . . . . . . . . .10 Initial Interest Rate. . . . . . . . . . . . . . . . . . . . .10 Initial Purchaser. . . . . . . . . . . . . . . . . . . . . . .10 Institutional Accredited Investor. . . . . . . . . . . . . . .10 Interest Payment Date. . . . . . . . . . . . . . . . . . . . .10 Interest Swap Obligations. . . . . . . . . . . . . . . . . . .10 Investment Grade Date. . . . . . . . . . . . . . . . . . . . .10 Issue Date . . . . . . . . . . . . . . . . . . . . . . . . . .11 Lien . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11 ii Maturity . . . . . . . . . . . . . . . . . . . . . . . . . . .11 Minimum Subordinated Capital Base. . . . . . . . . . . . . . .11 New Credit Agreement . . . . . . . . . . . . . . . . . . . . .11 Non-U.S. Person. . . . . . . . . . . . . . . . . . . . . . . .11 Note Purchase Agreement. . . . . . . . . . . . . . . . . . . .11 Officer. . . . . . . . . . . . . . . . . . . . . . . . . . . .11 Officer's Certificate. . . . . . . . . . . . . . . . . . . . .12 Opinion of Counsel . . . . . . . . . . . . . . . . . . . . . .12 Ordinary Course of Business Liens. . . . . . . . . . . . . . .12 Outstanding. . . . . . . . . . . . . . . . . . . . . . . . . .13 Participant. . . . . . . . . . . . . . . . . . . . . . . . . .14 Paying Agent . . . . . . . . . . . . . . . . . . . . . . . . .14 Permitted Existing Indebtedness of an Acquired Person. . . . .14 Permitted Indebtedness . . . . . . . . . . . . . . . . . . . .14 Permitted Liens. . . . . . . . . . . . . . . . . . . . . . . .17 Permitted Refinancing Indebtedness . . . . . . . . . . . . . .19 Permitted Stone Canada Indebtedness. . . . . . . . . . . . . .20 Permitted Subordinated Indebtedness. . . . . . . . . . . . . .20 Person . . . . . . . . . . . . . . . . . . . . . . . . . . . .21 Place of Payment . . . . . . . . . . . . . . . . . . . . . . .21 Predecessor Senior Note. . . . . . . . . . . . . . . . . . . .21 Private Placement Legend . . . . . . . . . . . . . . . . . . .20 QIB. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20 Rate Determination Period. . . . . . . . . . . . . . . . . . .21 Receivables. . . . . . . . . . . . . . . . . . . . . . . . . .21 Record Date. . . . . . . . . . . . . . . . . . . . . . . . . .21 Redeemable Stock . . . . . . . . . . . . . . . . . . . . . . .21 Redemption Date. . . . . . . . . . . . . . . . . . . . . . . .22 Redemption Price . . . . . . . . . . . . . . . . . . . . . . .22 Register" and "Registrar . . . . . . . . . . . . . . . . . . .22 Regulation S . . . . . . . . . . . . . . . . . . . . . . . . .21 Reset Date . . . . . . . . . . . . . . . . . . . . . . . . . .22 Reset Rate . . . . . . . . . . . . . . . . . . . . . . . . . .22 Restricted Note. . . . . . . . . . . . . . . . . . . . . . . .22 Responsible Officer. . . . . . . . . . . . . . . . . . . . . .22 Restricted Payment . . . . . . . . . . . . . . . . . . . . . .22 Restricted Subsidiary. . . . . . . . . . . . . . . . . . . . .22 Rule 144 . . . . . . . . . . . . . . . . . . . . . . . . . . .21 Rule 144A. . . . . . . . . . . . . . . . . . . . . . . . . . .21 Securities Act . . . . . . . . . . . . . . . . . . . . . . . .21 Senior Indebtedness. . . . . . . . . . . . . . . . . . . . . .22 Senior Notes . . . . . . . . . . . . . . . . . . . . . . . . .23 Seven Year Treasury Rate . . . . . . . . . . . . . . . . . . .23 Special Record Date. . . . . . . . . . . . . . . . . . . . . .23 iii Specified Bank Debt. . . . . . . . . . . . . . . . . . . . . .23 Stated Maturity. . . . . . . . . . . . . . . . . . . . . . . .24 Stone Canada . . . . . . . . . . . . . . . . . . . . . . . . .24 Stone Canada Group . . . . . . . . . . . . . . . . . . . . . .24 Subordinated Capital Base. . . . . . . . . . . . . . . . . . .24 Subordinated Indebtedness. . . . . . . . . . . . . . . . . . .25 Subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . .25 Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . .25 Ten Year Treasury Rate . . . . . . . . . . . . . . . . . . . .25 Trustee. . . . . . . . . . . . . . . . . . . . . . . . . . . .26 Trust Indenture Act. . . . . . . . . . . . . . . . . . . . . .26 U.S. Government Obligations. . . . . . . . . . . . . . . . . .26 Unrestricted Subsidiary. . . . . . . . . . . . . . . . . . . .26 Vice President . . . . . . . . . . . . . . . . . . . . . . . .26 Wholly Owned Subsidiary. . . . . . . . . . . . . . . . . . . .26 SECTION 102. Compliance Certificates and Opinions. . . . . . . . . . . . . .26 SECTION 103. Form of Documents Delivered to Trustee. . . . . . . . . . . . .27 SECTION 104. Acts of Holders . . . . . . . . . . . . . . . . . . . . . . . .28 SECTION 105. Notices, etc., to Trustee and Company . . . . . . . . . . . . .29 SECTION 106. Notice to Holders; Waiver . . . . . . . . . . . . . . . . . . .29 SECTION 107. Express Incorporation of the Trust Indenture Act; Conflict with Trust Indenture Act. . . . . . . . . . . . . .30 SECTION 108. Effect of Headings and Table of Contents. . . . . . . . . . . .30 SECTION 109. Successors and Assigns. . . . . . . . . . . . . . . . . . . . .30 SECTION 110. Separability Clause . . . . . . . . . . . . . . . . . . . . . .30 SECTION 111. Benefits of Indenture . . . . . . . . . . . . . . . . . . . . .30 SECTION 112. Governing Law . . . . . . . . . . . . . . . . . . . . . . . . .30 SECTION 113. Legal Holidays. . . . . . . . . . . . . . . . . . . . . . . . .30 SECTION 114. No Recourse Against Others. . . . . . . . . . . . . . . . . . .31 SECTION 115. Consent to Jurisdiction and Service of Process. . . . . . . . .31 SECTION 116. Incorporation by Reference to Trust Indenture Act . . . . . . .32 ARTICLE TWO Senior Note Forms SECTION 201. Forms Generally . . . . . . . . . . . . . . . . . . . . . . . .33 SECTION 202. Form of Face of Senior Note . . . . . . . . . . . . . . . . . .34 SECTION 203. Form of Reverse of Senior Note. . . . . . . . . . . . . . . . .38 SECTION 204. Form of Trustee's Certificate of Authentication . . . . . . . .45 SECTION 205. CUSIP Number. . . . . . . . . . . . . . . . . . . . . . . . . .45 iv ARTICLE THREE The Senior Notes SECTION 301. Title and Terms . . . . . . . . . . . . . . . . . . . . . . . .45 SECTION 302. Denominations . . . . . . . . . . . . . . . . . . . . . . . . .46 SECTION 303. Execution, Authentication, Delivery and Dating. . . . . . . . .46 SECTION 304. Temporary Senior Notes. . . . . . . . . . . . . . . . . . . . .47 SECTION 305. Registration, Registration of Transfer and Exchange . . . . . .47 SECTION 306. Transfer and Exchange of Restricted Notes . . . . . . . . . . .49 SECTION 307. Mutilated, Destroyed, Lost and Stolen Senior Mortgage Notes . .53 SECTION 308. Payment of Interest; Interest Rights Preserved. . . . . . . . .54 SECTION 309. Persons Deemed Owners . . . . . . . . . . . . . . . . . . . . .55 SECTION 310. Cancellation. . . . . . . . . . . . . . . . . . . . . . . . . .55 SECTION 311. Computation of Interest . . . . . . . . . . . . . . . . . . . .55 ARTICLE FOUR Satisfaction and Discharge SECTION 401. Satisfaction and Discharge of Indenture . . . . . . . . . . . .56 SECTION 402. Application of Trust Money. . . . . . . . . . . . . . . . . . .57 ARTICLE FIVE Remedies SECTION 501. Events of Default and Company Events of Default . . . . . . . .57 SECTION 502. Acceleration of Maturity; Rescission and Annulment. . . . . . .59 SECTION 503. Collection of Indebtedness and Suits for Enforcement by Trustee . . . . . . . . . . . . . . . . . . . . . . . . .60 SECTION 504. Trustee May File Proofs of Claim. . . . . . . . . . . . . . . .61 SECTION 505. Trustee May Enforce Claims Without Possession of Senior Notes . . . . . . . . . . . . . . . . . . . . . . . .62 SECTION 506. Application of Money Collected. . . . . . . . . . . . . . . . .62 SECTION 507. Limitation on Suits . . . . . . . . . . . . . . . . . . . . . .62 SECTION 508. Unconditional Right of Holders to Receive Principal, Premium and Interest . . . . . . . . . . . . . . . . . . . . . . . .63 SECTION 509. Restoration of Rights and Remedies. . . . . . . . . . . . . . .63 SECTION 510. Rights and Remedies Cumulative. . . . . . . . . . . . . . . . .63 SECTION 511. Delay or Omission Not Waiver. . . . . . . . . . . . . . . . . .64 SECTION 512. Control by Holders. . . . . . . . . . . . . . . . . . . . . . .64 SECTION 513. Waiver of Past Defaults . . . . . . . . . . . . . . . . . . . .64 SECTION 514. Undertaking for Costs . . . . . . . . . . . . . . . . . . . . .65 SECTION 515. Waiver of Stay or Extension Laws. . . . . . . . . . . . . . . .65 ARTICLE SIX The Trustee SECTION 601. Certain Duties and Responsibilities of the Trustee. . . . . . .65 SECTION 602. Notice of Defaults. . . . . . . . . . . . . . . . . . . . . . .66 v SECTION 603. Certain Rights of Trustee . . . . . . . . . . . . . . . . . . .66 SECTION 604. Not Responsible for Recitals or Issuance of Senior Notes. . . .67 SECTION 605. May Hold Senior Notes . . . . . . . . . . . . . . . . . . . . .67 SECTION 606. Money Held in Trust . . . . . . . . . . . . . . . . . . . . . .68 SECTION 607. Compensation and Reimbursement. . . . . . . . . . . . . . . . .68 SECTION 608. Disqualification; Conflicting Interests . . . . . . . . . . . .69 SECTION 609. Corporate Trustee Required; Eligibility . . . . . . . . . . . .69 SECTION 610. Resignation and Removal; Appointment of Successor . . . . . . .69 SECTION 611. Acceptance of Appointment by Successor. . . . . . . . . . . . .70 SECTION 612. Merger, Conversion, Consolidation or Succession to Business . .71 SECTION 613. Preferential Collection of Claims Against Company . . . . . . .71 SECTION 614. Appointment of Authenticating Agent . . . . . . . . . . . . . .71 ARTICLE SEVEN Holders' Lists and Reports by the Trustee and the Issuer SECTION 701. Issuer to Furnish Trustee Names and Addresses of Holders. . . .73 SECTION 702. Preservation of Information; Communications to Holders. . . . .73 SECTION 703. Reports by Trustee. . . . . . . . . . . . . . . . . . . . . . .74 SECTION 704. Reports by Company. . . . . . . . . . . . . . . . . . . . . . .74 ARTICLE EIGHT Consolidation, Merger, Lease, Sale or Transfer SECTION 801. When Company May Merge, etc . . . . . . . . . . . . . . . . . .75 SECTION 802. Senior Notes to Be Secured in Certain Events. . . . . . . . . .77 SECTION 803. Officer's Certificate; Opinion of Counsel . . . . . . . . . . .77 SECTION 804. Successor Corporation Substituted . . . . . . . . . . . . . . .77 ARTICLE NINE Supplements to the Indenture SECTION 901. Supplemental Indentures Without Consent of Holders. . . . . . .78 SECTION 902. Supplemental Indentures with Consent of Holders . . . . . . . .78 SECTION 903. Execution of Supplemental Indentures. . . . . . . . . . . . . .79 SECTION 904. Effect of Supplemental Indentures . . . . . . . . . . . . . . .80 SECTION 905. Conformity with Trust Indenture Act . . . . . . . . . . . . . .80 SECTION 906. Reference in Senior Notes to Supplemental Indentures. . . . . .80 ARTICLE TEN Covenants SECTION 1001. Payment of Principal, Premium and Interest . . . . . . . . . .80 SECTION 1002. Maintenance of Office or Agency. . . . . . . . . . . . . . . .80 SECTION 1003. Money for Senior Notes Payments to Be Held in Trust. . . . . .81 vi SECTION 1004. Corporate Existence. . . . . . . . . . . . . . . . . . . . . .82 SECTION 1005. Payment of Taxes and Other Claims. . . . . . . . . . . . . . .83 SECTION 1006. Restriction on Dividends . . . . . . . . . . . . . . . . . . .83 SECTION 1007. Limitation on Future Liens and Guaranties. . . . . . . . . . .84 SECTION 1008. Limitation on Future Incurrence of Indebtedness. . . . . . . .86 SECTION 1009. Limitation on Asset Dispositions . . . . . . . . . . . . . . .86 SECTION 1010. Maintenance of Properties. . . . . . . . . . . . . . . . . . .90 SECTION 1011. Compliance Certificates. . . . . . . . . . . . . . . . . . . .91 SECTION 1012. Waiver of Stay, Extension or Usury Laws. . . . . . . . . . . .91 SECTION 1013. Change of Control. . . . . . . . . . . . . . . . . . . . . . .92 SECTION 1014. Payment of Additional Amounts. . . . . . . . . . . . . . . . .93 SECTION 1015. Waiver of Certain Covenants. . . . . . . . . . . . . . . . . .94 SECTION 1016. Certain Additional Issuer Covenants. . . . . . . . . . . . . .95 ARTICLE ELEVEN Maintenance of Subordinated Capital Base SECTION 1101. Maintenance of Subordinated Capital Base . . . . . . . . . . .95 SECTION 1102. Alternative Interest Rate Adjustment . . . . . . . . . . . . .97 ARTICLE TWELVE Guaranty SECTION 1201. Guaranty . . . . . . . . . . . . . . . . . . . . . . . . . . .98 SECTION 1202. Obligations of the Company Unconditional . . . . . . . . . . .99 SECTION 1203. Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . 100 ARTICLE THIRTEEN Defeasance And Covenant Defeasance SECTION 1301. Applicability of Article; Company's Option to Effect Defeasance or Covenant Defeasance . . . . . . . . . . . . 101 SECTION 1302. Defeasance and Discharge . . . . . . . . . . . . . . . . . . 101 SECTION 1303. Covenant Defeasance. . . . . . . . . . . . . . . . . . . . . 102 SECTION 1305. Deposited Money and Government Obligations to be Held in Trust; Other Miscellaneous Provisions . . . . . . . . . . 104 ARTICLE FOURTEEN Redemption of Securities SECTION 1401. Applicability of Article . . . . . . . . . . . . . . . . . . 104 SECTION 1401. Election to Redeem; Notice to Trustee. . . . . . . . . . . . 104 SECTION 1403. Selection by Trustee of the Senior Notes to Be Redeemed. . . 105 SECTION 1404. Notice of Redemption . . . . . . . . . . . . . . . . . . . . 105 SECTION 1405. Deposit of Redemption Price. . . . . . . . . . . . . . . . . 106 vii SECTION 1406. Senior Notes Payable on Redemption Date. . . . . . . . . . . 106 SECTION 1407. Senior Notes Redeemed in Part. . . . . . . . . . . . . . . . 106 EXHIBIT A FORM OF TRANSFER CERTIFICATE FOR TRANSFER TO A QIB EXHIBIT B FORM OF TRANSFER CERTIFICATE FOR TRANSFER TO AN INSTITUTIONAL ACCREDITED INVESTOR EXHIBIT C FORM OF INVESTMENT LETTER FOR INSTITUTIONAL ACCREDITED INVESTORS EXHIBIT D FORM OF TRANSFER CERTIFICATE FOR TRANSFER TO A NON-U.S. PERSON EXHIBIT E FORM OF INVESTMENT LETTER FOR REGULATION S PURCHASERS viii INDENTURE, dated as of August 16, 1996, between STONE CONTAINER FINANCE COMPANY OF CANADA (herein called the "Issuer"), an unlimited liability company duly organized and existing under the laws of Nova Scotia, STONE CONTAINER CORPORATION, a corporation duly constituted and existing under the laws of the State of Delaware (herein called the "Company"), and THE BANK OF NEW YORK, a New York banking corporation, as Trustee (herein called the "Trustee") having its Corporate Trust office at 101 Barclay Street, New York, New York 10286. RECITALS OF THE COMPANY The Issuer has duly authorized the creation of an issue of its 11-1/2% Senior Notes due 2006 (the "Senior Notes") of substantially the tenor and amount hereinafter set forth, and to provide therefor, and the Issuer and the Company have duly authorized the execution and delivery of this Indenture. All things necessary to make the Senior Notes, when executed by the Issuer and the Company and authenticated and delivered by the Trustee hereunder and duly issued by the Issuer, the valid obligations of the Issuer, and to make this Indenture a valid and binding agreement of the Issuer and the Company, in accordance with its terms, have been done. NOW, THEREFORE, THIS INDENTURE WITNESSETH: For and in consideration of the premises and the purchase of the Senior Notes by the Holders (as hereinafter defined) thereof, it is mutually covenanted and agreed, for the equal and proportionate benefit of all Holders as follows: ARTICLE ONE DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION SECTION 101. DEFINITIONS. For all purposes of this Indenture, except as otherwise expressly provided for unless the context otherwise requires: (1) the terms defined in this Article have the meanings assigned to them in this Article and include the plural as well as the singular; (2) all other terms used herein which are defined in the Trust Indenture Act, either directly or by reference therein, have the meanings assigned to them therein; (3) all accounting terms not otherwise defined herein have the meanings assigned to them in accordance with GAAP; (4) the word "including" (and with correlative meaning "include") means including, without limiting the generality of, any description preceding such term; and 1 (5) the words "herein", "hereof" and "hereunder" and other words of similar import refer to this Indenture as a whole and not to any particular Article, Section or other subdivision. Certain terms, used principally in Article Six, are defined in that Article. "11-7/8% Rating Adjustable Notes" means the Company's 11-7/8% Rating Adjustable Senior Notes issued under the 1996 Rating Adjustable Indenture on July 24, 1996. "1991 Indenture" means the indenture dated as of November 1, 1991 between the Company and The Bank of New York, as Trustee, as amended and supplemented to the date hereof and, unless otherwise indicated, from time to time after the date hereof. References herein to Indebtedness issued under the 1991 Indenture shall include any Indebtedness issued thereunder both before and after the date hereof. "1994 Senior Notes" means the Company's 11-1/2% Senior Notes due 2004 issued on October 12, 1994. "1994 Senior Notes Indenture" means the indenture dated as of October 12, 1994 between the Company and the Bank of New York, as Trustee, with respect to the 1994 Senior Notes, as amended and supplemented from time to time. "1996 Rating Adjustable Indenture" means the indenture dated as of July 24, 1996 between the Company and The Bank of New York, as Trustee, as amended and supplemented to the date hereof, including the First Supplemental Indenture thereto dated as of July 24, 1996, and, unless otherwise indicated, from time to time after the date hereof. References herein to Indebtedness issued under the 1996 Rating Adjustable Indenture shall include any Indebtedness issued thereunder both before and after the date hereof. "Acquiring Person" means any Person or group (as defined in Section 13(d)(3) of the Exchange Act) who or which, together with all affiliates and associates (as defined in Rule 12b-2 under the Exchange Act), becomes the beneficial owner of shares of common stock of the Company having more than 50% of the total number of votes that may be cast for the election of directors of the Company; PROVIDED, HOWEVER, that an Acquiring Person shall not include (i) the Company, (ii) any Subsidiary of the Company, (iii) any employee benefit plan of the Company or any Subsidiary of the Company or any entity holding common stock of the Company for or pursuant to the terms of any such plan, (iv) any descendant of Joseph Stone or the spouse of any such descendant, the estate of any such descendant or the spouse of any such descendant, any trust or other arrangement for the benefit of any such descendant or the spouse of any such descendant or any charitable organization established by any such descendant or the spouse of any such descendant (collectively, the "Stone Family"), or (v) any group which includes any member or members of the Stone Family and a majority of the common stock of the Company held by such group is beneficially owned by such member or members. Notwithstanding the foregoing, no Person shall become an "Acquiring Person" as the result of an acquisition of common stock by the Company which, by reducing the number of shares outstanding, increases the proportionate 2 number of shares beneficially owned by such Person to more than 50% or more of the common stock of the Company then outstanding; PROVIDED, HOWEVER, that if a Person shall become the beneficial owner of more than 50% or more of the common stock of the Company then outstanding by reason of share purchases by the Company and shall, after such share purchases by the Company, become the beneficial owner of any additional shares of common stock of the Company, then such Person shall be deemed to be an "Acquiring Person." "Act", when used with respect to any Holder, has the meaning specified in Section 104. "Additional Amounts" has the meaning specified in Section 1014. "Affiliate" of any specified Person means any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person. For the purposes of this definition, "control" when used with respect to any specified Person means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. "Asset Disposition" means any sale, transfer, sale-leaseback or other disposition of (i) shares of Capital Stock of a Restricted Subsidiary (other than directors' qualifying shares) or (ii) property or assets of the Company or any Restricted Subsidiary (other than a sale, transfer, sale-leaseback or other disposition of Receivables and other assets or property described in clause (vi) of the definition of Permitted Liens pursuant to a Receivables sale constituting Indebtedness pursuant to clause (ii) of the definition thereof); PROVIDED, HOWEVER, that an Asset Disposition shall not include any sale, transfer, sale-leaseback or other disposition (a) of Collateral (as defined in the First Mortgage Note Indenture while the First Mortgage Notes are outstanding), (b) of the shares, property or assets referred to in clause (i) and (ii) by a Restricted Subsidiary to the Company or to another Restricted Subsidiary or by the Company to a Restricted Subsidiary, (c) of defaulted Receivables for collection or (d) in the ordinary course of business, but shall include any sale, transfer, sale-leaseback or other disposition by the Company or a Restricted Subsidiary to an Unrestricted Subsidiary of the shares, property or assets referred to in clauses (i) and (ii). The designation by the Company of a Subsidiary of the Company as an "Unrestricted Subsidiary" shall constitute an Asset Disposition of such Subsidiary's property and assets net of its liabilities, unless the transfer of property and assets to such Subsidiary has previously constituted an Asset Disposition. "Asset Disposition Offer" shall have the meaning provided in Section 1009(c). "Asset Disposition Offer Amount" shall have the meaning provided in Section 1009(a). "Asset Disposition Payment Date" shall have the meaning provided in Section 1009(c). 3 "Assumption" means the assumption by the Company of all of the rights and obligations of the Issuer under the Indenture and the Notes and any related documents in accordance with Section 901(7), whether arising before or after such assumption, which assumption shall not release the Guaranty with respect to matters arising prior to such assumption. "Authenticating Agent" means any Person authorized by the Trustee to act on behalf of the Trustee to authenticate Senior Notes. "Authority" means any federal, state, municipal or local government or quasi-governmental agency or authority. "Bankruptcy Law" means Title 11, U.S., Code Companies' Creditors Arrangement Act (Canada), Bankruptcy and Insolvency Act (Canada) or Winding-Up Act (Canada) or any similar federal, state or provincial law for the relief of debtors. "Board of Directors" means the board of directors of the Issuer or the Company as the case may be; PROVIDED, HOWEVER, that when the context refers to actions or resolutions of the Board of Directors, then the term "Board of Directors" shall also mean any duly authorized committee of the Board of Directors of the Issuer or the Company, as the case may be, or Officer authorized to act with respect to any particular matter to exercise the power of the Board of Directors of the Issuer or the Company as the case may be. "Board Resolution" means a copy of a resolution certified by the Secretary or an Assistant Secretary of the Issuer or the Company, as the case may be, to have been duly adopted by the relevant Board of Directors and to be in full force and effect on the date of such certification, and delivered to the Trustee. "Business Day", when used with respect to any Place of Payment, means each Monday, Tuesday, Wednesday, Thursday and Friday which is not a day on which banking institutions in that Place of Payment are authorized or obligated by law or regulation to close. "Capital Stock" means, with respect to any Person, any and all shares, interests, participations, warrants, rights, options or other equivalents (however designated) of capital stock or any other equity interest of such Person, including each class of common stock and preferred stock. "Capitalized Lease Obligation" means, in respect of any Person, an obligation to pay rent or other amounts under a lease that is required to be capitalized for financial reporting purposes in accordance with GAAP, and the amount of Indebtedness represented by such obligation shall be the capitalized amount of such obligation determined in accordance with such principles. "Certificated Notes" shall have the meaning provided in Section 201(c). 4 "Change of Control" means any event by which (i) an Acquiring Person has become such or (ii) Continuing Directors cease to comprise a majority of the members of the Board of Directors of the Company. "Change of Control Date", "Change of Control Offer" and "Change of Control Payment Date" shall have the respective meanings provided in Section 1013. "Commission" means the Securities and Exchange Commission, as from time to time constituted, created under the Exchange Act, or, if at any time after the execution of this Indenture such Commission is not existing and performing the duties now assigned to it under the Trust Indenture Act, then the body performing such duties at such time. "Commodities Agreement" of any Person means any forward contract, option or futures contract or similar agreement or arrangement designed to protect such Person or any of its Subsidiaries from fluctuations in the price of, or shortage of supply of, commodities. "Company" means the Person named as the "Company" in the first paragraph of this Indenture until a successor corporation shall have become such pursuant to the applicable provisions of this Indenture, and thereafter "Company" shall mean such successor corporation. "Company Event of Default" shall have the meaning specified in Section 501(b). "Company Request" or "Company Order" means a written request or order signed in the name of the Issuer or the Company, as the case may be, by its Chairman of the Board, its President or a Vice President, and by its Treasurer, an Assistant Treasurer, its Controller, an Assistant Controller, its Secretary or an Assistant Secretary, and delivered to the Trustee. "Consolidated Amortization Expense" means, for any period, the amortization expense of the Company and its Restricted Subsidiaries for such period, determined on a consolidated basis in accordance with GAAP. "Consolidated Cash Flow Available for Fixed Charges" means, for any period, (a) the sum of the amounts for such period of (i) Consolidated Net Income, (ii) Consolidated Interest Expense, (iii) Consolidated Income Tax Expense, (iv) Consolidated Depreciation Expense, (v) Consolidated Amortization Expense and (vi) other non-cash items reducing Consolidated Net Income, MINUS (b) non-cash items increasing Consolidated Net Income, all as determined on a consolidated basis for the Company and its Restricted Subsidiaries in accordance with GAAP. "Consolidated Depreciation Expense" means, for any period, the depreciation expense of the Company and its Restricted Subsidiaries for such period, determined on a consolidated basis in accordance with GAAP. "Consolidated Free Cash Flow" means, for any period, (a) the sum of the amounts for such period of (i) Consolidated Net Income, (ii) Consolidated Depreciation Expense and (iii) Consolidated Amortization Expense, MINUS (b) the sum of (i) Restricted Payments during such 5 period, (ii) net reduction during such period in Indebtedness of the Company and its Restricted Subsidiaries (other than as a result of (A) Asset Dispositions or (B) Collateral Asset Dispositions or Collateral Loss Events (as such terms are defined in the First Mortgage Note Indenture)) and (iii) the excess (but not the deficit) of capital expenditures of the Company and its Restricted Subsidiaries for such period not financed pursuant to clause (vi) of the definition of Permitted Indebtedness over Consolidated Depreciation Expense. "Consolidated Income Tax Expense" means, for any period, the aggregate of the income tax expense of the Company and its Restricted Subsidiaries for such period, determined on a consolidated basis in accordance with GAAP. "Consolidated Interest Coverage Ratio" means, for any period, the ratio of (i) Consolidated Cash Flow Available for Fixed Charges to (ii) Consolidated Interest Expense. "Consolidated Interest Expense" means, for any period, the interest expense (including the interest component of all Capitalized Lease Obligations and the earned discount or yield with respect to a Receivables sale constituting Indebtedness) of the Company and its Restricted Subsidiaries for such period, determined on a consolidated basis in accordance with GAAP; PROVIDED, HOWEVER, that, with respect to revolving credit, revolving Receivables purchases or other similar arrangements, the interest expense in respect thereof for any period shall be the PRO FORMA interest expense attributable to all amounts committed during such period under such revolving credit, revolving Receivables purchases or other similar arrangements, whether or not such amounts were actually outstanding during such period, in accordance with the terms thereof, in each case on a consolidated basis in accordance with GAAP. "Consolidated Net Income" means, for any period, the net income (or loss) of the Company and its Restricted Subsidiaries on a consolidated basis for such period taken as a single accounting period, determined in accordance with GAAP; PROVIDED, HOWEVER, that: (a) there shall be excluded therefrom (i) the net income (or loss) of any Person (other than the Company) which is not a Restricted Subsidiary, EXCEPT to the extent of the amounts of dividends or other distributions actually paid in cash or tangible property or tangible assets (such property or assets to be valued at their fair market value net of any obligations secured thereby) to the Company or any of its Restricted Subsidiaries by such Person during such period, (ii) EXCEPT to the extent includable pursuant to the foregoing clause (i), the net income (or loss) of any Person accrued prior to the date it becomes a Restricted Subsidiary or is merged into or consolidated with the Company or any of its Restricted Subsidiaries or that Person's property or assets are acquired by the Company or any of its Restricted Subsidiaries, (iii) the net income of any Restricted Subsidiary to the extent that the declaration or payment of dividends or similar distributions by that Restricted Subsidiary of that income is not at the time permitted by operation of the terms of its charter or any agreement, instrument, judgment, decree, order, statute, rule or governmental regulation applicable to that Restricted Subsidiary and (iv) the excess (but not the deficit), if any, of (x) any gain which must be treated as an extraordinary item under GAAP or any gain realized upon the sale or other disposition of any asset that is not sold in the ordinary course of business or of any Capital Stock of a Restricted Subsidiary over (y) any loss which must be treated as an 6 extraordinary item under GAAP or any loss realized upon the sale or other disposition of any asset that is not sold in the ordinary course of business or of any Capital Stock of a Restricted Subsidiary; and (b) there shall be included therein the amount of cash realized by the Company or any of its Restricted Subsidiaries during such period on account of dividends or other distributions theretofore paid in other than cash or tangible property or tangible assets by a Person which is not a Restricted Subsidiary. "Consolidated Net Worth" means the amount which at any date of determination, in conformity with GAAP consistently applied, would be set forth under the caption "stockholders' equity" (or any like caption) on a consolidated balance sheet of the Company and its Restricted Subsidiaries, exclusive of amounts attributable to Redeemable Stock (at such time as no Indebtedness is outstanding under the 1991 Indenture, excluding the effects of foreign currency translation adjustments). If the Company has changed one or more of the accounting principles used in the preparation of its financial statements because of a change mandated by the Financial Accounting Standards Board or its successor, then Consolidated Net Worth shall mean the Consolidated Net Worth the Company would have had if the Company had continued to use those generally accepted accounting principles employed on November 1, 1991. "Continental Guaranty" means the Guaranty dated as of October 7, 1983 between The Continental Group, Inc. and the Company, as amended from time to time. "Continuing Director" means any member of the Board of Directors, while such person is a member of such Board of Directors of the Company, who is not an Acquiring Person, or an Affiliate or associate of an Acquiring Person or a representative of an Acquiring Person or of any such Affiliate or associate and who (a) was a member of such Board of Directors prior to November 1, 1991, or (b) subsequently became or becomes a member of such Board of Directors and whose nomination for election or election to such Board of Directors was or is recommended or approved by resolution of a majority of the Continuing Directors or who was or is included as a nominee in a proxy statement of the Company distributed when a majority of such Board of Directors consists of Continuing Directors. "Corporate Trust Office" means the office of the Trustee at which at any particular time its corporate trust business shall be principally administered, which office at the date hereof is located at 101 Barclay Street, New York, New York, 10286. "Corporation" includes corporations, associations, companies, business trusts and limited partnerships. "Covenant Defeasance" has the meaning specified in Section 1303. "Credit Agreements" means (i) the credit agreement, dated as of March 1, 1989, by and among the Company, the financial institutions signatory thereto, Bankers Trust Company, as agent for such financial institutions, and Citibank, N.A., Chemical Bank (as successor by merger to Manufacturers Hanover Trust Company) and The First National Bank of Chicago, as co-agents for such financial institutions, as amended, modified, refinanced (including, without 7 limitation, by the New Credit Agreement) or extended from time to time, (ii) the credit agreement, dated as of March 1, 1989, by and among Stone Canada, the financial institutions signatory thereto, Bankers Trust Company, as agent for such financial institutions, and Citibank, N.A., Chemical Bank (as successor by merger to Manufacturers Hanover Trust Company) and The First National Bank of Chicago, as co-agents for such financial institutions, as amended, modified, refinanced (including, without limitation, by the New Credit Agreement) or extended from time to time and (iii) the revolving credit agreement, dated as of March 1, 1989, by and among Stone Canada, the financial institutions signatory thereto, BT Bank of Canada, as administrative agent, The Bank of Nova Scotia, as payment agent, and Bankers Trust Company, as collateral agent, as amended, modified, refinanced (including, without limitation, by the New Credit Agreement) or extended from time to time. "Currency Agreement" of any Person means any foreign exchange contract, currency swap agreement, forward currency contract, option or futures contract or other similar agreement or arrangement, and any renewal or extension thereof, designed to protect such Person or any of its Subsidiaries against fluctuations in currency values. "Custodian" means any receiver, trustee, assignee, liquidator, sequestrator or similar official under any Bankruptcy Law. "Default" means any event which is, or after notice or passage or time or both would be, an Event of Default or a Company Event of Default, as the case may be. "Defaulted Interest" has the meaning specified in Section 308. "Defeasance" has the meaning specified in Section 1302. "Deficiency Amount" shall have the meaning provided in Section 1009(b). "Deficiency Date" shall have the meaning provided in Section 1101(a). "Deficiency Offer" shall have the meaning provided in Section 1101(a). "Deficiency Offer Amount" shall have the meaning provided in Section 1101(a). "Deficiency Payment Date" shall have the meaning provided in Section 1101(c)(2). "Depositary" means The Depositary Trust Company, as depositary for the Global Notes, and its successors and assigns. "Dollars" and "$" means lawful money of the United States of America. "Event of Default" has the meaning specified in Section 501(a). "Exchange Act" means the Securities Exchange Act of 1934, as amended from time to time, and the rules and regulations promulgated thereunder. 8 "First Mortgage Note Indenture" means the indenture dated as of October 12, 1994 between the Company and Norwest Bank Minnesota, National Association, as Trustee, with respect to the Company's 10-3/4% First Mortgage Notes due 2002 as amended and supplemented from time to time. "First Mortgage Notes" mean the Company's 10-3/4% First Mortgage Notes due 2002, issued on October 12, 1994. "GAAP" means generally accepted accounting principles, as in effect as of November 1, 1991 in the United States of America, set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or in such other statements by such other entity as is approved by a significant segment of the accounting profession. "Global Note" shall have the meaning provided in Section 201(b). "Global Note Holder" shall have the meaning specified in Section 201(b). "Guaranty" has the meaning specified in Section 1201. "Holder" or "Securityholder" means a Person in whose name a Senior Note is registered in the Register. "Indebtedness" means (without duplication), with respect to any Person, (i) any obligation of such Person to pay the principal of, premium, if any, interest on, penalties, reimbursement or indemnification amounts, fees, expenses or other amounts relating to any indebtedness, and any other liability, contingent or otherwise, of such Person (A) for borrowed money or the deferred purchase price of property or services (excluding trade payables and payables, indebtedness, obligations and other liabilities of the Company to any Restricted Subsidiary or of any Restricted Subsidiary to the Company or to any other Restricted Subsidiary), whether or not the recourse of the lender is to the whole of the assets of such Person or only to a portion thereof; (B) for any letter of credit for the account of such Person supporting other obligations of such Person described in this definition; or (C) for the payment of money relating to a Capitalized Lease Obligation; (ii) the unrecovered investment of a purchaser (other than the Company or any of its Restricted Subsidiaries) of such Person's Receivables pursuant to a Receivables purchase facility or otherwise (whether or not characterized as a sale of such Receivables or a secured loan, but excluding any disposition of Receivables in connection with a disposition of fixed assets or a business of such Person and any disposition of defaulted Receivables for collection), together with any obligation of such Person to pay any discount, interest, fees, indemnification amounts, penalties, recourse on account of the uncollectability of Receivables, expenses or other amounts in connection therewith; (iii) any obligation of another Person (other than a Restricted Subsidiary of such Person) of the kind described in the preceding clause (i) or (ii), which the Person has guaranteed or which is otherwise its legal liability; (iv) any obligation of another Person (other than a Restricted Subsidiary of such Person) of the kind 9 described in the preceding clause (i) or (ii) secured by a Lien to which the property or assets of such Person are subject, whether or not the obligation secured thereby shall have been assumed by or shall otherwise be such Person's legal liability; and (v) any renewals, extensions or refundings of any of the foregoing described in any of the preceding clauses (i), (ii), (iii) and (iv). The "amount" or "principal amount" of Indebtedness of any Person at any date, as used herein, shall be the outstanding principal amount at such date of all unconditional Indebtedness, the maximum principal amount of any contingent Indebtedness or the unrecovered purchaser's investment in a sale of Receivables, in each case at such date and without taking into account any premium, interest, penalties, reimbursement or indemnification amounts, fees, expenses or other amounts (other than principal or unrecovered purchaser's investment) in respect thereof; PROVIDED, HOWEVER, that (y) with respect to Indebtedness described in clause (iv) above, the amount of Indebtedness shall be the lesser of (a) the amount of the Indebtedness of such other Person that is secured by the property or assets of such Person and (b) the fair market value of the property or assets securing such Indebtedness, and (z) with respect to revolving credit, revolving Receivables purchases or other similar arrangements, the amount of Indebtedness thereunder shall be the amounts of such commitments as of the date of determination. "Indenture" means this instrument as originally executed or as it may from time to time be supplemented or amended by one or more indentures supplemental hereto entered into pursuant to the applicable provisions hereof. "Initial Interest Rate", when used with respect to any Senior Note, means the initial rate of interest to be borne by such Senior Note as stated on the face thereof. "Initial Purchaser" means Salomon Brothers Inc, in its capacity as Initial Purchaser under the Note Purchase Agreement. "Institutional Accredited Investor" means an institutional "accredited investor," as defined in Rule 501(A)(1), (2), (3) or (7) under the Securities Act, other than QIBs. "Interest Payment Date" means the Stated Maturity of an installment of interest on any Senior Note. "Interest Swap Obligations" of any Person means the obligations of such Person pursuant to any interest rate swap agreement, interest rate collar agreement, forward rate agreement, interest rate cap insurance, option or futures contract or other similar agreement or arrangement, and any renewal or extension thereof, designed to protect such Person or any of its Subsidiaries against fluctuations in interest rates or to permit the exchange of fixed rate obligations of such Person for floating rate obligations and entered into in the ordinary course of financial management of the Company and not for speculative purposes. "Investment Grade Date" shall mean any day on which the Notes are assigned a rating of either (i) Baa3 or higher by Moody's Investors Service, Inc., or (ii) BBB- or higher by Standard & Poor's Corporation. 10 "Issue Date" means August 16, 1996. "Issuer" means the Person named the Issuer in the first paragraph of this Indenture until a successor corporation shall have become such pursuant to the applicable provisions of this Indenture, and thereafter "Issuer" shall mean such successor corporation. "Lien" means any mortgage, pledge, security interest, adverse claim (as defined in Section 8.302(2) of the New York Uniform Commercial Code), encumbrance, lien or charge of any kind (including any conditional sale or other title retention agreement or lease in the nature thereof, any filing or agreement to file a financing statement as debtor under the Uniform Commercial Code or any similar statute other than to reflect ownership by a third party of property leased to the Company or any of its Subsidiaries under a lease which is not in the nature of a conditional sale or title retention agreement). "Maturity", when used with respect to any Senior Note, means the date on which the principal of such Senior Note or an installment of the principal becomes due and payable as therein or herein provided, whether at the Stated Maturity or by declaration of acceleration, call for redemption or otherwise. "Minimum Subordinated Capital Base" shall have the meaning provided in Section 1101(a). "New Credit Agreement" means the credit agreement, dated as of October 12, 1994 and amended and restated as of March 22, 1996, by and among the Company, the financial institutions signatory thereto and Bankers Trust Company, as agent for such financial institutions, as amended, modified, refinanced or extended from time to time. "Non-U.S. Person" means any Person who is not a "U.S. Person," as defined in Rule 902(o) under the Securities Act. "Note Purchase Agreement" means the Purchase Agreement dated as of August 9, 1996 relating to the Senior Notes among the Issuer, the Company and the Initial Purchaser, as amended. "Officer" means the Chairman of the Board, the President, any Vice President, the Treasurer, any Assistant Treasurer or the Secretary of the Issuer or the Company, as the case may be. "Officer's Certificate" means a certificate signed by an Officer and delivered to the Trustee that shall comply with Sections 102 and 103. "Opinion of Counsel" means a written opinion of counsel, who may be an employee of or counsel for the Issuer or the Company, and who shall be reasonably acceptable to the Trustee. 11 "Ordinary Course of Business Liens" means, with respect to any Person, (i) Liens for taxes, assessments, governmental charges, levies or claims not yet delinquent or being contested in good faith; (ii) statutory Liens of landlords, carriers, warehousemen, mechanics, suppliers, materialmen, repairmen or other like Liens arising in the ordinary course of business (including the construction of facilities) or deposits to obtain the release of such Liens; (iii) Liens in connection with workers' compensation, unemployment insurance and other similar legislation; (iv) zoning restrictions, licenses, easements, rights-of-way and other similar charges or encumbrances or restrictions not interfering in any material respect with the business of such Person or any of its Subsidiaries; 1. Liens securing such Person's obligations with respect to commercial letters of credit; 2. Liens to secure public or statutory obligations of such Person; 3. judgment and attachment Liens against such Person not giving rise to a Default under the Senior Notes or Liens created by or existing from any litigation or legal proceeding against such Person which is currently being contested in good faith by such Person in appropriate proceedings; 4. leases or subleases granted to other Persons or existing on property acquired by such Persons; 5. Liens encumbering property or assets of such Person under construction arising from progress or partial payments; 6. Liens encumbering customary initial deposits and margin accounts and other Liens securing obligations arising out of Interest Swap Obligations, Currency Agreements and Commodities Agreements, in each case of the type typically securing such obligations; provided, however, that if such Interest Swap Obligations, Currency Agreements and Commodities Agreements relate to Indebtedness not incurred in violation of this Indenture, such Lien may also cover the property and assets securing the Indebtedness to which such Interest Swap Obligations, Currency Agreements and Commodities Agreements relate; 7. Liens encumbering deposits made to secure obligations arising from public, statutory, regulatory, contractual or warranty requirements or obligations of such Person or its Subsidiaries (not constituting Indebtedness); 12 8. Liens arising from filing UCC financing statements regarding leases or consignments; 9. purchase money Liens securing payables (not constituting Indebtedness) arising from the purchase by such Person or any of its Affiliates of any equipment or goods in the ordinary course of business; 10. Liens arising out of consignment or similar arrangements for the sale of goods entered into by such Person or any of its Subsidiaries in the ordinary course of business; 11. Liens in the ordinary course of business granted by such Person to secure the performance of tenders, statutory obligations, surety and appeal bonds, bids, leases, government contracts, or progress payments, performance and return-of-money bonds and other similar obligations (not constituting Indebtedness); 12. Liens in favor of collecting banks constituting a right of set-off, revocation, refund or chargeback with respect to money or instruments of the Company or any Subsidiary on deposit with or in the possession of such bank; and 13. Liens in favor of customs and revenue authorities. "Outstanding" means, as of the date of determination, all Senior Notes theretofore authenticated and delivered under this Indenture, EXCEPT: (i)Senior Notes theretofore canceled by the Trustee or delivered to the Trustee for cancellation; (ii)Senior Notes, or portions thereof, for whose payment or redemption money in the necessary amount has been theretofore deposited with the Trustee or any Paying Agent (other than the Issuer) in trust or set aside and segregated in trust by the Issuer (if the Issuer shall act as its own Paying Agent) for the Holders of such Senior Notes; PROVIDED that, if such Senior Notes are to be redeemed, notice of such redemption has been duly given pursuant to this Indenture or provision therefor satisfactory to the Trustee has been made; (iii)Senior Notes which have been paid pursuant to Section 306 or in exchange for or in lieu of which other Senior Notes have been authenticated and delivered pursuant to this Indenture, other than any such Senior Notes in respect of which there shall have been presented to the Trustee proof satisfactory to it that such Senior Notes are held by a BONA FIDE purchaser in whose hands such Senior Notes are valid obligations of the Issuer; and (iv)Senior Notes which have been defeased pursuant to Section 1302; provided, however, that in determining whether the Holders of the requisite principal amount of the Outstanding Senior Notes have given any request, demand, authorization, direction, notice, 13 consent or waiver hereunder, Senior Notes owned by the Issuer, the Company or any other obligor upon the Senior Notes or any Affiliate of the Issuer, or Company or of such other obligor shall be disregarded and deemed not to be Outstanding, except that, in determining whether the Trustee shall be protected in relying upon any such request, demand, authorization, direction, notice, consent or waiver, only Senior Notes which the Trustee knows to be so owned shall be so disregarded. Senior Notes so owned which have been pledged in good faith may be regarded as Outstanding if the pledgee establishes to the satisfaction of the Trustee the pledgee's right so to act with respect to such Senior Notes and that the pledgee is not the Issuer or the Company or any other obligor upon the Senior Notes or any Affiliate of the Issuer or the Company or of such other obligor. "Participant" shall have the meaning provided in Section 201(b). "Paying Agent" means any Person authorized by the Issuer to pay the principal of (and premium, if any) or interest on any Senior Note on behalf of the Company. The Issuer or the Company may act as Paying Agent with respect to any Senior Note issued hereunder. "Permitted Existing Indebtedness of an Acquired Person" means Indebtedness of any Person (which may be assumed or guaranteed by, or may otherwise become the legal liability of, the Company or any Restricted Subsidiary with or into which such Person is merged or consolidated) existing at the time such Person becomes a Restricted Subsidiary, or is merged with or into or consolidated with the Company or one of its Restricted Subsidiaries, so long as such Indebtedness was not created in anticipation of or as a result of such Person becoming a Restricted Subsidiary or of such merger or consolidation, and any Indebtedness to the extent exchanged for, or the net proceeds of which are used to refinance, redeem or defease, such Indebtedness (or any extension, renewal or refinancing thereof), or to finance any costs incurred in connection with such exchange, refinancing, redemption or defeasance; PROVIDED, HOWEVER, that the proceeds of such Indebtedness shall be used to so refinance, redeem or defease the Indebtedness within 12 months of the incurrence of such subsequent Indebtedness. "Permitted Indebtedness" means (i)(a) any Indebtedness in a principal amount not exceeding the principal amount outstanding or committed under the Credit Agreements (including any letter of credit facility thereunder) as of November 1, 1991 PLUS two hundred fifty million dollars ($250,000,000), and LESS the sum of (x) proceeds from the sale of all Indebtedness under the 1991 Indenture issued from time to time that are applied to repay Indebtedness under the Credit Agreements and (y) the proceeds from the sale of the First Mortgage Notes, the 1994 Senior Notes, the Senior Notes and the 11-7/8% Rating Adjustable Notes; (b) any Indebtedness in a principal amount not exceeding 80% of the aggregate face amount of Receivables of the Company and its Restricted Subsidiaries (measured as of the latest date as of which information regarding Receivables is available) and constituting Indebtedness described in clause (ii) of the definition of Indebtedness or outstanding pursuant to any other revolving credit facility; (c) any Indebtedness under the 1991 Indenture issued prior to the date hereof the proceeds of which have been used to repay Indebtedness under the Credit Agreements within five Business Days after such issuance (and any subsequent Indebtedness the proceeds of which are used to refinance such 14 Indebtedness) and (d) the First Mortgage Notes, the 1994 Senior Notes, the Senior Notes and the 11-7/8% Rating Adjustable Notes (and any subsequent Indebtedness the proceeds of which are used to refinance such Indebtedness); PROVIDED, HOWEVER, that: (1)the aggregate principal amount permitted to be outstanding under clause (a) shall be reduced by the aggregate amount of any repayments or prepayments of any Senior Indebtedness (other than the Senior Notes, First Mortgage Notes, the 1994 Senior Notes and Indebtedness issued under the 1991 Indenture or the 1996 Rating Adjustable Indenture) out of the proceeds of Asset Dispositions as described in and required by Section 1009 hereof after November 1, 1991, and, thereafter, shall be increased if, at the end of the fourth consecutive complete fiscal quarter after the initial reduction pursuant to this clause (1) or at any anniversary of the end of such fourth fiscal quarter, the Consolidated Free Cash Flow of the Company for the preceding four quarters has been zero or greater, in which event the amount of the increase shall be the amount by which the consolidated capital expenditures of the Company and its Restricted Subsidiaries not financed by Indebtedness referred to in clause (vi) of this definition during such four-quarter period exceeds Consolidated Depreciation Expense for such period (provided any such increase shall be made only to the extent all such reductions occurring prior to the four fiscal quarters for which such calculation of Consolidated Free Cash Flow has been made exceed all prior increases pursuant to this clause (1)); (2)(A) the aggregate amount permitted to be incurred under clause (a) shall be reduced by the principal amount outstanding under the New Credit Agreement on the date hereof net of subsequent reductions thereof, and (B) the aggregate amount permitted to be incurred under clause (b) shall be reduced by the principal amounts outstanding under the Master Trust Indenture and Security Agreement among the Company, Stone Receivables Corporation, Marine Midland Bank, as Trustee, and Bankers Trust Company, as Administrative Agent (the "SRC Master Trust Indenture"); (3)the Permitted Indebtedness contemplated by this clause (i) may be incurred by the Company and, in the case of Permitted Indebtedness constituting Indebtedness under clause (ii) of the definition of Indebtedness, by the Company or any Restricted Subsidiary; and (4)any Restricted Subsidiary in the Stone Canada Group may incur, assume or guarantee any Indebtedness under clauses(i)(a) and (i)(b) above under any revolving credit facilities of Restricted Subsidiaries in the Stone Canada Group entered into pursuant to this clause (i), for which the aggregate amount committed thereunder does not exceed two hundred million dollars ($200,000,000), to finance the working capital of Restricted Subsidiaries in the Stone Canada Group; (i)Permitted Subordinated Indebtedness; (ii)Permitted Refinancing Indebtedness; (iii)Permitted Stone Canada Indebtedness; 15 (iv)Permitted Existing Indebtedness of an Acquired Person; (v)Indebtedness incurred for the purpose of acquiring Capital Stock of another Person, or assets comprising a business or line of business or intangible assets or acquiring, constructing or improving fixed assets, in each case related primarily to, or used in connection with, the paper or forest products businesses and which (a) constitutes all or a portion of (but not more than) the purchase price of such Capital Stock or assets (such purchase price including any Indebtedness assumed or repaid in connection with such purchase) or the cost of construction or improvement of such assets (together with any transaction costs relating to such purchase, construction or improvement), (b) is incurred prior to, at the time of or within 270 days after the acquisition, construction or improvement of such assets for the purpose of financing the purchase price of such Capital Stock or assets or the cost of construction or improvement thereof (together with any transaction costs relating to such purchase, construction or improvement) and (c) is the direct or guaranteed obligation of any of (1) the Company, (2) a Restricted Subsidiary formed for the purpose of acquiring such Capital Stock or assets (and having no other material assets other than assets to be used for such acquisition), (3) any Person comprised within the acquired assets or (4) in the case of the construction or improvement of fixed assets, the Restricted Subsidiary which will own such assets, or any extension, renewal or refinancing of such Indebtedness; provided, however, that the amount so extended, renewed or refinanced shall not exceed the principal amount outstanding on the date of such extension, renewal or refinancing, plus costs incurred in connection with any such extension, renewal or refinancing (it being understood that any fixed assets included within capital expenditures which increased Indebtedness permitted under clause (i) of the definition of Permitted Indebtedness pursuant to clause (1) to the proviso to such clause may not be financed pursuant to this clause (vi)); (vi)Indebtedness in an aggregate principal amount not to exceed three hundred million dollars ($300,000,000) at any one time outstanding; PROVIDED, HOWEVER, that no Restricted Subsidiary may incur Indebtedness under this clause (vii) to the extent that after the incurrence of such Indebtedness the sum (without duplication) of (x) all Indebtedness of Restricted Subsidiaries incurred under this clause (vii), plus (y) Indebtedness and other obligations then secured pursuant to clause (xii) of the definition of Permitted Liens, plus (z) the amount of Indebtedness that was not incurred pursuant to clause (i)(b) of this definition and is secured pursuant to clause (vi) of the definition of Permitted Liens shall not exceed three hundred million dollars ($300,000,000); (vii)Indebtedness of the Company in an aggregate principal amount not to exceed two hundred fifty million dollars ($250,000,000) at any one time outstanding; (viii)any Interest Swap Obligation, Currency Agreement or Commodities Agreement relating to Indebtedness that was not incurred in violation of the terms of this Indenture; and (ix)Indebtedness to finance an increase in the working capital of any Person or Persons that (a) are organized under the laws of a jurisdiction other than the United States or any subdivision thereof and (b) became Restricted Subsidiaries after November 1, 1991; provided, however, that Indebtedness pursuant to this clause (x) is the obligation of the Company or such Person or 16 Persons. "Permitted Liens" means, with respect to any Person, (i)Ordinary Course of Business Liens; (ii)Liens upon property or assets acquired or constructed by such Person or any Affiliate of such Person after November 1, 1991 or constituting improvements after November 1, 1991 to property or assets; PROVIDED, HOWEVER, that (a) any such Lien is created solely for the purpose of securing Indebtedness representing, or incurred to finance or refinance, the purchase price (such purchase price including any Indebtedness assumed or repaid in connection with such purchase) or cost of construction of the property or assets subject thereto or of such improvement, (b) the principal amount of the Indebtedness secured by such Lien does not exceed 100% of such purchase price or cost (together with any transaction costs relating to such purchase, construction or improvement), (c) such Lien does not extend to or cover any other property or assets other than such property, assets, improvement and any other improvements thereon (or, in the case of any construction or improvement, any substantially unimproved real property on which the property is constructed or the improvement is located) and (d) the occurrence of such Indebtedness is permitted by clause (vi) of the definition of Permitted Indebtedness; (iii)Liens securing obligations with respect to letters of credit (other than commercial letters of credit) to the extent the obligations supported by such letters of credit may be secured without violating Section 1007 hereof; (iv)Liens covering property subject to any Capitalized Lease Obligation or other lease which was not entered into in violation of this Indenture securing the interest of the lessor or other Person under such Capitalized Lease Obligation or other lease; (v)Liens securing obligations to a trustee pursuant to the compensation and indemnity provisions of any indenture (including this Indenture) and Liens securing obligations to a trustee or agent with respect to collateral for any Indebtedness; (vi)Liens created in connection with a disposition of Receivables (whether or not characterized as a sale of such Receivables or a secured loan) not prohibited by this Indenture on (a) such Receivables, (b) collateral securing such Receivables, (c) goods or services, the sale, lease or furnishing of which gave rise to such Receivables, (d) books and records relating to such Receivables, (e) agreements or arrangements supporting or securing such Receivables and (f) incidental property and assets relating to any of the foregoing; PROVIDED, HOWEVER, that the aggregate amount at any time of Indebtedness that is secured pursuant to this clause (vi) and was not incurred pursuant to clause (i)(b) of the definition of Permitted Indebtedness, shall at no time exceed (x) three hundred million dollars ($300,000,000) LESS (y) the sum of Indebtedness and other obligations then secured pursuant to clause (xii) of this definition PLUS the then outstanding principal amount of Indebtedness of Restricted Subsidiaries incurred under clause (vii) of the definition of Permitted Indebtedness (and not secured pursuant to this clause (vi) or such clause (xii)); 17 (vii)Liens upon property or assets of the Company created in substitution and exchange for a Permitted Lien upon other property or assets of the Company or any of its Subsidiaries and Liens upon property or assets of any Subsidiaries of the Company created in substitution and exchange for a Permitted Lien upon other property or assets of any Subsidiaries of the Company; PROVIDED, HOWEVER, that (a) such Permitted Lien is released contemporaneously with the creation of the Lien in substitution therefor, (b) the fair market value of the property or assets with respect to the Lien so released is substantially the same as the fair market value of the property or assets subject to the Lien created in substitution therefor and (c) no Lien may be placed on property or assets of the Company or a Restricted Subsidiary in substitution and exchange for a Lien upon property or assets of an Unrestricted Subsidiary; (viii)Liens upon property or assets of a Subsidiary of a Person securing Indebtedness of such Person or of such Subsidiary, which Liens are created in substitution and exchange for an outstanding pledge by such Person of a majority of the Capital Stock of such Subsidiary for the purpose of securing such Indebtedness (or a guaranty in respect thereof); PROVIDED , HOWEVER, that if the property and assets of such Subsidiary to be subjected to such Liens have a fair market value in excess of twenty-five million dollars ($25,000,000), such Subsidiary shall have guaranteed the obligations of the Company in respect of the Senior Notes and, if requested by the Trustee, such Subsidiary shall have waived all its rights of subrogation and reimbursement from the Company in connection with such guaranty; (ix)Liens upon any property or assets (a) existing at the time of acquisition thereof by the Company or any Subsidiary, (b) of a Person existing at the time such Person is merged with or into or consolidated with the Company or any Subsidiary of the Company or existing at the time of a sale or transfer of any such property or assets of such Person to the Company or any Subsidiary of the Company or (c) of a Person existing at the time such Person becomes a Subsidiary of the Company; PROVIDED, HOWEVER, that such Liens shall not have been created in contemplation of such sale, merger, consolidation, transfer or acquisition; (x)Liens existing at November 1, 1991; (xi)(a) Liens upon any property or assets of the Company and its Restricted Subsidiaries securing Indebtedness under the Credit Agreements in a principal amount not exceeding the principal amount outstanding or committed under the Credit Agreements (including any letter of credit facility, but without duplication with respect to commitments for loans the use of proceeds of which is restricted to repayment of other Indebtedness under the Credit Agreements) as of November 1, 1991 LESS (y) the proceeds from the sale of all Indebtedness under the 1991 Indenture issued from time to time that are or have been applied to repay Indebtedness under the Credit Agreements and PLUS (z) two hundred fifty million dollars ($250,000,000) and (b) Liens securing Indebtedness permitted by clause (i) of the definition of Permitted Indebtedness upon property or assets that as of November 1, 1991 secured the Credit Agreements or that secure the SRC Master Trust Indenture; (xii)Liens securing Indebtedness or other obligations of the Company and its Restricted 18 Subsidiaries not to exceed an aggregate principal amount of three hundred fifty million dollars ($350,000,000) LESS, at any time, the sum of (y) the then outstanding principal amount of Indebtedness of Restricted Subsidiaries incurred under clause (vii) of the definition of Permitted Indebtedness (and not secured pursuant to this clause (xii) or clause (vi) of this definition) PLUS (z) the amount of Indebtedness secured pursuant to clause (vi) of this definition and not incurred pursuant to clause (i)(b) of the definition of Permitted Indebtedness; (xiii)Liens upon property or assets of a Subsidiary securing Indebtedness or other obligations owing to the Company; (xiv)Liens on proceeds of any property or assets subject to a Lien permitted by the other clauses of this definition; (xv)any equal and ratable Lien that is granted pursuant to the Continental Guaranty and that relates to a Lien that otherwise constitutes a Permitted Lien; (xvi)Liens on property or assets used to defease Indebtedness that was not incurred in violation of this Indenture; (xvii)Liens on property or assets of any Restricted Subsidiary organized under the laws of a jurisdiction other than the United States or any subdivision thereof securing Indebtedness of such Restricted Subsidiary outstanding as of November 1, 1991 (or any extension, renewal or refinancing thereof); (xviii)any extension, renewal or replacement (or successive extensions, renewals or replacements) in whole or in part of any Lien referred to in the foregoing clauses (i) through (xvii) (covering the same property and assets as such Lien); and Permitted Collateral Liens (as defined in the First Mortgage Note Indenture); PROVIDED, HOWEVER, that no Lien described in any of the foregoing clauses other than clause (xi)(a) shall encumber the rights of the Company with respect to Indebtedness, obligations and other liabilities owed to the Company by any Restricted Subsidiary or to any Restricted Subsidiary by the Company or another Restricted Subsidiary. "Permitted Refinancing Indebtedness" means Indebtedness of (i) the Company to the extent exchanged for, or the net proceeds of which are used to refinance, redeem or defease, Indebtedness of the Company or any Restricted Subsidiary (or any extension, renewal or refinancing thereof) outstanding at the time of incurrence of such subsequent Indebtedness, or to finance any costs incurred in connection with any such exchange, refinancing, redemption or defeasance, (ii) a Restricted Subsidiary to the extent exchanged for, or the net proceeds of which are used to refinance, redeem or defease, Indebtedness of such Restricted Subsidiary (or any extension, renewal or refinancing thereof) outstanding at the time of incurrence of such subsequent Indebtedness, or to finance any costs incurred in connection with any such exchange, refinancing, redemption or defeasance, or (iii) the Company or a Restricted Subsidiary to the 19 extent exchanged for, or the net proceeds of which are used to refinance, redeem or defease, any then outstanding industrial revenue or development bonds that were outstanding at November 1, 1991 (or any extension, renewal or refinancing thereof), or to finance any costs incurred in connection with such exchange, refinancing or defeasance; PROVIDED, HOWEVER, that, in the case of (i), (ii) or (iii), the proceeds of such Indebtedness shall be used to so refinance, redeem or defease the Indebtedness within 12 months of the incurrence of such subsequent Indebtedness; and PROVIDED, FURTHER, that the only Indebtedness which may be subject to exchange, refinancing, redemption, or defeasance pursuant to clause (i), (ii) or (iii) of this definition shall be Indebtedness outstanding as of November 1, 1991 (other than Indebtedness under the Credit Agreements, Subordinated Indebtedness and Indebtedness under lines of credit) or any extension, renewal or refinancing thereof, and Indebtedness that was incurred after November 1, 1991 and before the date hereof (other than solely as Permitted Indebtedness under the 1991 Indenture) or is incurred after the date hereof (other than solely as Permitted Indebtedness). "Permitted Stone Canada Indebtedness" means Indebtedness of the Company or a Restricted Subsidiary in the Stone Canada Group outstanding pursuant to lines of credit in an aggregate principal amount not to exceed one hundred million dollars ($100,000,000), (of which not more than Canadian sixty million dollars (Cn.$60,000,000) may be owed by Restricted Subsidiaries in the Stone Canada Group) at any one time outstanding or pursuant to any extension, renewal or refinancing of such outstanding amount PLUS any costs incurred in connection with any such extension, renewal or refinancing; PROVIDED, HOWEVER, that the aggregate principal amount permitted to be incurred under this definition shall be reduced by the principal amount under lines of credit outstanding on the date hereof net of subsequent repayments or reductions thereof. "Permitted Subordinated Indebtedness" means (i) Subordinated Indebtedness of the Company to the extent exchanged for, or the net proceeds of which are used to refinance, redeem or defease, then outstanding Subordinated Indebtedness of the Company that was outstanding at November 1, 1991 (or any extension, renewal or refinancing thereof), or to finance any costs incurred in connection with any such exchange, refinancing, redemption or defeasance; PROVIDED, HOWEVER, that (a) such Subordinated Indebtedness does not have a shorter weighted average life than that then remaining for, or a maturity earlier than that of, the Indebtedness so exchanged, refinanced, redeemed or defeased, EXCEPT that in the case of any exchange, such Subordinated Indebtedness may have a maturity that is earlier (but not more than six months earlier) than that of the Indebtedness so exchanged, PROVIDED that the Subordinated Indebtedness shall have the same or a longer weighted average life than that then remaining for the Indebtedness so exchanged and (b) in the case of refinancings, redemptions or defeasances, the proceeds of such Subordinated Indebtedness shall be used to so refinance, redeem or defease the Indebtedness within 12 months of the incurrence of such subsequent Subordinated Indebtedness; and (ii) Indebtedness of the Company in an aggregate principal amount not to exceed two hundred fifty million dollars ($250,000,000) at any one time outstanding, so long as such Indebtedness (a) constitutes Subordinated Indebtedness and (b) does not have (A) a weighted average life that is shorter than that then remaining for (x) the Company's 9-7/8% Senior Notes due 2001 then outstanding, (y) 1994 Senior Notes then outstanding or (z) the Senior Notes then Outstanding or (B) a maturity 20 that is earlier than the latest maturity of (x) the Company's 9-7/8% Notes due 2001 then outstanding, (y) the 1994 Senior Notes then outstanding or (z) the Senior Notes then outstanding. "Person" means any individual, corporation, partnership, joint venture, association, joint-stock company, trust, unincorporated organization or government or any agency or political subdivision thereof. "Place of Payment", means The City of New York or any other place or places where the principal of (and premium, if any) and interest on the Senior Notes are payable. "Predecessor Senior Note" of any particular Senior Note means every previous Senior Note evidencing all or a portion of the same debt as that evidenced by such particular Senior Note; and, for the purposes of this definition, any Senior Note authenticated and delivered under Section 306 in exchange for or in lieu of a mutilated, destroyed, lost or stolen Senior Note shall be deemed to evidence the same debt as the mutilated, destroyed, lost or stolen Senior Note. "Private Placement Legend" means the legend on a Senior Note specified in Section 202(b). "QIB" means a Qualified Institutional Buyer as defined in Rule 144A. "Rate Determination Period" means the four full weeks ending on the seventh Business Day prior to a Reset Date. "Receivables" means receivables, chattel paper, instruments, documents or intangibles evidencing or relating to the right to payment of money. "Record Date" for the interest payable on any Interest Payment Date means the close of business on February 1 or August 1, as the case may be, whether or not a Business Day, immediately preceding the Interest Payment Date on which such interest is payable. "Redeemable Stock" means, with respect to any Person, any Capital Stock that by its terms or otherwise is required to be redeemed or purchased by such Person or any of its Subsidiaries prior to 30 days after the latest maturity date of the Senior Notes then Outstanding, or is redeemable or subject to mandatory purchase or similar put rights at the option of the Holder thereof at any time prior to 30 days after the maturity date of the Senior Notes then Outstanding, or any security which is convertible or exchangeable into a security which has such provisions. "Redemption Date" means the date fixed for redemption of any Senior Note by or pursuant to this Indenture. "Redemption Price" means the price at which any Senior Note is to be redeemed pursuant to this Indenture. "Register" and "Registrar" have the respective meanings specified in Section 305. 21 "Regulation S" means Regulation S under the Securities Act (including any successor regulation thereto), as it may be amended from time to time. "Reset Date" means a date on which the interest rate on the Senior Notes shall be reset pursuant to Section 1102(a). "Reset Rate" shall have the meaning provided in Section 1102(a). "Responsible Officer", when used with respect to the Trustee, means the chairman or any vice-chairman of the board of directors, the chairman or any vice-chairman of the executive committee of the board of directors, the chairman of the trust committee, the president, any vice president, the secretary, any assistant secretary, the treasurer, any assistant treasurer, the cashier, any assistant cashier, any senior trust officer or assistant trust officer, the controller or any assistant controller or any other officer of the Trustee customarily performing functions similar to those performed by any of the above designated officers and also means, with respect to a particular corporate trust matter, any other officer to whom such matter is referred because of his knowledge of and familiarity with the particular subject. "Restricted Payment" shall have the meaning provided in Section 1006. "Restricted Senior Note" shall mean any Senior Note required to bear the Private Placement Legend in accordance with Section 306(a). "Restricted Subsidiary" means any Subsidiary of the Company other than an Unrestricted Subsidiary. "Rule 144" means Rule 144 under the Securities Act (including any successor regulation thereto), as amended from time to time. "Rule 144A" means Rule 144A under the Securities Act (including any successor regulation thereto), as amended from time to time. "Securities Act" means the Securities Act of 1933 (including any successor statute thereto), as amended from time to time. "Senior Indebtedness" means the principal of, interest on and other amounts due on (i) Indebtedness of the Company, whether outstanding on the date hereof or thereafter created, incurred, assumed or guaranteed by the Company, on or prior to the date hereof in compliance with the 1991 Indenture and thereafter in compliance with Section 1008 hereof (including, without limitation, the Senior Notes), (ii) obligations of the Company related to the termination of Interest Swap Obligations, Currency Agreements or Commodities Agreements pertaining to Indebtedness described under clause (i) above and (iii) principal of or interest on the Senior Notes. Notwithstanding anything to the contrary in the foregoing, Senior Indebtedness shall not include: (a) Subordinated Indebtedness, (b) Indebtedness of or amounts owed by the Company for compensation to employees, for goods or materials purchased in the ordinary course of 22 business or for services or (c) Indebtedness of the Company to a Subsidiary of the Company. "Senior Notes" has the meaning stated in the first recital of this Indenture and more particularly means any Senior Note authenticated and delivered under this Indenture. "Seven Year Treasury Rate" means the arithmetic average (rounded to the nearest basis point) of the weekly average per annum yield to maturity values adjusted to constant maturities of seven years, for the Rate Determination Period as determined from the yield curves of the most actively traded marketable United States Treasury fixed interest rate securities (x) constructed daily by the United States Treasury Department (i) as published by the Federal Reserve Board in its Statistical Release H.15 (519), "Selected Interest Rates," which weekly average yield to maturity values currently are set forth in such Statistical Release under the caption "U.S. Government Securities--Treasury Constant Maturities--7 Year" or (ii) if said Statistical Release H.15 (519) is not then published, as published by the Federal Reserve Board in any release comparable to its Statistical Release H.15 (519) or (iii) if the Federal Reserve Board shall not be publishing a comparable release, as published in any official publication or release of any other United States Government Department or agency, or (y) if the United States Treasury Department shall not then be constructing such yield curves, then as constructed by the Federal Reserve Board or any other United States Government Department or agency and published as set forth in (x) above. However, if the Seven Year Treasury Rate cannot be determined as provided above, then the Seven Year Treasury Rate shall mean the arithmetic average (rounded to the nearest basis point) of the per annum yields to maturity for each Business Day during the Rate Determination Period of all of the issues of actively trading issues of non-interest bearing United States Treasury fixed interest rate securities with a maturity of not less than 81 months nor more than 87 months from such Business Day (1) as published in THE WALL STREET JOURNAL or (2) if THE WALL STREET JOURNAL shall cease such publication, based on average asked prices (or yields) as quoted by each of three United States Government securities dealers of recognized national standing selected by the Company. "Special Record Date" for the payment of any Defaulted Interest means a date fixed by the Trustee pursuant to Section 308. "Specified Bank Debt" means (i) all Indebtedness and other monetary obligations owing under the New Credit Agreement or any credit facilities with the banks signatory to the New Credit Agreement (or with banks affiliated with such banks), so long as such facilities are related to the New Credit Agreement; and (ii) Indebtedness owing as of the date hereof or hereafter to banks or other financial institutions under credit facilities which may in the future refinance, refund, replace, supplement or succeed (regardless of any gaps in time) the New Credit Agreement or the facilities referenced in clause (i) hereof (including extensions and restructurings and the inclusion of additional or different or substitute lenders), so long as (a) the aggregate principal amount outstanding (including available amounts under committed revolving credit or similar working capital facilities, letter of credit facilities and other commitments to provide credit) of such Indebtedness is at least equal to the principal of all publicly issued Senior Indebtedness (including without limitation, the Senior Notes, the First Mortgage Notes, the 1994 23 Senior Notes and Indebtedness under the 1991 Indenture) then outstanding (it being understood that Indebtedness described in clause (i) above and issues of Indebtedness having a principal amount lower than set forth in clause (b) below shall not be included in this amount), (b) Indebtedness outstanding under each particular credit facility has a principal amount outstanding (including available amounts under committed revolving credit or similar working capital facilities, letter of credit facilities and other commitments to provide credit) of at least twenty-five million dollars ($25,000,000) and (c) such Indebtedness constitutes Senior Indebtedness. "SRC Master Trust Indenture" has the meaning specified in clause (2) of the proviso to clause (i) of the definition of Permitted Indebtedness. "Stated Maturity", when used with respect to any Senior Note or any installment of principal thereof or interest thereon, means the date specified in such Senior Note as the fixed date on which the principal of such Senior Note or any installment of principal or interest is due and payable. "Stone Canada" means Stone Container (Canada) Inc., a company organized under the Canadian Business Corporations Act. "Stone Canada Group"" means Stone Canada and its Restricted Subsidiaries existing as of the date hereof. "Subordinated Capital Base" means the sum of (i) the Consolidated Net Worth and (ii) to the extent not included in clause (i) above, the amounts (without duplication) relating to (a) the principal amount of Subordinated Indebtedness incurred after November 1, 1991 which is unsecured and which does not have at the time of incurrence of such Subordinated Indebtedness a weighted average life that is shorter than the weighted average life remaining for the then outstanding Indebtedness under the 1991 Indenture issued prior to the date hereof, or if less than two hundred million dollars ($200,000,000) of such Indebtedness is outstanding, the Senior Notes or a maturity that is earlier than the maturity of any of the then outstanding Indebtedness under the 1991 Indenture, or if less than two hundred million dollars ($200,000,000) of such Indebtedness is outstanding, the Senior Notes, (b) redeemable stock of the Company that does not constitute Redeemable Stock and (c) the principal amount of the 11-1/2% Senior Subordinated Securities due September 1, 1999 of the Company or any Subordinated Indebtedness exchanged for, or the net proceeds of which are used to refinance, redeem or defease, such 11-1/2% Senior Subordinated Notes due September 1, 1999 pursuant to clause (ii) of the definition of "Permitted Indebtedness", that in the case of clauses (a), (b) and (c), as at the date of determination, in conformity with GAAP consistently applied, would be set forth on the consolidated balance sheet of the Company and its Restricted Subsidiaries. "Subordinated Indebtedness" means Indebtedness of the Company (whether outstanding on the date hereof or hereafter created, incurred, assumed or guaranteed by the Company) which, pursuant to the terms of the instrument creating or evidencing the same, is subordinate to the Senior Notes in right of payment or in rights upon liquidation. 24 "Subsidiary" means, with respect to any Person, (i) any corporation of which at least a majority in interest of the outstanding Capital Stock having by the terms thereof voting power under ordinary circumstances to elect directors of such corporation, irrespective of whether or not at the time stock of any other class or classes of such corporation shall have or might have voting power by reason of the happening of any contingency, is at the time, directly or indirectly, owned or controlled by such Person, or by one or more other corporations a majority in interest of such stock of which is similarly owned or controlled, or by such Person and one or more other corporations a majority in interest of such stock of which is similarly owned or controlled or (ii) any other Person (other than a corporation) in which such Person, directly or indirectly, at the date of determination thereof, has at least a majority equity ownership interest. "Taxes" means any tax, duty, levy, impost, assessment or other governmental charge imposed or levied by or on behalf of the Government of Canada or of any province or territory thereof or by an authority or agency therein or thereof having power to tax. "Ten Year Treasury Rate" means the arithmetic average (rounded to the nearest basis point) of the weekly average per annum yield to maturity values (adjusted to constant maturities of ten years, for the Rate Determination Period as determined from the yield curves of the most actively traded marketable United States Treasury fixed interest rate securities (x) constructed daily by the United States Treasury Department (i) as published by the Federal Reserve Board in its Statistical Release H.15 (519), "Selected Interest Rates." which weekly average yield to maturity values currently are set forth in such Statistical Release under the caption "U.S. Government Securities--Treasury Constant Maturities-10 Year" or (ii) if said Statistical Release H.15 (519) is not then published, as published by the Federal Reserve Board in any release comparable to its Statistical Release H.15 (519) or (iii) if the Federal Reserve Board shall not be publishing a comparable release, as published in any official publication or release of any other United States Government Department or agency, or (y) if the United States Treasury Department shall not then be constructing such yield curves, then as constructed by the Federal Reserve Board or any other United States Government Department or agency and published as set forth in (x) above. However, if the Ten Year Treasury Rate cannot be determined as provided above, then the Ten Year Treasury Rate shall mean the arithmetic average (rounded to the nearest basis point) of the per annum yields to maturity for each Business Day during the Rate Determination Period of all of the issues of actively trading issues of non-interest bearing United States Treasury fixed interest rate securities with a maturity of not less then 117 months nor more than 123 months from such Business Day (1) as published in THE WALL STREET JOURNAL or (2) if THE WALL STREET JOURNAL shall cease such publication, based on average asked prices (or yields) as quoted by each of three United States Government securities dealers of recognized national standing selected by the Company. "Trustee" means the Person named as the "Trustee" in the first paragraph of this instrument until a successor Trustee shall have become such pursuant to the applicable provisions of this Indenture, and thereafter "Trustee" shall mean or include each Person who is then a Trustee hereunder. 25 "Trust Indenture Act" means the Trust Indenture Act of 1939, as amended, as in force at the date as of which this Indenture was executed; PROVIDED, HOWEVER, that in the event that such Act is amended after such date, "Trust Indenture Act" means, to the extent required by any such amendment, the Trust Indenture Act of 1939 as so amended. "U.S. Government Obligations" means securities which are (i) direct obligations of the United States of America for the payment of which its full faith and credit is pledged or (ii) obligations of a person controlled or supervised by and acting as an agency or instrumentality of the United States of America the timely payment of which is unconditionally guaranteed by the full faith and credit of the United States of America which, in either case, are not callable or redeemable at the option of the issuer thereof or otherwise subject to prepayment. "Unrestricted Subsidiary" means a Subsidiary of the Company which has been designated as an "Unrestricted Subsidiary" for purposes of this Indenture by the Company and (i) at least 20% of whose common stock is held by one or more Persons (other than the Company and its Affiliates) which acquired such common stock in a BONA FIDE transaction for fair value and (ii) at least 10% of whose total capitalization at the time of designation is in the form of common stock or at least 15% of the fair market value of whose assets at such time shall have been contributed by such Persons. An Unrestricted Subsidiary may be designated to be a Restricted Subsidiary only if, at the time of such designation, all Indebtedness and Liens of such Subsidiary could be incurred under this Indenture. "Vice President", when used with respect to the Issuer, the Company or the Trustee, means any vice president, whether or not designated by a number or a word or words added before or after the title "vice president". "Wholly Owned Subsidiary" means a Person organized under the laws of Canada or any province thereof or any state of the United States, all of the Capital Stock (other than directors' qualifying shares) of which is owned by the Company directly by the Company and/or indirectly through one or more other Wholly Owned Subsidiaries. (xviii) SECTION 102. COMPLIANCE CERTIFICATES AND OPINIONS. Upon any application or request by the Issuer or the Company to the Trustee to take any action under any provision of this Indenture, the Issuer or the Company, as the case may be, shall furnish to the Trustee an Officer's Certificate stating that all conditions precedent, if any, provided for in this Indenture relating to the proposed action have been complied with and an Opinion of Counsel stating that in the opinion of such counsel all such conditions precedent, if any, have been complied with, except that in the case of any such application or request as to which the furnishing of such documents is specifically required by any provision of this Indenture relating to such particular application or request, no additional certificate or opinion need be furnished. Every certificate or opinion with respect to compliance with a condition or covenant provided for in this Indenture shall include: 26 (1)a statement that each individual signing such certificate or opinion has read such covenant or condition and the definitions herein relating thereto; (2)a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based; (3)a statement that, in the opinion of each such individual, he has made such examination or investigation as is necessary to enable him to express an informed opinion as to whether or not such covenant or condition has been complied with; and (4)a statement as to whether, in the opinion of each such individual, such condition or covenant has been complied with. (4) SECTION 103. FORM OF DOCUMENTS DELIVERED TO TRUSTEE. In any case where several matters are required to be certified by, or covered by an opinion of, any specified Person, it is not necessary that all such matters be certified by, or covered by the opinion of, only one such Person, or that they be so certified or covered by only one document, but one such Person may certify or give an opinion with respect to some matters and one or more other such Persons as to other matters, and any such Person may certify or give an opinion as to such matters in one or several documents. Any certificate or opinion of an Officer may be based, insofar as it relates to legal matters, upon a certificate or opinion of, or representations by, counsel, unless such Officer knows, or in the exercise of reasonable care should know, that the certificate or opinion or representations with respect to the matters upon which his certificate or opinion is based are erroneous. Any such certificate or Opinion of Counsel may be based, insofar as it relates to factual matters, upon a certificate or opinion of, or representations by, an Officer or Officers of the Issuer or the Company, as the case may be, stating that the information with respect to such factual matters is in the possession of the Issuer or the Company, as the case may be, unless such counsel knows, or in the exercise of reasonable care should know, that the certificate or opinion or representations with respect to such matters are erroneous. Where any Person is required to make, give or execute two or more applications, requests, consents, certificates, statements, opinions or other instruments under this Indenture, they may, but need not, be consolidated and form one instrument. SECTION 104. ACTS OF HOLDERS. (a) Any request, demand, authorization, direction, notice, consent, waiver or other action provided by this Indenture to be given or taken by Holders may be embodied in and evidenced by one or more instruments of substantially similar tenor signed by such Holders in person or by agents duly appointed in writing; and, except as herein otherwise expressly provided, such action shall become effective when such instrument or instruments are delivered to the Trustee and, where it is hereby expressly required, to the Issuer. Such instrument or instruments 27 (and the action embodied therein and evidenced thereby) are herein sometimes referred to as the "Act" of the Holders signing such instrument or instruments. Proof of execution of any such instrument or of a writing appointing any such agent shall be sufficient for any purpose of this Indenture and (subject to Section 601) conclusive in favor of the Trustee, the Issuer and the Company, if made in the manner provided in this Section. (b) The fact and date of the execution by any Person or any such instrument or writing may be proved by the affidavit or a witness of such execution or by a certificate of a notary public or other Person authorized by law to take acknowledgments of deeds, certifying that the individual signing such instrument or writing acknowledged to him the execution thereof. Where such execution is by a signer acting in a capacity other than his individual capacity, such certificate or affidavit shall also constitute sufficient proof of his authority. The fact and date of the execution of any such instrument or writing, or the authority of the Person executing the same, may also be proved in any other manner which the Trustee deems sufficient. (c) The ownership of Senior Notes shall be proved by the Register. (d) Any request, demand, authorization, direction, notice, consent, waiver or other Act of the Holder of any Senior Note shall bind every future Holder of the same Senior Note and the Holder of every Senior Note issued upon the registration of transfer thereof or in exchange therefor in lieu thereof in respect of anything done, omitted or suffered to be done by the Trustee, the Issuer or the Company in reliance thereon, whether or not notation of such action is made upon such Senior Note. (e) If the Issuer or the Company shall solicit from the Holders any request, demand, authorization, direction, notice, consent, waiver or other Act, the Issuer or the Company, as the case may be, may, at its option, by or pursuant to a Board Resolution, fix in advance a record date for the determination of Holders entitled to give such request, demand, authorization, direction, notice, consent, waiver or other Act, but the Issuer or the Company, as the case may be, shall have no obligation to do so. If such a record date is fixed, such request, demand, authorization, direction, notice, consent, waiver or other Act (including revocation thereof) may be given before or after such record date, but only the Holders of record at the close of business on such record date shall be deemed to be Holders for the purposes of determining whether Holders of the requisite proportion of Outstanding Senior Notes have authorized or agreed or consented to such request, demand, authorization, direction, notice, consent, waiver or other Act, and for that purpose the Outstanding Senior Notes shall be computed as of such record date; PROVIDED that no such authorization, agreement or consent by the Holders on such record date shall be deemed effective unless it shall become effective pursuant to the provisions of this Indenture not later than six months after the record date. SECTION 105. NOTICES, ETC., TO TRUSTEE AND COMPANY. Any request, demand, authorization, direction, notice, consent, waiver or Act of Holders or other document provided or permitted by this Indenture to be made upon, given or furnished to, or filed with: 28 (1)the Trustee by any Holder or by the Issuer or the Company shall be sufficient for every purpose hereunder if made, given, furnished or filed in writing to or with the Trustee at its Corporate Trust Office, or (2)the Issuer or the Company by the Trustee or by any Holder shall be sufficient for every purpose hereunder (unless otherwise herein expressly provided) if in writing and mailed, first-class postage prepaid, to the Issuer or the Company, as the case may be, addressed to it at the address of its principal office specified in the first paragraph of this Indenture, attention: Secretary or at any other address previously furnished in writing to the Trustee by the Issuer or the Company, as the case may be. (2) SECTION 106. NOTICE TO HOLDERS; WAIVER. Where this Indenture or any Senior Note provides for notice to Holders of any event, such notice shall be deemed sufficiently given (unless otherwise herein or in such Senior Note expressly provided) if in writing and mailed, first-class postage prepaid, to each Holder affected by such event, at his address as it appears in the Register, not later than the latest date, and not earlier than the earliest date, prescribed for the giving of such notice. In any case where notice to Holders is given by mail, neither the failure to mail such notice, nor any defect in any notice so mailed, to any particular Holder shall affect the sufficiency of such notice with respect to other Holders or the validity of the proceedings to which such notice relates. Where this Indenture or any Senior Note provides for notice in any manner, such notice may be waived in writing by the Person entitled to receive such notice, either before or after the event, and such waiver shall be the equivalent of such notice. Waivers of notice by Holders shall be filed with the Trustee, but such filing shall not be a condition precedent to the validity of any action taken in reliance upon such waiver. In case by reason of the suspension of regular mail service or by reason of any other cause it shall be impracticable to give such notice by mail, then such notification as shall be made with the approval of the Trustee shall constitute a sufficient notification for every purpose hereunder. Any request, demand, authorization, direction, notice, consent or waiver required or permitted under this Indenture shall be in the English language, except that any published notice may be in an official language of the country of publication. SECTION 107. THE TRUST INDENTURE ACT; CONFLICT WITH TRUST INDENTURE ACT. (a) Reference in this Indenture to specific Sections of the Trust Indenture Act are to be treated as if this Indenture were required to be qualified under and to conform to the requirements of the Trust Indenture Act. (b) If any provision hereof limits, qualifies or conflicts with the duties imposed by any of Sections 310 through 317, inclusive, of the Trust Indenture Act through the operation of Section 318(c) thereof, such imposed duties shall control. 29 SECTION 108. EFFECT OF HEADINGS AND TABLE OF CONTENTS. The Article and Section headings herein and the Table of Contents are for convenience only and shall not affect the construction hereof. SECTION 109. SUCCESSORS AND ASSIGNS. All covenants and agreements in this Indenture by the Issuer and the Company shall bind each of their successors and assigns, whether so expressed or not. SECTION 110. SEPARABILITY CLAUSE. In case any provision in this Indenture or in the Senior Notes shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. SECTION 111. BENEFITS OF INDENTURE. Nothing in this Indenture or in the Senior Notes, express or implied, shall give to any Person, other than the parties hereto or thereto and their successors hereunder and the Holders, any benefit or any legal or equitable right, remedy or claim under this Indenture. SECTION 112. GOVERNING LAW. This Indenture and the Senior Notes shall be governed by and construed in accordance with the laws (other than the choice of law provisions) of the State of New York. SECTION 113. LEGAL HOLIDAYS. In any case where any Interest Payment Date, Redemption Date, or Stated Maturity of any Senior Note, or any other payment date, including, without limitation, any Asset Disposition Payment Date, Change of Control Payment Date, Deficiency Payment Date or Redemption Date, shall not be a Business Day, then (notwithstanding any other provision of this Indenture or of the Senior Notes) payment of interest or principal (and premium, if any) need not be made on such date, but may be made on the next succeeding Business Day with the same force and effect as if made on the Interest Payment Date, or Redemption Date or at the Stated Maturity or other payment date, PROVIDED that no interest shall accrue for the period from and after such Interest Payment Date or Redemption Date or Stated Maturity or other payment date, as the case may be. SECTION 114. NO RECOURSE AGAINST OTHERS. Directors, officers, employees or stockholders, as such, of the Issuer or Company shall not have any liability for any obligations of the Issuer or the Company under the Senior Notes or this Indenture, or for any claim based on, in respect of or by reason of such obligations or their creation. Each Securityholder, by accepting a Senior Note, waives and releases all such liability. Such waivers and releases are part of the consideration for the issuance of the Senior Notes. 30 SECTION 115. CONSENT TO JURISDICTION AND SERVICE OF PROCESS. (a) The Issuer and the Company each irrevocably submit to the jurisdiction of any Federal court (or, if such court refuses to take jurisdiction, any New York State Court) located in the Borough of Manhattan in The City of New York over any suit, action or proceeding arising out of or relating to this Indenture or any Senior Note. The Issuer and the Company each irrevocably waives, to the fullest extent permitted by law, any objection which it may have to the laying of the venue of any such suit, action or proceeding brought in such a court and any claim that any suit, action or proceeding brought in such a court has been brought in an inconvenient forum. The Issuer and the Company each agrees that final judgment in any such suit, action or proceeding brought in such a court shall be conclusive and binding upon it and may be enforced in the courts of, in the case of the Issuer, Canada or any other courts to the jurisdiction of which the Issuer or the Company is subject, by a suit upon judgment, PROVIDED that service of process is effected upon the Issuer or the Company, as the case may be, in the manner specified in the following paragraph or as otherwise permitted by law; PROVIDED, HOWEVER, that the Issuer and the Company do not waive, and the foregoing provisions of this sentence shall not constitute or be deemed to constitute a waiver of, (i) any right to appeal any such judgment, to seek any stay or otherwise to seek reconsideration or review of any such judgment in each case before the trial court of a United States Federal or State court having appellate jurisdiction over such trial court or (ii) any stay of execution or levy pending an appeal from, or a suit, action or proceeding for reconsideration or review of, any such judgment. (b) As long as any of the Senior Notes remain Outstanding, the Issuer and the Company will at all times have an authorized agent in the Borough of Manhattan, The City of New York upon whom process may be served in any suit, action or proceeding arising out of or relating to this Indenture or any Senior Note. Service of process upon such agent and written notice of such service mailed or delivered to the Issuer or the Company, as the case may be, shall to the extent permitted by law be deemed in every respect effective service of process upon the Issuer or the Company, as the case may be, in any such suit, action or proceeding. The Issuer and the Company each hereby irrevocably appoints CT Corporation System whose address is, as of the date hereof, 1633 Broadway, New York, New York 10019, as their agent for such purpose until August 16, 2008, and covenants and agrees that service of process in any such suit, action or proceeding may be made upon them at the office of such agent at said address (or at such other address in the Borough of Manhattan, The City of New York, as the Issuer and the Company may designate by written notice to the Trustee). The Issuer and the Company each hereby represents and warrants that such agent has accepted such appointment and has agreed to act as said agent for service of process, and the Issuer and the Company each agrees to take any and all action, including the filing of any and all documents that may be necessary to continue such appointment in full force and effect as aforesaid. (c) The Issuer and the Company each hereby consents to process being served in any suit, action or proceeding of the nature referred to in the preceding paragraphs by service upon such agent together with the mailing of a copy thereof by registered or certified mail, postage prepaid, return receipt requested to the address of the Issuer or the Company, as the case 31 may be, specified in Section 105 or to any other address of which the Issuer or the Company, as the case may be, shall have given written notice to the Trustee. The Issuer and the Company each hereby irrevocably waives, to the fullest extent permitted by law, all claim of error by reason of any such service (but does not waive any right to assert lack of subject matter jurisdiction) and agree that such service and mailing (i) shall be deemed in every respect effective service of process upon the Issuer or the Company, as the case may be, in any such suit, action or proceeding and (ii) shall, to the fullest extent permitted by law, be taken and held to be valid personal service. (d) Nothing in this Section 115 shall affect the right of the Trustee or any Holder to serve process in any manner permitted by law or limit the right of the Trustee to bring proceedings against the Issuer or the Company in the courts of any jurisdiction or jurisdictions. SECTION 116. INCORPORATION BY REFERENCE TO TRUST INDENTURE ACT. Whenever this Indenture refers to a provision of the Trust Indenture Act, the provision is incorporated by reference in and made a part of this Indenture. The following Trust Indenture Act terms incorporated by reference in this Indenture have the following meanings: "indenture securities" means the Senior Notes. "indenture security holder" means a Holder or a Securityholder. "indenture to be qualified" means this Indenture. "indenture trustee" or "institutional trustee" means the Trustee. "obligor" on the indenture securities means the Company or any other obligor on the Senior Notes, if any. All other Trust Indenture Act terms used or incorporated by reference in this Indenture that are defined by the Trust Indenture Act, defined by Trust Indenture Act reference to another statute or defined by Commission rule have the meanings assigned to them therein. ARTICLE TWO SENIOR NOTE FORMS SECTION 201. FORMS GENERALLY. (a)The Senior Notes and the certificate of authentication of the Trustee therein shall be in substantially the form set forth in this Article, with such appropriate insertions, omissions, substitutions and other variations as are required or permitted by this Indenture, and may have such letters, numbers or other marks of identification and such legends or endorsements placed thereon as may be required to comply with the rules of any securities exchange or as may, consistently herewith, be determined by the Officers executing such Senior Notes, as evidenced by 32 their execution of the Senior Notes. The definitive Senior Notes shall be typed, printed, lithographed or engraved on steel engraved borders or any combination of such methods or produced in any other manner, all as determined by the Officers of the Issuer executing such Senior Notes, as evidenced by their execution of such Senior Notes. (b) Senior Notes initially offered and sold (i) to QIBs in reliance on Rule 144A or (ii) Non-U.S. Persons in reliance on Regulation S, as provided in the Note Purchase Agreement, shall be issued initially in the form of one or more permanent global notes in definitive, fully registered form, without coupons, substantially in the form set forth in Section 202 (each, a "Global Note"). Upon issuance, each such Global Note shall be registered in the name of Cede & Co. or such other nominee designated by the Depositary (the "Global Note Holder"), duly executed by the Issuer and the Company (as guarantor) and authenticated by the Trustee as hereinafter provided and deposited on behalf of the purchasers of the Senior Notes represented thereby with the Trustee at its Corporate Trust Office, as custodian for the Depositary. The aggregate principal amount of each Global Note may from time to time be increased or decreased by adjustments made on the records of the Trustee, as custodian for the Depositary for such Global Note, as provided in Section 305, which adjustments shall be conclusive as to the aggregate principal amount of such Global Note. So long as the Global Note Holder is the registered owner of any Senior Notes, the Global Note Holder will be considered the sole Holder under the Indenture of any Senior Notes evidenced by a Global Note. Beneficial owners of Senior Notes evidenced by a Global Note will not be considered the owners or Holders thereof under this Indenture for any purpose, including with respect to the giving of any directions, instructions or approvals to the Trustee thereunder. Accordingly, beneficial owners of an interest in a Global Note must rely on the procedures of the Depositary, and if such person is not a member of, or participant in, the Depository ("Participant"), on the procedures of the Participant through which such person owns its interest, to exercise any rights and fulfill any obligations of a Holder under this Indenture. No beneficial owners of an interest in a Global Note will be able to transfer that interest except in accordance with the Depository's applicable procedures, in addition to those provided for in the Indenture. None of the Company, the Issuer, the Trustee, the Registrar or any Paying Agent will have any responsibility or liability for any aspect of the records of the Depository on any Participant or for maintaining, supervising or reviewing any records of the Depository or any Participant relating to the Senior Notes, and may conclusively rely on, and will be protected in relying on, instructions from the Global Note Holder or the Depository for all purposes. (c) Senior Notes initially offered and sold to Institutional Accredited Investors as provided in the Note Purchase Agreement, shall be issued initially in definitive certificated, fully registered form, without coupons ("Certificated Notes") substantially in the form set forth in Section 202. (a) SECTION 202. FORM OF FACE OF SENIOR NOTE. Each Senior Note shall be in substantially the following form: (a) [INCLUDE IF SENIOR NOTE IS A GLOBAL NOTE -- UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE 33 DEPOSITORY TRUST COMPANY TO THE ISSUER OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE ISSUED IN EXCHANGE FOR THIS CERTIFICATE OR ANY PORTION HEREOF IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY (AND ANY PAYMENT IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY) ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN. THIS NOTE IS A GLOBAL NOTE WITHIN THE MEANING OF THE INDENTURE HEREINAFTER REFERRED TO. THIS GLOBAL NOTE MAY NOT BE EXCHANGED, IN WHOLE OR IN PART, FOR A NOTE REGISTERED IN THE NAME OF ANY PERSON OTHER THAN THE DEPOSITORY TRUST COMPANY OR A NOMINEE THEREOF EXCEPT IN THE CIRCUMSTANCES SET FORTH IN SECTIONS 305 AND 306 OF THE INDENTURE, AND MAY NOT BE TRANSFERRED, IN WHOLE OR IN PART, EXCEPT IN ACCORDANCE WITH THE RESTRICTIONS SET FORTH IN SECTIONS 305 AND 306 OF THE INDENTURE. BENEFICIAL INTERESTS IN THIS GLOBAL NOTE MAY NOT BE TRANSFERRED EXCEPT IN ACCORDANCE WITH SECTIONS 305 AND 306 OF THE INDENTURE.] (b) [INCLUDE THE FOLLOWING LEGEND ONLY IF REQUIRED PURSUANT TO SECTION 306(a) -- THIS NOTE (OR ITS PREDECESSOR) EVIDENCED HEREBY WAS ORIGINALLY ISSUED IN A TRANSACTION EXEMPT FROM REGISTRATION UNDER SECTION 5 OF THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND THE NOTE EVIDENCED HEREBY MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN APPLICABLE EXEMPTION THEREFROM. EACH PURCHASER OF THE NOTE EVIDENCED HEREBY IS HEREBY NOTIFIED THAT THE SELLER MAY BE RELYING ON THE EXEMPTION PROVIDED BY RULE 144A UNDER THE SECURITIES ACT. THE HOLDER OF THE NOTE EVIDENCED HEREBY AGREES FOR THE BENEFIT OF THE ISSUER AND STONE CONTAINER CORPORATION (THE "COMPANY") THAT (A) SUCH NOTE MAY BE RESOLD, PLEDGED OR OTHERWISE TRANSFERRED, ONLY (1) (a) TO A PERSON WHO THE SELLER REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT) IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A, (b) IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144 UNDER THE SECURITIES ACT (c) PURSUANT TO OFFERS AND SALES OUTSIDE THE UNITED STATES IN COMPLIANCE WITH THE PROVISIONS OF REGULATION S UNDER THE SECURITIES ACT OR (d) IN ACCORDANCE WITH ANOTHER EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT (AND BASED UPON CERTIFICATES AND/OR OPINIONS OF COUNSEL TO THE EXTENT REQUIRED IN THE INDENTURE), (2) TO THE ISSUER OR THE COMPANY OR (3) PURSUANT TO AN 34 EFFECTIVE REGISTRATION STATEMENT AND, IN EACH CASE, IN ACCORDANCE WITH THE APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES OR ANY OTHER APPLICABLE JURISDICTION AND (B) THE HOLDER WILL, AND EACH SUBSEQUENT HOLDER IS REQUIRED TO, NOTIFY ANY PURCHASER OF THE NOTE EVIDENCED HEREBY OF THE RESALE RESTRICTIONS SET FORTH IN (A)(1) ABOVE IF THEN APPLICABLE. (c) [INSERT ANY LEGEND REQUIRED BY THE INTERNAL REVENUE CODE OF 1986, AS AMENDED, AND THE REGULATIONS THEREUNDER.] (d) (Face of Senior Note) STONE CONTAINER FINANCE COMPANY OF CANADA 11-1/2% Senior Note due 2006 guaranteed on a senior basis by STONE CONTAINER CORPORATION Number ______ U.S.$______ CUSIP NO.: ________ Stone Container Finance Company of Canada (herein called the "Issuer," which term includes any successor corporation under the Indenture hereinafter referred to), for value received, hereby promises to pay to ______ or registered assigns, [[INCLUDE IF NOT A GLOBAL NOTE] the principal sum of _____ UNITED STATES DOLLARS] [INCLUDE IF A GLOBAL NOTE -- the Initial Principal Amount Specified in Schedule A hereto] on August 15, 2006, and to pay interest thereon from the date hereof or from the most recent Interest Payment Date to which interest has been paid or duly provided for, semi-annually on February 15 and August 15 of each year (commencing February 15, 1997), at the rate of 11-1/2% per annum, until the principal hereof is paid or made available for payment. The interest so payable, and punctually paid or duly provided for, on any Interest Payment Date will, as provided in such Indenture, be paid to the Person in whose name this Senior Note (or one or more Predecessor Senior Notes) is registered at the close of business on the Record Date for such interest, which shall be the February 1 or August 1 (whether or not a Business Day), as the case may be, preceding such Interest Payment Date. Any such interest not so punctually paid or duly provided for will forthwith cease to be payable to the Holder on such Record Date and may either be paid to the Person in whose name this Senior Note (or one or more Predecessor Senior Notes) is registered at the close of business on a Special Record Date for the payment of such Defaulted Interest to be fixed by the Trustee, notice whereof shall be given to Holders of Senior Notes not less than 10 days prior to such Special Record Date, or be paid at any time in any other lawful manner not inconsistent with the requirements of any securities exchange on which the Senior Notes may be listed, and upon such notice as may be required by such exchange, all as more fully provided in the Indenture. 35 Payment of the principal of (and premium, if any) and interest on this Senior Note will be made at the office or agency of the Issuer maintained for that purpose in the Borough of Manhattan, The City of New York in dollars; PROVIDED, HOWEVER, that at the option of the Issuer, payment of interest may be made by check mailed to the address of the Person entitled thereto as such address shall appear in the Register. Payment of the principal of (and premium, if any), interest, Additional Amounts on, and other amounts payable in respect of, this Senior Note is guaranteed on a senior basis by the Company as provided in such Indenture. Reference is hereby made to the further provisions of this Senior Note set forth on the reverse hereof, which further provisions shall for all purposes have the same effect as if set forth at this place. Unless the certificate of authentication hereon has been executed by the Trustee referred to on the reverse hereof by manual signature, this Senior Note shall not be entitled to any benefit under the Indenture or be valid or obligatory for any purpose. IN WITNESS WHEREOF, each of the Issuer and the Company has caused this instrument to be duly executed. STONE CONTAINER FINANCE COMPANY OF CANADA, as Issuer By -------------------------------- STONE CONTAINER CORPORATION, as Guarantor By -------------------------------- 36 SECTION 203. FORM OF REVERSE OF SENIOR NOTE. (Reverse of Senior Note) 1.This Senior Note is one of a duly authorized issue of securities of the Issuer designated as its "11-1/2% Senior Notes due 2006" (herein called the "Senior Notes") limited in aggregate principal amount to two hundred million United States dollars (U.S.$200,000,000), issued and to be issued in a single series under an indenture, dated as of August 16, 1996 (as amended or supplemented from time to time, the "Indenture"), between the Issuer, Stone Container Corporation (the "Company"), as guarantor, and The Bank of New York, as trustee (the "Trustee," which term includes any successor Trustee under the Indenture), to which Indenture reference is hereby made for a statement of the respective rights, limitations of rights, duties and immunities thereunder of the Issuer, the Company, the Trustee and each of the Holders and of the terms upon which the Senior Notes are, and are to be, authenticated and delivered. All terms used in this Senior Note which are not defined herein shall have the meanings assigned to them in the Indenture. 2.Interest on this Senior Note will be computed on the basis of a 360-day year of twelve, 30-day months. Each payment of interest in respect of an Interest Payment Date will include interest accrued through the day before such Interest Payment Date. If an Interest Payment Date falls on a day that is not a Business Day, the interest payment to be made on such Interest Payment Date will be made on the next succeeding Business Day with the same force and effect as if made on such Interest Payment Date, and no additional interest will accrue as a result of such delayed payment. If any payment of principal of (and premium, if any) or installment of interest on this Senior Note is not paid when due then, to the extent that payment of such interest shall be legally enforceable, interest upon such overdue principal (and premium, if any) and installment of interest, shall be paid at the rate set forth on the face of this Senior Note. The Issuer shall pay the Holders such Additional Amounts as may be payable under Section 1014 of the Indenture. 3.Under certain circumstances following an Asset Disposition, the Company may offer to repurchase Senior Notes, in whole or in part, at a repurchase price equal to 100% of the principal amount thereof, plus accrued interest to the date of repurchase, from proceeds or excess net proceeds of such Asset Disposition, as provided in, and subject to the terms of, the Indenture. The Company is required to give Holders notice of such right within the period specified in the Indenture. Holders may tender their Senior Notes for repurchase on or prior to the close of business on the applicable payment date. If the aggregate principal amount of Senior Notes surrendered for repurchase exceeds the aggregate principal amount of the applicable offer price, the selection of the Senior Notes to be repurchased shall be made by the Trustee on a PRO RATA basis. 4.Except as set forth below, as provided in the Indenture, in the event that the Company's Subordinated Capital Base is less than one billion dollars ($1,000,000,000) (the "Minimum Subordinated Capital Base") as at the end of each of any two consecutive fiscal quarters (the last day of the second such fiscal quarter, a "Deficiency Date"), then the Company shall, no later than 37 60 days after the Deficiency Date (105 days if a Deficiency Date is also the end of the Company's fiscal year), make an offer to all Holders to purchase (a "Deficiency Offer") 10% of the principal amount of the Senior Notes originally issued, or such lesser amount as may be Outstanding at the time such Deficiency Offer is made (the "Deficiency Offer Amount"), at a purchase price equal to 100% of principal amount, plus accrued and unpaid interest to the Deficiency Payment Date. Thereafter, semi-annually the Company shall make like Deficiency Offers for the then applicable Deficiency Offer Amount of Senior Notes until the Company's Subordinated Capital Base as at the end of any subsequent fiscal quarter shall be equal to or greater than the Minimum Subordinated Capital Base. Notwithstanding the foregoing, after any specified Deficiency Date, the last day of any subsequent fiscal quarter shall not constitute a Deficiency Date (giving rise to an additional obligation under the first sentence of this paragraph) unless the Company's Subordinated Capital Base was equal to or greater than the Minimum Subordinated Capital Base as at the end of a fiscal quarter that followed such specified Deficiency Date and preceded such subsequent quarter. 5.Notwithstanding the foregoing, as provided in the Indenture, in the event that (1) the making of a Deficiency Offer by the Company or (2) the purchase of Senior Notes by the Company in respect of a Deficiency Offer would constitute a default (with the giving of notice, the passage of time or both) with respect to any Specified Bank Debt at the time outstanding, then, in lieu of the making of a Deficiency Offer in the circumstances set forth above, (i) the interest rate on the Senior Notes shall be reset as of the first day of the second fiscal quarter following the Deficiency Date (the "Reset Date") to a rate per annum (the "Reset Rate") equal to the greater of (x) the Initial Interest Rate and (y) the sum of (A) 400 basis points and (B) the higher of the Seven Year Treasury Rate and the Ten Year Treasury Rate, (ii) on the first Interest Payment Date following the Reset Date, the interest rate on the Senior Notes, as reset on the Reset Date, shall increase by fifty (50) basis points, and (iii) the interest rate on the Senior Notes shall further increase by an additional fifty (50) basis points on each succeeding Interest Payment Date; PROVIDED, HOWEVER, that notwithstanding clauses (i), (ii) or (iii) above, in no event shall the interest rate to be borne by the Senior Notes at any time exceed the Initial Interest Rate by more than two hundred (200) basis points. Once the interest rate on the Senior Notes has been reset as set forth above, as provided in the Indenture, if the Company's Subordinated Capital Base is equal to or greater than the Minimum Subordinated Capital Base as of the last day of any fiscal quarter subsequent to the Deficiency Date, interest on the Senior Notes shall return to the Initial Interest Rate effective as of the first day of the second following fiscal quarter. 6.The Indenture also provides that upon the occurrence of a Change of Control, subject to the satisfaction of certain substantial conditions precedent set forth in the Indenture, each Holder shall have the right to require that the Company repurchase such Holder's Senior Notes in whole or in part at a price equal to 101% of the aggregate principal amount thereof plus accrued and unpaid interest, if any, to the date of such repurchase. 7.The Indenture contains provisions for (i) defeasance of certain of the obligations of the Issuer and the Company (including covenants) under the Indenture and (ii) satisfaction and discharge of the Indenture upon compliance by the Issuer and the Company with certain 38 conditions set forth therein, which provisions apply to this Senior Note. 8.The Senior Notes will not be redeemable on or prior to August 17, 2001. After such date, the Senior Notes will be redeemable at the option of the Issuer, at any time as a whole, or from time to time in part, on not less than 30 days nor more than 45 days' notice, at 101% of the principal amount thereof, plus accrued and unpaid interest (if any) to the Redemption Date, so long as the date upon which such notice is given is an Investment Grade Date. In addition, after August 15, 2004, the Senior Notes will be redeemable at the option of the Company, at any time as a whole, or from time to time in part, on not less than 30 days nor more than 45 days' notice, at 100% of the principal amount thereof, plus accrued and unpaid interest (if any) to the Redemption Date. 9.The Indenture imposes certain limitations on the ability of the Company and its Restricted Subsidiaries to, among other things, make certain Restricted Payments, create and incur Indebtedness and create or suffer to exist certain Liens (other than Permitted Liens). The Indenture imposes limitations on the ability of the Issuer and the Company to merge or consolidate with any other Person or sell, assign, transfer or lease all or substantially all of its properties or assets. All such covenants and limitations are subject to a number of important qualifications and exceptions. The Issuer and the Company must report periodically to the Trustee on compliance with the covenants in the Indenture. 10.The payment of principal, interest, Additional Amounts and other amounts payable in respect of the Senior Notes is unconditionally guaranteed by the Company in accordance with Article Twelve of the Indenture. The Indenture permits the Company, at its option at any time, to assume all of the Issuer's rights and obligations under the Indenture, the Senior Notes and related documents in accordance with the terms of a supplemental Indenture, in which event the Issuer will be released from such rights and obligations. Upon the occurrence of a Company Event of Default, and the declaration of principal, interest, Additional Amounts and other amounts payable in respect of the Senior Notes to be immediately due and payable in accordance with this Indenture, the Company shall be deemed to directly assume such obligations. 11.The Indenture permits, with certain exceptions as therein provided, the amendment thereof and the modification of the rights and obligations of the Issuer and the Company and the rights of the Holders to be affected under the Indenture at any time by the Issuer and the Company and the Trustee with the consent of the Holders representing at least a majority in principal amount of the Senior Notes at the time Outstanding. The Indenture also contains provisions permitting the Holders of at least a majority in principal amount of the Senior Notes at the time Outstanding, on behalf of the Holders of all Senior Notes, to waive compliance by the Issuer and the Company with certain provisions of the Indenture and certain defaults under the Indenture and their consequences. Any such consent or waiver by the Holder of this Senior Note shall bind such Holder and all future Holders of this Senior Note and of any Senior Note issued upon the registration of transfer hereof or in exchange hereof or in lieu hereof, whether or not notation of such consent or waiver is made upon this Senior Note. 39 12.No reference herein to the Indenture and no provision of this Senior Note or of the Indenture shall alter or impair the obligations of the Issuer or the Company, which are absolute and unconditional, to pay (in the case of the Company as provided in the Guaranty or as otherwise provided in the case of a Company Event of Default) the principal of (and premium, if any), interest and Additional Amounts on this Senior Note at the times, place and rate, and in the coin or currency, herein prescribed. 13.As provided in the Indenture and subject to certain limitations therein set forth, the transfer of this Senior Note is registrable in the Register, upon surrender of this Senior Note for registration of transfer at the office or agency of the Issuer in any place where the principal of (and premium, if any) and interest on this Senior Note are payable, duly endorsed by, or accompanied by a written instrument of transfer in form satisfactory to the Company and the Registrar duly executed by the Holder hereof, such Holder's attorney duly authorized in writing, and thereupon one or more new Senior Notes, of authorized denominations and for the same Stated Maturity and aggregate principal amount, will be issued to the designated transferee or transferees. 14.The Senior Notes are issuable only in registered form without coupons in denominations of one thousand dollars ($1,000) and any integral multiple thereof. As provided in the Indenture and subject to certain limitations therein set forth, Senior Notes are exchangeable for a like aggregate principal amount of Senior Notes of a different authorized denomination, as requested by the Holder surrendering the same. No service charge shall be made for any such registration of transfer or exchange, but the Issuer may require payment by the Holder of a sum sufficient to cover any tax or other governmental charge payable in connection therewith. 15.Prior to due presentment of this Senior Note for registration of transfer, the Issuer, the Company, the Trustee and any agent of the Issuer, the Company or the Trustee may treat the Person in whose name this Senior Note is registered as the owner hereof for all purposes, whether or not this Senior Note be overdue, and neither the Issuer, the Company, the Trustee nor any such agent shall be affected by notice to the contrary. 16.All payments on the Senior Notes will be made in United States Dollars. 17.A director, officer, employee or stockholder, as such, of the Issuer or the Company shall not have any liability for any obligations of the Issuer or the Company under this Senior Note or the Indenture, or for any claim based on, in respect of or by reason of, such obligations or their creation. Each Holder, by accepting a Senior Note, waives and releases all such liability. The waiver and release are part of the consideration for the issuance of this Senior Note. 18.Pursuant to a recommendation promulgated by the Committee on Uniform Security Identification Procedures ("CUSIP"), the Issuer or the Company has caused CUSIP numbers to be printed on the Senior Notes as a convenience to the Holders of the Senior Notes. No representation is made as to the correctness or accuracy of such numbers as printed on the Senior Notes and reliance may be placed only on the other identification numbers printed hereon. 40 19.At any time when the Company is not subject to Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, upon request of a Holder of a Senior Note [FOR GLOBAL NOTE -- or of a beneficial owner of an interest in a Global Note], the Issuer and the Company will promptly furnish or cause to be furnished Rule 144A Information (as defined below) to such Holder [FOR GLOBAL NOTE -- or beneficial owner], or to a prospective purchaser of a Senior Note [FOR GLOBAL NOTE -- or a beneficial interest in a Global Note] designated by such holder [or beneficial owner of such interest], in order to permit compliance by such Holder [FOR GLOBAL NOTE or beneficial owner] with Rule 144A under the Securities Act of 1933, as amended (the "Securities Act"). "Rule 144A Information" shall be such information as is specified pursuant to Rule 144A(d)(4) under the Securities Act (or any successor provision thereto). ASSIGNMENT FORM To assign this Senior Note, fill in the form below: (I) or (we) assign and transfer this Senior Note to ------------------------------------------------------- (Insert assignee's social security or tax I.D. number) ------------------------------------------------------- ------------------------------------------------------- ------------------------------------------------------- ------------------------------------------------------- (Print or type assignee's name, address and zip code) and irrevocably appoint _____________________________ agent to transfer this Senior Note on the books of the Company. The agent may substitute another to act for him or her. Dated: ____________ Your Signature: _________________________ (Sign exactly as your name appears on the other side of this Senior Note) Signature Guaranty:______________________________ Signatures must be guaranteed by an "eligible guarantor institution" meeting the requirements of the Registrar, which requirements include membership or participation in STAMP or such other "signature guarantee program" as may be determined by the Registrar in addition to, or in substitution for, STAMP, all in accordance with the Securities Exchange Act of 1934, as amended. 41 OPTION OF HOLDER TO ELECT PURCHASE If you wish to elect to have all or any portion of this Senior Note purchased by the Company pursuant to Section 1009 ("Asset Disposition Offer"), Section 1013 ("Change of Control Offer"), or Section 1101 ("Deficiency Offer") of the Indenture, check the applicable boxes: Section 1009: Section 1013: Section 1101: in whole in whole in whole in part in part in part amount to be amount to be amount to be purchased: $ purchased: $ purchased: $ -------- -------- --------- Dated:________________ Your Signature: (Sign exactly as your name appears on the other side of this Senior Note) Signature Guaranty: Signatures must be guaranteed by an "eligible guarantor institution" meeting the requirements of the Registrar, which requirements include membership or participation in STAMP or such other "signature guarantee program" as may be determined by the Registrar in addition to, or in substitution for, STAMP, all in accordance with the Securities Exchange Act of 1934, as amended. Social Security Number or Taxpayer Identification Number:________ 42 [IF NOTE IS A GLOBAL NOTE, INSERT AS A SEPARATE PAGE -- Schedule A SCHEDULE OF ADJUSTMENTS
Notation made on Principal amount behalf of the Date adjustment Principal amount Principal amount following Security made increase decrease adjustment Registrar __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ _________]
43 19. SECTION 204. FORM OF TRUSTEE'S CERTIFICATE OF AUTHENTICATION. The Trustee's certificate of authentication on each Senior Note shall be in substantially the following form: Dated:____________ TRUSTEE'S CERTIFICATE OF AUTHENTICATION This is one of the 111/2% Senior Notes due 2006 issued under the Indenture referred to in this Senior Note. THE BANK OF NEW YORK, as Trustee By_____________________ Authorized Signatory SECTION 205. CUSIP NUMBER. The Issuer in issuing Senior Notes may use a "CUSIP" number, and if so, the Trustee may use the CUSIP number in notices of redemption or exchange as a convenience to Holders; PROVIDED, that any such notice may state that no representation is made as to the correctness or accuracy of the CUSIP number printed on the notice or on the Senior Notes, and that reliance may be placed only on the other identification numbers printed on the Senior Notes, and any such redemption shall not be affected by any defect in or omission of such numbers. The Issuer will promptly notify the Trustee of any change in the CUSIP number of the Senior Notes. ARTICLE THREE THE SENIOR NOTES SECTION 301. TITLE AND TERMS. The aggregate principal amount of Senior Notes Outstanding at any time may not exceed the amount of two hundred million dollars ($200,000,000). The Senior Notes shall be issued in a single series, known and designated as the "11-1/2% Senior Notes due 2006" of the Issuer. The Stated Maturity for the payment of principal of the Senior Notes shall be August 15, 2006, and the Senior Notes shall bear interest at 11-1/2% per annum from the Issue Date, or from the most recent Interest Payment Date to which interest has been paid thereon or duly provided for, payable semi-annually on February 15 and August 15 of each year (commencing February 15, 1997) until the principal thereof is paid or duly provided for. The principal of (and premium, if any,) interest and Additional Amounts on the Senior 44 Notes shall be payable at the office or agency of the Issuer in the Borough of Manhattan, The City of New York, maintained for such purpose and at any other office or agency maintained by the Issuer for such purpose; PROVIDED, HOWEVER, that interest may be payable at the option of the Issuer by check mailed to the address of the Person entitled thereto as such address shall appear on the Register except in the case of any Global Notes, as otherwise provided under the rules of the Depository or in any Letter of Representations provided by the Issuer or the Company to the Depository. SECTION 302. DENOMINATIONS. The Senior Notes shall be issuable in fully registered form without coupons in denominations of one thousand dollars ($1,000) or any integral multiple thereof. SECTION 303. EXECUTION, AUTHENTICATION, DELIVERY AND DATING. The Senior Notes shall be executed on behalf of each of the Issuer and the Company, as guarantor, by its Chairman of the Board, its President or one of its Vice President. The signature of any of these officers on the Senior Notes may be manual or facsimile. The seal of the Issuer may be in the form of a facsimile thereof and may be impressed, affixed, imprinted or otherwise reproduced on the Senior Notes. Typographical and other minor errors or defects in any such reproduction of the seal or any such signature shall not affect the validity or enforceability of any Senior Note that has been duly authenticated and delivered by the Trustee. Senior Notes bearing the manual or facsimile signatures of individuals who were at any time the proper officers of the Issuer shall bind the Issuer, notwithstanding that such individuals or any of them have ceased to hold such offices prior to the authentication and delivery of such Senior Notes or did not hold such offices at the date of such Senior Notes. At any time and from time to time after the execution and delivery of this Indenture, the Issuer may deliver Senior Notes executed by the Issuer and the Company as guarantor to the Trustee for authentication, together with a Company Order of the Issuer for the authentication and delivery of such Senior Notes, and the Trustee in accordance with such Company Order shall authenticate and make such Senior Notes available for delivery. Each Senior Note shall be dated the date of its authentication. The Senior Notes may contain such notations, legends or endorsements required by law, stock exchange rule or usage. No Senior Note shall be entitled to any benefit under this Indenture or be valid or obligatory for any purpose unless there appears on such Senior Note a certificate of authentication substantially in the form provided for herein executed by the Trustee by manual signature, and such certificate upon any Senior Note shall be conclusive evidence, and the only evidence, that such Senior Note has been duly authenticated and delivered hereunder and is entitled to the benefits of this Indenture. SECTION 304. TEMPORARY SENIOR NOTES. Pending the preparation of definitive Senior Notes, the Issuer and the Company may 45 execute, and upon a Company Order of the Issuer, the Trustee shall authenticate and make available for delivery, temporary Senior Notes which are printed, lithographed, typewritten, mimeographed, or otherwise produced, in any authorized denomination, substantially in the tenor of the definitive Senior Notes in lieu of which they are issued and with such appropriate insertions, omissions, substitutions and other variations as the officers executing such Senior Notes may determine, as conclusively evidenced by their execution of such Senior Notes. If temporary Senior Notes are issued, the Issuer will cause definitive Senior Notes to be prepared without unreasonable delay. After the preparation of definitive Senior Notes, the temporary Senior Notes shall be exchangeable for definitive Senior Notes upon surrender of the temporary Senior Notes at the office or agency of the Issuer in a Place of Payment, without charge to the Holder. Upon surrender for cancellation of any one or more temporary Senior Notes, the Issuer and the Company shall execute and the Trustee shall authenticate and make available for delivery in exchange therefor a like principal amount of definitive Senior Notes of authorized denominations and of like tenor. Until so exchanged, the temporary Senior Notes shall in all respects be entitled to the same benefits under this Indenture as definitive Senior Notes. SECTION 305. REGISTRATION, REGISTRATION OF TRANSFER AND EXCHANGE. (a) The Issuer shall cause to be kept at the Corporate Trust Office of the Trustee a register (the register maintained in such office and in any other office or agency of the Issuer in a Place of Payment being herein sometimes collectively referred to as the "Register") in which, subject to such reasonable regulations as it may prescribe, the Issuer shall provide for the registration of Senior Notes and for registration of transfers of Senior Notes. The Trustee is hereby appointed "Registrar" for the purpose of registering Senior Notes and transfers of Senior Notes as herein provided. Upon surrender for registration of transfer of any Senior Note at the office or agency of the Issuer in a Place of Payment, the Issuer shall execute, and the Trustee shall authenticate and make available for delivery, in the name of the designated transferee or transferees, one or more new Senior Notes, of any authorized denomination or denominations and of a like aggregate principal amount, all as requested by the transferor. At the option of the Holder, Senior Notes may be exchanged for other Senior Notes, of any authorized denomination or denominations and of a like aggregate principal amount, upon surrender of the Senior Notes to be exchanged at such office or agency upon the payment of the charges, if any, hereinafter provided. Whenever any of the Senior Notes are so surrendered for exchange, the Issuer shall execute, and the Trustee shall authenticate and make available for delivery, the Senior Notes which the Holder making the exchange is entitled to receive. All Senior Notes issued upon any registration of transfer or exchange of Senior Notes shall be the valid obligations of the Issuer and the Company (as provided in the Guaranty), evidencing the same debt, and entitled to the same benefits under this Indenture, as the Senior Notes surrendered upon such registration of transfer or exchange. Every Senior Note presented or surrendered for registration of transfer or for exchange shall (if so required by the Issuer or the 46 Trustee) be duly endorsed, or be accompanied by a written instrument of transfer in form satisfactory to the Issuer and the Registrar duly executed, by the Holder thereof or such Holder's attorney duly authorized in writing. No service charge shall be made for any registration of transfer or exchange of Senior Notes, but the Issuer may require payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection with any registration of transfer or exchange of Senior Notes, other than exchanges pursuant to Section 304, 906, 1009(f), 1013(b) or 1101(d) not involving any transfer. The Company shall not be required (i) to issue, register the transfer of or exchange the Senior Notes during a period beginning at the opening of business 15 days before the date of the mailing of a notice of redemption of the Senior Notes selected for redemption under Section 1403 and ending at the close of business on the day of such mailing, or (ii) to register the transfer of or exchange any Senior Notes so selected for redemption in whole or in part, except the unredeemed portion of any Senior Notes being redeemed in part. As used in this Section 305, the term "transfer" encompasses any sale, pledge or other transfer of any Senior Notes referred to herein. (b) A Global Note may not be transferred, in whole or in part, to any Person other than the Depositary or a nominee thereof, and no such transfer to any such other Person may be registered; PROVIDED that this shall not prohibit any transfer of a Senior Note that is issued in exchange for a Global Note but is not itself a Global Note. Beneficial interests in a Global Note may be transferred to persons who take delivery thereof in the form of a beneficial interest in the same Global Note in accordance with the transfer restrictions set forth thereon and in accordance with the Depositary's applicable procedures. Nothing in this Section shall prohibit or render ineffective any transfer of a beneficial interest in a Global Note effected in accordance with the other provisions of this Indenture. (c) Notwithstanding any other provision in this Indenture, any person having a beneficial interest in a Global Note may, upon written request to the Trustee, exchange such beneficial interest for Senior Notes in the form of Certificated Notes, subject to Section 306. In addition, if (i) the Issuer notifies the Trustee in writing that the Depositary is no longer willing or able to act as a depositary and the Issuer is unable to locate a qualified successor within 90 days or (ii) the Issuer, at its option, notifies the Trustee in writing that it elects to cause the issuance of Notes in the form of Certificated Notes under the Indenture, then, upon surrender by the Global Note Holder of its Global Note, Senior Notes in such form will be issued to each Person that the Global Note Holder and the Depository identify as being the beneficial owners of the related Notes. Subject to the foregoing, any exchange of a Global Note for other Certificated Notes may be made in whole or in part, and all Certificated Notes issued in exchange for a Global Note or any portion thereof shall be registered in such name or names as the Depository shall direct. SECTION 306. TRANSFER AND EXCHANGE OF RESTRICTED SENIOR NOTES. 47 (a)By its acceptance of any Restricted Senior Note, each Holder of, and beneficial owner of an interest in, such Restricted Senior Note acknowledges the restrictions on transfer of such Restricted Senior Note set forth in the Private Placement Legend thereon and agrees that it will transfer such Restricted Senior Note only in accordance with the Private Placement Legend. Upon the registration of transfer, exchange or replacement of a Senior Note not bearing the Private Placement Legend, the Trustee shall deliver a Senior Note or Senior Notes that do not bear the Private Placement Legend. Upon the transfer, exchange or replacement of a Senior Note bearing the Private Placement Legend, the Trustee shall deliver a Senior Note or Senior Notes bearing the Private Placement Legend, unless such legend may be removed from such Senior Note as provided in this Section 306(a). Each Senior Note shall bear the Private Placement Legend unless and until: (i)a transfer of such Senior Note is made pursuant to an effective registration statement under the Securities Act; or (ii)such Senior Note is transferred or exchanged for the account of a Person who is not an Affiliate of the Company at the time of the transfer or exchange and has not been an Affiliate during the preceding three months, PROVIDED a period of at least three years (or such shorter period specified in any modification occurring after the Issue Date to Rule 144(k) under the Securities Act or any successor provision thereto) has elapsed since the later of the date the Senior Notes were acquired from the Company or from an Affiliate of the Company, and there is delivered to the Issuer such satisfactory evidence, which may include an opinion of independent counsel licensed to practice law in the State of New York or one or more certificates from the transferor, transferee and/or exchanging parties, as may reasonably be requested by the Issuer confirming that neither such legend nor the restrictions on transfer set forth therein are required to ensure that transfers of such Senior Note will not violate the registration and prospectus delivery requirements of the Securities Act and the applicable securities laws of any other jurisdiction; PROVIDED, that the Trustee shall not be required to determine (but may rely on a determination made by the Issuer with respect to) the sufficiency of any such evidence; and upon provision of such evidence, the Trustee shall authenticate and deliver in exchange for such Senior Note, a Senior Note or Senior Notes (representing the same aggregate principal amount of the Senior Note being exchanged) without such Private Placement Legend. (b)SPECIAL TRANSFER PROVISIONS. The following provisions of this paragraph (b) are applicable only to Restricted Senior Notes: (i) TRANSFERS OF CERTIFICATED NOTES TO QIBS OR NON-U.S. PERSONS IN GLOBAL NOTE FORM. If the Holder of a Certificated Note wishes to transfer such Certificated Note to a QIB pursuant to Rule 144A or a Non-U.S. Person pursuant to Regulation S, who wishes to take delivery in the form of a beneficial interest in a Global Note, such Holder may, subject to the rules and procedures of the Depositary, cause the exchange of such Certificated Note for an equivalent beneficial interest in a Global Note. 48 Upon receipt by the Trustee, as Registrar, at its office in The City of New York of (A) such Certificated Note, duly endorsed as provided herein, (B) instructions from such Holder directing the Trustee, as Registrar, to credit or cause to be credited a beneficial interest in the Global Note equal to the principal amount of the Certificated Note to be exchanged, such instructions to contain information regarding the participant account with the Depositary to be credited with such increase, (C) a certificate in the form of Exhibit A attached hereto from the transferor (if such transfer is to a QIB) or Exhibit D attached hereto (if such transfer is to a Non-U.S. Person and (D) if the transfer is being made to a Non-U.S. Person pursuant to Regulation S, a Certificate in the form of Exhibit E attached hereto from the transferee, then the Trustee, as Registrar, shall cancel or cause to be canceled such Certificated Note and shall instruct the Depositary to increase or cause to be increased such Global Note by the aggregate principal amount of the beneficial interest in the Certificated Note to be exchanged and to credit or cause to be credited to the account of the Person specified in such instructions a beneficial interest in the Global Note equal to the principal amount of the Certificated Note so canceled; (ii) TRANSFERS OF CERTIFICATED NOTES TO QIBS OR NON-U.S. PERSONS IN CERTIFICATED FORM. If the Holder of a Certificated Note wishes to transfer such Certificated Note to a QIB pursuant to Rule 144A or a Non-U.S. Person pursuant to Regulation S, who wishes to take delivery in the form of a Certificated Note, such Holder may, subject to the restrictions on transfer set forth herein and in such Certificated Note, cause the exchange of such Certificated Note for one or more Certificated Notes of any authorized denomination or denominations and of the same aggregate principal amount. Upon receipt by the Trustee, as Registrar, at its office in The City of New York of (A) such Certificated Note, duly endorsed as provided herein, (B) instructions from such Holder directing the Trustee, as Registrar, to authenticate and deliver one or more Certificated Notes to be exchanged, such instructions to contain the name or names of the designated transferee or transferees, the authorized denomination or denominations of the Certificated Notes to be so issued and appropriate delivery instructions, (C) a certificate in the form of Exhibit A attached hereto from the transferor (if such transfer is to a QIB) or Exhibit D hereto (if such transfer is to a Non-U.S. Person) and (4) if the transfer is being made pursuant to Regulation S to a Non-U.S. Person, a certificate in the form of Exhibit E attached hereto from the transferee, then the Trustee, as Registrar, shall cancel or cause to be canceled such Certificated Note and concurrently therewith, the Issuer shall execute, and the Trustee shall authenticate and deliver, one or more Certificated Notes of the same aggregate principal amount, in accordance with the instructions referred to above; (iii) TRANSFERS TO INSTITUTIONAL ACCREDITED INVESTORS. (1) If a Holder of a beneficial interest in a Global Note deposited with the Depositary or the Trustee as custodian for the Depositary wishes at any time to transfer its interest in such Global Note to an Institutional Accredited Investor, such Holder may, subject to the rules and procedures of the Depositary, cause the exchange of such interest for one or more Certificated Notes of any authorized denomination or denominations and of the same aggregate principal amount. Upon receipt by the Trustee, as Registrar, at its office in The 49 City of New York of (A) instructions from the Depositary directing the Trustee, as Registrar, to authenticate and deliver one or more Certificated Notes of the same aggregate principal amount as the beneficial interest in the Global Note to be exchanged, such instructions to contain the name or names of the designated transferee or transferees, the authorized denomination or denominations of the Certificated Notes to be so issued and appropriate delivery instructions, (B) a certificate in the form of Exhibit B attached hereto from the transferor, (C) a certificate in the form of Exhibit C attached hereto from the transferee and (D) such other certifications, legal opinions or other information as the Issuer or the Trustee may reasonably require to confirm that such transfer is being made pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act and the applicable securities laws of any other applicable jurisdiction, then the Trustee, as Registrar, will instruct the Depositary to reduce or cause to be reduced such Global Note by the aggregate principal amount of the beneficial interest therein to be exchanged and to debit or cause to be debited from the account of the Person making such transfer the beneficial interest in the Global Note that is being transferred, and concurrently with such reduction and debit the Issuer shall execute, and the Trustee shall authenticate and deliver, one or more Certificated Notes of the same aggregate principal amount in accordance with the instructions referred to above; (2) If a Holder of a Certificated Note wishes to transfer such Note to an Institutional Accredited Investor, such Holder may, subject to the restrictions on transfer set forth herein and in such Certificated Note, cause the exchange of such Certificated Note for one or more Certificated Notes of any authorized denomination or denominations and of the same aggregate principal amount. Upon receipt by the Trustee, as Registrar, at its office in The City of New York of (A) such Certificated Note, duly endorsed as provided herein, (B) instructions from such Holder directing the Trustee, as Registrar, to authenticate and deliver one or more Certificated Notes of the same aggregate principal amount as the Certificated Notes to be exchanged, such instructions to contain the name or names of the designated transferee or transferees, the authorized denomination or denominations of the Certificated Notes to be so issued and appropriate delivery instructions, (C) a certificate in the form of Exhibit B attached hereto from the transferor, (D) a certificate in the form of Exhibit C attached hereto from the transferee and (E) such other certifications, legal opinions or other information as the Issuer or the Trustee may reasonably require to confirm that such transfer is being made pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act and the applicable securities laws of any other applicable jurisdiction, then the Trustee, as Registrar, shall cancel or cause to be canceled such Certificated Note and concurrently therewith, the Issuer shall execute, and the Trustee shall authenticate and deliver, one or more Certificated Notes of the same aggregate principal amount, in accordance with the instructions referred to above; (iv) TRANSFERS OF BENEFICIAL INTERESTS IN A GLOBAL NOTE . Interests of beneficial owners in a Global Note shall be transferred in accordance with the rules and procedures of the Depositary (or its successors), which shall, in the case of an initial 50 Global Note, include restrictions designed to ensure that the beneficial owners of such initial Global Note are QIBs or Non-U.S. Persons acquiring their beneficial interests pursuant to Regulation S. (v) TRANSFERS PURSUANT TO OTHER EXEMPTIONS. (1) If a Holder of a beneficial interest in a Global Note deposited with the Depositary or the Trustee as custodian for the Depositary wishes at any time to transfer its interest in such Global Note pursuant to another applicable exemption from the registration requirements of the Securities Act, such Holder may, subject to the rules and procedures of the Depositary, cause the exchange of such interest for one or more Certificated Notes of any authorized denomination or denominations and of the same aggregate principal amount. Upon receipt by the Trustee, as Registrar, at its office in The City of New York of (A) instructions from the Depositary directing the Trustee, as Registrar, to authenticate and deliver one or more Certificated Notes of the same aggregate principal amount as the beneficial interest in the Global Note to be exchanged, such instructions to contain the name or names of the designated transferee or transferees, the authorized denomination or denominations of the Certificated Notes to be so issued and appropriate delivery instructions and (B) such certifications, legal opinions or other information as the Issuer or the Trustee may reasonably require to confirm that such transfer is being made pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act and the applicable securities laws of any other applicable jurisdiction, then the Trustee, as Registrar, will instruct the Depositary to reduce or cause to be reduced such Global Note by the aggregate principal amount of the beneficial interest therein to be exchanged and to debit or cause to be debited from the account of the Person making such transfer the beneficial interest in the Global Note that is being transferred, and concurrently with such reduction and debit the Issuer shall execute, and the Trustee shall authenticate and deliver, one or more Certificated Notes of the same aggregate principal amount in accordance with the instructions referred to above; and (2) if a Holder of a Certificated Note wishes to transfer such Certificated Note pursuant to another applicable exemption from the registration requirements of the Securities Act, such Holder may, subject to the restrictions on transfer set forth herein and in such Certificated Note, cause the exchange of such Certificated Note for one or more Certificated Notes of any authorized denomination or denominations and of the same aggregate principal amount. Upon receipt by the Trustee, as Registrar, at its office in The City of New York of (A) such Certificated Note, duly endorsed as provided herein, (B) instructions from such Holder directing the Trustee, as Registrar, to authenticate and deliver one or more Certificated Notes of the same aggregate principal amount as the Certificated Notes to be exchanged, such instructions to contain the name or authorized denomination or denominations of the Certificated Notes to be so issued and appropriate delivery instructions and (C) such certifications, legal opinions or other information as the Issuer or the Trustee may reasonably require to confirm that such transfer is being made pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act and the 51 applicable securities laws of any other applicable jurisdiction, then the Trustee, as Registrar, shall cancel or cause to be canceled such Certificated Note and concurrently therewith, the Issuer shall execute, and the Trustee shall authenticate and deliver, one or more Certificated Notes of the same aggregate principal amount, in accordance with the instructions referred to above; (vi) In the event that a Global Note is exchanged for Certificated Notes pursuant to Section 3.05(c), such Notes may be exchanged only in accordance with such procedures as are substantially consistent with the provisions of clauses (i) through (v) above (including the certification requirements intended to ensure that such transfers comply with the Private Placement Legend) and such other procedures as may from time to time be adopted by the Issuer; and (vii) The Trustee shall retain for two years, copies of all documents received pursuant to this Section 3.06. The Issuer shall have the right to inspect and make copies of all such documents at any reasonable time upon the giving of reasonable written notice to the Trustee. SECTION 307. MUTILATED, DESTROYED, LOST AND STOLEN SENIOR MORTGAGE NOTES. If any mutilated Senior Note is surrendered to the Trustee, the Issuer shall execute and upon the Issuer's request the Trustee shall authenticate and deliver in exchange therefor a new Senior Note of like tenor and principal amount and bearing a number not contemporaneously outstanding. If there shall be delivered to the Issuer or the Trustee (i) evidence to their satisfaction of the destruction, loss or theft of any Senior Note and (ii) such security or indemnity as may be required by them to save each of them and any agent of either of them harmless, then, in the absence of notice to the Issuer or the Trustee that such Senior Note has been acquired by a BONA FIDE purchaser, the Issuer shall execute and upon its request the Trustee shall authenticate and deliver, in lieu of any such destroyed, lost or stolen Senior Note, a new Senior Note of like tenor and principal amount and bearing a number not contemporaneously outstanding. In case any such mutilated, destroyed, lost or stolen Senior Note has become or is about to become due and payable, the Issuer in its discretion may, instead of issuing a new Senior Note, pay such Senior Note. No service charge shall be made for the issuance of any new Senior Note under this Section, but the Issuer may require the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in relation thereto and any other expenses (including the fees and expenses of the Trustee) connected therewith. Every new Senior Note issued pursuant to this Section in lieu of any destroyed, lost or stolen Senior Note shall constitute an original additional contractual obligation of the 52 Issuer, whether or not the destroyed, lost or stolen Senior Note shall be at any time enforceable by anyone, and shall be entitled to all the benefits of this Indenture equally and proportionately with any and all other Senior Notes duly issued hereunder. The provisions of this Section are exclusive and shall preclude (to the extent lawful) all other rights and remedies with respect to the replacement or payment of mutilated, destroyed, lost or stolen Senior Notes. SECTION 308. PAYMENT OF INTEREST; INTEREST RIGHTS PRESERVED. Interest on any Senior Note which is payable, and is punctually paid or duly provided for, on any Interest Payment Date shall be paid to the Person in whose name such Senior Note (or one or more Predecessor Senior Notes) is registered at the close of business on the Record Date for such interest. Any interest on any Senior Note which is payable, but is not punctually paid or duly provided for, on any Interest Payment Date (herein called "Defaulted Interest") shall forthwith cease to be payable to the Holder on the relevant Record Date by virtue of having been such Holder, and such Defaulted Interest may be paid by the Issuer, at its election in each case, as provided in clause (1) or (2) below: (1) Issuer may elect to make payment of any Defaulted Interest, and any interest payable on Defaulted Interest, to the Persons in whose names the Senior Notes (or their respective Predecessor Senior Notes) are registered at the close of business on a Special Record Date for the payment of such Defaulted Interest, which shall be fixed in the following manner. The Issuer shall notify the Trustee in writing of the amount of Defaulted Interest proposed to be paid on each Senior Note and the date of the proposed payment, and at the same time the Issuer shall deposit with the Trustee an amount of money equal to the aggregate amount proposed to be paid in respect of such Defaulted Interest or shall make arrangements satisfactory to the Trustee for such deposit prior to the date of the proposed payment, such money when deposited to be held in trust for the benefit of the Persons entitled to such Defaulted Interest as in this clause provided. Thereupon the Trustee shall fix a Special Record Date for the payment of such Defaulted Interest which shall be not more than 15 days and not less than 10 days prior to the date of the proposed payment and not less than 10 days after the receipt by the Trustee of the notice of the proposed payment. The Trustee shall promptly notify the Issuer of such Special Record Date and, in the name and at the expense of the Issuer, shall cause notice of the proposed payment of such Defaulted Interest and the Special Record Date therefor to be mailed, first-class postage prepaid, to each Holder at such Holder's address as it appears in the Register, not less than 10 days prior to such Special Record Date. Notice of the proposed payment of such Defaulted Interest and the Special Record Date therefor having been so mailed, such Defaulted Interest shall be paid to the Persons in whose names the Senior Notes (or their respective Predecessor Senior Notes) are registered at the close of business on such Special Record Date and shall no longer be payable pursuant to the following clause (2). (2) The Issuer may make payment of any Defaulted Interest, and any interest 53 payable on Defaulted Interest, on the Senior Notes in any other lawful manner not inconsistent with the requirements of any securities exchange on which such Senior Notes may be listed, and upon such notice as may be required by such exchange, if, after notice given by the Issuer to the Trustee of the proposed payment pursuant to this clause, such manner of payment shall be deemed practicable by the Trustee. Subject to the foregoing provisions of this Section, each Senior Note delivered under this Indenture upon registration of transfer of or in exchange for or in lieu of any other Senior Note shall carry the rights to interest accrued and unpaid, and to accrue, which were carried by such Predecessor Senior Note. SECTION 309. PERSONS DEEMED OWNERS. Prior to due presentment of a Senior Note for registration of transfer, the Issuer, the Company, the Trustee and any agent of the Issuer, the Company or the Trustee may treat the Person in whose name such Senior Note is registered as the owner of such Senior Note for the purpose of receiving payment of principal of (and premium, if any) and (subject to Section 308) interest on such Senior Note and for all other purposes whatsoever, whether or not such Senior Note be overdue, and neither the Issuer, the Company, the Trustee nor any agent of the Issuer, the Company or the Trustee shall be affected by notice to the contrary. SECTION 310. CANCELLATION. All Senior Notes surrendered for payment, redemption, registration of transfer or exchange shall, if surrendered to any Person other than the Trustee, be delivered to the Trustee and shall be promptly canceled by it. The Issuer may at any time deliver to the Trustee for cancellation any Senior Note previously authenticated and delivered hereunder which the Issuer may have acquired in any manner whatsoever, and all Senior Notes so delivered shall be promptly canceled by the Trustee. No Senior Notes shall be authenticated in lieu of or in exchange for any of the Senior Notes canceled as provided in this Section, except as expressly permitted by this Indenture. All canceled Senior Notes shall be held by the Trustee and may be destroyed (and, if so destroyed, certification of their destruction shall be delivered to the Issuer, unless, by a Company Order, the Issuer shall direct that canceled Senior Notes be returned to it). SECTION 311. COMPUTATION OF INTEREST. Interest on the Senior Notes shall be computed on the basis of a 360-day year of twelve 30-day months. ARTICLE FOUR 54 SATISFACTION AND DISCHARGE SECTION 401. SATISFACTION AND DISCHARGE OF INDENTURE. This Indenture shall cease to be of further effect (except as to any surviving rights of registration of transfer or exchange of Senior Notes herein expressly provided for), when the Trustee, upon Company Request by and at the expense of the Issuer, shall execute proper instruments acknowledging satisfaction and discharge of this Indenture, when (1) either: (A) all Outstanding Senior Notes theretofore authenticated and issued hereunder (other than (i) Senior Notes which have been destroyed, lost or stolen and which have been replaced or paid as provided in Section 306 and (ii) Senior Notes for whose payment money has theretofore been deposited in trust or segregated and held in trust by the Issuer and thereafter repaid to the Issuer or discharged from such trust, as provided in Section 1003) have been delivered to the Trustee for cancellation; or (B) all such Senior Notes not theretofore delivered to the Trustee for cancellation (i) have become due and payable, (ii) will become due and payable at their Stated Maturity within one year, or (iii) are to be called for redemption within one year under arrangements satisfactory to the Trustee for the giving of notice of redemption by the Trustee in the name, and at the expense, of the Issuer, and the Issuer, in the case of (B)(i), (ii) or (iii) above, has deposited with the Trustee as trust funds in trust for the purpose an amount sufficient to pay and discharge the entire indebtedness on such Senior Notes not theretofore delivered to the Trustee for cancellation, for principal (and premium, if any) and interest to the date of such deposit (in the case of Senior Notes which have become due and payable) or the Stated Maturity or Redemption Date, as the case may be; (2) the Issuer has paid or caused to be paid all other sums payable hereunder by the Issuer; and (3) the Issuer has delivered to the Trustee an Officer's Certificate of the Issuer and the Company and an Opinion of Counsel, each stating that all conditions precedent provided for herein relating to the satisfaction and discharge of this Indenture have been complied with. Notwithstanding the satisfaction and discharge of this Indenture, the obligations of (a) the Issuer to the Trustee under Section 607, the obligations of the Issuer to any Authenticating 55 Agent under Section 614 and, if money shall have been deposited with the Trustee pursuant to clause (B) of clause (1) of this Section, the obligations of the Trustee under Section 402 and the last paragraph of Section 1003 (b) the obligations of the Issuer under Section 1014 and (c) the Company's obligations pursuant to the Guaranty in respect of the matters specified in (a) and (b) shall survive. SECTION 402. APPLICATION OF TRUST MONEY. Subject to the provisions of the last paragraph of Section 1003, all money deposited with the Trustee pursuant to Section 401 shall be held in trust and applied by it, in accordance with the provisions of the Senior Notes and this Indenture, to the payment, either directly or through any Paying Agent (including the Issuer acting as its own Paying Agent) as the Trustee may determine, to the Persons entitled thereto, of the principal (and premium, if any) and interest for whose payment such money has been deposited with or received by the Trustee. ARTICLE FIVE REMEDIES SECTION 501. EVENTS OF DEFAULT AND COMPANY EVENTS OF DEFAULT. (a) "Event of Default", wherever used herein with respect to Senior Notes, means any one of the following events (whatever the reason for such Event of Default and whether it shall be voluntary or involuntary or to be effected by operation of law or pursuant to any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body): (1) the Issuer defaults in the payment of interest or Additional Amounts on any Senior Note when such interest becomes due and payable and the default continues for a period of 30 days; or (2) the Issuer defaults in the payment of the principal of (or premium, if any, on) any Senior Note when the same becomes due and payable at Maturity or otherwise (except for a default in payment which constitutes a Company Event of Default); or (3) the Issuer or the Company fails to observe or perform any of its other covenants, warranties or agreements in the Senior Notes or this Indenture (other than a covenant, agreement or warranty a default in whose performance or whose breach is elsewhere in this Section specifically dealt with), and the failure to observe or perform continues for the period and after the notice specified in the last paragraph of this Section 501(a); or (4) (i) the Company fails to pay at final maturity the principal of any Indebtedness of the Company, whether such Indebtedness now exists or shall hereafter be created and an aggregate principal amount of not less than twenty-five million dollars ($25,000,000) (or, if less, the least amount contained in any similar provision of an instrument governing any outstanding 56 Subordinated Indebtedness of the Company, but in no event less than ten million dollars ($10,000,000)) or more of such Indebtedness is outstanding or (ii) an event or events of default, as defined in any one or more mortgages, indentures, agreements or instruments under which there may be issued, or by which there may be secured or evidenced, any Indebtedness of the Company, whether such Indebtedness now exists or shall hereafter be created, shall happen and shall result in Indebtedness in an aggregate amount of not less than twenty-five million dollars ($25,000,000) (or, if less, the least amount contained in any similar provision of an instrument governing any outstanding Subordinated Indebtedness of the Company, but in no event less than ten million dollars ($10,000,000)) or more becoming or being declared due and payable prior to the date on which it would otherwise have become due and payable, and such acceleration shall not have been rescinded or annulled (or if such acceleration shall not have been rescinded or annulled, such Indebtedness shall not have been discharged), within a period of 15 days after there shall have been given to the Issuer and the Company by the Trustee or by the Holders of at least 25% in aggregate principal amount of the Outstanding Senior Notes a written notice specifying such event or events of default and requiring the Company to cause such acceleration to be rescinded or annulled or to cause such Indebtedness to be discharged and stating that such notice is a "Notice of Default" hereunder; or (5) one or more judgments or decrees shall be entered against the Issuer or the Company involving, individually or in the aggregate, a liability of twenty-five million dollars ($25,000,000) or more and a sufficient number of such judgments or decrees shall not have been vacated, discharged, satisfied or stayed pending appeal within 30 days from the entry thereof so as to bring the aggregate liability in respect thereof below the twenty-five million dollar ($25,000,000) threshold; or (6) the Issuer or the Company pursuant to or within the meaning of any Bankruptcy Law (i) commences a voluntary case or proceeding under any Bankruptcy Law with respect to itself, (ii) consents to the entry of a judgment, decree or order for relief against it in an involuntary case or proceeding under any Bankruptcy Law, (iii) consents to or acquiesces in the institution of bankruptcy or insolvency proceedings against it, (iv) applies for, consents to or acquiesces in the appointment of or taking possession by a Custodian of the Issuer or the Company or for any material part of its property, (v) makes a general assignment for the benefit of its creditors or (vi) takes any corporate action in furtherance of or to facilitate, conditionally or otherwise, any of the foregoing; or (7) (i) a court of competent jurisdiction enters a judgment, decree or order for relief in respect of the Issuer or the Company in an involuntary case or proceeding under any Bankruptcy Law which shall (A) approve as properly filed a petition seeking reorganization, arrangement, adjustment or composition in respect of the Company, (B) appoint a Custodian of the Issuer or the Company or for any material part of its property or (C) order the winding-up or liquidation of its affairs, and such judgment, decree or order shall remain unstayed and in effect for a period of 90 consecutive days; or (ii) any bankruptcy or insolvency petition or application is filed, or any bankruptcy or insolvency proceeding is commenced against the Issuer or the Company and such petition, application or proceeding is not dismissed within 90 days; or (iii) any 57 warrant of attachment is issued against any material portion of the property of the Issuer or the Company which is not released within 90 days of service. (8) the dissolution or termination of the existence of the Issuer (prior to the Assumption) or the Company or the liquidation or winding up of the affairs (in each case whether voluntarily or by operation of law) of the Issuer (prior to the Assumption) or the Company. A Default under clause (3) above is not an Event of Default until the Trustee or the Holders of at least 25% in aggregate principal amount of the Outstanding Senior Notes notify the Issuer and the Company of the Default and the Issuer or the Company does not cure the Default within 60 days after receipt of the notice. The notice must specify the Default, demand that it be remedied and state that the notice is a "Notice of Default." When a Default under clause (3) above is cured within such 60-day period, it ceases. (b) In the event that the Company fails to make or complete: (a) a Deficiency Offer required hereunder; (b) an Asset Disposition Offer required hereunder; (c) a Change of Control Offer required hereunder; or (d) an offer to repurchase Senior Notes as required under Section 801(4), any such event shall constitute a Company Event of Default. (c) The Issuer and the Company shall file with the Trustee written notice of the occurrence of any Default, Event of Default or Company Event of Default within five (5) business days of an Officer of such Person becoming aware of any such Default, Event of Default or Company Event of Default. SECTION 502. ACCELERATION OF MATURITY; RESCISSION AND ANNULMENT. If an Event of Default with respect to Senior Notes (other than an Event of Default specified in clause (6) or (7) of Section 501) occurs and is continuing, the Trustee by notice in writing to the Issuer, or the Holders of at least 25% in aggregate principal amount of the Outstanding Senior Notes by notice in writing to the Issuer and the Trustee, may declare the unpaid principal of and accrued interest to the date of acceleration on all the Outstanding Senior Notes to be due and payable immediately and, upon any such declaration, the Outstanding Senior Notes shall become and be immediately due and payable. If an Event of Default specified in clause (6) or (7) of Section 501 occurs, all unpaid principal (without premium) of and accrued interest on the Outstanding Senior Notes shall IPSO FACTO become and be immediately due and payable without any declaration or other act on the part of the Trustee or any Holder of any Senior Note. If a Company Event of Default occurs, the Trustee or the Holders of at least 25% in aggregate principal amount of the Outstanding Notes by notice in writing to the Company (and to the Trustee if given by the Holders of at least 25% in aggregate amount of Notes) may declare all unpaid principal of and accrued interest and Additional Amounts on the Outstanding Senior Notes to be immediately due and payable by the Company, and the Company shall be deemed to 58 have assumed all such obligations as direct obligations of the Company. Upon payment of all such principal and interest, all of the obligations of the Issuer under the Senior Notes and the Company under the Guaranty and (upon payment of the Senior Notes) this Indenture shall terminate, EXCEPT obligations under Section 607, 1014, 1201 (in respect of the Issuer's surviving obligations) and 1203. The Holders representing at least a majority in principal amount of the Outstanding Senior Notes by notice to the Trustee may rescind an acceleration and its consequences if (i) all existing Events of Default or Company Events of Default, other than the nonpayment of the principal and interest of the Senior Notes that has become due solely by such declaration of acceleration, have been cured or waived, (ii) to the extent the payment of such interest is lawful, interest on overdue installments of interest and overdue principal that has become due otherwise than by such declaration of acceleration have been paid, (iii) the rescission would not conflict with any judgment or decree of a court of competent jurisdiction and (iv) all payments due to the Trustee and any predecessor Trustee under Section 607 have been made. SECTION 503. COLLECTION OF INDEBTEDNESS AND SUITS FOR ENFORCEMENT BY TRUSTEE. The Issuer covenants that if: (1) default is made in the payment of any interest on any Senior Note when such interest becomes due and payable and such default continues for a period of 30 days, or (2) default is made in the payment of the principal of (or premium, if any, on) any Senior Note at the Maturity thereof, the Issuer will, upon demand of the Trustee, pay to it, for the benefit of the Holders of such Senior Notes, the whole amount then due and payable on such Senior Notes for principal (and premium, if any) and interest and, to the extent that payment of such interest shall be legally enforceable, interest on any overdue principal (and premium, if any) and on any overdue interest, at the rate or rates prescribed therefor in such Senior Notes, and, in addition thereto, such further amount as shall be sufficient to cover the costs and expenses of collection, including the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel. If the Issuer fails to pay such amounts forthwith upon such demand, the Trustee, in its own name and as trustee of an express trust, may institute a judicial proceeding for the collection of the sums so due and unpaid, may prosecute such proceeding to judgment or final decree and may enforce the same against the Issuer and the Company or any other obligor upon such Senior Notes and collect the moneys adjudged or decreed to be payable in the manner provided by law out of the property of the Issuer and the Company or any other obligor upon such Senior Notes, wherever situated. 59 If an Event of Default or Company Event of Default occurs and is continuing, the Trustee may in its discretion proceed to protect and enforce its rights and the rights of the Holders by such appropriate judicial proceedings as the Trustee shall deem most effectual to protect and enforce any such rights, either for the specific enforcement of any covenant or agreement in this Indenture or in aid of the exercise of any power granted therein, or to secure any other proper remedy. SECTION 504. TRUSTEE MAY FILE PROOFS OF CLAIM. In case of the pendency of any receivership, insolvency, liquidation, bankruptcy, reorganization, arrangement, adjustment, composition or other judicial proceeding relative to the Issuer or the Company or any other obligor upon the Senior Notes or the property of the Issuer or the Company or of such other obligor or their creditors, the Trustee (irrespective of whether the principal of the Senior Notes shall then be due and payable as therein expressed or by declaration or otherwise and irrespective of whether the Trustee shall have made any demand on the Issuer or the Company for the payment of overdue principal or interest) shall be entitled and empowered, by intervention in such proceeding or otherwise, (1) to file and prove a claim for the whole amount of principal (and premium, if any) and interest owing and unpaid in respect of the Senior Notes or under the Indenture and to file such other papers or documents as may be necessary or advisable in order to have the claims of the Trustee (including any claim for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agent and counsel) and of the Holders allowed in such judicial proceedings, and (2) to collect and receive any moneys or other property payable or deliverable on any such claims and to distribute the same; and any custodian, receiver, assignee, trustee, liquidator, sequestrator or other similar official in any such judicial proceeding is hereby authorized by each Holder to make such payments to the Trustee and, in the event that the Trustee shall consent to the making of such payments directly to the Holders, to pay to the Trustee any amount due it for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, and any other amounts due the Trustee under Section 607. Nothing herein contained shall be deemed to authorize the Trustee to authorize or consent to or accept or adopt on behalf of any Holder any plan of reorganization, arrangement, adjustment or composition affecting the Senior Notes or the rights of any Holder thereof or to authorize the Trustee to vote in respect of the claim of any Holder in any such proceeding. SECTION 505. TRUSTEE MAY ENFORCE CLAIMS WITHOUT POSSESSION OF SENIOR NOTES. All rights of action and claims under this Indenture or the Senior Notes may be prosecuted and enforced by the Trustee without the possession of any of the Senior Notes or the 60 production thereof in any proceeding relating thereto, and any such proceeding instituted by the Trustee shall be brought in its own name as trustee of an express trust, and any recovery of judgment shall, after provision for the payment of the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, be for the ratable benefit of the Holders in respect of which such judgment has been recovered. SECTION 506. APPLICATION OF MONEY COLLECTED. Any money collected by the Trustee pursuant to this Article shall be applied in the following order, at the date or dates fixed by the Trustee and, in case of the distribution of such money on account of principal (or premium, if any) or interest, upon presentation of the Senior Notes in respect of which moneys have been collected and the notation thereon of the payment if only partially paid and upon surrender thereof if fully paid: First: To the payment of all amounts due the Trustee under Section 607; Second: To the payment of the amounts then due and unpaid for principal of (and premium, if any), interest and Additional Amounts on the Senior Notes in respect of which or for the benefit of which such money has been collected, ratably, without preference or priority of any kind, according to the amounts due and payable on such Senior Notes for principal (and premium, if any), interest and Additional Amounts, respectively; and Third: To the Issuer. The Trustee may fix a record date and payment date for any payment to Holders pursuant to this Section 506. At least fifteen (15) days before such record date, the Trustee shall mail to each Holder and the Issuer a notice that states the record date, the payment date and the amount to be paid. SECTION 507. LIMITATION ON SUITS. No Holder shall have any right to institute any proceeding, judicial or otherwise, with respect to this Indenture, or for the appointment of a receiver or trustee, or for any other remedy hereunder, unless: (1) such Holder has previously given written notice to the Trustee of a continuing Event of Default or Company Event of Default; (2) the Holders of not less than 25% in principal amount of the Outstanding Senior Notes shall have made written request to the Trustee to institute proceedings in respect of such Event of Default or Company Event of Default in its own name as Trustee hereunder; (3) such Holder or Holders have offered to the Trustee reasonable indemnity against the costs, expenses and liabilities to be incurred in compliance with such request; 61 (4) the Trustee for 60 days after its receipt of such notice, request and offer of indemnity has failed to institute any such proceeding; and (5) no direction inconsistent with such written request has been given to the Trustee during such 60-day period by the Holders of a majority in principal amount of the Outstanding Senior Notes; it being understood and intended that no one or more Holders shall have any right in any manner whatever by virtue of, or by availing of, any provision of this Indenture to affect, disturb or prejudice the rights of any other of such Holders, or to obtain or to seek to obtain priority or preference over any other of such Holders or to enforce any right under this Indenture, except in the manner herein provided and for the equal and ratable benefit of all such Holders. SECTION 508. UNCONDITIONAL RIGHT OF HOLDERS TO RECEIVE PRINCIPAL, PREMIUM AND INTEREST. Notwithstanding any other provision of this Indenture, the Holder of any Senior Note shall have the right, which is absolute and unconditional, to receive payment of the principal of (and premium, if any) (subject to Section 308) interest on such Senior Note on the Stated Maturity or Maturities expressed in such Senior Note (or, in the case of a repurchase offer for Senior Notes under terms set forth in this Indenture, on the date specified therefor) and to institute suit for the enforcement of any such payment, and such rights shall not be impaired without the consent of such Holder. SECTION 509. RESTORATION OF RIGHTS AND REMEDIES. If the Trustee or any Holder has instituted any proceeding to enforce any right or remedy under this Indenture and such proceeding has been discontinued or abandoned for any reason, or has been determined adversely to the Trustee or to such Holder, then and in every such case, subject to any determination in such proceeding, the Issuer and the Company, the Trustee and the Holders shall be restored severally and respectively to their former positions hereunder and thereafter all rights and remedies of the Trustee and the Holders shall continue as though no such proceeding had been instituted. SECTION 510. RIGHTS AND REMEDIES CUMULATIVE. Except as otherwise provided with respect to the replacement of mutilated, destroyed, lost or stolen Senior Notes in the last paragraph of Section 306, no right or remedy herein conferred upon or reserved to the Trustee or to the Holders is intended to be exclusive of any other right or remedy, and every right and remedy shall, to the extent permitted by law, be cumulative and in addition to every other right and remedy given hereunder or now or hereafter existing at law or in equity or otherwise. The assertion or employment of any right or remedy hereunder, or otherwise, shall not prevent the concurrent assertion of employment of any other appropriate right or remedy. 62 SECTION 511. DELAY OR OMISSION NOT WAIVER. No delay or omission of the Trustee or of any Holder of any of the Senior Notes to exercise any right or remedy accruing upon an Event of Default shall impair any such right or remedy or constitute a waiver of any Event of Default or Company Event of Default or an acquiescence therein. Every right and remedy given by this Article or by law to the Trustee or to the Holders may be exercised from time to time, and as often as may be deemed expedient, by the Trustee or by the Holders, as the case may be. SECTION 512. CONTROL BY HOLDERS. The Holders of a majority in principal amount of the Outstanding Senior Notes shall have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred on the Trustee, with respect to the Senior Notes, PROVIDED that: (1) such direction shall not be in conflict with any rule of law or with this Indenture; (2) the Trustee may take any other action deemed proper by the Trustee which is not inconsistent with such direction; and (3) subject to Section 601, the Trustee need not take any action which might involve the Trustee in personal liability or be unduly prejudicial to the Holders not joining therein. SECTION 513. WAIVER OF PAST DEFAULTS. Holders representing not less than a majority in principal amount of the Outstanding Senior Notes may by written notice to the Trustee on behalf of the Holders of all Senior Notes waive any Default, Event of Default or Company Event of Default and its consequences, except a Default, Event of Default or Company Event of Default (1) in respect of the payment of the principal of (or premium, if any) or interest on any Senior Note, or (2) in respect of a covenant or other provision hereof which under Article Nine cannot be modified or amended without the consent of the Holder of each Outstanding Senior Note affected. Upon any such waiver, such Default, Event of Default or Company Event of Default shall cease to exist and shall be deemed to have been cured, for every purpose of this Indenture and the Senior Notes; but no such waiver shall extend to any subsequent or other Default, Event of Default or Company Event of Default impair any right consequent thereon. SECTION 514. UNDERTAKING FOR COSTS. 63 All parties to this Indenture agree, and each Holder of any Senior Note by such Holder's acceptance thereof shall be deemed to have agreed, that any court may in its discretion require, in any suit for the enforcement of any right or remedy under this Indenture, or in any suit against the Trustee for any action taken, suffered or omitted by it as Trustee, the filing by any party litigant in such suit of an undertaking to pay the costs of such suit, and that such court may in its discretion assess reasonable costs, including reasonable attorneys' fees, against any party litigant in such suit, having due regard to the merits and good faith of the claims or defenses made by such party litigant; but the provisions of this Section shall not apply to any suit instituted by the Issuer or the Company, to any suit instituted by the Trustee, to any suit instituted by any Holder, or group of Holders, holding in the aggregate more than 10% in principal amount of the Outstanding Senior Notes, or to any suit instituted by any Holder for the enforcement of the payment of the principal of (or premium, if any) or interest on any Senior Note on or after the Stated Maturity or Maturities expressed in such Senior Note (or, in the case of a repurchase of Senior Notes hereunder, on or after the date specified therefor). SECTION 515. WAIVER OF STAY OR EXTENSION LAWS. The Issuer and the Company each covenants (to the extent that it may lawfully do so) that it will not at any time insist upon, or plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay or extension law wherever enacted, now or at any time hereafter in force, which may affect the covenants or the performance of this Indenture; and the Issuer and the Company (to the extent that it may lawfully do so) each hereby expressly waives all benefit or advantage of any such law and covenants that it will not hinder, delay or impede the execution of any power herein granted to the Trustee, but will suffer and permit the execution of every such power as though no such law had been enacted. ARTICLE SIX THE TRUSTEE SECTION 601. CERTAIN DUTIES AND RESPONSIBILITIES OF THE TRUSTEE. (a) Except during the continuance of an Event of Default or Company Event of Default, the Trustee's duties and responsibilities under this Indenture shall be governed by Section 315(a) of the Trust Indenture Act as though this Indenture were qualified under the Trust Indenture Act. (b) In case an Event of Default or Company Event of Default has occurred and is continuing, and is actually known to the Trustee, the Trustee shall exercise the rights and powers vested in it by this Indenture and shall use the same degree of care and skill in their exercise, as a prudent person would exercise or use under the circumstances in the conduct of his or her own affairs. (c) None of the provisions of Section 315(d) of the Trust Indenture Act shall be excluded from this Indenture. 64 (d) No implied covenants or obligations shall be read into this Indenture against the Trustee. SECTION 602. NOTICE OF DEFAULTS. Within 30 days after the occurrence of any Default, Event of Default or Company Event of Default, the Trustee shall give to all Holders, as their names and addresses appear in the Register, notice of such Default, Event of Default or Company Event of Default or Company Event of Default actually known to the Trustee, unless such Default, Event of Default or Company Event of Default shall have been cured or waived; PROVIDED, HOWEVER, that, except in the case of a Default, Event of Default or Company Event of Default in the payment of the principal of (or premium, if any) or interest on any Senior Note, the Trustee shall be protected in withholding such notice if and so long as the board of directors, the executive committee or directors or Responsible Officers of the Trustee in good faith determine that the withholding of such notice is in the interest of the Holders. SECTION 603. CERTAIN RIGHTS OF TRUSTEE. Subject to the provisions of the Trust Indenture Act: (1) the Trustee may rely and shall be protected in acting or refraining from acting upon any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, other evidence of indebtedness or other paper or document believed by it to be genuine and to have been signed or presented by the proper party or parties; (2) any request or direction of the Issuer or the Company mentioned herein shall be sufficiently evidenced by a Company Request or Company Order of the Issuer or the Company, as the case may be, and any resolution of the Board of Directors may be sufficiently evidenced by a Board Resolution of the Issuer or the Company, as the case may be; (3) whenever in the administration of this Indenture the Trustee shall deem it desirable that a matter be proved or established prior to taking, suffering or omitting any action hereunder, the Trustee (unless other evidence be herein specifically prescribed) may, in the absence of bad faith on its part, rely upon an Officer's Certificate of the Issuer or the Company, as the case may be; (4) the Trustee may consult with counsel of its selection and the written advice of such counsel or any Opinion of Counsel shall be full and complete authorization and protection in respect of any action taken, suffered or omitted by it hereunder in good faith and in reliance thereon; (5) the Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Indenture at the request or direction of any of the Holders pursuant to this Indenture, unless such Holders shall have offered to the Trustee reasonable security or 65 indemnity against the costs, expenses and liabilities which might be incurred by it in compliance with such request or direction; (6) prior to the occurrence of an Event of Default or Company Event of Default and after the curing or waiving of all such Events of Default or Company Events of Default which may have occurred, the Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, approval or other paper or document, or the books and records of the Issuer or the Company, unless requested in writing to do so by the Holders of a majority in principal amount of the Outstanding Senior Notes; PROVIDED, HOWEVER, that if the payment within a reasonable time to the Trustee of the costs, expenses or liabilities likely to be incurred by it in the making of such investigation is not, in the opinion of the Trustee, reasonably assured to the Trustee by the security afforded to it by the terms of this Indenture, the Trustee may require reasonable indemnity against such costs, expenses or liabilities as a condition to so proceeding; the reasonable expense of every such investigation shall be paid by the Issuer or, if paid by the Trustee, shall be repaid by the Issuer upon demand; (7) the Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through agents or attorneys and the Trustee shall not be responsible for any misconduct or negligence on the part of any agent or attorney appointed with due care by it hereunder; and (8) the Trustee shall not be required to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder or in the exercise of its rights or power, if it shall have reasonable grounds for believing that repayment of such funds or adequate indemnity against such risk or liability is not reasonably assured to it. SECTION 604. NOT RESPONSIBLE FOR RECITALS OR ISSUANCE OF SENIOR NOTES. The recitals contained herein and in the Senior Notes, except the Trustee's certificates of authentication, shall be taken as the statements of the Issuer and the Company, and the Trustee or any Authenticating Agent assumes no responsibility for their correctness. The Trustee makes no representations as to the validity or sufficiency of this Indenture or of the Senior Notes. Neither the Trustee nor any Authenticating Agent shall be accountable for the use or application by the Issuer or the Company of Senior Notes or the proceeds thereof. SECTION 605. MAY HOLD SENIOR NOTES. The Trustee, any Authenticating Agent, any Paying Agent, any Registrar or any other agent of the Issuer or the Company, in its individual or any other capacity, may become the owner or pledgee of Senior Notes and, subject to Sections 608 and 613, may otherwise deal with the Issuer and the Company with the same rights it would have if it were not Trustee, Authenticating Agent, Paying Agent, Registrar or such other agent. 66 SECTION 606. MONEY HELD IN TRUST. Money held by the Trustee in trust hereunder (including amounts held by the Trustee as Paying Agent) need not be segregated from other funds except to the extent required by law. The Trustee shall be under no liability for interest on any money received by it hereunder except as otherwise agreed upon in writing with the Issuer. SECTION 607. COMPENSATION AND REIMBURSEMENT. The Issuer and the Company jointly and severally agree: (1) to pay to the Trustee from time to time such reasonable compensation as the Company and the Trustee shall from time to time agree for all services rendered by it hereunder (which compensation shall not be limited by any provision of law in regard to the compensation of a trustee of an express trust); (2) except as otherwise expressly provided herein, to reimburse the Trustee upon its request for all reasonable expenses, disbursements and advances incurred or made by the Trustee in accordance with any provision of this Indenture (including the reasonable compensation and the expenses and disbursements of its agents and counsel), except any such expense, disbursement or advance as may be attributable to its negligence or bad faith; and (3) to indemnify the Trustee for, and to hold it harmless against, any loss, liability, damage, claim or expense, including taxes (other than taxes based upon or determined or measured by the income of the Trustee), incurred without negligence or bad faith on its part, arising out of or in connection with the acceptance or administration of the trust or trusts hereunder, including the costs and expenses of defending itself against any claim or liability in connection with the exercise or performance of any of its powers or duties hereunder. The Trustee shall have a claim prior to the Senior Notes as to all property and funds held by it hereunder for any amount owing it or any predecessor Trustee pursuant to this Section 607, except with respect to funds held in trust for the benefit of the Holders. When the Trustee incurs expenses or renders services in connection with an Event of Default specified in Section 501(6) or Section 501(7), the expenses (including the reasonable charges and expenses of its counsel) and the compensation for the services are intended to constitute expenses of administration under any applicable federal or state bankruptcy, insolvency or other similar law. The provisions of this Section 607 shall survive the termination of this Indenture and the resignation or removal of the Trustee. SECTION 608. DISQUALIFICATION; CONFLICTING INTERESTS. The Trustee shall be disqualified only where such disqualification is required by 67 Section 310(b) of the Trust Indenture Act. SECTION 609. CORPORATE TRUSTEE REQUIRED; ELIGIBILITY. There shall at all times be a Trustee hereunder which shall be eligible to act as Trustee under Section 310(a)(1) of the Trust Indenture Act having a combined capital and surplus of at least fifty million dollars ($50,000,000) subject to supervision or examination by federal or State authority, to the extent there is such an institution eligible and willing to serve. If such corporation publishes reports of condition at least annually, pursuant to law or to the requirements of said supervising or examining authority, then for the purposes of this Section, the combined capital and surplus of such corporation shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. Neither the Company nor any Affiliate of the Issuer or the Company may serve as Trustee. If at any time the Trustee shall cease to be eligible in accordance with the provisions of this Section, it shall resign immediately in the manner and with the effect hereinafter specified in this Article. SECTION 610. RESIGNATION AND REMOVAL; APPOINTMENT OF SUCCESSOR. (a) No resignation or removal of the Trustee and no appointment of a successor Trustee pursuant to this Article shall become effective until the acceptance of appointment by the successor Trustee in accordance with the applicable requirements of Section 611. (b) The Trustee may resign at any time by giving written notice thereof to the Issuer. If the instrument of acceptance by a successor Trustee required by Section 611 shall not have been delivered to the Trustee within 30 days after the giving of such notice of resignation, the resigning Trustee may petition any court of competent jurisdiction for the appointment of a successor Trustee. (c) The Trustee may be removed at any time by Act of the Holders of a majority in principal amount of the Outstanding Senior Notes, delivered to the Trustee and to the Issuer. (d) If at any time: (i) the Trustee shall fail to comply with Section 310(b) of the Trust Indenture Act after written request therefor by the Issuer or by any Holder who has been a BONA FIDE Holder for at least six months; or (ii) the Trustee shall cease to be eligible under Section 609 and shall fail to resign after written request therefor by the Issuer or by any Holder who has been a BONA FIDE Holder for at least six months; or (iii) the Trustee shall become incapable of acting or shall be adjudged a bankrupt or insolvent or a receiver of the Trustee or of its property shall be appointed or any 68 public officer shall take charge or control of the Trustee or of its property or affairs for the purpose of rehabilitation, conservation or liquidation; then, in any such case, (A) the Issuer by a Board Resolution may remove the Trustee, or (B) subject to Section 315(e) of the Trust Indenture Act, any Holder who has been a BONA FIDE Holder for at least six months may, on behalf of himself and all others similarly situated, petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor Trustee, subject to any stay of such removal entered in accordance with Section 310(b) of the Trust Indenture Act. (e) If the Trustee shall resign, be removed or become incapable of acting, or if a vacancy shall occur in the office of Trustee for any cause, the Issuer, by a Board Resolution, shall promptly appoint a successor Trustee and shall comply with the applicable requirements of Section 611. If, within one year after such resignation, removal or incapability, or the occurrence of such vacancy, a successor Trustee shall be appointed by Act of the Holders of a majority in principal amount of the Outstanding Senior Notes delivered to the Issuer and the retiring Trustee, the successor Trustee so appointed shall, forthwith upon its acceptance of such appointment in accordance with the applicable requirements of Section 611, become the successor Trustee and to that extent supersede the successor Trustee appointed by the Company. If no successor Trustee shall have been so appointed by the Issuer or the Holders and accepted appointment in the manner required by Section 611, any Holder who has been a BONA FIDE Holder for at least six months may, subject to Section 514 hereof, on behalf of himself and all others similarly situated, petition any court of competent jurisdiction for the appointment of a successor Trustee. (f) The Issuer shall give notice of each resignation and each removal of the Trustee and each appointment of a successor Trustee by mailing written notice of such event by first-class mail, postage prepaid, to all Holders as their names and addresses appear in the Register. Each notice shall include the name of the successor Trustee and the address of its Corporate Trust Office. (iii) SECTION 611. ACCEPTANCE OF APPOINTMENT BY SUCCESSOR. (a) In case of the appointment hereunder of a successor Trustee, every such successor Trustee so appointed shall execute, acknowledge and deliver to the Issuer and to the retiring Trustee an instrument accepting such appointment, and thereupon the resignation or removal of the retiring Trustee shall become effective and such successor Trustee, without any further act, deed or conveyance, shall become vested with all the rights, powers, trusts and duties of the retiring Trustee; but, on the request of the Issuer or the successor Trustee, such retiring Trustee shall, upon payment of its charges, execute and deliver an instrument transferring to such successor Trustee all the rights, powers and trusts of the retiring Trustee, and shall duly assign, transfer and deliver to such successor Trustee all property and money held by such retiring Trustee hereunder, subject to its Lien, if any, provided for in Section 607. (b) Upon request of any such successor Trustee, the Issuer shall execute any and all instruments for more fully and certainly vesting in and confirming to such successor 69 Trustee all such rights, powers and trusts referred to in Subsection (a) above. (c) No successor Trustee shall accept its appointment unless at the time of such acceptance such successor Trustee shall be qualified and eligible under this Article and the Trust Indenture Act. SECTION 612. MERGER, CONVERSION, CONSOLIDATION OR SUCCESSION TO BUSINESS. Any corporation into which the Trustee may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, conversation or consolidation to which the Trustee shall be a party, or any corporation succeeding to all or substantially all the corporate trust business of the Trustee, shall be the successor of the Trustee hereunder, PROVIDED such corporation shall be otherwise qualified and eligible under this Article and the Trust Indenture Act, without the execution or filing of any paper or any further act on the part of any of the parties hereto. In case any Senior Notes shall have been authenticated, but not delivered, by the Trustee then in office, any successor by merger, conversion or consolidation to such authenticating Trustee may adopt such authentication and deliver the Senior Notes so authenticated with the same effect as if such successor Trustee had itself authenticated such Senior Notes. SECTION 613. PREFERENTIAL COLLECTION OF CLAIMS AGAINST COMPANY. The Trustee shall comply with Section 311(a) of the Trust Indenture Act, excluding any creditor relationship listed in Section 311(b) of the Trust Indenture Act. A Trustee who has resigned or been removed shall be subject to Section 311(a) of the Trust Indenture Act to the extent indicated therein. SECTION 614. APPOINTMENT OF AUTHENTICATING AGENT. At any time when any of the Senior Notes remain Outstanding the Trustee may appoint an Authenticating Agent or Agents which shall be authorized to act on behalf of, and subject to the direction of, the Trustee to authenticate Senior Notes issued upon exchange, registration of transfer or partial redemption thereof or pursuant to Section 306, and Senior Notes so authenticated shall be entitled to the benefits of this Indenture and shall be valid and obligatory for all purposes as if authenticated by the Trustee hereunder. Wherever reference is made in this Indenture to the authentication and delivery of Senior Notes by the Trustee or the Trustee's certificate of authentication, such reference shall be deemed to include authentication and delivery on behalf of the Trustee by an Authenticating Agent and a certificate of authentication executed on behalf of the Trustee by an Authenticating Agent. Each Authenticating Agent shall be acceptable to the Issuer and shall at all times be a corporation organized and doing business under the laws of the United States of America, any State thereof or the District of Columbia, authorized under such laws to act as Authenticating Agent, having a combined capital and surplus of not less than fifty million dollars ($50,000,000) and subject to supervision or examination by federal or State authority. If such Authenticating Agent publishes reports of condition at least 70 annually, pursuant to law or to the requirements of said supervising or examining authority, then for the purposes of this Section, the combined capital and surplus of such Authenticating Agent shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. If at any time an Authenticating Agent shall cease to be eligible in accordance with the provisions of this Section, such Authenticating Agent shall resign immediately in the manner and with the effect specified in this Section. Any corporation into which an Authenticating Agent may be merged or converted to or with which it may be consolidated, or any corporation resulting from any merger, conversion or consolidation to which such Authenticating Agent shall be a party, or any corporation succeeding to the corporate agency or corporate trust business of an Authenticating Agent, shall continue to be an Authenticating Agent, provided such corporation shall be otherwise eligible under this Section, without the execution or filing of any paper or any further act on the part of the Trustee or the Authenticating Agent. An Authenticating Agent may resign at any time by giving written notice thereof to the Trustee and to the Issuer. The Trustee may at any time terminate the agency of an Authenticating Agent by giving written notice thereof to such Authenticating Agent and to the Issuer. Upon receiving such a notice of resignation or upon such a termination, or in case at any time such Authenticating Agent shall cease to be eligible in accordance with the provisions of this Section, the Trustee may appoint a successor Authenticating Agent which shall be acceptable to the Issuer and shall mail written notice of such appointment by first-class mail, postage prepaid, to all Holders, as their names and addresses appear in the Register. Any successor Authenticating Agent upon acceptance of its appointment hereunder shall become vested with all the rights, powers and duties of its predecessor hereunder, with like effect as if originally named as an Authenticating Agent. No successor Authenticating Agent shall be appointed unless eligible under the provisions of this Section. The Issuer agrees to pay to each Authenticating Agent from time to time reasonable compensation for its services under this Section. If an appointment is made pursuant to this Section, the Senior Notes may have endorsed thereon, in addition to the Trustee's certificate of authentication, an alternate certificate of authentication in the following form: Dated: ---------- This is one of the 11-1/2% Senior Notes due 2006 issued under the Indenture referred to in this Senior Note. THE BANK OF NEW YORK as Trustee By: ------------- 71 as Authenticating Agent By: ------------- AUTHORIZED SIGNATORY ARTICLE SEVEN HOLDERS' LISTS AND REPORTS BY THE TRUSTEE AND THE ISSUER SECTION 701. ISSUER TO FURNISH TRUSTEE NAMES AND ADDRESSES OF HOLDERS. The Issuer will furnish or cause to be furnished to the Trustee: (1) semi-annually, not later than January 1 and July 1 in each year, a list, in such form as the Trustee may reasonably require, of the names and addresses of the Holders as of the preceding December 15 or June 15, as the case may be, and (2) at such other times as the Trustee may request in writing, within 30 days after the receipt by the Issuer of any such request, a list of similar form and content as of a date not more than 15 days prior to the time such list is furnished; PROVIDED, HOWEVER, that so long as the Trustee is the Registrar, no such list shall be required to be furnished. SECTION 702. PRESERVATION OF INFORMATION; COMMUNICATIONS TO HOLDERS. (a) The Trustee shall preserve, in as current a form as is reasonably practicable, the names and addresses of Holders contained in the most recent list furnished to the Trustee as provided in Section 701 and the names and addresses of Holders received by the Trustee in its capacity as Registrar. The Trustee may destroy any list furnished to it as provided in Section 701 upon receipt of a new list so furnished. (b) Holders may communicate as provided in Section 312(b) of the Trust Indenture Act with other Holders with respect to their rights under this Indenture or under the Senior Notes, and the Trustee shall comply with its obligations under such Section 312(b). (c) Each Holder of Senior Notes, by receiving and holding the same, agrees with the Issuer and the Company and the Trustee that none of the Issuer, the Company or the Trustee nor any agent of either of them shall be held accountable by reason of the disclosure of any such information as to the names and addresses of the Holders in accordance with Section 702(b), regardless of the source from which such information was derived, and that the Trustee shall not be held accountable by reason of mailing any material pursuant to a request made under 72 Section 702(b). SECTION 703. REPORTS BY TRUSTEE. (a) Within 60 days after May 15 of each year commencing with the year 1997, the Trustee shall transmit by mail to all Holders as provided in Section 313(c) of the Trust Indenture Act, a brief report dated as of such May 15, if required by and in compliance with Section 313(a) of the Trust Indenture Act. (b) The Trustee shall comply with Sections 313(b) and 313(c) of the Trust Indenture Act. (c) A copy of each such report shall, at the time of such transmission to Holders, be filed by the Trustee with each stock exchange upon which the Senior Notes are listed, with the Commission and with the Issuer. The Company will notify the Trustee when any of the Senior Notes are listed on any stock exchange. SECTION 704. REPORTS BY COMPANY. (a) The Issuer and the Company shall: (1) file with the Trustee, within 15 days after the Company is required to file the same with the Commission, copies of the annual reports and of the information, documents and other reports (or copies of such portions of any of the foregoing as the Commission may from time to time by rules and regulations prescribe) which the Company may be required to file with the Commission pursuant to Section 13 or Section 15(d) of the Exchange Act; or, if the Company is not required to file information, documents or reports pursuant to either of said Sections, then it shall file with the Trustee and the Commission, within the earlier of (a) the same 15 days after the Company would have been required to file with the Commission under the preceding clause and (b) the date which it is required to so file under the 1991 Indenture so long as any Indebtedness is outstanding thereunder, in accordance with rules and regulations prescribed from time to time by the Commission, such of the supplementary and periodic information, documents and reports which may be required pursuant to Section 13 of the Exchange Act in respect of a security listed and registered on a national securities exchange as may be prescribed from time to time in such rules and regulations; (2) file with the Trustee and the Commission, in accordance with rules and regulations prescribed from time to time by the Commission, such additional information, documents and reports with respect to compliance by the Company with the conditions and covenants of this Indenture as may be required from time to time by such rules and regulations; (3) transmit by mail to all Holders, as their names and addresses appear in the Register, (a) concurrently with furnishing the same to its stockholders, the Company's annual report to stockholders, containing certified financial statements, and any other financial reports which the Company generally furnishes to its stockholders, and (b) within 30 days after the filing 73 thereof with the Trustee, such summaries of any other information, documents and reports required to be filed by the Company pursuant to paragraphs (1) and (2) of this Section as may be required by rules and regulations prescribed from time to time by the Commission; and (4) furnish to the Trustee, on or before May 1 of each year, a brief certificate from the principal executive officer, principal financial officer or principal accounting officer as to his or her knowledge of the Issuer's and the Company's compliance with all conditions and covenants under this Indenture. For purposes of this paragraph, such compliance shall be determined without regard to any period of grace or requirement of notice provided under this Indenture. Such certificate need not comply with Section 102. (b) At any time when the Company is not subject to Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, upon request of a Holder of a Senior Note or, in the case of a Global Note, or of a beneficial owner of an interest in a Global Note, the Issuer and the Company will promptly furnish or cause to be furnished Rule 144A Information (as defined below) to such Holder (or beneficial owner of a Global Note), or to a prospective purchaser of a Note (or a beneficial interest in a Global Note) designated by such holder (or beneficial owner of such interest), in order to permit compliance by such Holder (or beneficial owner) with Rule 144A under the Securities Act. "Rule 144A Information" shall be such information as is specified pursuant to Rule 144A(d)(4) under the Securities Act (or any successor provision thereto). ARTICLE EIGHT CONSOLIDATION, MERGER, LEASE, SALE OR TRANSFER SECTION 801. WHEN COMPANY MAY MERGE, ETC. The Company shall not consolidate with, or merge with or into any other corporation (whether or not the Company shall be the surviving corporation), or sell, assign, transfer or lease all or substantially all of its properties and assets as an entirety or substantially as an entirety to any Person or group of affiliated Persons, in one transaction or a series of related transactions, unless: (1) either the Company shall be the continuing Person or the Person (if other than the Company) formed by such consolidation or with which or into which the Company is merged or the Person (or group of affiliated Persons) to which all or substantially all the properties and assets of the Company as an entirety are sold, assigned, transferred or leased is a corporation (or constitute corporations) organized and existing under the laws of the United States of America or any State thereof or the District of Columbia and expressly assumes, by an indenture supplemental hereto, executed and delivered to the Trustee, in form satisfactory to the Trustee, all the obligations of the Company under the Senior Notes and this Indenture; (2) immediately before and after giving effect to such transaction or series of related transactions, no Event of Default, and no Default, shall have occurred and be continuing; 74 (3) immediately after giving effect to such transaction or series of related transactions on a PRO FORMA basis, but prior to any purchase accounting adjustments resulting from the transaction or series of related transactions, the Consolidated Net Worth of the Company (or of the surviving, consolidated or transferee entity if the Company is not continuing, treating such entity as the Company for purposes of determining Consolidated Net Worth) shall be at least equal to the Consolidated Net Worth of the Company immediately before such transaction or series of related transactions; and (4) immediately after giving effect to such transaction or series of related transactions, the Company (or the surviving, consolidated or transferee entity if the Company is not continuing, but treating such entity as the Company for purposes of making such determination) would be permitted to incur an additional dollar of Indebtedness (not constituting Permitted Indebtedness) immediately prior to such transaction or series of related transactions under Section 1008; PROVIDED, HOWEVER, that this Subsection (4) shall be inapplicable if (a) such transaction or series of related transactions would result in the occurrence of a Change of Control or (b) immediately prior to giving effect to such transaction or series of related transactions, the Company would not be permitted to incur an additional dollar of Indebtedness (not constituting Permitted Indebtedness) under Section 1008, and immediately after giving effect to such transaction or series of related transactions on a PRO FORMA basis, but prior to any purchase accounting adjustments resulting from the transaction or series of related transactions, the Consolidated Interest Coverage Ratio of the Company (or the surviving, consolidated or transferee entity if the Company is not continuing, treating such entity as the Company for purposes of determining Consolidated Interest Coverage Ratio) shall be at least equal to the Consolidated Interest Coverage Ratio of the Company immediately before such transaction or series of related transactions; and PROVIDED, FURTHER, that notwithstanding the foregoing, if this Subsection (4) is inapplicable by reason of clause (b) of the first proviso to this Subsection, and at the date three months after the consummation of such transaction or series of related transactions the rating ascribed to the Senior Notes by Standard & Poor's Corporation or Moody's Investors Service, Inc. shall be lower than the rating ascribed to the Senior Notes prior to the public announcement of such transaction or series of related transactions, then the Company shall make an offer for the Senior Notes at the same price and following the same procedures and obligations as required with respect to a Change of Control pursuant to Section 1013 (as if such date three months after the giving effect to such transaction or series of related transactions were the Change of Control Date). SECTION 802. SENIOR NOTES TO BE SECURED IN CERTAIN EVENTS. If, upon any consolidation or merger, or upon any sale, assignment, transfer or lease as provided in Section 801, any material property of the Company or any Restricted Subsidiary or any shares of Capital Stock or Indebtedness of any Restricted Subsidiary, owned immediately prior thereto, would thereupon become subject to any Lien securing any indebtedness for borrowed money of, or guaranteed by, such other corporation or Person (other than any Permitted Lien), the Company, prior to such consolidation, merger, sale, assignment, transfer or lease, will by indenture supplemental hereto secure the due and punctual payment of the principal 75 of, and premium, if any, and interest on the Senior Notes then Outstanding (together with, if the Company shall so determine, any other Indebtedness of, or guaranteed by, the Company or any Restricted Subsidiary and then existing or thereafter created) equally and ratably with (or, at the option of the Company, prior to) the Indebtedness secured by such Lien. SECTION 803. OFFICER'S CERTIFICATE; OPINION OF COUNSEL. The Company shall deliver to the Trustee prior to the proposed transaction(s) covered by Section 801 an Officer's Certificate and an Opinion of Counsel, each stating that the transaction(s) and such supplemental indenture comply with this Indenture and that all conditions precedent to the consummation of the transaction(s) under this Indenture have been met. SECTION 804. SUCCESSOR CORPORATION SUBSTITUTED. Upon any consolidation by the Company with or merger by the Company into any other corporation or any lease, sale, assignment or transfer of all or substantially all of the property and assets of the Company in accordance with Section 801, the successor corporation formed by such consolidation or into which the Company is merged or the successor corporation or affiliated group of corporations to which such lease, sale, assignment or transfer is made shall succeed to, and be substituted for, and may exercise every right and power of, the Company under this Indenture with the same effect as if such successor corporation or corporations had been named as the Company herein, and thereafter, except in the case of a lease, the predecessor corporation or corporations shall be relieved of all obligations and covenants under this Indenture and the Senior Notes and in the event of such conveyance or transfer, except in the case of a lease, any such predecessor corporation may be dissolved and liquidated. ARTICLE NINE SUPPLEMENTS TO THE INDENTURE SECTION 901. SUPPLEMENTAL INDENTURES WITHOUT CONSENT OF HOLDERS. Without notice to or the consent of any Holders, the Issuer and the Company, when authorized by Board Resolutions, and the Trustee, at any time and from time to time, may, subject to Section 1003, enter into one or more indentures supplemental hereto, in form satisfactory to the Trustee, for any of the following purposes: (1) to evidence the succession of another Person to the Issuer or the Company and the assumption by any such successor of the covenants of the Issuer or the Company herein and in the Senior Notes; or (2) to add to the covenants of the Issuer and the Company for the benefit of the Holders or to surrender any right or power herein or in the Senior Notes conferred upon the Issuer or the Company; or 76 (3) to add any additional Events of Default or Company Events of Default; or (4) to secure the Senior Notes; or (5) to evidence and provide for the acceptance of appointment hereunder by a successor Trustee; or (6) to cure any ambiguity, defect or inconsistency or to correct or supplement any provision herein which may be inconsistent with any other provision herein; or (7) to provide for the assumption by the Company of all of the obligations of the Issuer under the Indenture, the Notes and all related documents; or (8) to make any change that does not materially adversely affect the interests of the Holders. Upon request of the Issuer and the Company, accompanied by Board Resolutions of each of them authorizing the execution of any such supplemental indenture, and upon receipt by the Trustee of the documents described in (and subject to the last sentence of) Section 903, the Trustee shall join with the Issuer and the Company in the execution of any supplemental indenture authorized or permitted by the terms of this Indenture. SECTION 902. SUPPLEMENTAL INDENTURES WITH CONSENT OF HOLDERS. With the written consent of Holders representing at least a majority in principal amount of the Outstanding Senior Notes, by Act of said Holders delivered to the Issuer and the Trustee, the Issuer and the Company, when authorized by Board Resolutions, and the Trustee shall, subject to Section 903, enter into an indenture or indentures supplemental hereto for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Indenture or of modifying in any manner the rights of the Holders under this Indenture; PROVIDED, HOWEVER, that no such supplemental indenture shall, without the consent of the Holder of each Outstanding Senior Note, (1) change the Stated Maturity of the principal of, or any installment of principal of or interest on, any Senior Note, or reduce the principal amount thereof or the rate of interest thereon or any premium payable upon the redemption thereof or extend the time for payment thereof, or change the Place of Payment where, or the coin or currency in which, any Senior Note or any premium or the interest thereon is payable, or impair the right to institute a suit for the enforcement of any such payment on or after the Stated Maturity thereof (or, in the case of a repurchase offer for the Senior Notes under this Indenture, on or after the repurchase date specified therefor), or (2) reduce the percentage in principal amount of the Outstanding Senior Notes, the consent of whose Holders is required for any such supplemental indenture, or the consent of whose Holders is required for any waiver of compliance with certain provisions of this Indenture 77 or Defaults, Events of Default or Company Events of Default hereunder and their consequences provided for in this Indenture, or (3) change the repurchase provisions (including those contained in Section 801(4), Article Eleven, Section 1009 and Section 1013) hereof in a manner adverse to such Holder, or (4) subordinate in right of payment, or otherwise subordinate, the Senior Notes to any other Indebtedness; or (5) modify any of the provisions of this Section, Section 513 or Section 1014, except to increase any such percentage or to provide that certain other provisions of this Indenture cannot be modified or waived without the consent of the Holder of each Outstanding Senior Note affected thereby, PROVIDED, HOWEVER, that this clause shall not be deemed to require the consent of any Holder with respect to changes in the references to "the Trustee" and concomitant changes in this Section and Section 1014, or the deletion of this proviso, in accordance with the requirements of Sections 611(b) and 901(7). It shall not be necessary for any Act of Holders under this Section to approve the particular form of any proposed supplemental indenture, but it shall be sufficient if such Act shall approve the substance thereof. SECTION 903. EXECUTION OF SUPPLEMENTAL INDENTURES. The Trustee shall sign any supplemental indenture authorized pursuant to this Article, subject to the last sentence of this Section 903. In executing, or accepting the additional trusts created by, any supplemental indenture permitted by this Article or the modifications thereby of the trusts created by this Indenture, the Trustee shall be entitled to receive, and (subject to Section 601) shall be fully protected in relying upon, an Officer's Certificate and an Opinion of Counsel stating that the execution of such supplemental indenture is authorized or permitted by this Indenture. The Trustee may, but shall not be obligated to, enter into any such supplemental indenture which affects the Trustee's own rights, duties or immunities under this Indenture or otherwise. SECTION 904. EFFECT OF SUPPLEMENTAL INDENTURES. Upon the execution of any supplemental indenture under this Article, this Indenture shall be modified in accordance therewith, and such supplemental indenture shall form a part of this Indenture for all purposes; and every Holder of Senior Notes theretofore or thereafter authenticated and delivered hereunder shall be bound thereby. SECTION 905. CONFORMITY WITH TRUST INDENTURE ACT. Every supplemental indenture executed pursuant to this Article shall conform to the requirements of the Trust Indenture Act as though this Indenture were qualified thereunder. 78 SECTION 906. REFERENCE IN SENIOR NOTES TO SUPPLEMENTAL INDENTURES. Senior Notes authenticated and delivered after the execution of any supplemental indenture pursuant to this Article may, and shall if required by the Trustee, bear a notation in form approved by the Trustee as to any matter provided for in such supplemental indenture. If the Issuer shall so determine, new Senior Notes so modified as to conform, in the opinion of the Trustee and the Issuer, to any such supplemental indenture may be prepared and executed by the Issuer and the Company and authenticated and delivered by the Trustee in exchange for Outstanding Senior Notes. ARTICLE TEN COVENANTS SECTION 1001. PAYMENT OF PRINCIPAL, PREMIUM AND INTEREST. The Issuer covenants and agrees for the benefit of the Holders that it will duly and punctually pay the principal of (and premium, if any) and interest on the Senior Notes in United States Dollars accordance with the terms of the Senior Notes and this Indenture. An installment of principal or interest shall be considered paid on the date it is due if the Trustee or Paying Agent holds by 12:00 noon New York City time on that date dollars designated for and sufficient to pay the installment and is not prohibited from paying such money to the Holders pursuant to the terms of this Indenture. SECTION 1002. MAINTENANCE OF OFFICE OR AGENCY. The Issuer and the Company will maintain in the Place of Payment, an office or agency where Senior Notes may be presented or surrendered for payment, where Senior Notes may be surrendered for registration of transfer or exchange and where notices and demands to or upon the Issuer and the Company in respect of the Senior Notes and this Indenture may be served. The Issuer or the Company will give prompt written notice to the Trustee of the location, and any change in the location, of such office or agency. If at any time the Issuer and the Company shall fail to maintain such required office or agency or shall fail to furnish the Trustee with the address thereof, such presentations, surrenders, notices and demands may be made or served at the Corporate Trust Office of the Trustee, and the Issuer and the Company each hereby appoints the Trustee as its agent to receive all such presentations, surrenders, notices and demands. The Issuer and the Company may also from time to time designate one or more other offices or agencies where the Senior Notes may be presented or surrendered for any or all such purposes and may from time to time rescind such designations; PROVIDED, HOWEVER, that no such designation or rescission shall in any manner relieve the Issuer of its obligation to maintain an office or agency in the Place of Payment for such purposes. The Issuer will give prompt written notice to the Trustee of any such designation or rescission and of any change in the location of any such other office or agency. 79 SECTION 1003. MONEY FOR SENIOR NOTES PAYMENTS TO BE HELD IN TRUST. If the Issuer or the Company shall at any time act as the Paying Agent with respect to the Senior Notes, it will, on or before each due date of the principal of (and premium, if any), interest and Additional Amounts on any of the Senior Notes, segregate and hold in trust for the benefit of the Persons entitled thereto a sum sufficient to pay the principal (and premium, if any) or interest so becoming due until such sums shall be paid to such Persons or otherwise disposed of as herein provided and will promptly notify the Trustee of its action or failure so to act. Whenever the Issuer shall have one or more Paying Agents with respect to the Senior Notes, it will, prior to each due date of the principal of (and premium, if any) or interest on any of the Senior Notes, deposit with a Paying Agent a sum sufficient to pay the principal (and premium, if any) or interest so becoming due, such sum to be held in trust for the benefit of the Persons entitled to such principal, premium or interest, and (unless such Paying Agent is the Trustee) the Issuer will promptly notify the Trustee of its action or failure to so act. The Issuer will cause each Paying Agent for the Senior Notes (other than the Trustee) to execute and deliver to the Trustee an instrument in which such Paying Agent shall agree with the Trustee, subject to the provisions of this Section, that such Paying Agent will: (1) hold all sums held by it for the payment of the principal of (and premium, if any) or interest on Senior Notes in trust for the benefit of the Persons entitled thereto until such sums shall be paid to such Persons or otherwise disposed of as herein provided; (2) give the Trustee notice of any default by the Issuer or the Company (or any other obligor upon the Senior Notes) in the making of any payment of principal (and premium, if any), interest or Additional Amounts on the Senior Notes; and (3) at any time during the continuance of any such default, upon the written request of the Trustee, forthwith pay to the Trustee all sums so held in trust by such Paying Agent. The Issuer may at any time, for the purpose of obtaining the satisfaction and discharge of this Indenture or for any other purpose, pay, or by Company Order direct any Paying Agent to pay, to the Trustee all sums held in trust by the Issuer, the Company or such Paying Agent, such sums to be held by the Trustee upon the same trusts as those upon which such sums were held by the Issuer, the Company or such Paying Agent; and, upon such payment by any Paying Agent to the Trustee, such Paying Agent shall be released from all further liability with respect to such money. Any money deposited with the Trustee or any Paying Agent, or then held by the Issuer or the Company, in trust for the payment of the principal of (and premium, if any) or interest on any Senior Note and remaining unclaimed for one year after such principal (and premium, if any) or interest has become due and payable shall be paid to the Issuer or the 80 Company, as the case may be, on Company Request, or (if then held by the Issuer or the Company, as the case may be) shall be discharged from such trust; and the Holder of such Senior Note shall thereafter, as an unsecured general creditor, look only to the Issuer and the Company (as provided in the Guaranty) for payment thereof, and all liability of the Trustee or such Paying Agent with respect to such trust money, and all liability of the Issuer or the Company, as the case may be, as trustee thereof, shall thereupon cease; PROVIDED, HOWEVER, that the Trustee or such Paying Agent, before being required to make any such repayment, may at the expense of the Issuer cause to be published once, in a newspaper published in the English language, customarily published on each Business Day and of general circulation in New York, New York notice that such money remains unclaimed and that, after a date specified therein, which shall not be less than 30 days from the date of such publication, any unclaimed balance of such money then remaining will be repaid to the Issuer. SECTION 1004. CORPORATE EXISTENCE. Subject to Article Eight, the Issuer and the Company will do or cause to be done all things necessary to preserve and keep in full force and effect its corporate existence and that of each of the Company's Restricted Subsidiaries and the rights (charter and statutory), licenses and franchises of the Company and its Restricted Subsidiaries; PROVIDED, HOWEVER, that (a) the Company shall not be required to preserve any such right, license or franchise or the corporate existence of any of its Restricted Subsidiaries (other than the Issuer on or prior to the Assumption) if the Board of Directors, or the board of directors of the Restricted Subsidiary concerned, as the case may be, shall determine that the preservation thereof is no longer desirable in the conduct of the business of the Company or any of its Restricted Subsidiaries and that the loss thereof is not materially disadvantageous to the Holders; (b) nothing herein contained shall prevent any Restricted Subsidiary of the Company from (i) liquidating or dissolving (other than the Issuer prior to the Assumption), or (ii) merging into, or consolidating with the Company (PROVIDED that the Company shall be the continuing or surviving corporation) or with any one or more Restricted Subsidiaries of the Company if the Board of Directors or the board of directors of the Restricted Subsidiary concerned, as the case may be, shall so determine, provided that any such merger or consolidation involving the Issuer on or prior to the Assumption may only be with a Wholly Owned Subsidiary. SECTION 1005. PAYMENT OF TAXES AND OTHER CLAIMS. The Company will pay or discharge or cause to be paid or discharged, before the same shall become delinquent, (1) all material taxes, assessments and governmental charges levied or imposed upon the Company or any Restricted Subsidiary or upon the income, profits or property of the Company or any Restricted Subsidiary and (2) all lawful claims against the Company or any Restricted Subsidiary for labor, materials and supplies which in the case of either clause (1) or (2) of this Section, if unpaid, might by law become a material Lien upon the property of the Company or any Restricted Subsidiary; PROVIDED, HOWEVER, that neither the Company nor any Restricted Subsidiary shall be required to pay or discharge or cause to be paid or discharged any such tax, assessment, charge or claim whose amount, applicability or validity is being 81 contested in good faith by appropriate proceedings. SECTION 1006. RESTRICTION ON DIVIDENDS. The Company will not, and will not permit any Subsidiary of the Company to, directly or indirectly, (1) declare or pay any dividend or make any distribution, in cash or otherwise, in respect of any shares of Capital Stock of the Company or to the holders of Capital Stock of the Company as such (other than dividends or distributions payable in shares of Capital Stock of the Company (other than Redeemable Stock)) or (2) purchase, redeem or otherwise acquire or retire for value any of the Capital Stock of the Company or options, warrants or other rights to acquire any such Capital Stock, other than acquisitions of Capital Stock or such options, warrants or other rights by any Subsidiary of the Company from the Company (any such transaction included in clause (1) or (2) being hereafter collectively referred to as a "Restricted Payment") if (i) at the time of such Restricted Payment and after giving effect thereto, (a) an Event of Default shall have occurred and be continuing or (b) the Consolidated Net Worth of the Company shall be less than seven hundred fifty million dollars ($750,000,000); or if (ii) after giving effect to such Restricted Payment, the aggregate amount expended subsequent to November 1, 1991, for all such Restricted Payments (the amount of any Restricted Payment, if other than cash, to be the fair market value of such payment as determined by the Board of Directors of the Company, whose reasonable determination shall be conclusive and evidenced by a Board Resolution) exceeds the algebraic sum of (w) a number calculated as follows: (A) if the aggregate Consolidated Net Income of the Company earned on a cumulative basis during the period subsequent to September 30, 1991 through the end of the last fiscal quarter that is prior to the declaration of any such dividend or distribution or the giving of notice of such purchase, redemption or other acquisition or retirement and for which such financial information is then available, is a positive number, then 100% of such positive number, and (B) if the aggregate Consolidated Net Income of the Company earned on a cumulative basis during the period subsequent to September 30, 1991 through the end of the last fiscal quarter that is prior to the declaration of any such dividend or distribution or the giving of notice of such purchase, redemption or other acquisition or retirement and for which such financial information is then available, is a negative number, then 100% of such negative number, (x) the aggregate net cash proceeds received by the Company from the issuance and sale, other than to a Subsidiary of the Company, subsequent to November 1, 1991, of Capital Stock (including Capital Stock issued upon the conversion of, or in exchange for, securities other than Capital Stock and options, warrants or other rights to acquire Capital Stock, but excluding Redeemable Stock), (y) the aggregate net cash proceeds originally received by the Company from the issuance and sale, other than to a Subsidiary of the Company, of Indebtedness of the Company that is converted into Capital Stock of the Company subsequent to November 1, 1991, and (z) three hundred million dollars ($300,000,000); PROVIDED, HOWEVER, that the retirement of any shares of the Company's Capital Stock by exchange for, or out of the proceeds of the substantially concurrent sale of, other shares of Capital Stock of the Company other than Redeemable Stock shall not constitute a Restricted Payment. If all of the conditions to the declaration of a dividend or distribution set out in this Section are satisfied at the time such dividend or distribution is declared, then such dividend or distribution may be paid or made within sixty days after such declaration even if the 82 payment of such dividend, the making of such distribution or the declaration thereof would not have been permitted under this Section at any time after such declaration. The Issuer will not declare or pay any dividend or make any distribution, in cash or otherwise, in respect of any shares of its Capital Stock other than to the Company. SECTION 1007. LIMITATION ON FUTURE LIENS AND GUARANTIES. (a) If the Company or any Subsidiary of the Company shall create, incur, assume or suffer to exist any Lien upon any of the assets of the Company or a Subsidiary of the Company (whether such assets are owned at November 1, 1991 or thereafter acquired) as security for (i) any Indebtedness or other obligation (whether unconditional or contingent) of the Company that ranks PARI PASSU with the Senior Notes or any Indebtedness or other obligation (whether unconditional or contingent) of a Subsidiary of the Company, the Company will secure or will cause such Subsidiary to guarantee and secure the Outstanding Senior Notes equally and ratably with (or, at the option of the Company, prior to) such Indebtedness or other obligation, so long as such Indebtedness or other obligation shall be so secured, or (ii) any Subordinated Indebtedness, the Company will secure the Outstanding Senior Notes prior to such Subordinated Indebtedness, so long as such Subordinated Indebtedness shall be so secured; PROVIDED, HOWEVER, that this Subsection shall not apply in the case of Permitted Liens or Liens granted by any Unrestricted Subsidiary to secure Indebtedness or other obligations of itself or of any Person other than the Company and its Restricted Subsidiaries. (b) The Company will not guarantee the Indebtedness of any Subsidiary of the Company and will not permit any such Subsidiary to guarantee (i) any Indebtedness of the Company that ranks PARI PASSU with the Senior Notes, (ii) any Indebtedness of a Subsidiary of the Company or (iii) any Subordinated Indebtedness; PROVIDED, HOWEVER, that this Subsection shall not apply to (1) any guaranty by a Subsidiary if such Subsidiary also guarantees the Senior Notes on a PARI PASSU basis with respect to guaranties of Indebtedness described in clause (i) and (ii) and on a senior basis with respect to guaranties of Indebtedness described in clause (iii); (2) any guaranty existing on November 1, 1991 or any extension or renewal of such guaranty to the extent such extension or renewal is for the same or a lesser amount; (3) any guaranty which constitutes Indebtedness permitted by clause (v) or (vi) of the definition of Permitted Indebtedness granted by a Person permitted to incur such Indebtedness; (4) any guaranty by the Company of Indebtedness of a Restricted Subsidiary, PROVIDED that (A) incurrence of such Indebtedness of the Restricted Subsidiary is not prohibited by this Indenture and (B) (x) such guaranty constitutes Indebtedness of the Company incurred as Permitted Indebtedness pursuant to clause (vii) or (viii) of the definition of Permitted Indebtedness (it being understood that, for purposes of determining Permitted Indebtedness, any such guaranty shall be deemed to constitute Indebtedness separate from, and, in addition to, Indebtedness of a Restricted Subsidiary which is so guaranteed) or (y) immediately prior to and (on a PRO FORMA basis) after granting such guaranty, the Company would be permitted to incur an additional dollar of Indebtedness (not constituting Permitted Indebtedness) under Section 1008; (5) any guaranty by an Unrestricted Subsidiary of Indebtedness or other obligations of any Person other than the Company and its Restricted 83 Subsidiaries; (6) any guaranty by the Company or any Subsidiary or Seminole of Indebtedness or other obligations constituting Indebtedness permitted by clause (i)(a) of the definition of Permitted Indebtedness in a principal amount not exceeding the principal amount outstanding or committed under the Credit Agreements (including any letter of credit facility, but without duplication with respect to commitments for loans the use of proceeds of which is restricted to repayment of other Indebtedness under the Credit Agreements) as of November 1, 1991, PLUS two hundred fifty million dollars ($250,000,000) and LESS the proceeds from the sale of all Indebtedness under the 1991 Indenture issued from time to time applied to repay Indebtedness under the Credit Agreements; (7) any guaranty by the Company of Indebtedness of any Restricted Subsidiary outstanding on November 1, 1991 which is not subordinated to any Indebtedness of such Restricted Subsidiary, and any renewal, extension or refinancing of such Indebtedness permitted by this Indenture; (8) any guaranty by the Company of Indebtedness of any Restricted Subsidiary that is organized under the laws of a jurisdiction other than the United States or any subdivision thereof, PROVIDED that the incurrence of such Indebtedness of such Restricted Subsidiary is not prohibited by this Indenture; (9) any guaranty by a Restricted Subsidiary that is organized under the laws of a jurisdiction other than the United States or any subdivision thereof of the Indebtedness of any of its Subsidiaries that is a Restricted Subsidiary and that is organized under the laws of a jurisdiction other than the United States or any subdivision thereof, PROVIDED that incurrence of such Indebtedness of such Restricted Subsidiary is not prohibited by this Indenture; (10) any guaranty by the Company or a Subsidiary of the Company of Indebtedness or other obligations in a principal amount not exceeding two hundred fifty thousand dollars ($250,000); (11) any guaranty in the form of an endorsement of negotiable instruments for deposit or collection and similar transactions; (12) any guaranty arising under or in connection with performance bonds, indemnity bonds, surety bonds, or commercial letters of credit not exceeding twenty-five million dollars ($25,000,000) in aggregate principal amount from time to time outstanding; (13) any guaranty by a Subsidiary of the Company of Indebtedness or other obligations of another Subsidiary in effect at the time of such guarantor becoming a Subsidiary and not created in contemplation thereof; or (14) any guaranty by the Company or a Restricted Subsidiary of any Interest Swap Obligation, Currency Agreement or Commodities Agreement relating to Indebtedness that is guaranteed pursuant to another clause of this Subsection. (c) Notwithstanding subparagraphs (a) and (b), the Issuer will not (i) create, incur, assume or suffer to exist any Lien upon any of its assets other than Liens specified in (1) clause (i), (iii), (vi), (vii) or (xvi) of the definition of Ordinary Course of Business Liens or (2) clause (v) of the definition of Permitted Liens (in respect of the Indenture only) or (iii) guarantee any Indebtedness. SECTION 1008. LIMITATION ON FUTURE INCURRENCE OF INDEBTEDNESS. (a) The Company will not, and will not permit any Restricted Subsidiary to, incur, create, assume, guarantee or in any other manner become directly or indirectly liable with respect to or responsible for the payment of any Indebtedness except: (1) Permitted Indebtedness; and (2) Indebtedness of the Company if at the time thereof and after giving effect thereto the Consolidated Interest Coverage Ratio of the Company, on a PRO FORMA basis for the 84 then four most recent fiscal quarters, taken as a whole (giving effect to (i) such Indebtedness and (ii) the effect on the Consolidated Cash Flow Available for Fixed Charges of the Company for the then four most recent fiscal quarters, taken as a whole, as a result of any acquisition of a Person acquired by the Company or any Restricted Subsidiary with the proceeds of such Indebtedness), would be greater than 1.75 to 1. Without limiting the foregoing, the Company shall not, and shall not permit any Restricted Subsidiary to, guarantee, or in any other manner become directly or indirectly liable with respect to or responsible for the payment of, Indebtedness of any Unrestricted Subsidiary in an amount greater than, for all guaranties and undertakings of responsibility by the Company and its Restricted Subsidiaries, 20% of the aggregate amount of Indebtedness of such Unrestricted Subsidiary. (b) Notwithstanding the foregoing, the Issuer will not incur, create, assume, guarantee or in any other manner become directly or indirectly liable with respect to or responsible for the payment of any Indebtedness other than the Notes and Indebtedness owed to the Company or a Wholly Owned Subsidiary. SECTION 1009. LIMITATION ON ASSET DISPOSITIONS. (a) (i) The Company will not, and will not permit any Restricted Subsidiary to, make any Asset Disposition. In the event that the Company fails to observe the covenant set forth in the foregoing sentence, such event of failure shall constitute an Event of Default unless (i) (except as otherwise permitted in the last sentence of Subsection (g) below) the Company (or the Restricted Subsidiary, as the case may be) receives consideration at the time of such Asset Disposition at least equal to the fair market value for the assets sold or otherwise disposed of (which shall be as determined in good faith (x) in the case of dispositions of assets having a fair market value of ten million dollars ($10,000,000) or more, by the Board of Directors, whose reasonable determination shall be conclusive and evidenced by a Board Resolution, or (y) in the case of dispositions of assets having a fair market value of less than ten million dollars ($10,000,000) but not less than five million dollars ($5,000,000), an Officer of the Company, whose reasonable determination shall be conclusive and evidenced by a certificate of such Officer) and (ii) the Company applies the aggregate net proceeds in excess of three hundred million dollars ($300,000,000) received by the Company or any Restricted Subsidiary from all Asset Dispositions occurring subsequent to November 1, 1991 (but excluding for purposes of this clause (ii), whether before or after the receipt of net proceeds in excess of three hundred million dollars ($300,000,000), (1) the net proceeds of any Asset Disposition or series of related Asset Dispositions where the net proceeds are less than five million dollars ($5,000,000) and (2) the first twenty-five million dollars ($25,000,000) of net proceeds in each fiscal year without taking into account any amount excluded pursuant to (1)) as follows: (A) to the payment or prepayment of any Senior Indebtedness within six months of such Asset Disposition, or (B) to investment in the business of the Company and its Restricted Subsidiaries (including, without limitation, by acquiring equity, other than Redeemable Stock, of the transferee of such Asset Disposition) within six months of such Asset Disposition or, if such investment is with respect to a project to be completed within a period greater than six months from such Asset Disposition, then within the period of time necessary to complete such project; PROVIDED, HOWEVER, that (x) in the case of 85 applications contemplated by clause (B), the Board of Directors has, within such six-month period, adopted in good faith a resolution committing such excess proceeds to such investment, (y) EXCEPT as provided in the next sentence, none of such excess proceeds shall be used to make any Restricted Payment or any payment in respect of Subordinated Indebtedness and (z) to the extent not applied in accordance with clauses (A) or (B) above, or if after being so applied there remain excess net proceeds in an amount greater than ten million dollars ($10,000,000), the Company shall make a PRO RATA offer to all Holders to purchase Senior Notes at 100% of principal amount, plus accrued and unpaid interest to the Asset Disposition Payment Date, up to an aggregate principal amount equal to such excess net proceeds (as adjusted pursuant to Subsection (g) of this Section, the "Asset Disposition Offer Amount"). If after being applied in accordance with clauses (A), (B) and (z) above there remain excess net proceeds, the Company will apply such excess net proceeds to the general corporate purposes of the Company or any Subsidiary of the Company. (b) Notwithstanding Subsection (a) of this Section, to the extent the Company or any of its Restricted Subsidiaries receives securities or other non-cash property or assets as proceeds of an Asset Disposition (other than equity in the transferee not constituting Redeemable Stock), the Company shall not be required to make any application required by Subsection (a) of this Section until the Company or such Restricted Subsidiary receives cash proceeds from a sale, repayment, exchange, redemption or retirement of or extraordinary dividend or return of capital on such non-cash property, EXCEPT that if and to the extent the sum of all cash proceeds plus the fair market value of equity (other than Redeemable Stock) in the transferee of such Asset Disposition received at the time of such Asset Disposition is less than 70% of the fair market value of the total proceeds of such Asset Disposition (with such fair market value determined and evidenced in the same manner as stated in clause (i) of Subsection (a) of this Section), the amount of such deficiency (the "Deficiency Amount") shall be applied as required by Subsection (a) of this Section as if received at the time of the Asset Disposition. Any amounts deferred pursuant to the preceding sentence shall be applied in accordance with Subsection (a) of this Section when cash proceeds are thereafter received from a sale, repayment, exchange, redemption or retirement of or extraordinary dividend or return of capital on such non-cash property; PROVIDED, HOWEVER, that the Company shall not be required to apply with respect to any equity interest in a transferee an amount exceeding the fair market value attributable to such equity interest at the time of the Asset Disposition; and PROVIDED, FURTHER, that if a Deficiency Amount was applied pursuant to the exception contained in the preceding sentence, then once the cumulative amount of applications made pursuant to Subsections (a) and (b) of this Section (including any Deficiency Amounts) equals 100% of the fair market value of the total proceeds of the Asset Disposition at the time of such Asset Disposition, cash proceeds thereafter received from a sale, repayment, exchange, redemption or retirement of or extraordinary dividend or return of capital on such non-cash property shall not be required to be applied in accordance with Subsection (a) of this Section EXCEPT to the extent such cash proceeds exceed the Deficiency Amount. (c) An offer to purchase Senior Notes required to be made pursuant to this Section is referred to as an "Asset Disposition Offer" and the date on which the purchase of Senior Notes relating to any such Asset Disposition Offer is to be made is referred to as the 86 "Asset Disposition Payment Date." (d) The Company shall provide the Trustee with notice of an Asset Disposition Offer and with all information required to accompany the notice described in (e) below, at least 45 days before any such Asset Disposition Payment Date and at least 10 days before the notice of any Asset Disposition Offer is mailed to Holders. (e) Notice of an Asset Disposition Offer described in this Section shall be mailed on behalf of the Company by the Trustee to all Holders at their last registered addresses not less than 30 days nor more than 60 days before the Asset Disposition Payment Date, which shall be a date not more than 210 days after the Asset Disposition giving rise to such Asset Disposition Offer. The Asset Disposition Offer shall remain open from the time of the mailing of such notice until not more than five Business Days before the Asset Disposition Payment Date. The notice shall state: (1) that the Asset Disposition Offer is being made pursuant to this Section and the reason for the Asset Disposition Offer; (2) the purchase price and the Asset Disposition Payment Date; (3) the aggregate principal amount of Senior Notes initially subject to the Asset Disposition Offer Amount and, if applicable, a description of the adjustment mechanisms describe in Subsection (g) of this Section; (4) the name and address of the Paying Agent and the Trustee and that Senior Notes must be surrendered to the Paying Agent to collect the purchase price; (5) that any of the Senior Notes not tendered or accepted for payment will continue to accrue interest; (6) that any Senior Note accepted for payment pursuant to the Asset Disposition Offer shall cease to accrue interest after the Asset Disposition Payment Date; (7) that each Holder electing to have a Senior Note purchased pursuant to an Asset Disposition Offer will be required to surrender the Senior Note, with the form entitled "Option of Holder to Elect Purchase" on the reverse of the Senior Note completed, to the Paying Agent at the address specified in the notice prior to the close of business on the fifth Business Day prior to the Asset Disposition Payment Date; (8) that Holders will be entitled to withdraw their election if the Paying Agent receives, not later than the close of business on the third Business Day preceding the Asset Disposition Payment Date, a telegram, telex, facsimile transmission or letter setting forth: the name of the Holder, the principal amount of the Senior Note the Holder delivered for purchase, the certificate number of the Senior Note the Holder delivered and a statement that such Holder is withdrawing his election to have the Senior Note purchased; and 87 (9) that Holders whose Senior Notes are purchased only in part will be issued new Senior Notes equal in principal amount to the unpurchased portion of the Senior Notes surrendered. (f) On the Asset Disposition Payment Date, the Company shall (i) accept for payment Senior Notes or portions thereof tendered pursuant to the Asset Disposition Offer in an aggregate principal amount equal to the Asset Disposition Offer Amount or such lesser amount of Senior Notes as shall have been tendered, (ii) on or before 12:00 noon New York City time, deposit with the Paying Agent money sufficient to pay the purchase price of all Senior Notes or portions thereof so accepted, and (iii) deliver or cause to be delivered to the Trustee Senior Notes so accepted together with an Officer's Certificate stating the Senior Notes or portions thereof accepted by the Company, which Notes will be retired by the Issuer. If the aggregate principal amount of Senior Notes tendered exceeds the Asset Disposition Offer Amount, the Issuer shall select the Senior Notes to be purchased on a PRO RATA basis to the nearest one thousand dollars ($1,000) of principal amount. The Paying Agent shall promptly mail or deliver to Holders of Senior Notes so accepted payment in an amount equal to the purchase price, and the Issuer shall execute and the Trustee shall promptly authenticate and mail or make available for delivery to such Holders a new Senior Note equal in principal amount to any unpurchased portion of the Senior Note surrendered. Any Senior Notes not so accepted shall be promptly mailed or made available for delivery to the Holder thereof. The Issuer will publicly announce the results of the Asset Disposition Offer on or as soon as practicable after the Asset Disposition Payment Date. For purposes of this Section, the Trustee or its agent shall act as the Paying Agent. (g) The Company shall not make an "Asset Disposition Offer" (as defined) required under Section 1009 of the 1991 Indenture, the First Mortgage Indenture, the 1994 Senior Notes Indenture or the 1996 Rating Adjustable Indenture, in connection with a disposition of assets (other than the Collateral (as defined in the First Mortgage Note Indenture)) unless the Company shall have made an Asset Disposition Offer hereunder (and in respect of certain other Senior Indebtedness in accordance with the following sentence) on a PRO RATA basis (in an aggregate amount equal to the amount to be offered pursuant to the Asset Disposition Offer under the 1991 Indenture, the First Mortgage Indenture, the 1994 Senior Notes Indenture and the 1996 Rating Adjustable Indenture, and in accordance with Section 1009(g) of the First Mortgage Note Indenture, the 1994 Senior Notes and the 1996 Rating Adjustable Indenture) the closing date of which is prior to six months after the asset disposition triggering the obligations of the Company under the 1991 Indenture, the First Mortgage Note Indenture, the 1994 Senior Notes Indenture and/or the 1996 Rating Adjustable Indenture. Notwithstanding the previous sentence, if the Company issues on or after the Issue Date, any Senior Indebtedness (including Senior Notes) containing a requirement that an offer be made to repurchase such Senior Indebtedness under the same circumstances and in the same manner (including the prescribed time periods hereof) provided in this Section 1009, then (i) the Company may apply the Asset Disposition Offer Amount (before any adjustment pursuant to this sentence) to the PRO RATA purchase of Senior Notes tendered hereunder and the Senior Indebtedness tendered thereunder and (ii) the Asset Disposition Offer Amount available to repurchase the Senior Notes shall be reduced by the amount applied to the purchase of such Senior Indebtedness; PROVIDED that this sentence shall only 88 apply to (i) Senior Indebtedness issued on or after the Issue Date that explicitly permits the PRO RATA purchase of Senior Notes as described herein and refers to this Section 1009(g), and (ii) any Indebtedness outstanding at the date of this Indenture that is amended to explicitly permit the pro-rata purchase of Senior Notes as described herein and refers to this Section 1009(g). In the event that the First Mortgage Notes are refinanced through a public or private offering of Indebtedness constituting debt securities and the amount of such refinancing Indebtedness is no greater than the principal amount of the First Mortgage Notes outstanding as of the date of such refinancing, the Company need not comply with Subsection (a) of this Section 1009 in respect of an Asset Disposition involving the collateral securing such Indebtedness (other than collateral granted in respect of such Indebtedness pursuant to a negative pledge or similar provision contained in the indenture or similar instrument relating to such Indebtedness) to the extent that such compliance would constitute a default under such indenture or similar instrument. SECTION 1010. MAINTENANCE OF PROPERTIES. The Company will cause all material properties used or useful in the conduct of its business or the business of any of its Subsidiaries to be maintained and kept in good condition, repair and working order (normal wear and tear excepted) and supplied with all necessary equipment and will cause to be made all necessary repairs, renewals, replacements, betterments and improvements thereof, all as in the judgment of the Company may be necessary, so that the business carried on in connection therewith may be properly and advantageously conducted at all times; PROVIDED, HOWEVER, that nothing in this Section shall prevent the Company from discontinuing the operation or maintenance of any of such properties, or disposing of any of them, if such discontinuance or disposal is, in the judgment of the Board of Directors or of the board of directors of the Subsidiary concerned, as the case may be, desirable in the conduct of the business of the Company or any Subsidiary of the Company and not materially disadvantageous to the Holders. SECTION 1011. COMPLIANCE CERTIFICATES. (a) The Issuer and the Company shall each deliver to the Trustee within 90 days after the end of each fiscal year of the Company (which fiscal year currently ends on December 31), an Officer's Certificate stating whether or not the signer knows of any Default or Event of Default by the Issuer or the Company that occurred prior to the end of the fiscal year and is then continuing. If the signer does know of such a Default or Event of Default, the certificate shall describe each such Default or Event of Default and its status and the specific section or sections of this Indenture in connection with which such Default or Event or Default has occurred. The Company shall also promptly notify the Trustee in writing should the Company's fiscal year be changed so that the end thereof is on any date other than the date on which the Company's fiscal year currently ends. (b) The Company shall deliver to the Trustee as soon as practicable but in any event not later than 45 days after the end of each fiscal quarter an Officer's Certificate setting forth the Company's Subordinated Capital Base for purposes of this Section 1011. The Trustee 89 may conclusively rely on the Officer's Certificate for such purposes. (c) The Company shall deliver to the Trustee within 90 days after the end of each fiscal year a written statement by the Company's independent certified public accountants stating (i) that their audit examination has included a review of the terms of this Indenture and the Senior Notes as they relate to accounting matters and (ii) whether, in connection with their audit examination, any Default has come to their attention and if such a Default has come to their attention, specifying the nature and period of existence thereof and the specific section or sections of this Indenture in connection with which such Default has occurred; PROVIDED, that without any restriction as to the scope of the audit examination, such independent certified public accountants shall not be liable by reason of the failure to obtain knowledge of such Default that would not be disclosed in the course of an audit examination conducted in accordance with generally accepted auditing standards. (d) The Issuer and the Company shall each deliver to the Trustee forthwith upon becoming aware of a Default, Event of Default or Company Event of Default (but in no event later than 10 days after the occurrence of each Default, Event of Default or Company Event of Default that is continuing), an Officer's Certificate setting forth the details of such Default, Event of Default or Company Event of Default and the action that it proposes to take with respect thereto and the specific section or sections of this Indenture in connection with which such Default, Event of Default, or Company Event of Default has occurred. SECTION 1012. WAIVER OF STAY, EXTENSION OR USURY LAWS. The Issuer and the Company each covenant (to the extent that it may lawfully do so) that it will not at any time insist upon, or plead, or in any manner whatsoever claim, and will actively resist any and all efforts to be compelled to take the benefit or advantage of, any stay or extension law or any usury law or other law, which would prohibit or forgive the Issuer or the Company from paying all or any portion of the principal of and/or interest on the Senior Notes as contemplated herein (including, in the case of the Company, payments in respect of the Guaranty), wherever enacted, now or at any time hereafter in force, or which may affect the covenants or the performance of this Indenture; and (to the extent that it may lawfully do so) the Issuer and the Company each hereby expressly waive all benefit or advantage of any such law, and covenants that it will not hinder, delay or impede the execution of any power herein granted to the Trustee, but will suffer and permit the execution of every such power as though no such law had been enacted. SECTION 1013. CHANGE OF CONTROL. (a) Upon the occurrence of a Change of Control (the "Change of Control Date") and subject to the requirements of the next succeeding sentence, each Holder shall have the right to require that the Company repurchase such Holder's Senior Notes in whole or in part pursuant to the offer described in Subsection (b) below (the "Change of Control Offer") at a purchase price equal to 101% of the aggregate principal amount of such Senior Notes plus accrued and unpaid interest, if any, to the date of such purchase. If such purchase would 90 constitute an event of default under Specified Bank Debt, then, prior to giving the notice to Holders provided in Subsection (b) below, the Issuer shall (i) repay in full in cash such Specified Bank Debt or (ii) obtain the requisite consent of holders of such Specified Bank Debt to permit the purchase of Senior Notes without giving rise to an event of default under such Specified Bank Debt. (b) Promptly upon satisfaction of either one of the obligations, if then applicable, set forth in clause (i) or (ii) of Subsection (a) above, the Company shall mail a notice to each Holder and the Trustee in respect of the Change of Control Offer (which notice shall contain all instructions and materials necessary to enable such Holders to tender Senior Notes) stating: (1) that the Change of Control Offer is being made pursuant to this Section and that all Senior Notes properly tendered will be accepted for payment; (2) the purchase price and the purchase date (which shall be no earlier than 30 days nor later than 40 days from the date such notice is mailed, but in any event prior to the date on which any Subordinated Indebtedness is paid pursuant to the terms of a provision similar to this Section) (the "Change of Control Payment Date"); (3) the name and address of the Paying Agent and the Trustee and that the Senior Notes must be surrendered to the Paying Agent to collect the purchase price; (4) that any Senior Note not tendered will continue to accrue interest; (5) that any Senior Note accepted for payment pursuant to the Change of Control Offer shall cease to accrue interest after the Change of Control Payment Date; (6) that each Holder electing to have a Senior Note purchased pursuant to a Change of Control Offer will be required to surrender the Senior Note, with the form entitled "Option of Holder to Elect Purchase" on the reverse of the Senior Note completed, to the Paying Agent at the address specified in the notice prior to the close of business on the Business Day prior to the Change of Control Payment Date; (7) that Holders will be entitled to withdraw their election if the Paying Agent receives, not later than the close of business on the third Business Day preceding the Change of Control Payment Date, a telegram, telex, facsimile transmission or letter setting forth the name of the Holder, the principal amount of the Senior Note the Holder delivered for purchase, the certificate numbers of the Senior Note the Holder delivered and a statement that such Holder is withdrawing his election to have such Senior Note purchased; and (8) that Holders whose Senior Notes are purchased only in part will be issued new Senior Notes equal in principal amount to the unpurchased portion of the Senior Notes surrendered. 91 On or before 12:00 noon New York City time on the Change of Control Payment Date, the Company shall (i) accept for payment Senior Notes or portions thereof tendered pursuant to the Change of Control Offer, (ii) deposit with the Paying Agent money sufficient to pay the purchase price of all Senior Notes or portions thereof so accepted and (iii) deliver or cause to be delivered to the Trustee Senior Notes so accepted, together with an Officer's Certificate stating the aggregate principal amount of the Senior Notes or portions thereof so accepted by the Company, which shall be retired by the Issuer. The Paying Agent shall promptly mail or deliver to the Holder of Senior Notes so accepted payment in an amount equal to the purchase price, and the Trustee shall promptly authenticate and mail or make available for delivery to such Holder a new Senior Note equal in principal amount to any unpurchased portion of the Senior Note surrendered. The Issuer will publicly announce or cause to be announced the results of the Change of Control Offer on or as soon as practicable after the Change of Control Payment Date. For purposes of this Section, the Trustee or its agent shall act as the Paying Agent. If a Change of Control has occurred but a Change of Control Offer is not permitted to be made, the Issuer shall mail a notice of such Change of Control to each Holder within 30 days following a Change of Control Date. The Company shall comply with any applicable tender offer rules (including, without limitation, any applicable requirements of Rule 14e-1 under the Exchange Act) and any other legal requirements in the event that a Change of Control Offer is made under the circumstances described in this Section 1013. SECTION 1014. PAYMENT OF ADDITIONAL AMOUNTS. All payments made by the Issuer under or with respect to the Senior Notes will be made free and clear of and without withholding or deduction for or on account of any present or future Taxes, unless the Issuer is required to withhold or deduct Taxes by Canadian law or by the interpretation or administration thereof. If, after the Issue Date, the Issuer is so required to withhold or deduct any amount for or on account of Taxes from any payment made under or with respect to the Notes, the Issuer shall pay to each Holder of Notes on the date of the required payment such additional amounts (the "Additional Amounts") as may be necessary so that the net amount received by such Holder (including the Additional Amounts) after such withholding or deduction will not be less than the amount the Holder would have received if such taxes had not been withheld or deducted, PROVIDED that no Additional Amounts will be payable with respect to a payment made to a Holder (an "Excluded Holder") (i) with which the Issuer does not deal at arm's length (within the meaning of the Income Tax Act (Canada)) at the time of making such payment or (ii) which is subject to such Taxes by reason of its being connected with Canada or any province or territory thereof otherwise than by the mere holding of the Senior Notes or the receipt of payments thereunder. The Issuer shall also (i) make such withholding or deduction and (ii) remit the full amount deducted or withheld to the relevant authority in accordance with the applicable law. The Issuer shall furnish to the Holders of Senior Notes that are Outstanding on the date of the required payment within 30 days after the date the payment of any Taxes is due 92 pursuant to applicable law, certified copies of tax receipts evidencing that such payment has been made by the Issuer. The Issuer shall indemnify and hold harmless each Holder on the date of the required payment (other than an Excluded Holder) and upon written request reimburse each such Holder for the amount of (i) any Taxes so levied or imposed and paid by such Holder as a result of payments made under or with respect to the Outstanding Notes, (ii) any liability (including penalties, interest and expense) arising therefrom or with respect thereto, and (iii) any Taxes imposed with respect to any reimbursement under clause (i) or (ii) above. At least 30 days prior to each date on which any payment under or with respect to the Senior Notes is due and payable, if the Issuer becomes obligated to pay Additional Amounts with respect to such payment, the Issuer shall deliver to the Trustee an Officers' Certificate stating the fact that such Additional Amounts will be payable, and the amounts so payable and will set forth such other information as is necessary to enable the Trustee to pay such Additional Amounts to the Holders on the payment date. Whenever in this Indenture there is mentioned, in any context, the payment of principal (and premium, if any); payments in connection with a Change of Control Offer, a Deficiency Offer or an Asset Disposition Offer, interest (including Defaulted Interest); or any other amount payable on or with respect to any of the Senior Notes, such mention shall be deemed to include mention of the payment of Additional Amounts provided for in this Section 1014 to the extent that, in such context, Additional Amounts are, were or would be payable in respect thereof pursuant to the provisions of this Section 1014 and express mention of the payment of Additional Amounts in those provisions hereof shall not be construed as excluding Additional Amounts in those provisions hereof where such express mention is not made (if applicable). The obligations of the Issuer under this Section 1014 shall survive the termination of this Indenture and the payment of all amounts under or with respect to this Indenture and the Senior Notes. SECTION 1015. WAIVER OF CERTAIN COVENANTS. The Issuer and the Company may omit in any particular instance to comply with any term, provision or condition set forth in Sections 1006, 1007, 1008 and 1009, if before the time for such compliance Holders representing at least a majority in principal amount of the Outstanding Senior Notes shall, by Act of such Holders, either waive such compliance in such instance or generally waive compliance with such term, provision or condition, but no such waiver shall extend to or affect such term, provision or condition except to the extent so expressly waived, and, until such waiver shall become effective, the obligations of the Issuer and the duties of the Trustee in respect of any such term, provision or condition shall remain in full force and effect. SECTION 1016. CERTAIN ADDITIONAL ISSUER COVENANTS. (a) The Issuer will not (i) engage in any business other than the issuance, sale and administration of the Notes and activities incidental thereto, (ii) make any investment (whether in the form of a loan, advance, guaranty, extension of credit, capital contribution, 93 acquisition of Capital Stock, bonds or other securities or other items that would be classified as investments in accordance with GAAP) in or with respect to any Person other than the Company or a Wholly-Owned Subsidiary; (iii) prior to the Assumption, dissolve or terminate, or permit the dissolution or termination of its existence or liquidate or wind up, or permit the liquidation or winding up, of its affairs (in each case whether voluntarily or by operation of law); or (iv) prior to the Assumption consolidate with or merge with or into any Person other than the Company or a Wholly-Owned Subsidiary (which shall become a successor corporation to the Issuer hereunder (whether or not the Issuer shall be the surviving corporation) or a Wholly-Owned Subsidiary; or (v) sell, assign, transfer or lease any of its properties or assets to any Person other than the Company or a Wholly-Owned Subsidiary. ARTICLE ELEVEN MAINTENANCE OF SUBORDINATED CAPITAL BASE SECTION 1101. MAINTENANCE OF SUBORDINATED CAPITAL BASE. (a) Subject to the terms of Section 1102, in the event that the Company's Subordinated Capital Base is less than one billion dollars ($1,000,000,000) (the "Minimum Subordinated Capital Base") as at the end of each of any two consecutive fiscal quarters (the last day of the second such fiscal quarter, a "Deficiency Date"), then, with respect to Senior Notes, the Company shall, no later than 60 days after the Deficiency Date (105 days if a Deficiency Date is also the end of the Company's fiscal year), make an offer to all Holders to purchase (a "Deficiency Offer") 10% of the principal amount of Senior Notes originally issued, or such lesser amount as may be Outstanding at the time each Deficiency Offer is made (the "Deficiency Offer Amount"), at a purchase price equal to 100% of principal amount, plus accrued and unpaid interest to the Deficiency Payment Date. (b) Thereafter, semi-annually the Company shall make like Deficiency Offers for the then applicable Deficiency Offer Amount of Senior Notes until the Company's Subordinated Capital Base as at the end of any subsequent fiscal quarter shall be equal to or greater than the Minimum Subordinated Capital Base. Notwithstanding the foregoing, after any specified Deficiency Date, the last day of any subsequent fiscal quarter shall not constitute a Deficiency Date (giving rise to an additional obligation under Subsection (a) of this Section) unless the Company's Subordinated Capital Base was equal to or greater than the Minimum Subordinated Capital Base as at the end of a fiscal quarter that followed such specified Deficiency Date and preceded such subsequent quarter. (c) Within 60 days (105 days if a Deficiency Date is also the end of the Company's fiscal year) following a Deficiency Date, the Company shall mail a notice to each Holder in respect of the Deficiency Offer (which notice shall contain all instructions and materials necessary to enable such Holders to tender Senior Notes) stating: (1) that the Deficiency Offer is being made pursuant to this Section and the reason for the Deficiency Offer; 94 (2) the purchase price and the purchase date, which shall be 20 Business Days from the date such notice is mailed or, if acceptance for payment and payment is not then lawful, on the earliest subsequent Business Day on which acceptance for payment and payment is then lawful (a "Deficiency Payment Date"); (3) the aggregate principal amount of Senior Notes subject to the Deficiency Amount; (4) the name and address of the Paying Agent and the Trustee and that Senior Notes must be surrendered to the Paying Agent to collect the purchase price; (5) that any of the Senior Notes not tendered or accepted for payment will continue to accrue interest; (6) that any Senior Note accepted for payment pursuant to the Deficiency Offer shall cease to accrue interest after the Deficiency Payment Date; (7) that each Holder electing to have a Senior Note purchased pursuant to a Deficiency Offer will be required to surrender the Senior Note, with the form entitled "Option of Holder to Elect Purchase" on the reverse of the Senior Note completed, to the Paying Agent at the address specified in the notice prior to the close of business on the Business Day prior to the Deficiency Payment Date; (8) that Holders will be entitled to withdraw their election if the Paying Agent receives, not later than the close of business on the third Business Day preceding the Deficiency Payment Date, a telegram, telex, facsimile transmission or letter setting forth: the name of the Holder, the principal amount of the Senior Note the Holder delivered for purchase, the certificate number of the Senior Note the Holder delivered and a statement that such Holder is withdrawing his election to have the Senior Note purchased; and (9) that Holders whose Senior Notes are purchased only in part will be issued new Senior Notes equal in principal amount to the unpurchased portion of the Senior Notes surrendered. (d) On a Deficiency Payment Date, the Company shall (i) accept for payment Senior Notes or portions thereof tendered pursuant to the Deficiency Offer in an aggregate principal amount equal to the Deficiency Offer Amount or such lesser principal amount of such Senior Notes as shall have been tendered, (ii) on or before 12:00 noon New York City time, deposit with the Paying Agent money sufficient to pay the purchase price of all such Senior Notes or portions thereof so accepted, and (iii) deliver, or cause to be delivered to the Trustee, Senior Notes or portions thereof so accepted together with an Officer's Certificate stating the Senior Notes or portions thereof accepted by the Company, which shall be retired by the Issuer. If the aggregate principal amount of such Senior Notes tendered exceeds the Deficiency Offer Amount, the Issuer shall select the Senior Notes to be purchased on a PRO RATA basis to the nearest one thousand dollars ($1,000) of principal amount. The Paying Agent shall promptly mail or make 95 available for delivery to Holders of Senior Notes so accepted payment in amounts equal to the purchase prices therefor, and the Issuer shall execute and the Trustee shall promptly authenticate and mail or make available for delivery to such Holders new Senior Notes equal in principal amounts to, any unpurchased portion of the Senior Notes surrendered. Any Senior Notes not so accepted shall be promptly mailed or made available for delivery to the Holder thereof. The Issuer will publicly announce the results of the Deficiency Offer on or as soon as practicable after the Deficiency Payment Date. For purposes of this Section, the Trustee or its agent shall act as the Paying Agent. (e) The Company shall comply with all applicable tender offer rules (including, without limitation, any applicable requirements of Rule 14e-1 under the Exchange Act) and any other legal requirements in the event that a Deficiency Offer is made under the circumstances described in this Section 1101. SECTION 1102. ALTERNATIVE INTEREST RATE ADJUSTMENT. (a) Notwithstanding the terms of Section 1101, in the event that (1) the making of a Deficiency Offer by the Company or (2) the purchase of Senior Notes by the Company in respect of a Deficiency Offer would constitute a default (with the giving of notice, the passage of time or both) with respect to any Specified Bank Debt at the time outstanding, then, in lieu of the making of a Deficiency Offer in the circumstances set forth in Section 1101, (i) the interest rate on the Senior Notes shall be reset as of the first day of the second fiscal quarter following the Deficiency Date (the "Reset Date") to a rate per annum (the "Reset Rate") equal to the greater of (x) the Initial Interest Rate and (y) the sum of (A) 400 basis points and (B) the higher of the Seven Year Treasury Rate and the Ten Year Treasury Rate, (ii) on the first Interest Payment Date following the Reset Date, the interest rate on the Senior Notes, as reset on the Reset Date, shall increase by fifty (50) basis points, and (iii) the interest rate on the Senior Notes shall further increase by an additional fifty (50) basis points on each succeeding Interest Payment Date; PROVIDED, HOWEVER, that in no event shall the interest rate on the Senior Notes at any time exceed the Initial Interest Rate by more than two hundred (200) basis points. (b) Once the interest rate on the Senior Notes has been reset pursuant to Subsection (a) of this Section, if the Company's Subordinated Capital Base is equal to or greater than the Minimum Subordinated Capital Base as of the last day of any fiscal quarter subsequent to the Deficiency Date, interest on the Senior Notes shall return to the Initial Interest Rate effective as of the first day of the second following fiscal quarter; PROVIDED, HOWEVER, that the interest rate on the Senior Notes shall again be adjusted in accordance with Subsection (a) of this Section if the Company's Subordinated Capital Base shall thereafter be less than the Minimum Subordinated Capital Base as at the last day of any two consecutive subsequent fiscal quarters and if the making of a Deficiency Offer or the purchase of Senior Notes by the Company in respect of a Deficiency Offer would, at such time, constitute a default (with the giving of notice, the passage of time, or both) with respect to any Specified Bank Debt at the time outstanding. (c) The Issuer shall notify the Trustee of the Reset Rate not later than two 96 Business Days after the Reset Date in the circumstances set forth in Subsection (a) of this Section. Not later than five Business Days after the Trustee has received such notice from the Issuer, the Trustee shall mail to each Holder such notice setting forth the Reset Rate. Commencing on the Reset Date, the Senior Notes shall bear interest (as determined in accordance with clauses (i), (ii) and (iii) of Subsection (a) of this Section) until the date on which such interest rate returns to the Initial Interest Rate pursuant to Subsection (b) of this Section. The Issuer shall notify the Trustee and the Holders of such Senior Notes promptly when the interest rate on such Senior Notes returns to the Initial Interest Rate pursuant to Subsection (b) of this Section. Failure of the Issuer or the Trustee to give, or failure of a Holder to receive, such notices shall not in any event affect the validity of the proceedings of the adjustment of the interest to be borne by such Senior Notes effective on the Reset Date of the Issuer's obligations hereunder. ARTICLE TWELVE GUARANTY SECTION 1201. GUARANTY. The Company hereby unconditionally guarantees (the "Guaranty") to each Holder and the Trustee on behalf of the Holders that: (a) the Issuer will promptly and punctually perform and observe each and every agreement, covenant and condition on the part of the Issuer to be performed or observed in this Indenture or the Senior Notes, (b) all sums stated in this Indenture and the Senior Notes to be payable and all other amounts payable pursuant to this Indenture and the Senior Notes, including, without limitation, the principal of, the interest (and Defaulted Interest) and any premium on, the Notes, and any Additional Amounts, will be promptly paid in full when due in accordance with the provisions thereof, whether at maturity, or as a prepayment or by acceleration or otherwise, all at the time and place and in the amount and manner prescribed in, and otherwise in accordance with, this Indenture and the Senior Notes and (c) the Issuer will promptly satisfy and discharge all other obligations, indebtedness or liabilities now or hereafter incurred by it to the Holders and the Trustee on behalf of the Holders pursuant to any waiver, modification, amendment or change of any provision of this Indenture or the Senior Notes in accordance with the terms of the applicable waiver, modification, amendment or change, and the Guaranty also applies to amounts payable by the Issuer to the Trustee under this Indenture. SECTION 1202. OBLIGATIONS OF THE COMPANY UNCONDITIONAL. (a) The Guaranty is an unconditional and absolute guaranty of payment and not a guaranty of collection, and if for any reason any duty, agreement or obligation of the Issuer contained in this Indenture or the Senior Notes shall not be performed or observed by the Issuer as provided therein, or if any amount payable under or in connection with this Indenture or the Senior Notes shall not be paid in full when the same becomes due and payable, the guarantor undertakes to perform or cause to be performed promptly each of such duties, agreements and obligations and to pay forthwith each such amount to the person entitled to receive the same, regardless of any defense or set-off or counterclaim which the Issuer or any other person may have or assert and regardless of whether or not the Trustee or any Holder shall have instituted any 97 suit, action or proceeding or exhausted its remedies or taken any steps to enforce any rights against the Issuer or any other person to compel any such performance or observance or to collect all or part of any such amount, either pursuant to the provisions of this Indenture or the Senior Notes or at law or in equity, and regardless of any other condition or contingency. (b) The Company hereby unconditionally: (i) waives any requirement that, in the event of any Event of Default, the Issuer, the Trustee or the Holders first make demand upon, or seek to enforce remedies against, the Issuer or any other person before demanding payment under or seeking to enforce this guaranty; (ii) covenants that this Guaranty will not be discharged except by complete performance of all obligations contained in this Indenture and the Senior Notes; (iii) agrees that this Guaranty shall remain in full force and effect without regard to, and shall not be affected or impaired, without limitation, by, any invalidity, irregularity or unenforceability in whole or in part of this Indenture or the Senior Note or any limitation on the liability of the Issuer thereunder, or any impossibility or illegality of performance on the part of the Issuer under this Indenture or the Senior Notes or any limitation on the method or terms of payment thereunder which may now or hereafter be caused or imposed in any manner whatsoever; and (iv) waives diligence, presentment and protest with respect to, and, except for any notices specifically required to be delivered to the Company under this Indenture, any notice of Default or Events of Default in the payment of any amount at any time payable by the Issuer under or in connection with, the Indenture or the Senior Notes. The Company acknowledges its own responsibility to keep itself informed of the financial condition of the Issuer, and of all other circumstances bearing upon the risk of nonpayment of such obligations or any part thereof, that diligent inquiry would reveal. The Company agrees that neither the Trustee nor any Holder shall have any duty to advise the Company of information regarding such conditions or any such circumstance. (c) The obligations, covenants, agreements and duties of the Company under this Guaranty shall not be released, affected or impaired by any assignment or transfer, in whole or in part, of this Indenture or the Senior Notes, even if made without notice to or the consent of the Company, or any waiver by the Trustee or any Holder, of the performance or observance by the Issuer or the Company of any of the agreements, covenants, terms or conditions contained in this Indenture or the Senior Notes, or any indulgence in or the extension of the time for payment by the Issuer or the Company of any amounts payable under or in connection with this Indenture or the Senior Notes or of the time for performance by the Issuer or the guarantor of any other obligations under or arising out of this Indenture or the Senior Notes or the extension or renewal thereof, or the modification or amendment (whether material or otherwise) of any duty, agreement or obligation of the Issuer or the Company set forth in this Indenture or the Senior Notes, or the voluntary or involuntary liquidation, administration, sale or other disposition of all or substantially all of the assets of the Issuer or the Company, or any receivership, insolvency, bankruptcy, reorganization, or other similar proceeding, affecting the Issuer or the Company or any assets of the Issuer or the Company, or the release of any property from any security for the Senior Notes, or the impairment of any such property or security, or the release or discharge of the Issuer or the Company from the performance or observance of any agreement, covenant, term or condition contained in this Indenture or the Senior Notes by operation of law, or the m 98 other circumstances bearing upon the risk of nonpayment of such obligations or any part thereof, that diligent inquiry would reveal. The Company agrees that neitd instrument is such corporate seal, that it was so affixed by authority of the Board of Directors of said corporation; and that he signed his name thereto by like authority. - ------------------------- My commission expires: 99 EX-10.(J) 3 EXHIBIT 10(J) SEVERANCE AGREEMENT THIS AGREEMENT, dated July 22, 1996, is made by and between Stone Container Corporation, a Delaware corporation (the "Company"), and X (the "Executive"). WHEREAS, the Company considers it essential to the best interests of its stockholders to foster the continued employment of key management personnel; and WHEREAS, the Board recognizes that, as is the case with many publicly held corporations, the possibility of a Change in Control exists and that such possibility, and the uncertainty and questions which it may raise among management, may result in the departure or distraction of management personnel to the detriment of the Company and its stockholders; and WHEREAS, the Board has determined that appropriate steps should be taken to reinforce and encourage the continued attention and dedication of members of the Company's management, including the Executive, to their assigned duties without distraction in the face of potentially disturbing circumstances arising from the possibility of a Change in Control; NOW, THEREFORE, in consideration of the premises and the mutual covenants herein contained, the Company and the Executive hereby agree as follows: 1. DEFINED TERMS. The definitions of capitalized terms used in this Agreement are provided in the last Section hereof. 2. TERM OF AGREEMENT. The Term of this Agreement shall commence on the date hereof and shall continue in effect through December 31, 1998; PROVIDED, HOWEVER, that commencing on January 1, 1998 and each January 1 thereafter, the Term shall automatically be extended for one additional year unless a Change in Control shall have occurred prior to such January 1 or, not later than September 30 of the preceding year, the Company or the Executive shall have given notice not to extend this Agreement; and FURTHER PROVIDED, HOWEVER, that if a Change in Control shall have occurred during the Term, the Term shall be extended for a period of twenty-four (24) months beyond the month in which such Change in Control occurred. 3. COMPANY'S COVENANTS SUMMARIZED. In order to induce the Executive to remain in the employ of the Company and in consideration of the Executive's covenants set forth in Section 4 hereof, the Company agrees, under the conditions described herein, to pay the Executive the Severance Payments and the other payments and benefits described herein. Except as provided in the first sentence of Section 6.2(A) hereof and Section 9.1 hereof, no amount or benefit shall be payable under this Agreement unless there shall have been (or, under the terms of the second sentence of Section 6.1 hereof, there shall be deemed to have been) a termination of the Executive's employment with the Company following a Change in Control and during the Term. This Agreement shall not be construed as creating an express or implied contract of employment and, except as otherwise agreed in writing between the Executive and the Company, the Executive shall not have any right to be retained in the employ of the Company. 4. THE EXECUTIVE'S COVENANTS. The Executive agrees that, subject to the terms and conditions of this Agreement, in the event of a Potential Change in Control during the Term, the Executive will remain in the employ of the Company until the earliest of (i) a date which is six (6) months from the date of such Potential Change of Control, (ii) the date of a Change in Control, (iii) the date of termination by the Executive of the Executive's employment for Good Reason or by reason of death, Disability or Retirement, or (iv) the termination by the Company of the Executive's employment for any reason. 5. COMPENSATION OTHER THAN SEVERANCE PAYMENTS. 5.1 Following a Change in Control and during the Term, during any period that the Executive fails to perform the Executive's full-time duties with the Company as a result of incapacity due to physical or mental illness, the Company shall pay the Executive's full salary to the Executive at the rate in effect at the commencement of any such period, together with all compensation and benefits payable to the Executive under the terms of any compensation or benefit plan, program or arrangement 2 maintained by the Company during such period, until the Executive's employment is terminated by the Company for Disability. 5.2 If the Executive's employment shall be terminated for any reason following a Change in Control and during the Term, the Company shall pay the Executive's full salary to the Executive through the Date of Termination at the rate in effect immediately prior to the Change in Control or, if greater, at the rate in effect at the time the Notice of Termination is given, together with all compensation and benefits payable to the Executive through the Date of Termination under the terms of the Company's compensation and benefit plans, programs or arrangements. 5.3 If the Executive's employment shall be terminated for any reason following a Change in Control and during the Term, the Company shall pay to the Executive the Executive's normal post-termination compensation and benefits as such payments become due. Such post-termination compensation and benefits shall be determined under, and paid in accordance with, the Company's retirement, insurance and other compensation or benefit plans, programs and arrangements as in effect immediately prior to the Change in Control or, to the extent more favorable to the Executive, as in effect immediately prior to the Date of Termination. 6. SEVERANCE PAYMENTS. 6.1 If the Executive's employment terminates following a Change in Control and during the Term, other than (A) by the Company for Cause, (B) by reason of death or Disability, or (C) by the Executive without Good Reason, then the Company shall pay the Executive the payments described in this Section 6.1 (the "Severance Payments") and Section 6.2, in addition to any payments and benefits to which the Executive is entitled under Section 5 hereof. For purposes of this Agreement, the Executive's employment shall be deemed to have been terminated following a Change in Control by the Company without Cause or by the Executive with Good Reason, if (i) the Executive's employment is terminated by the Company without Cause prior to a 3 Change in Control which actually occurs during the term of this Agreement and such termination was at the request or direction of a Person who has entered into an agreement with the Company the consummation of which would constitute a Change in Control, (ii) the Executive terminates his employment with Good Reason prior to a Change in Control which actually occurs during the term of this Agreement and the circumstance or event which constitutes Good Reason occurs at the request or direction of such Person, or (iii) the Executive's employment is terminated by the Company without Cause prior to a Change in Control and the Executive reasonably demonstrates that such termination is otherwise in connection with or in anticipation of a Change in Control which actually occurs during the term of this Agreement. For purposes of any determination regarding the applicability of the immediately preceding sentence, any position taken by the Executive shall be presumed to be correct unless the Company establishes to the Committee by clear and convincing evidence that such position is not correct. (A) In lieu of any further salary payments to the Executive for periods subsequent to the Date of Termination and in lieu of any severance benefit otherwise payable to the Executive, the Company shall pay to the Executive a lump sum severance payment, in cash, equal to three times the sum of (i) the higher of the Executive's annual base salary in effect immediately prior to the occurrence of the event or circumstance upon which the Notice of Termination is based and the Executive's annual base salary in effect immediately prior to the Change in Control, and (ii) the product of (a) the amount determined under clause (i) above and (b) the higher of the average percentage of base salary paid to or earned by the Executive pursuant to any annual bonus or incentive plan maintained by the Company in respect of the three years immediately preceding that in which the Date of Termination occurs or the average percentage of base salary paid to or 4 earned by the Executive in respect of the three years immediately preceding that in which the Change in Control occurs. (B) For the thirty-six (36) month period immediately following the Date of Termination, the Company shall arrange to provide the Executive with life, disability, accident and health insurance benefits and Company-provided perquisites (including, but not limited to a Company car and club membership dues), in each case substantially similar to those which the Executive is receiving immediately prior to the Notice of Termination (without giving effect to any amendment to such benefits or perquisites made subsequent to a Change in Control which amendment adversely affects in any manner the Executive's entitlement to or the amount of such benefits); PROVIDED, HOWEVER, that, such health insurance benefits shall be provided through a third-party insurer. Benefits and perquisites otherwise receivable by the Executive pursuant to this Section 6.1(B) shall be reduced to the extent comparable benefits or perquisites are actually received by or made available to the Executive without cost during the thirty-six (36) month period following the Executive's termination of employment (and any such benefits and perquisites actually received by or made available to the Executive shall be reported to the Company by the Executive). (C) Notwithstanding any provision of any annual or long-term incentive plan to the contrary, the Company shall pay to the Executive a lump sum amount, in cash, equal to the sum of (i) any incentive compensation which has been allocated or awarded to the Executive for a completed fiscal year or other measuring period preceding the Date of Termination under any such plan and which, as of the Date of Termination, is contingent only upon the continued employment of the Executive to a subsequent date or otherwise has not been paid, and (ii) a pro rata portion to the Date of Termination of the aggregate value of all contingent incentive compensation awards to the Executive for all then uncompleted 5 periods under any such plan, calculated as to each such award by multiplying the award that the Executive would have earned on the last day of the performance award period, assuming the achievement, at the target level, of the individual and corporate performance goals established with respect to such award, by the fraction obtained by dividing the number of full months and any fractional portion of a month during such performance award period through the Date of Termination by the total number of months contained in such performance award period. (D) In addition to the retirement benefits to which the Executive is entitled under each Pension Plan, the Company shall pay the Executive a lump sum amount, in cash, equal to the excess of (i) the actuarial equivalent of the aggregate retirement pension (taking into account any early retirement subsidies associated therewith and determined as a straight life annuity commencing at the date (but in no event earlier than the third anniversary of the Date of Termination) as of which the actuarial equivalent of such annuity is greatest) which the Executive would have accrued under the terms of all Pension Plans (without regard to any amendment to any Pension Plan made subsequent to a Change in Control and on or prior to the Date of Termination, which amendment adversely affects in any manner the computation of retirement benefits thereunder), determined as if the Executive were fully vested thereunder and had accumulated (after the Date of Termination) thirty-six (36) additional months of service credit thereunder and had been credited under each Pension Plan during such period with compensation at the higher of (i) the Executive's compensation (as defined in such Pension Plan) during the twelve (12) months immediately preceding the Date of Termination or (ii) the Executive's compensation (as defined in such Pension Plan) during the twelve (12) months immediately preceding the Change in Control, over (ii) the actuarial equivalent of the aggregate retirement pension 6 (taking into account any early retirement subsidies associated therewith and determined as a straight life annuity commencing at the date (but in no event earlier than the Date of Termination) as of which the actuarial equivalent of such annuity is greatest) which the Executive had accrued pursuant to the provisions of the Pension Plans as of the Date of Termination. For purposes of this Section 6.1(D), "actuarial equivalent" shall be determined using the same assumptions utilized under the Stone Container Corporation Salaried Employees Retirement Plan immediately prior to the Date of Termination. (E) If the Executive would have become entitled to benefits under the Company's post-retirement health care or life insurance plans, as in effect immediately prior to the Change in Control or the Date of Termination (whichever is more favorable to the Executive), had the Executive's employment terminated at any time during the period of thirty-six (36) months after the Date of Termination, the Company shall provide such post-retirement health care or life insurance benefits to the Executive and the Executive's dependents commencing on the later of (i) the date on which such coverage would have first become available and (ii) the date on which benefits described in subsection (B) of this Section 6.1 terminate. 6.2 (A) Whether or not the Executive becomes entitled to the Severance Payments, if any of the payments or benefits received or to be received by the Executive in connection with a Change in Control or the Executive's termination of employment (whether pursuant to the terms of this Agreement or any other plan, arrangement or agreement with the Company, any Person whose actions result in a Change in Control or any Person affiliated with the Company or such Person) (such payments or benefits, excluding the Gross-Up Payment, being hereinafter referred to as the "Total Payments") will be subject to the Excise Tax, the Company shall pay to the Executive an additional amount (the 7 "Gross-Up Payment") such that the net amount retained by the Executive, after deduction of any Excise Tax on the Total Payments and any federal, state and local income and employment taxes and Excise Tax upon the Gross-Up payment, shall be equal to the Total Payments. (B) For purposes of determining whether any of the Total Payments will be subject to the Excise Tax and the amount of such Excise Tax, (i) all of the Total Payments shall be treated as "parachute payments" (within the meaning of section 280G(b)(2) of the Code) unless, in the opinion of tax counsel ("Tax Counsel") reasonably acceptable to the Executive and selected by the accounting firm which was, immediately prior to the Change in Control, the Company's independent auditor (the "Auditor"), such payments or benefits (in whole or in part) do not constitute parachute payments, including by reason of section 280G(b)(4)(A) of the Code, (ii) all "excess parachute payments" within the meaning of section 280G(b)(l) of the Code shall be treated as subject to the Excise Tax unless, in the opinion of Tax Counsel, such excess parachute payments (in whole or in part) represent reasonable compensation for services actually rendered (within the meaning of section 280G(b)(4)(B) of the Code) in excess of the Base Amount allocable to such reasonable compensation, or are otherwise not subject to the Excise Tax, and (iii) the value of any noncash benefits or any deferred payment or benefit shall be determined by the Auditor in accordance with the principles of sections 280G(d)(3) and (4) of the Code. For purposes of determining the amount of the Gross-Up Payment, the Executive shall be deemed to pay federal income tax at the highest marginal rate of federal income taxation in the calendar year in which the Gross-Up Payment is to be made and state and local income taxes at the highest marginal rate of taxation in the state and locality of the Executive's residence or, if higher, in the state and locality of the Executive's principal place of employment, on the Date 8 of Termination (or if there is no Date of Termination, then the date on which the Gross-Up Payment is calculated for purposes of this Section 6.2), net of the maximum reduction in federal income taxes which could be obtained from deduction of such state and local taxes. (C) In the event that the Excise Tax is finally determined to be less than the amount taken into account hereunder in calculating the Gross-Up Payment, the Executive shall repay to the Company, at the time that the amount of such reduction in Excise Tax is finally determined, the portion of the Gross-Up Payment attributable to such reduction (plus that portion of the Gross-Up Payment attributable to the Excise Tax and federal, state and local income and employment taxes imposed on the Gross-Up Payment being repaid by the Executive to the extent that such repayment results in a reduction in Excise Tax and/or a federal, state or local income or employment tax deduction) plus interest on the amount of such repayment at 120% of the rate provided in section 1274(b)(2)(B) of the Code. In the event that the Excise Tax is determined to exceed the amount taken into account hereunder in calculating the Gross-Up Payment (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-Up Payment), the Company shall make an additional Gross-Up Payment in respect of such excess (plus any interest, penalties or additions payable by the Executive with respect to such excess) at the time that the amount of such excess is finally determined. The Executive and the Company shall each reasonably cooperate with the other in connection with any administrative or judicial proceedings concerning the existence or amount of liability for Excise Tax with respect to the Total Payments. 9 6.3 The payments provided in subsections (A), (C) and (D) of Section 6.1 hereof and in Section 6.2 hereof shall be made not later than the fifth day following the Date of Termination; PROVIDED, HOWEVER, that if the amounts of such payments cannot be finally determined on or before such day, the Company shall pay to the Executive on such day an estimate, as determined in good faith by the Executive or, in the case of payments under Section 6.2 hereof, in accordance with Section 6.2 hereof, of the minimum amount of such payments to which the Executive is clearly entitled and shall pay the remainder of such payments (together with interest on the unpaid remainder (or on all such payments to the extent the Company fails to make such payments when due) at 120% of the rate provided in section 1274(b)(2)(B) of the Code) as soon as the amount thereof can be determined but in no event later than the thirtieth (30th) day after the Date of Termination. In the event that the amount of the estimated payments exceeds the amount subsequently determined to have been due, such excess shall constitute a loan by the Company to the Executive, payable on the fifth (5th) business day after demand by the Company (together with interest at 120% of the rate provided in section 1274(b)(2)(B) of the Code). At the time that payments are made under this Section, the Company shall provide the Executive with a written statement setting forth the manner in which such payments were calculated and the basis for such calculations including, without limitation, any opinions or other advice the Company has received from Tax Counsel, the Auditor or other advisors or consultants (and any such opinions or advice which are in writing shall be attached to the statement). 6.4 The Company also shall pay to the Executive all legal fees and expenses incurred by the Executive in disputing in good faith any issue hereunder relating to the termination of the Executive's employment, in seeking in good faith to obtain or enforce any benefit or right provided by this Agreement or in connection with any tax audit or proceeding to the extent attributable to the application of section 4999 of the 10 Code to any payment or benefit provided hereunder. Such payments shall be made within five (5) business days after delivery of the Executive's written requests for payment accompanied with such evidence of fees and expenses incurred as the Company reasonably may require. 7. TERMINATION PROCEDURES AND COMPENSATION DURING DISPUTE. 7.1 NOTICE OF TERMINATION. After a Change in Control and during the Term, any purported termination of the Executive's employment (other than by reason of death) shall be communicated by written Notice of Termination from one party hereto to the other party hereto in accordance with Section 10 hereof. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated. Further, a Notice of Termination for Cause is required to include a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters (3/4) of the entire membership of the Board at a meeting of the Board which was called and held for the purpose of considering such termination (after reasonable notice to the Executive and an opportunity for the Executive, together with the Executive's counsel, to be heard before the Board) finding that, in the good faith opinion of the Board, the Executive was guilty of conduct set forth in clause (i) or (ii) of the definition of Cause herein, and specifying the particulars thereof in detail. 7.2 DATE OF TERMINATION. "Date of Termination," with respect to any purported termination of the Executive's employment after a Change in Control and during the Term, shall mean (i) if the Executive's employment is terminated for Disability, thirty (30) days after Notice of Termination is given (provided that the Executive shall not have returned to the full-time performance of the Executive's duties during such thirty (30) day period), and (ii) if the Executive's employment is terminated for any other 11 reason, the date specified in the Notice of Termination (which, in the case of a termination by the Company, shall not be less than thirty (30) days (except in the case of a termination for Cause) and, in the case of a termination by the Executive, shall not be less than fifteen (15) days nor more than sixty (60) days, respectively, from the date such Notice of Termination is given). 7.3 DISPUTE CONCERNING TERMINATION. If within fifteen (15) days after any Notice of Termination is given, or, if later, prior to the Date of Termination (as determined without regard to this Section 7.3), the party receiving such Notice of Termination notifies the other party that a dispute exists concerning the termination, the Date of Termination shall be extended until the earlier of (i) the date on which the Term ends or (ii) the date on which the dispute is finally resolved, either by mutual written agreement of the parties or by a final judgment, order or decree of an arbitrator or a court of competent jurisdiction (which is not appealable or with respect to which the time for appeal therefrom has expired and no appeal has been perfected); PROVIDED, HOWEVER, that the Date of Termination shall be extended by a notice of dispute given by the Executive only if such notice is given in good faith and the Executive pursues the resolution of such dispute with reasonable diligence. 7.4 COMPENSATION DURING DISPUTE. If a purported termination occurs following a Change in Control and during the Term and the Date of Termination is extended in accordance with Section 7.3 hereof, the Company shall continue to pay the Executive the full compensation in effect when the notice giving rise to the dispute was given (including, but not limited to, salary) and continue the Executive as a participant in all compensation, benefit and insurance plans in which the Executive was participating when the notice giving rise to the dispute was given, until the Date of Termination, as determined in accordance with Section 7.3 hereof. Amounts paid under this Section 7.4 are in addition to all other amounts due under this Agreement (other than those 12 due under Section 5.2 hereof) and shall not be offset against or reduce any other amounts due under this Agreement. 8. NO MITIGATION. The Company agrees that, if the Executive's employment with the Company terminates during the Term, the Executive is not required to seek other employment or to attempt in any way to reduce any amounts payable to the Executive by the Company pursuant to Section 6 hereof or Section 7.4 hereof. Further, except as specifically provided in Section 6.1(B) and (E) hereof, the amount of any payment or benefit provided for in this Agreement shall not be reduced by any compensation earned by the Executive as the result of employment by another employer, by retirement benefits, by offset against any amount claimed to be owed by the Executive to the Company, or otherwise. 9. SUCCESSORS; BINDING AGREEMENT. 9.1 In addition to any obligations imposed by law upon any successor to the Company, the Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. Failure of the Company to obtain such assumption and agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle the Executive to compensation from the Company in the same amount and on the same terms as the Executive would be entitled to hereunder if the Executive were to terminate the Executive's employment for Good Reason after a Change in Control, except that, for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Date of Termination. 13 9.2 This Agreement shall inure to the benefit of and be enforceable by the Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If the Executive shall die while any amount would still be payable to the Executive hereunder (other than amounts which, by their terms, terminate upon the death of the Executive) if the Executive had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the executors, personal representatives or administrators of the Executive's estate. 10. NOTICES. For the purpose of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, addressed, if to the Executive, to the address inserted below the Executive's signature on the final page hereof and, if to the Company, to the address set forth below, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon actual receipt: To the Company: Stone Container Corporation 150 N. Michigan Avenue Chicago, Illinois 60601 Attention: General Counsel 11. MISCELLANEOUS. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by the Executive and such officer as may be specifically designated by the Board. No waiver by either party hereto at any time of any breach by the other party hereto of, or of any lack of compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or 14 dissimilar provisions or conditions at the same or at any prior or subsequent time. This Agreement supersedes any other agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof which have been made by either party. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of Illinois. All references to sections of the Exchange Act or the Code shall be deemed also to refer to any successor provisions to such sections. Any payments provided for hereunder shall be paid net of any applicable withholding required under federal, state or local law and any additional withholding to which the Executive has agreed. The obligations of the Company and the Executive under this Agreement which by their nature may require either partial or total performance after the expiration of the Term (including, without limitation, those under Sections 6 and 7 hereof) shall survive such expiration. 12. VALIDITY. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 13. COUNTERPARTS. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 14. SETTLEMENT OF DISPUTES; ARBITRATION. (a) All claims by the Executive for benefits under this Agreement shall be directed to and determined by the Committee and shall be in writing. Any denial by the Committee of a claim for benefits under this Agreement shall be delivered to the Executive in writing and shall set forth the specific reasons for the denial and the specific provisions of this Agreement relied upon. The Committee shall afford a reasonable opportunity to the Executive for a review of the decision denying a claim and shall further allow the Executive to appeal to the 15 Committee a decision of the Committee within sixty (60) days after notification by the Committee that the Executive's claim has been denied. (b) Any further dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration in Chicago, Illinois in accordance with the rules of the American Arbitration Association then in effect; PROVIDED, HOWEVER, that the evidentiary standards set forth in this Agreement shall apply. Judgment may be entered on the arbitrator's award in any court having jurisdiction. Notwithstanding any provision of this Agreement to the contrary, the Executive shall be entitled to seek specific performance of the Executive's right to be paid until the Date of Termination during the pendency of any dispute or controversy arising under or in connection with this Agreement. 1. DEFINITIONS. For purposes of this Agreement, the following terms shall have the meanings indicated below: (A) "Affiliate" shall have the meaning set forth in Rule 12b-2 promulgated under Section 12 of the Exchange Act. (B) "Auditor" shall have the meaning set forth in Section 6.2 hereof. (C) "Base Amount" shall have the meaning set forth in section 280G(b)(3) of the Code. (D) "Beneficial Owner" shall have the meaning set forth in Rule 13d-3 under the Exchange Act. (E) "Board" shall mean the Board of Directors of the Company. (F) "Cause" for termination by the Company of the Executive's employment shall mean (i) the willful and continued failure by the Executive to substantially perform the Executive's duties with the Company (other than any such failure resulting from the Executive's incapacity due to physical or mental illness or any such actual or anticipated failure after the issuance of a Notice of Termination 16 for Good Reason by the Executive pursuant to Section 7.1 hereof) after a written demand for substantial performance is delivered to the Executive by the Board, which demand specifically identifies the manner in which the Board believes that the Executive has not substantially performed the Executive's duties, or (ii) the willful engaging by the Executive in conduct which is demonstrably and materially injurious to the Company or its subsidiaries, monetarily or otherwise. For purposes of clauses (i) and (ii) of this definition, (x) no act, or failure to act, on the Executive's part shall be deemed "willful" unless done, or omitted to be done, by the Executive not in good faith and without reasonable belief that the Executive's act, or failure to act, was in the best interest of the Company and (y) in the event of a dispute concerning the application of this provision, no claim by the Company that Cause exists shall be given effect unless the Company establishes to the Committee by clear and convincing evidence that Cause exists. (G) A "Change in Control" shall be deemed to have occurred if the event set forth in any one of the following paragraphs shall have occurred: (I) any Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or its affiliates) representing 20% or more of the combined voting power of the Company's then outstanding securities, excluding any Person who becomes such a Beneficial Owner in connection with a transaction described in clause (i) of paragraph (III) below; or (II) the following individuals cease for any reason to constitute a majority of the number of directors then serving: individuals who, on the date hereof, constitute the Board and any new director (other than a director whose initial assumption of office is in connection with an actual or threatened 17 election contest, including but not limited to a consent solicitation, relating to the election of directors of the Company) whose appointment or election by the Board or nomination for election by the Company's stockholders was approved or recommended by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors on the date hereof or whose appointment, election or nomination for election was previously so approved or recommended; or (III) there is consummated a merger or consolidation of the Company or any direct or indirect subsidiary of the Company with any other corporation, other than (i) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior to such merger or consolidation continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or any parent thereof), in combination with the ownership of any trustee or other fiduciary holding securities under an employee benefit plan of the Company or any subsidiary of the Company, at least 60% of the combined voting power of the securities of the Company or such surviving entity or any parent thereof outstanding immediately after such merger or consolidation, or (ii) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company (not including in the securities Beneficially Owned by such Person any securities acquired directly from the Company or its Affiliates) representing 20% or more of the combined voting power of the Company's then outstanding securities; or 18 (IV) the stockholders of the Company approve a plan of complete liquidation or dissolution of the Company or there is consummated an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets, other than a sale or disposition by the Company of all or substantially all of the Company's assets to an entity, at least 60% of the combined voting power of the voting securities of which is owned by stockholders of the Company in substantially the same proportions as their ownership of the Company immediately prior to such sale. Notwithstanding the foregoing, a "Change in Control" shall not be deemed to have occurred by virtue of the consummation of any transaction or series of integrated transactions immediately following which the record holders of the common stock of the Company immediately prior to such transaction or series of transactions continue to have substantially the same proportionate ownership in an entity which owns all or substantially all of the assets of the Company immediately following such transaction or series of transactions. (H) "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time. (I) "Committee" shall mean (i) the individuals (not fewer than three in number) who, on the date six months before a Change in Control, constitute the Compensation Committee of the Board, plus (ii) in the event that fewer than three individuals are available from the group specified in clause (i) above for any reason, such individuals as may be appointed by the individual or individuals so available (including for this purpose any individual or individuals previously so appointed under this clause (ii)). 19 (J) "Company" shall mean Stone Container Corporation and, except in determining under Section 15(G) hereof whether or not any Change in Control of the Company has occurred, shall include any successor to its business and/or assets which assumes and agrees to perform this Agreement by operation of law, or otherwise. (K) "Date of Termination" shall have the meaning set forth in Section 7.2 hereof. (L) "Disability" shall be deemed the reason for the termination by the Company of the Executive's employment, if, as a result of the Executive's incapacity due to physical or mental illness, the Executive shall have been absent from the full-time performance of the Executive's duties with the Company for a period of six (6) consecutive months, the Company shall have given the Executive a Notice of Termination for Disability, and, within thirty (30) days after such Notice of Termination is given, the Executive shall not have returned to the full-time performance of the Executive's duties. (M) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended from time to time. (N) "Excise Tax" shall mean any excise tax imposed under section 4999 of the Code. (O) "Executive" shall mean the individual named in the first paragraph of this Agreement. (P) "Good Reason" for termination by the Executive of the Executive's employment shall mean the occurrence (without the Executive's express written consent) after any Change in Control, or prior to a Change in Control under the circumstances described in clause (ii) of the second sentence of Section 6.1 hereof (treating all references in paragraphs (I) through (VII) below to a "Change in Control" as references to a "Potential Change in Control"), of any one of the following acts by the Company, or failures by the Company to act, 20 unless, in the case of any act or failure to act described in paragraph (I), (V), (VI) or (VII) below, such act or failure to act is corrected prior to the Date of Termination specified in the Notice of Termination given in respect thereof: (I) the assignment to the Executive of any duties inconsistent in any material respect with the Executive's positions, duties, responsibilities or status with the Company immediately prior to the Change in Control, a change in the Executive's reporting responsibilities, titles or offices as in effect immediately prior to the Change in Control, or any failure to re-elect the Executive to any office, title or position with the Company held by the Executive immediately prior to the Change in Control; (II) a reduction by the Company in the Executive's annual base salary as in effect on the date hereof or as the same may be increased from time to time except for across-the-board salary reductions similarly affecting all senior executives of the Company and all senior executives of any Person in control of the Company; (III) the relocation of the Executive's principal place of employment to a location more than 50 miles from the Executive's principal place of employment immediately prior to the Change in Control or the Company's requiring the Executive to be based anywhere other than such principal place of employment (or permitted relocation thereof) except for required travel on the Company's business to an extent substantially consistent with the Executive's present business travel obligations; (IV) the failure by the Company to pay to the Executive any portion of the Executive's current compensation, or to pay to the Executive any portion of an installment of deferred compensation under any deferred compensation program of the Company, within seven (7) days of the date such compensation is due; 21 (V) the failure by the Company to continue in effect any compensation plan in which the Executive participates immediately prior to the Change in Control which is material to the Executive's total compensation, including but not limited to any such plans relating to stock options, restricted stock, stock appreciation rights, incentive compensation, or annual or long term bonus, unless an equitable arrangement (embodied in an ongoing substitute or alternative plan) has been made with respect to such plan, or the failure by the Company to continue the Executive's participation therein (or in such substitute or alternative plan) on a basis not materially less favorable, both in terms of the amount or timing of payment of benefits provided and the level of the Executive's participation relative to other participants, as existed immediately prior to the Change in Control; (VI) the failure by the Company to continue to provide the Executive with benefits substantially similar to those enjoyed by the Executive under any of the Company's pension, savings, life insurance, medical, health and accident, or disability plans in which the Executive was participating immediately prior to the Change in Control, the taking of any action by the Company which would directly or indirectly materially reduce any of such benefits or deprive the Executive of any material fringe benefit enjoyed by the Executive at the time of the Change in Control, or the failure by the Company to provide the Executive with the number of paid vacation days to which the Executive is entitled on the basis of years of service with the Company in accordance with the Company's normal vacation policy in effect at the time of the Change in Control; or 22 (VII) any purported termination of the Executive's employment which is not effected pursuant to a Notice of Termination satisfying the requirements of Section 7.1 hereof; for purposes of this Agreement, no such purported termination shall be effective. The Executive's right to terminate the Executive's employment for Good Reason shall not be affected by the Executive's incapacity due to physical or mental illness. The Executive's continued employment shall not constitute consent to, or a waiver of rights with respect to, any act or failure to act constituting Good Reason hereunder. For purposes of any determination regarding the existence of Good Reason, any claim by the Executive that Good Reason exists shall be presumed to be correct unless the Company establishes to the Committee by clear and convincing evidence that Good Reason does not exist. (Q) "Gross-Up Payment" shall have the meaning set forth in Section 6.2 hereof. (R) "Notice of Termination" shall have the meaning set forth in Section 7.1 hereof. (S) "Pension Plan" shall mean any tax-qualified, supplemental or excess benefit pension plan maintained by the Company and any other plan or agreement entered into between the Executive and the Company which is designed to provide the Executive with supplemental retirement benefits. (T) "Person" shall have the meaning given in Section 3(a)(9) of the Exchange Act, as modified and used in Sections 13(d) and 14(d) thereof, except that such term shall not include (i) the Company or any of its subsidiaries, (ii) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any of its Affiliates, (iii) an underwriter temporarily holding securities pursuant to an offering of such securities, (iv) a corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company or (v) any descendant of Joseph Stone, 23 the spouse of any such descendant, the estate of any such descendant or spouse, any trust or any other arrangement for the benefit of any such descendant or any such spouse or any charitable organization established by any such descendant or any such spouse. (U) "Potential Change in Control" shall be deemed to have occurred if the event set forth in any one of the following paragraphs shall have occurred: (I) the Company enters into an agreement, the consummation of which would result in the occurrence of a Change in Control; (II) the Company or any Person publicly announces an intention to take or to consider taking actions which, if consummated, would constitute a Change in Control; (III) any Person becomes the Beneficial Owner, directly or indirectly, of securities of the Company representing 10% or more of either the then outstanding shares of common stock of the Company or the combined voting power of the Company's then outstanding securities (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or its affiliates); or (IV) the Board adopts a resolution to the effect that, for purposes of this Agreement, a Potential Change in Control has occurred. (V) "Retirement" shall be deemed the reason for the termination by the Company or the Executive of the Executive's employment if such employment is terminated in accordance with the Company's retirement policy, including early retirement, generally applicable to its salaried employees, as in effect immediately prior to the Change in Control, or in accordance with any retirement arrangement established with the Executive's express written consent with respect to the Executive. 24 (W) "Severance Payments" shall mean those payments described in Section 6.1 hereof. (X) "Tax Counsel" shall have the meaning set forth in Section 6.2 hereof. (Y) "Term" shall mean the period of time described in Section 2 hereof (including any extension, continuation or termination described therein). (Z) "Total Payments" shall mean those payments so described in Section 6.2 hereof. STONE CONTAINER CORPORATION By: _______________________________________________________ Name: Thomas P. Cutilletta Title: Senior Vice President, Administration & Corporate Controller By: _______________________________________________________ [Signature] Name & Address: _________________________________________________ _________________________________________________ _________________________________________________ (Please print) 25 EX-10.(K) 4 EXHIBIT 10(K) VALLEY 3X SEVERANCE AGREEMENT THIS AGREEMENT, dated July 22, 1996, is made by and between Stone Container Corporation, a Delaware corporation (the "Company"), and X (the "Executive"). WHEREAS, the Company considers it essential to the best interests of its stockholders to foster the continued employment of key management personnel; and WHEREAS, the Board recognizes that, as is the case with many publicly held corporations, the possibility of a Change in Control exists and that such possibility, and the uncertainty and questions which it may raise among management, may result in the departure or distraction of management personnel to the detriment of the Company and its stockholders; and WHEREAS, the Board has determined that appropriate steps should be taken to reinforce and encourage the continued attention and dedication of members of the Company's management, including the Executive, to their assigned duties without distraction in the face of potentially disturbing circumstances arising from the possibility of a Change in Control; NOW, THEREFORE, in consideration of the premises and the mutual covenants herein contained, the Company and the Executive hereby agree as follows: 1. DEFINED TERMS. The definitions of capitalized terms used in this Agreement are provided in the last Section hereof. 2. TERM OF AGREEMENT. The Term of this Agreement shall commence on the date hereof and shall continue in effect through December 31, 1998; PROVIDED, HOWEVER, that commencing on January 1, 1998 and each January 1 thereafter, the Term shall automatically be extended for one additional year unless a Change in Control shall have occurred prior to such January 1 or, not later than September 30 of the preceding year, the Company or the Executive shall have given notice not to extend this Agreement; and FURTHER PROVIDED, HOWEVER, that if a Change in Control shall have occurred during the Term, the Term shall be extended for a period of twenty-four (24) months beyond the month in which such Change in Control occurred. 1 3. COMPANY'S COVENANTS SUMMARIZED. In order to induce the Executive to remain in the employ of the Company and in consideration of the Executive's covenants set forth in Section 4 hereof, the Company agrees, under the conditions described herein, to pay the Executive the Severance Payments and the other payments and benefits described herein. Except as provided in Section 9.1 hereof, no amount or benefit shall be payable under this Agreement unless there shall have been (or, under the terms of the second sentence of Section 6.1 hereof, there shall be deemed to have been) a termination of the Executive's employment with the Company following a Change in Control and during the Term. This Agreement shall not be construed as creating an express or implied contract of employment and, except as otherwise agreed in writing between the Executive and the Company, the Executive shall not have any right to be retained in the employ of the Company. 4. THE EXECUTIVE'S COVENANTS. The Executive agrees that, subject to the terms and conditions of this Agreement, in the event of a Potential Change in Control during the Term, the Executive will remain in the employ of the Company until the earliest of (i) a date which is six (6) months from the date of such Potential Change of Control, (ii) the date of a Change in Control, (iii) the date of termination by the Executive of the Executive's employment for Good Reason or by reason of death, Disability or Retirement, or (iv) the termination by the Company of the Executive's employment for any reason. 5. COMPENSATION OTHER THAN SEVERANCE PAYMENTS. 5.1 Following a Change in Control and during the Term, during any period that the Executive fails to perform the Executive's full-time duties with the Company as a result of incapacity due to physical or mental illness, the Company shall pay the Executive's full salary to the Executive at the rate in effect at the commencement of any such period, together with all compensation and benefits payable to the Executive under the terms of any compensation or benefit plan, program or arrangement maintained by the Company during such period, until the Executive's employment is terminated by the Company for Disability. 2 5.2 If the Executive's employment shall be terminated for any reason following a Change in Control and during the Term, the Company shall pay the Executive's full salary to the Executive through the Date of Termination at the rate in effect immediately prior to the Change in Control or, if greater, at the rate in effect at the time the Notice of Termination is given, together with all compensation and benefits payable to the Executive through the Date of Termination under the terms of the Company's compensation and benefit plans, programs or arrangements. 5.3 If the Executive's employment shall be terminated for any reason following a Change in Control and during the Term, the Company shall pay to the Executive the Executive's normal post-termination compensation and benefits as such payments become due. Such post-termination compensation and benefits shall be determined under, and paid in accordance with, the Company's retirement, insurance and other compensation or benefit plans, programs and arrangements as in effect immediately prior to the Change in Control or, to the extent more favorable to the Executive, as in effect immediately prior to the Date of Termination. 6. SEVERANCE PAYMENTS. 6.1 Subject to Section 6.2 hereof, if the Executive's employment terminates following a Change in Control and during the Term, other than (A) by the Company for Cause, (B) by reason of death or Disability, or (C) by the Executive without Good Reason, then the Company shall pay the Executive the payments described in this Section 6.1 (the "Severance Payments"), in addition to any payments and benefits to which the Executive is entitled under Section 5 hereof. For purposes of this Agreement, the Executive's employment shall be deemed to have been terminated following a Change in Control by the Company without Cause or by the Executive with Good Reason, if (i) the Executive's employment is terminated by the Company without Cause prior to a Change in Control which actually occurs during the term of this Agreement and such termination was at the request or direction of a Person who has entered into an agreement with the Company the consummation of which would constitute a Change in Control, (ii) the Executive terminates his employment with Good Reason prior to a Change in Control which actually occurs during the term of this Agreement and the circumstance or event which constitutes Good Reason occurs at the request or direction of such Person, or (iii) the Executive's employment is terminated by the Company without Cause prior to a Change in Control and the Executive reasonably demonstrates that such termination is otherwise in connection with or in anticipation of a Change in Control which actually occurs during the term of this Agreement. For purposes of any determination regarding the applicability of the immediately preceding sentence, any position taken by the Executive shall be presumed to be correct unless the Company establishes to the Committee by clear and convincing evidence that such position is not correct. 3 (A) In lieu of any further salary payments to the Executive for periods subsequent to the Date of Termination and in lieu of any severance benefit otherwise payable to the Executive, the Company shall pay to the Executive a lump sum severance payment, in cash, equal to three times the sum of (i) the higher of the Executive's annual base salary in effect immediately prior to the occurrence of the event or circumstance upon which the Notice of Termination is based and the Executive's annual base salary in effect immediately prior to the Change in Control, and (ii) the product of (a) the amount determined under clause (i) above and (b) the higher of the average percentage of base salary paid to or earned by the Executive pursuant to any annual bonus or incentive plan maintained by the Company in respect of the three years immediately preceding that in which the Date of Termination occurs or the average percentage of base salary paid to or earned by the Executive in respect of the three years immediately preceding that in which the Change in Control occurs. 4 (B) For the thirty-six (36) month period immediately following the Date of Termination, the Company shall arrange to provide the Executive with life, disability, accident and health insurance benefits and Company-provided perquisites (including, but not limited to a Company car and club membership dues), in each case substantially similar to those which the Executive is receiving immediately prior to the Notice of Termination (without giving effect to any amendment to such benefits or perquisites made subsequent to a Change in Control which amendment adversely affects in any manner the Executive's entitlement to or the amount of such benefits); PROVIDED, HOWEVER, that, such health insurance benefits shall be provided through a third-party insurer. Benefits and perquisites otherwise receivable by the Executive pursuant to this Section 6.1(B) shall be reduced to the extent comparable benefits or perquisites are actually received by or made available to the Executive without cost during the thirty-six (36) month period following the Executive's termination of employment (and any such benefits and perquisites actually received by or made available to the Executive shall be reported to the Company by the Executive). If the Severance Payments shall be decreased pursuant to Section 6.2 hereof, and the Section 6.1(B) benefits or perquisites which remain payable after the application of Section 6.2 hereof are thereafter reduced pursuant to the immediately preceding sentence because of the receipt or availability of comparable benefits or perquisites, the Company shall, at the time of such reduction, pay to the Executive the least of (a) the amount of the decrease made in the Severance Payments pursuant to Section 6.2 hereof, (b) the amount of the subsequent reduction in these Section 6.1(B) benefits or perquisites, or (c) the maximum amount which can be paid to the Executive without being, or causing any other payment to be, nondeductible by reason of section 280G of the Code. 5 (C) Notwithstanding any provision of any annual or long-term incentive plan to the contrary, the Company shall pay to the Executive a lump sum amount, in cash, equal to the sum of (i) any incentive compensation which has been allocated or awarded to the Executive for a completed fiscal year or other measuring period preceding the Date of Termination under any such plan and which, as of the Date of Termination, is contingent only upon the continued employment of the Executive to a subsequent date or otherwise has not been paid, and (ii) a pro rata portion to the Date of Termination of the aggregate value of all contingent incentive compensation awards to the Executive for all then uncompleted periods under any such plan, calculated as to each such award by multiplying the award that the Executive would have earned on the last day of the performance award period, assuming the achievement, at the target level, of the individual and corporate performance goals established with respect to such award, by the fraction obtained by dividing the number of full months and any fractional portion of a month during such performance award period through the Date of Termination by the total number of months contained in such performance award period. (D) In addition to the retirement benefits to which the Executive is entitled under each Pension Plan, the Company shall pay the Executive a lump sum amount, in cash, equal to the excess of (i) the actuarial equivalent of the aggregate retirement pension (taking into account any early retirement subsidies associated therewith and determined as a straight life annuity commencing at the date (but in no event earlier than the third anniversary of the Date of Termination) as of which the actuarial equivalent of such annuity is greatest) which the Executive would have accrued under the terms of all Pension Plans (without regard to any amendment to any Pension Plan made subsequent to a Change in Control and on or prior to the Date of Termination, which amendment adversely affects in any manner the computation of retirement benefits thereunder), determined as if the Executive were fully vested thereunder and had accumulated (after the Date of Termination) thirty-six (36) additional months of service credit thereunder and had been credited under each Pension Plan during such period with compensation at the higher of (i) the 6 Executive's compensation (as defined in such Pension Plan) during the twelve (12) months immediately preceding the Date of Termination or (ii) the Executive's compensation (as defined in such Pension Plan) during the twelve (12) months immediately preceding the Change in Control, over (ii) the actuarial equivalent of the aggregate retirement pension (taking into account any early retirement subsidies associated therewith and determined as a straight life annuity commencing at the date (but in no event earlier than the Date of Termination) as of which the actuarial equivalent of such annuity is greatest) which the Executive had accrued pursuant to the provisions of the Pension Plans as of the Date of Termination. For purposes of this Section 6.1(D), "actuarial equivalent" shall be determined using the same assumptions utilized under the Stone Container Corporation Salaried Employees Retirement Plan immediately prior to the Date of Termination. (E) If the Executive would have become entitled to benefits under the Company's post-retirement health care or life insurance plans, as in effect immediately prior to the Change in Control or the Date of Termination (whichever is more favorable to the Executive), had the Executive's employment terminated at any time during the period of thirty-six (36) months after the Date of Termination, the Company shall provide such post-retirement health care or life insurance benefits to the Executive and the Executive's dependents commencing on the later of (i) the date on which such coverage would have first become available and (ii) the date on which benefits described in subsection (B) of this Section 6.1 terminate. 7 6.2 (A) Notwithstanding any other provisions of this Agreement, in the event that any payment or benefit received or to be received by the Executive in connection with a Change in Control or the termination of the Executive's employment (whether pursuant to the terms of this Agreement or any other plan, arrangement or agreement with the Company, any Person whose actions result in a Change in Control or any Person affiliated with the Company or such Person) (all such payments and benefits, including the Severance Payments, being hereinafter called "Total Payments") would be subject (in whole or part), to the Excise Tax, then, after taking into account any reduction in the Total Payments provided by reason of section 280G of the Code in such other plan, arrangement or agreement, the cash Severance Payments shall first be reduced, and the noncash Severance Payments shall thereafter be reduced, to the extent necessary so that no portion of the Total Payments is subject to the Excise Tax but only if (A) the net amount of such Total Payments, as so reduced (and after subtracting the net amount of federal, state and local income taxes on such reduced Total Payments) is greater than (B) the excess of (i) the net amount of such Total Payments, without reduction (but after subtracting the net amount of federal, state and local income taxes on such Total Payments), over (ii) the amount of Excise Tax to which the Executive would be subject in respect of such unreduced Total Payments; PROVIDED, HOWEVER, that the Executive may elect (at any time prior to the delivery of a Notice of Termination hereunder) to have the noncash Severance Payments reduced (or eliminated) prior to any reduction of the cash Severance Payments. 8 (B) For purposes of determining whether and the extent to which the Total Payments will be subject to the Excise Tax, (i) no portion of the Total Payments the receipt or enjoyment of which the Executive shall have effectively waived at such time and manner so that such portion does not constitute a "payment" within the meaning of section 280G(b) of the Code shall be taken into account, (ii) no portion of the Total Payments shall be taken into account which, in the opinion of tax counsel reasonably acceptable to the Executive and selected by the accounting firm (the "Auditor") which was, immediately prior to the Change in Control, the Company's independent auditor, does not constitute a "parachute payment" within the meaning of section 280G(b)(2) of the Code (including by reason of section 280G(b)(4)(A) of the Code) and, in calculating the Excise Tax, no portion of such Total Payments shall be taken into account which constitutes reasonable compensation for services actually rendered, within the meaning of section 280G(b)(4)(B) of the Code, in excess of the Base Amount allocable to such reasonable compensation, and (iii) the value of any non-cash benefit or any deferred payment or benefit included in the Total Payments shall be determined by the Auditor in accordance with the principles of sections 280G(d)(3) and (4) of the Code. 6.3 The payments provided in subsections (A), (C) and (D) of Section 6.1 hereof shall be made not later than the fifth day following the Date of Termination; PROVIDED, HOWEVER, that if the amounts of such payments, and the limitation on such payments set forth in Section 6.2 hereof, cannot be finally determined on or before such day, the Company shall pay to the Executive on such day an estimate, as determined in good faith by the Executive, of the minimum amount of such payments to which the Executive is clearly entitled and shall pay the remainder of such payments (together with interest on the unpaid remainder (or on all such payments to the extent the Company fails to make such payments when due) at 120% of the rate provided in section 1274(b)(2)(B) of the Code) as soon as the amount thereof can be determined but in no event later than the thirtieth (30th) day after 9 the Date of Termination. In the event that the amount of the estimated payments exceeds the amount subsequently determined to have been due, such excess shall constitute a loan by the Company to the Executive, payable on the fifth (5th) business day after demand by the Company (together with interest at 120% of the rate provided in section 1274(b)(2)(B) of the Code). At the time that payments are made under this Section, the Company shall provide the Executive with a written statement setting forth the manner in which such payments were calculated and the basis for such calculations including, without limitation, any opinions or other advice the Company has received from Tax Counsel, the Auditor or other advisors or consultants (and any such opinions or advice which are in writing shall be attached to the statement). 6.4 The Company also shall pay to the Executive all legal fees and expenses incurred by the Executive in disputing in good faith any issue hereunder relating to the termination of the Executive's employment, in seeking in good faith to obtain or enforce any benefit or right provided by this Agreement or in connection with any tax audit or proceeding to the extent attributable to the application of section 4999 of the Code to any payment or benefit provided hereunder. Such payments shall be made within five (5) business days after delivery of the Executive's written requests for payment accompanied with such evidence of fees and expenses incurred as the Company reasonably may require. 7. TERMINATION PROCEDURES AND COMPENSATION DURING DISPUTE. 7.1 NOTICE OF TERMINATION. After a Change in Control and during the Term, any purported termination of the Executive's employment (other than by reason of death) shall be communicated by written Notice of Termination from one party hereto to the other party hereto in accordance with Section 10 hereof. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated. Further, a Notice of Termination for Cause is required to include a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters (3/4) of the entire membership of the Board at a meeting of the Board which was called and held for the purpose of considering such termination (after reasonable notice to the Executive and an opportunity for the Executive, together with the Executive's counsel, to be heard before the Board) finding that, in the good faith opinion of the Board, the Executive was guilty of conduct set forth in clause (i) or (ii) of the definition of Cause herein, and specifying the particulars thereof in detail. 10 7.2 DATE OF TERMINATION. "Date of Termination," with respect to any purported termination of the Executive's employment after a Change in Control and during the Term, shall mean (i) if the Executive's employment is terminated for Disability, thirty (30) days after Notice of Termination is given (provided that the Executive shall not have returned to the full-time performance of the Executive's duties during such thirty (30) day period), and (ii) if the Executive's employment is terminated for any other reason, the date specified in the Notice of Termination (which, in the case of a termination by the Company, shall not be less than thirty (30) days (except in the case of a termination for Cause) and, in the case of a termination by the Executive, shall not be less than fifteen (15) days nor more than sixty (60) days, respectively, from the date such Notice of Termination is given). 7.3 DISPUTE CONCERNING TERMINATION. If within fifteen (15) days after any Notice of Termination is given, or, if later, prior to the Date of Termination (as determined without regard to this Section 7.3), the party receiving such Notice of Termination notifies the other party that a dispute exists concerning the termination, the Date of Termination shall be extended until the earlier of (i) the date on which the Term ends or (ii) the date on which the dispute is finally resolved, either by mutual written agreement of the parties or by a final judgment, order or decree of an arbitrator or a court of competent jurisdiction (which is not appealable or with respect to which the time for appeal therefrom has expired and no appeal has been perfected); PROVIDED, HOWEVER, that the Date of Termination shall be extended by a notice of dispute given by the Executive only if such notice is given in good faith and the Executive pursues the resolution of such dispute with reasonable diligence. 11 7.4 COMPENSATION DURING DISPUTE. If a purported termination occurs following a Change in Control and during the Term and the Date of Termination is extended in accordance with Section 7.3 hereof, the Company shall continue to pay the Executive the full compensation in effect when the notice giving rise to the dispute was given (including, but not limited to, salary) and continue the Executive as a participant in all compensation, benefit and insurance plans in which the Executive was participating when the notice giving rise to the dispute was given, until the Date of Termination, as determined in accordance with Section 7.3 hereof. Amounts paid under this Section 7.4 are in addition to all other amounts due under this Agreement (other than those due under Section 5.2 hereof) and shall not be offset against or reduce any other amounts due under this Agreement. 8. NO MITIGATION. The Company agrees that, if the Executive's employment with the Company terminates during the Term, the Executive is not required to seek other employment or to attempt in any way to reduce any amounts payable to the Executive by the Company pursuant to Section 6 hereof or Section 7.4 hereof. Further, except as specifically provided in Section 6.1(B) and (E) hereof, the amount of any payment or benefit provided for in this Agreement shall not be reduced by any compensation earned by the Executive as the result of employment by another employer, by retirement benefits, by offset against any amount claimed to be owed by the Executive to the Company, or otherwise. 12 9. SUCCESSORS; BINDING AGREEMENT. 9.1 In addition to any obligations imposed by law upon any successor to the Company, the Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. Failure of the Company to obtain such assumption and agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle the Executive to compensation from the Company in the same amount and on the same terms as the Executive would be entitled to hereunder if the Executive were to terminate the Executive's employment for Good Reason after a Change in Control, except that, for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Date of Termination. 9.2 This Agreement shall inure to the benefit of and be enforceable by the Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If the Executive shall die while any amount would still be payable to the Executive hereunder (other than amounts which, by their terms, terminate upon the death of the Executive) if the Executive had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the executors, personal representatives or administrators of the Executive's estate. 13 10. NOTICES. For the purpose of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, addressed, if to the Executive, to the address inserted below the Executive's signature on the final page hereof and, if to the Company, to the address set forth below, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon actual receipt: To the Company: Stone Container Corporation 150 N. Michigan Avenue Chicago, Illinois 60601 Attention: General Counsel 11. MISCELLANEOUS. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by the Executive and such officer as may be specifically designated by the Board. No waiver by either party hereto at any time of any breach by the other party hereto of, or of any lack of compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. This Agreement supersedes any other agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof which have been made by either party. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of Illinois. All references to sections of the Exchange Act or the Code shall be deemed also to refer to any successor provisions to such sections. Any payments provided for hereunder shall be paid net of any applicable withholding required under federal, state or local law and any additional withholding to which the Executive has agreed. The obligations of the Company and the Executive under this Agreement which by their nature may require either partial or total performance after the expiration of the Term (including, without limitation, those under Sections 6 and 7 hereof) shall survive such expiration. 14 12. VALIDITY. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 13. COUNTERPARTS. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 14. SETTLEMENT OF DISPUTES; ARBITRATION. (a) All claims by the Executive for benefits under this Agreement shall be directed to and determined by the Committee and shall be in writing. Any denial by the Committee of a claim for benefits under this Agreement shall be delivered to the Executive in writing and shall set forth the specific reasons for the denial and the specific provisions of this Agreement relied upon. The Committee shall afford a reasonable opportunity to the Executive for a review of the decision denying a claim and shall further allow the Executive to appeal to the Committee a decision of the Committee within sixty (60) days after notification by the Committee that the Executive's claim has been denied. (b) Any further dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration in Chicago, Illinois in accordance with the rules of the American Arbitration Association then in effect; PROVIDED, HOWEVER, that the evidentiary standards set forth in this Agreement shall apply. Judgment may be entered on the arbitrator's award in any court having jurisdiction. Notwithstanding any provision of this Agreement to the contrary, the Executive shall be entitled to seek specific performance of the Executive's right to be paid until the Date of Termination during the pendency of any dispute or controversy arising under or in connection with this Agreement. 15 1. DEFINITIONS. For purposes of this Agreement, the following terms shall have the meanings indicated below: (A) "Affiliate" shall have the meaning set forth in Rule 12b-2 promulgated under Section 12 of the Exchange Act. (B) "Auditor" shall have the meaning set forth in Section 6.2 hereof. (C) "Base Amount" shall have the meaning set forth in section 280G(b)(3) of the Code. (D) "Beneficial Owner" shall have the meaning set forth in Rule 13d-3 under the Exchange Act. (E) "Board" shall mean the Board of Directors of the Company. (F) "Cause" for termination by the Company of the Executive's employment shall mean (i) the willful and continued failure by the Executive to substantially perform the Executive's duties with the Company (other than any such failure resulting from the Executive's incapacity due to physical or mental illness or any such actual or anticipated failure after the issuance of a Notice of Termination for Good Reason by the Executive pursuant to Section 7.1 hereof) after a written demand for substantial performance is delivered to the Executive by the Board, which demand specifically identifies the manner in which the Board believes that the Executive has not substantially performed the Executive's duties, or (ii) the willful engaging by the Executive in conduct which is demonstrably and materially injurious to the Company or its subsidiaries, monetarily or otherwise. For purposes of clauses (i) and (ii) of this definition, (x) no act, or failure to act, on the Executive's part shall be deemed "willful" unless done, or omitted to be done, by the Executive not in good faith and without reasonable belief that the Executive's act, or failure to act, was in the best interest of the Company and (y) in the event of a dispute concerning the application of this provision, no claim by the Company that Cause exists shall be given effect unless the Company establishes to the Committee by clear and convincing evidence that Cause exists. 16 (G) A "Change in Control" shall be deemed to have occurred if the event set forth in any one of the following paragraphs shall have occurred: (I) any Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or its affiliates) representing 20% or more of the combined voting power of the Company's then outstanding securities, excluding any Person who becomes such a Beneficial Owner in connection with a transaction described in clause (i) of paragraph (III) below; or (II) the following individuals cease for any reason to constitute a majority of the number of directors then serving: individuals who, on the date hereof, constitute the Board and any new director (other than a director whose initial assumption of office is in connection with an actual or threatened election contest, including but not limited to a consent solicitation, relating to the election of directors of the Company) whose appointment or election by the Board or nomination for election by the Company's stockholders was approved or recommended by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors on the date hereof or whose appointment, election or nomination for election was previously so approved or recommended; or (III) there is consummated a merger or consolidation of the Company or any direct or indirect subsidiary of the Company with any other corporation, other than (i) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior to such merger or consolidation continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or any parent thereof), in combination with the ownership of any trustee or other fiduciary holding securities under an employee benefit plan of the Company or any subsidiary of the Company, at least 60% of the combined voting power of the securities of the Company or such surviving entity or any parent thereof outstanding immediately after such merger or consolidation, or (ii) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company (not including in the securities Beneficially Owned by such Person any securities acquired directly from the Company or its Affiliates) representing 20% or more of the combined voting power of the Company's then outstanding securities; or 17 (IV) the stockholders of the Company approve a plan of complete liquidation or dissolution of the Company or there is consummated an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets, other than a sale or disposition by the Company of all or substantially all of the Company's assets to an entity, at least 60% of the combined voting power of the voting securities of which is owned by stockholders of the Company in substantially the same proportions as their ownership of the Company immediately prior to such sale. Notwithstanding the foregoing, a "Change in Control" shall not be deemed to have occurred by virtue of the consummation of any transaction or series of integrated transactions immediately following which the record holders of the common stock of the Company immediately prior to such transaction or series of transactions continue to have substantially the same proportionate ownership in an entity which owns all or substantially all of the assets of the Company immediately following such transaction or series of transactions. 18 (H) "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time. (I) "Committee" shall mean (i) the individuals (not fewer than three in number) who, on the date six months before a Change in Control, constitute the Compensation Committee of the Board, plus (ii) in the event that fewer than three individuals are available from the group specified in clause (i) above for any reason, such individuals as may be appointed by the individual or individuals so available (including for this purpose any individual or individuals previously so appointed under this clause (ii)). (J) "Company" shall mean Stone Container Corporation and, except in determining under Section 15(G) hereof whether or not any Change in Control of the Company has occurred, shall include any successor to its business and/or assets which assumes and agrees to perform this Agreement by operation of law, or otherwise. (K) "Date of Termination" shall have the meaning set forth in Section 7.2 hereof. (L) "Disability" shall be deemed the reason for the termination by the Company of the Executive's employment, if, as a result of the Executive's incapacity due to physical or mental illness, the Executive shall have been absent from the full-time performance of the Executive's duties with the Company for a period of six (6) consecutive months, the Company shall have given the Executive a Notice of Termination for Disability, and, within thirty (30) days after such Notice of Termination is given, the Executive shall not have returned to the full-time performance of the Executive's duties. 19 (M) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended from time to time. (N) "Excise Tax" shall mean any excise tax imposed under section 4999 of the Code. (O) "Executive" shall mean the individual named in the first paragraph of this Agreement. (P) "Good Reason" for termination by the Executive of the Executive's employment shall mean the occurrence (without the Executive's express written consent) after any Change in Control, or prior to a Change in Control under the circumstances described in clause (ii) of the second sentence of Section 6.1 hereof (treating all references in paragraphs (I) through (VII) below to a "Change in Control" as references to a "Potential Change in Control"), of any one of the following acts by the Company, or failures by the Company to act, unless, in the case of any act or failure to act described in paragraph (I), (V), (VI) or (VII) below, such act or failure to act is corrected prior to the Date of Termination specified in the Notice of Termination given in respect thereof: (I) the assignment to the Executive of any duties inconsistent in any material respect with the Executive's positions, duties, responsibilities or status with the Company immediately prior to the Change in Control, a change in the Executive's reporting responsibilities, titles or offices as in effect immediately prior to the Change in Control, or any failure to re-elect the Executive to any office, title or position with the Company held by the Executive immediately prior to the Change in Control; (II) a reduction by the Company in the Executive's annual base salary as in effect on the date hereof or as the same may be increased from time to time except for across-the-board salary reductions similarly affecting all executives of the Company and all executives of any Person in control of the Company; 20 (III) the relocation of the Executive's principal place of employment to a location more than 50 miles from the Executive's principal place of employment immediately prior to the Change in Control or the Company's requiring the Executive to be based anywhere other than such principal place of employment (or permitted relocation thereof) except for required travel on the Company's business to an extent substantially consistent with the Executive's present business travel obligations; (IV) the failure by the Company to pay to the Executive any portion of the Executive's current compensation, or to pay to the Executive any portion of an installment of deferred compensation under any deferred compensation program of the Company, within seven (7) days of the date such compensation is due; (V) the failure by the Company to continue in effect any compensation plan in which the Executive participates immediately prior to the Change in Control which is material to the Executive's total compensation, including but not limited to any such plans relating to stock options, restricted stock, stock appreciation rights, incentive compensation, or annual or long term bonus, unless an equitable arrangement (embodied in an ongoing substitute or alternative plan) has been made with respect to such plan, or the failure by the Company to continue the Executive's participation therein (or in such substitute or alternative plan) on a basis not materially less favorable, both in terms of the amount or timing of payment of benefits provided and the level of the Executive's participation relative to other participants, as existed immediately prior to the Change in Control; 21 (VI) the failure by the Company to continue to provide the Executive with benefits substantially similar to those enjoyed by the Executive under any of the Company's pension, savings, life insurance, medical, health and accident, or disability plans in which the Executive was participating immediately prior to the Change in Control, the taking of any action by the Company which would directly or indirectly materially reduce any of such benefits or deprive the Executive of any material fringe benefit enjoyed by the Executive at the time of the Change in Control, or the failure by the Company to provide the Executive with the number of paid vacation days to which the Executive is entitled on the basis of years of service with the Company in accordance with the Company's normal vacation policy in effect at the time of the Change in Control; or (VII) any purported termination of the Executive's employment which is not effected pursuant to a Notice of Termination satisfying the requirements of Section 7.1 hereof; for purposes of this Agreement, no such purported termination shall be effective. The Executive's right to terminate the Executive's employment for Good Reason shall not be affected by the Executive's incapacity due to physical or mental illness. The Executive's continued employment shall not constitute consent to, or a waiver of rights with respect to, any act or failure to act constituting Good Reason hereunder. For purposes of any determination regarding the existence of Good Reason, any claim by the Executive that Good Reason exists shall be presumed to be correct unless the Company establishes to the Committee by clear and convincing evidence that Good Reason does not exist. 22 (Q) "Notice of Termination" shall have the meaning set forth in Section 7.1 hereof. (R) "Pension Plan" shall mean any tax-qualified, supplemental or excess benefit pension plan maintained by the Company and any other plan or agreement entered into between the Executive and the Company which is designed to provide the Executive with supplemental retirement benefits. (S) "Person" shall have the meaning given in Section 3(a)(9) of the Exchange Act, as modified and used in Sections 13(d) and 14(d) thereof, except that such term shall not include (i) the Company or any of its subsidiaries, (ii) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any of its Affiliates, (iii) an underwriter temporarily holding securities pursuant to an offering of such securities, (iv) a corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company or (v) any descendant of Joseph Stone, the spouse of any such descendant, the estate of any such descendant or spouse, any trust or any other arrangement for the benefit of any such descendant or any such spouse or any charitable organization established by any such descendant or any such spouse. (T) "Potential Change in Control" shall be deemed to have occurred if the event set forth in any one of the following paragraphs shall have occurred: (I) the Company enters into an agreement, the consummation of which would result in the occurrence of a Change in Control; (II) the Company or any Person publicly announces an intention to take or to consider taking actions which, if consummated, would constitute a Change in Control; (III) any Person becomes the Beneficial Owner, directly or indirectly, of securities of the Company representing 10% or more of either the then outstanding shares of common stock of the Company or the combined voting power of the Company's then outstanding securities (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or its affiliates); or 23 (IV) the Board adopts a resolution to the effect that, for purposes of this Agreement, a Potential Change in Control has occurred. (U) "Retirement" shall be deemed the reason for the termination by the Company or the Executive of the Executive's employment if such employment is terminated in accordance with the Company's retirement policy, including early retirement, generally applicable to its salaried employees, as in effect immediately prior to the Change in Control, or in accordance with any retirement arrangement established with the Executive's express written consent with respect to the Executive. (V) "Severance Payments" shall mean those payments described in Section 6.1 hereof. (W) "Term" shall mean the period of time described in Section 2 hereof (including any extension, continuation or termination described therein). (X) "Total Payments" shall mean those payments so described in Section 6.2 hereof. 24 STONE CONTAINER CORPORATION By: _______________________________________________________ Name: Thomas P. Cutilletta Title: Senior Vice President, Administration & Corporate Controller By: ______________________________________________________ [Signature] Name & Address: _________________________________________________ _________________________________________________ _________________________________________________ (Please print) EX-10.(L) 5 EXHIBIT 10(L) VALLEY 2X SEVERANCE AGREEMENT THIS AGREEMENT, dated July 22, 1996, is made by and between Stone Container Corporation, a Delaware corporation (the "Company"), and X (the "Executive"). WHEREAS, the Company considers it essential to the best interests of its stockholders to foster the continued employment of key management personnel; and WHEREAS, the Board recognizes that, as is the case with many publicly held corporations, the possibility of a Change in Control exists and that such possibility, and the uncertainty and questions which it may raise among management, may result in the departure or distraction of management personnel to the detriment of the Company and its stockholders; and WHEREAS, the Board has determined that appropriate steps should be taken to reinforce and encourage the continued attention and dedication of members of the Company's management, including the Executive, to their assigned duties without distraction in the face of potentially disturbing circumstances arising from the possibility of a Change in Control; NOW, THEREFORE, in consideration of the premises and the mutual covenants herein contained, the Company and the Executive hereby agree as follows: 1. DEFINED TERMS. The definitions of capitalized terms used in this Agreement are provided in the last Section hereof. 2. TERM OF AGREEMENT. The Term of this Agreement shall commence on the date hereof and shall continue in effect through December 31, 1998; PROVIDED, HOWEVER, that commencing on January 1, 1998 and each January 1 thereafter, the Term shall automatically be extended for one additional year unless a Change in Control shall have occurred prior to such January 1 or, not later than September 30 of the preceding year, the Company or the Executive shall have given notice not to extend this Agreement; and FURTHER PROVIDED, HOWEVER, that if a Change in Control shall have occurred during the Term, the Term shall be extended for a period of twenty-four (24) months beyond the month in which such Change in Control occurred. 1 3. COMPANY'S COVENANTS SUMMARIZED. In order to induce the Executive to remain in the employ of the Company and in consideration of the Executive's covenants set forth in Section 4 hereof, the Company agrees, under the conditions described herein, to pay the Executive the Severance Payments and the other payments and benefits described herein. Except as provided in Section 9.1 hereof, no amount or benefit shall be payable under this Agreement unless there shall have been (or, under the terms of the second sentence of Section 6.1 hereof, there shall be deemed to have been) a termination of the Executive's employment with the Company following a Change in Control and during the Term. This Agreement shall not be construed as creating an express or implied contract of employment and, except as otherwise agreed in writing between the Executive and the Company, the Executive shall not have any right to be retained in the employ of the Company. 4. THE EXECUTIVE'S COVENANTS. The Executive agrees that, subject to the terms and conditions of this Agreement, in the event of a Potential Change in Control during the Term, the Executive will remain in the employ of the Company until the earliest of (i) a date which is six (6) months from the date of such Potential Change of Control, (ii) the date of a Change in Control, (iii) the date of termination by the Executive of the Executive's employment for Good Reason or by reason of death, Disability or Retirement, or (iv) the termination by the Company of the Executive's employment for any reason. 5. COMPENSATION OTHER THAN SEVERANCE PAYMENTS. 5.1 Following a Change in Control and during the Term, during any period that the Executive fails to perform the Executive's full-time duties with the Company as a result of incapacity due to physical or mental illness, the Company shall pay the Executive's full salary to the Executive at the rate in effect at the commencement of any such period, together with all compensation and benefits payable to the Executive under the terms of any compensation or benefit plan, program or arrangement maintained by the Company during such period, until the Executive's employment is terminated by the Company for Disability. 2 5.2 If the Executive's employment shall be terminated for any reason following a Change in Control and during the Term, the Company shall pay the Executive's full salary to the Executive through the Date of Termination at the rate in effect immediately prior to the Change in Control or, if greater, at the rate in effect at the time the Notice of Termination is given, together with all compensation and benefits payable to the Executive through the Date of Termination under the terms of the Company's compensation and benefit plans, programs or arrangements. 5.3 If the Executive's employment shall be terminated for any reason following a Change in Control and during the Term, the Company shall pay to the Executive the Executive's normal post-termination compensation and benefits as such payments become due. Such post-termination compensation and benefits shall be determined under, and paid in accordance with, the Company's retirement, insurance and other compensation or benefit plans, programs and arrangements as in effect immediately prior to the Change in Control or, to the extent more favorable to the Executive, as in effect immediately prior to the Date of Termination. 6. SEVERANCE PAYMENTS. 6.1 Subject to Section 6.2 hereof, if the Executive's employment terminates following a Change in Control and during the Term, other than (A) by the Company for Cause, (B) by reason of death or Disability, or (C) by the Executive without Good Reason, then the Company shall pay the Executive the payments described in this Section 6.1 (the "Severance Payments"), in addition to any payments and benefits to which the Executive is entitled under Section 5 hereof. For purposes of this Agreement, the Executive's employment shall be deemed to have been terminated following a Change in Control by the Company without Cause or by the Executive with Good Reason, if (i) the Executive's employment is terminated by the Company without Cause prior to a Change in Control which actually occurs during the term of this Agreement and such termination was at the request or direction of a Person who has entered into an agreement with the Company the consummation of which would constitute a Change in Control, (ii) the Executive terminates his 3 employment with Good Reason prior to a Change in Control which actually occurs during the term of this Agreement and the circumstance or event which constitutes Good Reason occurs at the request or direction of such Person, or (iii) the Executive's employment is terminated by the Company without Cause prior to a Change in Control and the Executive reasonably demonstrates that such termination is otherwise in connection with or in anticipation of a Change in Control which actually occurs during the term of this Agreement. For purposes of any determination regarding the applicability of the immediately preceding sentence, any position taken by the Executive shall be presumed to be correct unless the Company establishes to the Committee by clear and convincing evidence that such position is not correct. (A) In lieu of any further salary payments to the Executive for periods subsequent to the Date of Termination and in lieu of any severance benefit otherwise payable to the Executive, the Company shall pay to the Executive a lump sum severance payment, in cash, equal to two times the sum of (i) the higher of the Executive's annual base salary in effect immediately prior to the occurrence of the event or circumstance upon which the Notice of Termination is based and the Executive's annual base salary in effect immediately prior to the Change in Control, and (ii) the product of (a) the amount determined under clause (i) above and (b) the higher of the average percentage of base salary paid to or earned by the Executive pursuant to any annual bonus or incentive plan maintained by the Company in respect of the three years immediately preceding that in which the Date of Termination occurs or the average percentage of base salary paid to or earned by the Executive in respect of the three years immediately preceding that in which the Change in Control occurs. 4 (B) For the twenty-four (24) month period immediately following the Date of Termination, the Company shall arrange to provide the Executive with life, disability, accident and health insurance benefits and Company-provided perquisites (including, but not limited to a Company car and club membership dues), in each case substantially similar to those which the Executive is receiving immediately prior to the Notice of Termination (without giving effect to any amendment to such benefits or perquisites made subsequent to a Change in Control which amendment adversely affects in any manner the Executive's entitlement to or the amount of such benefits); PROVIDED, HOWEVER, that, such health insurance benefits shall be provided through a third-party insurer. Benefits and perquisites otherwise receivable by the Executive pursuant to this Section 6.1(B) shall be reduced to the extent comparable benefits or perquisites are actually received by or made available to the Executive without cost during the twenty-four (24) month period following the Executive's termination of employment (and any such benefits and perquisites actually received by or made available to the Executive shall be reported to the Company by the Executive). If the Severance Payments shall be decreased pursuant to Section 6.2 hereof, and the Section 6.1(B) benefits or perquisites which remain payable after the application of Section 6.2 hereof are thereafter reduced pursuant to the immediately preceding sentence because of the receipt or availability of comparable benefits or perquisites, the Company shall, at the time of such reduction, pay to the Executive the least of (a) the amount of the decrease made in the Severance Payments pursuant to Section 6.2 hereof, (b) the amount of the subsequent reduction in these Section 6.1(B) benefits or perquisites, or (c) the maximum amount which can be paid to the Executive without being, or causing any other payment to be, nondeductible by reason of section 280G of the Code. 5 (C) Notwithstanding any provision of any annual or long-term incentive plan to the contrary, the Company shall pay to the Executive a lump sum amount, in cash, equal to the sum of (i) any incentive compensation which has been allocated or awarded to the Executive for a completed fiscal year or other measuring period preceding the Date of Termination under any such plan and which, as of the Date of Termination, is contingent only upon the continued employment of the Executive to a subsequent date or otherwise has not been paid, and (ii) a pro rata portion to the Date of Termination of the aggregate value of all contingent incentive compensation awards to the Executive for all then uncompleted periods under any such plan, calculated as to each such award by multiplying the award that the Executive would have earned on the last day of the performance award period, assuming the achievement, at the target level, of the individual and corporate performance goals established with respect to such award, by the fraction obtained by dividing the number of full months and any fractional portion of a month during such performance award period through the Date of Termination by the total number of months contained in such performance award period. (D) In addition to the retirement benefits to which the Executive is entitled under each Pension Plan, the Company shall pay the Executive a lump sum amount, in cash, equal to the excess of (i) the actuarial equivalent of the aggregate retirement pension (taking into account any early retirement subsidies associated therewith and determined as a straight life annuity commencing at the date (but in no event earlier than the second anniversary of the Date of Termination) as of which the actuarial equivalent of such annuity is greatest) which the Executive would have accrued under the terms of all Pension Plans (without regard to any amendment to any Pension Plan made subsequent to a Change in Control and on or prior to the Date of Termination, which amendment adversely affects in any manner the computation of retirement benefits thereunder), determined as if the Executive were fully vested thereunder and had accumulated (after the Date of Termination) twenty-four (24) additional months of service credit thereunder and had been credited under each 6 Pension Plan during such period with compensation at the higher of (i) the Executive's compensation (as defined in such Pension Plan) during the twelve (12) months immediately preceding the Date of Termination or (ii) the Executive's compensation (as defined in such Pension Plan) during the twelve (12) months immediately preceding the Change in Control, over (ii) the actuarial equivalent of the aggregate retirement pension (taking into account any early retirement subsidies associated therewith and determined as a straight life annuity commencing at the date (but in no event earlier than the Date of Termination) as of which the actuarial equivalent of such annuity is greatest) which the Executive had accrued pursuant to the provisions of the Pension Plans as of the Date of Termination. For purposes of this Section 6.1(D), "actuarial equivalent" shall be determined using the same assumptions utilized under the Stone Container Corporation Salaried Employees Retirement Plan immediately prior to the Date of Termination. (E) If the Executive would have become entitled to benefits under the Company's post-retirement health care or life insurance plans, as in effect immediately prior to the Change in Control or the Date of Termination (whichever is more favorable to the Executive), had the Executive's employment terminated at any time during the period of twenty-four (24) months after the Date of Termination, the Company shall provide such post-retirement health care or life insurance benefits to the Executive and the Executive's dependents commencing on the later of (i) the date on which such coverage would have first become available and (ii) the date on which benefits described in subsection (B) of this Section 6.1 terminate. 7 6.2 (A) Notwithstanding any other provisions of this Agreement, in the event that any payment or benefit received or to be received by the Executive in connection with a Change in Control or the termination of the Executive's employment (whether pursuant to the terms of this Agreement or any other plan, arrangement or agreement with the Company, any Person whose actions result in a Change in Control or any Person affiliated with the Company or such Person) (all such payments and benefits, including the Severance Payments, being hereinafter called "Total Payments") would be subject (in whole or part), to the Excise Tax, then, after taking into account any reduction in the Total Payments provided by reason of section 280G of the Code in such other plan, arrangement or agreement, the cash Severance Payments shall first be reduced, and the noncash Severance Payments shall thereafter be reduced, to the extent necessary so that no portion of the Total Payments is subject to the Excise Tax but only if (A) the net amount of such Total Payments, as so reduced (and after subtracting the net amount of federal, state and local income taxes on such reduced Total Payments) is greater than (B) the excess of (i) the net amount of such Total Payments, without reduction (but after subtracting the net amount of federal, state and local income taxes on such Total Payments), over (ii) the amount of Excise Tax to which the Executive would be subject in respect of such unreduced Total Payments; PROVIDED, HOWEVER, that the Executive may elect (at any time prior to the delivery of a Notice of Termination hereunder) to have the noncash Severance Payments reduced (or eliminated) prior to any reduction of the cash Severance Payments. 8 (B) For purposes of determining whether and the extent to which the Total Payments will be subject to the Excise Tax, (i) no portion of the Total Payments the receipt or enjoyment of which the Executive shall have effectively waived at such time and manner so that such portion does not constitute a "payment" within the meaning of section 280G(b) of the Code shall be taken into account, (ii) no portion of the Total Payments shall be taken into account which, in the opinion of tax counsel reasonably acceptable to the Executive and selected by the accounting firm (the "Auditor") which was, immediately prior to the Change in Control, the Company's independent auditor, does not constitute a "parachute payment" within the meaning of section 280G(b)(2) of the Code (including by reason of section 280G(b)(4)(A) of the Code) and, in calculating the Excise Tax, no portion of such Total Payments shall be taken into account which constitutes reasonable compensation for services actually rendered, within the meaning of section 280G(b)(4)(B) of the Code, in excess of the Base Amount allocable to such reasonable compensation, and (iii) the value of any non-cash benefit or any deferred payment or benefit included in the Total Payments shall be determined by the Auditor in accordance with the principles of sections 280G(d)(3) and (4) of the Code. 6.3 The payments provided in subsections (A), (C) and (D) of Section 6.1 hereof shall be made not later than the fifth day following the Date of Termination; PROVIDED, HOWEVER, that if the amounts of such payments, and the limitation on such payments set forth in Section 6.2 hereof, cannot be finally determined on or before such day, the Company shall pay to the Executive on such day an estimate, as determined in good faith by the Executive, of the minimum amount of such payments to which the Executive is clearly entitled and shall pay the remainder of such payments (together with interest on the unpaid remainder (or on all such payments to the extent the Company fails to make such payments when due) at 120% of the rate provided in section 1274(b)(2)(B) of the Code) as soon as the amount thereof can be determined but in no event later than the thirtieth (30th) day after the Date of Termination. In the event that the amount of the estimated payments exceeds the amount subsequently determined to have been due, such excess shall constitute a loan by the Company to the Executive, payable on the fifth (5th) business day after demand by the Company (together with interest at 120% of the rate provided in section 1274(b)(2)(B) of the Code). At the time 9 that payments are made under this Section, the Company shall provide the Executive with a written statement setting forth the manner in which such payments were calculated and the basis for such calculations including, without limitation, any opinions or other advice the Company has received from Tax Counsel, the Auditor or other advisors or consultants (and any such opinions or advice which are in writing shall be attached to the statement). 6.4 The Company also shall pay to the Executive all legal fees and expenses incurred by the Executive in disputing in good faith any issue hereunder relating to the termination of the Executive's employment, in seeking in good faith to obtain or enforce any benefit or right provided by this Agreement or in connection with any tax audit or proceeding to the extent attributable to the application of section 4999 of the Code to any payment or benefit provided hereunder. Such payments shall be made within five (5) business days after delivery of the Executive's written requests for payment accompanied with such evidence of fees and expenses incurred as the Company reasonably may require. 7. TERMINATION PROCEDURES AND COMPENSATION DURING DISPUTE. 7.1 NOTICE OF TERMINATION. After a Change in Control and during the Term, any purported termination of the Executive's employment (other than by reason of death) shall be communicated by written Notice of Termination from one party hereto to the other party hereto in accordance with Section 10 hereof. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated. Further, a Notice of Termination for Cause is required to include a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters (3/4) of the entire membership of the Board at a meeting of the Board which was called and 10 held for the purpose of considering such termination (after reasonable notice to the Executive and an opportunity for the Executive, together with the Executive's counsel, to be heard before the Board) finding that, in the good faith opinion of the Board, the Executive was guilty of conduct set forth in clause (i) or (ii) of the definition of Cause herein, and specifying the particulars thereof in detail. 7.2 DATE OF TERMINATION. "Date of Termination," with respect to any purported termination of the Executive's employment after a Change in Control and during the Term, shall mean (i) if the Executive's employment is terminated for Disability, thirty (30) days after Notice of Termination is given (provided that the Executive shall not have returned to the full-time performance of the Executive's duties during such thirty (30) day period), and (ii) if the Executive's employment is terminated for any other reason, the date specified in the Notice of Termination (which, in the case of a termination by the Company, shall not be less than thirty (30) days (except in the case of a termination for Cause) and, in the case of a termination by the Executive, shall not be less than fifteen (15) days nor more than sixty (60) days, respectively, from the date such Notice of Termination is given). 7.3 DISPUTE CONCERNING TERMINATION. If within fifteen (15) days after any Notice of Termination is given, or, if later, prior to the Date of Termination (as determined without regard to this Section 7.3), the party receiving such Notice of Termination notifies the other party that a dispute exists concerning the termination, the Date of Termination shall be extended until the earlier of (i) the date on which the Term ends or (ii) the date on which the dispute is finally resolved, either by mutual written agreement of the parties or by a final judgment, order or decree of an arbitrator or a court of competent jurisdiction (which is not appealable or with respect to which the time for appeal therefrom has expired and no appeal has been perfected); provided, however, that the Date of Termination shall be extended by a notice of dispute given by the Executive only if such notice is given in good faith and the Executive pursues the resolution of such dispute with reasonable diligence. 11 7.4 COMPENSATION DURING DISPUTE. If a purported termination occurs following a Change in Control and during the Term and the Date of Termination is extended in accordance with Section 7.3 hereof, the Company shall continue to pay the Executive the full compensation in effect when the notice giving rise to the dispute was given (including, but not limited to, salary) and continue the Executive as a participant in all compensation, benefit and insurance plans in which the Executive was participating when the notice giving rise to the dispute was given, until the Date of Termination, as determined in accordance with Section 7.3 hereof. Amounts paid under this Section 7.4 are in addition to all other amounts due under this Agreement (other than those due under Section 5.2 hereof) and shall not be offset against or reduce any other amounts due under this Agreement. 8. NO MITIGATION. The Company agrees that, if the Executive's employment with the Company terminates during the Term, the Executive is not required to seek other employment or to attempt in any way to reduce any amounts payable to the Executive by the Company pursuant to Section 6 hereof or Section 7.4 hereof. Further, except as specifically provided in Section 6.1(B) and (E) hereof, the amount of any payment or benefit provided for in this Agreement shall not be reduced by any compensation earned by the Executive as the result of employment by another employer, by retirement benefits, by offset against any amount claimed to be owed by the Executive to the Company, or otherwise. 12 9. SUCCESSORS; BINDING AGREEMENT. 9.1 In addition to any obligations imposed by law upon any successor to the Company, the Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. Failure of the Company to obtain such assumption and agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle the Executive to compensation from the Company in the same amount and on the same terms as the Executive would be entitled to hereunder if the Executive were to terminate the Executive's employment for Good Reason after a Change in Control, except that, for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Date of Termination. 9.2 This Agreement shall inure to the benefit of and be enforceable by the Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If the Executive shall die while any amount would still be payable to the Executive hereunder (other than amounts which, by their terms, terminate upon the death of the Executive) if the Executive had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the executors, personal representatives or administrators of the Executive's estate. 13 10. NOTICES. For the purpose of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, addressed, if to the Executive, to the address inserted below the Executive's signature on the final page hereof and, if to the Company, to the address set forth below, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon actual receipt: To the Company: Stone Container Corporation 150 N. Michigan Avenue Chicago, Illinois 60601 Attention: General Counsel 11. MISCELLANEOUS. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by the Executive and such officer as may be specifically designated by the Board. No waiver by either party hereto at any time of any breach by the other party hereto of, or of any lack of compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. This Agreement supersedes any other agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof which have been made by either party. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of Illinois. All references to sections of the Exchange Act or the Code shall be deemed also to refer to any successor provisions to such sections. Any payments provided for hereunder shall be paid net of any applicable withholding required under federal, state or local law and any additional withholding to which the Executive has agreed. The obligations of the Company and the Executive under this Agreement which by their nature may require either partial or total performance after the expiration of the Term (including, without limitation, those under Sections 6 and 7 hereof) shall survive such expiration. 14 12. VALIDITY. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 13. COUNTERPARTS. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 14. SETTLEMENT OF DISPUTES; ARBITRATION. (a) All claims by the Executive for benefits under this Agreement shall be directed to and determined by the Committee and shall be in writing. Any denial by the Committee of a claim for benefits under this Agreement shall be delivered to the Executive in writing and shall set forth the specific reasons for the denial and the specific provisions of this Agreement relied upon. The Committee shall afford a reasonable opportunity to the Executive for a review of the decision denying a claim and shall further allow the Executive to appeal to the Committee a decision of the Committee within sixty (60) days after notification by the Committee that the Executive's claim has been denied. (b) Any further dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration in Chicago, Illinois in accordance with the rules of the American Arbitration Association then in effect; PROVIDED, HOWEVER, that the evidentiary standards set forth in this Agreement shall apply. Judgment may be entered on the arbitrator's award in any court having jurisdiction. Notwithstanding any provision of this Agreement to the contrary, the Executive shall be entitled to seek specific performance of the Executive's right to be paid until the Date of Termination during the pendency of any dispute or controversy arising under or in connection with this Agreement. 15 15. DEFINITIONS. For purposes of this Agreement, the following terms shall have the meanings indicated below: (A) "Affiliate" shall have the meaning set forth in Rule 12b-2 promulgated under Section 12 of the Exchange Act. (B) "Auditor" shall have the meaning set forth in Section 6.2 hereof. (C) "Base Amount" shall have the meaning set forth in section 280G(b)(3) of the Code. (D) "Beneficial Owner" shall have the meaning set forth in Rule 13d-3 under the Exchange Act. (E) "Board" shall mean the Board of Directors of the Company. (F) "Cause" for termination by the Company of the Executive's employment shall mean (i) the willful and continued failure by the Executive to substantially perform the Executive's duties with the Company (other than any such failure resulting from the Executive's incapacity due to physical or mental illness or any such actual or anticipated failure after the issuance of a Notice of Termination for Good Reason by the Executive pursuant to Section 7.1 hereof) after a written demand for substantial performance is delivered to the Executive by the Board, which demand specifically identifies the manner in which the Board believes that the Executive has not substantially performed the Executive's duties, or (ii) the willful engaging by the Executive in conduct which is demonstrably and materially injurious to the Company or its subsidiaries, monetarily or otherwise. For purposes of clauses (i) and (ii) of this definition, (x) no act, or failure to act, on the Executive's part shall be deemed "willful" unless done, or omitted to be done, by the Executive not in good faith and without reasonable belief that the Executive's act, or failure to act, was in the best interest of the Company and (y) in the event of a dispute concerning the application of this provision, no claim by the Company that Cause exists shall be given effect unless the Company establishes to the Committee by clear and convincing evidence that Cause exists. 16 (G) A "Change in Control" shall be deemed to have occurred if the event set forth in any one of the following paragraphs shall have occurred: (I) any Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or its affiliates) representing 20% or more of the combined voting power of the Company's then outstanding securities, excluding any Person who becomes such a Beneficial Owner in connection with a transaction described in clause (i) of paragraph (III) below; or (II) the following individuals cease for any reason to constitute a majority of the number of directors then serving: individuals who, on the date hereof, constitute the Board and any new director (other than a director whose initial assumption of office is in connection with an actual or threatened election contest, including but not limited to a consent solicitation, relating to the election of directors of the Company) whose appointment or election by the Board or nomination for election by the Company's stockholders was approved or recommended by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors on the date hereof or whose appointment, election or nomination for election was previously so approved or recommended; or 17 (III) there is consummated a merger or consolidation of the Company or any direct or indirect subsidiary of the Company with any other corporation, other than (i) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior to such merger or consolidation continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or any parent thereof), in combination with the ownership of any trustee or other fiduciary holding securities under an employee benefit plan of the Company or any subsidiary of the Company, at least 60% of the combined voting power of the securities of the Company or such surviving entity or any parent thereof outstanding immediately after such merger or consolidation, or (ii) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company (not including in the securities Beneficially Owned by such Person any securities acquired directly from the Company or its Affiliates) representing 20% or more of the combined voting power of the Company's then outstanding securities; or (IV) the stockholders of the Company approve a plan of complete liquidation or dissolution of the Company or there is consummated an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets, other than a sale or disposition by the Company of all or substantially all of the Company's assets to an entity, at least 60% of the combined voting power of the voting securities of which is owned by stockholders of the Company in substantially the same proportions as their ownership of the Company immediately prior to such sale. Notwithstanding the foregoing, a "Change in Control" shall not be deemed to have occurred by virtue of the consummation of any transaction or series of integrated transactions immediately following which the record holders of the common stock of the Company immediately prior to such transaction or series of transactions continue to have substantially the same proportionate ownership in an entity which owns all or substantially all of the assets of the Company immediately following such transaction or series of transactions. 18 (H) "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time. (I) "Committee" shall mean (i) the individuals (not fewer than three in number) who, on the date six months before a Change in Control, constitute the Compensation Committee of the Board, plus (ii) in the event that fewer than three individuals are available from the group specified in clause (i) above for any reason, such individuals as may be appointed by the individual or individuals so available (including for this purpose any individual or individuals previously so appointed under this clause (ii)). (J) "Company" shall mean Stone Container Corporation and, except in determining under Section 15(G) hereof whether or not any Change in Control of the Company has occurred, shall include any successor to its business and/or assets which assumes and agrees to perform this Agreement by operation of law, or otherwise. (K) "Date of Termination" shall have the meaning set forth in Section 7.2 hereof. (L) "Disability" shall be deemed the reason for the termination by the Company of the Executive's employment, if, as a result of the Executive's incapacity due to physical or mental illness, the Executive shall have been absent from the full-time performance of the Executive's duties with the Company for a period of six (6) consecutive months, the Company shall have given the Executive a Notice of Termination for Disability, and, within thirty (30) days after such Notice of Termination is given, the Executive shall not have returned to the full-time performance of the Executive's duties. 19 (M) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended from time to time. (N) "Excise Tax" shall mean any excise tax imposed under section 4999 of the Code. (O) "Executive" shall mean the individual named in the first paragraph of this Agreement. (P) "Good Reason" for termination by the Executive of the Executive's employment shall mean the occurrence (without the Executive's express written consent) after any Change in Control, or prior to a Change in Control under the circumstances described in clause (ii) of the second sentence of Section 6.1 hereof (treating all references in paragraphs (I) through (VII) below to a "Change in Control" as references to a "Potential Change in Control"), of any one of the following acts by the Company, or failures by the Company to act, unless, in the case of any act or failure to act described in paragraph (I), (V), (VI) or (VII) below, such act or failure to act is corrected prior to the Date of Termination specified in the Notice of Termination given in respect thereof: (I) the assignment to the Executive of any duties inconsistent in any material respect with the Executive's positions, duties, responsibilities or status with the Company immediately prior to the Change in Control, a change in the Executive's reporting responsibilities, titles or offices as in effect immediately prior to the Change in Control, or any failure to re-elect the Executive to any office, title or position with the Company held by the Executive immediately prior to the Change in Control; (II) a reduction by the Company in the Executive's annual base salary as in effect on the date hereof or as the same may be increased from time to time except for across-the-board salary reductions similarly affecting all executives of the Company and all executives of any Person in control of the Company; 20 (III) the relocation of the Executive's principal place of employment to a location more than 50 miles from the Executive's principal place of employment immediately prior to the Change in Control or the Company's requiring the Executive to be based anywhere other than such principal place of employment (or permitted relocation thereof) except for required travel on the Company's business to an extent substantially consistent with the Executive's present business travel obligations; (IV) the failure by the Company to pay to the Executive any portion of the Executive's current compensation, or to pay to the Executive any portion of an installment of deferred compensation under any deferred compensation program of the Company, within seven (7) days of the date such compensation is due; (V) the failure by the Company to continue in effect any compensation plan in which the Executive participates immediately prior to the Change in Control which is material to the Executive's total compensation, including but not limited to any such plans relating to stock options, restricted stock, stock appreciation rights, incentive compensation, or annual or long term bonus, unless an equitable arrangement (embodied in an ongoing substitute or alternative plan) has been made with respect to such plan, or the failure by the Company to continue the Executive's participation therein (or in such substitute or alternative plan) on a basis not materially less favorable, both in terms of the amount or timing of payment of benefits provided and the level of the Executive's participation relative to other participants, as existed immediately prior to the Change in Control; 21 (VI) the failure by the Company to continue to provide the Executive with benefits substantially similar to those enjoyed by the Executive under any of the Company's pension, savings, life insurance, medical, health and accident, or disability plans in which the Executive was participating immediately prior to the Change in Control, the taking of any action by the Company which would directly or indirectly materially reduce any of such benefits or deprive the Executive of any material fringe benefit enjoyed by the Executive at the time of the Change in Control, or the failure by the Company to provide the Executive with the number of paid vacation days to which the Executive is entitled on the basis of years of service with the Company in accordance with the Company's normal vacation policy in effect at the time of the Change in Control; or (VII) any purported termination of the Executive's employment which is not effected pursuant to a Notice of Termination satisfying the requirements of Section 7.1 hereof; for purposes of this Agreement, no such purported termination shall be effective.The Executive's right to terminate the Executive's employment for Good Reason shall not be affected by the Executive's incapacity due to physical or mental illness. The Executive's continued employment shall not constitute consent to, or a waiver of rights with respect to, any act or failure to act constituting Good Reason hereunder. For purposes of any determination regarding the existence of Good Reason, any claim by the Executive that Good Reason exists shall be presumed to be correct unless the Company establishes to the Committee by clear and convincing evidence that Good Reason does not exist. (Q) "Notice of Termination" shall have the meaning set forth in Section 7.1 hereof. 22 (R) "Pension Plan" shall mean any tax-qualified, supplemental or excess benefit pension plan maintained by the Company and any other plan or agreement entered into between the Executive and the Company which is designed to provide the Executive with supplemental retirement benefits. (S) "Person" shall have the meaning given in Section 3(a)(9) of the Exchange Act, as modified and used in Sections 13(d) and 14(d) thereof, except that such term shall not include (i) the Company or any of its subsidiaries, (ii) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any of its Affiliates, (iii) an underwriter temporarily holding securities pursuant to an offering of such securities, (iv) a corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company or (v) any descendant of Joseph Stone, the spouse of any such descendant, the estate of any such descendant or spouse, any trust or any other arrangement for the benefit of any such descendant or any such spouse or any charitable organization established by any such descendant or any such spouse. (T) "Potential Change in Control" shall be deemed to have occurred if the event set forth in any one of the following paragraphs shall have occurred: (I) the Company enters into an agreement, the consummation of which would result in the occurrence of a Change in Control; (II) the Company or any Person publicly announces an intention to take or to consider taking actions which, if consummated, would constitute a Change in Control; (III) any Person becomes the Beneficial Owner, directly or indirectly, of securities of the Company representing 10% or more of either the then outstanding shares of common stock of the Company or the combined voting power of the Company's then outstanding securities (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or its affiliates); or 23 (IV) the Board adopts a resolution to the effect that, for purposes of this Agreement, a Potential Change in Control has occurred. (U) "Retirement" shall be deemed the reason for the termination by the Company or the Executive of the Executive's employment if such employment is terminated in accordance with the Company's retirement policy, including early retirement, generally applicable to its salaried employees, as in effect immediately prior to the Change in Control, or in accordance with any retirement arrangement established with the Executive's express written consent with respect to the Executive. (V) "Severance Payments" shall mean those payments described in Section 6.1 hereof. (W) "Term" shall mean the period of time described in Section 2 hereof (including any extension, continuation or termination described therein). (X) "Total Payments" shall mean those payments so described in Section 6.2 hereof. 24 STONE CONTAINER CORPORATION By: _______________________________________________________ Name: Thomas P. Cutilletta Title: Senior Vice President, Administration & Corporate Controller By: _______________________________________________________ [Signature] Name & Address: _________________________________________________ _________________________________________________ _________________________________________________ (Please print) 25 EX-11 6 EXHIBIT 11 EXHIBIT 11 STONE CONTAINER CORPORATION COMPUTATION OF PRIMARY AND FULLY DILUTED NET INCOME (LOSS) PER SHARE (in millions, except per share)
YEAR ENDED DECEMBER 31, ------------------------------- 1996 1995 1994 --------- --------- --------- PRIMARY EARNINGS PER SHARE - --------------------------------------------------------------------------------------- Shares of Common Stock: Weighted average number of common shares outstanding................................. 99.2 94.1 88.2 --------- --------- --------- Primary Weighted Average Shares Outstanding............................................ 99.2 94.1 88.2 --------- --------- --------- --------- --------- --------- Net Income (Loss)...................................................................... $ (126.2) $ 255.5 $ (204.6) Less: Series E Cumulative Convertible Exchangeable Preferred Stock dividend............ (8.1) (8.1) (8.1) Redemption premium on redeemable preferred stock of a consolidated affiliate...... -- -- (4.0) --------- --------- --------- Net income (loss) used in computing primary net income (loss) per common share......... $ (134.3) $ 247.4 $ (216.7) --------- --------- --------- --------- --------- --------- Primary Earnings Per Share............................................................. $ (1.35) $ 2.63 $ (2.46) --------- --------- --------- --------- --------- --------- FULLY DILUTED EARNINGS PER SHARE - --------------------------------------------------------------------------------------- Shares of Common Stock: Weighted average number of common shares outstanding................................. 99.2 94.1 88.2 Dilutive effect of options and warrants.............................................. -- -- .1 Addition from assumed conversion of 8.875% convertible senior subordinated notes..... 5.2 15.2 21.6 Addition from assumed conversion of 6.75% convertible subordinated debentures........ 1.3 2.0 3.4 Addition from assumed conversion of Series E Cumulative Convertible Exchangeable Preferred Stock.................................................................... 3.4 3.4 3.4 --------- --------- --------- Fully Diluted Weighted Average Shares Outstanding...................................... 109.1 114.7 116.7 --------- --------- --------- --------- --------- --------- Net Income (Loss)...................................................................... $ (126.2) $ 255.5 $ (204.6) Less: Series E Cumulative Convertible Exchangeable Preferred Stock dividend............ (8.1) (8.1) (8.1) Income adjustment associated with assumed conversion of Stone-Consolidated Corporation Corporation 8% convertible subordinated debentures................... -- (10.6) -- Redemption premium on redeemable preferred stock of a consolidated affiliate...... -- -- (4.0) Add back: Interest on 8.875% convertible senior subordinated notes..................... 3.2 9.5 13.5 Interest on 6.75% convertible subordinated debentures........................ 1.9 2.8 4.7 Income adjustment associated with assumed conversion of Stone-Consolidated Corporation 8% convertible subordinated debentures........................... -- -- 6.9 Series E Cumulative Convertible Exchangeable Preferred Stock dividend........ 8.1 8.1 8.1 --------- --------- --------- Net income (loss) used in computing fully diluted net income (loss) per common share... $ (121.1) $ 257.2 $ (183.5) --------- --------- --------- --------- --------- --------- Fully Diluted Earnings Per Share (A)................................................... $ (1.11) $ 2.24 $ (1.57) --------- --------- --------- --------- --------- ---------
- --------- (A) Fully diluted earnings per share for 1996 and 1994 are not disclosed in the consolidated financial statements because the amounts are anti-dilutive. 57 EX-12 7 EXHIBIT 12 EXHIBIT 12 STONE CONTAINER CORPORATION COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
Year ended December 31, ------------------------------------------------------ (IN MILLIONS) 1992 1993 1994 1995 1996 - ------------ -------- -------- -------- ------- -------- Income (loss) before extraordinary charges and cumulative effects of accounting changes. . . . . . . . . . $(169.9) $(319.2) $(128.8) $444.5 $(122.5) Income tax provision (credit). . . . . (59.4) (147.7) (35.5) 320.9 (66.0) Minority interest in consolidated subsidiaries. . . . . . . . . . . . . 5.3 3.6 1.2 29.3 (.6) Preferred stock dividend requirements of majority owned subsidiary. . . . . (4.7) (5.7) (9.4) -- -- Undistributed (earnings) loss of non- consolidated subsidiaries . . . . . . 6.0 13.3 9.1 (9.0) (48.6) Capitalized interest . . . . . . . . . (47.4) (10.8) (4.7) (13.2) (11.7) -------- -------- -------- ------- -------- (270.1) (466.5) (168.1) 772.5 (249.4) -------- -------- -------- ------- -------- -------- -------- -------- ------- -------- Fixed charges: Interest charges (expensed and capitalized), amortization of debt discount and debt fees on all indebtedness . . . . . . . . . . . . 433.5 437.5 460.7 473.5 425.2 Interest cost portion of rental expenses (33-1/3%) . . . . . . . . . 27.8 27.4 29.1 35.4 36.0 Preferred stock dividend requirements of majority owned subsidiary . . . . 4.7 5.7 9.4 -- -- -------- -------- -------- ------- -------- Total fixed charges 466.0 470.6 499.2 508.9 461.2 -------- -------- -------- ------- -------- -------- -------- -------- ------- -------- Earnings before income taxes, undistributed (earnings) loss of non-consolidated subsidiaries, minority interest and fixed charges (excluding capitalized interest). . . $ 195.9 $ 4.1 $ 331.1 $ 1,281.4 $ 211.8 -------- -------- -------- ------- -------- Ratio of earnings to fixed charges (D) (C) (B) 2.52 (A) -------- -------- -------- ------- -------- -------- -------- -------- ------- --------
(A) The Company's earnings for the year ended December 31, 1996 were insufficient to cover fixed charges by $249.4 million. (B) The Company's earnings for the year ended December 31, 1994 were insufficient to cover fixed charges by $168.1 million. Earnings for 1994 included a non-recurring pretax gain of $22.0 million relating to an involuntary conversion at the Company's Panama City, Florida pulp and paperboard mill. If such a nonrecurring event had not occurred, earnings would have been insufficient to cover the fixed charges by $190.1 million. (C) The Company's earnings for the year ended December 31, 1993 were insufficient to cover fixed charges by $466.5 million. Earnings for 1993 included a non-recurring pretax gain of $35.4 million from the sale of the Company's 49 percent equity interest in Empaques de Carton Titan, S.A. If such a non-recurring event had not occurred, earnings would have been insufficient to cover fixed charges by $501.9 million. (D) The Company's earnings for the year ended December 31, 1992 were insufficient to cover fixed charges by $270.1 million. EX-21 8 EXHIBIT 21 EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT Organized Under Percentage the Laws of Ownership ----------- --------- CONSOLIDATED SUBSIDIARIES: - -------------------------- A.H. Julius Rohde GmbH. . . . . . . . . . . . . . Germany 100% Apache Railway Corporation. . . . . . . . . . . . Arizona 100% Atlanta & Saint Andrews Bay Railroad Company. . . Florida 100% Baie Holdings Limited (NPL) . . . . . . . . . . . Canada 100% Cameo Container Corporation . . . . . . . . . . . Illinois 100% Cartomills, S.A.. . . . . . . . . . . . . . . . . Belgium 100% Cartomills France S.A.R.L.. . . . . . . . . . . . France 100% Cartonnages Robert Delubac S.A.R.L. . . . . . . . France 99.8% Cousins Leasing Corporation . . . . . . . . . . . New York 100% DST Design Service Team GmbH. . . . . . . . . . . Germany 100% Europa Carton AG. . . . . . . . . . . . . . . . . Germany 100% Europapel, S.A. . . . . . . . . . . . . . . . . . Spain 93.1% Eurotrend Gesellschaft Gmbh.. . . . . . . . . . . Germany 100% Fowler Specialty Packaging, Inc.. . . . . . . . . Delaware 100% Gamache Exploration & Mining Co. Ltd (NPL). . . . Canada 100% Graficarton, S.A. . . . . . . . . . . . . . . . . Spain 94.7% Grundstrucks-Verwaltungsgesellschaft Altona mbh . Germany 95% IFP Packungsgestaltung GmbH . . . . . . . . . . . Germany 100% IDENTITY Institute fur Corporate Design GmbH. . . Germany 100% Indonesian Container Investments Corporation. . . British Virgin Islands 100% Inversiones Stone de Argentina (BVI) Ltd. . . . . British Virgin Islands 100% Inversiones Stone de Chile (BVI) Ltd. . . . . . . British Virgin Islands 100% Leasing-Kontor Fur Investitionsguter GmbH . . . . Germany 100% Orangeburg Trucking, Inc. . . . . . . . . . . . . South Carolina 100% Oxford Holdings, Inc. . . . . . . . . . . . . . . Delaware 100% Societe Emballages des Cevennes, S.A. . . . . . . France 99.8% Societe Europeenne de Carton S.A.R.L. . . . . . . France 100% Southwest Forest Insurance Company, Ltd.. . . . . Bermuda 100% Speditions-Gesellschaft Visurgis mbh. . . . . . . Germany 100% SSJ Corporation . . . . . . . . . . . . . . . . . Delaware 100% Ston Forestal, S.A. . . . . . . . . . . . . . . . Costa Rica 100% Ston Forestal Panama S.A. . . . . . . . . . . . . Panama 100% Stone Communications Corporation. . . . . . . . . Delaware 100% Stone Connecticut Paperboard Properties, Inc. . . Delaware 100% Stone Container Administradora Argentina (BVI) Ltd. . . . . . . . . . . . British Virgin Islands 100% Stone Container Asia Corporation. . . . . . . . . Delaware 100% Stone Container Australia Pty., Ltd.. . . . . . . Australia 100% Stone Container (Canada) Inc. . . . . . . . . . . Canada 100% Stone Container (China) Corporation . . . . . . . British Virgin Islands 100% Stone Container de Mexico S.A. de C.V.. . . . . . Mexico 100% Stone Container Espana, S.A.. . . . . . . . . . . Spain 100% Stone Container Finance Company of Canada . . . . Nova Scotia 100% Stone Container GmbH. . . . . . . . . . . . . . . Germany 100% Organized Under Percentage the Laws of Ownership ----------- --------- CONSOLIDATED SUBSIDIARIES: - -------------------------- Stone Container International Corporation . . . . U.S. Virgin Islands 100% Stone Container Latin America Corporation . . . . Delaware 100% Stone Papers, Inc.. . . . . . . . . . . . . . . . Delaware 100% Stone Receivables Corporation . . . . . . . . . . Delaware 100% Stone/River House Australian Investments, Inc.. . Delaware 100% Stone Venepal (Celgar) Pulp Inc.. . . . . . . . . Canada 90% Stone-Ven Investments, Inc. . . . . . . . . . . . Delaware 100% Strong-Robinette Bag Company, Inc.. . . . . . . . Virginia 100% WWG Weser-Werstoff-Gesellschaft mbH . . . . . . . Germany 51% Wellpappenwerk Waren GmbH . . . . . . . . . . . . Germany 100% 2736551 Canada Inc. . . . . . . . . . . . . . . . Canada 100% NON-CONSOLIDATED ENTITIES: - ------------------------- Aspamill, Inc.. . . . . . . . . . . . . . . . . . Canada 45% Associated Paper Mills (Ontario) Limited. . . . . Canada 45% Bridgewater Paper Company Limited . . . . . . . . England 46.6% Bridgewater Paper Leasing Limited . . . . . . . . England 46.6% Bridgewater Newsprint Limited . . . . . . . . . . England 46.6% Cartonex Bernal S.A.. . . . . . . . . . . . . . . Argentina 50% Cartonex S.A. I.C.F.Y.F. . . . . . . . . . . . . Argentina 50% Corrupac S.A. . . . . . . . . . . . . . . . . . . Chile 50% Cartonnages MGC S.A.. . . . . . . . . . . . . . . France 50% Cheshire Recycling Limited. . . . . . . . . . . . England 46.6% Compagnie d'Estacades de La Cascapedia, Inc.. . . Canada 50% Compagnie de Flottage due St. Maurice Limitee . . Canada 36.3% Estrella de Osa S.A.. . . . . . . . . . . . . . . Costa Rica 49% Financiere Carton Papier. . . . . . . . . . . . . France 50% Florida Coast Paper Company, LLC. . . . . . . . . Delaware 50% Florida Coast Paper Corporation . . . . . . . . . Delaware 50% Florida Coast Paper Finance Corporation . . . . . Delaware 50% Florida Coast Paper Holding Company, LLC. . . . . Delaware 50% GfA-Gesellschaft fur Altpapier und Rohstoffe mbh. Germany 33.3% ICO Inc.. . . . . . . . . . . . . . . . . . . . . Canada 42% Indupa Vertriebgesellschaft mbh & Co. KG. . . . . Germany 50% Indupa Grundstucksgesellschaft mbh. . . . . . . . Germany 50% Interstate Packaging Corporation. . . . . . . . . New York 50% Laimbeer Packaging Company LLC. . . . . . . . . . Delaware 50% L & M Corrugated Container Corporation. . . . . . Illinois 50% MacMillan Bathurst. . . . . . . . . . . . . . . . Canada 50% MacMillan Bathurst Inc. . . . . . . . . . . . . . Canada 50% Mannkraft Corporation . . . . . . . . . . . . . . Pennsylvania 49% Maritime Containers Limited . . . . . . . . . . . Canada 35% ORPACK-Stone Corporation. . . . . . . . . . . . . Delaware 49% Paper Recycling International, L.P. . . . . . . . Delaware 50% Paroco Rohstoffverwertung GmbH. . . . . . . . . . Germany 49% Produits Forestiers Petit Paris Inc.. . . . . . . Canada 23.3% Rohstoffhandel Kiel GmbH. . . . . . . . . . . . . Germany 37.5% Rosenbloom Group Inc. . . . . . . . . . . . . . . Canada 45% Organized Under Percentage the Laws of Ownership ----------- --------- NON-CONSOLIDATED SUBSIDIARIES: - ------------------------------ S&G Packaging Company, LLC. . . . . . . . . . . . Delaware 65% Scieries Saugenay Limitee.. . . . . . . . . . . . Canada 23.3% Shanghai Stone Millennium Packaging and Paper Co. Ltd. . . . . . . . . . . . . . . . China 50% Stirling Fibre (Holdings) Limited . . . . . . . . England 46.6% Stirling Fibre Limited. . . . . . . . . . . . . . England 46.6% Stirling Recycling Limited. . . . . . . . . . . . England 46.6% Stone-Billerud S.A. . . . . . . . . . . . . . . . Switzerland 50% Stone-Consolidated Corporation. . . . . . . . . . Canada 46.6% Stone-Consolidated (Europe) S.A.. . . . . . . . . Belgium 46.6% Stone-Consolidated (US) Corporation . . . . . . . Delaware 46.6% Stone Container (Hong Kong) Limited . . . . . . . Hong Kong 50% Stone Container Japan Co., Ltd. . . . . . . . . . Japan 50% Tradepak Internacional S.A. de C.V. . . . . . . . Mexico 35.9% Tradepak International, Inc.. . . . . . . . . . . Delaware 35.9% Trans-Seal Corporation. . . . . . . . . . . . . . Japan 50% Venepal S.A.C.A.. . . . . . . . . . . . . . . . . Venezuela 19.7% Venepal-Stone Forestal, S.A.. . . . . . . . . . . Venezuela 49% Vertriebsgesellschaft Rohstoffhandel Kiel GmbH. . Germany 37.5% EX-23 9 EXHIBIT 23 EXHIBIT 23 Consent of Independent Accountants --------------------------------- We hereby consent to the incorporation by reference in the Prospectus constituting part of the Registration Statements on Form S-3 (Nos. 33-66086 and 333-20467) 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 10, 1997, except as to Note 2, which is as of February 14, 1997, appearing in 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 in this Form 10-K. PRICE WATERHOUSE LLP Chicago, Illinois March 24, 1997 58 EX-27 10 EXHIBIT 27
5 THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM STONE CONTAINER CORPORATION AND SUBSIDIARIES' DECEMBER 31, 1996 CONSOLIDATED BALANCE SHEET AND CONSOLIDATED OPERATIONS AND RETAINED EARNINGS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000,000 12-MOS DEC-31-1996 DEC-31-1996 113 0 597 24 742 1561 4939 2305 6354 889 3951 0 115 955 (275) 6354 5142 5142 4085 4996 (79) 0 414 (189) (66) (122) 0 (4) 0 (126) (1.35) (1.35)
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