ST. JOE FOREST PRODUCTS COMPANY--LINERBOARD MILL OPERATIONS
Independent Auditors' Report
Statement of Financial Position as of December 31, 1995
Statementof  Operations  for the period from January 1, 1996 to May 30,
1996 and for the years ended December 31, 1995 and 1994
Statementof Cash Flows for the period  from  January 1, 1996 to May 30,
1996 and for the years ended December 31, 1995 and 1994
Statementof Changes in Equity  for the period  from  January 1, 1996 to
May 30,  1996 and for the years  ended  December  31, 1995 and 1994
Notes to Financial Statements

FLORIDA COAST PAPER COMPANY, L.L.C.
Independent Auditors' Report
Balance Sheet as of December 31, 1996
Statementof  Operations  and  Changes in  Accumulated  Deficit  for the
period from May 30, 1996 to December 31, 1996
Statement of Cash Flows for the period from May 30, 1996 to December 31, 1996
Notes to Financial Statements

FLORIDA COAST PAPER FINANCE CORP.

Finance Corp. is a subsidiary of the Company that was  incorporated  in Delaware
for the purpose of serving as co- issuer of and to  facilitate  the  offering of
Florida Coast's 12 3/4% Series A First Mortgage Notes due 2003 (the "Old Notes")
and Florida Coast's  exchange of its Old Notes for its registered 12 3/4% Series
B First Mortgage  Notes due 2003.  Finance Corp.  does not have any  substantial
operations  or  assets  and  does  not have any  revenues;  thus,  the  separate
financial  statements of Finance  Corp.  have not been included in the financial
statements included herein.


<PAGE>

                          INDEPENDENT AUDITORS' REPORT


THE BOARD OF DIRECTORS
St. Joe Forest Products Company:

We have audited the  accompanying  statement  of  financial  position of St. Joe
Forest Products Company--Linerboard Mill Operations as of December 31, 1995, and
the related  statements of operations,  cash flows and changes in equity for the
period  from  January  1, 1996 to May 30,  1996 and for each of the years in the
two-year  period ended  December 31, 1995.  These  financial  statements are the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these financial statements based on our audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  Those standards require that we plan and perform 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.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion,  the financial  statements  referred to above present fairly, in
all  material  respects,  the  financial  position  of St. Joe  Forest  Products
Company--Linerboard  Mill Operations as of December 31, 1995, and the results of
its operations and its cash flows for the period from January 1, 1996 to May 30,
1996 and for each of the years in the two-year  period ended  December 31, 1995,
in conformity with generally accepted accounting principles.




                                             /s/ KPMG Peat Marwick LLP
                                             -------------------------
                                               KPMG Peat Marwick LLP


Jacksonville, Florida
March 20, 1997


<PAGE>

           ST. JOE FOREST PRODUCTS COMPANY--LINERBOARD MILL OPERATIONS

                         STATEMENT OF FINANCIAL POSITION

                             As of December 31, 1995
                             (dollars in thousands)


ASSETS
Current assets:
Accounts receivable .......................................             $  9,249
Inventories, net ..........................................               14,632
Other assets ..............................................                1,143
                                                                        --------
Total current assets ......................................               25,024

Property, plant and equipment, net ........................              169,424
                                                                        --------
Total assets ..............................................             $194,448
                                                                        ========

LIABILITIES AND EQUITY
Current liabilities:              
Accounts payable...........................................             $  7,746
Accrued liabilities .......................................                1,354
Accrued reserves ..........................................                2,056
                                                                        --------
Total current liabilities .................................               11,156

Accrued reserves ..........................................                2,379
Deferred income taxes .....................................               33,533
                                                                        --------
Total liabilities .........................................               47,088
                                                                        --------
Equity in net assets ......................................              147,360
                                                                        --------
Total liabilities and equities ............................             $194,448
                                                                        ========

See accompanying notes to financial statements.


                                      - 2 -

<PAGE>

           ST. JOE FOREST PRODUCTS COMPANY--LINERBOARD MILL OPERATIONS

                             STATEMENT OF OPERATIONS

           For the period from January 1, 1996 to May 30, 1996 and the
                     years ended December 31, 1995 and 1994
                             (dollars in thousands)
<TABLE>
<CAPTION>

                                                                             Period ended              Year ended December 31,
                                                                             ------------              -----------------------
                                                                             May 30, 1996            1995                  1994
                                                                             ------------            ----                  ----
                                                                  
<S>                                                                          <C>                   <C>                    <C>      
Net Sales ......................................................             $ 67,670              $ 239,165              $ 192,886
Cost of sales ..................................................               68,979                180,788                183,800
Selling, general and administrative expense ....................                1,409                  4,672                  3,077
                                                                             --------              ---------              ---------
Operating profit (loss) ........................................               (2,718)                53,705                  6,009

Other income:
Interest income ................................................                   --                    962                    383
Other, net .....................................................                  152                     95                    227
                                                                             --------              ---------              ---------
                                                                                  152                  1,057                    610
                                                                             --------              ---------              ---------
Income (loss) before income taxes ..............................               (2,566)                54,762                  6,619
Provision for income taxes:
Current ........................................................                 (753)                20,995                   (494)
Deferred .......................................................                 (198)                  (701)                 2,947
                                                                             --------              ---------              ---------
Total provision for income taxes ...............................                 (951)                20,294                  2,453
                                                                             --------              ---------              ---------
Net income (loss) ..............................................            $  (1,615)              $ 34,468              $   4,166
                                                                             ========              =========              =========
</TABLE>

See accompanying notes to financial statements.


                                      - 3 -

<PAGE>

           ST. JOE FOREST PRODUCTS COMPANY--LINERBOARD MILL OPERATIONS

                             STATEMENT OF CASH FLOWS

               For the period from January 1, 1996 to May 30, 1996
                 and the years ended December 31, 1995 and 1994
                             (Dollars in thousands)
<TABLE>
<CAPTION>

                                                                             Period ended                 Year ended December 31,
                                                                             ------------                 -----------------------
                                                                             May 30, 1996               1995                 1994
                                                                             ------------               ----                 ----
                                                             
CASH FLOWS FROM OPERATING ACTIVITIES:
<S>                                                                            <C>                   <C>                   <C>     
Net income (loss) ................................................             $ (1,615)             $ 34,468              $  4,166
Adjustments to reconcile net income (loss) to
     cash provided by operating activities:
         Depreciation ............................................               10,335                24,054                23,678
         Increase (decrease) in deferred
              income taxes .......................................                 (198)                 (701)                2,947
Changes in operating assets and liabilities:
     Accounts receivable .........................................                3,324                 3,043                (3,920)
     Inventories, net ............................................                  630                (2,524)                2,370
     Other assets ................................................                 (304)                  (78)                   (4)
     Accounts payable ............................................                  402                  (810)                  426
     Accrued liabilities .........................................                  820                   558                   333
     Accrued expenses and reserves ...............................                   --                 1,212                  (153)
                                                                               --------              --------              --------
Cash provided by operating activities ............................               13,394                59,222                29,843
                                                                               --------              --------              --------

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment .......................               (4,160)              (22,457)               (8,321)
Purchases of held to maturity investments ........................                   --                (8,850)               (3,951)
Proceeds from maturity of investments ............................                   --                 8,850                 3,951
                                                                               --------              --------              --------
Cash used in investing activities ................................               (4,160)              (22,457)               (8,321)
                                                                               --------              --------              --------

CASH FLOWS FROM FINANCING ACTIVITIES:
Change in intercompany accounts ..................................               (9,234)              (50,326)               (8,434)
                                                                               --------              --------              --------
Cash used in financing activities ................................               (9,234)              (50,326)               (8,434)
                                                                               --------              --------              --------

Net (decrease) increase in cash and cash
     equivalents .................................................                   --               (13,561)               13,088
Cash and cash equivalents at
     beginning of period .........................................                   --                13,561                   473
                                                                               --------              --------              --------
Cash and cash equivalents at end of period .......................             $     --              $     --              $ 13,561
                                                                               ========              ========              ========
</TABLE>

See accompanying notes to financial statements.


                                      - 4 -

<PAGE>

           ST. JOE FOREST PRODUCTS COMPANY--LINERBOARD MILL OPERATIONS

                         STATEMENT OF CHANGES IN EQUITY

               For the period from January 1, 1996 to May 30, 1996
                 and the years ended December 31, 1995 and 1994
                             (Dollars in thousands)
<TABLE>
<CAPTION>


                                                                             Period ended                 Year ended December 31,
                                                                             ------------                 -----------------------
                                                                             May 30, 1996               1995                 1994
                                                                             ------------               ----                 ----
<S>                                                                             <C>                  <C>                  <C>      
Common stock ........................................................           $      10            $      10            $      10
                                                                                =========            =========            =========

Additional paid in capital ..........................................           $  75,014            $  75,014            $  75,014
                                                                                =========            =========            =========

Retained earnings:
     Balance at beginning of year ...................................           $ 158,684            $ 124,216            $ 120,050
     Net income (loss) ..............................................              (1,615)              34,468                4,166
                                                                                ---------            ---------            ---------
     Balance at end of year .........................................           $ 157,069            $ 158,684            $ 124,216
                                                                                =========            =========            =========

Intercompany accounts:
     Balance at beginning of year ...................................           $ (86,348)           $ (36,022)           $ (27,588)
     Intercompany (sales) purchases:
         St. Joe Container Company ..................................             (36,834)            (126,410)             (97,691)
         St. Joseph Land and Development
              Company ...............................................              16,932               55,225               54,321
         Apalachicola Northern Railroad .............................               1,241                4,310                4,489
     Costs allocated from St. Joe Paper Company:
         Overhead allocation ........................................                 400                  960                  960
         Current income taxes .......................................                (753)              20,995                 (494)
     Net cash (transferred) received ................................               9,780               (5,406)              29,981
                                                                                ---------            ---------            ---------
     Balance at end of year .........................................           $ (95,582)           $ (86,348)           $ (36,022)
                                                                                =========            =========            =========
</TABLE>

See accompanying notes to financial statements.


                                      - 5 -

<PAGE>

           ST. JOE FOREST PRODUCTS COMPANY--LINERBOARD MILL OPERATIONS

                          NOTES TO FINANCIAL STATEMENTS

               For the period from January 1, 1996 to May 30, 1996
                 and the years ended December 31, 1995 and 1994
                             (Dollars in thousands)


(1)  Nature of Operations

St. Joe Forest Products  Company (SJFP) is engaged in the manufacture of mottled
white and unbleached  kraft  linerboard.  SJFP operates one production  facility
which is located in Port St. Joe, Florida.  Sales are primarily to manufacturers
of corrugated containers, both domestic and foreign.

(2)  Basis of Presentation

The  accompanying  financial  statements  include  all of the  relevant  assets,
liabilities, revenues and expenses attributable to the linerboard mill operation
of SJFP.  Certain of SJFP's  assets and  liabilities  were sold on May 30, 1996,
pursuant to the asset purchase  agreement  between St. Joe Paper Company (SJPC),
SJFP, St. Joe Container Company (SJCC), Florida Coast Paper Company,  L.L.C. and
Four M.  Corporation  dated  November 1, 1995.  The financial  statements do not
reflect SJFP's wholly owned subsidiaries.

(3)  Summary of Significant Accounting Policies

(a)  Estimates

The preparation of financial  statements in conformity  with generally  accepted
accounting principles requires management to make estimates and assumptions that
affect  the  reported  amounts  of assets  and  liabilities  and  disclosure  of
contingent  assets and  liabilities at the date of the financial  statements and
the  reported  amounts of revenues  and expenses  during the  reporting  period.
Actual results could differ from those estimates.

(b)  Revenue Recognition

Revenue from the sale of linerboard  is recognized  generally on delivery of the
product to the common carrier.

(c)  Cash and Cash Equivalents

For purposes of the statement of cash flows,  cash and cash equivalents  include
cash  on  hand,  bank  demand  accounts,   money  market  accounts,   remarketed
certificates  of  participation   and  repurchase   agreements  having  original
maturities of three months or less.

(d)  Inventories

Inventories  are stated at the lower of cost or market.  Costs for  manufactured
paper products and  associated  raw materials are determined  under the last-in,
first-out  (LIFO) method.  Costs for  substantially  all other  inventories  are
determined  under the first-in,  first-out  (FIFO) or the average cost method. A
reserve for  obsolescence  is established  for materials and supplies  having no
activity in the previous seven years.

(e)  Property, Plant and Equipment

Depreciation is computed using both  straight-line and accelerated  methods over
the useful lives of various assets.


                                      - 6 -

<PAGE>

(f)  Self-insurance

Self-insurance  reserves are  established  for  automobile  liability,  workers'
compensation,  group health insurance  provided to employees and property losses
based on claims filed and claims  incurred but not reported,  with a maximum per
occurrence of $25 for automobile liability, $600 for workers' compensation,  $50
for property loss,  other than windstorm,  and $250 for damage due to windstorm.
SJFP is insured for insurance costs in excess of these limits.

(g)  Income Taxes

SJFP's results of operations are included in the  consolidated  U.S. federal and
Florida  income  tax  returns  of SJPC.  The tax  provisions  and  deferred  tax
liabilities presented have been determined as if SJFP was a stand-alone business
filing  separate  returns,  except to the extent that an  operating  loss can be
utilized by SJPC, the benefit is allocated to SJFP.  Current tax liabilities are
paid to or refunded by SJPC.

SJFP follows the asset and liability  method of  accounting  for income taxes in
accordance  with  Statement of  Financial  Accounting  Standards  (SFAS) No. 109
"Accounting  for  Income  Taxes."  Under  SFAS  109,  deferred  tax  assets  and
liabilities  are  recognized  for the future tax  consequences  attributable  to
differences  between the financial statement carrying amounts of existing assets
and  liabilities  and their  respective  tax  bases.  Deferred  tax  assets  and
liabilities  are measured  using enacted tax rates  expected to apply to taxable
income in the years in which  those  temporary  differences  are  expected to be
recovered  or settled.  Under SFAS 109,  the effect on  deferred  tax assets and
liabilities  of a change in tax rates is recognized in income in the period that
includes the enactment date.

(4)      Inventories

Inventories as of December 31 consist of:

                                                                          1995
                                                                          ----

Manufactured paper products and associated raw materials.......         $  3,886
Materials and supplies.........................................           10,746
                                                                         -------
                                                                        $ 14,632


The replacement cost of manufactured  paper products and associated raw material
inventories  was in excess of LIFO  stated  cost by  approximately  $2,750 as of
December 31, 1995.  The reserve for  obsolescence  was  approximately  $2,100 at
December 31, 1995.

(5)  Property, Plant and Equipment

Property, plant and equipment, at cost, as of December 31 consist of:

                                                                  Estimated
                                                        1995      Useful Life
                                                        ----      -----------
                                                    
Land............................................   $       200            --
Land improvements...............................         4,123            20
Buildings.......................................        11,474            45
Machinery and equipment.........................       366,225         12-30
Office equipment................................           732            10
Autos and trucks................................           861           3-6
Construction                                             1,796            --
                                                    ----------
                                                       385,411
Accumulated depreciation........................       215,987
                                                     ---------
                                                     $ 169,424
                                                     =========


                                      - 7 -

<PAGE>

(6)      Income Taxes

Total  income tax expense  (benefit)  for the period from January 1, 1996 to May
30,  1996 and the year ended  December  31,  1995 and 1994 was  attributable  to
income (loss) from continuing  operations and was ($951),  $20,294,  and $2,453,
respectively.

Income tax expense  (benefit)  attributable  to income  (loss)  from  continuing
operations  differed from the amount computed by applying the statutory  federal
income tax rate to pre-tax income (loss) as a result of the following:
<TABLE>
<CAPTION>


                                                                               Period ended                 Year ended December 31,
                                                                               ------------                 -----------------------
                                                                               May 30, 1996               1995                 1994
                                                                               ------------               ----                 ----

<S>                                                                               <C>                    <C>                  <C>   
Tax at the statutory federal rate ..................................              $   (898)              $19,167              $2,317
State income taxes (net of federal benefit) ........................                   (53)                1,127                 136
                                                                                  --------               -------              ------
                                                                                  $   (951)              $20,294              $2,453
                                                                                  ========               =======              ======
</TABLE>

The tax effects of temporary  differences that give rise to significant portions
of deferred tax  liabilities  and deferred tax assets at December 31, 1995,  are
presented below:

                                                                        1995
                                                                        ----

Deferred tax liabilities:
   Property, plant and equipment, principally due to differences
       in depreciation............................................    $ 35,197
Deferred tax assets:
   Current:
       Accrued reserves...........................................         762
       Noncurrent:
       Accrued reserves...........................................       1,644
       Total deferred tax assets..................................       2,406
Net deferred tax liability........................................    $ 32,791
                                                                       =======

Based on the timing of reversal of future taxable  amounts and SJFP's history of
reporting  taxable  income,  SJFP  believes that the deferred tax assets will be
realized and a valuation  allowance  is not  considered  necessary.  The current
deferred tax asset of $762 is recorded in other assets as of December 31, 1995

(7)  Pension and Retirement Plans

Substantially  all of SJFP's  employees,  along with other SJPC and subsidiaries
eligible  employees,  participate  in SJPC pension  plans.  During the past four
years,  the assets of the SJPC pension plan have  exceeded  benefit  obligations
under such plans,  resulting  in pension  income  under SFAS No. 87  "Employers'
Accounting for Pensions."  SJPC has an Employee Stock  Ownership Plan (ESOP) for
the purpose of purchasing stock of SJPC for the benefit of qualified  employees.
Contributions  to the ESOP  are  limited  to .5% of  compensation  of  employees
covered  under the ESOP.  No assets of the SJPC pension plan or the ESOP will be
transferred  as a result of the  asset  purchase  agreement.  No  allocation  of
benefit or expense  from the pension  plans or ESOP has been made to SJFP during
the period from January 1, 1996 to May 30, 1996 and the years ended December 31,
1995 and 1994 due to immateriality.

SJPC also has other defined  contribution  plans which, in conjunction  with the
ESOP cover  substantially all its salaried  employees.  Contributions are at the
employees'  discretion  and are  matched  by SJPC up to certain  limits.  SJFP's
expense for these  defined  contribution  plans was $79,  $131 and $133 in 1996,
1995 and 1994 respectively.


                                      - 8 -

<PAGE>

Pursuant to the asset purchase agreement, the assets of the defined contribution
plans  attributable to transferred SJFP employees may be paid out immediately to
the  employee,  left in the plans or rolled  over into a  qualified  plan of the
buyer, if such plan exists.

(8)  Related Party Transactions

Intercompany  due to and  due  from  balances  between  SJFP  and  SJPC  and its
affiliates have been included in equity.  The net  intercompany  due to SJFP was
$86,348 at December 31, 1995. The intercompany  transactions described below may
or may not be  indicative  of what such  transactions  would  have been had SJFP
operated either as an unaffiliated entity or in affiliation with another entity.

An allocation  of costs of overhead of SJPC is included in selling,  general and
administrative  expenses.  SJPC provides  services for SJFP in treasury,  taxes,
benefits  administration  and legal  support  and other  financial  systems  and
support. SJPC's budgeted overhead was allocated based on a formula which equally
weighted  each  subsidiary's  proportional  share of  payroll,  sales  and fixed
assets.  This  formula  is  similar  to that  which  is used by many  states  to
determine the economic  activity of an entity and is considered by management to
be a reasonable  measure of the use of corporate  resources by each  subsidiary.
SJFP was billed  approximately  $400 for the period from  January 1, 1996 to May
30, 1996 and approximately $960 annually for such services in 1995 and 1994.

Sales to SJCC,  a wholly owned  subsidiary  of SJFP,  amounted to  approximately
$36,834,  $126,410 and $97,691 representing  approximately  78,000,  238,000 and
248,000  tons for the period  from  January 1, 1996 to May 30,  1996 and for the
years  ended  December  31,  1995 and  1994,  respectively.  Pricing  for  these
transactions  was  based  on the  Pulp &  Paper  Week  Price  Watch:  Paper  and
Paperboard.  In addition,  SJFP purchases both linerboard and corrugating medium
for SJCC from outside  suppliers.  The price paid by SJFP for this rollstock was
negotiated with each supplier. SJCC was charged for this rollstock at the prices
published in Pulp & Paper Week.

Purchases  of  pulpwood  and wood chips  from St.  Joseph  Land and  Development
Company, a wholly owned subsidiary of SJFP,  amounted to approximately  $16,932,
$55,225 and $54,321 representing  approximately 570,000, 2,033,000 and 2,028,000
tons for the period from January 1, 1996 to May 30, 1996 and for the years ended
December 31, 1995 and 1994, respectively.

SJFP ships the majority of its product via  Apalachicola  Northern  Railroad,  a
subsidiary of SJPC. Amounts billed for freight amounted to approximately $1,241,
$4,310 and $4,489 for the period  from  January 1, 1996 to May 30,  1996 and for
the years ended December 31, 1995 and 1994, respectively.

(9)  Contingencies

SJFP is involved in  litigation on a number of matters and is subject to certain
claims  which  arise in the normal  course of  business,  none of which,  in the
opinion of management,  is expected to have a material  adverse effect on SJFP's
financial position, liquidity, or results of operations.

SJFP has retained certain  self-insurance risks with respect to losses for third
party  liability,  property  damage  and  group  health  insurance  provided  to
employees.

SJFP is subject to costs  arising  out of  environmental  laws and  regulations,
which include  obligations to remove or limit the effects on the  environment of
the disposal or releases of certain wastes or substances at various sites. It is
SJFP's policy to accrue and charge against earnings  environmental cleanup costs
when it is  probable  that a  liability  has  been  incurred  and an  amount  is
reasonably  estimable.  As assessments and cleanups proceed,  these accruals are
reviewed  and  adjusted,  if  necessary,   as  additional   information  becomes
available.

SJFP is  currently  a party to, or  involved  in,  legal  proceedings  involving
environmental  matters such as alleged  discharges into water or soil. It is not
possible to quantify  future  environmental  costs because many issues relate to
actions by third parties or changes in environmental  regulation.  Environmental
liabilities are paid over an


                                      - 9 -

<PAGE>

extended  period and the timing of such  payments  cannot be predicted  with any
confidence.  Based on information presently available,  management believes that
the ultimate  disposition  of currently  known  matters will not have a material
effect on the financial position,  liquidity,  or results of operations of SJFP.
Aggregate  environmental  related  accruals  were  approximately  $1,000  as  of
December 31, 1995.

                                     - 10 -


<PAGE>

                        REPORT OF INDEPENDENT ACCOUNTANTS


TO THE MANAGEMENT OVERSIGHT COMMITTEE AND MEMBERS
OF FLORIDA COAST PAPER COMPANY, L.L.C.

In our opinion,  the  accompanying  balance sheet and the related  statements of
operations and changes in accumulated  deficit and of cash flows present fairly,
in all material respects, the financial position of Florida Coast Paper Company,
L.L.C.  (the  "Company") at December 31, 1996 and the results of its  operations
and its cash flows for the period  from May 30, 1996 to 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  9 to the  financial  statements,  all of the  Company's
linerboard production is purchased by the Company's owners at prices intended to
generate  sufficient  funds to cover the Company's  cash operating  costs,  cash
interest expenses and maintenance capital  expenditures.  As discussed in Note 3
to the financial  statements,  the  Company's  owners have agreed to continue to
make  supporting  payments to the  Company,  despite the  planned  cessation  of
production on April 1, 1997.

PRICE WATERHOUSE LLP

Chicago, Illinois
March 27, 1996


                                     - 11 -


<PAGE>

                       FLORIDA COAST PAPER COMPANY, L.L.C.

                                  BALANCE SHEET

                             As of December 31, 1996
                             (dollars in thousands)




ASSETS
Current assets:
   Cash and cash equivalents......................................... $   8,621
   Accounts receivable from Joint Venture Partners...................     8,643
   Other receivables.................................................       567
   Inventories.......................................................    13,185
   Other.............................................................       681
                                                                      ---------
       Total current assets..........................................    31,697
                                                                       --------
   Property, plant and equipment, net of accumulated depreciation....   184,946
   Deferred debt issuance costs......................................     7,825
   Other noncurrent assets...........................................       997
                                                                      ---------
       Total assets..................................................  $225,465
                                                                        -------

Current liabilities:
   Accounts payable.................................................. $  10,222
   Accrued liabilities...............................................     8,567
   Accrued interest..................................................     1,753
                                                                      ---------
       Total current liabilities.....................................    20,542
                                                                       --------

Long-term debt:
   Senior long-term debt.............................................   165,000
   Subordinated debt.................................................    10,791
   Other noncurrent liabilities......................................     3,076
   Commitments and contingencies (Note 10)........................... ---------
       Total liabilities.............................................   199,409
                                                                      ---------
Members' equity
   Contributed capital...............................................    40,000
   Accumulated deficit...............................................  (13,944)
                                                                     ---------
       Total members' equity.........................................    26,056
                                                                     ----------
Total liabilities and members' equity................................$  225,465
                                                                      =========

The accompanying notes are an integral part of these statements.


                                     - 12 -

<PAGE>

                       FLORIDA COAST PAPER COMPANY, L.L.C.

           STATEMENT OF OPERATIONS AND CHANGES IN ACCUMULATED DEFICIT

              For the period from May 30, 1996 to December 31, 1996
                             (dollars in thousands)


Net sales to Joint Venture Partners....................         $  103,365
Cost of sales..........................................            102,728
General, selling & administrative expense..............              1,545
                                                               -----------
   Operating loss......................................              (908)
                                                              -----------
Interest income........................................                510
Interest expense.......................................            (13,546)
                                                               ----------
   Other expense, net..................................            (13,036)
                                                               ----------
Loss before income taxes...............................            (13,944)
Provision for state income taxes.......................                 --
                                                             -------------
Net loss...............................................            (13,944)
Accumulated deficit, beginning of period...............                 --
                                                             -------------
Accumulated deficit, end of period.....................        $   (13,944)
                                                                ==========


The accompanying notes are an integral part of these financial statements.


                                     - 13 -

<PAGE>

                       FLORIDA COAST PAPER COMPANY, L.L.C.

                             STATEMENT OF CASH FLOWS

              For the period from May 30, 1996 to December 31, 1996
                             (dollars in thousands)
<TABLE>
<CAPTION>

CASH FLOWS FROM OPERATING ACTIVITIES:
<S>                                                                               <C>       
Net loss ......................................................................   $ (13,944)
Adjustments to reconcile net loss to net cash provided by operating activities:
   Depreciation ...............................................................       7,785
   Other non-cash items .......................................................       1,952
Changes in current assets and liabilities:
   Accounts receivable ........................................................      (3,403)
   Inventories ................................................................       1,153
   Other current assets .......................................................      (1,368)
   Accounts payable ...........................................................         788
   Accrued liabilities ........................................................       7,501
   Accrued interest ...........................................................       1,753
                                                                                  ---------
Net cash provided by operating activities .....................................       2,217
                                                                                  ---------

CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings ....................................................................     175,500
Debt repayments ...............................................................        (500)
Capital contribution from Joint Venture Partners ..............................      40,000
Payment of debt issuance costs ................................................      (8,250)
                                                                                  ---------
Net cash provided by financing activities .....................................   $ 206,750
                                                                                  ---------

CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ..........................................................      (3,932)
Payments made for business acquired ...........................................    (196,414)
                                                                                  ---------
Net cash used in investing activities .........................................    (200,346)
                                                                                  ---------

NET CASH FLOWS:
Net increase in cash and cash equivalents .....................................       8,621
Cash and cash equivalents, beginning of period ................................          --
                                                                                  ---------
Cash and cash equivalents, end of period ......................................   $   8,621
                                                                                  ---------
</TABLE>

See Note 4 regarding supplemental cash flow information.

The accompanying notes are an integral part of these financial statements.


                                     - 14 -

<PAGE>


                       FLORIDA COAST PAPER COMPANY, L.L.C.

                          NOTES TO FINANCIAL STATEMENTS
                                December 31, 1996

NOTE 1 -- NATURE OF OPERATIONS

Florida Coast Paper Company,  L.L.C.  (the "Company") was formed for the purpose
of purchasing a paperboard mill from St. Joe Forest Products Company ("St. Joe")
located in Port St. Joe,  Florida (the  "Mill").  The Company is a joint venture
between Stone Container Corporation ("Stone") and Four M Corporation  (together,
the "Joint Venture Partners"). The purchase, which occurred on May 30, 1996, was
accounted for under the purchase  method.  Accordingly,  the purchase  price was
allocated to the net assets acquired based on estimated fair values as supported
by various company analyses some of which are still pending. The Mill is engaged
in the manufacture of mottled white and unbleached  kraft  linerboard.  See also
Part I Item 1. Business--The Company.

NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Fiscal Year:

The Company utilizes a December 31 fiscal year end. The  accompanying  financial
statements are presented as of December 31, 1996 and for the period from May 30,
1996 to December 31, 1996 (the "1996 period").

Estimates:

The financial  statements  are prepared in conformity  with  generally  accepted
accounting principles that require the use of management  estimates.  Changes in
such estimates may affect amounts reported in future periods.

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 the  financial
statements.

Inventories:

Inventories are stated at the lower of cost or market.  Costs for  substantially
all inventories are determined using the average cost method.

Property, plant and equipment:

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.

Depreciation is provided on the  straight-line  method over the estimated useful
lives of depreciable assets based on the following annual rates:

Type of asset:                                                         Rates
-------------                                                    --------------
Machinery and equipment......................................        7% to 33%
Buildings....................................................            4%
Land improvements............................................            7%


                                     - 15 -

<PAGE>

In accordance with Statement of Financial Accounting Standards ("SFAS") No. 121,
"Accounting for the impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of", the  Company's  long-lived  assets are reviewed for  impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable.

Deferred debt issuance costs:

Deferred debt issuance costs are amortized over the expected life of the related
debt using the interest method.

Revenue recognition policy:

Revenues are recognized during the period in which such product is shipped.

Income taxes:

As a limited liability company, the Company's results of operations are included
in the U.S.  federal  income tax  returns  of the Joint  Venture  Partners.  The
Company has  provided a valuation  allowance  for all state net  operating  loss
carryforwards generated.

Insurance reserves:

The  Company  retains  portions  of  anticipated   losses  related  to  workers'
compensation and group medical.  Liabilities in excess of specified  amounts are
the  responsibility  of the  Company's  insurance  carriers.  Reserves have been
provided for the Company's loss retentions, based on experience and management's
best  estimate.  Changes in actual  experience  could cause these  estimates  to
change in the near term.

Concentration of credit risk

A significant  portion of the  Company's  accounts  receivable  are due from the
Joint Venture Partners. See Note 9 "Related party transactions."

NOTE 3 -- SUBSEQUENT EVENT

On March 5,  1997 the  Company  announced  that on April 1,  1997 it will  cease
production  at  the  Mill  until  market  conditions  warrant  a  resumption  of
linerboard  production.  Stone  and Four M, the  Joint  Venture  Partners,  have
committed to fund the Company's cash operating costs,  cash interest expense and
maintenance capital expenditures during the shutdown. The Company also has a $20
million Subordinated Credit Facility provided by its Joint Venture Partners.

NOTE 4 -- ADDITIONAL CASH FLOW STATEMENT INFORMATION

                                 (in thousands)
----------------------------------------------------------
Cash paid during the 1996 period for: interest............    $10,577
                                      income taxes........    $    --
                                                              ========


                                     - 16 -

<PAGE>

NOTE 5 -- INVENTORIES

Inventories as of December 31, 1996 are summarized as follows:
 
 (in thousands)                                                1996
---------------------------------------------              ------------
Raw materials................................              $      3,616
Supplies.....................................                     8,337
Finished goods and work in process...........                     1,232
                                                           ------------
   Total inventories.........................              $     13,185
                                                           ------------



NOTE 6 -- PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment as of December 31, 1996 is summarized as follows:

                                                                          
 (in thousands)                                                1996       
---------------------------------------------              ------------   
Land and land improvements................................ $     2,815
Buildings.................................................       7,564
Machinery and equipment...................................     181,177
Construction in progress..................................       1,175
                                                           -----------
   Total property, plant and equipment....................     192,731
Accumulated depreciation..................................     (7,785)
                                                           ----------
   Total property, plant and equipment, net............... $   184,946
                                                           -----------

NOTE 7-- LONG-TERM DEBT

Long-term debt at December 31, 1996 is summarized as follows:

                                                                          
 (in thousands)                                                1996       
---------------------------------------------              ------------   
Senior debt:
   12.75% First Mortgage Notes due June 1, 2003..........     $  165,000
Subordinated debt:
   13.25% Subordinated Seller Note due June 1, 2004......         10,791
   Subordinated Credit Facility..........................             --
                                                              ----------
Total subordinated debt..................................         10,791
                                                              ----------
Total long-term debt.....................................     $   175,791
                                                              ----------

The First  Mortgage  Notes (the  "Notes")  bear interest at a rate of 12.75% per
annum,  payable  semiannually on June 1 and December 1 of each year,  commencing
December 1, 1996.  The Company is not required to make any mandatory  redemption
or sinking fund payments with respect to the Notes prior to maturity.

Interest on the  Subordinated  Seller  Note (the  "Seller  Note") is  compounded
quarterly  and has been added to the  principal  of the Seller  Note rather than
being paid in cash.

In  connection  with the  acquisition  of the Mill  assets,  the  Joint  Venture
Partners have agreed to provide the Company with a $20 million subordinated line
of credit for general corporate purposes (the  "Subordinated  Credit Facility").
The  Subordinated  Credit Facility will expire 90 days after the maturity of the
Notes, and each loan made under the Subordinated  Credit Facility bears interest
at a rate equal to LIBOR,  plus 3.625% per annum.  At December 31,  1996,  there
were no borrowings outstanding under the Subordinated Credit Facility.


                                     - 17 -

<PAGE>

There are no amounts of long-term debt maturing during the next five years.

The  indenture  pursuant  to which the Notes have been issued  contains  certain
covenants  that,  among other things,  limit the ability of the Company to incur
additional  indebtedness,  make distributions,  create certain liens, enter into
certain transactions with affiliates,  sell assets or enter into certain mergers
and consolidations.

The Notes are secured by a first mortgage on all real property and  improvements
comprising the Company and a first priority  security  interest in substantially
all of the  equipment of the Company and certain  other  assets (but  excluding,
among other things, inventories and accounts receivable).

The Seller Note contains  certain  covenants none of which are more  restrictive
than those contained in the indenture.

The fair  value of the  Company's  debt,  based on the  quoted  market  price at
December 31, 1996, was $190,641.

NOTE 8 -- PENSIONS

The Company has  noncontributory  pension  plans for the benefit of all salaried
and hourly employees. The funding policy for the plans is to annually contribute
the statutory  required  minimum.  The salaried  pension plan provides  benefits
based on a formula  that takes into  account each  participant's  final  average
earnings.  The  hourly  pension  plan  provides  benefits  under a flat  benefit
formula.  The salaried and hourly  pension  plans provide  reduced  benefits for
early retirement.

Net pension expense for the combined  pension plans for the 1996 period includes
the following components:


 (in thousands)                                                    1996
-------------------------------------------------------         ------------
Service cost-- benefits earned during the period.......         $        442
Interest cost on projected benefit obligations.........                   75
                                                                -------------
Net pension expense....................................         $        517
                                                                -------------

The following table sets forth the funded status of the Company's  pension plans
and the amounts recorded in the Balance Sheet:

<TABLE>
<CAPTION>

                                                                              December 31,
 (in thousands)                                                                  1996
--------------------------------------------------------------------------       ----
Actuarial present value of benefit obligations:
<S>                                                                           <C>     
   Vested benefits ........................................................   $(1,835)
   Non-vested benefits ....................................................      (391)
                                                                              -------
Accumulated benefit obligation ............................................    (2,226)
Effect of increase in compensation levels .................................       (70)
                                                                              -------
Projected benefit obligation for service rendered through December 31, 1996    (2,296)
Plan assets at fair value .................................................        50
                                                                              -------
Excess of projected benefit obligation over plan assets ...................    (2,246)
Unrecognized net actuarial loss ...........................................       170
                                                                              -------
Net accrual ...............................................................   $(2,076)
                                                                              =======
</TABLE>

The weighted  average  discount rate used in determining  the actuarial  present
value of the projected benefit obligations at December 31, 1996 was 7.5 percent.
The rate of  increase in future  compensation  levels  used in  determining  the
actuarial  present value of the projected  benefit  obligations was 5.0 percent.
The expected long-term rate of return on assets was 8.5 percent.


                                     - 18 -


<PAGE>

NOTE 9 -- RELATED PARTY TRANSACTIONS

Pursuant to an Output Purchase Agreement, each of the Joint Venture Partners has
agreed to purchase  from the Company  one half of the Mill's  entire  linerboard
production  at a price  that is $25 per ton  below  the  price  of such  product
published  in Pulp & Paper Week,  an industry  trade  publication,  subject to a
minimum  purchase  price,  which minimum  purchase price is intended to generate
sufficient  funds to cover cash  operating  costs,  cash  interest  expense  and
maintenance  capital  expenditures.  During the 1996 period,  the Joint  Venture
Partners  were charged an  additional  $8.34  million as a result of the minimum
purchase  price  provisions  of the Output  Purchase  Agreement.  This amount is
included in Net Sales to Joint Venture  Partners in the Statement of Operations.
Furthermore, in addition to an initial investment of $40 million in the Company,
the Joint Venture  Partners have severally  agreed to provide the Company with a
$20 million Subordinated Credit Facility. See Note 7 "Long-term debt."

At  December  31,  1996,  the  Company had  receivables  from the Joint  Venture
Partners of approximately $8.6 million.

The Company has entered  into a  procurement  agreement  with Stone  pursuant to
which Stone will procure wood fiber, at market values, on behalf of the Company.

NOTE 10 -- COMMUNICATIONS AND CONTINGENCIES

The Company entered into a Wood Fiber Supply  Agreement (the "Fiber  Agreement")
with St. Joseph Land and Development  Company ("St. Joe Land") pursuant to which
St. Joe Land will supply a specified  quantity of pulpwood and wood chips to the
Company.  The Company and St. Joe Land are currently  determining  the impact of
the cessation of production on the Fiber Agreement.  See Note 3. The Company may
be required to make payments pursuant to the Fiber Agreement during the shutdown
period.

In  accordance  with the  provisions  of the WARN  Act,  in the  event  that the
shutdown of the  Company's  operations  exceeds  six months,  the Company may be
required to provide severance payments to its employees of up to 60 days of pay.

Pursuant to the Acquisition Agreement,  St. Joe Forest Products Company, St. Joe
Paper Company and St. Joe Container Company have agreed to indemnify the Company
for certain  environmental  matters based on  activities  prior to May 30, 1996.
However,  there can be no assurance that this indemnification will be sufficient
to reimburse the Company for all environmental liabilities.

The  Company  is  subject  to  costs  arising  out  of  environmental  laws  and
regulations  that  include  obligations  to remove or limit the  effects  on the
environment  of the  disposal  or  release of certain  wastes or  substances  at
various sites. It is the Company's  policy to accrue and charge against earnings
environmental  cleanup  costs  when it is  probable  that a  liability  has been
incurred and an amount is  reasonably  estimable.  As  assessments  and cleanups
proceed,  these accruals are reviewed and adjusted, if necessary,  as additional
information  becomes  available.  St. Joe previously  made  significant  capital
expenditures   to  comply  with  water,   air  and  solid  and  hazardous  waste
regulations. The Company expects to make significant expenditures in the future.
The Company's environmental capital expenditures were immaterial in 1996 and are
expected to approximate $600 thousand in 1997.

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  have  submitted  extensive  comments  to the EPA on the  proposed
regulations  in  support  of  the  position  that  requirements  under  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 approximately $87
million  (unaudited)  in  order  to meet the  requirements  of the  regulations,
although it is likely this  estimate  will  decrease  upon  finalization  of the
rules.  While it cannot be predicted  with  certainty,  it appears as though the
final cluster rules that


                                     - 19 -

<PAGE>

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 $27 million  (unaudited)  during the
period of 1998 through 2006 in order to meet the requirements of the anticipated
regulations.  If the Company determines to discontinue the production of mottled
white  linerboard,  the  Company  estimates  the  capital  spending  that may be
required  to  comply  with  the  anticipated  regulations  could  be $5  million
(unaudited)  (but  could  reach as high as $45  million  (unaudited)  under  the
currently   proposed   regulations).   The  ultimate  financial  impact  of  the
regulations on the Company cannot be accurately  estimated at this time but will
depend  on  the  nature  of  the  final  regulations,  the  timing  of  required
implementation and the cost and availability of new technology.  The Company may
determine  that,  under the final  regulations,  the costs  associated  with the
production of mottled white linerboard may be prohibitive and could  discontinue
its  production.  Because of the current higher margins  associated with mottled
white  linerboard,  in the event the  Company  discontinues  the  production  of
mottled white linerboard, its revenues and profit margins could decrease.

The Company may be subject to legal proceedings involving  environmental matters
such as alleged  discharges into water or soil.  Based on information  presently
available,  management  believes that the ultimate  disposition  of such matters
would  not  have  a  material  effect  on the  financial  position,  results  of
operations or liquidity of the Company.

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 11 -- QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

The following table summarizes quarterly financial data for 1996:

               (dollars in thousands)
               ----------------------
1996                 Second (1)    Third      Fourth
----                 -----------  ------     --------

Net sales .......    $14,279     $43,496     $45,590
Cost of sales ...     14,478      43,393      44,857
Net income (loss)     (2,138)     (5,365)     (6,441)

(1)  Includes one month of Florida Coast's results.


                                     - 20 -