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PROSPECTUS
$400,000,000
[LOGO]
JEFFERSON SMURFIT CORPORATION (U.S.)
$300,000,000 11 1/4% SERIES A SENIOR NOTES DUE 2004
$100,000,000 10 3/4% SERIES B SENIOR NOTES DUE 2002
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UNCONDITIONALLY GUARANTEED ON A SENIOR BASIS BY
JSCE, INC.
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INTEREST ON THE SERIES A SENIOR NOTES PAYABLE MAY 1 AND NOVEMBER 1
INTEREST ON THE SERIES B SENIOR NOTES PAYABLE MAY 1 AND NOVEMBER 1
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THE SERIES A SENIOR NOTES WILL BE REDEEMABLE AT THE OPTION OF JSC(U.S.), IN
WHOLE OR IN PART, ANY TIME ON OR AFTER MAY 1, 1999, INITIALLY AT 105.625% OF
THEIR PRINCIPAL AMOUNT, PLUS ACCRUED INTEREST, DECLINING TO 100% OF THEIR
PRINCIPAL AMOUNT, PLUS ACCRUED INTEREST, ON OR AFTER MAY 1, 2001. IN
ADDITION, JSC(U.S.) MAY REDEEM, AT ANY TIME PRIOR TO MAY 1, 1997, UP
TO $100 MILLION AGGREGATE PRINCIPAL AMOUNT OF THE SERIES A SENIOR
NOTES, AT A REDEMPTION PRICE OF 110% OF THEIR PRINCIPAL AMOUNT,
PLUS ACCRUED INTEREST, WITH THE NET CASH PROCEEDS FROM AN
ISSUANCE OF CAPITAL STOCK OF JSC(U.S.) OR JSCE OR ANY
PARENT OF JSC(U.S.) TO THE EXTENT THAT SUCH PROCEEDS
ARE CONTRIBUTED TO JSC(U.S.). THE SERIES B
SENIOR NOTES WILL NOT BE REDEEMABLE PRIOR TO
MATURITY.
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THE SERIES A SENIOR NOTES AND THE SERIES B SENIOR NOTES ARE SENIOR UNSECURED
OBLIGATIONS OF JSC(U.S.), AND THE GUARANTEES OF THE SERIES A SENIOR NOTES AND
THE SERIES B SENIOR NOTES ARE SENIOR UNSECURED OBLIGATIONS OF JSCE.
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SEE 'RISK FACTORS' FOR INFORMATION THAT SHOULD BE
CONSIDERED BY PROSPECTIVE INVESTORS.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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This Prospectus is to be used by Morgan Stanley & Co. Incorporated in
connection with offers and sales in market-making transactions at negotiated
prices related to prevailing market prices at the time of sale. Morgan Stanley &
Co. Incorporated may act as principal or agent in such transactions.
April 19, 1995
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ADDITIONAL INFORMATION
JSCE, Inc. ('JSCE') is a wholly-owned subsidiary of Jefferson Smurfit
Corporation (formerly SIBV/MS Holdings, Inc.) ('JSC'). On December 31, 1994,
Jefferson Smurfit Corporation (U.S.), a wholly-owned subsidiary of JSC ('Old
JSC(U.S.)'), merged (the 'Merger') into its wholly-owned subsidiary, Container
Corporation of America ('CCA'), with CCA surviving and changing its name to
Jefferson Smurfit Corporation (U.S.) ('JSC(U.S.)'). JSCE owns a 100% equity
interest in JSC(U.S.) and is the guarantor of JSC(U.S.)'s 11 1/4% Series A
Senior Notes due 2004 (the 'Series A Senior Notes') and 10 3/4% Series B Senior
Notes due 2002 (the 'Series B Senior Notes' and, together with the Series A
Senior Notes, the 'Senior Notes').
Old JSC(U.S.) and CCA have filed with the Securities and Exchange
Commission (the 'Commission') a Registration Statement (which term shall
encompass any amendment thereto) on Form S-2 under the Securities Act of 1933
(the 'Securities Act'), with respect to the Senior Notes and the related
guarantees thereof. This Prospectus does not contain all the information set
forth in the Registration Statement and the exhibits and schedules thereto, to
which reference is hereby made. Statements made in this Prospectus as to the
contents of any contract, agreement or other document referred to are not
necessarily complete. With respect to each such contract, agreement or other
document filed as an exhibit to the Registration Statement, reference is made to
the exhibit for a more complete description of the matter involved, and each
such statement shall be deemed qualified in its entirety by such reference.
JSC(U.S.) and JSCE are subject to the informational requirements of the
Securities Exchange Act of 1934 (the 'Exchange Act'), and in accordance
therewith are required to file reports and other information with the
Commission. The Registration Statement and the exhibits thereto filed by JSCE
and JSC(U.S.) with the Commission, as well as such reports and other information
filed by JSCE and JSC(U.S.) with the Commission, may be inspected and copied at
the public reference facilities maintained by the Commission at 450 Fifth
Street, N.W., Room 1024, Washington, D.C. 20549, and should also be available
for inspection and copying at the regional offices of the Commission located in
the Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661 and Seven World Trade Center, 13th Floor, New York, New York
10048. Copies of such material can also be obtained by mail from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549 at prescribed rates.
The respective indentures pursuant to which the Senior Notes were issued
require JSCE and JSC(U.S.) to file with the Commission annual reports containing
consolidated financial statements and the related report of independent public
accountants and quarterly reports containing unaudited condensed consolidated
financial statements for the first three quarters of each fiscal year for so
long as any Series A Senior Notes or Series B Senior Notes, as the case may be,
are outstanding.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents which have been filed with the Commission are
hereby incorporated by reference in this Prospectus:
(1) JSC(U.S.)'s Annual Report on Form 10-K for the fiscal year ended
December 31, 1994, filed with the Commission on March 7, 1995, and as
amended by Amendment No. 1 on Form 10-K/A, filed with the Commission on
March 8, 1995; and
(2) All other reports filed by JSC(U.S.) pursuant to Section 13(a) or
15(d) of the Exchange Act since December 31, 1994.
Any statement contained in a document incorporated by reference herein
shall be deemed to be modified or superseded for purposes of this Prospectus to
the extent that a statement contained herein or in any other subsequently filed
document which also is incorporated by reference herein modifies or supersedes
such statement. Any such statement so modified or superseded shall not be
deemed, except as so modified or superseded, to constitute a part of this
Prospectus.
Copies of all documents which are incorporated herein by reference (not
including the exhibits to such information, unless such exhibits are
specifically incorporated by reference in such information)
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will be provided without charge to each person, including any beneficial owner,
to whom this Prospectus is delivered, upon written or oral request. Copies of
this Prospectus, as amended or supplemented from time to time, and any other
documents (or parts of documents) that constitute part of the Prospectus under
Section 10(a) of the Securities Act will also be provided without charge to each
such person, upon written or oral request. Requests should be directed to
Jefferson Smurfit Corporation, Attention: Charles A. Hinrichs, 8182 Maryland
Avenue, St. Louis, Missouri 63105; telephone (314) 746-1100.
No action has been or will be taken in any jurisdiction by JSC(U.S.), JSCE
or by the Underwriter that would permit a public offering of the Senior Notes or
possession or distribution of this Prospectus in any jurisdiction where action
for that purpose is required, other than in the United States. Persons into
whose possession this Prospectus comes are required by JSC(U.S.), JSCE and the
Underwriter to inform themselves about and to observe any restrictions as to the
offering of the Senior Notes and the distribution of this Prospectus.
In this Prospectus, references to 'dollar' and '$' are to United States
dollars, and the terms 'United States' and 'U.S.' mean the United States of
America, its states, its territories, its possessions and all areas subject to
its jurisdiction. All tons referenced are short tons.
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TABLE OF CONTENTS
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PAGE
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Additional Information......................... 2
Incorporation of Certain Documents by
Reference.................................... 2
Prospectus Summary............................. 4
Risk Factors................................... 12
Recapitalization Plan.......................... 19
Capitalization................................. 22
Selected Historical Financial Data............. 23
Management's Discussion and Analysis
of Results of Operations and Financial
Condition.................................... 25
Business....................................... 31
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Management..................................... 49
Security Ownership of Certain Beneficial Owners
and Management............................... 59
Certain Transactions........................... 60
Description of Certain Indebtedness............ 64
Description of the Senior Notes................ 69
Certain Federal Income Tax Considerations...... 97
Market-Making Activities of MS&Co. ............ 97
Legal Matters.................................. 98
Experts........................................ 98
Index to Financial Statements.................. F-1
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PROSPECTUS SUMMARY
The following information is qualified in its entirety by the more detailed
information and the financial statements and notes thereto that appear elsewhere
in this Prospectus. The Senior Notes are obligations of JSC(U.S.),
unconditionally guaranteed on a senior basis by JSCE. As used in this
Prospectus, references to the 'Company' shall, as the context may require, refer
collectively to CCA and Jefferson Smurfit Corporation (U.S.) prior to the
Merger, or JSC, JSCE and JSC(U.S.). Capitalized terms not defined in this
Summary are defined elsewhere in this Prospectus.
THE COMPANY
The Company operates in two business segments. Paperboard/Packaging
Products and Newsprint. The Company believes it is one of the nation's largest
producers of paperboard and packaging products and is the largest producer of
recycled paperboard and recycled packaging products. In addition, the Company
believes it is one of the nation's largest producers of recycled newsprint.
The Company's Paperboard/Packaging Products segment includes a system of 16
paperboard mills that, in 1994, produced 1,932,000 tons of virgin and recycled
containerboard, 767,000 tons of coated and uncoated recycled boxboard and solid
bleached sulfate ('SBS') and 209,000 tons of recycled cylinderboard, which were
sold to the Company's own converting operations and to third parties. The
Company's converting operations consist of 52 corrugated container plants, 18
folding carton plants, and 20 industrial packaging plants located across the
country, with three plants located outside the U.S. In 1994, the Company's
container plants converted 2,018,000 tons of containerboard, an amount equal to
approximately 104.5% of the amount produced, its folding carton plants converted
543,000 tons of SBS, recycled boxboard and coated natural kraft, an amount equal
to approximately 70.8% of the amount of boxboard it produced, and its industrial
packaging plants converted 128,000 tons of recycled cylinderboard, an amount
equal to approximately 61.1% of the amount it produced. The Company's
Paperboard/Packaging Products segment contributed 92.0% of the Company's net
sales in 1994.
The Company's paperboard operations are supported by its reclamation
division, which processed or brokered 4.1 million tons of wastepaper in 1994,
and by its timber division which manages approximately one million acres of
owned or leased timberland located in close proximity to its virgin fibre mills.
The paperboard/packaging products operations also include 15 consumer packaging
plants.
The Company's Newsprint segment includes two newsprint mills in Oregon,
which produced 615,000 tons of recycled newsprint in 1994, and two facilities
that produce Cladwood'r', a construction material produced from newsprint and
wood by-products. The Company's newsprint mills are also supported by the
Company's reclamation division.
The predecessor to the Company was founded in 1974 when Jefferson Smurfit
Group plc ('JS Group'), a worldwide leader in the packaging products industry,
commenced operations in the United States by acquiring 40% of a small paperboard
and packaging products company. The remaining 60% of that company was acquired
in 1977, and in 1978 net sales were $42.9 million. The Company implemented a
strategy to build a fully integrated, broadly based, national packaging
business, primarily through acquisitions, including Alton Box Board Company in
1979, the paperboard and packaging divisions of Diamond International
Corporation in 1982, 80% of Smurfit Newsprint Corporation ('SNC') in 1986, and
50% of CCA in 1986. The Company financed its acquisitions by using leverage, and
in several cases, utilized joint venture financing whereby the Company
eventually obtained control of the acquired company. While no major acquisition
has been made since 1986, the Company has made 20 smaller acquisitions and
started up seven new facilities which had combined sales in 1994 of $323.2
million. JSC was formed in 1983 to consolidate the operations of the Company,
and today the Company ranks among the industry leaders in its two business
segments, Paperboard/Packaging Products and Newsprint. In 1994, the Company had
net sales of $3.2 billion, achieving a compound annual sales growth rate of
31.0% for the period since 1978.
The principal components of the Company's business strategy include the
following:
Maintain Focus on Recycled Products. The Company believes that it is
the largest processor of wastepaper, the largest producer of coated
recycled paperboard, the largest producer of recycled medium and one
of the largest producers of recycled newsprint in the United
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States. The Company has historically utilized a significant amount of
recycled fibre in its products and has maintained a strategy to allow
it to supply all of the Company's recycled fibre needs for its paper
producing operations.
Focus on Cost Reduction. In 1993, the Company implemented a
company-wide cost reduction program designed to improve the cost
competitiveness of all the Company's operating facilities and staff
functions. Additionally, in 1993 the Company began a restructuring
program to improve the Company's long-term competitive position by,
among other things, realigning and consolidating various
manufacturing operations over the next two to three years. In
September 1993, the Company recorded pre-tax charges of $96 million
to implement its restructuring program.
Continue to Pursue Vertical Integration. The Company's integration
reduces the volatility of pricing for the Company's containerboard
products, allows the Company to run its mills at higher operating
rates during industry downturns and protects the Company from
potential regional supply and demand imbalances for recycled fibre
grades.
Continue Growth in Core Businesses. The Company intends to continue
its strategy of building its core Paperboard/Packaging Products
segment primarily by pursuing acquisitions and through capital
improvement programs.
Maintain Leading Market Positions. The Company's prominence in the
United States packaging industry provides the Company certain
advantages in marketing its products, including excellent customer
visibility and recognition as a quality producer, which has enabled
the Company to enter into strategic alliances with select large
national account customers. The Company's broad range of packaging
products provides a single source option to supply all of a
customer's packaging needs.
Improve Financial Profile. Since the 1989 recapitalization of JSC,
the Company has pursued a strategy designed to reduce its financial
risk profile. During this period, the Company has accessed various
capital markets through several transactions, resulting in improved
financial flexibility. The Recapitalization Plan (as defined below)
improved the Company's operating and financial flexibility by
reducing the level and overall cost of its debt, extending maturities
of indebtedness, increasing stockholders' equity and increasing its
access to capital markets. The Company intends to further improve its
balance sheet over the next few years through debt reduction.
All of the outstanding shares of capital stock of JSCE are owned by JSC.
Prior to the consummation of the Recapitalization Plan (as defined in
' -- Recapitalization Plan'), 50% of the common stock of JSC was owned directly,
and by an indirect subsidiary of, Smurfit International B.V. ('SIBV'), an
indirect wholly-owned subsidiary of JS Group, a public corporation organized
under the laws of the Republic of Ireland, 39.7% was beneficially owned by The
Morgan Stanley Leveraged Equity Fund II, L.P., a Delaware limited partnership
investment fund formed to make investments in industrial and other companies
('MSLEF II') and the other MSLEF II Associated Entities (as defined in 'Certain
Transactions -- General'), and 10.3% was beneficially owned by certain other
investors. MSLEF II is an affiliate of Morgan Stanley & Co. Incorporated
('MS&Co.'), the Underwriter.
Immediately after the consummation of the Recapitalization Plan, SIBV
beneficially owned approximately 46.5%, MSLEF II and the other MSLEF II
Associated Entities beneficially owned in the aggregate approximately 28.7%, and
all other stockholders (including public stockholders) beneficially owned
approximately 24.8% of the outstanding shares of common stock of JSC (after
giving effect to the Reclassification (as defined in 'Recapitalization Plan --
Reclassification and Related Transactions'), the 'JSC Common Stock'). See
'Security Ownership of Certain Beneficial Owners' and 'Certain Transactions'.
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The following chart illustrates the corporate structure of JSC, JSCE and
JSC(U.S.), and the indebtedness of such corporations following the consummation
of the Recapitalization Plan.
[GRAPHIC REPRESENTATION of the corporate structure and principal assets and
indebtedness of Jefferson Smurfit Corporation ('JSC'), JSCE, Inc. ('JSCE') and
Jefferson Smurfit Corporation (U.S.) ('JSC(U.S.)), illustrating that: (i) the
principal assets of JSC include 100% of the stock of JSCE, (ii) the principal
assets of JSCE include 100% of the stock of JSC(U.S.), (iii) the principal
assets of JSC(U.S.) include paper mills, converting facilities, timberland,
other operating assets and 80% of the stock of SNC, (iv) JSCE's indebtedness
consists of Senior Obligations* (Guarantees of JSC(U.S.) debt under the New
Revolving Credit Facility, Tranche A Term Loan, Tranche B Term Loan, Senior
Notes and 1993 Notes) and (v) JSC(U.S.)'s indebtedness consists of Senior
Obligations* (New Revolving Credit Facility, Tranche A Term Loan, Tranche B
Term Loan, Senior Notes and 1993 Notes) and other indebtedness**. The asterisks
relate to the two footnotes following the graphic representation.]
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* Includes those obligations (other than intercompany indebtedness) that rank
equally with each other senior obligation listed (except that certain of
such obligations, but not all, are secured).
** A limited-purpose subsidiary of the Company has certain borrowings pursuant
to the Company's accounts receivable securitization program. See 'Description
of Certain Indebtedness -- Securitization' and 'Management's Discussion and
Analysis of Results of Operations and Financial Condition -- Liquidity and
Capital Resources'.
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RECAPITALIZATION PLAN
In 1994 the Company implemented a recapitalization plan (the
'Recapitalization Plan') to repay or refinance a substantial portion of its
indebtedness in order to improve operating and financial flexibility by reducing
the level and overall cost of its debt, extending maturities of indebtedness,
increasing stockholders' equity and increasing its access to capital markets. On
a performance basis, giving effect to the Recapitalization Plan as if it had
occurred on January 1, 1994, the aggregate savings in interest expense for the
year ended December 31, 1994 would have been $47.9 million (of which $53.3
million represents cash interest expense, offset by increased deferred debt
amortization of $5.4 million), resulting in income before extraordinary items of
$42.0 million and a loss of $15.1 million for 1994.
The Recapitalization Plan included the following primary components:
(i) (a) The offering (the 'Debt Offerings') by JSC(U.S.) pursuant
to this Prospectus of $300 million aggregate principal amount of
Series A Senior Notes and $100 million aggregate principal amount
of Series B Senior Notes;
(b) The offering by JSC of 19,250,000 shares of JSC Common
Stock through an offering within the United States and Canada and
an offering outside the United States and Canada (the 'Equity
Offerings'). The Equity Offerings and the Debt Offerings are
collectively referred to herein as the '1994 Offerings';
(c) The purchase by SIBV of shares of JSC Common Stock for an
aggregate purchase price of $150 million (the 'SIBV Investment');
(d) The entering into of a new credit agreement by JSC(U.S.)
(the '1994 Credit Agreement') consisting of a $450 million
revolving credit facility (the 'New Revolving Credit Facility'), a
$900 million delayed term loan (the 'Tranche A Term Loan') and a
$300 million initial term loan (the 'Tranche B Term Loan' and,
together with the Tranche A Term Loan, the 'New Term Loans').
(ii) The application of the net proceeds of the Equity Offerings and
the SIBV Investment and a portion of the net proceeds of the Debt
Offerings, together with borrowings under the 1994 Credit Agreement, to
refinance (the 'Bank Debt Refinancing') all of the Company's indebtedness
outstanding under (a) the Second Amended and Restated Credit Agreement,
dated as of November 9, 1989, among the Company, the lenders which are
parties thereto, Bankers Trust Company as agent and Chemical Bank and Bank
of America National Trust and Savings Association as co-agents (the '1989
Credit Agreement'); (b) the Amended and Restated Note Purchase Agreement,
dated as of December 14, 1989, among the Company, and the purchasers of the
senior secured notes (the 'Secured Notes') issued thereunder (the 'Secured
Note Purchase Agreement'), and (c) the Loan and Note Purchase Agreement,
dated as of August 26, 1992, among the Company, the lenders which are party
thereto, Chemical Bank as agent and the managing agents and collateral
trustee which are party thereto (the '1992 Credit Agreement' and, together
with the 1989 Credit Agreement, the 'Old Bank Facilities').
(iii) The application, on December 1, 1994, of borrowings, including
borrowings under the 1994 Credit Agreement, used to redeem the Company's
(a) 13 1/2% Senior Subordinated Notes due 1999 (the 'Senior Subordinated
Notes'), (b) 14% Subordinated Debentures due 2001 (the 'Subordinated
Debentures') and (c) 15 1/2% Junior Subordinated Accrual Debentures due
2004 (the 'Junior Accrual Debentures' and, together with the Senior
Subordinated Notes and the Subordinated Debentures, the 'Subordinated
Debt'). Such redemption, including the payment of accrued and unpaid
interest on the Junior Accrual Debentures as of December 1, 1994, is herein
referred to as the 'Subordinated Debt Refinancing'.
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SOURCES AND USES
The following table sets forth the sources and uses of funds which were
used to effect the Recapitalization Plan:
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($ MILLIONS)
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Sources of Funds
The Debt Offerings(a)................................................................. $ 400
The Equity Offerings(a)............................................................... 250
SIBV Investment....................................................................... 150
New Revolving Credit Facility(b)...................................................... 30
New Term Loans........................................................................ 1,200
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Total............................................................................ $2,030
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Uses of Funds
Prepayment of debt under Old Bank Facilities.......................................... $ 810
Prepayment of Secured Notes........................................................... 271
Redemption of Subordinated Debt(c).................................................... 844
Fees and expenses(d).................................................................. 105
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Total............................................................................ $2,030
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(a) Without deducting estimated underwriting discounts and commissions and
expenses.
(b) The amount shown is net of available cash. The maximum amount available
under such facility is $450 million, with up to $150 million of such amount
being available for letters of credit. At December 31, 1994, borrowings of
$43.0 million and letters of credit of $103.8 million were outstanding
under such facility. See also footnotes (a) and (c)
(c) Represents the outstanding principal amount and redemption premiums paid on
the Senior Subordinated Notes and the Subordinated Debentures, and the
estimated accreted value, including accrued and unpaid interest, of the
Junior Accrual Debentures as of December 1, 1994.
(d) Expenses include fees and expenses relating to the Bank Debt Refinancing,
commissions and underwriting discounts relating to the Debt Offerings and
the Equity Offerings, respectively, and reimbursement of certain fees and
expenses of SIBV incurred in connection with the Recapitalization Plan. See
'Certain Transactions -- Other Transactions'. There were no underwriting
discounts or commissions on the sale of JSC Common Stock pursuant to the
SIBV Investment.
The Company obtained certain consents and waivers which were necessary for it to
consummate the Recapitalization Plan, consisting, among others, of the consent
of (i) the holders of a majority in aggregate principal amount of JSC(U.S.)'s
9 3/4% Senior Notes due 2003 (the '1993 Notes') outstanding, (ii) 60% of the
holders of the outstanding aggregate principal amount of Secured Notes and (iii)
certain parties under the Company's $230 million 1991 trade receivables
securitization program (the '1991 Securitization') (collectively, the 'Consents
and Waivers'). For more information concerning the Consents and Waivers, see
'Recapitalization Plan -- Consents and Waivers'.
For more information concerning the Recapitalization Plan, see 'Recapitalization
Plan'.
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THE OFFERINGS
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Issuer.................................... Jefferson Smurfit Corporation (U.S.).
Securities Offered/Interest Rate.......... $300,000,000 aggregate principal amount of 11 1/4% Series A Senior
Notes due 2004 and $100,000,000 aggregate principal amount of 10 3/4%
Series B Senior Notes due 2002.
Interest Payment Dates.................... May 1 and November 1.
Maturity.................................. May 1, 2004 for the Series A Senior Notes and May 1, 2002 for the
Series B Senior Notes.
Redemption................................ The Series A Senior Notes may be redeemed at the option of JSC(U.S.),
in whole or in part, at any time on or after May 1, 1999, initially
at 105.625% of their principal amount and declining to 100% of such
principal amount on or after May 1, 2001, in each case plus accrued
interest. In addition, at the option of JSC(U.S.) at any time prior
to May 1, 1997, JSC(U.S.) may redeem up to $100 million aggregate
principal amount at maturity of the Series A Senior Notes with the
Net Cash Proceeds from the issuance of Capital Stock (other than
Redeemable Stock) of JSC(U.S.) or JSCE or any parent of JSC(U.S.) to
the extent that the proceeds are contributed to JSC(U.S.) or used to
acquire Capital Stock of JSC(U.S.) (other than Redeemable Stock) in a
single transaction or a series of related transactions (other than
the Equity Offerings or an issuance to a Subsidiary), at a redemption
price of 110% of the principal amount thereof, plus accrued interest.
The Series B Senior Notes will not be redeemable prior to maturity.
Ranking................................... The Senior Notes are senior unsecured obligations of JSC(U.S.) and
rank pari passu with the other senior indebtedness of JSC(U.S.),
including, without limitation, JSC(U.S.)'s obligations under the 1994
Credit Agreement and the 1993 Notes. JSC(U.S.)'s obligations under
the 1994 Credit Agreement, but not the Senior Notes or the 1993
Notes, are secured by liens on substantially all of the assets of
JSC(U.S.) and its subsidiaries with the exception of cash and cash
equivalents and trade receivables. As of December 31, 1994, JSC(U.S.)
had outstanding approximately $2,441.9 million of senior indebtedness
(excluding intercompany indebtedness), of which approximately
$1,534.5 million was secured indebtedness. The secured indebtedness
will have priority over the Senior Notes and the 1993 Notes with
respect to the assets securing such indebtedness. See 'Risk
Factors -- Effect of Secured Indebtedness on the Senior Notes;
Ranking'.
Covenants................................. The indentures pursuant to which the Senior Notes were issued (the
'Indentures') contain certain covenants that, among other things,
limit the ability of JSC(U.S.) and its subsidiaries to incur
indebtedness, pay dividends and make other restricted payments,
engage in transactions with shareholders and affiliates, issue
capital stock, create liens, sell assets, engage in sale-leaseback
transactions, allow the imposition of restrictions on the ability of
Restricted Subsidiaries to pay dividends to JSC(U.S.), engage in
mergers and consolidations and make investments in Unrestricted
Subsidiaries. The limitations imposed by the covenants on JSC(U.S.)
and its subsidiaries are subject to certain exceptions. See
'Description of the Senior Notes -- Covenants'.
Put Option................................ Upon a Change of Control, JSC(U.S.) will make an offer to purchase
the Senior Notes at a purchase price equal to 101% of the principal
amount thereof, plus accrued interest. Certain transactions with
affiliates of the Company may not constitute a Change of Control. See
'Description of the Senior Notes -- Covenants -- Repurchase of Senior
Notes upon Change of Control'.
Guarantees................................ The payment of principal and interest on the Senior Notes is
unconditionally guaranteed on a senior unsecured basis by JSCE. Such
guarantee ranks pari passu with the other senior
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indebtedness of JSCE, including, without limitation, JSCE's
guarantees of JSC(U.S.)'s obligations under the 1994 Credit
Agreement) and JSCE's guarantees of JSC(U.S.)'s obligations under the
1993 Notes. JSCE's guarantees under the 1994 Credit Agreement, but
not JSCE's guarantees of the Senior Notes or the 1993 Notes, are
secured by liens on substantially all the assets of JSCE and its
subsidiaries with the exception of cash and cash equivalents and
trade receivables. As of December 31, 1994, JSCE had outstanding
approximately $2,441.9 million of senior indebtedness (including
indebtedness of JSC(U.S.)'s other consolidated subsidiaries but
excluding intercompany indebtedness), of which approximately $1,534.5
million was secured indebtedness. The secured indebtedness will have
priority over JSCE's guarantees of the Senior Notes and the 1993
Notes with respect to the assets securing such indebtedness. See
'Risk Factors -- Effect of Secured Indebtedness on the Senior Notes;
Ranking'. In the event that (i) a purchaser of capital stock of
JSC(U.S.) acquires a majority of the voting rights thereunder or (ii)
there occurs a merger or consolidation of JSC(U.S.) that results in
JSC(U.S.) having a parent other than JSCE and, at the time of and
after giving effect to such transactions, such purchaser or parent
satisfies certain minimum net worth and cash flow requirements, JSCE
will be released from its guarantee of the Senior Notes. Such sale,
merger or consolidation will be prohibited unless certain other
requirements are met, including that the purchaser or the entity
surviving such a merger or consolidation expressly assumes
JSC(U.S.)'s or JSCE's obligations, as the case may be, and that no
Event of Default (as defined below) occur or be continuing. See
'Description of the Senior Notes -- Consolidation, Merger and Sale of
Assets'.
</TABLE>
For more complete information regarding the Senior Notes, see 'Description of
the Senior Notes'.
RISK FACTORS
For a discussion of certain factors that should be considered in evaluating
an investment in the Senior Notes, see 'Risk Factors'.
10
<PAGE>
SUMMARY FINANCIAL DATA
The summary historical financial data presented below were derived from the
consolidated financial statements of the Company included elsewhere herein and
should be read in conjunction with 'Selected Historical Financial Data',
'Management's Discussion and Analysis of Results of Operations and Financial
Condition' and the consolidated financial statements included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
HISTORICAL
--------------------------------
YEAR ENDED DECEMBER 31,
--------------------------------
1992 1993 1994(a)
-------- -------- --------
(IN MILLIONS, EXCEPT RATIOS
AND STATISTICAL DATA)
<S> <C> <C> <C>
OPERATING RESULTS:
Net sales................................................................................... $2,998.4 $2,947.6 $3,233.3
Restructuring and environmental and other charges........................................... 150.0
Income (loss) from operations............................................................... 271.6 (8.8) 290.9
Interest expense............................................................................ (300.1) (254.2) (268.5)
Income (loss) before extraordinary item and cumulative effect of accounting changes......... (34.0) (174.6) 12.3
Extraordinary item -- (loss) from early extinguishment of debt, net of income tax benefit... (49.8) (37.8) (55.4)
Cumulative effect of accounting changes..................................................... (16.5)
Net loss.................................................................................... (83.8) (228.9) (43.1)
Ratio of earnings to fixed charges(b)....................................................... (c) (c) 1.08
OTHER DATA:
Gross profit margin(d)...................................................................... 16.8% 12.9% 15.9%
Selling and administrative expenses as a percent of net sales............................... 7.7 8.1 6.9
EBITDA(e)................................................................................... $ 407.8 $ 274.2 $ 427.1
Ratio of EBITDA to interest expense......................................................... 1.36x 1.08x 1.59x
Property and timberland additions........................................................... $ 97.9 $ 117.4 $ 163.2
Depreciation, depletion and amortization.................................................... 134.9 130.8 131.6
BALANCE SHEET DATA (AT END OF PERIOD):
Working capital............................................................................. $ 105.7 $ 40.0 $ 10.5
Total assets................................................................................ 2,436.4 2,597.1 2,759.0
Long-term debt (excluding current maturities)............................................... 2,503.0 2,619.1 2,391.7
Stockholder's deficit....................................................................... (828.9) (1,057.8) (730.3)
STATISTICAL DATA:
Containerboard production (thousand tons)................................................... 1,918 1,840 1,932
Boxboard and SBS production (thousand tons) (f)............................................. 745 744 767
Newsprint production (thousand tons)........................................................ 615 615 615
Corrugated shipping containers
sold (thousand tons)...................................................................... 1,871 1,936 2,013
Folding cartons sold (thousand tons)........................................................ 487 475 486
Fibre reclaimed and brokered (thousand tons)................................................ 3,846 3,907 4,134
Timberland owned or leased (thousand acres)................................................. 978 984 985
</TABLE>
- ------------
(a) Had the Recapitalization occurred on January 1, 1994, interest expense for
the year ended December 31, 1994 would have been $220.6 million, resulting
in income before extraordinary item and cumulative effect of accounting
changes for the year ended December 31, 1994 of $42.0 million and a net
loss for the year ended December 31, 1994 of $15.1 million.
(b) For purposes of these calculations, earnings consist of income (loss)
before income taxes, equity in earnings (loss) of affiliates, minority
interests, extraordinary item and cumulative effect of accounting changes,
plus fixed charges. Fixed charges consist of interest on indebtedness,
amortization of deferred debt issuance costs and that portion of lease
rental expense considered to be representative of the interest factor
therein (deemed to be one-fourth of lease rental expense).
(c) For the years ended December 31, 1992 and 1993, earnings were inadequate to
cover fixed charges by $31.4 million and $264.2 million, respectively.
(d) Gross profit margin represents the excess of net sales over cost of goods
sold divided by net sales.
(e) EBITDA represents net income before interest expense, income taxes,
depreciation, depletion and amortization, equity in earnings (loss) of
affiliates, minority interests, extraordinary items and cumulative effect
of accounting changes and in 1993, restructuring and environmental and
other charges. The restructuring and environmental and other charges in
1993 included $43 million of asset writedowns and $107 million of future
cash expenditures. EBITDA is presented here, not as a measure of operating
results, but rather as a measure of the Company's debt service ability.
(f) Amounts shown for 1992 and 1993 exclude production from the Lockland, Ohio
boxboard mill that was closed in January 1994 as part of the Company's
Restructuring Program (see 'Management's Discussion and Analysis of Results
of Operations and Financial Condition').
11
<PAGE>
RISK FACTORS
In addition to the other information contained in this Prospectus, the
following factors should be considered carefully in evaluating an investment in
the securities offered by this Prospectus.
SUBSTANTIAL LEVERAGE
The Company has, on a consolidated basis, a substantial amount of debt. The
Company's long-term debt at December 31, 1994 was $2,391.7 million. The amount
of long-term indebtedness at such date on a historical basis is substantial
relative to the Company's stockholder's equity, which has been negative in
recent years due to the accounting treatment of the 1989 Transaction (as defined
in ' -- Recent Losses; Negative Stockholder's Equity') and recent net losses.
See ' -- Recent Losses; Negative Stockholder's Equity'. Although the
consummation of the Recapitalization Plan reduced the Company's consolidated
interest expense over the next several years, the Company will remain obligated
to make substantial interest payments on its indebtedness. See 'Description of
Certain Indebtedness'. For the year ended December 31, 1994, the Company's ratio
of earnings to fixed charges was 1.08 and, on a pro forma basis, giving effect
to the Recapitalization Plan as if it had occurred on January 1, 1994, would
have been 1.30. See 'Capitalization'.
ABILITY TO SERVICE DEBT
The Company generally expects to fund its and its subsidiaries' debt
service obligations, capital expenditures and working capital requirements
through funds generated from operations and additional borrowings under the New
Revolving Credit Facility. At December 31, 1994 the Company had in the aggregate
approximately $303.2 million in unused borrowing capacity under the New
Revolving Credit Facility. See 'Capitalization'. In February 1995, the Company
entered into a $315.0 million accounts receivable securitization program (the
'1995 Securitization') consisting of a $300.0 million receivables-backed
commercial paper program and a $15.0 million term loan. The proceeds of the 1995
Securitization were used to extinguish the Company's borrowings under the
Company's 1991 Securitization. See 'Management's Discussion and Analysis of
Results of Operations and Financial Condition -- Liquidity and Capital
Resources'.
The ability of the Company to meet its obligations and to comply with the
financial covenants contained in its indebtedness is largely dependent upon the
future performance of the Company, which will be subject to financial, business
and other factors affecting it. Many of these factors are beyond the Company's
control, such as the state of the economy, demand for and selling prices of its
products, costs of its raw materials and legislative factors and other factors
relating to its industry generally or to specific competitors. There can be no
assurance that the Company will generate sufficient cash flow to meet its
obligations under its indebtedness, which, as of December 31, 1994 includes
repayment obligations of $50.2 million in 1995, $349.8 million in 1996, $158.8
million in 1997, $164.6 million in 1998 and $174.7 million in 1999. If the
Company were unable to generate sufficient cash flow or otherwise obtain funds
necessary to make required payments on its indebtedness, or if the Company fails
to comply with the various covenants in such indebtedness, it would be in
default under the terms thereof, which would permit the lenders thereunder to
accelerate the maturity of such indebtedness and could cause defaults under
other indebtedness of the Company or result in a bankruptcy of the Company. See
'Management's Discussion and Analysis of Results of Operations and Financial
Condition -- Liquidity and Capital Resources' and 'Description of Certain
Indebtedness'. In addition, if a 'Change of Control' as defined in the 1994
Credit Agreement, the 1993 Notes or the Senior Notes is deemed to have occurred,
then the holders of such indebtedness shall have the right to be repaid 101% of
the principal amount of such indebtedness plus accrued and unpaid interest
thereon. See 'Description of Certain Indebtedness'. The occurrence of a 'Change
of Control' as so defined could also result in The Times Mirror Company having
certain rights under the shareholders agreement between the Company and The
Times Mirror Company. See 'Certain Transactions -- Other Transactions'.
Similarly, the exercises of such rights could also trigger cross-default or
cross-acceleration provisions, and lead to the bankruptcy of the Company.
12
<PAGE>
RESTRICTIVE COVENANTS
The limitations contained in the agreements relating to the Company's
indebtedness, together with its highly leveraged position, as well as various
provisions in the agreements relating to the governance of the Company,
including the Stockholders Agreement and the Registration Rights Agreement (each
as defined below), could limit the ability of the Company to effect future debt
or equity financings and may otherwise restrict corporate activities, including
its ability to avoid defaults and to respond to market conditions, to provide
for capital expenditures beyond those permitted or to take advantage of business
opportunities. If the Company cannot generate sufficient cash flow from
operations to meet its obligations, then its indebtedness might have to be
refinanced. There can be no assurance that any such refinancing could be
effected successfully or on terms that are acceptable to the Company. In the
absence of such refinancing, the Company could be forced to dispose of assets in
order to make up for any shortfall in the payments due on its indebtedness under
circumstances that might not be favorable to realizing the best price for such
assets. Moreover, the lenders under the 1994 Credit Agreement generally have a
prior right to the proceeds of asset sales and certain sales of securities by
the Company. Further, there can be no assurance that any assets could be sold
quickly enough, or for amounts sufficient, to enable the Company to make any
such payments.
RECENT LOSSES; NEGATIVE STOCKHOLDER'S EQUITY
Although the Company has consistently generated substantial income from
operations, it has experienced, primarily as a result of interest expense
resulting from high leverage (see ' -- Substantial Leverage'), net losses during
the industry downcycle of the early 1990's. The Company was unable to generate
enough income from operations to offset the significant interest expense
resulting from its high leverage and, as a result, the Company had net losses
for the fiscal years ended December 31, 1994, 1993 and 1992 (see 'Selected
Historical Financial Data'). The worldwide economic recovery which began in 1994
has resulted in improvements in demand for the Company's products, and
significant price increases have been implemented during the second half of 1994
and the beginning of 1995, particularly for containerboard, corrugated shipping
containers and newsprint, three of the Company's most important products. As a
result of the pricing improvements and the Company's cost reduction efforts (see
'Business -- Business Strategy' and 'Management's Discussion and Analysis of
Results of Operations and Financial Condition'), the Company had net income of
$5.8 million and $22.9 million in the third and fourth quarters of 1994,
respectively, compared to net losses of $116.7 million and $27.8 million,
respectively, for the same periods in 1993. The loss for the third quarter of
1993 included pre-tax charges of $96.0 million for the restructuring program and
$54.0 million for environmental and other charges.
The Company has had a deficit in stockholder's equity since 1989 when JSC
was organized to effect the acquisition of the publicly held shares of Old
JSC(U.S.) and the shares of CCA not then owned by Old JSC(U.S.), and the
recapitalization of such companies (the '1989 Transaction'), since such
transaction was treated as a recapitalization for financial accounting purposes.
On a historical basis, at December 31, 1994, the Company's stockholder's deficit
was $730.3 million. See 'Capitalization'.
EFFECT OF SECURED INDEBTEDNESS ON THE SENIOR NOTES; RANKING
The secured indebtedness will have priority over the Senior Notes with
respect to the assets securing such indebtedness. Although the Senior Notes (and
JSCE's guarantees thereof) rank pari passu with indebtedness outstanding under
the 1994 Credit Agreement (and the 1993 Notes), such bank debt (including all
guarantee obligations of JSCE in respect thereof) is secured by (i) a security
interest in substantially all of the assets, with the exception of cash and cash
equivalents and trade receivables, of JSC(U.S.) and its material subsidiaries
and (ii) a pledge of all of the capital stock of material subsidiaries of
JSC(U.S.). See 'Description of Certain Indebtedness -- The 1994 Credit
Agreement'. The Senior Notes and JSCE's guarantees thereof are unsecured and
therefore do not have the benefit of such collateral; that is, if an event of
default occurs under the 1994 Credit Agreement, the banks party thereto will
have a prior right to the Company's assets and may foreclose upon such
collateral to the exclusion of the holders of the Senior Notes, notwithstanding
the existence of an event of default with respect thereto. Accordingly, in such
an event the Company's assets would first be used to repay in full
13
<PAGE>
amounts outstanding under the 1994 Credit Agreement, resulting in a portion of
the Company's assets being unavailable to satisfy the claims of holders of
Senior Notes and other pari passu, unsecured indebtedness (including the 1993
Notes). As of December 31, 1994, the Company had $1,534.5 million of secured
indebtedness outstanding, including indebtedness under the 1994 Credit
Agreement.
Subsidiaries of the Company may also in the future own assets, incur
indebtedness and liabilities or guarantee senior indebtedness other than the
Senior Notes provided that, if the aggregate amount of indebtedness guaranteed
by any Restricted Subsidiary (as defined in the indentures relating to the
Senior Notes) of the Company (other than SNC) exceeds $50 million, then the
indentures relating to the Senior Notes and the 1993 Notes require such
subsidiary to also guarantee the Senior Notes and the 1993 Notes. Such
guarantees will, however, be unsecured, whereas the guarantees of the
indebtedness under the 1994 Credit Agreement will be secured. Consequently, the
Senior Notes to the extent not so guaranteed will be effectively subordinated to
claims of creditors of such subsidiaries, including, in the case of SNC and,
subject to the foregoing proviso, other subsidiary guarantors, the banks that
are party to the 1994 Credit Agreement. As a result of the foregoing, in an
event of default, holders of Senior Notes may recover less, ratably, than the
banks that are party to the 1994 Credit Agreement and other secured creditors of
the Company or its subsidiaries.
PAYMENTS DUE ON COMPANY INDEBTEDNESS PRIOR TO MATURITY OF SENIOR NOTES;
REFINANCING RISKS
An aggregate of approximately $2,107.1 million and $1,497.4 million of senior
indebtedness (excluding intercompany indebtedness) matures prior to the Series A
Senior Notes and the Series B Senior Notes, respectively. Accordingly, the
Company will have to refinance or otherwise generate sufficient cash to repay a
substantial amount of indebtedness prior to the time the Senior Notes mature.
The Company's ability to do this will depend, in part, on the Company's
financial condition at the time and the covenants and other provisions in its
debt agreements. In this regard, it should be noted that the Company's ability
to incur new indebtedness will be quite limited by the terms of its outstanding
indebtedness.
In February 1995, the Company entered into the $315.0 million 1995
Securitization consisting of a $300.0 million receivables-backed commercial
paper program and a $15.0 million term loan. The proceeds of the 1995
Securitization were used to extinguish the Company's borrowings under the 1991
Securitization.
PRICING
General. Most markets in which the Company competes are subject to
significant price fluctuations. The Company's sales and profitability have
historically been more sensitive to price changes than changes in volume, and
recent reductions in prices during 1991 through 1993 had an adverse impact on
the Company's results of operations. Although the Company has been successful in
implementing price increases in the second half of 1994 and the first quarter of
1995, future decreases in prices of the magnitude experienced in 1993 for the
Company's products would adversely affect its operating results, and coupled
with the highly leveraged financial position of the Company, would adversely
impact the Company's ability to respond to competition and to other market
conditions or to otherwise take advantage of business opportunities.
Containerboard. The imbalance of supply and demand experienced in 1991 and
1992 which resulted in lower prices and excess inventories for the
containerboard and corrugated shipping container products industry was corrected
in 1993. By the end of the third quarter of 1993, inventory levels had decreased
significantly and higher demand in 1994 was met by a restoration of operating
rates to generally high levels. As market conditions improved, the Company was
able to implement several price increases in 1994 totaling $125 per ton. By the
end of 1994, the price of linerboard had risen to $430 per ton and increased an
additional $50 per ton on January 1, 1995. The January 1, 1995 price of $480 per
ton for linerboard set a new record. An additional $50 per ton price increase
was implemented by the Company effective April 1, 1995. Price increases have
been implemented for corrugated shipping containers, corresponding with the
linerboard increases. See 'Business -- Industry Overview -- Paperboard'.
14
<PAGE>
Newsprint. Newsprint prices were discounted substantially from 1990 to 1994
due to supply and demand imbalances. During 1991 and 1992, new capacity of
approximately two million tons annually came on line, representing an
approximate 12% increase in supply. During the same period, U.S. consumption of
newsprint fell due to declines in readership and ad linage. As prices fell,
certain high cost, virgin paper machines, primarily in Canada, representing
approximately 1.2 million tons of annual production capacity, were shut down and
remained idle during 1994. Discounts continued to grow until May 1994, when
transaction prices for large customers were increased by $37 per ton.
Strengthening demand enabled the Company to implement additional price increases
in August and December of 1994, totaling $87 per ton. By the end of 1994,
transaction prices for large volume customers had risen to $500 per ton.
Newsprint prices were increased an additional $45 per ton on March 1, 1995 and
an additional $68 per ton increase has been announced by the Company effective
May 1, 1995. See 'Business -- Industry Overview -- Newsprint'.
COMPETITION
The paperboard and packaging products industries are highly competitive,
and no single company is dominant. The Company's competitors include large,
vertically integrated paperboard and packaging products companies and numerous
smaller companies. In recent years, there has been a trend toward consolidation
within the paperboard and packaging products industries, and the Company
believes that this trend is likely to continue. See 'Business -- Industry
Overview'. The primary competitive factors in the paperboard and packaging
products industries are price, design, quality and service, with varying
emphasis on these factors depending on the product line. To the extent that one
or more of the Company's competitors becomes more successful with respect to any
key competitive factor, the Company's business could be materially, adversely
affected. The market for the Newsprint segment is also highly competitive. See
'Business -- Competition'.
ENVIRONMENTAL MATTERS
Federal, state and local environmental requirements, particularly relating
to air and water quality, are a significant factor in the Company's business.
The Company faces potential environmental liability as a result of violations of
permit terms and similar authorizations that have occurred from time to time at
its facilities. In addition, the Company faces potential liability for 'response
costs' at various sites with respect to which the Company has received notice
that it may be a 'potentially responsible party' as well as for contamination of
certain Company-owned properties, under the Comprehensive Environmental
Response, Compensation and Liability Act, analogous state laws and other laws
concerning hazardous substance contamination. In 1993, the Company recorded a
pre-tax charge which included approximately $39 million related to environmental
matters, representing primarily asbestos and PCB removal, solid waste cleanup at
existing and former operating sites, and expenses for response costs at various
sites where the Company has received notice that it is a potentially responsible
party. During 1994, the Company incurred $6.1 million in cash expenditures
related to these environmental matters. While the Company believes that such
charges are adequate, there can be no assurance that actual expenditures
relating to such matters will not exceed such charges over the period covered
thereby. Similarly, while the Company believes it is currently in compliance
with all applicable environmental laws in all material respects and has budgeted
for future expenditures required to maintain such compliance, unforeseen
significant expenditures in connection with such compliance could have an
adverse effect on the Company's financial condition. See 'Management's
Discussion and Analysis of Results of Operations and Financial
Condition -- General -- Environmental Matters' and 'Business -- Environmental
Matters'.
POTENTIAL FRAUDULENT CONVEYANCE LIABILITY
Various laws enacted for the protection of creditors may have applied to
the Company's incurrence of indebtedness and the making of certain payments in
connection with the 1989 Transaction, debt under the 1989 Credit Agreement and
the Secured Notes, and Old JSC(U.S.)'s guarantees thereof. Such state and
federal fraudulent transfer laws may also apply to refinancings of such debt,
including the issuance by the Company of the 1993 Notes and the Senior Notes,
the entering into and incurrence of
15
<PAGE>
debt under the 1994 Credit Agreement, guarantees by the Company and its
subsidiaries thereof and the application of the proceeds thereof. If a court in
a lawsuit by an unpaid creditor or representative of creditors of the Company,
such as a trustee in bankruptcy or the Company as debtor in possession, were to
find that, at the time of the 1989 Transaction, the Company (a) was insolvent or
was rendered insolvent by reason of the 1989 Transaction or the indebtedness
incurred and payments made in connection therewith, (b) was engaged in a
business or transaction for which the assets remaining with the Company
constituted unreasonably small capital, (c) intended to, or believed that it
would, incur debts beyond its ability to pay as such debts matured or (d)
intended to hinder, delay or defraud its creditors, such court could, under
state or federal fraudulent transfer law, avoid the Senior Notes or such other
indebtedness (including under the 1993 Notes and the 1994 Credit Agreement) and
order that all payments made by the Company with respect thereto be returned to
it or to a fund for the benefit of its creditors. Such court could also
subordinate the Senior Notes or such other indebtedness (including under the
1993 Notes and the 1994 Credit Agreement) or the guarantees thereof to all
existing and future indebtedness of the Company. Such avoidance or subordination
would result in an event of default under the 1994 Credit Agreement.
The measure of insolvency for purposes of the foregoing would vary
depending upon the law of the jurisdiction being applied. Generally, however, a
company would be considered insolvent if the sum of such company's debts were
greater than all of such company's property at a fair valuation or if the
present fair saleable value of such company's assets were less than the amount
that would be required to pay its probable liability on its existing debts
(including contingent liabilities) as they become absolute and matured.
Accordingly, the Company does not believe that the fact that its liabilities
exceed the book value of its assets, as reflected on its balance sheet (which is
not based on fair saleable value or fair value), would be a significant factor
in any fraudulent conveyance analysis.
The Company believed at the time of the 1989 Transaction and continues to
believe today, that at the time of the 1989 Transaction, and after giving effect
thereto, the Company did not come within any of the clauses (a) through (d)
above and that therefore the incurrence of indebtedness under the Senior Notes
or such other indebtedness (including under the 1993 Notes and the 1994 Credit
Agreement) will not constitute fraudulent transfers. These beliefs were (and
are) based on management's analysis of, among other things, (i) internal cash
flow projections, (ii) the Company's historical financial information and (iii)
valuations of assets and liabilities of the Company. There can be no assurance,
however, that a court passing on such questions would agree with the Company's
analysis.
CONTROL BY PRINCIPAL STOCKHOLDERS
General. Since the completion of the Equity Offerings, SIBV, MSLEF II and
the MSLEF II Associated Entities, acting together have been, by reason of their
ownership of JSC Common Stock, be able to control the vote on all matters
submitted to a vote of holders of JSC Common Stock. In this regard, JSC, SIBV,
the MSLEF II Associated Entities and certain other entities have entered into a
Stockholders Agreement (the 'Stockholders Agreement'), which became effective as
of the completion of the Equity Offerings and which contains, among other
things, provisions for various corporate governance matters, including the
election as directors and the appointment as officers of certain designees of
SIBV or MSLEF II. Pursuant to the Stockholders Agreement, each of SIBV and MSLEF
II have the right to elect one-half of the Company's Board of Directors. See
'Management -- Provisions of Stockholders Agreement Pertaining to Management'
and 'Certain Transactions -- Stockholders Agreement'. The presence of SIBV and,
until they dispose of their shares (see below), the MSLEF II Associated
Entities, as controlling stockholders, is also likely to deter a potential
acquirer from making a tender offer or otherwise attempting to obtain control of
JSC, even if such events might be favorable to JSC's stockholders.
SIBV. SIBV, which owns its JSC Common Stock directly and through an
indirect wholly-owned subsidiary, is itself an indirect wholly-owned subsidiary
of JS Group, an international paperboard and packaging corporation organized
under the laws of the Republic of Ireland. JS Group is listed on the London and
Dublin Stock Exchanges and is the largest industrial corporation in Ireland. JS
Group and its subsidiaries have a number of operations similar to those of the
Company, although for the most part outside the United States other than their
newsprint operations. Accordingly, JS Group's interests with
16
<PAGE>
respect to various business decisions of JSC and the Company may conflict with
the interests of JSC and the Company. See 'Certain Transactions -- Stockholders
Agreement -- Transactions with Affiliates; Other Businesses'.
MSLEF II. As previously reported in JSC's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1994, representatives of MSLEF II have informed
the Company that they expect, subject to market and other conditions, to dispose
of MSLEF II's shares of JSC Common Stock through an underwritten offering, a
distribution to MSLEF II's partners, or otherwise, during 1995. No assurances
can be given whether or when disposal of any or all of such shares will occur.
Under the Stockholders Agreement, sales or other dispositions by the MS
Holders (as defined in the Stockholders Agreement and which term includes the
MSLEF II Associated Entities) (including distributions to the partners of MSLEF
II) could result in SIBV no longer being limited by such agreement to electing
only one-half of JSC's Board of Directors. In addition, such sales or other
dispositions could result in JSC and SIBV no longer being required to obtain the
approval of two directors who are designees of MSLEF II for JSC and the Company
to engage in certain activities, for which such approval is otherwise required
by the Stockholders Agreement. See 'Management -- Provisions of Stockholders
Agreement Pertaining to Management'. Furthermore, MSLEF II has the right at any
time to waive any of the provisions of the Stockholders Agreement, to agree to
the early termination thereof or to fail to exercise any of its rights
thereunder.
No Obligation to Invest. Although SIBV and the MSLEF II Associated Entities
have in the past made additional investments in JSC and the Company, they are
not obligated to do so in the future. Investors should not assume or expect that
either or both of such stockholders or their affiliates will invest additional
capital, whether in the form of debt or equity, in the future, particularly in
light of the intention of the MSLEF II Associated Entities to dispose of their
shares of JSC Common Stock and the fact that SIBV's ability to make such
investments is subject to limitations contained in agreements relating to
indebtedness of SIBV and its affiliates.
TAX NET OPERATING LOSS CARRYFORWARDS
As of December 31, 1994, the Company and the other members of its
consolidated group had aggregate net operating loss ('NOL') carryforwards of
approximately $460.5 million for federal income tax purposes. These
carryforwards, if not utilized to offset taxable income in future periods, will
expire at various times in 2005 through 2009.
If JSC experiences an 'ownership change' within the meaning of Section 382
of the Internal Revenue Code of 1986, as amended (the 'Code'), the Company's
ability to use NOL carryforwards existing at such time to offset its taxable
income, if any, generated in taxable periods after the ownership change would be
subject to an annual limitation (the 'Section 382 Limitation'). The amount of
NOL carryforwards which may be utilized on an annual basis following an
ownership change generally would be equal to the product of the value of the
outstanding stock of JSC immediately prior to the ownership change (reduced by
certain contributions to JSC's capital made in the two years prior to the
ownership change) multiplied by the 'long-term tax-exempt rate', which is
determined monthly and is 6.50% for April 1995.
Although the Company does not believe that JSC experienced an ownership
change upon or following consummation of the Equity Offerings, it is possible
that future events that are beyond the control of the Company and JSC (such as
transfers of JSC Common Stock by certain stockholders) or certain stock
issuances or other actions by JSC or the Company, could cause JSC to experience
an ownership change. By way of example and without limitation, a sale by MSLEF
II of a substantial amount of JSC Common Stock, when combined with prior owner
shifts in the three years preceding the sale by MSLEF II, would likely result in
an ownership change. As previously reported in JSC's Quarterly Report on Form
10-Q for the quarter ended September 30, 1994, representatives of MSLEF II have
informed the Company that they expect, subject to market and other conditions,
to dispose of MSLEF II's shares of JSC Common Stock through an underwritten
offering, a distribution to MSLEF II's partners, or otherwise, during 1995. No
assurances can be given whether or when disposal of any or all of such shares
will occur.
17
<PAGE>
If JSC experienced an ownership change at a time at which the value of JSC
Common Stock was equal to $16.125 per share (the closing price on March 31,
1995, as reported on the Nasdaq Stock Market) the Section 382 Limitation would
be approximately $84 million using a 'long-term tax exempt rate' of 6.50%.
Depending on the circumstances, such an ownership change could significantly
restrict the Company's ability to utilize NOLs existing at such time to offset
subsequent taxable income. Accordingly, due to uncertainty as to whether an
ownership change will occur in the future, prospective purchasers of Senior
Notes should not assume the unrestricted availability of currently existing or
future NOL carryforwards in making their investment decisions.
TERMS OF THE SENIOR NOTES
The indentures purusant to which the Senior Notes were issued contain
covenants that restrict, among other things, the ability of the Company and its
subsidiaries to incur indebtedness, pay dividends, engage in transactions with
stockholders and affiliates, issue capital stock, create liens, sell assets,
engage in mergers and consolidations and make investments in unrestricted
subsidiaries. The covenants are the result of negotiation among the Company and
the Underwriter, and although the covenants are generally designed to protect
the Senior Noteholders from actions that could result in significant credit
deterioration, the covenants (like covenants in other similar indebtedness) are
subject to various exceptions which are generally designed to allow the Company
to continue to operate its business without undue restraint and, therefore, are
not total prohibitions with respect to the proscribed activities. For example,
the Company could incur additional indebtedness that is secured or that is pari
passu with the Senior Notes in the future if it were able to satisfy the
financial ratios required by the covenant restricting debt issuance. For a
description of such exceptions, See 'Description of the Senior Notes'.
The terms of the Senior Notes generally can be amended or modified with the
consent of the holders of a majority in aggregate principal amount of Senior
Notes then outstanding. While certain provisions related primarily to payment
cannot be modified absent the consent of each holder affected thereby, such
majority approval extends to many significant matters, including, for example,
the waiver of an Event of Default.
TRADING MARKET FOR THE SENIOR NOTES
The Senior Notes are not listed for trading on any securities exchange or
on any automated dealer quotation system. MS&Co. currently makes a market in the
Senior Notes. However, MS&Co. is not obligated to make a market for the Senior
Notes and may discontinue or suspend such market-making at any time without
notice. Accordingly, no assurance can be given as to the liquidity of, or the
trading market for, the Senior Notes. Further, the liquidity of, and trading
market for, the Senior Notes may be adversely affected by declines and
volatility in the market for high yield securities generally as well as any
changes in the Company's financial performance or prospects.
18
<PAGE>
RECAPITALIZATION PLAN
In 1994 the Company implemented the Recapitalization Plan to repay or
refinance a substantial portion of its indebtedness in order to improve
operating and financial flexibility by reducing the level and overall cost of
its debt, extending maturities of indebtedness, increasing stockholders' equity
and increasing its access to capital markets. The Company implemented the
Recapitalization Plan at that time to take advantage of favorable conditions in
the capital markets. The Recapitalization Plan included the following primary
components in addition to others described below: (i) the Debt Offerings, (ii)
the Equity Offerings, (iii) the SIBV Investment, (iv) the Bank Debt Refinancing
and (v) the Subordinated Debt Refinancing.
SOURCES AND USES
The following table sets forth the sources and uses of funds used to effect
the Recapitalization Plan:
<TABLE>
<CAPTION>
($ MILLIONS)
<S> <C>
Sources of Funds
The Debt Offerings(a)............................................................. $ 400
The Equity Offerings(a)........................................................... 250
SIBV Investment................................................................... 150
New Revolving Credit Facility(b).................................................. 30
Tranche A Term Loan............................................................... 900
Tranche B Term Loan............................................................... 300
-------
Total........................................................................ $2,030
-------
-------
Uses of Funds
Prepayment of debt under 1989 Credit Agreement.................................... $ 609
Prepayment of debt under 1992 Credit Agreement.................................... 201
Prepayment of Secured Notes....................................................... 271
Redemption of Senior Subordinated Notes(c)........................................ 374
Redemption of Subordinated Debentures(c).......................................... 321
Redemption of Junior Accrual Debentures(d)........................................ 149
Fees and expenses(e).............................................................. 105
-------
Total........................................................................ $2,030
-------
-------
</TABLE>
- ------------
(a) Without deducting estimated underwriting discounts and commissions and
expenses.
(b) The amount shown is net of available cash. The maximum amount available
under such facility is $450 million, with up to $150 million of such amount
being available for letters of credit. At December 31, 1994 borrowings of
$43.0 million and letters of credit of approximately $103.8 million were
outstanding under such facility. See also footnotes (a) and (d).
(c) Represents the outstanding principal amount and redemption premiums paid
on such securities. Aggregate redemption premiums for the Senior
Subordinated Notes and the Subordinated Debentures were $24.0 million and
$21.0 million, respectively.
(d) Represents the estimated accreted value of the Junior Accrual Debentures
as of December 1, 1994, and includes accrued and unpaid interest payable
as of such date.
(e) Expenses include fees and expenses relating to the Bank Debt Refinancing,
commissions and underwriting discounts relating to the Debt Offerings and
the Equity Offerings, respectively, and reimbursement of certain fees and
expenses of SIBV incurred in connection with the Recapitalization Plan.
See 'Certain Transactions -- Other Transactions'. There were no
underwriting discounts or commissions on the sale of JSC Common Stock
pursuant to the SIBV Investment.
DEBT OFFERINGS
Concurrently with the Equity Offerings, JSC(U.S.) offered the Senior Notes
in the Debt Offerings. The Senior Notes are general unsecured obligations of
JSC(U.S.), guaranteed by JSCE, and rank pari passu in right of payment with all
other senior indebtedness of JSC(U.S.). For a description of certain terms of
the Senior Notes see 'Description of the Senior Notes'.
EQUITY OFFERINGS
Concurrently with the Debt Offerings, JSC offered 15,400,000 shares of JSC
Common Stock initially in the United States and Canada and 3,850,000 shares of
JSC Common Stock initially outside the United States and Canada.
19
<PAGE>
SALE OF STOCK TO SIBV
SIBV purchased from JSC pursuant to the SIBV Investment 11,538,462 shares
of JSC Common Stock for an aggregate purchase price of $150 million. JSC and
SIBV entered into a subscription agreement (the 'Subscription Agreement') which,
among other things, provides for the SIBV Investment. Following the consummation
of the Equity Offerings and the SIBV Investment, SIBV, directly and indirectly
through a wholly owned subsidiary, beneficially owned 46.5% of the outstanding
shares of JSC Common Stock. See 'Security Ownership of Certain Beneficial
Owners'. In addition, the Subscription Agreement provides that SIBV shall have
certain contractual preemptive rights which generally allow SIBV to maintain its
percentage ownership of JSC Common Stock.
BANK DEBT REFINANCING
As part of the Recapitalization Plan, the Company entered into the 1994
Credit Agreement. Substantially concurrently with the consummation of the 1994
Offerings, the Company used borrowings under the 1994 Credit Agreement, the net
proceeds of the Equity Offerings and the SIBV Investment and a portion of the
net proceeds of the Debt Offerings contributed to it by JSC, to refinance its
indebtedness outstanding under the Old Bank Facilities and Secured Notes. See
'Description of Certain Indebtedness -- The 1994 Credit Agreement'.
RECLASSIFICATION AND RELATED TRANSACTIONS
Prior to the consummation of the Equity Offerings, the capital stock of JSC
consisted of four classes of outstanding common stock (Class A, Class B, Class C
and Class D) and a fifth class of common stock (Class E) reserved for issuance
upon the exercise of outstanding options. Prior to the consummation of the
Equity Offerings, the only outstanding shares of voting stock of JSC were the
shares of Class A common stock (all outstanding shares of which were directly
and indirectly owned by SIBV) and Class B common stock (all outstanding shares
of which were owned by MSLEF II). Immediately prior to the consummation of the
Equity Offerings, a reclassification (the 'Reclassification') occurred, pursuant
to which JSC's five classes of common stock were converted into one class, on a
basis of ten shares of JSC Common Stock for each share of stock outstanding of
each of the old classes. Following the Reclassification, JSC's only class of
common stock was the JSC Common Stock, 80,200,000 shares of which were
outstanding immediately prior to the Equity Offerings and the SIBV Investment.
The Company, pursuant to the Substitution Transaction (as defined below),
merged Old JSC(U.S.) into CCA. Prior to the merger of Old JSC(U.S.) into CCA,
JSC interposed JSCE, a new wholly-owned subsidiary between it and Old JSC(U.S.),
which would own all of the capital stock of Old JSC(U.S.) prior to such merger,
and all of the capital stock of JSC(U.S.) after such merger. See 'Description of
Certain Indebtedness -- Substitution Transaction'.
STOCKHOLDERS AGREEMENT; CHARTER AND BY-LAW AMENDMENTS
Subsequent to the 1989 Transaction and prior to the Equity Offerings, the
Company operated pursuant to the terms of an organization agreement (the
'Organization Agreement'), which, among other things, provided for the election
of directors, the selection of officers and the day-to-day management of JSC and
the Company. In connection with the Recapitalization Plan, (i) the Organization
Agreement was terminated upon the closing of the Equity Offerings and, at such
time, the Stockholders Agreement among JSC, SIBV, the MSLEF II Associated
Entities and certain other entities, became effective and (ii) the certificates
of incorporation and by-laws of each of JSC, JSC(U.S.) and CCA were amended. See
'Management -- Directors', 'Management -- Provisions of Stockholders Agreement
Pertaining to Management' and 'Certain Transactions -- Stockholders Agreement'
for a description of the Stockholders Agreement.
20
<PAGE>
SUBORDINATED DEBT REFINANCING
On December 1, 1994, CCA used available proceeds of the Debt Offerings,
remaining borrowings under the Tranche A Term Loan and borrowings under the New
Revolving Credit Facility to effect the Subordinated Debt Refinancing, which
consisted of the redemption of the Senior Subordinated Notes, the Subordinated
Debentures and the Junior Accrual Debentures and the payment of accrued and
unpaid interest on the Junior Accrual Debentures as of December 1, 1994.
CONSENTS AND WAIVERS
The Company was required to obtain the Consents and Waivers under, among
other things, the Senior Notes, the Secured Notes and the 1991 Securitization in
order to consummate the Recapitalization Plan. The Company obtained the Consents
and Waivers.
21
<PAGE>
CAPITALIZATION
The following table sets forth the historical consolidated capitalization
of the Company as of December 31, 1994. This table should be read in conjunction
with the historical consolidated statements of operations and balance sheet of
the Company included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
DECEMBER 31,
1994
------------
(IN
MILLIONS)
<S> <C>
Short-term debt (represents current maturities of long-term debt).................................. $ 50.2
------------
Long-term debt:
New Revolving Credit Facility(a)(b)........................................................... $ 43.0
Tranche A Term Loan(a)........................................................................ 855.0
Tranche B Term Loan(a)........................................................................ 299.0
Senior Notes(c)............................................................................... 400.0
1993 Notes(d)................................................................................. 500.0
Securitization Loans.......................................................................... 217.2
Other senior indebtedness..................................................................... 77.5
------------
Total long-term debt.......................................................................... 2,391.7
------------
Minority interest in subsidiary.................................................................... 16.4
------------
Stockholder's deficit:
Additional paid-in capital and common stock................................................... 1,102.4
Retained deficit.............................................................................. (1,832.7)
------------
Total stockholder's deficit................................................................... (730.3)
------------
Total capitalization..................................................................... $ 1,677.8
------------
------------
</TABLE>
- ------------
(a) For further information about the New Revolving Credit Facility, the
Tranche A Term Loan and the Tranche B Term Loan, see 'Description of
Certain Indebtedness -- The 1994 Credit Agreement'.
(b) Represents funds utilized under such revolving credit facilities. The
maximum amount available under each of the New Revolving Credit Facility
(including the amount which was drawn down upon consummation of the
Recapitalization Plan) is $450 million (with up to $150 million of such
amount being available for letters of credit). At December 31, 1994
borrowings of $43.0 million and letters of credit of approximately $103.8
million were outstanding under the New Revolving Credit Facility.
(c) For further information about the Senior Notes, see 'Description of Senior
Notes'.
(d) For further information about the 1993 Notes, see 'Description of Certain
Indebtedness -- Terms of the 1993 Notes'.
22
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA
The following table sets forth selected consolidated financial data of the
Company as of and for the years ended December 31, 1990, 1991, 1992, 1993 and
1994.(a) This data should be read in conjunction with 'Management's Discussion
and Analysis of Results of Operations and Financial Condition' and the
consolidated financial statements of the Company and the related notes included
elsewhere in this Prospectus. The selected consolidated financial data of the
Company presented under the captions Operating Results and Balance Sheet Data,
with the exception of the ratio of earnings to fixed charges, were derived from
the consolidated financial statements of the Company, which were audited by
independent auditors.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------
1990 1991 1992 1993 1994(b)
-------- -------- -------- -------- --------
(IN MILLIONS, EXCEPT RATIOS AND STATISTICAL DATA)
<S> <C> <C> <C> <C> <C>
OPERATING RESULTS:
Net sales.............. $2,910.9 $2,940.1 $2,998.4 $2,947.6 $3,233.3
Cost of goods sold..... 2,294.2 2,407.3 2,495.4 2,567.2 2,718.7
Selling and
administrative
expenses............. 218.8 225.2 231.4 239.2 223.7
Restructuring charge... 96.0
Environmental and other
charges.............. 54.0
-------- -------- -------- -------- --------
Income (loss) from
operations........... 397.9 307.6 271.6 (8.8) 290.9
Interest expense....... (337.8) (335.2) (300.1) (254.2) (268.5)
Other, net(c).......... (2.9) (39.5) 4.5 5.4 6.3
-------- -------- -------- -------- --------
Income (loss) before
income taxes,
extraordinary item
and cumulative effect
of accounting
changes.............. 57.2 (67.1) (24.0) (257.6) 28.7
Provision for (benefit
from) income taxes... 35.4 10.0 10.0 (83.0) 16.4
-------- -------- -------- -------- --------
Income (loss) before
extraordinary item
and cumulative effect
of accounting
changes.............. 21.8 (77.1) (34.0) (174.6) 12.3
Extraordinary item:
Loss from early
extinguishment of
debt, net of income
tax benefit........ (49.8) (37.8) (55.4)
Cumulative effect of
accounting changes... (16.5)
-------- -------- -------- -------- --------
Net income (loss)...... $ 21.8 $ (77.1) $ (83.8) $ (228.9) $ (43.1)
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Ratio of earnings to
fixed charges(d)..... 1.17 (e) (e) (e) 1.08
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
OTHER DATA:
Gross profit
margin(f)............ 21.2% 18.1% 16.8% 12.9% 15.9%
Selling and
administrative
expenses as a percent
of net sales......... 7.5 7.7 7.7 8.1 6.9
EBITDA(g).............. $ 525.1 $ 440.9 $ 407.8 $ 274.2 $ 427.1
Ratio of EBITDA to
interest expense..... 1.55x 1.32x 1.36x 1.08x 1.59x
Property and timberland
additions............ $ 192.0 $ 118.9 $ 97.9 $ 117.4 $ 163.2
Depreciation, depletion
and amortization..... 122.6 130.0 134.9 130.8 131.6
BALANCE SHEET DATA (AT
END OF PERIOD):
Working capital........ $ 60.7 $ 76.9 $ 105.7 $ 40.0 $ 10.5
Property, plant and
equipment and
timberland, net...... 1,527.3 1,525.9 1,496.5 1,636.0 1,686.1
Total assets........... 2,447.9 2,460.1 2,436.4 2,597.1 2,759.0
Long-term debt
(excluding current
maturities).......... 2,636.7 2,650.4 2,503.0 2,619.1 2,391.7
Deferred income taxes
(excluding current
portion)............. 168.6 158.3 159.8 232.2 207.7
Stockholder's
deficit.............. (899.4) (976.9) (828.9) (1,057.8) (730.3)
STATISTICAL DATA:
Containerboard
production (thousand
tons)................ 1,797 1,830 1,918 1,840 1,932
Boxboard and SBS
production (thousand
tons)(h)............. 718 726 745 744 767
Newsprint production
(thousand tons)...... 623 614 615 615 615
Corrugated shipping
containers sold
(thousand tons)...... 1,655 1,768 1,871 1,936 2,013
Folding cartons sold
(thousand tons)...... 455 482 487 475 486
Fibre reclaimed and
brokered (thousand
tons)................ 3,547 3,666 3,846 3,907 4,134
Timberland owned or
leased (thousand
acres)............... 968 978 978 984 985
</TABLE>
(footnotes on next page)
23
<PAGE>
(footnotes from previous page)
(a) On April 18, 1995, the Company issued a press release reporting improved
sales and profits for the first quarter of 1995. For the three months ended
March 31, 1995, net sales increased 38% from $727.7 million to $1,001.1
million and income from operations increased 169% from $46.8 million to
$126.0 million. During the first quarter of 1995, the Company concluded the
refinancing of the 1991 Securitization. As a result of the refinancing and
utilization of excess cash, net long-term debt repayments were $45.0
million. In conjunction with the debt reduction, the Company recorded an
extraordinary loss from the early extinguishment of debt of $0.4 million.
Income before extraordinary item for the three months ended March 31, 1995
was $39.3 million compared to a loss of $11.8 million for the same period in
1994. Net income was $38.9 million for the three months ended March 31, 1995
compared to a net loss of $11.8 million during the comparable period in
1994.
(b) Had the Recapitalization occurred on January 1, 1994, interest expense for
the year ended December 31, 1994 would have been $220.6 million, resulting
in income before extraordinary item and cumulative effect of accounting
charges for the year ended December 31, 1994 of $42.0 million and a net loss
for the year ended December 31, 1994 of $15.1 million.
(c) Other, net includes equity in earnings (loss) of affiliates and in 1991,
includes after-tax charges of $29.3 million and $6.7 million for the write-
off of the Company's equity investments in Temboard and PCL, respectively.
(d) For purposes of these calculations, earnings consist of income (loss) before
income taxes, equity in earnings (loss) of affiliates, minority interests
and extraordinary item and cumulative effect of accounting changes, plus
fixed charges. Fixed charges consist of interest on indebtedness,
amortization of deferred debt issuance costs and that portion of lease
rental expense considered to be representative of the interest factor
therein (deemed to be one-fourth of lease rental expense).
(e) For the years ended December 31, 1991, 1992 and 1993, earnings were
inadequate to cover fixed charges by $26.7 million, $31.4 million and $264.2
million, respectively.
(f) Gross profit margin represents the excess of net sales over cost of goods
sold divided by net sales.
(g) EBITDA represents net income before interest expense, income taxes,
depreciation, depletion and amortization, equity in earnings (loss) of
affiliates, minority interests, extraordinary items and cumulative effect of
accounting changes and in 1993, a restructuring charge and environmental and
other charges. The restructuring and environmental and other charges in 1993
included $43 million of asset writedowns and $107 million of future cash
expenditures. EBITDA is presented here, not as a measure of operating
results, but rather as a measure of the Company's debt service ability.
(h) Amounts shown for 1990, 1991, 1992 and 1993 exclude production from the
Lockland, Ohio boxboard mill that was closed in January 1994 as part of the
Company's Restructuring Program (see 'Management's Discussion and Analysis
of Results of Operations and Financial Condition').
24
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The following discussion and analysis should be read in conjunction with
the selected historical financial data and the historical consolidated financial
statements of the Company. Except as otherwise indicated, the following
discussion relates solely to historical results.
GENERAL
INDUSTRY CONDITIONS
Markets for containerboard, corrugated shipping containers and newsprint,
three of the Company's most important products, are generally subject to
cyclical changes in the economy and changes in industry capacity, both of which
can significantly impact selling prices and the Company's profitability. The
sluggish U.S. economy in 1991, 1992 and 1993, coupled with a decline in export
markets, caused an imbalance of supply and demand, which resulted in excess
inventories and lower prices for these products. From the first quarter of 1991
through the third quarter of 1993, reported linerboard prices fell from
approximately $350 per ton to approximately $280 per ton. Similarly, newsprint
prices were depressed over the same period. As a result, profits of companies in
these industries, including profits of the Company, fell sharply in 1993.
Containerboard markets began to recover in late 1993 and, based on
increasing demand, a price increase was successfully implemented in the fourth
quarter of 1993. As the economy gained strength and export shipments increased
during 1994, demand for containerboard products improved. Excess inventories
were sold and additional price increases were rapidly implemented. By the end of
1994, the price of linerboard had risen to $430 per ton and increased an
additional $50 per ton on January 1, 1995. An additional price increase for
containerboard was implemented by the Company effective April 1, 1995. Demand
for newsprint improved in the second half of 1994 and price increases were
implemented by the Company in May, August and December of 1994, for a total
price increase of $124 per ton. An additional $45 per ton price increase was
implemented on newsprint on March 1, 1995 and an additional newsprint increase
has been announced by the Company effective May 1, 1995.
Prices for the Company's other products showed mixed performance for 1994.
Recycled boxboard prices were comparable to 1993, but SBS prices, although
rising in the second half of 1994, were 5% lower on average compared to last
year. Recycled cylinderboard prices were higher by approximately 8% compared to
last year.
As the economic recovery progressed, unprecedented demand for recycled
fibre caused shortages of this material and prices escalated at a dramatic rate
beginning in the second quarter of the year. While the effect of the reclaimed
fibre price increases is favorable to the Company's reclamation products
division, it is unfavorable to the Company overall because of the increase in
fibre cost to the paper mills that use reclaimed fibre. The Company believes
that its cost of fibre, a key raw material, will remain substantially higher
than in prior years, although it does not anticipate a problem satisfying its
need for this material in the foreseeable future.
With the exception of recycled fibre, the moderate level of inflation
during the past few years has not had a material impact on the Company's
financial position or operating results. The Company uses LIFO method of
accounting for approximately 80% of its inventories. Under this method, the cost
of products sold reported in the financial statements approximates current cost
and thus reduces the distortion in reported income due to increasing costs.
COST REDUCTION INITIATIVES
The cyclical downturn of the early 1990's led management to undertake
several major cost reduction initiatives. In 1991, the Company implemented an
austerity program to freeze staff levels, defer certain discretionary spending
programs and more aggressively manage capital expenditures and working capital
in order to conserve cash and reduce interest expense. While these measures
successfully reduced expenses and increased cash flow, the length and extent of
the industry downturn led the Company, in 1993, to initiate a new six year plan
to reduce costs, increase volume and improve product mix (the 'Cost Reduction
Initiatives').
25
<PAGE>
The Cost Reduction Initiatives include systematic Company-wide efforts
designed to improve the cost competitiveness of all the Company's operating
facilities and staff functions. In addition to increases in volume and
improvements in product mix resulting from less commodity oriented business at
its converting operations, the program focuses on opportunities to reduce costs
and other measures, including (i) productivity improvements, (ii) capital
projects which provide high returns and quick paybacks, (iii) reductions in the
purchase cost of materials, (iv) reductions in personnel costs and (v)
reductions in waste cost.
RESTRUCTURING PROGRAM
To further counteract the downturn in the industries in which the Company
operates, management examined its cost and operating structure and developed a
restructuring program (the 'Restructuring Program') to improve its long-term
competitive position. As a result of management's review, in September 1993, the
Company recorded a pre-tax charge of $96 million including a provision for
direct expenses associated with (i) plant closures (consisting primarily of
employee severance and termination benefits, lease termination costs and
environmental costs), (ii) asset write-downs (consisting primarily of write-off
of machinery no longer used in production and nonperforming machine upgrades),
(iii) employee severance and termination benefits for the elimination of
salaried and hourly personnel in operating and management realignment, and (iv)
relocation of employees and consolidation of plant operations.
The restructuring charge consisted of approximately $43 million for the
write-down of assets at closed facilities and other nonproductive assets and $53
million of anticipated cash expenditures. Approximately $23.9 million (45%) of
the cash expenditures were incurred through 1994, the majority of which related
to plant closure costs. The remaining cash expenditures will continue to be
funded through operations, a majority of which will be paid in 1995 and 1996, as
originally planned. Based on expenditures to date and those anticipated by the
original plan, no significant adjustment to the reserve balance is expected at
this time.
ENVIRONMENTAL MATTERS
In 1993, the Company recorded a provision of $54 million of which $39
million relates to environmental matters, representing asbestos and PCB removal,
solid waste cleanup at existing and former operating sites, and expenses for
response costs at various sites where the Company has received notice that it is
a potentially responsible party ('PRP'). During 1994, the Company incurred $6.1
million in cash expenditures related to these environmental matters. The
Company, as well as other companies in the industry, faces potential
environmental liability related to various sites at which wastes have allegedly
been deposited. The Company has received notice that it is or may be a PRP at a
number of federal and state sites (the 'Sites') where remedial action may be
required. Because the laws that govern the clean up of waste disposal sites have
been construed to authorize joint and several liability, government agencies or
other parties could seek to recover all response costs for any Site from any one
of the PRPs for such Site, including the Company, despite the involvement of
other PRPs. Although the Company is unable to estimate the aggregate response
costs in connection with the remediation of all Sites, if the Company were held
jointly and severally liable for all response costs at some or all of the Sites,
it would have a material adverse effect on the financial condition and results
of operations of the Company. However, joint and several liability generally has
not in the past been imposed on PRPs, and, based on such past practice, the
Company's past experience and the financial conditions of other PRPs with
respect to the Sites, the Company does not expect to be held jointly and
severally liable for all response costs at any Site. Liability at waste disposal
sites is typically shared with other PRPs and costs generally are allocated
according to relative volumes of waste deposited. At most Sites, the waste
attributed to the Company is a very small portion of the total waste deposited
at the Site (generally significantly less than 1%). There are approximately ten
Sites where final settlement has not been reached and where the Company's
potential liability is expected to exceed de minimis levels. Accordingly, the
Company believes that its estimated total probable liability for response costs
at the Sites was adequately reserved at December 31, 1994. Further, the estimate
takes into consideration the number of other PRPs at each site, the identity,
and financial position of such parties, in light of the joint and several nature
of the liability, but does not take into account possible insurance coverage or
other similar reimbursement.
26
<PAGE>
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
1994 1993 1992
--------------------- --------------------- ---------------------
<S> <C> <C> <C> <C> <C> <C>
OPERATING OPERATING OPERATING
NET PROFIT NET PROFIT NET PROFIT
SALES (LOSS) SALES (LOSS) SALES (LOSS)
-------- --------- -------- --------- -------- ---------
(IN MILLIONS)
Paperboard/Packaging Products............ $2,973.7 $ 310.9 $2,699.5 $ 16.5 $2,751.0 $ 284.6
Newsprint................................ 259.6 (16.5) 248.1 (21.4) 247.4 (10.3)
-------- --------- -------- --------- -------- ---------
Total............................... $3,233.3 $ 294.4 $2,947.6 $ (4.9) $2,998.4 $ 274.3
-------- --------- -------- --------- -------- ---------
-------- --------- -------- --------- -------- ---------
</TABLE>
1994 COMPARED TO 1993
Results for 1994 reflect the accelerating demand for the Company's
products. Net sales of $3.23 billion for 1994 set a record, up 9.7% compared to
1993. Increases/(decreases) in sales for each of the Company's segments are
shown in the chart below.
<TABLE>
<CAPTION>
1994 COMPARED TO 1993
-----------------------------------
<S> <C> <C> <C>
PAPERBOARD/
PACKAGING
PRODUCTS NEWSPRINT TOTAL
----------- --------- -------
(IN MILLIONS)
Increase (decrease) due to:
Sales price and product mix.................................... $ 183.8 $11.6 $ 195.4
Sales volume................................................... 199.5 (.1) 199.4
Acquisitions and new facilities................................ 5.3 5.3
Plant closings and asset distributions......................... (114.4) (114.4)
----------- --------- -------
Total net sales increase.................................. $ 274.2 $11.5 $ 285.7
----------- --------- -------
----------- --------- -------
</TABLE>
Net sales in the Paperboard/Packaging Products segment for 1994 increased
$274.2 million, up 10.2% compared to 1993, due to higher sales prices and
increased sales volume. Record sales volume was achieved for several major
products, including: containerboard up 3.8%; corrugated shipping containers up
4.7%; and reclamation products up 5.8%. Sales growth for this segment was
mitigated by the shutdown of several operating facilities in late 1993 and early
1994, including a coated recycled boxboard mill, five converting plants and two
reclamation products facilities, in connection with the Company's Restructuring
Program.
Net sales in the Newsprint segment for 1994 increased $11.5 million, up
4.6% compared to 1993, due primarily to higher sales prices in the second half
of the year.
Costs and expenses in both segments in 1994 were favorably impacted by the
Cost Reduction Initiatives begun in 1993 and by the Restructuring Program
(together, the 'Plans'). Cost of goods sold as a percent of net sales in the
Paperboard/Packaging Products segment declined from 85.6% in 1993 to 82.5% in
1994, primarily as a result of higher sales prices, improved capacity
utilization and other benefits associated with the Plans. Cost of goods sold as
a percent of net sales in the Newsprint segment improved modestly from 102.8% in
1993 to 102.2% in 1994, primarily as a result of higher sales prices. Selling
and administrative expenses in both segments in 1994 were also favorably
impacted by the Plans.
The Company increased its weighted average discount rate in measuring its
pension obligations from 7.6% to 8.5% and its rate of increase in compensation
levels from 4.0% to 5.0% at December 31, 1994. The net effect of changing these
assumptions was the primary reason for the decrease in projected benefit
obligations and the changes are expected to decrease pension cost in 1995 by
approximately $3.9 million.
Average debt levels outstanding decreased in 1994 as a result of the
Recapitalization discussed below; however, interest expense of $268.5 million
for 1994 increased 5.6% compared to 1993 due to the impact of higher effective
interest rates in 1994.
The tax provision for 1994 was $16.4 million compared to a tax benefit for
1993 of $83.0 million. The Company's effective tax rate for 1994 was higher than
the Federal statutory tax rate due to several factors, the most significant of
which was the effect of permanent differences between book and tax accounting.
27
<PAGE>
The Company recorded an extraordinary loss from the early extinguishment of
debt (net of income tax benefits) amounting to $55.4 million in 1994 and $37.8
million in 1993. The Company adopted Statement of Financial Accounting Standards
('SFAS') No. 112 'Employers' Accounting for Postemployment Benefits' in 1994,
the effect of which was not material.
1993 COMPARED TO 1992
The Company's net sales for 1993 decreased 1.7% to $2.95 billion compared
to $3.0 billion in 1992. Increases/(decreases) in each of the Company's segment
sales are shown in the chart below.
<TABLE>
<CAPTION>
1993 COMPARED TO 1992
----------------------------------
<S> <C> <C> <C>
PAPERBOARD/
PACKAGING
PRODUCTS NEWSPRINT TOTAL
----------- --------- ------
(IN MILLIONS)
Increase (decrease) due to:
Sales price and product mix..................................... $ (91.2) $(3.0) $(94.2)
Sales volume.................................................... 15.8 3.7 19.5
Acquisitions and new facilities................................. 34.9 34.9
Plant closings and asset distributions.......................... (11.0) (11.0)
----------- --------- ------
Total net sales increase (decrease)........................ $ (51.5) $ .7 $(50.8)
----------- --------- ------
----------- --------- ------
</TABLE>
Net sales decreased 1.9% in the Paperboard/Packaging Products segment in
1993. The decrease was due primarily to lower prices and changes in product mix
for containerboard, corrugated shipping containers and folding cartons. This
decrease was partially offset by an increase in sales volume primarily of
corrugated shipping containers, which set a record in 1993. A newly constructed
corrugated container facility and several minor acquisitions in 1992 caused net
sales to increase $34.9 million for 1993.
Net sales increased 0.3% in the Newsprint segment as a result of an
increase in sales volume in 1993 compared to 1992, partially offset by a decline
in sales prices.
Cost of goods sold as a percent of net sales for the Paperboard/Packaging
Products segment rose from 81.8% in 1992 to 85.6% in 1993 due primarily to the
aforementioned changes in pricing and product mix. Cost of goods sold as a
percent of net sales in the Newsprint segment rose from 99.0% in 1992 to 102.8%
in 1993 due primarily to the higher cost of energy and fibre and decreases in
sales price. In 1993, the Company changed the estimated depreciable lives of its
paper machines and major converting equipment. These changes were made to better
reflect the estimated periods during which the assets will remain in service and
were based upon the Company's historical experience and comparable industry
practice. These changes were made effective January 1, 1993 and had the effect
of reducing depreciation expense by $17.8 million and decreasing the 1993 net
loss by $11.0 million.
Selling and administrative expenses increased to $239.2 million (3.4%) for
1993 compared to $231.4 million for 1992. The increase was due primarily to
higher provisions for retirement costs, acquisitions, new facilities and other
costs.
In order to minimize significant year-to-year fluctuations in pension cost
caused by financial market volatility, the Company changed, effective January 1,
1993, the method of accounting for the recognition of fluctuations in the market
value of pension assets. The effect of this change on 1993 results of
operations, including the cumulative effect of prior years, was not material.
See Note 6 to the Company's consolidated financial statements.
The Company reduced its weighted average discount rate in measuring its
pension obligations from 8.75% to 7.6% and its rate of increase in compensation
levels from 5.5% to 4.0% at December 31, 1993. The net effect of changing these
assumptions was the primary reason for the increase in the projected benefit
obligations and the changes are expected to increase pension cost by
approximately $3.4 million in 1994.
Interest expense for 1993 declined $45.9 million due to lower effective interest
rates and the lower level of subordinated debt outstanding resulting primarily
from a $231.8 million capital contribution received in August 1992.
The benefit from income taxes for 1993 was $83.0 million compared to a tax
provision of $10.0 million in 1992. The significant difference in the income tax
provision from 1993 to 1992 results from the use of the liability method of
accounting which restored deferred income taxes and increased the related
28
<PAGE>
asset values for tax effects previously recorded as a reduction of the carrying
amount of the related assets under prior business combinations. The Company's
effective tax rate for 1993 was lower than the Federal statutory tax rate due to
the effect of permanent differences between book and tax accounting and a $5.7
million provision to adjust deferred tax assets and liabilities in 1993 due to
the enacted Federal income tax rate change from 34% to 35%.
Effective January 1, 1993, the Company adopted SFAS No. 109, 'Accounting
for Income Taxes' and SFAS No. 106, 'Employers' Accounting for Postretirement
Benefits Other Than Pensions'. The cumulative effect of adopting SFAS No. 109
was to increase net income for 1993 by approximately $20.5 million. The
cumulative effect of adopting SFAS No. 106 was to decrease net income for 1993
by approximately $37.0 million.
LIQUIDITY AND CAPITAL RESOURCES
The Company implemented the Recapitalization Plan in order to improve its
operating and financial flexibility by reducing the level of overall cost of its
debt, extending maturities of indebtedness, increasing stockholders' equity and
increasing its access to capital markets. In connection with the
Recapitalization Plan, (i) JSC issued and sold 19,250,000 shares of JSC Common
Stock pursuant to a registered public offering at an initial public offering
price of $13.00 per share, (ii) JS Group, through its wholly-owned subsidiary
SIBV, purchased an additional 11,538,462 shares of JSC Common Stock for $150
million, (iii) the Company issued and sold the Senior Notes and (iv) the Company
entered into the 1994 Credit Agreement. Proceeds of the Recapitalization Plan,
including $370.6 million from the shares issued to the public and SIBV, $400.0
million from the sale of the 1994 Notes and borrowings under the 1994 Credit
Agreement were used to extinguish the Companys' 1989 and 1992 term loans, the
1989 revolving credit facility, the Company's senior secured notes and redeem
the Company's Subordinated Debt, including related premiums and accrued
interest, and pay related fees and expenses. Had the Recapitalization Plan
occurred on January 1, 1994, the Company's income before extraordinary item and
cumulative effect of accounting changes would have been $42.0 million and the
net loss would have been $15.1 million for 1994.
Outstanding loans under the Tranche A Term Loan and the New Revolving
Credit Facility bear interest at rates selected at the option of the Company
equal to the alternate base rate ('ABR') plus 1.5% per annum or the adjusted
LIBOR Rate plus 2.5% per annum (8.77% at December 31, 1994). Interest on
outstanding loans under the Tranche B Term Loan is payable at a rate per annum
selected at the option of the Company, equal to the prime rate plus 2% per annum
or the adjusted LIBOR rate plus 3% per annum (8.56% at December 31, 1994). The
ABR rate is defined as the highest of Chemical Bank's prime lending rate, 1/2 of
1% in excess of the Federal Funds Rate or 1% in excess of the base certificate
of deposit rate. The New Revolving Credit Facility matures in 2001. The Tranche
A Term Loan matures in various installments from 1995 to 2001. The Tranche B
Term Loan matures in various installments from 1995 to 2002.
The 1994 Credit Agreement contains various business and financial covenants
including, among other things, (i) limitations on dividends, redemptions and
repurchases of capital stock, (ii) limitations on the incurrence of
indebtedness, liens, leases, sale-leaseback transactions, (iii) limitations on
capital expenditures, (iv) maintenance of minimum levels of consolidated
earnings before depreciation, interest, taxes and amortization and (v)
maintenance of minimum interest coverage ratios. Such restrictions, together
with the highly leveraged position of the Company, could restrict corporate
activities, including the Company's ability to respond to market conditions, to
provide for unanticipated capital expenditures or to take advantage of business
opportunities.
The 1994 Credit Agreement imposes an annual limit on future capital
expenditures of $150.0 million. The capital spending limit is subject to
increase by an amount up to $75.0 million in any year if the prior year's
spending was less than the maximum amount allowed. The Company has a carryover
of $62.4 million for 1995. Capital expenditures in 1994, including property and
timberland additions and acquisitions, were $166.9 million. Because the Company
has invested heavily in its core businesses in prior years, management believes
the annual limitation for capital expenditures does not impair its plans for
maintenance, expansion and continued modernization of its facilities.
The Company's earnings are significantly affected by the amount of interest
on its indebtedness. The Company enters into interest rate swap, cap and option
agreements to manage its interest rate
29
<PAGE>
exposure on its indebtedness. Management's objective is to protect the Company
from interest rate volatility and reduce or cap interest expense within
acceptable levels of risk. Periodic amounts to be paid or received under these
agreements are accrued and recognized as adjustments to interest expense. The
Company amends existing agreements or enters into agreements with offsetting
effects when necessary to change its net position. During 1994, as interest
rates increased, the Company amended several of its agreements and entered new
agreements, including options, to respond to those rate changes. Significant
option positions entered into to offset increasing rates in 1994 expired
unexercised, and there are no significant options outstanding at December 31,
1994.
The table below shows certain interest rate swap agreements outstanding at
December 31, 1994, the related maturities for the years thereafter and the
contracted pay and receive rates for such agreements. Included are swaps with a
notional amount of $345.0 million not associated with existing debt at December
31, 1994, due to previous debt extinguishments, which are carried at fair market
value with changes to the fair value reflected in interest expense.
<TABLE>
<CAPTION>
INTEREST
RATE INTEREST RATE
SWAPS AT SWAP MATURITIES
DECEMBER 31, -------------------------------
1994 1995 1996 1997
(IN MILLIONS) ------------ ------- ------- -------
<S> <C> <C> <C> <C>
Pay fixed interest rate swaps.............................. $532.5 $(150.0) $(150.0) $(232.5)
Pay rate.............................................. 7.180% 7.180% 6.990% 7.474%
Receive rate.......................................... 5.732%
Receive fixed interest rate swaps.......................... $595.0 $(595.0)
Pay rate.............................................. 7.161%
Receive rate.......................................... 5.041% 5.041%
</TABLE>
In addition, the Company has swap agreements not associated with existing
debt at December 31, 1994 with a notional amount of $180.0 million (of which
$100.0 million matures in 1995 and $80.0 million matures in 1996) whereby the
Company is receiving a weighted average variable rate of 5.2% and pays a
weighted average variable rate of 6.1%.
The Company has a cap agreement with a notional amount of $100.0 million,
which matures in 1996, on variable rate debt which caps the Company's variable
interest rates at 7.5% on the notional amount. In addition, the Company has a
cap agreement with a notional amount of $100.0 million, which matures in 1996,
on variable rate debt which limits the Company's interest payment to a range of
5.5 - 7.0% on the notional amount.
Operating activities have historically been the major source of cash for
the Company's working capital needs, capital expenditures and debt payments. Net
cash provided by operating activities for 1994 improved $71.1 million (90.9%)
over 1993. Scheduled payments due in 1995 and 1996 under the 1994 Credit
Agreement are $46.0 million and $117.0 million, respectively, with increasing
amounts thereafter. The Company believes that cash provided by operating
activities and available financing sources will be sufficient for the next
several years to pay interest on the Company's obligations, amortize its term
loans and fund capital expenditures.
At December 31, 1994, the Company had $303.2 million of unused borrowing
capacity under its 1994 Credit Agreement and borrowing capacity of $12.0 million
under its 1991 Securitization, subject to the Company's level of eligible
accounts receivable. In the first quarter of 1995, the Company entered into the
new $315.0 million 1995 Securitization, consisting of a $300.0 million trade
receivables-backed commercial paper program and a $15.0 million term loan.
Proceeds of the 1995 Securitization were used to extinguish the Company's 1991
Securitization.
30
<PAGE>
BUSINESS
GENERAL
The predecessor to the Company was founded in 1974 when JS Group, a
worldwide leader in the packaging products industry, commenced operations in the
United States by acquiring 40% of a small paperboard and packaging products
company. The remaining 60% of that company was acquired by JS Group in 1977, and
in 1978 net sales were $42.9 million. The Company implemented a strategy to
build a fully integrated, broadly based, national packaging business, primarily
through acquisitions, including Alton Box Board Company in 1979, the paperboard
and packaging divisions of Diamond International Corporation in 1982, 80% of SNC
in 1986 and 50% of CCA in 1986. The Company financed its acquisitions by using
leverage and, in several cases, utilized joint venture financing whereby the
Company eventually obtained control of the acquired company. While no major
acquisition has been made since 1986, the Company has made 20 smaller
acquisitions and started up seven new facilities which had combined sales in
1994 of $323.2 million. JSC was formed in 1983 to consolidate the operations of
the Company, and today the Company ranks among the industry leaders in its two
business segments, Paperboard/Packaging Products and Newsprint. In 1994, the
Company had net sales of $3.2 billion, achieving a compound annual sales growth
rate of 31.0% for the period since 1978.
The Company believes it is one of the nation's largest producers of
paperboard and packaging products and is the largest producer of recycled
paperboard and recycled packaging products. In 1994, the Company's system of 16
paperboard mills produced 1,932,000 tons of virgin and recycled containerboard,
767,000 tons of coated and uncoated recycled boxboard and SBS and 209,000 tons
of recycled cylinderboard, which were sold to the Company's own converting
operations or to third parties. The Company's converting operations consist of
52 corrugated container plants, 18 folding carton plants, and 20 industrial
packaging plants located across the country, with three plants located outside
the U.S. In 1994, the Company's container plants converted 2,018,000 tons of
containerboard, an amount equal to approximately 104.5% of the amount it
produced, its folding carton plants converted 543,000 tons of SBS, recycled
boxboard and coated natural kraft, an amount equal to approximately 70.8% of the
amount it produced, and its industrial packaging plants converted 128,000 tons
of recycled cylinderboard, an amount equal to approximately 61.1% of the amount
it produced. The Company's Paperboard/Packaging Products segment contributed
92.0% of the Company's net sales in 1994.
The Company's paperboard operations are supported by its reclamation
division, which processed or brokered 4.1 million tons of wastepaper in 1994,
and by its timber division which manages approximately one million acres of
owned or leased timberland located in close proximity to its virgin fibre mills.
The paperboard/packaging products operations also include 15 consumer packaging
plants.
In addition, the Company believes it is one of the nation's largest
producers of recycled newsprint. The Company's Newsprint segment includes two
newsprint mills in Oregon, which produced 615,000 tons of recycled newsprint in
1994, and two facilities that produce Cladwood'r', a construction material
produced from newsprint and wood by-products. The Company's newsprint mills are
also supported by the Company's reclamation division.
DEVELOPMENT OF BUSINESS
Since its founding in 1974, the Company has followed a strategy to build a
broadly based packaging business, primarily through acquisitions. The Company's
acquisitions were principally motivated by opportunities to expand productive
capacity, both geographically and into new product lines, further integrate its
operations and broaden its existing product lines and customer base. The Company
has sought to improve the productivity of plants and operations acquired by it.
The most significant acquisitions were:
1979 -- Acquired 51% of Alton Box Board Company; the remaining 49% was
acquired in 1981. Alton's containerboard and industrial packaging
businesses consisted of fully integrated containerboard and paperboard
operations. The Alton acquisition significantly enhanced the Company's
presence in the midwest and expanded its operations to the southeast. In
addition, the Alton acquisition expanded the Company's product lines to
include folding cartons and industrial packaging and provided a network of
reclamation facilities which supplied wastepaper
31
<PAGE>
to the Company's recycled mills. Alton owned a kraft linerboard mill and a
recycled medium mill, two recycled cylinderboard mills, 32 converting
facilities and nine recycled wastepaper plants. Alton's total annual
paperboard production at the date of acquisition was 471,775 tons, as
compared to 655,745 tons in 1994.
1982 -- Acquired 50% of the paperboard and packaging divisions of Diamond
International Corporation through a joint venture; the remaining 50% was
acquired in 1983. In addition to expanding the Company's existing product
lines and customer base, the Diamond acquisition added new product lines,
including labels and other consumer packaging, and a related business
which produced rotogravure cylinders for use on printing presses used
extensively by the folding carton industry. Diamond owned two coated
recycled boxboard mills, which provided the Company with an integrated
source of recycled boxboard for use in its folding carton plants, as well
as three folding carton plants, three shipping container plants and three
consumer packaging plants. Diamond's operations were located primarily in
the midwest. Diamond's annual coated recycled boxboard production,
exclusive of a mill recently shut down, at the date of acquisition was
74,494 tons, as compared to 114,548 tons in 1994.
1986 -- Acquired 80% of SNC, formerly Publishers Paper Company. The SNC
acquisition extended the Company's product line to include newsprint and
also expanded the Company's reclamation operations to the west coast. The
SNC acquisition consisted of two newsprint mills and two Cladwood'r'
manufacturing plants, all of which are located in Oregon. SNC's annual
newsprint production at the date of acquisition was 592,804 tons, as
compared to 615,328 tons in 1994.
1986 -- Acquired 50% of CCA through a joint venture with The Morgan
Stanley Leveraged Equity Fund, L.P.; the remaining 50% was acquired in
1989. The total CCA acquisition cost was $1,130 million, which was
financed with $1,060 million of debt and $70 million of preferred and
common equity. The CCA acquisition substantially enhanced the Company's
production capacity and further integrated the Company's operations. It
also expanded its paperboard and packaging operations to the west coast,
which enabled the Company to compete on a national level and broaden its
customer base. The CCA acquisition consisted primarily of nine paperboard
mills, 40 converting plants and five reclamation facilities as well as
approximately 1,000,000 acres of owned or leased timberlands. CCA's
operations are located throughout the United States. CCA's total annual
paperboard production at the date of acquisition was 1,760,039 tons, as
compared to 2,047,865 tons in 1994.
INDUSTRY OVERVIEW
PAPERBOARD
General
Paperboard is a general term used to describe certain heavyweight grades of
paper primarily used for packaging products. Paperboard is produced from four
basic types of pulp: (i) unbleached kraft; (ii) bleached kraft; (iii) recycled
and (iv) semi-chemical. Unbleached kraft, bleached kraft and semi-chemical
paperboards are produced primarily from wood pulp. Recycled paperboard is
produced primarily from wastepaper. Recycled paperboard demand has grown at a
more rapid rate than virgin grades based primarily on its increased quality and
rising environmental awareness by consumers.
Paperboard is classified by three major end-uses: (i) containerboard, (ii)
boxboard and (iii) other paperboard. Containerboard primarily includes
linerboard and corrugating medium, the components of corrugated boxes used in
the transportation of manufactured goods. Boxboard includes folding carton
stock, setup boxboard and food board. Folding cartons, the major segment of
boxboard, are used to package a wide range of consumer products such as health
and beauty products, dry cereals and soap powders. Folding cartons are often
clay-coated for better printability and consumer appeal. Other paperboard
includes paperboard used in a number of industrial applications: fiber drums,
composite cans, spiral tubes, cores, gypsum wallboard liner and box partitions.
32
<PAGE>
According to the American Forest & Paper Association (the 'AFPA'), the
following table represents 1994 containerboard and boxboard production in the
United States.
<TABLE>
<CAPTION>
%
--------------------------------------------------
UNBLEACHED BLEACHED
END-USE PRODUCTION(1) % OF TOTAL KRAFT KRAFT RECYCLED SEMICHEMICAL
- ----------------------------------- ------------- ---------- ---------- -------- -------- ------------
(TONS IN
THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Containerboard..................... 28,013 77% 63 1 16 20
Boxboard........................... 8,162 23 16 45 39 --
------------- ----------
36,175 100%
------------- ----------
------------- ----------
</TABLE>
- ------------
(1) Excludes approximately 3.1 million export containerboard tons and 1.2
million export boxboard tons.
Containerboard
Demand. Total containerboard production (including exports) grew from 22.8
million tons in 1984 to 31.1 million tons in 1994 (consisting of 28.0 million
tons of domestic production and 3.1 million tons of exports) for a compound
annual growth rate ('Rate') of 3.2%. From 1984-1994, containerboard produced
from recycled paperboard grew at a much faster rate than unbleached kraft,
experiencing a 10.7% Rate. Containerboard demand is highly cyclical and
fluctuates with the general level of economic activity.
[GRAPHIC REPRESENTATION of the relationship between the change in Gross
Domestic Product ('GDP') and the change in containerboard production from 1984
to 1994. For each year during the period 1984-1994, the annual percentage
change in GDP was 6.2%, 3.2%, 2.9%, 3.1%, 3.9%, 2.5%, 1.2%, (0.7)%, 2.6%, 2.9%
and 4.0%, respectively. During this same period, the annual percentage change
in containerboard production was 7.1%, (3.7)%, 8.4%, 7.1%, 1.8%, 1.1%, 3.7%,
2.2%, 4.2%, 1.0% and 6.0%, respectively. The source of the containerboard
production data is the American Forest and Paper Association.]
Overall, containerboard demand is a function of the level of corrugated box
shipments from box converting plants and, to some extent, the level of
containerboard inventories on hand. Corrugated box demand was very strong in
1994 with shipments exceeding 1993 by 6.0%. Box plant containerboard inventory
levels were at 1.98 million tons on December 31, 1994, their lowest level on a
tonnage basis since 1987. Containerboard demand has also been assisted in recent
months by an increase in exports. The Company has experienced similar strong
demand and believes that it will continue through 1995. Resource Information
Systems, Inc. ('RISI'), a well known industry consultant, projects domestic
containerboard production to grow to 30.7 million tons by 1997, a 3.2% Rate from
1994. RISI projects containerboard exports to grow at an 8.1% Rate from 1994 to
1997.
33
<PAGE>
Supply. From 1984 to 1994 total U.S. containerboard capacity grew from 24.1
million tons to 31.7 million tons, a 2.8% Rate. In 1994, capacity utilization in
the industry was 98.4%, setting a new high for the period from 1984 to 1994.
According to the AFPA, producers plan to add approximately 3.3 million tons of
containerboard capacity in 1994-1997. Approximately 2.2 million tons, or 67% of
the added capacity, will be recycled linerboard and corrugating medium. The
following graph reflects the historical relationship between containerboard
capacity utilization and linerboard prices, the predominant grade for
containerboard products.
[GRAPHIC REPRESENTATION of the relationship between the level of containerboard
capacity utilization and linerboard prices from 1984 to 1994. For each year
during the period 1984-1994, annual containerboard capacity utilization was
94.5%, 90.3% , 95.2%, 97.8%, 95.4%, 94.6%, 95.1%, 95.2%, 95.6%, 93.7% and
98.4%, respectively. For each year during this same period, unbleached Kraft
linerboard prices per short ton (42 lb., Eastern Market) were $335, $274,
$295, $361, $403, $405, $378, $336, $345, $316 and $375, respectively (1984
prices are as of December 31. 1985-1994 prices reflect the average of the four
quarter-end prices). The source of the containerboard capacity utilization data
is the American Forest and Paper Association. The source of the linerboard
prices is the Pulp and Paper North American Factbook.]
Pricing. Pricing historically has been correlated with the levels of
industry capacity utilization. Over the past business cycle, containerboard
prices peaked in 1989. Linerboard peaked at approximately $410 per ton but then
gradually deteriorated, reaching a low of $280-$290 per ton in July 1993, owing
to decreased demand and increased inventories. Containerboard markets began to
recover in late 1993 and, based on increasing demand, a price increase was
successfully implemented by the Company in the fourth quarter of 1993. As the
economy gained strength and industry export shipments increased during 1994,
demand for containerboard products improved. Excess inventories were sold and
additional price increases were rapidly implemented. By the end of 1994, the
price of linerboard had risen to $430 per ton and increased an additional $50
per ton on January 1, 1995.
The January 1, 1995 price of $480 per ton for linerboard set a new record.
An additional price increase for containerboard was implemented by the Company
effective April 1, 1995. Although there can be no assurance that this price
increase will be sustained, management believes that such price increase will
hold.
Boxboard
Demand. Total boxboard production (including exports) grew to 9.4 million
tons in 1994 from 7.0 million tons in 1984, representing a 2.9% Rate.
Traditionally, recycled and SBS have been by far the largest segments of
boxboard production, representing 38% and 48%, respectively. During 1984 to
1994, recycled boxboard grew at a 2.2% Rate, SBS boxboard grew at a 1.5% Rate
and unbleached kraft,
34
<PAGE>
starting from a much smaller base, grew at a 5.5% Rate. Like containerboard,
boxboard demand tends to fluctuate with the general level of economic activity.
During the late 1980s, the use of clay coated recycled boxboard as a substitute
for SBS boxboard increased based on its improved quality, heightened
environmental awareness by consumers and increased demand by customers for less
expensive packaging alternatives. RISI projects both recycled boxboard
production and SBS production to increase at a 2.6% Rate from 1994 to 1997.
Supply. From 1984 to 1994 total boxboard capacity grew from 7.6 million
tons to 9.6 million tons, a 2.4% Rate. SBS folding boxboard grew at a 2.0% Rate,
reaching 4.7 million tons by 1994, while recycled folding boxboard grew to 3.3
million tons by 1994, a 1.2% Rate.
[GRAPHIC REPRESENTATION of the level of boxboard capacity utilization from 1984
to 1994. For each year during the period 1984-1994, annual boxboard capacity
utilization was 92.9%, 87.5%, 89.5%, 90.2%, 92.2%, 92.8%, 90.7%, 93.5%, 92.6%,
95.1% and 97.6%, respectively. The source of this data is the American Forest
and Paper Association.]
According to the AFPA, 0.9 million tons of boxboard capacity will be added
between 1994-1997. Unbleached boxboard accounts for 42%, recycled boxboard
accounts for 19% and SBS accounts for 39% of announced capacity additions.
Pricing. While general boxboard pricing levels are dependent on the overall
balance of supply and demand, relative pricing of different grades of boxboard
is affected by the substitutability of one grade for another in various customer
applications. For example, although the clay coated recycled demand and supply
situation is positive for the upcoming years, clay coated recycled prices are
influenced by SBS prices. During the late 1980s, SBS prices were substantially
higher than clay coated recycled prices. In recent years, SBS prices have
declined at a greater percentage than clay coated recycled, so that on a yield
basis, there is not currently a significant price differential between the two.
Future price growth in some grades of SBS may be tempered by recent and
projected capacity increases.
NEWSPRINT
General. Newsprint is an uncoated paper used in newspaper production.
Virgin newsprint is manufactured primarily from mechanical or groundwood pulps.
The bulk of North American virgin newsprint capacity is located in Canada and
the majority of recycled newsprint capacity is located in the U.S. because of
the close proximity of wastepaper collection sites. In recent years, the
majority of U.S. state legislatures have enacted recycled content laws requiring
newspaper publishers to use newsprint containing various percentages of recycled
fiber.
35
<PAGE>
Demand. According to the AFPA, the total U.S. newsprint production in 1994
remained flat, compared to 1993, with 7.0 million tons being produced. Canadian
production was 10.2 million tons in 1994, compared to 10.0 million tons in 1993.
From 1984 to 1994, North American newsprint production grew at a 1.2% Rate.
Newsprint demand is dependent on the general level of newspaper advertising.
RISI estimates North American newsprint shipments will remain flat through 1997.
According to the AFPA, North American production is also influenced by the
export levels to major newsprint consuming regions such as Western Europe and
Asia. In 1992, U.S. and Canadian producers increased export shipments 17% over
1991. 1993 witnessed a significant decline in North American exports due to
unfavorable currency exchange rates and new capacity in Europe and Asia.
Supply. According to the AFPA, North American newsprint capacity was 17.9
million tons in 1994, reflecting a 0.8% Rate since 1984. During the period from
year end 1988 to year end 1991, 0.95 million tons of U.S. newsprint capacity and
0.37 million tons of Canadian newsprint capacity were added, severely depressing
utilization rates in the early 1990s. Capacity expansion in the newsprint
industry has been concentrated on recycling and, over the last three years,
eleven new deinking plants have been brought into operation with the capacity to
recycle 2.9 million tons of recovered paper.
Capacity utilization has been at relatively low levels during the early
1990s as a large growth in capacity has coincided with a decline in newsprint
demand, which has led to lower rates for North American mills overall. Capacity
utilization from 1984 to 1994 is shown in the table below:
[GRAPHIC REPRESENTATION of the level of newsprint capacity utilization in the
United States and Canada from 1984 to 1994. For each year during the period
1984-1994, U.S. newsprint capacity utilization was 94.7%, 93.8%, 97.0%, 97.3%,
97.8%, 96.7%, 97.3%, 97.0%, 97.0%, 98.0% and 96.6%, respectively. For each year
during this same period, Canadian newsprint capacity utilization was 91.8%,
91.4%, 93.9%, 97.7%, 98.9%, 96.2%, 89.8%, 87.3%, 88.6%, 95.7% and 96.1%,
respectively. The source of these figures is the American Forest and Paper
Association.]
According to the AFPA, North American newsprint capacity will remain flat
through 1997 because no new mills or machines are planned during this period and
capacity gains resulting from rebuilds of existing machines and miscellaneous
improvements will be offset by the reallocation of capacity in several mills to
produce groundwood and specialty papers rather than newsprint. Several new
recycled newsprint mills have been announced recently in Western Europe, and
such mills are expected to affect future exports by North American producers.
36
<PAGE>
Pricing. Newsprint is a commodity paper grade with pricing largely a
function of capacity utilization. West coast prices fell from a peak of
approximately $541 per ton (30-lb, delivered) in 1988 to a low of $382 per ton
in the second quarter of 1992. In December 1993 the Company announced price
increases which were unsuccessful. However, due to strengthening demand,
successful price increases were implemented in May, August and December of 1994
for a total price increase of $124 per ton. Based on continuing increases in
demand, an increase of $44 per ton was implemented in March 1995 and an
additional increase has been announced for May 1995. Although there can be no
assurance that this price increase will be sustained, management believes that
such price increase will hold.
BUSINESS STRATEGY
The principal components of the Company's business strategy include the
following:
MAINTAIN FOCUS ON RECYCLED PRODUCTS
The Company believes it is the largest processor of wastepaper, the largest
producer of coated recycled paperboard, the largest producer of recycled medium
and one of the largest producers of recycled newsprint in the U.S. The Company
has historically utilized a significant amount of recycled fibre in its products
and has maintained a strategy to allow it to supply all of the Company's
recycled fibre needs for its paper producing operations. There are several
advantages to this strategy. First, recycled products are gaining in popularity
with customers as a result of increased environmental awareness and improved
quality, making them more competitive with products made from virgin fibre.
Second, the Company's national operations allow it to minimize costs of
transporting wastepaper to its mills. Third, as the largest collector of
wastepaper in the world, the Company's reclamation division has access to
wastepaper supplies throughout the country. With its supply network well in
place, the Company believes it has sufficient sources of supply to meet the
needs of its recycled mills, during periods of unprecedented demand such as
occurred in 1994 and the first quarter of 1995.
The following chart indicates the significant percentage of recycled
paperboard produced and consumed by the Company's operations.
<TABLE>
<CAPTION>
1992 1993 1994
----- ----- -----
(TONS IN THOUSANDS)
<S> <C> <C> <C>
Total paperboard produced by the Company............................. 2,876 2,790 2,908
Percent recycled................................................ 44.5% 45.9% 45.6%
Total paperboard consumed by the Company............................. 2.569 2,607 2,689
Percent recycled................................................ 35.9% 36.6% 35.5%
</TABLE>
FOCUS ON COST REDUCTION
The Company continuously strives to reduce operating costs on a system-wide
basis through the implementation of cost reduction programs. In 1991, the
Company implemented an austerity program to offset the impact of declining
prices. This austerity program froze staff levels, deferred certain
discretionary spending programs and more aggressively managed capital
expenditures and working capital to conserve cash and reduce interest expense.
While the austerity program succeeded in reducing expenses and improving
cash flow, the length and extent of the recession led the Company in 1993 to
initiate the Cost-Reduction Initiatives and the Restructuring Program.
The Cost-Reduction Initiatives are a systematic Company-wide effort
designed to improve the cost competitiveness of all the Company's operating
facilities and staff functions. The Cost-Reduction Initiatives focus on reducing
costs and other measures, including:
Productivity improvements to reduce variable unit cost at production
facilities and to increase volume.
Identification of approximately $100 million of high return, quick payback
capital projects for which spending was be accelerated.
37
<PAGE>
Reduction in fibre cost by substituting cheaper grades of waste fibre.
Reduction in cost of materials generated through a Company-wide council
which negotiates large national purchasing activities.
Reductions in personnel cost through a Company-wide freeze on compensation
for salaried employees in 1994 and reductions in workforce.
Reduction in waste cost in the manufacturing process.
Increased focus on specialty niche businesses which are less commodity
oriented and carry pricing premiums.
The Company implemented the Restructuring Program in September 1993 to
improve the Company's long-term competitive position. The Restructuring Program
includes plant closures, reductions in workforce, and the realignment and
consolidation of various manufacturing operations over an approximately two to
three year period. The Restructuring Program has reduced production cost,
employee expense and depreciation charges. The Company closed certain high cost
operating facilities, including a coated recycled boxboard mill and five
converting plants, in January 1994. While future benefits of the Restructuring
Program are uncertain, the operating losses in 1993 for the plants shut down in
January 1994 and those contemplated in the future were $31 million. While the
Company believes that it realized financial benefits in 1994 from the closure of
these plants, and that it will realize such benefits in future periods, no
assurances can be given in this regard. For further information concerning the
Restructuring Program, see 'Management's Discussion and Analysis of Results of
Operations and Financial Condition -- General'.
CONTINUE TO PURSUE VERTICAL INTEGRATION
The Company's operations are vertically integrated in that the Company uses
significant amounts of timber harvested from its timberlands and wastepaper
provided by its reclamation operations in the manufacture of paperboard and
newsprint, and converts its production of paperboard into shipping containers,
folding cartons, papertubes and other products. The Company also exchanges a
significant amount of containerboard with other major companies in the industry.
These exchanges are generally used when shipment from the Company's mills would
not be freight cost efficient or when container plants require a certain grade
of containerboard not manufactured by the Company.
The Company's integration reduces the volatility of pricing for its
containerboard products, allows it to run its mills at higher operating rates
during industry downturns and protects the Company from potential regional
supply and demand imbalances for recycled fibre grades.
The following table illustrates the balance between the Company's
production and consumption levels for its core businesses for the last three
years.
<TABLE>
<CAPTION>
1992 1993 1994
----- ----- -----
(TONS IN THOUSANDS)
<S> <C> <C> <C>
Wastepaper
Collected by reclamation division................................................... 3,846 3,907 4,134
Consumed by paperboard and newsprint mills.......................................... 1,910 1,905 1,910
Containerboard
Produced by containerboard mills.................................................... 1,918 1,840 1,932
Consumed by container plants........................................................ 1,898 1,942 2,018
SBS and Recycled Boxboard
Produced by SBS and recycled boxboard mills......................................... 745 744 767
Consumed by folding carton plants................................................... 551 542 543
</TABLE>
CONTINUE GROWTH IN CORE BUSINESSES
The Company has built its core businesses through selective acquisitions of
existing businesses and ongoing capital improvements.
38
<PAGE>
Over the years, the Company's acquisition strategy has accomplished several
objectives, including (i) geographic expansion of its operations, (ii) growth of
its recycling capacity and expertise, (iii) expansion of its product lines in
order to satisfy most of the packaging needs of large national and multinational
customers, (iv) expansion of its operations into related products which can be
successfully marketed to existing customers as well as into related products to
which the Company can apply its papermaking expertise, and (v) integration of
its operations. The Company intends to continue its current strategy by
exploring potential acquisitions and pursuing those which meet its business
objectives.
MAINTAIN LEADING MARKET POSITIONS
The Company believes it is one of the most broadly based paperboard
packaging producers in the United States. The Company has achieved this status
through its selective acquisitions and its ongoing capital improvements program.
The Company believes it maintains significant U.S. market positions including
the following:
largest producer of recycled paperboard
largest producer of folding cartons
largest producer of coated recycled boxboard
largest processor of wastepaper
largest producer of mottled white linerboard
one of the largest producers of recycled newsprint
fourth largest producer of corrugated shipping containers
largest producer of recycled medium
fifth largest producer of containerboard
The Company believes that its size, as evidenced by its leading U.S. market
positions, provides certain advantages in marketing its products. The Company's
prominence in the U.S. packaging industry gives it excellent customer
visibility. The Company is well recognized by its customers as a quality
producer and has recently entered into strategic alliances with select large,
national account customers to supply packaging. In addition, the Company's broad
range of packaging products provides a single source option, whereby all of the
customers' packaging needs can be satisfied by the Company.
IMPROVE FINANCIAL PROFILE TO GROW CORE BUSINESSES
Since the 1989 recapitalization of JSC, the Company has pursued a strategy
designed to reduce its financial risk profile. During this period, the Company
has accessed various capital markets through several transactions, resulting in
improved financial flexibility.
In 1991, the Company completed a $230 million accounts receivable
securitization. Initial proceeds of $168 million were raised by an A1/D1+
commercial paper issue and a AA- medium term note issue. The proceeds were used
to retire debt, while the transaction increased the liquidity of the Company by
$180 million.
In 1992, JSC received cash equity capital from a subsidiary of JS Group and
MSLEF II (and certain of its limited partners who owned Junior Accrual
Debentures) of $33 million and $200 million, respectively, and in December 1993
a subsidiary of JS Group converted $167 million of preferred stock of JSC into
common stock of JSC. The Company also negotiated a $400 million senior secured
term loan. The equity and loan proceeds were used to repurchase $193.5 million
of the Junior Accrual Debentures and to prepay a portion of certain subordinated
indebtedness and $400 million of the 1989 term loan. This transaction reduced
near term debt service requirements and also reduced annual interest expense by
$30 million.
In 1993, in order to improve operating and financial flexibility, JSC(U.S.)
issued $500 million aggregate principal amount of 1993 Notes, the proceeds of
which were used to repay $100 million of revolving credit indebtedness and an
aggregate of $387.5 million of term loan indebtedness under its
39
<PAGE>
existing credit agreements. As a result of such refinancing, the Company
successfully extended maturities of its indebtedness and improved its liquidity.
The Recapitalization Plan further improved operating and financial
flexibility by reducing the level and overall cost of the Company's debt,
extending maturities of indebtedness, increasing stockholders' equity and
increasing its access to capital markets.
In 1995, the Company refinanced its accounts receivable securitization and
increased the size to $315 million. The term of the program is 57 months and the
Company has the option to extend the maturity after the second anniversary,
subject to the approval of a percentage of the lenders. Initial proceeds of
$206.8 million were raised by a AAA rated liquidity facility and a BBB rated
term loan. The liquidity facility was subsequently refunded with the proceeds of
an A1/D1 rated commercial paper issue.
The Company intends to further improve its balance sheet over the next few
years through debt reduction.
PRODUCTS
PAPERBOARD/PACKAGING PRODUCTS SEGMENT
Containerboard and Corrugated Shipping Containers. The Company's
containerboard operations are highly integrated and the Company believes this
integration enhances its ability to respond quickly and efficiently to customers
and to fill orders on short lead times. Tons of containerboard produced and
converted for the last three years were:
<TABLE>
<CAPTION>
1992 1993 1994
----- ----- -----
(TONS IN THOUSANDS)
<S> <C> <C> <C>
Containerboard
Production................................................................ 1,918 1,840 1,932
Consumption............................................................... 1,898 1,942 2,018
</TABLE>
The Company's mills produce a full line of containerboard, including
unbleached kraft linerboard, mottled white linerboard and recycled medium.
The Company believes it is the nation's largest producer of mottled white
linerboard, the largest producer of recycled medium and the fifth largest
producer of containerboard. Unbleached kraft linerboard is produced at the
Company's mills located in Fernandina Beach and Jacksonville, Florida and
mottled white linerboard is produced at its Brewton, Alabama mill. Recycled
medium is produced at the Company's mills located in Alton, Illinois, Carthage,
Indiana, Circleville, Ohio and Los Angeles, California. In 1994, the Company
produced 1,085,000, 317,000 and 530,000 tons of unbleached kraft linerboard,
mottled white linerboard and recycled medium, respectively.
Large capital investment is required to sustain the Company's
containerboard mills, which employ state of the art computer controlled
machinery in their manufacturing processes. During the last five years, the
Company has invested approximately $181 million to enhance product quality,
reduce costs, expand capacity and increase production efficiency, as well as
make required improvements to stay in compliance with environmental regulations.
Major capital projects completed in the last five years include (i) a rebuild of
Jacksonville's linerboard machine to produce high performance, lighter weight
grades now experiencing higher demand, (ii) modifications to Brewton's mottled
white machine to increase run speed by 100 tons per day and (iii) a chip
thickness screening project for the Fernandina Beach linerboard mill. A key
strategy for the next few years will be to reduce wood cost at its virgin fibre
mills by modifying methods of woodchip production and handling, utilizing random
length roundwood forms and continuing to pursue forest management practices
designed to enhance timberland productivity.
The Company's sales of containerboard in 1994 were $786.4 million
(including $424.9 million of intracompany sales). During the first part of 1994,
sales of containerboard to its container plants were reflected at prices based
upon those published by Official Board Markets which were generally higher
40
<PAGE>
than those paid by third parties except in exchange contracts. Beginning in
September 1994, the sales price of containerboard to the container plants was
the same as market price.
The Company believes it is the fourth largest producer of corrugated
shipping containers in the U.S. Corrugated shipping containers, manufactured
from containerboard in converting plants, are used to ship such diverse products
as home appliances, electric motors, small machinery, grocery products, produce,
books, tobacco and furniture, and for many other applications, including point
of purchase displays. The Company stresses the value added aspects of its
corrugated containers, such as labeling and multi-color graphics, to
differentiate its products and respond to customer requirements. The Company's
52 container plants serve local customers and large national accounts and are
located nationwide, generally in or near large metropolitan areas. The Company's
total sales of corrugated shipping containers in 1994 were $1,282.7 million
(including $91.4 million of intracompany sales). Total corrugated shipping
container sales volumes for 1992, 1993 and 1994 were 28,095, 29,394 and 30,822
million square feet, respectively.
Recycled Boxboard, SBS and Folding Cartons. The Company's recycled
boxboard, SBS and folding carton operations are also well integrated. Tons of
recycled boxboard and SBS produced and converted for the last three years were:
<TABLE>
<CAPTION>
1992 1993 1994
---- ---- ----
(TONS IN THOUSANDS)
<S> <C> <C> <C>
Recycled Boxboard and SBS
Production...................................................... 745 744 767
Consumption..................................................... 551 542 543
</TABLE>
The Company's mills produce recycled coated and uncoated boxboard and SBS.
The Company believes it is the nation's largest producer of coated recycled
boxboard, made from 100 percent recycled fibre, which offers comparable quality
to virgin boxboard for most applications. The Company also believes that its
premium-priced SBS offers a high quality product for packaging applications.
Coated recycled boxboard is produced at the Company's mills located in
Middletown, Ohio, Philadelphia, Pennsylvania, Santa Clara, California and
Wabash, Indiana. The Company produces uncoated recycled boxboard at its Los
Angeles, California mill and SBS at its Brewton, Alabama mill. The Company
believes its coated recycled boxboard, known as MASTERCOAT'r', is recognized in
the industry for its high quality and extensive range of grades and calipers.
The Brewton machine produces four basic grades of SBS including MASTERPRINT'r',
which is ideally suited for converting into folding cartons and related end
uses, MASTERSEAL'r' and MASTERVAC'r', which are used for visual carded packaging
that facilitates merchandising at the point of sale, and MASTERWITE'r', which is
designed for intricately printed and die-cut greeting cards and other specialty
uses. The table above excludes production of approximately 87,000 and 85,000
tons in 1992 and 1993, respectively, from the Lockland, Ohio boxboard mill that
was closed in January 1994 as part of the Company's Restructuring Program. See
'Management's Discussion and Analysis of Results of Operations and Financial
Condition'. In 1994, the Company produced 586,000 and 181,000 tons of recycled
boxboard and SBS, respectively. The Company's total sales of recycled boxboard
and SBS in 1994 were $390.9 million (including $197.5 million of intracompany
sales).
The Company's folding carton plants offer a broad range of converting
capabilities, including web and sheet litho, rotogravure and flexo printing and
a full line of structural and design graphics services. The Company's 18 folding
carton plants convert recycled boxboard and SBS, including approximately 52% of
the boxboard and SBS produced by the Company, into folding cartons. Folding
cartons are used primarily to protect customers' products while providing point
of purchase advertising. The Company makes folding cartons for a wide variety of
applications, including food and fast foods, detergents, paper products,
beverages, health and beauty aids and other consumer products. Customers range
from small local accounts to large national and multinational accounts. The
Company's folding carton plants are located nationwide, generally in or near
large metropolitan areas. The Company's sales of folding cartons in 1994 were
$644.7 million (including $1.8 million of intracompany sales). Folding carton
sales volumes for 1992, 1993 and 1994 were 487,000, 475,000 and 486,000 tons,
respectively.
41
<PAGE>
The Company has focused its capital expenditures in these operations and
its marketing activities to support a strategy of enhancing product quality as
it relates to packaging graphics, increasing flexibility while reducing customer
response time and assisting customers in innovative package designs.
The Company provides marketing consultation and research activities[, a key
competitive factor within the folding carton industry,] through its Design and
Market Research (DMR) Laboratory. It provides customers with graphic and product
design tailored to the specific technical requirements of lithographic,
rotogravure and flexographic printing, as well as photography for packaging,
sales promotion concepts, and point of purchase displays.
Recycled Cylinderboard and Industrial Packaging. The Company's recycled
cylinderboard and industrial packaging operations are also integrated. Tons of
recycled cylinderboard produced and converted for the last three years were:
<TABLE>
<CAPTION>
1992 1993 1994
---- ---- ----
(TONS IN THOUSANDS)
<S> <C> <C> <C>
Recycled Cylinderboard
Production.................................................................... 213 206 209
Consumption................................................................... 120 123 128
</TABLE>
The Company's recycled cylinderboard mills are located in: Tacoma,
Washington, Monroe, Michigan (2 mills), Lafayette, Indiana, and Cedartown,
Georgia. In 1994, total sales of recycled cylinderboard were $67.8 million
(including $28.9 million of intracompany sales).
The Company's 20 industrial packaging plants convert recycled
cylinderboard, including a portion of the recycled cylinderboard produced by the
Company, into papertubes and cores. Papertubes and cores are used primarily for
paper, film and foil, yarn carriers and other textile products and furniture
components. The Company also produces solid fibre partitions for the
pharmaceutical, electronics, glass, cosmetics and plastics industries. In
addition, the Company produces a patented self-locking partition especially
suited for automated packaging and product protection. The Company believes it
is the nation's third largest producer of tubes and cores. Also, the Company
manufactures corrugated pallets that are made entirely from corrugated
components and are lightweight yet extremely strong and are fully recyclable.
The Company's industrial packaging sales in 1994 were $94.0 million (including
$1.6 million in intracompany sales).
Consumer Packaging. The Company manufactures a wide variety of consumer
packaging products. These products include flexible packaging, paper and
metallized paper labels, and labels that are heat transferred to plastic
containers for a wide range of industrial and consumer product applications. The
contract packaging plants provide cartoning, bagging, liquid- or powder-filling,
high-speed overwrapping and fragranced advertising products. The Company
produces high-quality rotogravure cylinders and has a full-service organization
experienced in the production of color separations and lithographic film for the
commercial printing, advertising and packaging industries. The Company also
designs, manufactures and sells custom machinery including specialized machines
that apply labels to customers' packaging. The Company currently has 15
facilities including the engineering service center referred to below and has
improved their competitiveness by installing state-of-the-art production
equipment.
In addition, the Company has an engineering services center, specializing
in automated production systems and highly specialized machinery, providing
expert consultation, design and equipment fabrication for consumer and
industrial products manufacturers, primarily from the pharmaceutical,
agricultural and specialty products industries.
Total sales of consumer packaging products and services in 1994 were $179.7
million (including $14.2 million of intracompany sales).
Reclamation Operations; Fibre Resources and Timber Products. The raw
materials essential to the Company's business are reclaimed fibre from
wastepaper and wood, in the form of logs or chips. The Brewton, Circleville,
Jacksonville and Fernandina mills use primarily wood fibres, while the other
paperboard mills use reclaimed fibre exclusively. The newsprint mills use
approximately 45% wood fibre and 55% reclaimed fibre.
42
<PAGE>
The Company believes it is the nation's largest processor of wastepaper.
The use of recycled products in the Company's operations begins with its
reclamation division which operates 26 facilities that collect, sort, grade and
bale wastepaper, as well as collect aluminum and glass. The reclamation division
provides valuable fibre resources to both the paperboard and newsprint segments
of the Company as well as to other producers. Many of the reclamation facilities
are located in close proximity to the Company's recycled paperboard and
newsprint mills, assuring availability of supply, when needed, with minimal
shipping costs. In 1994, the Company processed 4.1 million tons of wastepaper.
The amount of wastepaper collected and the proportions sold internally and
externally by the Company's reclamation division for the last three years were:
<TABLE>
<CAPTION>
1992 1993 1994
----- ----- -----
(TONS IN THOUSANDS)
<S> <C> <C> <C>
Wastepaper collected by Reclamation Division......................... 3,846 3,907 4,134
Percent sold internally......................................... 49.7% 48.8% 45.5
Percent sold to third parties................................... 50.3% 51.2% 54.5
</TABLE>
The reclamation division also operates a nationwide brokerage system
whereby it purchases and resells wastepaper (including wastepaper for use in its
recycled fibre mills) on a regional and national contract basis. Such contracts
provide bulk purchasing, resulting in lower prices and cleaner wastepaper. Total
sales of recycled materials for 1994 were $428.2 million (including $190.2
million of intracompany sales).
During 1994, the wastepaper which was reclaimed by the Company's
reclamation plants and brokerage operations satisfied all of the Company's mill
requirements for reclaimed fibre.
The Company's timber division manages approximately one million acres of
owned and leased timberland. In 1994, approximately 61% of the timber harvested
by the Company was used in its Jacksonville, Fernandina and Brewton Mills. The
Company harvested 953,000 cords of timber which would satisfy approximately 37%
of the Company's requirements for wood fibres. The Company's wood fibre
requirements not satisfied internally are purchased on the open market or under
long-term contracts. In the past, the Company has not experienced difficulty
obtaining an adequate supply of wood through its own operations or open market
purchases. The Company is not aware of any circumstances that would adversely
affect its ability to satisfy its wood requirements in the foreseeable future.
In recent years, a shortage of wood fibre in the spotted owl regions in the
Northwest has resulted in increases in the cost of virgin wood fibre. In 1994,
the Company's total sales of timber products were $235.2 million (including
$185.4 million of intracompany sales).
NEWSPRINT SEGMENT
Newsprint Mills. The Company believes it is one of the largest producers of
recycled newsprint and the fourth largest producer overall of newsprint in the
United States. The Company's newsprint mills are located in Newberg and Oregon
City, Oregon. During 1992, 1993 and 1994, the Company produced 615,000, 615,000
and 615,000 tons of newsprint, respectively. In 1994, total sales of newsprint
were $231.4 million (none of which were intracompany sales).
For the past three years, an average of approximately 54% of the Company's
newsprint production has been sold to The Times Mirror Company ('Times Mirror')
pursuant to a long-term newsprint agreement (the 'Newsprint Agreement') entered
into in connection with the Company's acquisition of SNC stock in February 1986.
Under the terms of the Newsprint Agreement, the Company supplies newsprint to
Times Mirror generally at prevailing West Coast market prices. Sales of
newsprint to Times Mirror in 1994 amounted to $113.0 million.
Cladwood'r'. Cladwood'r' is a wood composite panel used by the housing
industry, manufactured from sawmill shavings and other wood residuals and
overlayed with recycled newsprint. The Company has two Cladwood'r' plants
located in Oregon. Total sales for Cladwood'r' in 1994 were $28.7 million ($.5
million of which were intracompany sales).
43
<PAGE>
MARKETING
The marketing strategy for the Company's mills is to maximize sales of
products to manufacturers located within an economical shipping area. The
strategy in the converting plants focuses on both specialty products tailored to
fit customers' needs and high volume sales of commodity products. The Company
also seeks to broaden the customer base for each of its segments rather than to
concentrate on only a few accounts for each plant. These objectives have led to
decentralization of marketing efforts, such that each plant has its own sales
force, and many have product design engineers, who are in close contact with
customers to respond to their specific needs. National sales offices are also
maintained for customers who purchase through a centralized purchasing office.
National account business may be allocated to more than one plant because of
production capacity and equipment requirements.
COMPETITION
The paperboard and packaging products markets are highly competitive and
are comprised of many participants. Although no single company is dominant, the
Company does face significant competitors in each of its businesses. The
Company's competitors include large vertically integrated companies as well as
numerous smaller companies. The industries in which the Company competes are
particularly sensitive to price fluctuations as well as other competitive
factors including design, quality and service, with varying emphasis on these
factors depending on product line. The market for the Newsprint segment is also
highly competitive.
BACKLOG
Demand for the Company's major product lines is relatively constant
throughout the year and seasonal fluctuations in marketing, production,
shipments and inventories are not significant. The Company does not have a
significant backlog of orders, as most orders are placed for delivery within 30
days.
RESEARCH AND DEVELOPMENT
The Company's research and development center works with its manufacturing
and sales operations, providing state-of-the-art technology, from raw materials
supply through finished packaging performance. Research programs have provided
improvements in coatings and barriers, stiffeners, inks and printing. The
technical staff conducts basic, applied and diagnostic research, develops
processes and products and provides a wide range of other technical services.
The Company actively pursues applications for patents on new inventions and
designs and attempts to protect its patents against infringement. Nevertheless,
the Company believes that its success and growth are dependent on the quality of
its products and its relationships with its customers, rather than on the extent
of its patent protection. The Company holds or is licensed to use certain
patents, but does not consider that the successful continuation of any important
phase of its business is dependent upon such patents.
EMPLOYEES
The Company had approximately 16,600 employees at December 31, 1994, of
which approximately 11,200 employees (68%), are represented by collective
bargaining units. The expiration date of union contracts for the Company's major
facilities are as follows: the Oregon City mill, expiring March 1997; the
Brewton mill, expiring October 1997; the Fernandina mill, expiring June 1998; a
group of 12 properties, including 4 paper mills and 8 corrugated container
plants, expiring June 1998; and the Jacksonville mill, expiring June 1999.
Although the contracts for the Alton mill and Newberg mill expired in June 1994
and March 1995, respectively, production at both mills has not been interrupted
and the Company is currently in the process of bargaining with the unions
representing the mill employees. The Company believes that its employee
relations are generally good and is currently in the process of bargaining with
unions representing production employees at a number of its other operations.
44
<PAGE>
PROPERTIES
The Company's properties at December 31, 1994 are summarized in the table
below. Approximately 59% of the Company's investment in property, plant and
equipment is represented by its paperboard and newsprint mills.
<TABLE>
<CAPTION>
NUMBER OF STATE
FACILITIES LOCATIONS
---------- ---------
<S> <C> <C>
Paperboard mills:
Containerboard mills................................................................... 7 6
Boxboard mills......................................................................... 4 4
Cylinderboard mills.................................................................... 5 4
Newsprint mills............................................................................. 2 1
Reclamation plants.......................................................................... 26 12
Converting facilities:
Corrugated container plants............................................................ 52 22
Folding carton plants.................................................................. 18 10
Industrial packaging plants............................................................ 20 13
Consumer packaging plants................................................................... 15 9
Cladwood'r' plants.......................................................................... 2 1
Wood product plants......................................................................... 1 1
---
Total............................................................................. 152 28
--- --
--- --
</TABLE>
In addition to its manufacturing facilities, the Company owns and leases
approximately 758,000 acres and 226,000 acres of timberland, respectively, and
also operates wood harvesting facilities.
LITIGATION
In May 1993, the Company received a notice of default on behalf of Otis B.
Ingram, as executor of the estate of Naomi M. Ingram, and Ingram-LeGrand Lumber
Company with respect to certain timber purchase agreements and timber management
agreements between the Company and such parties dated November 22, 1967
pertaining to approximately 30,000 acres of property in Georgia (the
'Agreements'). In June 1993, the Company filed suit against such parties in the
United States District Court, Middle District of Georgia, seeking declaratory
and injunctive relief and damages in excess of $3 million arising out of the
defendants' alleged breach and anticipatory repudiation of the Agreements. The
defendants have filed an answer and counterclaim seeking damages in excess of
$14 million based on allegations that the Company breached the Agreements and
failed to pay for timber allegedly stolen or otherwise removed from the property
by the Company or third parties. The case is set for trial in November 1995. The
alleged thefts of timber are being investigated by the Georgia Bureau of
Investigation, which has advised the Company that it is not presently a target
of this investigation. Management does not believe that the outcome of this
litigation will have a material adverse effect on the Company's financial
condition or operations.
The Company is a defendant in a number of other lawsuits which have arisen
in the normal course of business. While any litigation has an element of
uncertainty, the management of the Company believes that the outcome of such
suits will not have a material adverse effect on its financial condition or
operations.
45
<PAGE>
ENVIRONMENTAL MATTERS
Federal, state and local environmental requirements, particularly relating
to air and water quality, are a significant factor in the Company's business.
The Company employs processes in the manufacture of pulp, paperboard and other
products, resulting in various discharges and emissions that are subject to
numerous federal, state and local environmental control statutes, regulations
and ordinances. The Company operates and expects to operate under permits and
similar authorizations from various governmental authorities that regulate such
discharges and emissions.
Occasional violations of permit terms have occurred from time to time at
the Company's facilities, resulting in administrative actions, legal proceedings
or consent decrees and similar arrangements. Pending proceedings include the
following:
In March 1992, the Company entered into an administrative consent
order with the Florida Department of Environmental Regulation to carry out
any necessary assessment and remediation of Company-owned property in Duval
County, Florida that was formerly the site of a sawmill that dipped lumber
into a chemical solution. Assessment is on-going, but initial data
indicates soil and groundwater contamination that may require nonroutine
remediation. Management believes that the probable costs of this site,
taken alone or with potential costs at other Company-owned properties where
some contamination has been found, will not have a material adverse effect
on its financial condition or operations.
In February 1994, the Company entered into a consent decree with the
State of Ohio in full satisfaction of all liability for alleged violations
of applicable standards for particulate and opacity emissions with respect
to two coal-fired boilers at its Lockland, Ohio recycled boxboard mill
(which was permanently closed as part of the Company's restructuring
program). The Company paid $122,000 in penalties and enforcement costs
pursuant to such consent decree. The United States Environmental Protection
Agency also issued a notice of violation with respect to such emissions,
but has informally advised the Company's counsel that no Federal
enforcement is likely to be commenced in light of the settlement with the
State of Ohio.
In the fourth quarter of 1994, the Company learned of possible
noncompliance with certain provisions of its construction/operation permit
at its D-Graphics labels plant located in Jacksonville, Florida. In
October, 1994, the Company voluntarily reported such possible noncompliance
to state and local environmental authorities and suspended operations at
this facility for several days until temporary operating authority was
obtained. Subsequently, a settlement agreement was signed between the
Company, the Florida Department of Environmental Protection and the City of
Jacksonville Regulatory and Environmental Services Division to resolve all
civil and administrative issues regarding this matter, pursuant to which
the Company has paid an aggregate of $1.5 million in fines and penalties.
An operating permit allowing the plant to be operated on a continuing basis
has also been obtained. The United States Department of Justice is
currently conducting a criminal investigation of the matters reported by
the Company and it is uncertain whether any criminal action will be
forthcoming.
The Company also faces potential liability as a result of releases, or
threatened releases, of hazardous substances into the environment from various
sites owned and operated by third parties at which Company-generated wastes have
allegedly been deposited. Generators of hazardous substances sent to off-site
disposal locations at which environmental problems exist, as well as the owners
of those sites and certain other classes of persons (generally referred to as
'potentially responsible parties' or 'PRPs'), are, in most instances, subject to
joint and several liability for response costs for the investigation and
remediation of such sites under the Comprehensive Environmental Response,
Compensation and Liability Act ('CERCLA') and analogous state laws, regardless
of fault or the legality of the original disposal. The Company has received
notice that it is or may be a PRP at a number of federal and/or state sites
where remedial action may be required, and as a result may have joint and
several liability for cleanup costs at such sites. However, liability of CERCLA
sites is typically shared with the other PRPs and costs are commonly allocated
according to relative amounts of waste deposited. Because the Company's relative
percentage of waste deposited at the majority of these sites is quite small,
management of the Company believes that its probable liability under CERCLA,
taken
46
<PAGE>
on a case by case basis or in the aggregate, will not have a material adverse
effect on its financial condition or operations. Pending CERCLA proceedings
include the following:
MIAMI COUNTY, OHIO SITE
In January 1990, the Company filed a motion for leave to intervene and
for modification of the consent decree in United States v. General Refuse
Services, a case pending in the United States District Court for the
Southern District of Ohio. The Company contended that it should have been
allowed to participate in the proposed consent decree, which provided for
remediation of alleged releases or threatened releases of hazardous
substances at a site in Miami County, near Troy, Ohio, according to a plan
approved by the United States Environmental Protection Agency, Region V
(the 'Agency'). The Court granted the Company's motion to intervene in this
litigation, but denied the Company's motion for an order denying entry of
the consent decree. Consequently, the consent decree was entered without
the Company's being included as a party to the decree, meaning that the
Company had some exposure to potential claims for contribution to
remediation costs incurred by other participants and for non-reimbursed
response costs incurred by the Agency.
In December 1991, the United States filed a civil action against the
Company in United States District Court, Southern District of Ohio, to
recover its unreimbursed costs at the Miami County site, and the Company
subsequently filed a third-party complaint against certain entities that
had joined the original consent decree. The Company and the United States
have executed a consent decree which was approved by the Court in March
1995, pursuant to which the Company will pay $3.1 million in April 1995 in
satisfaction of its alleged and/or potential liability for past and future
response costs in connection with this site.
In October 1993, the United States filed an additional suit against
the Company in the same court seeking injunctive relief and damages up to
$25,000 per day from March 27, 1989 to the present, based on the Company's
alleged failure to properly respond to the Agency's document and
information requests in connection with this site. The Company and the
United States have reached an agreement in principle pursuant to which the
Company will pay $1.2 million in settlement of the pending litigation
concerning the Company's allegedly improper responses to the document
requests of the Environmental Protection Agency in connection with this
site.
In July 1993, counsel for the Company was advised by the Office of the
United States Attorney, Northern District of Illinois that a criminal
inquiry is also underway relating to the Company's responses to the
Agency's document and information requests. The Company is investigating
the circumstances regarding its responses. It is uncertain whether any
criminal action will be forthcoming.
MONTEREY PARK, CALIFORNIA SITE
The Company has paid approximately $768,000 pursuant to two partial
consent decrees entered into in 1990 and 1991 with respect to clean-up
obligations at the Operating Industries site in Monterey Park, California.
It is anticipated that there will be further remedial measures beyond those
covered by these partial settlements.
GRIFFIN, INDIANA SITE
The Company entered into a settlement with the United States, the
State of Indiana and certain other parties pursuant to which their
obligations in connection with a superfund site in Griffin, Indiana were
satisfied in exchange for aggregate payments of approximately $588,000.
KANKAKEE COUNTY, ILLINOIS SITE
The Company paid $258,000 and agreed to pay an additional amount of
approximately $50,000 in full settlement of its obligations in connection
with a superfund site in Kankakee County, Illinois.
In addition to other Federal and State laws regarding hazardous substance
contamination at sites owned or operated by the Company, the New Jersey
Industrial Site Recovery Act ('ISRA') requires
47
<PAGE>
that a 'Negative Declaration' or a 'Cleanup Plan' be filed and approved by the
New Jersey Department of Environmental Protection and Energy ('DEPE') as a
precondition to the 'transfer' of an 'industrial establishment'. The ISRA
regulations provide that a transferor may close a transaction prior to the
DEPE's approval of a negative declaration if the transferor enters into an
administrative consent order with the DEPE. The Company is currently a signatory
to administrative consent orders with respect to two formerly leased or owned
industrial establishments and has recently closed a facility and received a
negative declaration with respect thereto. Management believes that any
requirements that may be imposed by the DEPE with respect to these sites will
not have a materially adverse effect on the financial condition or operations of
the Company.
The Company's paperboard and newsprint mills are large consumers of energy,
using either natural gas or coal. Approximately 68% of the Company's total
paperboard tonnage is produced by mills which have coal-fired boilers. The cost
of energy is dependent, in part, on environmental regulations concerning sulfur
dioxide and particulate emissions.
Because various pollution control standards are subject to change, it is
not possible at this time to predict the amount of capital expenditures that
will ultimately be required to comply with future standards. In particular, the
United States Environmental Protection Agency has proposed a comprehensive rule
governing the pulp, paper and paperboard industry, which could require
substantial expenditures to achieve compliance on the part of the Company. For
the past three years, the Company has spent an average of approximately $10
million annually on capital expenditures for environmental purposes. Further
sums may be required in the future, although, in the opinion of management, such
expenditures will not have a material effect on its financial condition or
results of operations. The amount budgeted for such capital expenditures for
fiscal 1995 is approximately $20 million. Since the Company's competitors are,
or will be, subject to comparable pollution control standards, including the
proposed rule discussed above, if implemented, management is of the opinion that
compliance with future pollution standards will not adversely affect the
Company's competitive position.
48
<PAGE>
MANAGEMENT
DIRECTORS
The following table sets forth the names and ages of the directors of the
Company.
<TABLE>
<CAPTION>
NAME AGE
- --------------------------------- ---
<S> <C>
Michael W.J. Smurfit............. 58
Howard E. Kilroy................. 59
James E. Terrill................. 61
James R. Thompson................ 58
Donald P. Brennan................ 54
Alan E. Goldberg................. 40
David R. Ramsay.................. 31
G. Thompson Hutton............... 40
</TABLE>
The Board of Directors currently consists of eight directors. The directors
are classified into three groups: three directors having terms expiring in 1995
(Messrs. Terrill, Ramsay and Hutton), three directors having terms expiring in
1996 (Messrs. Kilroy, Goldberg and Thompson) and two directors having terms
expiring in 1997 (Messrs. Smurfit and Brennan).
EXECUTIVE OFFICERS
The following table sets forth the names, ages and positions of the
executive officers of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------------- --- --------------------------------------------------------------
<S> <C> <C>
Michael W.J. Smurfit............. 58 Chairman of the Board and Director
James E. Terrill................. 61 President, Chief Executive Officer and Director
Howard E. Kilroy*................ 59 Director
Richard W. Graham................ 60 Senior Vice President
Raymond G. Duffy................. 53 Vice President -- Planning
Michael C. Farrar................ 54 Vice President -- Environmental and Governmental Affairs
John R. Funke.................... 53 Vice President and Chief Financial Officer
Richard J. Golden................ 53 Vice President -- Purchasing
Michael F. Harrington............ 54 Vice President -- Personnel and Human Resources
Charles A. Hinrichs.............. 41 Vice President and Treasurer
Alan W. Larson................... 56 Vice President and General Manager -- Consumer Packaging
Division
Edward F. McCallum............... 60 Vice President and General Manager -- Container Division
Lyle L. Meyer.................... 58 Vice President
Patrick J. Moore................. 40 Vice President and General Manager -- Industrial Packaging
Division
David C. Stevens................. 60 Vice President and General Manager -- Reclamation Division
Truman L. Sturdevant............. 60 Vice President and General Manager of SNC
Michael E. Tierney............... 46 Vice President, General Counsel and Secretary
Richard K. Volland............... 56 Vice President -- Physical Distribution
William N. Wandmacher............ 52 Vice President and General Manager -- Containerboard Mill
Division
Gary L. West..................... 52 Vice President -- Sales and Marketing
</TABLE>
- ------------
* Mr. Kilroy resigned his position as Senior Vice President of the Company
effective March 31, 1995.
49
<PAGE>
BIOGRAPHIES
Donald P. Brennan has been a Director of the Company since 1989. Mr. Brennan
joined MS&Co. in 1982 and has been a Managing Director since 1984. He is
responsible for MS&Co.'s Merchant Banking Division and is Chairman and President
of Morgan Stanley Leveraged Equity Fund II, Inc. ('MSLEF II, Inc.') and Chairman
of Morgan Stanley Capital Partners III, Inc. ('MSCP III, Inc.'). Mr. Brennan
serves as Director of Fort Howard Corporation, Hamilton Services Limited, PSF
Finance Holdings, Inc., Shuttleway, Stanklav Holdings, Inc. and Waterford
Wedgwood U.K. plc and is Deputy Chairman of Waterford Wedgwood plc.
Raymond G. Duffy has been Vice President -- Planning since July 1983 and
served as Director of Corporate Planning from 1980 to 1983.
Michael C. Farrar was appointed Vice President-Environmental and
Governmental Affairs in March 1992. Prior to joining the Company, he was Vice
President of the American Paper Institute and the National Forest Products
Association for more than 5 years.
John R. Funke has been Vice President and Chief Financial Officer since
April 1989 and was Corporate Controller and Secretary from 1982 to April 1989.
Richard J. Golden has been Vice President -- Purchasing since January 1985
and was Director of Corporate Purchasing from October 1981 to January 1985. In
January 1994, he was assigned responsibility for world-wide purchasing for JS
Group.
Alan E. Goldberg has been a Director of the Company since 1989. Mr.
Goldberg joined MS&Co. in 1979 and has been a member of MS&Co.'s Merchant
Banking Division since its formation in 1985 and a Managing Director of MS&Co.
since 1988. Mr. Goldberg is a Director of MSLEF II, Inc. and a Vice Chairman of
MSCP III, Inc. Mr. Goldberg also serves as a Director of Amerin Guaranty
Corporation, CIMIC Holdings Limited, Centre Cat Limited, Hamilton Services
Limited and Risk Management Solutions, Inc.
Richard W. Graham was appointed Senior Vice President in February 1994. He
served as Vice President and General Manager -- Folding Carton and Boxboard Mill
Division from February 1991 to January 1994. Mr. Graham was Vice President and
General Manager -- Folding Carton Division from October 1986 to February 1991.
Michael F. Harrington was appointed Vice President-Personnel and Human
Resources in January 1992. Prior to joining the Company, he was Corporate
Director of Labor Relations/Safety and Health with Boise Cascade Corporation for
more than 5 years.
Charles A. Hinrichs was appointed Vice President and Treasurer in April
1995. Prior to joining the Company, Mr. Hinrichs was employed by The Boatmen's
National Bank of St. Louis for 13 years where most recently he was Senior Vice
President and Chief Credit Officer.
G. Thompson Hutton was elected to the Board of Directors in December 1994.
Mr. Hutton has been President and Chief Executive Officer of Risk Management
Solutions, Inc., an information services company based in Menlo Park,
California, since 1991. Prior to that he was Engagement Manager with McKinsey &
Company, Inc. from 1986 to 1991. He also serves as a Director of K2
Technologies, Express Yachts and is a Trustee of Colorado Outward Bound School.
Howard E. Kilroy has been a Director of the Company since 1989. Mr. Kilroy
was Chief Operations Director of JS Group from 1978 until March 1995 and
President of JS Group from October 1986 until March 1995. Mr. Kilroy was a
member of the Supervisory Board of SIBV from January 1978 to January 1992. He
was Senior Vice President of the Company for over 5 years. He retired from his
executive positions with JS Group and the Company at the end of March 1995, but
remains a Director of JS Group and the Company. In addition, he is Governor
(Chairman) of Bank of Ireland and a Director of Aran Energy plc.
Alan W. Larson has been Vice President and General Manager -- Consumer
Packaging Division since October 1988. Prior to joining the Company in 1988, he
was Executive Vice President of The Black and Decker Corporation.
Edward F. McCallum has been Vice President and General Manager -- Container
Division since October 1992. He served as Vice President and General Manager of
the Industrial Packaging Division
50
<PAGE>
from January 1991 to October 1992. Prior to that time, he served in various
positions in the Container Division since joining the Company in 1971.
Lyle L. Meyer has been Vice President since April 1989. He served as
President of Smurfit Pension and Insurance Services Company ('SPISCO') from 1982
until 1992, when SPISCO was merged into the Company.
Patrick J. Moore has been Vice President and General Manager -- Industrial
Packaging Division since December 1994. He served as Vice President and
Treasurer from February 1993 to December 1994, and was Treasurer from October
1990 to February 1993. Prior to joining the Company in 1987 as Assistant
Treasurer, Mr. Moore was with Continental Bank in Chicago where he served in
various corporate lending, international banking and administrative capacities.
David R. Ramsay has been a Director of the Company since 1989. Mr. Ramsay
joined MS&Co. in 1989 and is a Vice President of MS&Co.'s Merchant Banking
Division. Mr. Ramsay also serves as a Director of ARM Financial Group Inc.,
Integrity Life Insurance Company, National Integrity Life Insurance Company,
Consolidated Hydro, Inc., Hamilton Services Limited, A/S Bulkhandling and
Stanklav Holdings, Inc. and Risk Management Solutions, Inc. and is President and
a Director of PSF Finance Holdings, Inc.
Michael W.J. Smurfit has been Chairman and Chief Executive Officer of JS
Group since 1977. Dr. Smurfit has been Chairman of the Board of the Company
since 1989. He was Chief Executive Officer of the Company prior to July 1990.
David C. Stevens has been Vice President and General Manager -- Reclamation
Division since January 1993. He joined the Company in 1987 as General Sales
Manager and was named Vice President later that year. He held various management
positions with International Paper and was President of Mead Container Division
prior to joining the Company.
Truman L. Sturdevant has been Vice President and General Manager of SNC
since August 1990. Mr. Sturdevant joined the Company in 1984 as Vice President
and General Manager of the Oregon City newsprint mill.
James E. Terrill was named a Director and President and Chief Executive
Officer in February 1994. He served as Executive Vice President -- Operations
from August 1990 to February 1994. He also served as Executive Vice President of
SNC from February 1993 to February 1994 and was President of SNC from February
1986 to February 1993.
James R. Thompson was elected to the Board of Directors in July 1994. He is
Chairman of Winston & Strawn, a law firm that regularly represents the Company
on numerous matters. He served as Governor of the State of Illinois from 1977 to
1991. Mr. Thompson also serves as a Director of FMC Corporation, the Chicago
Board of Trade, Chicago and North Western Transportation Company, United
Fidelity, Inc., International Advisory Council of the Bank of Montreal, Prime
Retail, Inc., Pechiney International, Wakenhut Corrections Corporation and
American Publishing Corporation.
Michael E. Tierney has been Vice President, General Counsel and Secretary
since January 1993. He served previously as Senior Counsel and Assistant
Secretary since joining the Company in 1987.
Richard K. Volland has been Vice President -- Physical Distribution since
1978.
William N. Wandmacher has been Vice President and General
Manager -- Containerboard Mill Division since January 1993. He served as
Division Vice President -- Medium Mills from October 1986 to January 1993. Since
joining the Company in 1966, he has held increasingly responsible positions in
production, plant management and planning, both domestic and foreign.
Gary L. West has been Vice President--Sales and Marketing since 1994. He
was Vice President and General Manager -- Industrial Packaging Division from
October 1992 to December 1994. He served as Vice President -- Converting and
Marketing for the Industrial Packaging Division from January 1991 to October
1992. Prior to that time, he held various management positions in the Container
and Consumer Packaging divisions since joining the Company in 1980.
51
<PAGE>
PROVISIONS OF STOCKHOLDERS AGREEMENT PERTAINING TO MANAGEMENT
The Stockholders Agreement provides that SIBV and the MS Holders (as
defined in the Stockholders Agreement and which term includes the MSLEF II
Associated Entities and, with respect to certain of their shares, includes the
Direct Investors (as defined below)) shall vote their shares of JSC Common Stock
subject to the Stockholders Agreement to elect as directors of JSC (a) four
individuals selected by SIBV (each, an 'SIBV Nominee') one of whom shall be the
Chief Executive Officer and one of whom shall not be affiliated with SIBV or the
Company (an 'SIBV Unaffiliated Director') and (b) four individuals selected by
MSLEF II (each, a 'MSLEF II Nominee'), one of whom shall not be affiliated with
MSLEF II or the Company (a 'MSLEF II Unaffiliated Director'), if (i) the MS
Holders collectively own more than 10% of the outstanding JSC Common Stock or
SIBV owns less than 25% of the outstanding JSC Common Stock and certain of the
MS Holders shall not have collectively received, without duplication, the
Initial Return (as defined below) ('Tier 1') or (ii) the MS Holders collectively
own 30% or more of the outstanding JSC Common Stock or the MS Holders
collectively own a greater number of voting shares than SIBV and certain of the
MS Holders shall have collectively received the Initial Return ('Tier 2');
provided, however, that in the event that the MS Holders collectively own 7 1/2%
or more and less than 30% of the outstanding JSC Common Stock and certain of
them shall have collectively received the Initial Return, then SIBV shall not be
required to have one of its nominees be an SIBV Unaffiliated Director and the
four MSLEF II Nominees shall include two MSLEF II Unaffiliated Directors;
provided, further, that in the event that the MS Holders collectively own 6% or
more but less than 7 1/2% of the outstanding JSC Common Stock and certain of
them shall have collectively received the Initial Return, then SIBV shall
nominate four SIBV Nominees (one of whom shall be the Chief Executive Officer),
MSLEF II shall nominate two MSLEF II Nominees and JSC's Board of Directors shall
nominate two persons to the Board of Directors who shall not be affiliated with
SIBV or MSLEF II and who shall be reasonably acceptable to MSLEF II and SIBV.
Unless MSLEF II determines otherwise, MSLEF II Nominees, except MSLEF II
Unaffiliated Directors, shall be Managing Directors, Principals or Vice
Presidents of MS&Co. The Stockholders Agreement defines 'Initial Return' to mean
the receipt, as dividends or as a result of sales of shares of JSC Common Stock,
of $320 million in cash or certain other property (or a combination thereof)
collectively by the MSLEF II Associated Entities and their affiliates. The
Initial Return shall include amounts received by partners of MSLEF II and Equity
Investors (as defined below), whether or not such partners are MS Holders, by
reason of distributions in respect of, or repurchases of all or a portion of,
partnership interests in such partnerships (and shares which MSLEF II or Equity
Investors distributes to its partners will be deemed to have been sold at the
closing sales price per share for the last trading day prior to the date such
distribution is made). Calculations made for purposes of the foregoing shall not
give effect to shares of JSC Common Stock purchased after the date of the
closing of the 1994 Offerings (other than shares of JSC Common Stock acquired by
MS Holders or by SIBV in certain limited circumstances, including shares
acquired by the MSLEF II Associated Entities upon distributions in respect of,
or repurchases of all or a portion of, partnership interests in MSLEF II or
Equity Investors and shares acquired by SIBV pursuant to the preemptive rights
set forth in the Subscription Agreement). In addition, notwithstanding the
termination of the Stockholders Agreement, upon the MS Holders ceasing to own
six percent or more of the JSC Common Stock, so long as MSLEF II and MSLEF II,
Inc. and its affiliates own JSC Common Stock with a market value of at least $25
million, MSLEF II shall be entitled to designate, and SIBV shall, upon request,
vote its shares of JSC Common Stock subject to the Stockholders Agreement for
the election of, one nominee to the Board of Directors of JSC (who need not be a
MSLEF II Unaffiliated Director).
Pursuant to the terms of the Stockholders Agreement, SIBV and MSLEF II each
became entitled to designate four nominees to JSC's Board of Directors upon the
consummation of the Recapitalization Plan. Such designees include, in the case
of SIBV, Michael W. J. Smurfit, Howard E. Kilroy, James E. Terrill and James R.
Thompson and, in the case of MSLEF II, Donald P. Brennan, Alan E. Goldberg,
David R. Ramsay and G. Thompson Hutton. See ' -- Directors'. Pursuant to the
Stockholders Agreement, SIBV and MSLEF II have agreed to ensure the Board of
Directors will consist of only eight directors (unless they otherwise agree). In
addition, the Investors (as defined in the Stockholders Agreement and which term
includes SIBV, the MSLEF II Associated Entities and the Direct Investors) have
agreed pursuant to the Stockholders Agreement to use their best efforts to cause
their respective
52
<PAGE>
nominees to resign from JSC's Board of Directors and to cause the remaining
Directors, subject to their fiduciary duties, to fill the resulting vacancies,
if and to the extent changes in directors are necessary in order to reflect the
Board representation contemplated by the Stockholders Agreement.
Pursuant to the Stockholders Agreement, the Board of Directors of JSC has
all powers and duties and the full discretion to manage and conduct the business
and affairs of JSC as may be conferred or imposed upon a board of directors
pursuant to Section 141 of the Delaware General Corporation Law; provided,
however, that if the MS Holders' collective ownership of JSC Common Stock shall
be in Tier 1 or Tier 2, approval of certain specified actions shall require
approval of (a) the sum of one and a majority of the entire Board of Directors
of the Company present at a meeting of the Board of Directors (the 'Required
Majority') and (b) two directors who are SIBV Nominees and two directors who are
MSLEF II Nominees. Without limiting the foregoing, unless the MS Holders
collectively own 6% or more but less than 7 1/2% of the JSC Common Stock during
any period when JSC's Board of Directors does not consist of eight members (or
such greater number of members as may be agreed to by SIBV, MSLEF II and JSC)
then all actions of the Board of Directors shall require approval of at least
one director who is an SIBV Nominee and one director who is a MSLEF II Nominee.
The specified corporate actions that must be approved by a Required Majority
include the amendment of the certificate of incorporation or by-laws of JSC or
any of its subsidiaries (except as contemplated by this Prospectus); the
issuance, sale, purchase or redemption of securities of JSC or any of its
subsidiaries (other than, in the case of any issuance or sale, to JSC or any
direct or indirect wholly owned subsidiary of JSC and other than pursuant to the
Subscription Agreement); the establishment of and appointments to the Audit
Committee of JSC's Board of Directors; sales of assets or investments in, or
certain transactions with, JS Group or its affiliates in excess of a specified
amount or any other person in excess of other specified amounts, in each case
subject to certain limited exceptions; certain mergers, consolidations,
dissolutions or liquidations of JSC or any of its subsidiaries; the filing of a
petition in bankruptcy; the setting aside, declaration or making of any payment
or distribution by way of dividend or otherwise to the stockholders of JSC or
any of its subsidiaries, except for any such payments or distributions made or
to be made to JSC or any of its direct or indirect wholly owned subsidiaries;
the incurrence of certain new indebtedness, the creation of certain liens or
guarantees, the institution, termination or settlement of material litigation,
the surrender of property or rights, making certain investments, commitments,
capital expenditures or donations, in each case in excess of certain specified
amounts; entering into any lease (other than a capitalized lease) of any assets
of JSC located in any one place having a book value in excess of a specified
amount; the entering into any agreement or material transaction between JSC and
a director or officer of JSC, JSC(U.S.), JS Group, SIBV or MSLEF II or their
affiliates; the replacement of the independent accountants for JSC or any of its
subsidiaries or modification of significant accounting methods; the amendment or
termination of JSC's 1992 Stock Option Plan (except as contemplated by this
Prospectus); except as provided in the Stockholders Agreement, the election or
removal of directors and officers of JSC(U.S.); the increase or decrease of the
number of directors comprising JSC's Board of Directors; and any decision
regarding registration of any securities, except as provided in the Registration
Rights Agreement.
Upon consummation of the 1994 Offerings, the Board of Directors of JSC will
be divided into three classes of directors serving staggered three-year terms.
Pursuant to the Stockholders Agreement, SIBV and MSLEF II shall use their best
efforts to cause their respective designees to JSC's Board of Directors to elect
directors to the Boards of Directors of JSC(U.S.) in an analogous manner unless
they otherwise agree. The directors of JSC and JSC(U.S.) are the same
individuals.
COMMITTEES
The Board of Directors of JSC has appointed an Audit Committee, a
Compensation Committee and an Appointment Committee. The functions of these
committees and the members of the Board serving on such committees are set forth
below.
The Audit Committee is responsible for making recommendations to the Board
of Directors of JSC regarding the independent auditors to be appointed for the
Company, meeting with the independent auditors, the manager of internal audit
and other corporate officers to review matters relating to corporate financial
reporting and accounting procedures and policies, adequacy of financial,
accounting and operating controls and the scope of the audits of the independent
auditors and internal auditors and
53
<PAGE>
reviewing and reporting on the results of such audits to the Board of Directors
of JSC. The members of the Audit Committee are Messrs. Kilroy, Goldberg and
Thompson.
The Compensation Committee is responsible for reviewing the administration
of executive compensation programs and determining the compensation of the
executive officers of the Company. The members of the Compensation Committee are
Messrs. Brennan, Goldberg and Ramsay.
The Appointment Committee is responsible for approving compensation
(including fringe benefits) for those officers of the Company whose compensation
is not approved by the Compensation Committee. The members of the Appointment
Committee are Dr. Smurfit and Messrs. Kilroy, Terrill and Goldberg.
DIRECTOR COMPENSATION
Each non-employee director receives as compensation for serving on the
Board of Directors of JSC, an annual fee of $35,000, plus a fee of $2,000 for
attendance at each meeting which is in excess of four meetings per year and
travel expenses in connection with attendance at such meetings. Directors who
are employees of the Company do not receive any additional compensation by
reason of their membership on, or attendance at meetings of the Board. In 1994,
the Board of Directors of JSC held four meetings.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth the cash and noncash compensation for each
of the last three fiscal years awarded to or earned by the Chief Executive
Officer of the Company and the four other most highly compensated executive
officers of the Company (the 'Named Executive Officers') during 1994 The table
also includes Mr. James B. Malloy, who retired from the position of President
and Chief Executive Officer on February 1, 1994.
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
------------------------
AWARDS PAYMENTS
ANNUAL COMPENSATION ---------- ----------
-------------------------------------------------------------- SECURITIES LTIP
NAME AND 1997 OTHER ANNUAL UNDERLYING PAYOUTS
PRINCIPAL POSITION YEAR SALARY($) BONUS($) BONUS(a) COMPENSATION($) OPTIONS(#) ($)(b)
- -------------------------- ---- --------- -------- ---------- --------------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
James E. Terrill,
President and Chief
Executive Officer,
formerly Executive Vice
President
-- Operations(d).......... 1994 $ 678,333 $251,029 $1,000,000 $ 52,471 319,000 $ 346,604
1993 440,000 0 0 17,318 0 0
1992 367,500 243,477 0 944 181,000 0
Michael W.J. Smurfit,
Chairman of the Board... 1994 834,000 299,084 0 30,000 0 1,964,088
1993 832,369 0 0 30,000 0 0
1992 793,273 526,605 0 0 1,026,000 0
Richard W. Graham, Senior
Vice President.......... 1994 378,667 110,876 475,000 9,270 9,000 173,302
1993 337,000 0 0 5,215 0 0
1992 286,760 29,336 0 2,223 91,000 0
John R. Funke, Vice
President and Chief
Financial Officer....... 1994 300,000 107,584 500,000 28,599 29,000 231,069
1993 300,000 0 0 13,163 0 0
1992 232,000 153,705 0 1,647 121,000 0
David C. Stevens, Vice
President and General
Manager -- Reclamation
Division................ 1994 200,000 311,709 200,000 6,515 5,000 34,660
1993 200,000 48,954 0 1,402 0 0
1992 161,000 44,012 0 985 45,000 0
James B. Malloy, Retired,
formerly President and
Chief Executive
Officer(d).............. 1994 82,667 0 0 43,163 0 1,386,415
1993 992,000 0 0 17,867 0 0
1992 945,000 626,082 0 8,003 724,000 0
<CAPTION>
ALL OTHER
NAME AND COMPENSATION
PRINCIPAL POSITION ($)(c)
- -------------------------- ------------
<S> <C>
James E. Terrill,
President and Chief
Executive Officer,
formerly Executive Vice
President
-- Operations(d)........ $ 26,235
19,545
16,346
Michael W.J. Smurfit,
Chairman of the Board... 11,922
16,775
15,764
Richard W. Graham, Senior
Vice President.......... 9,937
10,817
9,075
John R. Funke, Vice
President and Chief
Financial Officer....... 10,779
10,167
10,435
David C. Stevens, Vice
President and General
Manager -- Reclamation
Division................ 7,719
7,965
5,947
James B. Malloy, Retired,
formerly President and
Chief Executive
Officer(d).............. 367,122
21,902
23,294
</TABLE>
(footnotes on next page)
54
<PAGE>
(footnotes from previous page)
(a) Amounts awarded in 1994 pursuant to JSC's 1994 Long-Term Incentive Plan.
These awards are not due and payable until April 30, 1997 and may be
subject to forfeiture if the executive's employment is terminated, other
than for death or disability, prior to such date.
(b) Aggregate long-term incentive payment of $7.67 million was made in 1994
prior to consummation of the Equity Offerings to a number of JSC's and its
affiliates' officers, including the Named Executive Officers and officers
of JS Group and its affiliates. These amounts represent deferred settlement
of the cancellation in 1992 of the Company's 1990 Long-Term Management
Incentive Plan. The amount paid to the officers of JS Group and its
affiliates (exclusive of Dr. Smurfit) was $1.69 million.
(c) Amounts shown under 'All Other Compensation' for 1994 include a $3,500
Company contribution to JSC's Savings Plan for each Named Executive Officer
(other than Dr. Smurfit) and JSC-paid split-dollar term life insurance
premiums for Dr. Smurfit ($11,922) and Messrs. Terrill ($22,735), Graham
($6,437), Funke ($5,374), Stevens ($4,219) and Malloy (none). Messrs.
Malloy and Funke also had reportable (above 120% of the applicable federal
long-term rate) earnings equal to $7,688 and $1,905, respectively, credited
to their accounts under JSC's Deferred Compensation Capital Enhancement
Plan. In addition, Mr. Malloy received $64,859 of unused vacation pay and
$291,075 of retirement benefits.
(d) James B. Malloy retired, as of February 1, 1994, as President and Chief
Executive Officer, and James E. Terrill succeeded to Mr. Malloy's positions
as President and Chief Executive Officer. Previously, Mr. Terrill was
Executive Vice President -- Operations.
1992 STOCK OPTION PLAN
OPTION PLAN
JSC's 1992 Stock Option Plan, as amended (the 'Plan') became effective on
August 26, 1992 and will continue in effect until the later of August 26, 2004
or the expiration of all outstanding options granted thereunder unless
terminated sooner by JSC's Board of Directors (the 'Board'); no options may be
granted under the Plan after August 25, 2004 or such earlier date determined by
the Board.
The purpose of the Plan is to advance the interests of JSC, its
subsidiaries and affiliates and their respective stockholders by providing
certain eligible employees of the Company, its subsidiaries and affiliates with
an opportunity to acquire a proprietary interest in JSC. Each salaried employee
is eligible to be an optionee, provided he/she is approved by the Board of
Directors. In 1994, JSC awarded 640,250 stock options, including 448,000 to all
executive officers as a group (12 persons), none to directors (with the
exception of Mr. Terrill) and 192,250 to employees other than executive
officers, at an exercise or base price of $12.50 with an expiration date of
February 14, 2006. As of December 31, 1994, there were 351 participants in the
Plan.
The Plan provides for the granting of nonstatutory stock options, which are
options that do not qualify as incentive stock options within the meaning of the
Code.
The Plan is administered by a committee of the Board (the 'Option Plan
Committee') consisting solely of two or more directors of JSC who are
'disinterested' within the meaning of Rule 16b-3 ('Rule 16b-3') promulgated
under Section 16 of the Exchange Act. Members of the Option Plan Committee do
not receive any remuneration from the Plan and serve at the discretion of the
Board.
The number of shares reserved for issuance under the Plan is 8,050,000,
subject to adjustment upon changes in capitalization. Shares may be treasury
shares or authorized but unissued shares.
Under the Plan, the Named Executive Officers and certain other eligible
employees have been granted options to purchase shares of JSC Common Stock.
Options may not be exercised unless they are both 'exercisable' and 'vested'.
The vesting schedule varies according to the schedule set forth in each Option
Agreement and provides for vesting over a period of time. The options which have
been granted to date generally become fully vested four years from the date of
grant. Options vest in their entirety upon the death, disability or retirement,
as defined in the Plan, of the optionee. Non-vested options are forfeited upon
any other termination of employment. The Option Plan Committee, with the consent
of the Board, may accelerate the vesting of options at such times and under such
circumstances as it deems appropriate.
Exercisability is determined in accordance with the following rules. Upon
the earliest to occur of (i) MSLEF II's transfer of all its JSC Common Stock or,
if MSLEF II distributes its JSC Common Stock to its partners pursuant to its
dissolution, the transfer by such partners of at least 50% of the aggregate JSC
Common Stock received from MSLEF II pursuant to its dissolution, (ii) the 11th
anniversary of the grant date of the options, and (iii) a public offering of JSC
Common Stock by MSLEF II (a 'MSLEF II Public Offering') (each, a 'Trigger
Date'), all vested options shall become exercisable and all options
55
<PAGE>
which vest subsequently shall become exercisable upon vesting; provided,
however, that if a public offering occurs prior to the Threshold Date (as
defined below) all vested options and all options which vest subsequent to the
public offering but prior to the Threshold Date shall be exercisable in an
amount (as of periodic determination dates) equal to the product of (a) the
number of shares of JSC Common Stock vested pursuant to the option (whether
previously exercised or not) and (b) the Morgan Percentage (as defined below) as
of such date; provided further that, in any event, (i) ten percent of stock
options granted prior to 1993 became exercisable on January 1, 1995, and (ii) a
holder's options shall become exercisable from time to time in an amount equal
to the percentage that the number of shares sold or distributed to its partners
by MSLEF II represents of its aggregate ownership of shares on May 11, 1994
(with vested options becoming exercisable up to such number before any
non-vested options become so exercisable) less the number of options, if any,
which became exercisable on January 1, 1995. The Threshold Date is the earlier
of (x) the date the members of the MSLEF II Group (as defined in the Option
Plan) shall have received collectively $200,000,000 in cash and/or other
property as a return of their investment in JSC (as a result of sales of shares
of JSC's common equity) and (y) the date that the members of the MSLEF II Group
shall have transferred an aggregate of at least 30% of JSC's common equity owned
by the MSLEF II Group as of August 26, 1992. The Morgan Percentage as of any
date is the percentage determined from the quotient of (a) the number of shares
of JSC's common equity held as of August 26, 1992, that were transferred by the
MSLEF II Group as of the determination date and (b) the number of shares of
JSC's common equity outstanding as of such date.
The purchase price of the stock purchased pursuant to the exercise of an
option is $10 per share for options granted as of August 26, 1992 and $12.50 per
share for options granted as of February 15, 1994; and for all other options,
such price must be the fair market value of the stock on the day the option is
granted. The option price may be adjusted in accordance with the antidilution
provisions of the Plan. Upon the exercise of any option, the purchase price must
be fully paid in cash or its equivalent or with already owned shares or shares
otherwise issuable upon exercise.
Certain Federal Income Tax Effects -- The following discussion of certain
federal income tax effects applicable to options granted under the Plan is a
summary only, and reference is made to the Code, the regulations and rulings
issued thereunder and judicial decisions relating thereto for a complete
statement of all relevant federal tax provisions.
An employee generally will not be taxed upon the grant of an option.
Rather, at the time of exercise of such option the employee will recognize
ordinary income for federal income tax purposes in an amount equal to the excess
of the fair market value of the shares purchased over the option price. JSC, or
its affiliates and subsidiaries, as the case may be, will generally be entitled
to a tax deduction at such time and in the same amount that the employee
recognizes ordinary income. Different rules may apply in the case of an employee
who is subject to the reporting requirements of Section 16(a) of the Exchange
Act.
If shares acquired upon exercise of an option are later sold or exchanged,
then the difference between the sales price and the fair market value of such
shares on the date that ordinary income was recognized with respect thereto will
generally be taxable as long-term or short-term capital gain or loss (if the
shares are a capital asset of the employee) depending upon whether the shares
have been held for more than one year after such date.
According to a published ruling of the Internal Revenue Service, an
employee who pays the option price upon exercise of a nonqualified stock option,
in whole or in part, by delivering shares already owned by him will recognize no
gain or loss for federal income tax purposes on the shares surrendered, but
otherwise will be taxed according to the rules described above. With respect to
shares acquired upon exercise that are equal in number to the shares
surrendered, the basis of such shares will be equal to the basis of the shares
surrendered, and the holding period of shares acquired will include the holding
period of the shares surrendered. The basis of additional shares received upon
exercise will be equal to the fair market value of such shares on the date that
governs the determination of the employee's ordinary income, and the holding
period for such additional shares will commence on such date.
56
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
The following table provides information concerning stock options granted
to the Named Executive Officers effective as of February 15, 1994.
OPTION GRANTS IN 1994
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE
AT ANNUAL RATES OF
NUMBER OF STOCK
SECURITIES % OF TOTAL PRICE APPRECIATION
UNDERLYING OPTIONS GRANTED EXERCISE OR FOR OPTION TERM(2)
OPTIONS TO EMPLOYEES BASE PRICE EXPIRATION -----------------------
NAME GRANTED IN FISCAL YEAR ($ PER SHARE)(1) DATE 5% 10%
- ------------------------------ ---------- --------------- ---------------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
James E. Terrill.............. 319,000 49.9% $12.50 2/14/2006 $3,173,477 $8,526,983
Michael W.J. Smurfit.......... 0 N/A N/A N/A N/A N/A
Richard W. Graham............. 9,000 1.4 12.50 2/14/2006 89,534 240,573
John R. Funke................. 29,000 4.5 12.50 2/14/2006 288,498 775,180
David C. Stevens.............. 5,000 0.8 12.50 2/14/2006 49,741 133,652
James B. Malloy............... 0 N/A N/A N/A N/A N/A
</TABLE>
- ------------
(1) The 1994 options were granted on February 15, 1994 and the exercise price
was set prior to JSC's initial public offering on May 4, 1994.
(2) The dollar amounts under these columns are the result of calculations at 5%
and 10% rates, as set by the Commission's executive compensation disclosure
rules. Actual gains, if any, on stock option exercises depend on future
performance of JSC Common Stock and overall stock market conditions. No
assurance can be made that the amounts reflected in these columns will be
achieved.
(3) On February 9, 1995, 91,750 options were granted to 37 individuals,
including 10,000 to Mr. Graham, at an exercise price of $17.625 per share.
OPTION EXERCISES AND YEAR-END VALUE TABLE
The following table summarizes the exercise of options and the value of
options held by the Named Executive Officers as of the end of 1994.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR,
AND FISCAL YEAR-END OPTION VALUE
<TABLE>
<CAPTION>
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED IN-THE-MONEY
SHARES OPTIONS AT JANUARY 1, 1995(1) OPTIONS AT JANUARY 1, 1995(2)
ACQUIRED ON VALUE ---------------------------------- -------------------------------
NAME EXERCISE(#) REALIZED($) EXERCISABLE(#) UNEXERCISABLE(#) EXERCISABLE($) UNEXERCISABLE($)
- --------------------------------- ----------- ----------- -------------- ------------------- -------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
James E. Terrill................. 0 N/A 18,100 481,900 $ 126,700 $ 2,575,800
Michael W.J. Smurfit............. 0 N/A 102,600 923,400 718,200 6,463,800
Richard W. Graham................ 0 N/A 9,100 90,900 63,700 613,800
John R. Funke.................... 0 N/A 12,100 137,900 84,700 892,800
David C. Stevens................. 0 N/A 4,500 45,500 31,500 306,000
James B. Malloy.................. 0 N/A 72,400 651,600 506,800 4,561,200
</TABLE>
- ------------
(1) No stock appreciation rights have been granted to any Named Executive
Officers. Ten percent of the outstanding options granted prior to 1993
became exercisable on January 1, 1995. None were exercisable on December 31,
1994.
(2) Value is the difference between the market value of JSC Common Stock on the
date of exercise or December 31, 1994 and the exercise price. The market
price at December 31, 1994 was $17.00 per share.
PENSION PLANS
SALARIED EMPLOYEES' PENSION PLAN AND SUPPLEMENTAL INCOME PENSION PLANS
JSC and its subsidiaries maintain a non-contributory pension plan for
salaried employees (the 'Pension Plan') and two non-contributory supplemental
income pension plans (the 'SIP I' and 'SIP II', together, the 'SIP Plans') for
certain key executive officers, under which benefits are determined by final
average earnings and years of credited service and are offset by a certain
portion of social security benefits. For purposes of the Pension Plan, final
average earnings equals the average of the highest five consecutive years of the
participants' last 10 years of service, including overtime and certain bonuses,
but excluding bonus payments under the Management Incentive Plan, deferred or
acquisition bonuses, fringe benefits and certain other compensation. For
purposes of each SIP, final
57
<PAGE>
average earnings equals the participant's average earnings, including bonus
payments made under the Management Incentive Plan, for the five consecutive
highest-paid calendar years out of the last 10 years of service. SIP I
recognizes up to 20 years of credited service and SIP II recognizes up to 22.5
years of credited service.
The pension benefits for the Named Executive Officers can be calculated
pursuant to the following table, which shows the total estimated single life
annuity payments that would be payable to the Named Executive Officers
participating in the Pension Plan and one of the SIP Plans after various years
of service at selected compensation levels. Payments under the SIP Plans are an
unsecured liability of JSC.
<TABLE>
<CAPTION>
SIP I PARTICIPANTS
----------------------------------------------
ANNUAL BENEFITS (SINGLE LIFE ANNUITY)
UPON FINAL RETIREMENT WITH FINAL
YEARS OF SERVICE INDICATED
FINAL (PRIOR TO ADJUSTMENT FOR SOCIAL SECURITY)
AVERAGE ----------------------------------------------
EARNINGS 5 YEARS 10 YEARS 15 YEARS 20 YEARS
- ----------------------------------------------------- -------- -------- -------- ----------
<S> <C> <C> <C> <C>
$ 200,000............................................ $ 25,000 $ 50,000 $ 75,000 $ 100,000
400,000........................................... 50,000 100,000 150,000 200,000
600,000........................................... 75,000 150,000 225,000 300,000
800,000........................................... 100,000 200,000 300,000 400,000
1,000,000........................................... 125,000 250,000 375,000 500,000
1,200,000........................................... 150,000 300,000 450,000 600,000
1,400,000........................................... 175,000 350,000 525,000 700,000
1,600,000........................................... 200,000 400,000 600,000 800,000
1,800,000........................................... 225,000 450,000 675,000 900,000
2,000,000........................................... 250,000 500,000 750,000 1,000,000
</TABLE>
<TABLE>
<CAPTION>
SIP II PARTICIPANTS
---------------------------------------------------------
ANNUAL BENEFITS (SINGLE LIFE ANNUITY)
UPON FINAL RETIREMENT WITH FINAL
YEARS OF SERVICE INDICATED
(PRIOR TO ADJUSTMENT FOR SOCIAL SECURITY)
FINAL ---------------------------------------------------------
AVERAGE 22.5
EARNINGS 5 YEARS 10 YEARS 15 YEARS 20 YEARS YEARS
- ------------------------------------------ ------- -------- -------- ---------- --------
<S> <C> <C> <C> <C> <C>
$ 200,000................................. $20,000 $ 40,000 $ 60,000 $ 80,000 $ 90,000
400,000................................ 40,000 80,000 120,000 160,000 180,000
600,000................................ 60,000 120,000 180,000 240,000 270,000
800,000................................ 80,000 160,000 240,000 320,000 360,000
1,000,000................................ 100,000 200,000 300,000 400,000 450,000
1,200,000................................ 120,000 240,000 360,000 480,000 540,000
1,400,000................................ 140,000 280,000 420,000 560,000 630,000
1,600,000................................ 160,000 320,000 480,000 640,000 720,000
1,800,000................................ 180,000 360,000 540,000 720,000 810,000
2,000,000................................ 200,000 400,000 600,000 800,000 900,000
</TABLE>
Dr. Smurfit and Mr. Malloy participate in SIP I and have 39 and 15 years of
credited service, respectively. SIP II became effective January 1, 1993, and Mr.
Terrill, Mr. Graham, Mr. Funke and Mr. Stevens participate in such plan and have
23, 36, 18 and 7 years of credited service, respectively. Current average
earnings for each of the the Named Executive Officers are as follows: Dr.
Smurfit ($1,069,000); Mr. Terrill ($516,000); Mr. Graham ($340,000); Mr. Funke
($322,000); and Mr. Stevens ($199,000). Mr. Malloy received approximately
$208,000 of SIP I payments in 1994.
EMPLOYMENT CONTRACTS AND TERMINATION, SEVERANCE AND CHANGE OF CONTROL
ARRANGEMENTS
Mr. Malloy has a deferred compensation agreement with a subsidiary of JSC,
pursuant to which he became entitled upon his retirement to lifetime payments of
$70,000 annually in addition to his accrued benefits under SIP I.
58
<PAGE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Prior to the consummation of the Equity Offerings, JSC did not maintain a
formal compensation committee. Dr. Smurfit, Mr. Malloy and Mr. Kilroy, executive
officers of JSC at the beginning of 1994, participated in deliberations of the
Board of Directors on executive compensation matters during 1994.
Dr. Smurfit and Mr. Kilroy are both directors and executive officers of JS
Group and JSC, and Mr. Malloy is a director of JS Group and a former director
and executive officer of JSC.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
All of the outstanding common stock of JSC(U.S.) is owned by JSCE, and all
of the outstanding common stock of JSCE is owned by JSC.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The table below sets forth certain information regarding the beneficial
ownership of JSC Common Stock by each person who is known to JSC to be the
beneficial owner of more than 5% of JSC's voting stock as of March 1, 1995.
Except as set forth below, the stockholders named below have sole voting and
investment power with respect to all shares of JSC Common Stock shown as being
beneficially owned by them.
<TABLE>
<CAPTION>
AMOUNT AND
NATURE OF PERCENT OF
NAME AND ADDRESS OF BENEFICIAL JSC COMMON
BENEFICIAL OWNER OWNERSHIP STOCK
- ------------------------------------------------------------------------------ ---------- ----------
<S> <C> <C>
SIBV ......................................................................... 51,638,462 46.5%
Smurfit International B.V.
Strawinskylaan 2001
Amsterdam 1077ZZ, The Netherlands
Attention: Rokin Corporate Services B.V.
MSLEF II Associated Entities(a) .............................................. 31,800,000 28.7%
c/o Morgan Stanley & Co. Incorporated
1221 Avenue of the Americas
New York, NY 10020
Attention: Donald Patrick Brennan
Mellon Bank, N.A., as Trustee for First Plaza Group Trust(b) ................. 5,000,000 4.5%
One Mellon Bank Center
Pittsburgh, PA 15258
</TABLE>
- ------------
(a) As previously reported in JSC's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1994, representatives of MSLEF II have informed
JSC that they expect, subject to market and other conditions, to dispose of
MSLEF II's shares of JSC Common Stock through an underwritten offering, a
distribution to MSLEF II's partners, or otherwise, during 1995. No
assurances can be given whether or when disposal of any or all of such
shares will occur.
(b) Amounts shown exclude shares of JSC Common Stock owned by MSLEF II, of
which First Plaza Group Trust is a limited partner. If MSLEF II were to
distribute its shares of JSC Common Stock to its partners, First Plaza
Group Trust would receive a number of shares based on its pro rata
ownership of MSLEF II.
SECURITY OWNERSHIP OF MANAGEMENT
The table below sets forth certain information regarding the beneficial
ownership of JSC Common Stock as of February 10, 1995 for (i) each of the
directors of JSC, (ii) each of the Named Executive Officers, and (iii) all
directors and executive officers of JSC as a group.
59
<PAGE>
<TABLE>
<CAPTION>
SHARES OF JSC COMMON STOCK
------------------------------
AMOUNT AND
NATURE OF PERCENT OF
BENEFICIAL JSC COMMON
BENEFICIAL OWNER OWNERSHIP(a)(b) STOCK(c)
- ------------------------------------------------------------------------- --------------- ----------
<S> <C> <C>
Michael W.J. Smurfit(d).................................................. 102,600 0.1%
James B. Malloy.......................................................... 72,400 0.1%
Howard E. Kilroy(d)...................................................... 42,300 --
James E. Terrill(d)...................................................... 18,100 --
John R. Funke............................................................ 13,600 --
Richard W. Graham........................................................ 9,100 --
David C. Stevens......................................................... 4,600 --
Donald P. Brennan(e)..................................................... 0 --
Alan E. Goldberg(e)...................................................... 0 --
David R. Ramsay(e)....................................................... 0 --
G. Thompson Hutton....................................................... 0 --
James R. Thompson........................................................ 0 --
All directors and executive officers as a group (24 persons, excluding
Mr. Malloy)(d)(e)...................................................... 255,700 0.2%
</TABLE>
- ------------
(a) Shares shown as beneficially owned include the number of shares of JSC
Common Stock that executive officers have the right to acquire within 60
days after February 10, 1995 pursuant to exercisable options under JSC's
1992 Stock Option Plan.
(b) Shares shown exclude any shares that may be held by JSC's Savings Plan.
(c) Based upon a total of 110,988,681 shares of JSC Common Stock issued and
outstanding on March 1, 1995.
(d) Excludes shares of JSC Common Stock owned by JS Group, which, through its
indirect wholly-owned subsidiary SIBV, owns 46.5% of JSC Common Stock. Dr.
Smurfit, Mr. Kilroy and Mr. Terrill own 6.6%, 0.9% and less than 0.1%,
respectively, of the outstanding shares of JS Group. Dr. Smurfit is an
officer of JS Group; Mr. Kilroy retired from his executive positions with
JS Group and the Company effective March 31, 1995, but remains a Director
of JS Group and the Company.
(e) Excludes shares of JSC Common Stock owned by MSLEF II.
The Company's obligations under the 1994 Credit Agreement are secured by,
among other things, the common stock of JSCE and the common stock of JSC(U.S.).
If an Event of Default occurs and is continuing under the 1994 Credit Agreement,
the banks will have the right to foreclose upon such stock.
CERTAIN TRANSACTIONS
Set forth below is a summary of certain agreements and arrangements entered
into by the Company and related parties in connection with the 1989 Transaction
(as defined below) the Recapitalization Plan, as well as other transactions
between the Company and related parties which have taken place during the
Company's most recently completed three fiscal years.
GENERAL
Prior to the consummation of the 1994 Offerings, SIBV and Smurfit
Packaging, and MSLEF II, each owned 50% of the voting common stock of JSC. MSLEF
II, MSLEF II, Inc., a Delaware corporation that is a wholly-owned subsidiary of
Morgan Stanley Group Inc. ('Morgan Stanley Group') and the general partner of
MSLEF II, SIBV/MS Equity Investors, L.P., a Delaware limited partnership the
general partner of which is a wholly-owned subsidiary of Morgan Stanley Group
('Equity Investors' and, together with MSLEF II and MSLEF II, Inc., the 'MSLEF
II Associated Entities'), First Plaza Group Trust, as trustee for certain
pension plans ('First Plaza'), Leeway & Co., as nominee for State Street Bank
and Trust Company, as trustee for a master pension trust ('Leeway' and, together
with First Plaza, the 'Direct Investors'), certain other investors and Smurfit
Packaging owned all of the non-voting stock of JSC.
The relationships among JSC(U.S.), JSC and certain JSC stockholders are set
forth in a number of agreements described below. The summary descriptions herein
of the terms of such agreements do not purport to be complete and are subject
to, and are qualified in their entirety by reference to, all of the provisions
of such agreements, which have been filed as exhibits to the Registration
Statement of which this Prospectus forms a part. Capitalized terms not otherwise
defined below or elsewhere in this Prospectus have the meanings given to them in
such agreements. Any reference to either SIBV or MSLEF II in the following
descriptions of the Organization Agreement and the Stockholders
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Agreement or in references to the terms of those agreements set forth in this
Prospectus shall be deemed to include their permitted transferees, unless the
context indicates otherwise.
THE ORGANIZATION AGREEMENT
As a result of the 1989 Transaction, Old JSC(U.S.) became a wholly-owned
subsidiary of JSC and CCA became an indirect wholly-owned subsidiary of JSC.
Subsequent to the 1989 Transaction, but prior to the consummation of the 1994
Offerings, the Company was operated pursuant to the terms of the Organization
Agreement, which had been amended on various occasions. The Organization
Agreement, among other things, provided generally for the election of directors,
the selection of officers and the day-to-day management of the Company.
In connection with the Recapitalization Plan, the Organization Agreement
was terminated upon the closing of the Equity Offerings and, at such time, the
Stockholders Agreement became effective among JSC, SIBV, the MSLEF II Associated
Entities and certain other entities.
The Organization Agreement also contained provisions whereby each of SIBV,
MSLEF II, MSLEF II, Inc., the Company and the holders of certain stock of JSC
would indemnify each other and related parties with respect to certain matters
arising under the Organization Agreement or the transactions contemplated
thereby, including losses resulting from a breach of the Organization Agreement.
In addition, the Company had also agreed to indemnify SIBV, MSLEF II, MSLEF II,
Inc. and certain other parties against losses arising out of, among other
things, (i) the conduct and operation of the business of the Company, or (ii)
any action or failure to act by the Company. Further, SIBV had agreed to
indemnify the Company and each of its subsidiaries against all liability for
taxes, charges, fees, levies or other assessments imposed on such entities as a
result of their not having withheld tax upon the issuance or payment of a
specified note to SIBV and the transfer of certain assets to SIBV in connection
with the 1989 Transaction. The foregoing indemnification provisions survived the
termination of the Organization Agreement in connection with the
Recapitalization Plan.
STOCKHOLDERS AGREEMENT
The Stockholders Agreement among JSC, SIBV, the MSLEF II Associated
Entities and certain other entities became effective upon the consummation of
the Equity Offerings. Pursuant to the Stockholders Agreement, dated as of May 3,
1994, among MSLEF III, SIBV, the Company and certain other parties, SIBV and the
MS Holders (as defined in the Stockholders Agreement) shall vote their shares of
JSC Common Stock subject to the Stockholders Agreement to elect as directors of
the Company a certain number of individuals selected by SIBV and a certain
number of individuals selected by MSLEF II, with such numbers varying depending
on the amount of JSC Common Stock collectively owned by the MS Holders, the
amount of JSC Common Stock owned by SIBV and the magnitude of the Initial Return
(as defined in the Stockholders Agreement) received by the MS Holders on their
investment of JSC Common Stock. Currently, the Company's Board of Directors
consists of four directors selected by MSLEF II (one of whom is not affiliated
with SIBV or the Company). Pursuant to the Stockholders Agreement, SIBV and
MSLEF II have agreed to ensure the Board of Directors will consist of only eight
directors (unless they otherwise agree). Depending on the amount of JSC Common
Stock collectively owned by the MS Holders and the magnitude of the Initial
Return received by the MS Holders on their investment of JSC Common Stock,
approval of certain specified actions of the Board shall require certain
approval as specified in the Stockholders Agreement.
DIRECTORS AND MANAGEMENT
For a description of certain provisions of the Stockholders Agreement which
relate to the management of the Company (including the election of directors of
the Company), see 'Management -- Provision of Stockholders Agreement Pertaining
to Management'.
TRANSACTIONS WITH AFFILIATES; OTHER BUSINESSES
The Stockholders Agreement specifically permits the Investors (and their
affiliates) to engage in transactions with the Company in addition to certain
specific transactions contemplated by the Stockholders Agreement, provided such
transactions (except for (i) transactions between any of JSC and JSC(U.S.), (ii)
the transactions contemplated by the Stockholders Agreement or by the
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Organization Agreement, (iii) the transactions contemplated by the Operating
Agreement, dated as of April 30, 1992, as amended, between JSC(U.S.) and Smurfit
Paperboard, Inc. ('SPI'), or in the Rights Agreement, dated as of April 30,
1992, as amended, between JSC(U.S.), SPI and Chemical Bank as collateral agent
and assignee of Bankers Trust Company, (iv) the transactions contemplated by the
Registration Rights Agreement (as defined in ' -- Registration Rights
Agreement') or by the Subscription Agreement, and (v) the provisions of certain
other specified agreements) are fully and fairly disclosed, have fair and
equitable terms, are reasonably necessary and are treated as a commercial
arms-length transaction with an unrelated third party.
No Investor is prohibited from owning, operating or investing in any
business, regardless of whether such business is competitive with the Company,
nor is any Investor required to disclose its intention to make any such
investment to the other Investors or to advise the Company of the opportunity
presented by any such prospective investment.
TRANSFER AND ACQUISITION OF OWNERSHIP
In general, transfers of JSC Common Stock to entities affiliated with SIBV
or any MS Holder are not restricted. The Stockholders Agreement provides MS
Holders the right to 'tag along' pro rata upon the transfer by SIBV of any JSC
Common Stock, other than transfers to affiliates and sales pursuant to a public
offering registered under the Securities Act or pursuant to Rule 144 under the
Securities Act.
No MS Holder may, without SIBV's prior written consent, transfer shares of
JSC Common Stock to any non-affiliated person or group which, when taken
together with all other shares of JSC Common Stock then owned by such person or
group, represent more than ten percent of the JSC Common Stock then outstanding.
Transfers by MS Holders other than to affiliates, distributions to partners, or
to such ten percent holders are subject to certain rights of first offer and
rights of first refusal in favor of SIBV. Such transfers by MS Holders which are
subject to SIBV's right of first refusal may not be made to any competitor of
SIBV or JSC or their subsidiaries. SIBV and its affiliates have the right,
exercisable on or after August 26, 2002, to purchase all, but not less than all,
of the JSC Common Stock then owned by the MS Holders at a price equal to the
Fair Market Value (as defined in the Stockholders Agreement).
The terms of the Stockholders Agreement do not restrict the ability of
MSLEF II or Equity Investors to distribute, upon dissolution or otherwise,
shares of JSC Common Stock to their respective partners. Following any such
distribution, the partners of MSLEF II or Equity Investors, as the case may be
(other than Morgan Stanley Group or any controlled affiliate thereof) will not
be subject to the Stockholders Agreement. In addition, following any such
distribution, MSLEF II may, on behalf of its partners or the partners of Equity
Investors, include in a registration requested by it under the Registration
Rights Agreement shares of JSC Common Stock which have been distributed to its
partners. See ' -- Registration Rights Agreement'.
SIBV and its affiliates may not, without MSLEF II, Inc.'s prior written
consent, acquire beneficial ownership of more than 50% of JSC's outstanding
Common Stock through November 15, 1999 and beneficial ownership of more than 70%
of JSC's outstanding Common Stock from November 15, 1999 through November 15,
2001, except pursuant to the Stockholders Agreement, the Registration Rights
Agreement or the Subscription Agreement.
In general, if JS Group either does not, directly or indirectly, own a
majority of the voting stock of SIBV, or directly or indirectly, have the right
to appoint a majority of the directors and officers of SIBV, MSLEF II may, at
its option, terminate the Stockholders Agreement.
TERMINATION
The Stockholders Agreement shall terminate either upon mutual agreement of
JSC, SIBV and MSLEF II, or at the option of SIBV or MSLEF II as the case may be,
upon either the MS Holders collectively or SIBV and its affiliates,
respectively, ceasing to own six percent or more of JSC's outstanding Common
Stock. In addition, the provisions of the Stockholders Agreement which restrict
transfer of JSC Common Stock may be terminated, at the option of MSLEF II, upon
SIBV and its affiliates, collectively, having disposed of an aggregate number of
shares of JSC Common Stock which equals, as of the consummation of the most
recent disposition of JSC Common Stock by SIBV or any of its affiliates, at
least 25% of the total shares of JSC Common Stock then outstanding, and all
other
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provisions of the Stockholders Agreement may be terminated, at the option of
SIBV, if MSLEF II shall have exercised its option to terminate certain
provisions of the Stockholders Agreement as described in this sentence.
REGISTRATION RIGHTS AGREEMENT
Pursuant to the Registration Rights Agreement, dated as of May 3, 1994,
among MSLEF II, SIBV, the Company and certain other parties (the 'Registration
Rights Agreement'), each of MSLEF II and SIBV have certain rights, upon giving a
notice as provided in the Registration Rights Agreement, to cause the Company to
use its best efforts to register under the Securities Act the shares of JSC
Common Stock owned by MSLEF II (including its partners) and certain other
entities (including their affiliates) and certain shares of JSC Common Stock
owned by SIBV and its affiliates. Under the terms of the Registration Rights
Agreement, the Company may not effect a common stock registration for its own
account until the earlier of (i) such time as MSLEF II shall have effected two
demand registrations and (ii) July 31, 1996. The Registration Rights Agreement
contains customary terms and provisions with respect to, among other things,
registration procedures and certain rights to indemnification and contribution
granted by parties thereunder in connection with the registration of JSC Common
Stock subject to such agreement. In addition, the Company is generally
prohibited from 'piggybacking' and selling stock for its own account in demand
registrations except in the case of any registration requested by SIBV and
except in the case of any registration requested by MSLEF II after the second
completed registration for MSLEF II, in which event SIBV or MSLEF II, as the
case may be may require that any such securities which are 'piggybacked' be
offered and sold on the same terms as the securities offered by SIBV or MSLEF
II, as the case may be.
The Company will pay all registration expenses (other than underwriting
discounts and commissions) in connection with MSLEF II's first two completed
demand registrations, SIBV's two completed demand registrations and all
registrations made in connection with the Company's registration.
OTHER TRANSACTIONS
In connection with the Recapitalization Plan, JSC issued 19.25 million
shares of JSC Common Stock at an initial public offering price of $13.00 per
share and the Company issued and sold $400 million of senior notes pursuant to
the Debt Offerings. In its capacity as underwriter of the Equity Offerings and
Debt Offerings, MS&Co. received net discounts and commissions of $5.5 million
and $10.0 million, respectively, in 1994. The Company paid $0.5 million to SIBV
for legal fees incurred by SIBV in connection with the recapitalization plan in
1994.
In connection with its issuance of the Senior Notes, Old JSC(U.S.) entered
into an agreement with SIBV whereby SIBV committed to purchase up to $200
million aggregate principal amount of 11 1/2% Junior Subordinated Notes maturing
2005 (the 'Notes') to be issued by Old JSC(U.S.). Proceeds of the Notes were to
be used to repurchase or otherwise retire subordinated debt of Old JSC(U.S.).
The agreement was terminated upon the consummation of the Equity Offerings. In
accordance with the agreement, the Company paid $.4 million to SIBV for letter
of credit fees incurred by SIBV in connection with this commitment, $1.0 million
for annual commitment fees of 1.375% on the undrawn principal amount and $.9
million for certain costs of SIBV associated with such commitments and the
termination thereof.
Net sales by the Company to JS Group, its subsidiaries and affiliates were
$36.5 million, $18.4 million and $22.8 million for the years ended December 31,
1994, 1993 and 1992, respectively. Net sales by JS Group, its subsidiaries and
affiliates to the Company were $71.0 million, $49.3 million and $60.1 million
for the years ended December 31, 1994, 1993 and 1992, respectively. Product
sales to and purchases from JS Group, its subsidiaries and affiliates were
consummated on terms generally similar to those prevailing with unrelated
parties.
The Company provides certain subsidiaries and affiliates of JS Group with
general management and elective management services under separate management
services agreements. The services provided include, but are not limited to,
management information services, accounting, tax and internal auditing services,
financial management and treasury services, manufacturing and engineering
services,
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research and development services, employee benefit plan and management
services, purchasing services, transportation services and marketing services.
In consideration of general management services, the Company is paid a
negotiated fee which amounted to $1.5 million, $2.3 million and $2.4 million for
1994, 1993 and 1992, respectively. In consideration for elective services, the
Company received approximately $2.8 million, $3.5 million and $3.2 million in
1994, 1993 and 1992, respectively, for its cost of providing such services. In
addition, the Company paid JS Group and its affiliates $0.6 million in 1994,
$0.4 million in 1993 and $0.3 million in 1992 for management services and
certain other services.
In October 1991, an affiliate of JS Group completed a rebuild of the No. 2
paperboard machine owned by it, located in JSC(U.S.)'s Fernandina Beach, Florida
paperboard mill (the 'Fernandina Mill'). Pursuant to the Fernandina Operating
Agreement, JSC(U.S.) operates and manages the machine, which is owned by a
subsidiary of SIBV. As compensation to JSC(U.S.) for its services, the affiliate
of JS Group agreed to reimburse JSC(U.S.) for production and manufacturing costs
directly attributable to the No. 2 paperboard machine and to pay JSC(U.S.) a
portion of the indirect manufacturing, selling and administrative costs incurred
by JSC(U.S.) for the entire Fernandina Mill. The compensation is determined by
applying various formulas and agreed upon amounts to the subject costs. The
amounts reimbursed to JSC(U.S.) totaled $54.0 million, $62.2 million and $54.7
million in 1994, 1993 and 1992, respectively.
On February 21, 1986, Old JSC(U.S.) purchased from Times Mirror 80% of the
issued and outstanding capital stock of SNC for approximately $132 million. In
connection with the purchase of the SNC capital stock, Old JSC(U.S.) and Times
Mirror entered into a shareholders agreement dated as of February 21, 1986.
Pursuant to the terms of such shareholders agreement, as amended, Times Mirror
has the right to purchase all capital stock of SNC held by JSC(U.S.) upon the
occurrence of certain events, including a change in control of JSC(U.S.) or JS
Group. A change of control of JSC(U.S.) includes, subject to certain exceptions,
(i) JS Group and its affiliates ceasing to own shares of JSC having at least 30%
of voting control of JSC and (ii) a person or group other than MSLEF II and
certain related entities acquiring shares of JSC having more than 25% voting
control of JSC and exercising operating control of JSC. A change of control of
JS Group includes, subject to certain exceptions, a person or group (other than
members of the Smurfit family) acquiring shares of JS Group having more than 30%
voting control of JS Group and exercising operating control of JS Group.
DESCRIPTION OF CERTAIN INDEBTEDNESS
The following is a brief discussion of the basic terms of and the
instruments governing certain indebtedness of the Company. The following
discussion does not purport to be complete and is subject to, and is qualified
in its entirety by reference to, the instruments governing the respective
indebtedness, which instruments are filed as exhibits to the Registration
Statement of which this Prospectus is a part.
THE 1994 CREDIT AGREEMENT
GENERAL
Pursuant to the 1994 Credit Agreement, the New Bank Facilities consist of
(i) the New Term Loans, consisting of two senior secured term loan facilities to
be provided to JSC(U.S.) in an aggregate principal amount of $1,200 million, to
be allocated between the Tranche A Term Loan in an aggregate principal amount of
$900 million and the Tranche B Term Loan in an aggregate principal amount of
$300 million and (ii) the New Revolving Credit Facility consisting of a seven
year senior secured revolving credit facility available to JSC(U.S.) in an
aggregate principal amount of $450 million, of which up to $150 million is
available as a letter of credit facility (the 'Letter of Credit Facility').
JSC(U.S.) has agreed to pay certain fees to Chemical in its capacity as the
administrative agent (in such capacity, the 'Agent') for its own account and for
the account of the other Lenders (as defined below) in connection with the New
Bank Facilities, payable as follows: (i) a commitment fee of 1/2 of 1% per annum
on the undrawn amount of the Tranche A Term Loan and the New Revolving Credit
Facility, accruing, with respect to each Lender, on the date of acceptance of
such Lender's commitment and (ii) with respect to each Lender which has a
commitment under the Tranche B Term Loan, (A) 1/2 of 1% per annum on the amount
of such commitment accruing for the period from and including the
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date of acceptance of such Lender's commitment to but excluding May 11, 1994,
the date of the initial funding of the New Bank Facilities (the 'Closing Date')
or the earlier termination of such Lender's commitment and (B) 3/4 of 1% per
annum on the undrawn amount of such Lender's commitment, accruing from and
including the Closing Date. All such commitment fees were paid on the Closing
Date and, thereafter, are payable in arrears at the end of each quarter and upon
termination of any commitment. The fees payable in respect of letters of credit
provided under the New Revolving Credit Facility are in an amount equal to the
greater of (a) the margin in excess of the Adjusted LIBOR Rate applicable to the
New Revolving Credit Facility at such time minus 1/2 of 1% and (b) 1%. In
addition, a separate fronting fee shall be payable by JSC(U.S.) to the bank
issuing the letters of credit for its own account in an amount to be agreed. All
letter of credit fees shall be payable on the aggregate amount available under
outstanding letters of credit under the New Revolving Credit Facility, and shall
be payable in arrears at the end of each quarter and upon the termination of the
New Revolving Credit Facility. Chemical Securities Inc. ('CSI'), BT Securities
Corporation ('BTSC') and the Lenders shall receive such other fees as have been
separately agreed upon with CSI, BTSC, Chemical Bank ('Chemical') and Bankers
Trust Company ('Bankers Trust'). CSI and BTSC acted as arrangers for the New
Bank Facilities.
Pursuant to the amended and restated commitment letter dated February 10,
1994 (the 'Commitment Letter') among Chemical, CSI, Bankers Trust, BTSC, CCA and
Old JSC(U.S.), CCA and Old JSC(U.S.) agreed, regardless of whether the financing
agreements relating to the New Bank Facilities are executed or the commitments
to provide the New Bank Facilities are terminated, to reimburse Chemical,
Bankers Trust, CSI and BTSC for, among other things, all of their respective
out-of-pocket costs and expenses incurred or sustained by such entities in
connection with the transactions contemplated by the Commitment Letter and to
indemnify Chemical, Bankers Trust, CSI and BTSC, and each director, officer,
employee and affiliate thereof against certain claims, damages, liabilities and
expenses incurred or asserted in connection with the transactions contemplated
by the Commitment Letter. In addition to the indemnity provided in the
Commitment Letter, CCA and Old JSC(U.S.) agreed, pursuant to the 1994 Credit
Agreement, to indemnify, jointly and severally, the Lenders, and each director,
officer, employee and agent thereof, against certain claims, damages,
liabilities and expenses incurred or asserted in connection with the
transactions contemplated by the 1994 Credit Agreement.
THE NEW BANK FACILITIES
The New Bank Facilities are provided pursuant to the terms and conditions
of the 1994 Credit Agreement among JSC, CCA, Old JSC(U.S.), the financial
institutions party thereto (the 'Lenders'), the managing agents named therein,
Chemical and Bankers Trust, as senior managing agents, Bankers Trust and the
other Lenders named therein as fronting banks and Chemical and administrative
agent and collateral agent.
Borrowings under the Tranche A Term Loan and under the Tranche B Term Loan
on the Closing Date were used, together with the proceeds of the Equity
Offerings and the SIBV Investment, borrowings under the New Revolving Credit
Facility, and a portion of the proceeds of the Debt Offerings, to consummate the
Bank Debt Refinancing. Borrowings under the Tranche A Term Loan were used after
the Closing Date to redeem the Subordinated Debt and pay accrued interest and
the applicable redemption premiums thereon. Borrowings under the New Revolving
Credit Facility are to be used for the sole purpose of providing working capital
for the Company and its subsidiaries and for other general corporate purposes.
The obligations under the 1994 Credit Agreement are unconditionally
guaranteed by JSC, JSCE, JSC(U.S.), SNC (but only to the extent permitted under
the shareholders agreement between Old JSC(U.S.) and Times Mirror) and certain
other existing and subsequently acquired or organized material subsidiaries of
the Company (each such entity providing such a guaranty, a 'Guarantor'). The
obligations of JSC(U.S.), JSCE, and such guarantees, under the 1994 Credit
Agreement (including all guarantee obligations of JSCE in respect thereof) are
secured, among other things, by a security interest in substantially all of the
assets of JSC(U.S.) and JSCE and their material subsidiaries, with the exception
of trade receivables of JSC(U.S.) and JSCE and their material subsidiaries sold
to Jefferson
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Smurfit Finance Corporation ('JSFC'), and by a pledge of all the capital stock
of JSC(U.S.), JSCE and each material subsidiary of JSC, JSC(U.S.) and JSCE.
The Tranche A Term Loan and the New Revolving Credit Facility will each
mature on April 30, 2001. The Tranche B Term Loan will mature on April 30, 2002.
The outstanding principal amount of the New Term Loans is repayable as follows,
such repayments to be made at the end of each six month period on each October
31 and April 30 after the Closing Date as follows:
<TABLE>
<CAPTION>
SEMI-ANNUAL TRANCHE A TERM TRANCHE B TERM TOTAL
PERIOD AFTER LOAN SEMI-ANNUAL LOAN SEMI-ANNUAL SEMI-ANNUAL
CLOSING DATE AMOUNT AMOUNT AMOUNT
- ----------------------------------------------------- ------------------ ---------------- ----------------
<S> <C> <C> <C>
October 31, 1994..................................... $ 0 $ 0 $ 0
April 30, 1995....................................... 0 0 0
October 31, 1995..................................... 45,000,000 1,000,000 46,000,000
April 30, 1996....................................... 45,000,000 1,000,000 46,000,000
October 31, 1996..................................... 70,000,000 1,000,000 71,000,000
April 30, 1997....................................... 70,000,000 1,000,000 71,000,000
October 31, 1997..................................... 80,000,000 1,000,000 81,000,000
April 30, 1998....................................... 80,000,000 1,000,000 81,000,000
October 31, 1998..................................... 80,000,000 1,000,000 81,000,000
April 30, 1999....................................... 80,000,000 1,000,000 81,000,000
October 31, 1999..................................... 80,000,000 11,000,000 91,000,000
April 30, 2000....................................... 80,000,000 11,000,000 91,000,000
October 31, 2000..................................... 95,000,000 15,000,000 110,000,000
April 30, 2001....................................... 95,000,000 15,000,000 110,000,000
October 31, 2001..................................... -- 120,000,000 120,000,000
April 30, 2002....................................... -- 120,000,000 120,000,000
------------------ ---------------- ----------------
$900,000,000 $300,000,000 $1,200,000,000
------------------ ---------------- ----------------
------------------ ---------------- ----------------
</TABLE>
The New Term Loans and the New Revolving Credit Facility may be prepaid at
any time, in whole or in part, at the option of the borrowers. Voluntary
reductions of the unutilized portion of the New Revolving Credit Facility are
permitted at any time. Pursuant to the 1994 Credit Agreement, required
prepayments on the New Bank Facilities are to be made in an amount equal to (i)
75% of Excess Cash Flow (as defined in the 1994 Credit Agreement), reducing to
50% of Excess Cash Flow upon the satisfaction of certain performance tests set
forth in the 1994 Credit Agreement, (ii) 100% of the net proceeds of the
issuance or incurrence of certain indebtedness (not including the Debt
Offerings), (iii) 100% of the net proceeds of certain non-ordinary course asset
sales, (iv) 100% of the net proceeds of certain condemnation or insurance
proceeds, and (v) 25% of the net proceeds of the issuance of any other equity
securities (other than the Equity Offerings and the exercise of management stock
options). Required prepayments will be allocated pro rata between the Tranche A
Term Loan and the Tranche B Term Loan, and will be applied pro rata against the
remaining scheduled amortization payments under each of the New Term Loans or,
if the New Term Loans have been fully repaid, to permanently reduce the then
existing commitments under the New Revolving Credit Facility.
Interest on indebtedness outstanding under the Tranche A Term Loan and the
New Revolving Credit Facility, from and including the Closing Date to but
excluding the first anniversary of the Closing Date, will be payable at a rate
per annum, selected at the option of JSC(U.S.), equal to the ABR Rate (as
defined below) plus 1.5% per annum or the Adjusted LIBOR Rate plus 2.5% per
annum. From and including the first anniversary of the Closing Date and
thereafter, the margin in excess of the ABR Rate or the Adjusted LIBOR Rate
applicable to such New Bank Facilities will be determined by reference to
certain financial tests. Interest on indebtedness outstanding under the Tranche
B Term Loan will be payable at a rate per annum, selected at the option of
JSC(U.S.), equal to the ABR Rate plus 2% per annum or the Adjusted LIBOR Rate
plus 3% per annum. Notwithstanding the foregoing, for the first 90 days
following the Closing Date, all such borrowings were required to be made with
reference to the ABR Rate or the Adjusted LIBOR Rate for one month borrowings.
All overdue installments of principal and, to the extent permitted by law,
interest on borrowings accruing interest based on the ABR Rate or the Adjusted
LIBOR Rate shall bear interest at a rate per annum equal to 2% in excess
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of the interest rate then borne by such borrowings. JSC(U.S.) shall have the
option of selecting the type of borrowing and the length of the interest period
applicable thereto.
'ABR Rate' shall mean the higher of (a) the rate which Chemical announces
from time to time as its prime lending rate, (b) 1/2 of 1% in excess of the
Federal Funds Rate and (c) 1% in excess of the base certificate of deposit rate
(defined as the secondary market rate for three month certificates of deposit,
as adjusted for assessments and statutory reserves).
'Adjusted LIBOR Rate' shall mean the London Interbank Offered Rate,
adjusted for statutory reserves at all times.
Interest based on the ABR Rate and the Adjusted LIBOR Rate shall be
determined based on the number of days elapsed over a 360 day year. Interest
based on the (i) ABR Rate shall be payable quarterly and (ii) Adjusted LIBOR
Rate shall be payable at the end of the applicable interest period but in any
event not less often than quarterly.
The 1994 Credit Agreement contains certain representations and warranties,
certain negative, affirmative and financial covenants, certain conditions and
certain events of default which are customarily required for similar financings,
in addition to other representations, warranties, covenants, conditions and
events of default appropriate to the specific transactions contemplated thereby.
Such covenants include restrictions and limitations of dividends, redemptions
and repurchases of capital stock, the incurrence of debt, liens, leases,
sale-leaseback transactions, capital expenditures, the issuance of stock,
transactions with affiliates, the making of loans, investments and certain
payments, and on mergers, acquisitions and asset sales, in each case subject to
certain exceptions. Furthermore, the Company is required to maintain compliance
with certain financial covenants, such as minimum levels of consolidated
earnings before depreciation, interest, taxes and amortization, and minimum
interest coverage ratios.
Events of default under the 1994 Credit Agreement include, among other
things, (i) failure to pay principal, interest, fees or other amounts when due;
(ii) violation of covenants; (iii) failure of any representation or warranty
made by the Company to the Lenders to be true in all material aspects; (iv)
cross default and cross acceleration with certain other indebtedness; (v)
'change of control'; (vi) certain events of bankruptcy; (vii) certain material
judgments; (viii) certain ERISA events; and (ix) the invalidity of the
guarantees of the indebtedness under the 1994 Credit Agreement or of the
security interests granted to the Lenders, in certain cases with appropriate
grace periods.
The foregoing summary of the 1994 Credit Agreement is qualified in its
entirety by reference to such agreement, a copy of which has been filed
with the Commission as an exhibit to the Registration Statement of which this
Prospectus forms a part.
SECURITIZATION
In 1991, the Company entered into the 1991 Securitization in order to
reduce its borrowings under the 1989 Credit Agreement. The 1991 Securitization
involved the sale of receivables to JSFC, a special purpose subsidiary of the
Company. In February 1995, the Company entered into the $315.0 million 1995
Securitization consisting of a $300.0 million receivables-backed commercial
paper program and a $15.0 million term loan. The proceeds of the 1995
Securitization were used to extinguish the Company's borrowings under the 1991
Securitization. See Note 4 to the Company's consolidated financial statements
and 'Recapitalization Plan -- Consents and Waivers -- Securitization'.
TERMS OF 1993 NOTES
In April 1993, CCA offered the 1993 Notes. The 1993 Notes are unsecured
senior obligations of JSC(U.S.) and will mature April 1, 2003. The 1993 Notes
bear interest at 9.75% per annum. Interest is payable semiannually on April 1
and October 1 of each year. The 1993 Notes are not redeemable prior to maturity.
The 1993 Notes are senior unsecured obligations of JSC(U.S.), which rank
pari passu with the other senior indebtedness of JSC(U.S.), including, without
limitation, JSC(U.S.)'s obligations under the 1994 Credit Agreement and the
Senior Notes. JSC(U.S.)'s obligations under the 1994 Credit Agreement, but not
the 1993 Notes, are secured by liens on substantially all the assets of
JSC(U.S.) and its subsidiaries
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with the exception of cash and cash equivalents and trade receivables. The
secured indebtedness has priority over the 1993 Notes with respect to the assets
securing such indebtedness.
The indenture relating to the 1993 Notes (the '1993 Note Indenture')
contains certain covenants that, among other things, limit the ability of
JSC(U.S.) and its subsidiaries to incur indebtedness, pay dividends, engage in
transactions with stockholders and affiliates, issue capital stock, create
liens, sell assets, enter into sale-leaseback transactions, engage in mergers
and consolidations and make investments in unrestricted subsidiaries. The
limitations imposed by the covenants on JSC(U.S.) and its subsidiaries are
subject to certain exceptions.
Upon a Change of Control, JSC(U.S.) is required to make an offer to
purchase the 1993 Notes at a purchase price equal to 101% of the principal
amount thereof, plus accrued interest. Certain transactions with affiliates of
the Company may not constitute a Change of Control. 'Change of Control' is
defined to mean such time as (i)(a) a person or group, other than MSLEF II,
Morgan Stanley Group, SIBV, JS Group and any affiliate thereof, (collectively,
the 'Original Stockholders'), becomes the beneficial owner of more than 35% of
the total voting power of the then outstanding voting stock of JSC(U.S.) or a
parent of JSC(U.S.) and (b) the Original Stockholders beneficially own, directly
or indirectly, less than the then outstanding voting stock of JSC(U.S.) or a
parent of JSC(U.S.) beneficially owned by such person or group; (ii)(a) a person
or group, other than the Original Stockholders, becomes the beneficial owner of
more than 35% of the total voting power of the then outstanding voting stock of
JSC(U.S.), (b) the Original Stockholders beneficially own, directly or
indirectly, less than the then outstanding voting stock of JSC(U.S.)
beneficially owned by such person or group and (c) JSC(U.S.) is a subsidiary of
JSCE at the time that the later of (a) and (b) above occurs.
The payment of principal and interest on the 1993 Notes is unconditionally
guaranteed on a senior basis by JSCE. Such guarantee ranks pari passu with the
other senior indebtedness of JSCE, including, without limitation, JSCE's
obligations under the 1994 Credit Agreement (including JSCE's guarantees of
JSC(U.S.)'s obligations thereunder) and JSCE's guarantee of JSC(U.S.)'s
obligations under the Senior Notes. JSCE's obligations under the 1994 Credit
Agreement, but not its guarantees of the 1993 Notes, are secured by liens on
substantially all the assets of JSCE and its subsidiaries with the exception of
cash and cash equivalents and trade receivables, and guaranteed by JSC(U.S.) and
certain of its subsidiaries. The secured indebtedness has priority over JSCE's
guarantees of the 1993 Notes with respect to the assets securing such
indebtedness. In the event that (i) a purchaser of capital stock of JSC(U.S.)
acquires a majority of the voting rights thereunder or (ii) there occurs a
merger or consolidation of JSC(U.S.) that results in JSC(U.S.) having a parent
other than JSCE and, at the time of and after giving effect to such transaction,
such purchaser or parent satisfies certain minimum net worth and cash flow
requirements, JSCE will be released from its guarantee of the 1993 Notes. Such
sale, merger or consolidation will be prohibited unless certain other
requirements are met, including that the purchaser or the entity surviving such
a merger or consolidation expressly assumes JSC(U.S.)'s or JSCE's obligations,
as the case may be, and that no Event of Default (as defined in the 1993 Note
Indenture) occur or be continuing.
MS&Co. acted as underwriter in connection with the original offering of the
1993 Notes and received an underwriting discount of $12.5 million in connection
therewith.
SUBSTITUTION TRANSACTION
In connection with the Substitution Transaction, JSC organized JSCE, a new
wholly-owned subsidiary of JSC, and JSCE became the owner of all of the
outstanding capital stock of Old JSC(U.S.). Pursuant to the Substitution
Transaction, JSC (i) caused JSCE to replace Old JSC(U.S.) as guarantor under the
indentures relating to CCA's public indebtedness (and under the 1994 Credit
Agreement) and to assume Old JSC(U.S.)'s other obligations thereunder, (ii)
amended such indentures so that references to Old JSC(U.S.) therein and in the
securities issued thereunder were changed to be JSCE (iii) caused Old JSC(U.S.)
to merge into CCA, with CCA succeeding to all of Old JSC(U.S.)'s assets and
liabilities (except that any guaranty of obligations of CCA by Old JSC(U.S.)
were extinguished) and (iv) caused CCA to change its name to JSC(U.S.). The
purpose of the Substitution Transaction was to maximize operating efficiencies
by combining JSC's two key operating subsidiaries into one entity and achieve
cost savings.
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DESCRIPTION OF THE SENIOR NOTES
The Series A Senior Notes were issued under an Indenture (the 'Series A
Senior Note Indenture') among Old JSC(U.S.), CCA and NationsBank of Georgia,
National Association, as Trustee (the 'Series A Senior Note Trustee'). The
Series B Senior Notes were issued under an Indenture (the 'Series B Senior Note
Indenture', and together with the Series A Senior Note Indenture, the
'Indentures') among JSC(U.S.), JSCE and NationsBank of Georgia, National
Association, as Trustee (the 'Series B Senior Note Trustee', and together with
the Series A Senior Note Trustee, the 'Trustees'). A copy of each of the Series
A Senior Note Indenture and the Series B Senior Note Indenture is filed as an
exhibit to the Registration Statement of which this Prospectus is a part and is
available as described under 'Additional Information'. Except as described under
' -- Optional Redemption' below or as otherwise indicated, this description
applies to both the Series A Senior Note Indenture and the Series B Senior Note
Indenture, and references to the 'Senior Notes' shall be to the Series A Senior
Notes or the Series B Senior Notes, as the case may be, or, if the context
requires, to both. The following summary of certain provisions of the Indentures
does not purport to be complete and is subject to, and is qualified in its
entirety by reference to, all the provisions of the Indentures, including the
definitions of certain terms therein and those terms made a part thereof by the
Trust Indenture Act of 1939, as amended. Wherever particular sections or defined
terms of the Indentures not otherwise defined herein are referred to, such
sections or defined terms shall be incorporated herein by reference.
GENERAL
Principal of, premium, if any, and interest on the Senior Notes is payable,
and the Senior Notes may be exchanged or transferred, at the office or agency of
JSC(U.S) in the Borough of Manhattan, The City of New York (which for the Series
A Senior Notes initially shall be the office or agency of the Series A Senior
Note Trustee, at 61 Broadway, Suite 1412, New York, New York 10006, and for the
Series B Senior Notes, initially shall be the office or agency of the Series B
Senior Note Trustee at 61 Broadway, Suite 1412, New York, New York 10006);
provided that, at the option of JSC(U.S.), payment of interest may be made by
check mailed to the address of the Holders as such address appears in the Senior
Notes Register. (Sections 2.01, 2.03 and 2.06)
The Senior Notes were issued only in fully registered form, without
coupons, in denominations of $1,000 and any integral multiple of $1,000.
(Section 2.02) No service charge was made for any registration of transfer or
exchange of Senior Notes, but JSC(U.S.) may require payment of a sum sufficient
to cover any transfer tax or other similar governmental charge payable in
connection therewith. (Section 2.05)
TERMS OF THE SENIOR NOTES
The Senior Notes are unsecured senior obligations of JSC(U.S.), limited to
$300 million aggregate principal amount of Series A Senior Notes and $100
million aggregate principal amount of Series B Senior Notes, and will mature on
May 1, 2004 and May 1, 2002, respectively. Each Senior Note bears interest at
the rate per annum shown on the front cover of this Prospectus from May 11, 1994
or from the most recent Interest Payment Date to which interest has been paid or
provided for, payable semi-annually (to the Holders of record at the close of
business on the April 15 or October 15 immediately preceding the Interest
Payment Date) on May 1 and November 1 of each year, commencing November 1, 1994.
OPTIONAL REDEMPTION
JSC(U.S.) may not redeem the Series B Senior Notes prior to maturity.
The Series A Senior Notes are redeemable, at JSC(U.S.)'s option, in whole
or in part, at any time on or after May 1, 1999 and prior to maturity, upon not
less than 30 nor more than 60 days' prior notice mailed by first class mail to
each Holder's last address as it appears in the Senior Notes Register, at the
following Redemption Prices (expressed as percentages of principal amount), plus
accrued interest, if any, to the Redemption Date (subject to the right of
Holders of record on the relevant Regular Record
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Date to receive interest due on an Interest Payment Date that is on or prior to
the Redemption Date), if redeemed during the 12-month period commencing on May 1
of the years set forth below:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
- ----------------------------------------------------------------------- ----------
<S> <C>
1999................................................................... 105.625%
2000................................................................... 102.813%
</TABLE>
and, on or after May 1, 2001, at 100% of principal amount. (Sections 11.01 and
11.04)
Notwithstanding the foregoing, at any time prior to May 1, 1997, JSC(U.S.)
may redeem up to $100 million in aggregate principal amount of the Series A
Senior Notes at a Redemption Price of 110% of the principal amount thereof plus
accrued interest to the Redemption Date, with the Net Cash Proceeds from the
issuance of Capital Stock (other than Redeemable Stock) of JSC(U.S.) (or any
entity of which it is a Subsidiary, including JSC and JSCE, to the extent such
Net Cash Proceeds are contributed to JSC(U.S.) or used to acquire Capital Stock
of JSC(U.S.) (other than Redeemable Stock)) in a single transaction or a series
of related transactions (other than the Equity Offerings or an issuance to a
Subsidiary).
Selection. In the case of any partial redemption, selection of the Series A
Senior Notes for redemption will be made by the Series A Senior Note Trustee in
compliance with the requirements of the principal national securities exchange,
if any, on which the Series A Senior Notes are listed or, if the Series A Senior
Notes are not listed on a national securities exchange, on a pro rata basis, by
lot or by such other method as the Series A Senior Note Trustee in its sole
discretion shall deem to be fair and appropriate; provided that no Series A
Senior Note of $1,000 in principal amount at maturity or less shall be redeemed
in part. If any Series A Senior Note is to be redeemed in part only, the notice
of redemption relating to such Series A Senior Note shall state the portion of
the principal amount thereof to be redeemed. A new Series A Senior Note in
principal amount equal to the unredeemed portion thereof will be issued in the
name of the Holder thereof upon cancellation of the original Series A Senior
Note.
The Credit Agreement contains covenants prohibiting the optional redemption
of the Senior Notes. See 'Description of Certain Indebtedness -- The 1994 Credit
Agreement'.
RANKING
The Indebtedness evidenced by the Senior Notes ranks pari passu in right of
payment with all other senior indebtedness of JSC(U.S.), including, without
limitation, JSC(U.S.)'s obligations under the 1994 Credit Agreement and the 1993
Notes. JSCE's guarantee of the Senior Notes ranks pari passu in right of payment
with all other unsubordinated indebtedness of JSCE, including, without
limitation, JSCE's obligations under the 1994 Credit Agreement and JSCE's
guarantee of the 1993 Notes.
JSC(U.S.)'s obligations under the 1994 Credit Agreement and JSCE's
guarantees of such obligations are secured by pledges of substantially all of
the assets of JSC(U.S.), JSCE and their material subsidiaries. JSC(U.S.)'s
obligations under the 1994 Credit Agreement, but not the Senior Notes, are
guaranteed by JSCE and certain subsidiaries of JSC(U.S.) and the obligations of
JSCE and each such guaranteeing subsidiary are secured by certain assets of JSCE
or such guaranteeing subsidiary, as the case may be. The Senior Notes and JSCE's
guarantee of the Senior Notes will be effectively subordinated to such security
interests and guarantees to the extent of such security interests and
guarantees. As of December 31, 1994, JSC(U.S.) had outstanding approximately
$2,441.9 million of senior indebtedness (excluding intercompany indebtedness),
of which approximately $1,534.5 million was secured indebtedness. The secured
indebtedness will have priority over the Senior Notes with respect to the assets
securing such indebtedness. See 'Risk Factors -- Effect of Secured Indebtedness
on the Senior Notes; Ranking' and 'Capitalization'.
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GUARANTEE
JSC(U.S.)'s obligations under the Senior Notes are unconditionally
guaranteed by JSCE.
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
covenants and other provisions of the Indentures. Reference is made to the
Indentures for the full definition of all terms as well as any other capitalized
term used herein for which no definition is provided.
'Acquired Indebtedness' is defined to mean Indebtedness of a Person
existing at the time such Person became a Subsidiary and not Incurred in
connection with, or in contemplation of, such Person becoming a Subsidiary.
'Adjusted Consolidated Net Income' is defined to mean, for any period, the
aggregate net income (or loss) of any Person and its consolidated Subsidiaries
for such period determined in conformity with GAAP; provided that the following
items shall be excluded in computing Adjusted Consolidated Net Income (without
duplication): (i) the net income (or loss) of such Person (other than net income
(or loss) attributable to a Subsidiary of such Person) in which any other Person
(other than such Person or any of its Subsidiaries) has a joint interest, except
to the extent of the amount of dividends or other distributions actually paid to
such Person or any of its Subsidiaries by such other Person during such period;
(ii) solely for the purposes of calculating the amount of Restricted Payments
that may be made pursuant to clause (C) of the first paragraph of the
'Limitation on Restricted Payments' covenant described below (and in such case,
except to the extent includable pursuant to clause (i) above), the net income
(or loss) of such Person accrued prior to the date it becomes a Subsidiary of
any other Person or is merged into or consolidated with such other Person or any
of its Subsidiaries or all or substantially all of the property and assets of
such Person are acquired by such other Person or any of its Subsidiaries; (iii)
the net income (or loss) of any Subsidiary (other than CCA) of any Person to the
extent that the declaration or payment of dividends or similar distributions by
such Subsidiary of such net income is not at the time permitted by the operation
of the terms of its charter or any agreement, instrument, judgment, decree,
order, statute, rule or governmental regulation applicable to such Subsidiary;
(iv) any gains or losses (on an after-tax basis) attributable to Asset Sales;
(v) except for purposes of calculating the amount of Restricted Payments that
may be made pursuant to clause (C) of the first paragraph of the 'Limitation on
Restricted Payments' covenant described below, any amounts paid or accrued as
dividends on Preferred Stock of such Person or Preferred Stock of any Subsidiary
of such Person owned by Persons other than such Person and any of its
Subsidiaries; (vi) all extraordinary gains and extraordinary losses; and (vii)
all non-cash charges reducing net income of such Person that relate to stock
options or stock appreciation rights and all cash payments reducing net income
of such Person that relate to stock options or stock appreciation rights, to the
extent such cash payments are not made pursuant to clause (xi) of the
'Limitation on Restricted Payments' covenant; provided that, solely for the
purposes of calculating the Interest Coverage Ratio (and in such case, except to
the extent includable pursuant to clause (i) above), 'Adjusted Consolidated Net
Income' of JSCE shall include the amount of all cash dividends received by JSCE
or any Subsidiary of JSCE from an Unrestricted Subsidiary.
'Adjusted Consolidated Net Tangible Assets' is defined to mean the total
amount of assets of JSCE and its Subsidiaries (less applicable depreciation,
amortization and other valuation reserves), except to the extent resulting from
write-ups of capital assets (excluding write-ups in connection with accounting
for acquisitions in conformity with GAAP), after deducting therefrom (i) all
current liabilities of JSCE and its Subsidiaries (excluding intercompany items)
and (ii) all goodwill, trade names, trademarks, patents, unamortized debt
discount and expense and other like intangibles, all as set forth on the most
recently available consolidated balance sheet of JSCE and its Subsidiaries,
prepared in conformity with GAAP.
'Affiliate' is defined to mean, as applied to any Person, any other Person
directly or indirectly controlling, controlled by, or under direct or indirect
common control with, such Person. For purposes of this definition, 'control'
(including, with correlative meanings, the terms 'controlling', 'controlled by',
and 'under common control with'), as applied to any Person, is defined to mean
the possession,
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directly or indirectly, of the power to direct or cause the direction of the
management and policies of such Person, whether through the ownership of voting
securities, by contract or otherwise. For purposes of this definition, no Bank
nor any affiliate of any Bank shall be deemed to be an Affiliate of JSCE or any
of its Subsidiaries nor shall MS&Co. (or any affiliate thereof) be deemed an
Affiliate of JSCE or any of its Subsidiaries solely by reason of its ownership
of or right to vote any Indebtedness of JSCE or any of its Subsidiaries.
'Asset Acquisition' is defined to mean (i) an investment by JSCE or any of
its Subsidiaries in any other Person pursuant to which such Person shall become
a Subsidiary of JSCE or any of its Subsidiaries or shall be merged into or
consolidated with JSCE or any of its Subsidiaries or (ii) an acquisition by JSCE
or any of its Subsidiaries of the assets of any Person other than JSCE or any of
its Subsidiaries that constitute substantially all of a division or line of
business of such Person.
'Asset Disposition' is defined to mean the sale or other disposition by
JSCE or any of its Subsidiaries (other than to JSCE or another Subsidiary of
JSCE) of (i) all or substantially all of the Capital Stock of any Subsidiary of
JSCE or (ii) all or substantially all of the assets that constitute a division
or line of business of JSCE or any of its Subsidiaries.
'Asset Sale' is defined to mean, with respect to any Person, any sale,
transfer or other disposition (including by way of merger, consolidation or
sale-leaseback transactions) in one transaction or a series of related
transactions by such Person or any of its Subsidiaries to any Person other than
JSCE or any of its Subsidiaries of (i) all or any of the Capital Stock of any
Subsidiary of such Person (other than pursuant to a public offering of the
Capital Stock of CCA or JSCE pursuant to which at least 15% of the total issued
and outstanding Capital Stock of CCA or JSCE has been sold by means of an
effective registration statement under the Securities Act or sales, transfers or
other dispositions of Capital Stock of CCA or JSCE substantially concurrently
with or following such a public offering), (ii) all or substantially all of the
property and assets of an operating unit or business of such Person or any of
its Subsidiaries or (iii) any other property and assets of such Person or any of
its Subsidiaries outside the ordinary course of business of such Person or such
Subsidiary and, in each case, that is not governed by the provisions of the
Indenture applicable to Mergers, Consolidations and Sales of Assets (it being
acknowledged that JSCE and its Subsidiaries may dispose of equipment in the
ordinary course of their respective businesses); provided that sales or other
dispositions of inventory, receivables and other current assets shall not be
included within the meaning of 'Asset Sale.'
'Attributable Indebtedness' is defined to mean, when used in connection
with a sale-leaseback transaction referred to in the 'Limitation on
Sale-Leaseback Transactions' covenant, at any date of determination, the product
of (i) the net proceeds from such sale-leaseback transaction and (ii) a
fraction, the numerator of which is the number of full years of the term of the
lease relating to the property involved in such sale-leaseback transaction
(without regard to any options to renew or extend such term) remaining at the
date of the making of such computation and the denominator of which is the
number of full years of the term of such lease (without regard to any options to
renew or extend such term) measured from the first day of such term.
'Average Life' is defined to mean, at any date of determination with
respect to any debt security, the quotient obtained by dividing (i) the sum of
the product of (A) the number of years from such date of determination to the
dates of each successive scheduled principal payment of such debt security and
(B) the amount of such principal payment by (ii) the sum of all such principal
payments.
'Banks' is defined to mean the lenders who are from time to time parties to
any Credit Agreement.
'Board of Directors' is defined to mean the Board of Directors of JSCE or
CCA, as the case may be, or any committee of such Board of Directors duly
authorized to act under the Indenture.
'Business Day' is defined to mean any day except a Saturday, Sunday or
other day on which commercial banks in The City of New York, or in the city of
the Corporate Trust Office of the Trustee, are authorized by law to close.
'Capital Stock' is defined to mean, with respect to any Person, any and all
shares, interests, participations or other equivalents (however designated,
whether voting or non-voting) of such Person's
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capital stock, whether now outstanding or issued after the date of the
Indenture, including, without limitation, all Common Stock and Preferred Stock.
'Capitalized Lease' is defined to mean, as applied to any Person, any lease
of any property (whether real, personal or mixed) of which the discounted
present value of the rental obligations of such Person as lessee, in conformity
with GAAP, is required to be capitalized on the balance sheet of such Person;
and 'Capitalized Lease Obligation' is defined to mean the rental obligations, as
aforesaid, under such lease.
'Change of Control' is defined to mean such time as (i) (a) a 'person' or
'group' (within the meaning of Sections 13(d) and 14(d)(2) of the Exchange Act),
other than the Original Stockholders, becomes the 'beneficial owner' (as defined
in Rule 13d-3 under the Exchange Act) of more than 35% of the total voting power
of the then outstanding Voting Stock of JSC or a JSC Parent and (b) the Original
Stockholders beneficially own, directly or indirectly, less than the then
outstanding Voting Stock of JSC or a JSC Parent beneficially owned by such
'person' or 'group'; or (ii) (a) a 'person' or 'group' (within the meaning of
Sections 13(d) and 14(d)(2) of the Exchange Act), other than the Original
Stockholders, becomes the 'beneficial owner' (as defined in Rule 13d-3 under the
Exchange Act) of more than 35% of the total voting power of the then outstanding
Voting Stock of JSCE, (b) the Original Stockholders beneficially own, directly
or indirectly, less than the then outstanding Voting Stock of JSCE beneficially
owned by such 'person' or 'group' and (c) CCA is a Subsidiary of JSCE at the
time that the later of (a) and (b) above occurs.
'Closing Date' is defined to mean the date on which the Senior Notes are
originally issued under the Indentures.
'Common Stock' is defined to mean, with respect to any Person, any and all
shares, interests, participations or other equivalents (however designated,
whether voting or non-voting) of such Person's common stock, whether now
outstanding or issued after the date of the Indenture, including, without
limitation, all series and classes of such common stock.
'Consolidated EBITDA' is defined to mean, with respect to any Person for
any period, the sum of the amounts for such period of (i) Adjusted Consolidated
Net Income, (ii) Consolidated Interest Expense, (iii) income taxes (other than
income taxes (either positive or negative) attributable to extraordinary and
non-recurring gains or losses or sales of assets), (iv) depreciation expense,
(v) amortization expense and (vi) all other non-cash items reducing Adjusted
Consolidated Net Income, less all non-cash items increasing Adjusted
Consolidated Net Income, all as determined on a consolidated basis for such
Person and its Subsidiaries in conformity with GAAP; provided that, if a Person
has any Subsidiary that is not a Wholly Owned Subsidiary of such Person,
Consolidated EBITDA of such Person shall be reduced (to the extent not otherwise
reduced by GAAP) by an amount equal to (A) the Adjusted Consolidated Net Income
of such Subsidiary multiplied by (B) the quotient of (1) the number of shares of
outstanding Common Stock of such Subsidiary not owned on the last day of such
period by such Person or any Subsidiary of such Person divided by (2) the total
number of shares of outstanding Common Stock of such Subsidiary on the last day
of such period.
'Consolidated Interest Expense' is defined to mean, with respect to any
Person for any period, the aggregate amount of interest in respect of
Indebtedness (including amortization of original issue discount on any
Indebtedness and the interest portion of any deferred payment obligation,
calculated in accordance with the effective interest method of accounting; all
commissions, discounts and other fees and charges owed with respect to letters
of credit and bankers' acceptance financing; the net costs associated with
Interest Rate Agreements; and Indebtedness that is Guaranteed by such Person)
and all but the principal component of rentals in respect of Capitalized Lease
Obligations paid, accrued or scheduled to be paid or to be accrued by such
Person and its consolidated subsidiaries during such period; excluding, however,
(i) any amount of such interest of any Subsidiary of such Person if the net
income (or loss) of such Subsidiary is excluded in the calculation of Adjusted
Consolidated Net Income for such person pursuant to clause (iii) of the
definition thereof (but only in the same proportion as the net income (or loss)
of such Subsidiary is excluded from the calculation of Adjusted Consolidated Net
Income for such Person pursuant to clause (iii) of the definition thereof) and
(ii) any premiums, fees and expenses (and any amortization thereof) payable in
connection with the 1989 Transaction, the 1992 Transaction, the 1993
Transaction, the issuance of the New Subordinated Notes and the applications of
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the proceeds thereof or the Recapitalization Plan, all as determined on a
consolidated basis in conformity with GAAP.
'Consolidated Net Worth' is defined to mean, at any date of determination,
shareholders' equity as set forth on the most recently available consolidated
balance sheet of JSCE and its Subsidiaries (which shall be as of a date not more
than 60 days prior to the date of such computation), less any amounts
attributable to Redeemable Stock or any equity security convertible into or
exchangeable for Indebtedness, the cost of treasury stock and the principal
amount of any promissory notes receivable from the sale of the Capital Stock of
JSCE or any Subsidiary of JSCE, each item to be determined in accordance with
GAAP (excluding the effects of foreign currency exchange adjustments under
Financial Accounting Standards Board Statement of Financial Accounting Standards
No. 52).
'Credit Agreement' is defined to mean the Credit Agreement, dated
approximately the Closing Date or the date of the Prospectus relating to the
sale of the Senior Notes, among JSCE, CCA, the guarantors party thereto and the
Banks party thereto, together with all other agreements, instruments and
documents executed or delivered pursuant thereto or in connection therewith
(including, without limitation, any promissory notes, Guarantees and security
documents), in each case, as such agreements, instruments and documents may be
amended (including, without limitation, any amendment and restatement thereof),
supplemented, extended, renewed, replaced or otherwise modified from time to
time, including, without limitation, any agreement increasing the amount of,
extending the maturity of, refinancing or otherwise restructuring (including,
but not limited to, by the inclusion of additional borrowers or guarantors
thereunder that are Subsidiaries of JSCE or by the requirement of additional
collateral or other credit enhancement to support the obligations thereunder)
all or any portion of the Indebtedness under such agreement or any successor
agreement or agreements; provided that, with respect to any agreement providing
for the refinancing of Indebtedness under any Credit Agreement, such agreement
shall be a Credit Agreement under the Indenture only if a notice to that effect
is delivered by JSCE to the Trustee and there shall be at any time no more than
two instruments that are Credit Agreements under the Indenture.
'Currency Agreement' is defined to mean any foreign exchange contract,
currency swap agreement or other similar agreement or arrangement designed to
protect JSCE or any of its Subsidiaries against fluctuations in currency values
to or under which JSCE or any of its Subsidiaries is a party or a beneficiary on
the date of the Indenture or becomes a party or a beneficiary thereafter.
'Default' is defined to mean any event that is, or after notice or passage
of time or both would be, an Event of Default.
'Existing Subordinated Debt Refinancing' is defined to mean the refinancing
of any or all of the Indebtedness represented by the Junior Accrued Debentures,
Senior Subordinated Notes and the Subordinated Debentures, including pursuant to
any Credit Agreement.
'Foreign Subsidiary' is defined to mean any Subsidiary of JSCE that (i)
derives more than 80% of its sales or net income from, or (ii) has more than 80%
of its assets located in, territories and jurisdictions outside the United
States of America (in each case determined on a consolidated basis in conformity
with GAAP).
'GAAP' is defined to mean generally accepted accounting principles in the
United States of America as in effect as of the date of the Indenture,
including, without limitation, those 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
approved by a significant segment of the accounting profession. All ratios and
computations based on GAAP contained in the Indenture shall be computed in
conformity with GAAP, except that calculations made for purposes of determining
compliance with the terms of the covenants and with other provisions of the
Indenture shall be made without giving effect to (i) the amortization of any
expenses incurred in connection with the 1989 Transaction, the 1992 Transaction,
the 1993 Transaction, the issuance of the New Subordinated Notes and the
application of the proceeds thereof or the Recapitalization Plan, (ii) except as
otherwise provided, the amortization of any amounts required or permitted by
Accounting Principles Board
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Opinion Nos. 16 and 17 and (iii) any charges associated with the adoption of
Financial Accounting Standard Nos. 106 and 109.
'Guarantee' is defined to mean any obligation, contingent or otherwise, of
any Person directly or indirectly guaranteeing any Indebtedness or other
obligation of any other Person and, without limiting the generality of the
foregoing, any obligation, direct or indirect, contingent or otherwise, of such
Person (i) to purchase or pay (or advance or supply funds for the purchase or
payment of) such Indebtedness or other obligation of such other Person (whether
arising by virtue of partnership arrangements, or by agreement to keep-well, to
purchase assets, goods, securities or services, to take-or-pay, or to maintain
financial statement conditions or otherwise) or (ii) entered into for purposes
of assuring in any other manner the obligee of such Indebtedness or other
obligation of the payment thereof or to protect such obligation of the payment
thereof or to protect such obligee against loss in respect thereof (in whole or
in part); provided that the term 'Guarantee' shall not include endorsements for
collection or deposit in the ordinary course of business. The term 'Guarantee'
used as a verb has a corresponding meaning.
'Holder' or 'Noteholder' or 'Senior Notes Holder' is defined to mean the
registered holder of any Series A Senior Note or Series B Senior Note, as the
case may be.
'Incur' is defined to mean, with respect to any Indebtedness, to incur, create,
issue, assume, Guarantee or otherwise become liable for or with respect to, or
become responsible for, the payment of, contingently or otherwise, such
Indebtedness; provided that neither the accrual of interest (whether such
interest is payable in cash or kind) nor the accretion of original issue
discount shall be considered an Incurrence of Indebtedness.
'Indebtedness' is defined to mean, with respect to any Person at any date
of determination (without duplication), (i) all indebtedness of such Person for
borrowed money, (ii) all obligations of such Person evidenced by bonds,
debentures, notes or other similar instruments (other than, in the case of JSCE
and its Subsidiaries, any non-negotiable notes of JSCE or its Subsidiaries
issued to its insurance carriers in lieu of maintenance of policy reserves in
connection with its workers' compensation and liability insurance programs),
(iii) all obligations of such Person in respect of letters of credit or other
similar instruments (including reimbursement obligations with respect thereto),
(iv) all obligations of such Person to pay the deferred and unpaid purchase
price of property or services, which purchase price is due more than six months
after the date of placing such property in service or taking delivery and title
thereto or the completion of such services, except Trade Payables, (v) all
obligations of such Person as lessee under Capitalized Leases, (vi) all
Indebtedness of other Persons secured by a Lien on any asset of such Person,
whether or not such Indebtedness is assumed by such Person; provided that the
amount of such Indebtedness shall be the lesser of (A) the fair market value of
such asset at such date of determination and (B) the amount of such
Indebtedness, (vii) all Indebtedness of other Persons Guaranteed by such Person
to the extent such Indebtedness is Guaranteed by such Person, (viii) all
obligations in respect of borrowed money under any Credit Agreement, the Secured
Notes and any Guarantees thereof and (ix) to the extent not otherwise included
in this definition, obligations under Currency Agreements and Interest Rate
Agreements. The amount of Indebtedness of any Person at any date shall be the
outstanding balance at such date of all unconditional obligations as described
above and the maximum liability determined by such Person's board of directors,
in good faith, as reasonably likely to occur, upon the occurrence of the
contingency giving rise to the obligation, of any contingent obligations at such
date, provided that the amount outstanding at any time of any Indebtedness
issued with original issue discount is the face amount of such Indebtedness less
the remaining unamortized portion of the original issue discount of such
Indebtedness at such time as determined in conformity with GAAP; and provided
further that Indebtedness shall not include (A) any liability for federal,
state, local or other taxes or (B) obligations of JSCE or its Restricted
Subsidiaries pursuant to Receivables Programs.
'Interest Coverage Ratio' is defined to mean, with respect to any Person on
any Transaction Date, the ratio of (i) the aggregate amount of Consolidated
EBITDA of such Person for the four fiscal quarters for which financial
information in respect thereof is available immediately prior to such
Transaction Date to (ii) the aggregate Consolidated Interest Expense of such
Person during such four fiscal quarters. In making the foregoing calculation,
(A) pro forma effect shall be given to (1) any
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Indebtedness Incurred subsequent to the end of the four-fiscal-quarter period
referred to in clause (i) and prior to the Transaction Date (other than
Indebtedness Incurred under a revolving credit or similar arrangement to the
extent of the commitment thereunder (or under any predecessor revolving credit
or similar arrangement) on the last day of such period), (2) any Indebtedness
Incurred during such period to the extent such Indebtedness is outstanding at
the Transaction Date and (3) any Indebtedness to be Incurred on the Transaction
Date, in each case as if such Indebtedness had been Incurred on the first day of
such four-fiscal-quarter period and after giving pro forma effect to the
application of the proceeds thereof as if such application had occurred on such
first day; (B) Consolidated Interest Expense attributable to interest on any
Indebtedness (whether existing or being Incurred) computed on a pro forma basis
and bearing a floating interest rate shall be computed as if the rate in effect
on the date of computation (taking into account any Interest Rate Agreement
applicable to such Indebtedness if such Interest Rate Agreement has a remaining
term in excess of 12 months) had been the applicable rate for the entire period;
(C) there shall be excluded from Consolidated Interest Expense any Consolidated
Interest Expense related to any amount of Indebtedness that was outstanding
during such four-fiscal-quarter period or thereafter but that is not outstanding
or is to be repaid on the Transaction Date, except for Consolidated Interest
Expense accrued (as adjusted pursuant to clause (B)) during such
four-fiscal-quarter period under a revolving credit or similar arrangement to
the extent of the commitment thereunder (or under any successor revolving credit
or similar arrangement) on the Transaction Date; (D) pro forma effect shall be
given to Asset Dispositions and Asset Acquisitions (including giving pro forma
effect to the application of proceeds of any Asset Disposition) that occur
during such four-fiscal-quarter period or thereafter and prior to the
Transaction Date as if they had occurred and such proceeds had been applied on
the first day of such four-fiscal-quarter period; (E) with respect to any such
four-fiscal-quarter period commencing prior to the Refinancing, the Refinancing
shall be deemed to have taken place on the first day of such period; and (F) pro
forma effect shall be given to asset dispositions and asset acquisitions
(including giving pro forma effect to the application of proceeds of any asset
disposition) that have been made by any Person that has become a Subsidiary of
JSC or has been merged with or into JSCE or any Subsidiary of JSCE during the
four-fiscal-quarter period referred to above or subsequent to such period and
prior to the Transaction Date and that would have constituted Asset Dispositions
or Asset Acquisitions had such transactions occurred when such Person was a
Subsidiary of JSCE as if such asset dispositions or asset acquisitions were
Asset Dispositions or Asset Acquisitions that occurred on the first day of such
period; provided that to the extent that clause (D) or (F) of this sentence
requires that pro forma effect be given to an Asset Acquisition or an asset
acquisition, such pro forma calculation shall be based upon the four full fiscal
quarters immediately preceding the Transaction Date of the Person, or division
or line of business of the Person, that is acquired for which financial
information is available.
'Interest Rate Agreement' is defined to mean any interest rate protection
agreement, interest rate future agreement, interest rate option agreement,
interest rate swap agreement, interest rate cap agreement, interest rate collar
agreement, interest rate hedge agreement or other similar agreement or
arrangement designed to protect JSCE or any of its Subsidiaries against
fluctuations in interest rates or obtain the benefits of floating interest rates
to or under which JSCE or any of its Subsidiaries is a party or a beneficiary on
the date of the Indenture or becomes a party or a beneficiary thereafter.
'Investment' is defined to mean any direct or indirect advance, loan (other
than advances to customers in the ordinary course of business that are recorded
as accounts receivable on the balance sheet of any Person or its Subsidiaries)
or other extension of credit or capital contribution to (by means of any
transfer of cash or other property to others or any payment for property or
services for the account or use of others), or any purchase or acquisition of
Capital Stock, bonds, notes, debentures or other similar instruments issued by
any other Person. For purposes of the definition of 'Unrestricted Subsidiary'
and the 'Limitation on Restricted Payments' covenant described below, (i)
'Investment' shall include the fair market value of the net assets of any
Subsidiary of JSCE at the time that such Subsidiary of JSCE is designated an
Unrestricted Subsidiary and shall exclude the fair market value of the net
assets of any Unrestricted Subsidiary at the time that such Unrestricted
Subsidiary is designated a Restricted Subsidiary of JSCE and (ii) any property
transferred to or from an Unrestricted Subsidiary shall be valued at its fair
market value at the time of such transfer, in each case as determined by the
Board of Directors in good faith.
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'JSC' is defined to mean Jefferson Smurfit Corporation, a Delaware
corporation.
'JSC Parent' is defined to mean any entity of which JSC is a direct or
indirect Subsidiary.
'Junior Accrual Debentures' is defined to mean CCA's 15 1/2% Junior
Subordinated Accrual Debentures due 2004.
'Lien' is defined to mean any mortgage, pledge, security interest,
encumbrance, lien or charge of any kind (including, without limitation, any
conditional sale or other title retention agreement or lease in the nature
thereof, any sale with recourse against the seller or any Affiliate of the
seller, or any agreement to give any security interest).
'Net Cash Proceeds' is defined to mean, with respect to any Asset Sale, the
proceeds of such Asset Sale in the form of cash or cash equivalents, including
payments in respect of deferred payment obligations (to the extent corresponding
to the principal, but not interest, component thereof) when received in the form
of cash or cash equivalents (except to the extent such obligations are financed
or sold with recourse to JSCE or any Subsidiary of JSCE) and proceeds from the
conversion of other property received when converted to cash or cash
equivalents, net of (i) brokerage commissions and other fees and expenses
(including fees and expenses of counsel and investment bankers) related to such
Asset Sale, (ii) provisions for all taxes (whether or not such taxes will
actually be paid or are payable) as a result of such Asset Sale without regard
to the consolidated results of operations of JSCE and its Subsidiaries, taken as
a whole, (iii) payments made to repay Indebtedness or any other obligation
outstanding at the time of such Asset Sale that either (A) is secured by a Lien
on the property or assets sold or (B) is required to be paid as a result of such
sale and (iv) appropriate amounts to be provided by JSCE or any Subsidiary of
JSCE as a reserve against any liabilities associated with such Asset Sale,
including, without limitation, pension and other post-employment benefit
liabilities, liabilities related to environmental matters and liabilities under
any indemnification obligations associated with such Asset Sale, all as
determined in conformity with GAAP.
'New Subordinated Notes' is defined to mean the 11 1/2% Junior Subordinated
Notes maturing 2005, in an aggregate amount not to exceed $200 million, of CCA
which SIBV had committed to purchase (which commitment terminates on the Closing
Date without any of such notes having been issued).
'1989 Transaction' is defined to mean the transaction in which (i) JSC
acquired the entire equity interest in Old JSC(U.S.), (ii) Old JSC(U.S.)
(through its ownership of JSC Enterprises) acquired the entire equity interest
in CCA, (iii) the MSLEF I Group received $500 million in respect of its shares
of CCA common stock, (iv) SIBV received $41.75 per share, or an aggregate of
approximately $1.25 billion, in respect of its shares of Old JSC(U.S.) stock and
(v) the public stockholders received $43 per share of Old JSC(U.S.) stock.
'1993 Transaction' is defined to mean the issuance and sale of an aggregate
principal amount of $500 million of 9 3/4% Senior Notes Due 2003, the repayment
of Indebtedness with the proceeds of such sale and the amendments (and consent
payments in respect thereof) to certain debt instruments, and the agreements
related thereto, that were effected in April 1993.
'1992 Stock Option Plan' is defined to mean the JSC 1992 Stock Option Plan,
as the same may be amended, supplemented or otherwise modified from time to
time.
'1992 Transaction' is defined to mean the purchase, in August 1992, by
certain stockholders of JSC of $231.8 million of Common Stock of JSC, the
contribution by JSC of such $231.8 million to CCA and the application by CCA of
such $231.8 million to repurchase Junior Accrual Debentures and repay other
subordinated Indebtedness of CCA.
'Original Stockholders' is defined to mean, collectively, MSLEF II, Morgan
Stanley Group, SIBV, JS Group and any Affiliate of any such Person.
'Permitted Liens' is defined to mean (i) Liens for taxes, assessments,
governmental charges or claims that are being contested in good faith by
appropriate legal proceedings promptly instituted and diligently conducted and
for which a reserve or other appropriate provision, if any, as shall be required
in conformity with GAAP shall have been made; (ii) statutory Liens of landlords
and carriers, warehousemen, mechanics, suppliers, materialmen, repairmen or
other similar Liens arising in the ordinary course of business and with respect
to amounts not yet delinquent or being contested in good
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faith by appropriate legal proceedings promptly instituted and diligently
conducted and for which a reserve or other appropriate provision, if any, as
shall be required in conformity with GAAP shall have been made; (iii) Liens
incurred or deposits made in the ordinary course of business in connection with
workers' compensation, unemployment insurance and other types of social
security; (iv) Liens incurred or deposits made to secure the performance of
tenders, bids, leases, statutory or regulatory obligations, bankers'
acceptances, surety and appeal bonds, government contracts, performance and
return-of-money bonds and other obligations of a similar nature incurred in the
ordinary course of business (exclusive of obligations for the payment of
borrowed money); (v) easements, rights-of-way, municipal and zoning ordinances
and similar charges, encumbrances, title defects or other irregularities that do
not materially interfere with the ordinary course of business of JSCE or any of
its Subsidiaries; (vi) Liens (including extensions and renewals thereof) upon
real or tangible personal property acquired after the Closing Date; provided
that (a) such Lien is created solely for the purpose of securing Indebtedness
Incurred (1) to finance the cost (including the cost of improvement or
construction) of the item of property or assets subject thereto and such Lien is
created prior to, at the time of or within six months after the later of the
acquisition, the completion of construction or the commencement of full
operation of such property or (2) to refinance any Indebtedness previously so
secured, (b) the principal amount of the Indebtedness secured by such Lien does
not exceed 100% of such cost and (c) any such Lien shall not extend to or cover
any property or assets other than such item of property or assets and any
improvements on such item; (vii) leases or subleases granted to others that do
not materially interfere with the ordinary course of business of JSCE or any of
its Subsidiaries; (viii) Liens encumbering property or assets under construction
arising from progress or partial payments by a customer of JSCE or any of its
Subsidiaries relating to such property or assets; (ix) any interest or title of
a lessor in the property subject to any Capitalized Lease or Operating Lease;
provided that any sale-leaseback transaction related thereto complies with the
'Limitation on Sale-Leaseback Transactions' covenant; (x) Liens arising from
filing Uniform Commercial Code financing statements regarding leases; (xi) Liens
on property of, or on shares of stock or Indebtedness of, any corporation
existing at the time such corporation becomes, or becomes a part of, any
Restricted Subsidiary; (xii) Liens in favor of JSCE or any Restricted
Subsidiary; (xiii) Liens arising from the rendering of a final judgment or order
against JSCE or any Subsidiary of JSCE that does not give rise to an Event of
Default; (xiv) Liens securing reimbursement obligations with respect to letters
of credit that encumber documents and other property relating to such letters of
credit and the products and proceeds thereof; (xv) Liens in favor of customs and
revenue authorities arising as a matter of law to secure payment of customs
duties in connection with the importation of goods; (xvi) Liens encumbering
customary initial deposits and margin deposits, and other Liens that are either
within the general parameters customary in the industry and incurred in the
ordinary course of business or otherwise permitted under the terms of either of
the Credit Agreements, in each case securing Indebtedness under Interest Rate
Agreements, Currency Agreements and forward contracts, options, future
contracts, futures options or similar agreements or arrangements designed to
protect JSCE or any of its Subsidiaries from fluctuations in the price of
commodities; (xvii) Liens arising out of conditional sale, title retention,
consignment or similar arrangements for the sale of goods entered into by JSCE
or any of its Subsidiaries in the ordinary course of business in accordance with
the past practices of JSCE and its Subsidiaries prior to the Closing Date;
(xviii) Liens on or sales of receivables; and (xix) Liens securing any real
property or other assets of JSCE or any Restricted Subsidiary in favor of the
United States of America or any State thereof, or any department, agency,
instrumentality or political subdivision thereof, in connection with the
financing of industrial revenue bond facilities or any equipment or other
property designed primarily for the purpose of air or water pollution control;
provided that any such Lien on such facilities, equipment or other property
shall not apply to any other assets of JSCE or any Restricted Subsidiary.
'Person' is defined to mean an individual, a corporation, a partnership, an
association, a trust or any other entity or organization, including a government
or political subdivision or an agency or instrumentality thereof.
'Preferred Stock' is defined to mean, with respect to any Person, any and
all shares, interests, participations or other equivalents (however designated,
whether voting or non-voting) of such Person's
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preferred or preference stock, whether now outstanding or issued after the date
of the Indenture, including, without limitation, all series and classes of such
preferred or preference stock.
'Principal Property' is defined to mean any manufacturing or processing
plant, warehouse or other building used by JSCE or any Restricted Subsidiary,
other than a plant, warehouse or other building that, in the good faith opinion
of the Board of Directors of JSCE as reflected in a Board Resolution, is not of
material importance to the business conducted by JSCE and its Restricted
Subsidiaries taken as a whole as of the date such Board Resolution is adopted.
'Recapitalization Plan' is defined to mean, collectively, the following
transactions: (i) the sale of the Senior Notes, (ii) the sale by JSC of JSC
Common Stock substantially concurrently with the transaction described in clause
(i), (iii) the SIBV Investment, (iv) the execution and delivery of the Credit
Agreement, (v) the application of the proceeds of the transactions described in
clauses (i) through (iv), (vi) the Existing Subordinated Debt Refinancing, (vii)
the obtaining of all consents and waivers necessary or determined by CCA, Old
JSC(U.S.) or JSC to be appropriate in connection with the foregoing, (viii) all
other transactions related to, or entered into in connection with, the foregoing
unless CCA determines that any such transaction should not be considered part of
the Recapitalization Plan and (ix) the payment and accrual of all fees and
expenses related to the foregoing.
'Receivables Programs' is defined to mean, with respect to any Person,
obligations of such Person or its Subsidiaries pursuant to accounts receivable
securitization programs, to the extent that the proceeds received pursuant to a
pledge, sale or other encumbrance of accounts receivable pursuant to such
programs do not exceed 91% of the total book value of such accounts receivable
(determined on a consolidated basis in accordance with GAAP as of the end of the
most recent fiscal quarter for which financial information is available), and
any extension, renewal, modification or replacement of such programs, including,
without limitation, any agreement increasing the amount of, extending the
maturity of, refinancing or otherwise restructuring all or any portion of the
obligations under such programs or any successor agreement or agreements.
'Redeemable Stock' is defined to mean any class or series of Capital Stock
of any Person that by its terms or otherwise is (i) required to be redeemed
prior to the Stated Maturity of the Senior Notes, (ii) redeemable at the option
of the holder of such class or series of Capital Stock at any time prior to the
Stated Maturity of the Senior Notes, or (iii) convertible into or exchangeable
for Capital Stock referred to in clause (i) or (ii) above or Indebtedness having
a scheduled maturity prior to the Stated Maturity of the Senior Notes; provided
that any Capital Stock that would not constitute Redeemable Stock but for
provisions thereof giving holders thereof the right to require such Person to
repurchase or redeem such Capital Stock upon the occurrence of an 'asset sale'
or 'change of control' occurring prior to the Stated Maturity of the Senior
Notes shall not constitute Redeemable Stock if the 'asset sale' or 'change of
control' provisions applicable to such Capital Stock are no more favorable
(except with respect to any premium payable) to the holders of such Capital
Stock than the provisions contained in 'Limitation on Asset Sales' and
'Repurchase of Senior Notes upon Change of Control' covenants described below
and such Capital Stock specifically provides that such Person will not
repurchase or redeem any such stock pursuant to such provisions prior to such
Person's repurchase of such Senior Notes, as are required to be repurchased
pursuant to the 'Limitation on Asset Sales' and 'Repurchase of Senior Notes upon
Change of Control' covenants described below.
'Restricted Subsidiary' is defined to mean any Subsidiary of JSCE other
than an Unrestricted Subsidiary.
'Senior Subordinated Notes' is defined to mean CCA's 13 1/2% Senior
Subordinated Notes due 1999.
'SIBV Investment' is defined to mean the purchase by SIBV (or a corporate
affiliate thereof) of shares of JSC Common Stock, substantially concurrently
with the sale by CCA of the Senior Notes.
'Significant Subsidiary' is defined to mean, at any date of determination,
any Subsidiary of JSCE that, together with its Subsidiaries, (i) for the most
recent fiscal year of JSCE, accounted for more than 10% of the consolidated
revenues of JSCE or (ii) as of the end of such fiscal year, was the owner of
more than 10% of the consolidated assets of JSCE, all as set forth on the most
recently available consolidated financial statements of JSCE for such fiscal
year.
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'Smurfit Newsprint' is defined to mean Smurfit Newsprint Corporation, a
Delaware corporation.
'Stated Maturity' is defined to mean, (i) with respect to any debt
security, the date specified in such debt security as the fixed date on which
the final installment of principal of such debt security is due and payable and
(ii) with respect to any scheduled installment of principal of or interest on
any debt security, the date specified in such debt security as the fixed date on
which such installment is due and payable.
'Subordinated Debentures' is defined to mean CCA's 14% Subordinated
Debentures due 2001.
'Subsidiary' is defined to mean, with respect to any Person, any
corporation, association or other business entity of which more than 50% of the
outstanding Voting Stock is owned, directly or indirectly, by JSCE or by one or
more other Subsidiaries of JSCE, or by such Person and one or more other
Subsidiaries of such Person; provided that, except as the term 'Subsidiary' is
used in the definition of 'Unrestricted Subsidiary' set forth below, an
Unrestricted Subsidiary shall not be deemed to be a Subsidiary of JSCE for
purposes of the Indenture.
'Times Mirror Agreement' is defined to mean the Shareholders Agreement,
dated February 21, 1986 between Old JSC(U.S.) and The Times Mirror Company, as
the same may at any time be amended, modified or supplemented.
'Trade Payables' is defined to mean, with respect to any Person, any
accounts payable or any other indebtedness or monetary obligation to trade
creditors created, assumed or Guaranteed by such Person or any of its
Subsidiaries arising in the ordinary course of business in connection with the
acquisition of goods or services.
'Transaction Date' is defined to mean, with respect to the Incurrence of
any Indebtedness by JSCE or any of its Subsidiaries, the date such Indebtedness
is to be Incurred and, with respect to any Restricted Payment, the date such
Restricted Payment is to be made.
'Unrestricted Subsidiary' is defined to mean (i) any Subsidiary of JSCE
that at the time of determination shall be designated an Unrestricted Subsidiary
by the Board of Directors of JSCE in the manner provided below and (ii) any
Subsidiary of an Unrestricted Subsidiary. The Board of Directors of JSCE may
designate any Subsidiary of JSCE (including any newly acquired or newly formed
Subsidiary of JSCE) other than CCA to be an Unrestricted Subsidiary unless such
Subsidiary owns any Capital Stock of, or owns or holds any Lien on any property
of, JSCE or any other Subsidiary of JSCE that is not a Subsidiary of the
Subsidiary to be so designated; provided that either (A) the Subsidiary to be so
designated has total assets of $1,000 or less or (B) if such Subsidiary has
assets greater than $1,000, that such designation would be permitted under the
'Limitation on Restricted Payments' covenant described below. The Board of
Directors of JSCE may designate any Unrestricted Subsidiary to be a Restricted
Subsidiary of JSCE; provided that immediately after giving effect to such
designation (x) JSCE could Incur $1.00 of additional Indebtedness under the
first paragraph of the 'Limitation on Indebtedness' covenant described below and
(y) no Default or Event of Default shall have occurred and be continuing. Any
such designation by the Board of Directors of JSCE shall be evidenced to the
Trustee by promptly filing with the Trustee a copy of the Board Resolution
giving effect to such designation and an Officers' Certificate certifying that
such designation complied with the foregoing provisions. Any Subsidiary of JSCE
may be designated as an Unrestricted Subsidiary (or not so designated) for
purposes of the Indenture without regard to whether such Subsidiary is so
designated (or not so designated) for purposes of any other agreement relating
to Indebtedness of JSCE or any of its Subsidiaries.
'Voting Stock' is defined to mean Capital Stock of any class or kind
ordinarily having the power to vote for the election of directors.
'Wholly Owned Subsidiary' is defined to mean, with respect to any Person,
any Subsidiary of such Person if all of the Common Stock or other similar equity
ownership interests (but not including Preferred Stock) in such Subsidiary
(other than any director's qualifying shares or Investments by foreign nationals
mandated by applicable law) is owned directly or indirectly by such Person.
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COVENANTS
LIMITATION ON INDEBTEDNESS
Under the terms of the Indentures, JSCE shall not, and shall not permit any
Restricted Subsidiary to, Incur any Indebtedness unless, after giving effect to
the Incurrence of such Indebtedness and the receipt and application of the
proceeds therefrom, the Interest Coverage Ratio of JSCE would be greater than
<TABLE>
<CAPTION>
(1) prior to July 1, 1994............................................................ 1.50:1,
<S> <C>
(2) after June 30, 1994 and prior to July 1, 1995.................................... 1.75:1,
(3) after June 30, 1995.............................................................. 2.00:1.
</TABLE>
Notwithstanding the foregoing, JSCE and any Restricted Subsidiary (except
as expressly provided below) may Incur each and all of the following: (i)
Indebtedness (A) of JSCE and CCA outstanding at any time in an aggregate
principal amount not to exceed the amount of outstanding Indebtedness and unused
commitments under the Credit Agreement on the Closing Date less any Indebtedness
Incurred pursuant to clause (iii) below to refinance or refund the Junior
Accrual Debentures, the Senior Subordinated Notes or the Subordinated
Debentures, (B) of JSCE and CCA outstanding at any time in an aggregate
principal amount not to exceed $275 million, (C) of JSC Enterprises, CCA
Enterprises and Smurfit Newsprint under any Credit Agreement outstanding at any
time in an aggregate principal amount not to exceed the amount of outstanding
Indebtedness and unused commitments under the Credit Agreement on the Closing
Date less, for purposes of determining cash borrowings under any Credit
Agreement by JSC Enterprises, CCA Enterprises and Smurfit Newsprint, (1) any
Indebtedness Incurred pursuant to clause (iii) below to refinance or refund the
Junior Accrual Debentures, the Senior Subordinated Notes or the Subordinated
Debentures and (2) the amount of Indebtedness Incurred under clause (i)(A) of
this paragraph, (D) of Restricted Subsidiaries of JSCE (other than CCA) in an
aggregate principal amount not to exceed $50 million at any one time
outstanding, and (E) consisting of Guarantees by Restricted Subsidiaries of JSCE
(other than CCA) of Indebtedness of JSCE and its Restricted Subsidiaries under
any Credit Agreement or any other Indebtedness of such Persons for borrowed
money; provided that any such Restricted Subsidiary that Guarantees such
Indebtedness under any Credit Agreement or any such other Indebtedness for
borrowed money shall fully and unconditionally Guarantee the Senior Notes on a
senior basis (to the same extent and for only so long as such Indebtedness under
any Credit Agreement or such other Indebtedness for borrowed money is Guaranteed
by such Restricted Subsidiary); provided further that (x) any such Guarantees of
Indebtedness subordinated to the Senior Notes will be subordinated to such
Subsidiary's Guarantee of the Senior Notes, if any, in a like manner and (y) for
purposes of this covenant, a Guarantee by a Restricted Subsidiary shall not be
deemed to exist, and Indebtedness shall not be deemed to have been Incurred by a
Restricted Subsidiary, solely by reason of one or more security interests in
assets of such Restricted Subsidiary having been granted pursuant to any Credit
Agreement; (ii) Indebtedness (A) of JSCE to any of its Restricted Subsidiaries
that is a Wholly Owned Subsidiary of JSCE, or of a Restricted Subsidiary to JSCE
or to any other Restricted Subsidiary that is a Wholly Owned Subsidiary of JSCE,
(B) of JSCE or any Restricted Subsidiary to Smurfit Newsprint or (C) of JSCE or
any Restricted Subsidiary to any Foreign Subsidiary in an aggregate principal
amount not to exceed $20 million at any one time outstanding; (iii) Indebtedness
issued in exchange for, or the net proceeds of which are used to refinance or
refund, outstanding Indebtedness of JSCE or any of its Restricted Subsidiaries,
other than Indebtedness Incurred under clauses (i)(A), (B) or (D), (ii)(C), (vi)
or (ix) of this paragraph and any refinancings thereof, in an amount (or, if
such new Indebtedness provides for an amount less than the principal amount
thereof to be due and payable upon a declaration of acceleration thereof, with
an original issue price) not to exceed the amount so exchanged, refinanced or
refunded (plus premiums, accrued interest, fees and expenses); provided that
Indebtedness issued in exchange for, or the proceeds of which are used to
refinance or refund, the Senior Notes or JSCE's Guarantee thereof or other
Indebtedness of CCA or JSCE that is pari passu with, or subordinated in right of
payment to, the Senior Notes or JSCE's Guarantee thereof, as the case may be
(other than the Junior Accrual Debentures, Senior Subordinated Notes and the
Subordinated Debentures), shall only be permitted under this clause (iii) if (A)
in case the Indebtedness to be refinanced is subordinated in right of payment to
the Senior Notes or JSCE's Guarantee thereof, such new Indebtedness, by its
terms or by the terms of any agreement or instrument pursuant to which such new
Indebtedness is issued or remains
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outstanding, is expressly made subordinate in right of payment to the Senior
Notes or JSCE's Guarantee thereof, as the case may be, at least to the extent
that the Indebtedness to be refinanced is subordinated to the Senior Notes or
JSCE's Guarantee thereof, as the case may be, (B) in case the Senior Notes are
refinanced in part or the Indebtedness to be refinanced is pari passu with, or
subordinated in right of payment to, the Senior Notes or JSCE's Guarantee
thereof, such new Indebtedness, determined as of the date of Incurrence of such
new Indebtedness, does not mature prior to six months after the Stated Maturity
of the Indebtedness to be refinanced (or, if earlier, six months after the
Stated Maturity of the Senior Notes) and the Average Life of such new
Indebtedness is at least equal to the remaining Average Life of the Indebtedness
to be refinanced plus six months (or, if less, the remaining Average Life of the
Senior Notes plus six months), and (C) if the Indebtedness to be refinanced is
Indebtedness of JSCE or CCA, such new Indebtedness Incurred pursuant to this
clause (iii) may not be Indebtedness of any Restricted Subsidiary of JSCE other
than CCA; (iv) Indebtedness (A) in respect of performance, surety or appeal
bonds provided in the ordinary course of business, (B) under Currency Agreements
and Interest Rate Agreements; provided that, in the case of Currency Agreements
that relate to other Indebtedness, such Currency Agreements do not increase the
Indebtedness of JSCE or its Restricted Subsidiaries outstanding at any time
other than as a result of fluctuations in foreign currency exchange rates or by
reason of fees, indemnities and compensation payable thereunder; and (C) arising
from agreements providing for indemnification, adjustment of purchase price or
similar obligations, or from Guarantees or letters of credit, surety bonds or
performance bonds securing any obligations of JSC or any Restricted Subsidiary
of JSCE pursuant to such agreements, in any case Incurred in connection with the
disposition of any business, assets or Restricted Subsidiary of JSCE, other than
Guarantees of Indebtedness Incurred by any Person acquiring all or any portion
of such business, assets or Restricted Subsidiary of JSCE for the purpose of
financing such acquisition; (v) Indebtedness in respect of letters of credit and
bankers' acceptances Incurred in the ordinary course of business consistent with
past practice; (vi) Indebtedness of JSCE or CCA in an aggregate amount not to
exceed $100 million at any one time outstanding; provided that such
Indebtedness, by its terms or by the terms of any agreement or instrument
pursuant to which such Indebtedness is issued or remains outstanding, (A) is
expressly made subordinate in right of payment to the Senior Notes or JSCE's
Guarantee thereof, as the case may be, (B) provides that no required payments of
principal of such Indebtedness by way of sinking fund, mandatory redemption or
otherwise shall be made by JSCE or CCA (including, without limitation, at the
option of the holder thereof other than an option given to a holder pursuant to
an 'asset sale' or 'change of control' provision that is no more favorable
(except with respect to any premium payable) to the holders of such Indebtedness
than the provisions contained in the 'Limitation on Asset Sales' and 'Repurchase
of Senior Notes upon Change of Control' covenants and such Indebtedness
specifically provides that JSCE and CCA will not repurchase or redeem such
Indebtedness pursuant to such provisions prior to CCA's repurchase of the Senior
Notes required to be repurchased by CCA under the 'Limitation on Asset Sales'
and 'Repurchase of Senior Notes upon Change of Control' covenants) at any time
prior to the Stated Maturity of the Senior Notes and (C) after giving effect to
the Incurrence of such Indebtedness and the application of the proceeds
therefrom, JSCE's Interest Coverage Ratio would be at least 1.25:1; (vii)
Indebtedness of CCA or JSCE Incurred on or before December 1, 1994, the proceeds
of which are used to pay cash interest on the Junior Accrual Debentures; (viii)
Acquired Indebtedness, provided that, at the time of the Incurrence thereof,
JSCE could Incur at least $1.00 of Indebtedness under the first paragraph of
this 'Limitation on Indebtedness' covenant, and refinancings thereof; provided
that such refinancing Indebtedness may not be Incurred by any Person other than
JSCE, CCA or the Restricted Subsidiary that is the obligor on such Acquired
Indebtedness; (ix) Indebtedness of JSCE or CCA Incurred to finance, directly or
indirectly, capital expenditures of JSCE and its Restricted Subsidiaries in an
aggregate principal amount not to exceed $75 million in each fiscal year of
JSCE, and any refinancing of such Indebtedness (including pursuant to any
Capitalized Lease); provided that the amount of Indebtedness which may be
Incurred in any fiscal year of JSCE pursuant to this clause (ix) shall be
increased by the amount of Indebtedness (other than refinancing Indebtedness)
which could have been Incurred in the prior fiscal year (including by reason of
this proviso) of JSCE pursuant to this clause (ix) but which was not so
Incurred; and (x) Indebtedness represented by the obligations of JSCE or CCA to
repurchase shares, or cancel or repurchase options to purchase shares, of JSC's,
a JSC Parent's, JSCE's or CCA's Common Stock held by employees of JSC, JSCE or
any of its Restricted Subsidiaries as set
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forth in the agreements under which such employees purchase or hold shares of
JSC's, a JSC Parent's, JSCE's or CCA's Common Stock, as such agreements may be
amended; provided that such Indebtedness is subordinated to the Senior Notes and
JSCE's Guarantee thereof, as the case may be, and that no payment of principal
of such Indebtedness may be made while any Senior Notes are outstanding.
Notwithstanding any other provision of this 'Limitation on Indebtedness'
covenant, (i) the maximum amount of Indebtedness that JSCE or any Restricted
Subsidiary may Incur pursuant to this 'Limitation on Indebtedness' covenant
shall not be deemed to be exceeded due solely to fluctuations in the exchange
rates of currencies, (ii) Indebtedness Incurred pursuant to the Credit Agreement
on the Closing Date (and after repaying the Indebtedness to be repaid pursuant
to the Recapitalization Plan (other than the Existing Subordinated Debt
Refinancing) and without giving effect to any exercise of any overallotment
option granted in connection with sales of JSC Common Stock pursuant to clause
(ii) of the definition of 'Recapitalization Plan' and the application of any
proceeds thereof), shall be treated as Incurred immediately after the Closing
Date pursuant to clause (i)(A) or (i)(C), as the case may be, of the second
paragraph of this 'Limitation on Indebtedness' covenant, (iii) for purposes of
calculating the amount of Indebtedness outstanding at any time under clause (i)
of the second paragraph of this 'Limitation on Indebtedness' covenant, no amount
of Indebtedness of JSCE or any Restricted Subsidiary outstanding on the Closing
Date, including the Senior Notes, shall be considered to be outstanding and (iv)
neither JSCE nor CCA may Incur any Indebtedness that is expressly subordinated
to any other Indebtedness of JSCE or CCA, as the case may be, unless such
Indebtedness, by its terms or the terms of any agreement or instrument pursuant
to which such Indebtedness is issued, is also expressly made subordinate to the
Senior Notes or JSCE's Guarantee of the Senior Notes, as the case may be, at
least to the extent that such Indebtedness is subordinated to such other
Indebtedness; provided that the limitation in clause (iv) above shall not apply
to distinctions between categories of unsubordinated Indebtedness which exist by
reason of (a) any liens or other encumbrances arising or created in respect of
some but not all unsubordinated Indebtedness, (b) intercreditor agreements
between holders of different classes of unsubordinated Indebtedness or (c)
different maturities or prepayment provisions.
For purposes of determining any particular amount of Indebtedness under
this 'Limitation on Indebtedness' covenant, (1) Indebtedness resulting from
security interests granted with respect to Indebtedness of JSCE or any
Restricted Subsidiary otherwise included in the determination of such particular
amount, and Guarantees (and security interests in respect thereof) of, or
obligations with respect to letters of credit supporting, Indebtedness otherwise
included in the determination of such particular amount shall not be included,
(2) any Liens granted pursuant to the equal and ratable provisions referred to
in the first paragraph or clause (i) of the second paragraph of the 'Limitation
on Liens' covenant shall not be treated as Indebtedness and (3) Indebtedness
permitted under this 'Limitation of Indebtedness' covenant need not be permitted
solely by reference to one provision permitting such Indebtedness but may be
permitted in part by reference to one such provision and in part by reference to
one or more other provisions of this covenant permitting such Indebtedness. For
purposes of determining compliance with this 'Limitation on Indebtedness'
covenant, (x) in the event that an item of Indebtedness meets the criteria of
more than one of the types of Indebtedness described in the above clauses, JSCE,
in its sole discretion, shall classify such item of Indebtedness and only be
required to include the amount and type of such Indebtedness in one of such
clauses and (y) the amount of Indebtedness issued at a price that is less than
the principal amount thereof shall be equal to the amount of the liability in
respect thereof determined in conformity with GAAP. (Section 3.03)
LIMITATION ON RESTRICTED PAYMENTS
So long as any of the Senior Notes are outstanding, JSCE will not, and will
not permit any Restricted Subsidiary to, directly or indirectly, (i) declare or
pay any dividend or make any distribution on its Capital Stock (other than
dividends or distributions payable solely in shares of its or such Restricted
Subsidiary's Capital Stock (other than Redeemable Stock) of the same class held
by such holders or in options, warrants or other rights to acquire such shares
of Capital Stock) held by Persons other than JSCE or any Restricted Subsidiary
that is a Wholly Owned Subsidiary of JSCE, (ii) purchase, redeem, retire or
otherwise acquire for value any shares of Capital Stock of JSC, a JSC Parent,
JSCE or
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CCA (including options, warrants or other rights to acquire such shares of
Capital Stock) held by Persons other than JSCE or any Restricted Subsidiary that
is a Wholly Owned Subsidiary of JSCE, (iii) make any voluntary or optional
principal payment, or voluntary or optional redemption, repurchase, defeasance,
or other voluntary acquisition or retirement for value, of (1) Indebtedness of
JSC or a JSC Parent, (2) Indebtedness of CCA that is subordinated in right of
payment to the Senior Notes (other than the Senior Subordinated Notes, the
Subordinated Debentures and the Junior Accrual Debentures) or (3) Indebtedness
of JSCE that is subordinated in right of payment to JSCE's Guarantee of the
Senior Notes (other than the Guarantees of JSCE with respect to the Senior
Subordinated Notes, the Subordinated Debentures and the Junior Accrual
Debentures), or (iv) make any Investment in any Unrestricted Subsidiary (such
payments or any other actions described in clauses (i) through (iv) being
collectively 'Restricted Payments') if, at the time of, and after giving effect
to, the proposed Restricted Payment: (A) a Default or Event of Default shall
have occurred and be continuing, (B) JSCE could not Incur at least $1.00 of
Indebtedness under the first paragraph of the 'Limitation on Indebtedness'
covenant or (C) the aggregate amount expended for all Restricted Payments (the
amount so expended, if other than in cash, to be determined in good faith by the
Board of Directors of JSCE, whose determination shall be conclusive and
evidenced by a Board Resolution) after the date of the Indenture shall exceed
the sum of (1) 50% of the aggregate amount of the Adjusted Consolidated Net
Income (or, if the Adjusted Consolidated Net Income is a loss, minus 100% of
such amount) of JSCE (determined by excluding income resulting from the
transfers of assets received by JSCE or a Restricted Subsidiary from an
Unrestricted Subsidiary) accrued on a cumulative basis during the period (taken
as one accounting period) beginning on the first day of the month immediately
following the Closing Date and ending on the last day of the last fiscal quarter
preceding the Transaction Date plus (2) the aggregate net proceeds (including
the fair market value of noncash proceeds as determined in good faith by the
Board of Directors of JSCE) received by JSCE or CCA from the issuance and sale
permitted by the Indenture of the Capital Stock of JSCE or CCA (other than
Redeemable Stock) to a Person who is not a Restricted Subsidiary of JSCE or an
Unrestricted Subsidiary of JSCE, including an issuance or sale permitted by the
Indenture for cash or other property upon the conversion of any Indebtedness of
JSCE or CCA subsequent to the Closing Date, or from the issuance of any options,
warrants or other rights to acquire Capital Stock of JSCE or CCA (in each case,
exclusive of any Redeemable Stock or any options, warrants or other rights that
are redeemable at the option of the holder, or are required to be redeemed,
prior to the Stated Maturity of the Senior Notes) plus all amounts contributed
to the capital of JSCE by JSC plus (3) an amount equal to the net reduction in
Investments in Unrestricted Subsidiaries (other than such Investments made
pursuant to clause (v) of the second paragraph of this 'Limitation on Restricted
Payments' covenant) resulting from payments of interest on Indebtedness,
dividends, repayments of loans or advances, or other transfers of assets, in
each case to JSCE or any Restricted Subsidiary from Unrestricted Subsidiaries,
or from redesignation of Unrestricted Subsidiaries as Restricted Subsidiaries
(valued in each case as provided in the definition of 'Investments'), not to
exceed in the case of any Unrestricted Subsidiary the amount of Investments
previously made by JSCE or any Restricted Subsidiary in such Unrestricted
Subsidiary plus (4) $25 million.
The foregoing provision shall not take into account, and shall not be
violated by reason of: (i) the payment of any dividend within 60 days after the
date of declaration thereof if, at said date of declaration, such payment would
comply with the foregoing paragraph; (ii) the redemption, repurchase, defeasance
or other acquisition or retirement for value of (A) Indebtedness of JSC or a JSC
Parent, (B) Indebtedness of CCA that is subordinated in right of payment to the
Senior Notes or (C) Indebtedness of JSCE that is subordinated in right of
payment to JSCE's Guarantee of the Senior Notes, including premium, if any, and
accrued and unpaid interest, with the proceeds of, or in exchange for,
Indebtedness Incurred under clause (iii) or (vi) of the second paragraph of the
'Limitation on Indebtedness' covenant; (iii) the payment of dividends on the
Capital Stock of JSCE or CCA, following any initial public offering of Capital
Stock of JSC provided for in the Recapitalization Plan, of up to 6% per annum of
the net proceeds received by JSCE or CCA, as the case may be, from JSC out of
the proceeds of (a) such public offering and (b) the SIBV Investment (net of
underwriting discounts and commissions, if any, but without deducting other fees
or expenses therefrom); (iv) the repurchase, redemption or other acquisition of
Capital Stock of JSC, a JSC Parent, JSCE or CCA in exchange for, or out of the
proceeds of a substantially concurrent offering of, shares of Capital Stock
(other than
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Redeemable Stock) of JSC, a JSC Parent, JSCE or CCA; (v) the making of
Investments in Unrestricted Subsidiaries in an aggregate amount not to exceed
$25 million in each fiscal year of JSCE; (vi) the acquisition of (A)
Indebtedness of JSC or a JSC Parent, (B) Indebtedness of CCA which is
subordinated in right of payment to the Senior Notes or (C) Indebtedness of JSCE
that is subordinated in right of payment to JSCE's Guarantee of the Senior Notes
in exchange for, or out of the proceeds of, a substantially concurrent offering
of, shares of the Capital Stock of JSC, a JSC Parent, JSCE or CCA (other than
Redeemable Stock); (vii) payments or distributions pursuant to or in connection
with a consolidation, merger or transfer of assets that complies with the
provisions of the Indenture applicable to mergers, consolidations and transfers
of all or substantially all of the property and assets of JSCE or CCA; (viii)
payments to JSC (A) in an aggregate amount not to exceed $2 million per annum to
cover the reasonable expenses of JSC incurred in the ordinary course of business
and (B) in an amount not to exceed the amount believed in good faith by the
Board of Directors of JSCE or CCA, as the case may be, to be necessary or
advisable for the payment of any liability of JSC, JSCE and CCA in connection
with federal, state, local or foreign taxes; (ix) payments to JSC or any
Restricted Subsidiary of JSCE in respect of Indebtedness of JSCE or any
Restricted Subsidiary of JSCE owed to JSCE or another Restricted Subsidiary of
JSCE; (x) distributions and payments required to be made pursuant to the Times
Mirror Agreement or distributions or payments to JSC, to enable JSC to satisfy
its payment obligations under the Times Mirror Agreement; (xi) payments to
Persons who are no longer Employees (as defined in the 1992 Stock Option Plan)
or the beneficiaries or estates of such Persons, as a result of the purchase by
JSC of options issued pursuant to the 1992 Stock Option Plan (or Common Stock
issued upon the exercise of such options) held by such Persons in accordance
with the 1992 Stock Option Plan; provided that such payments do not exceed $4
million in any fiscal year; or payments or distributions to JSC to enable JSC to
make any such payments; or (xii) the payment of pro rata dividends to holders of
Capital Stock of Smurfit Newsprint; provided that, in the case of clauses (ii)
through (vii), (xi) and (xii), no Default or Event of Default shall have
occurred and be continuing or occur as a consequence of the actions or payments
set forth therein. In connection with any purchase, repurchase, redemption,
defeasance or other acquisition or retirement for value of any security which is
not Capital Stock but which is convertible into or exchangeable for Capital
Stock (including options, warrants or other rights to purchase Capital Stock),
such purchase, repurchase, redemption, defeasance or other acquisition or
retirement shall be deemed covered by clause (iii) and not by clause (ii) of the
first paragraph of this 'Limitation on Restricted Payments' covenant if the
Board of Directors of JSCE makes a good faith determination that the value of
the underlying Capital Stock, less any consideration payable by the holder of
such security in connection with such conversion or exchange, is less than the
value of the referenced security. Notwithstanding the foregoing, any amounts
paid pursuant to clause (iii) of this second paragraph of this 'Limitation on
Restricted Payments' covenant shall reduce the amount available for Restricted
Payments under clause (C) of the first paragraph of this 'Limitation on
Restricted Payments' covenant.
Notwithstanding the foregoing, in the event of an issuance of Capital Stock
of CCA or JSCE (or JSC or a JSC Parent to the extent that the proceeds therefrom
are contributed to CCA) and (1) the repurchase, redemption or other acquisition
of Capital Stock out of the proceeds of such issuance as permitted by clause
(iv) above, or (2) the acquisition of Indebtedness that is subordinated in right
of payment to the Senior Notes, as permitted by clause (vi) above, then, in
calculating whether the conditions of clause (C) of the first paragraph of this
'Limitation on Restricted Payments' covenant have been met with respect to any
subsequent Restricted Payments, both the proceeds of such issuance and the
application of such proceeds shall be included under clause (C) of the first
paragraph of this 'Limitation on Restricted Payments' covenant. (Section 3.04)
LIMITATION ON DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING RESTRICTED
SUBSIDIARIES
So long as any of the Senior Notes are outstanding, JSCE will not, and will
not permit any Restricted Subsidiary to, create or otherwise cause or suffer to
exist or become effective any consensual encumbrance or restriction of any kind
on the ability of any Restricted Subsidiary (other than CCA) to (i) pay
dividends or make any other distributions permitted by applicable law on any
Capital Stock of such Restricted Subsidiary owned by JSCE or any other
Restricted Subsidiary, (ii) pay any Indebtedness owed to JSCE or any other
Restricted Subsidiary, (iii) make loans or advances to JSCE or any other
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Restricted Subsidiary or (iv) transfer, subject to certain exceptions, any of
its property or assets to JSCE or any other Restricted Subsidiary.
The foregoing provision shall not restrict or prohibit any encumbrances or
restrictions: (i) existing in any Credit Agreement, (ii) existing under the 1993
Notes, the Senior Subordinated Notes, the Subordinated Debentures, the Junior
Accrual Debentures, any indenture or agreement related to any of the foregoing
or any agreements in effect on the Closing Date or in any Indebtedness
containing any such encumbrance or restriction that is permitted pursuant to
clause (v) below or in any extensions, refinancings, renewals or replacements of
any of the foregoing; provided that the encumbrances and restrictions in any
such extensions, refinancings, renewals or replacements are not materially less
favorable taken as whole to the Holders than those encumbrances or restrictions
that are then in effect and that are being extended, refinanced, renewed or
replaced; (iii) existing under any Receivables Program or any other agreement
providing for the Incurrence of Indebtedness (or any exhibit, appendix or
schedule to such agreement or other agreement executed as a condition to the
execution of, funding under or pursuant to such agreement); provided that the
encumbrances and restrictions in any such agreement are not materially less
favorable taken as a whole to the Holders than those encumbrances and
restrictions contained in any Credit Agreement as of the Closing Date; (iv)
existing under or by reason of applicable law; (v) existing with respect to any
Person or the property or assets of such Person acquired by JSCE or any
Restricted Subsidiary and existing at the time of such acquisition, which
encumbrances or restrictions are not applicable to any Person or the property or
assets of any Person other than such Person or the property or assets of such
Person so acquired; (vi) in the case of clause (iv) of the first paragraph of
this 'Limitation on Dividend and Other Payment Restrictions Affecting Restricted
Subsidiaries' covenant, (A) that restrict in a customary manner the subletting,
assignment or transfer of any property or asset that is a lease, license,
conveyance or contract or similar property or asset, (B) existing by virtue of
any transfer of, agreement to transfer, option or right with respect to, or Lien
on, any property or assets of JSCE or any Restricted Subsidiary not otherwise
prohibited by the Indenture or (C) arising or agreed to in the ordinary course
of business and that do not, individually or in the aggregate, detract from the
value of property or assets of JSCE or any Restricted Subsidiary in any manner
material to JSCE and its Restricted Subsidiaries taken as a whole; or (vii) with
respect to a Restricted Subsidiary and imposed pursuant to an agreement that has
been entered into for the sale or disposition of all or substantially all of the
Capital Stock of, or property and assets of, such Restricted Subsidiary. Nothing
contained in this 'Limitation on Dividend and Other Payment Restrictions
Affecting Restricted Subsidiaries' covenant shall prevent JSCE or any Restricted
Subsidiary from (1) entering into any agreement permitting or providing for the
incurrence of Liens otherwise permitted in the 'Limitation on Liens' covenant or
(2) restricting the sale or other disposition of property or assets of JSCE or
any of its Subsidiaries that secure Indebtedness of JSCE or any of its
Subsidiaries. (Section 3.05)
LIMITATION ON THE ISSUANCE OF CAPITAL STOCK OF JSCE AND RESTRICTED SUBSIDIARIES
Under the terms of the Indenture, JSCE will not and will not permit any
Restricted Subsidiary (other than CCA), directly or indirectly, to issue or sell
any shares of its Capital Stock (including options, warrants or other rights to
purchase shares of such Capital Stock) except (i) to JSCE or another Restricted
Subsidiary that is a Wholly Owned Subsidiary of JSCE, (ii) if, immediately after
giving effect to such issuance or sale, such Restricted Subsidiary would no
longer constitute a Restricted Subsidiary for purposes of the Indenture, (iii)
if the Net Cash Proceeds from such issuance or sale are applied, to the extent
required to be applied, pursuant to the 'Limitation on Asset Sales' covenant or
if such issuance or sale does not constitute an 'Asset Sale,' (iv) issuances or
sales to foreign nationals of shares of the Capital Stock of Foreign
Subsidiaries, to the extent mandated by applicable foreign law, or (v) issuances
or sales of Capital Stock by JSCE to JSC. (Section 3.06)
LIMITATION ON TRANSACTIONS WITH SHAREHOLDERS AND AFFILIATES
Under the terms of the Indenture, JSCE will not, and will not permit any
Restricted Subsidiary of JSCE to, directly or indirectly, enter into, renew or
extend any transaction (including, without limitation, the purchase, sale, lease
or exchange of property or assets, or the rendering of any service) with any
holder (or any Affiliate of such holder) of 5% or more of any class of Capital
Stock of JSC or with any Affiliate of JSCE, except upon fair and reasonable
terms no less favorable to JSCE or such
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Restricted Subsidiary of JSCE than could be obtained, at the time of such
transaction or at the time of the execution of the agreement providing therefor,
in a comparable arm's-length transaction with a Person that is not such a holder
or an Affiliate.
The foregoing limitation does not limit, and shall not apply to: (i)
transactions (A) approved by a majority of the disinterested members of the
Board of Directors or (B) for which JSCE or a Restricted Subsidiary delivers to
the Trustee a written opinion of a nationally recognized investment banking firm
or a nationally recognized accounting firm stating that the transaction is fair
or, in the case of an opinion of a nationally recognized accounting firm,
reasonable or fair to JSCE or such Restricted Subsidiary from a financial point
of view; (ii) any transaction among JSCE and any Restricted Subsidiaries or
among Restricted Subsidiaries; (iii) the payment of reasonable and customary
regular fees to directors of JSCE or any Restricted Subsidiary who are not
employees of JSCE or any Restricted Subsidiary; (iv) any payments or other
transactions pursuant to any tax-sharing agreement between JSCE, CCA and JSC or
any other Person with which JSCE is required or permitted to file a consolidated
tax return or with which JSCE is or could be part of a consolidated group for
tax purposes; (v) any Restricted Payments not prohibited by the 'Limitation on
Restricted Payments' covenant; (vi) the provisions of management, financial and
operational services by JSCE and its Subsidiaries to Affiliates of JSCE in which
JSCE or its Subsidiaries have Investments and the payment of compensation for
such services; provided, that the Board of Directors of JSCE has determined that
the provision of such services is in the best interests of JSCE and its
Subsidiaries; (vii) any transaction required by the Times Mirror Agreement; or
(viii) any transaction contemplated by the terms of the Recapitalization Plan.
(Section 3.07)
LIMITATION ON LIENS
Under the terms of the Indenture, JSCE will not, and will not permit any
Restricted Subsidiary to, create, incur, assume or suffer to exist any Lien on
any Principal Property, or any shares of Capital Stock or Indebtedness of any
Restricted Subsidiary, without making effective provision for all of the Senior
Notes and all other amounts due under the Indenture to be directly secured
equally and ratably with (or prior to) the obligation or liability secured by
such Lien for so long as such Lien affects such Principal Property, shares of
Capital Stock or Indebtedness unless, after giving effect thereto, the aggregate
amount of any Indebtedness so secured, plus, the Attributable Indebtedness for
all sale-leaseback transactions restricted as described in the 'Limitation on
Sale-Leaseback Transactions' covenant, does not exceed 10% of Adjusted
Consolidated Net Tangible Assets.
The foregoing limitation does not apply to, and any computation of secured
Indebtedness under such limitation shall exclude: (i) Liens securing obligations
under (A) any Credit Agreement and (B) any Receivables Programs; (ii) other
Liens existing on the Closing Date; (iii) Liens securing Indebtedness of
Restricted Subsidiaries (other than Acquired Indebtedness and refinancings
thereof); (iv) Liens securing Indebtedness Incurred under clause (iv) or (v) of
the second paragraph of the 'Limitation on Indebtedness' covenant; (v) Liens
granted in connection with the extension, renewal or refinancing, in whole or in
part, of any Indebtedness described in clauses (i) through (iv) above; provided
that with respect to clauses (ii) and (iii) the amount of Indebtedness secured
by such Lien is not increased thereby; and provided further that the extension,
renewal or refinancing of Indebtedness of JSCE may not be secured by Liens on
assets of any Restricted Subsidiary (other than CCA) other than to the extent
the Indebtedness being extended, renewed or refinanced was at any time
previously secured by Liens on assets of such Restricted Subsidiary; (vi) Liens
with respect to Acquired Indebtedness permitted under clause (viii) of the
second paragraph of the 'Limitation on Indebtedness' covenant and permitted
refinancings thereof; provided that such Liens do not extend to or cover any
property or assets of JSCE or any Subsidiary of JSCE other than the property or
assets of the Subsidiary acquired; (vii) Liens securing the Senior Subordinated
Notes, the Subordinated Debentures, the Junior Accrual Debentures or the 1993
Notes, in each case to the extent required to be incurred pursuant to the terms
of the indentures governing such Indebtedness; or (viii) Permitted Liens.
(Section 3.08)
LIMITATION ON SALE-LEASEBACK TRANSACTIONS
Under the terms of the Indenture, JSCE will not, and will not permit any
Restricted Subsidiary to, enter into any sale-leaseback transaction involving
any Principal Property, unless the aggregate amount
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of all Attributable Indebtedness with respect to such transactions, plus all
Indebtedness secured by Liens on Principal Properties (excluding secured
Indebtedness that is excluded as described in the 'Limitation on Liens'
covenant), does not exceed 10% of Adjusted Consolidated Net Tangible Assets.
The foregoing restriction does not apply to, and any computation of
Attributable Indebtedness under such limitation shall exclude, any
sale-leaseback transaction if: (i) the lease is for a period, including renewal
rights, of not in excess of three years; (ii) the sale or transfer of the
Principal Property is entered into prior to, at the time of, or within 12 months
after the later of the acquisition of the Principal Property or the completion
of construction thereof; (iii) the lease secures or relates to industrial
revenue or pollution control bonds; (iv) the transaction is between JSCE and any
Restricted Subsidiary or between Restricted Subsidiaries; or (v) JSCE or such
Restricted Subsidiary, within 12 months after the sale of any Principal Property
is completed, applies an amount not less than the net proceeds received from
such sale to the retirement of unsubordinated Indebtedness, to Indebtedness of a
Restricted Subsidiary (other than CCA) or to the purchase of other property that
will constitute Principal Property or improvements thereto. (Section 3.09)
LIMITATION ON ASSET SALES
Under the terms of the Indenture, in the event and to the extent that the
Net Cash Proceeds received by JSC, JSCE or any of its Restricted Subsidiaries
from one or more Asset Sales occurring on or after the Closing Date in any
period of 12 consecutive months (other than Asset Sales by JSC, JSCE or any
Restricted Subsidiary to JSCE or another Restricted Subsidiary) exceed 10% of
Adjusted Consolidated Net Tangible Assets in any one fiscal year (determined as
of the date closest to the commencement of such 12-month period for which a
consolidated balance sheet of JSCE has been prepared), then JSCE shall or shall
cause the relevant Restricted Subsidiary to (i) within 12 months (or, in the
case of Asset Sales of plants or facilities, 24 months) after the date Net Cash
Proceeds so received exceed 10% of Adjusted Consolidated Net Tangible Assets in
any one fiscal year (determined as of the date closest to the commencement of
such 12-month period for which a balance sheet of JSCE and its Subsidiaries has
been prepared) (A) apply an amount equal to such excess Net Cash Proceeds to
repay unsubordinated Indebtedness of CCA or JSCE, make a dividend or
distribution to JSCE for application by JSCE to repay unsubordinated
Indebtedness of JSCE, or repay Indebtedness of any Restricted Subsidiary of
JSCE, in each case owing to a Person other than JSCE or any of its Restricted
Subsidiaries or (B) invest an equal amount, or the amount not so applied
pursuant to clause (A) (or enter into a definitive agreement committing to so
invest within 12 months after the date of such agreement), in property or assets
of a nature or type or which will be used in a business (or in a company having
property and assets of a nature or type, or engaged in a business) similar or
related to the nature or type of the property and assets of, or the business of,
JSCE and its Restricted Subsidiaries existing on the date of such Investment (as
determined in good faith by the Board of Directors of JSCE, whose determination
shall be conclusive and evidenced by a Board Resolution) and (ii) apply (no
later than the end of such 12-month period or 24-month period, as the case may
be, referred to in clause (i)) such excess Net Cash Proceeds (to the extent not
applied pursuant to clause (i)) as provided in the following paragraphs of this
'Limitation on Asset Sales' covenant. The amount of such excess Net Cash
Proceeds required to be applied (or to be committed to be applied) during such
12-month period or 24-month period, as the case may be, as set forth in clause
(A) or (B) of the preceding sentence and neither applied nor committed to be
applied as set forth above by the end of such period shall constitute 'Excess
Proceeds.'
If, as of the first day of any calendar month, the aggregate amount of
Excess Proceeds not theretofore subject to an Excess Proceeds Offer (as defined
below) totals at least $10 million, CCA must, not later than the fifteenth
Business Day of such month, make an offer (an 'Excess Proceeds Offer') to
purchase from the Holders of both the Series A Senior Notes and the Series B
Senior Notes on a pro rata basis an aggregate principal amount of Series A
Senior Notes and Series B Senior Notes equal to the Excess Proceeds on such
date, at a purchase price equal to 101% of the principal amount of such Series A
Senior Notes and Series B Senior Notes, plus, in each case, accrued interest (if
any) to the date of purchase (the 'Excess Proceeds Payment').
Notwithstanding the foregoing, (i) to the extent that any or all of the Net
Cash Proceeds of any Asset Sale are prohibited or delayed by applicable local
law from being repatriated to the United States
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of America, the portion of such Net Cash Proceeds so affected will not be
required to be applied pursuant to this 'Limitation on Asset Sales' covenant but
may be retained for so long, but only for so long, as the applicable local law
will not permit repatriation to the United States of America (under the
Indenture JSCE will agree to promptly take or cause the relevant Restricted
Subsidiary to promptly take all reasonable actions required by the applicable
local law and within JSCE's control to permit such repatriation) and once such
repatriation of any such affected Net Cash Proceeds is permitted under the
applicable local law, such repatriation will be immediately effected and such
repatriated Net Cash Proceeds will be applied in the manner set forth in this
'Limitation on Asset Sales' covenant as if such Asset Sale had occurred on the
date of repatriation; and (ii) to the extent that the Board of Directors of JSCE
has determined in good faith that repatriation of any or all of the Net Cash
Proceeds would have an adverse tax or other consequence to JSCE, the Net Cash
Proceeds so affected may be retained outside the United States of America for so
long as such adverse tax or other consequence would continue.
CCA shall commence an Excess Proceeds Offer by mailing a notice to the
Trustee and each Holder stating: (i) that the Excess Proceeds Offer is being
made pursuant to this 'Limitation on Asset Sales' covenant and that all Series A
Senior Notes and Series B Senior Notes validly tendered will be accepted for
payment on a pro rata basis; (ii) the purchase price and the date of purchase
(which shall be a Business Day no earlier than 30 days nor later than 60 days
from the date such notice is mailed) (the 'Excess Proceeds Payment Date'); (iii)
that any Senior Note not tendered will continue to accrue interest; (iv) that,
unless CCA defaults in the payment of the Excess Proceeds Payment, any Senior
Note accepted for payment pursuant to the Excess Proceeds Offer shall cease to
accrue interest after the Excess Proceeds Payment Date; (v) that Holders
electing to have a Senior Note purchased pursuant to the Excess Proceeds Offer
will be required to surrender the Senior Note together with the form entitled
'Option of the Holder to Elect Purchase' on the reverse side 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 immediately preceding the Excess
Proceeds Payment Date; (vi) 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 immediately preceding the Excess Proceeds Payment Date, a
telegram, telex, facsimile transmission or letter setting forth the name of such
Holder, the principal amount of Senior Notes delivered for purchase and a
statement that such Holder is withdrawing his election to have such Senior Notes
purchased; and (vii) that Holders whose Senior Notes are being purchased only in
part will be issued new Senior Notes equal in principal amount to the
unpurchased portion of the Senior Notes surrendered; provided that each Senior
Note purchased and each new Senior Note issued shall be in an original principal
amount of $1,000 or integral multiples thereof.
On the Excess Proceeds Payment Date, CCA shall (i) accept for payment on a
pro rata basis Series A Senior Notes and Series B Senior Notes or portions
thereof tendered pursuant to the Excess Proceeds 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 relevant Trustee all Senior Notes or portions thereof so accepted together
with an Officers' Certificate specifying the Senior Notes or portions thereof
accepted for payment by CCA. The Paying Agent shall promptly mail to the Holders
of Senior Notes so accepted payment in an amount equal to the purchase price,
and the Trustee shall promptly authenticate and mail to such Holders a new
Senior Note equal in principal amount to any unpurchased portion of the Senior
Notes surrendered; provided that each Senior Notes purchased and each new Senior
Notes issued shall be in an original principal amount of $1,000 or integral
multiples thereof. CCA will publicly announce the results of the Excess Proceeds
Offer as soon as practicable after the Excess Proceeds Payment Date. For
purposes of this 'Limitation on Asset Sales' covenant, the Trustee shall act as
the Paying Agent.
CCA will comply with Rule 14e-1 under the Exchange Act and any other
securities laws and regulations thereunder to the extent such laws and
regulations are applicable, in the event that such Excess Proceeds are received
by CCA under this 'Limitation on Asset Sales' covenant and CCA is required to
repurchase Senior Notes as described above and CCA may modify any of the
foregoing provisions of this 'Limitation on Asset Sales' covenant to the extent
it is advised by independent counsel that such modification is necessary or
appropriate in order to ensure such compliance. (Section 3.10)
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REPURCHASE OF SENIOR NOTES UPON CHANGE OF CONTROL
(a) In the event of a Change of Control, each Holder shall have the right
to require the repurchase of its Senior Notes by CCA in cash pursuant to the
offer described below (the 'Change of Control Offer') at a purchase price equal
to 101% of the principal amount thereof, plus accrued interest (if any) to the
date of purchase (the 'Change of Control Payment'). Prior to the mailing of the
notice to Holders provided for in the succeeding paragraph, but in any event
within 30 days following any Change of Control, CCA covenants to (i) (A) repay
in full all unsubordinated Indebtedness of CCA or make a dividend or
distribution to JSCE for application by JSCE to repay in full all unsubordinated
Indebtedness of JSCE or (B) offer to repay in full all such unsubordinated
Indebtedness of either JSCE or CCA and to repay such unsubordinated Indebtedness
of each holder of such unsubordinated Indebtedness who has accepted such offer
or (ii) obtain the requisite consents, if any, under the instruments governing
any such unsubordinated Indebtedness of JSCE or CCA to permit the repurchase of
the Senior Notes as provided for in the succeeding paragraph. CCA shall first
comply with the covenant in the preceding sentence before it shall be required
to repurchase Senior Notes pursuant to this 'Repurchase of Senior Notes upon
Change of Control' covenant.
(b) Within 30 days of the Change of Control, CCA shall mail a notice to the
Trustee and each Holder stating: (i) that a Change of Control has occurred, that
the Change of Control Offer is being made pursuant to this 'Repurchase of Senior
Notes upon Change of Control' covenant and that all Senior Notes validly
tendered will be accepted for payment; (ii) the purchase price and the date of
purchase (which shall be a Business Day no earlier than 30 days nor later than
60 days from the date such notice is mailed) (the 'Change of Control Payment
Date'); (iii) that any Senior Notes not tendered will continue to accrue
interest; (iv) that, unless CCA defaults in the payment of the Change of Control
Payment, any Senior Notes accepted for payment pursuant to the Change of Control
Offer shall cease to accrue interest after the Change of Control Payment Date;
(v) that Holders electing to have any Senior Notes or portion thereof purchased
pursuant to the Change of Control Offer will be required to surrender such
Senior Notes, together with the form entitled 'Option of the Holder to Elect
Purchase' on the reverse side of such Senior Notes completed, to the Paying
Agent at the address specified in the notice prior to the close of business on
the Business Day immediately preceding the Change of Control Payment Date; (vi)
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
immediately preceding the Change of Control Payment Date, a telegram, telex,
facsimile transmission or letter setting forth the name of such Holder, the
principal amount of Senior Notes delivered for purchase and a statement that
such Holder is withdrawing his election to have such Senior Notes purchased; and
(vii) that Holders whose Senior Notes are being purchased only in part will be
issued new Senior Notes equal in principal amount to the unpurchased portion of
the Senior Notes surrendered; provided that each Senior Note purchased and each
new Senior Note issued shall be in an original principal amount of $1,000 or
integral multiples thereof.
(c) On the Change of Control Payment Date, CCA 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, all Senior Notes or portions
thereof so accepted together with an Officers' Certificate specifying the Senior
Notes or portions thereof accepted for payment by CCA. The Paying Agent shall
promptly mail, to the Holders of Senior Notes so accepted, payment in an amount
equal to the purchase price, and the Trustee shall promptly authenticate and
mail to such Holders a new Senior Notes equal in principal amount to any
unpurchased portion of the Senior Notes surrendered; provided that each Senior
Notes purchased and each new Senior Note issued shall be in an original
principal amount of $1,000 or integral multiples thereof. CCA will publicly
announce 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 'Repurchase of
Senior Notes upon Change of Control' covenant, the Trustee shall act as Paying
Agent.
(d) CCA will comply with Rule 14e-1 under the Exchange Act and any other
securities laws and regulations thereunder to the extent such laws and
regulations are applicable in the event that a Change of Control occurs under
this 'Repurchase of Senior Notes upon Change of Control' covenant and CCA is
required to repurchase Senior Notes as described above and CCA may modify any of
the foregoing
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provisions of this 'Repurchase of Senior Notes upon Change of Control' covenant
to the extent it is advised by independent counsel that such modification is
necessary or appropriate in order to ensure such compliance. (Section 3.18)
If CCA is unable to repay all of its unsubordinated Indebtedness and is
also unable to obtain the consents of its unsubordinated creditors (and/or of
the holders of other Indebtedness, if any, of CCA or JSCE outstanding at the
time of a Change of Control whose consent would be so required) to permit the
repurchase of Senior Notes either pursuant to clause (i)(B) or clause (ii) of
the first paragraph of the foregoing covenant, then CCA will have breached such
covenant. This breach will constitute an Event of Default under the Indenture if
it continues for a period of 30 consecutive days after written notice is given
to CCA by the Trustee or the holders of at least 25% in aggregate principal
amount of the Senior Notes outstanding. In addition, the failure by CCA to
repurchase Senior Notes at the conclusion of the Change of Control Offer will
constitute an Event of Default without any waiting period or notice
requirements. JSCE has guaranteed all payments due on the Senior Notes,
including those due by reason of the acceleration thereof following the
occurrence of an Event of Default. This obligation of JSCE is not subject to any
waiting period or notice requirement once such an acceleration has occurred; as
discussed above, however, in certain circumstances there are notice and waiting
period requirements that must be satisfied before CCA's breach of the above
covenant constitutes an Event of Default.
There can be no assurances that CCA (or JSCE) will have sufficient funds
available at the time of any Change of Control to make any debt payment
(including repurchases of the Senior Notes) required by the foregoing covenant
and similar provisions contained in the Senior Subordinated Notes, the
Subordinated Debentures, the Junior Accrual Debentures, any Credit Agreement (as
well as in any other indebtedness which might be outstanding at the time).
Although there is some variation in the definition of 'Change of Control' among
such different classes of debt, there is substantial overlap. In any event, the
above covenant requiring CCA to repurchase the Senior Notes will, unless the
consents referred to above are obtained, require CCA and JSCE to offer to repay
or repay all indebtedness outstanding under any Credit Agreement, and any other
indebtedness then outstanding which by its terms prohibits such repurchases of
the Senior Notes, either prior to or concurrently with such repurchases.
EVENTS OF DEFAULT
The following events will be defined as 'Events of Default' in the
Indenture: (a) default in the payment of principal of (or premium, if any, on)
any Senior Notes when the same becomes due and payable at maturity, upon
acceleration, redemption or otherwise; (b) default in the payment of interest on
any Senior Notes when the same becomes due and payable, and such default
continues for a period of 30 days; (c) JSCE or CCA defaults in the performance
of or breaches any other covenant or agreement of JSCE or CCA in the Indenture
or under the Senior Notes and such default or breach continues for a period of
30 consecutive days after written notice by the Trustee or the Holders of 25% or
more in aggregate principal amount of the Series A Senior Notes and the Series B
Senior Notes then outstanding taken together as one class or, in the case of any
such default or breach under only one Indenture, 25% or more in aggregate
principal amount of the Series A Senior Notes or the Series B Senior Notes, as
the case may be, then outstanding; (d) there occurs with respect to any issue or
issues of Indebtedness of JSCE, CCA and/or one or more of their Significant
Subsidiaries having an outstanding principal amount of $50 million or more
individually or $100 million or more in the aggregate for all such issues of all
such Persons, whether such Indebtedness now exists or shall hereafter be
created, an event of default that has caused the holder thereof to declare such
Indebtedness to be due and payable prior to its Stated Maturity and such
Indebtedness has not been discharged in full or such acceleration has not been
rescinded or annulled within 30 days of such acceleration; (e) any final
judgment or order (not covered by insurance) for the payment of money in excess
of $50 million individually or $100 million in the aggregate for all such final
judgments or orders against all such Persons (treating any deductibles,
self-insurance or retention as not so covered) shall be rendered against JSCE,
CCA or any of their Significant Subsidiaries and shall not be paid or
discharged, and there shall be any period of 30 consecutive days following entry
of the final judgment or order in excess of $50 million individually or that
causes the aggregate amount for all such final judgments or orders
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outstanding and not paid or discharged against all such Persons to exceed $100
million during which a stay of enforcement of such final judgment or order, by
reason of a pending appeal or otherwise, shall not be in effect; (f) a court
having jurisdiction in the premises enters a decree or order for (i) relief in
respect of JSCE, CCA or any of their Significant Subsidiaries in an involuntary
case under any applicable bankruptcy, insolvency or other similar law now or
hereafter in effect, (ii) appointment of a receiver, liquidator, assignee,
custodian, trustee, sequestrator or similar official of JSCE, CCA or any of
their Significant Subsidiaries or for all or substantially all of the property
and assets of JSCE, CCA or any of their Significant Subsidiaries or (iii) the
winding up or liquidation of the affairs of JSCE, CCA or any of their
Significant Subsidiaries and, in each case, such decree or order shall remain
unstayed and in effect for a period of 60 consecutive days; (g) JSCE, CCA or any
of their Significant Subsidiaries (i) commences a voluntary case under any
applicable bankruptcy, insolvency or other similar law now or hereafter in
effect, or consents to the entry of an order for relief in an involuntary case
under any such law, (ii) consents to the appointment of or taking possession by
a receiver, liquidator, assignee, custodian, trustee, sequestrator or similar
official of JSCE, CCA or any of their Significant Subsidiaries or for all or
substantially all of the property and assets of JSCE, CCA or any of their
Significant Subsidiaries or (iii) effects any general assignment for the benefit
of creditors; (h) JSCE, CCA and/or one or more of their Significant Subsidiaries
fails to make (i) at the final (but not any interim) fixed maturity of any issue
of Indebtedness a principal payment of $50 million or more or (ii) at the final
(but not any interim) fixed maturity of more than one issue of such Indebtedness
principal payments aggregating $100 million or more and, in the case of clause
(i), such defaulted payment shall not have been made, waived or extended within
30 days of the payment default and, in the case of clause (ii), all such
defaulted payments shall not have been made, waived or extended within 30 days
of the payment default that causes the amount described in clause (ii) to exceed
$100 million; or (i) the non-payment of any two or more items of Indebtedness of
JSCE, CCA and/or one or more of their Significant Subsidiaries that would
constitute at the time of such nonpayments, but for the individual amounts of
such Indebtedness, an Event of Default under clause (d) or clause (h) above, or
both, and which items of Indebtedness aggregate $100 million or more. (Section
5.01)
If an Event of Default (other than an Event of Default specified in clause
(f) or (g) above that occurs with respect to JSCE or CCA) occurs and is
continuing under both the Series A Senior Note Indenture and the Series B Senior
Note Indenture, the Trustee or the Holders of at least 25% in aggregate
principal amount of the Series A Senior Notes and Series B Senior Notes then
outstanding taken together as one class or, in the case of any such Event of
Default which occurs and is continuing under only one Indenture, 25% in
aggregate principal amount of the Series A Senior Notes or the Series B Senior
Notes, as the case may be, then outstanding, by written notice to CCA (and to
the Trustee if such notice is given by the Holders (the 'Acceleration Notice')),
may, and the Trustee at the request of the Holders shall, declare the entire
unpaid principal of, premium, if any, and accrued interest on the Senior Notes
to be immediately due and payable. Upon a declaration of acceleration, such
principal of, premium, if any, and accrued interest shall be immediately due and
payable. In the event of a declaration of acceleration because an Event of
Default set forth in clause (d), (h) or (i) above has occurred and is
continuing, such declaration of acceleration shall be automatically rescinded
and annulled if the event of default triggering such Event of Default pursuant
to clause (d), (h) or (i) shall be remedied, cured by JSCE or CCA or waived by
the holders of the relevant Indebtedness within 60 days after the declaration of
acceleration with respect thereto. If an Event of Default specified in clause
(f) or (g) above occurs with respect to JSCE or CCA, all unpaid principal of,
premium, if any, and accrued interest on the Senior Notes then outstanding 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. The Holders of at least a
majority in principal amount of the outstanding Series A Senior Notes and Series
B Senior Notes taken together as one class (or, in the case of any default under
the respective Indenture relating to the Series A Senior Notes or the Series B
Senior Notes, then a majority in principal amount of the outstanding Series A
Senior Notes or Series B Senior Notes, as the case may be), by written notice to
JSCE, CCA and to the Trustee, may waive all past defaults and rescind and annul
a declaration of acceleration and its consequences if (i) all existing Events of
Default, other than the nonpayment of the principal of, premium, if any, and
interest on the Senior Notes that have become due solely by such declaration of
acceleration, have been cured or waived and (ii) the rescission would
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not conflict with any judgment or decree of a court of competent jurisdiction.
(Section 5.02) For information as to the waiver of defaults, see
' -- Modification and Waiver.'
As a result of the foregoing voting provisions relating to Events of
Default under the Indenture, Holders of Series B Senior Notes even if acting
unanimously may not be able to (i) declare a default under the Series B Senior
Note Indenture following a default in the performance of or any breach of
covenants or agreements of JSCE or CCA as set forth in clause (c) above, or (ii)
request acceleration of the principal of, premium, if any, and accrued interest
on, the Series B Senior Notes if an Event of Default occurs.
The Holders of at least a majority in aggregate principal amount of the
outstanding Senior Notes may 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. However the Trustee may refuse to follow any
direction that conflicts with law or the Indenture, that may involve the Trustee
in personal liability, or that the Trustee determines in good faith may be
unduly prejudicial to the rights of Holders of Senior Notes not joining in the
giving of such direction. (Section 5.05) A Holder may not pursue any remedy with
respect to the Indenture or the Senior Notes unless: (i) the Holder gives the
Trustee written notice of a continuing Event of Default; (ii) the Holders of at
least 25% in aggregate principal amount of outstanding Senior Notes make a
written request to the Trustee to pursue the remedy; (iii) such Holder or
Holders offer the Trustee indemnity satisfactory to the Trustee against any
costs, liability or expense; (iv) the Trustee does not comply with the request
within 60 days after receipt of the request and the offer of indemnity; and (v)
during such 60-day period, the Holders of a majority in aggregate principal
amount of the outstanding Senior Notes do not give the Trustee a direction that
is inconsistent with the request. (Section 5.06) However, such limitations do
not apply to the right of any Holder of a Senior Note to receive payment of the
principal of, premium, if any, or interest on, such Senior Note or to bring suit
for the enforcement of any such payment, on or after the due date expressed in
the Senior Notes which right shall not be impaired or affected without the
consent of the Holder. (Section 5.07) For purposes of the foregoing paragraph,
actions that may be taken by Holders of at least a majority or 25% in aggregate
principal amount of the outstanding Senior Notes may only be taken by Holders of
at least a majority or 25% (as the case may be) in aggregate principal amount of
the Series A Senior Notes and the Series B Senior Notes taken together as one
class or, in the case of any remedy which relates solely to one Indenture or one
class of Senior Notes, by Holders of at least a majority or 25% (as the case may
be) in aggregate principal amount of the Series A Senior Notes or the Series B
Senior Notes, as the case may be. (Sections 5.04, 5.05 and 5.06)
The Indenture will require certain officers of JSCE and CCA to certify, on
or before a date not more than 90 days after the end of each fiscal year, that a
review has been conducted of the activities of JSCE and CCA and their
Subsidiaries and JSCE's and CCA's and their Subsidiaries' performance under the
Indenture and that JSCE and CCA have fulfilled all obligations thereunder, or,
if there has been a default in the fulfillment of any such obligation,
specifying each such default and the nature and status thereof. JSCE and CCA
will also be obligated to notify the Trustee of any default or defaults in the
performance of any covenants or agreements under the Indenture. (Section 3.15)
CONSOLIDATION, MERGER AND SALE OF ASSETS
Neither JSCE nor CCA shall consolidate with, merge with or into, or sell,
convey, transfer, lease or otherwise dispose of all or substantially all of its
property and assets (as an entirety or substantially an entirety in one
transaction or a series of related transactions) to, any Person (other than a
Restricted Subsidiary that is a Wholly Owned Subsidiary of JSCE with a positive
net worth; provided that, in connection with any merger of JSCE or CCA with a
Restricted Subsidiary that is a Wholly Owned Subsidiary of JSCE, no
consideration (other than common stock in the surviving Person, JSCE or CCA)
shall be issued or distributed to the stockholders of JSCE) unless: (i) JSCE or
CCA shall be the continuing Person, or the Person (if other than JSCE or CCA)
formed by such consolidation or into which JSCE or CCA is merged or that
acquired or leased such property and assets of JSCE or CCA shall be a
corporation organized and validly existing under the laws of the United States
of America or any jurisdiction thereof and shall expressly assume, by a
supplemental indenture, executed and delivered to the Trustee, all of the
obligations of JSCE or CCA, as the case may be, on all of the Senior Notes and
under the Indenture; (ii) immediately after giving effect to such transaction,
no Default or
93
<PAGE>
Event of Default shall have occurred and be continuing; (iii) immediately after
giving effect to such transaction on a pro forma basis, the Interest Coverage
Ratio of the continuing Person continuing as, or becoming the successor, obligor
on the Senior Notes or the Guarantee is at least 1:1, or, if less, equal to the
Interest Coverage Ratio of JSCE or CCA, as the case may be, immediately prior to
such transaction; provided that, if the Interest Coverage Ratio of JSCE or CCA,
as the case may be, before giving effect to such transaction is within the range
set forth in column (A) below, then the pro forma Interest Coverage Ratio of the
continuing Person becoming the successor obligor of the Senior Notes shall be at
least equal to the lesser of (1) the ratio determined by multiplying the
percentage set forth in column (B) below by the Interest Coverage Ratio of JSCE
or CCA, as the case may be, prior to such transaction and (2) the ratio set
forth in column (C) below:
<TABLE>
<CAPTION>
(A) (B) (C)
- -------------------------------------------------------------------------------- --- ------
<S> <C> <C>
1.11:1 to 1.99:1................................................................ 90 % 1.5:1
2.00:1 to 2.99:1................................................................ 80 % 2.1:1
3.00:1 to 3.99:1................................................................ 70 % 2.4:1
4.00:1 or more.................................................................. 60 % 2.5:1
</TABLE>
and provided further that, if the pro forma Interest Coverage Ratio of JSCE, CCA
or any Person becoming the successor obligor of the Senior Notes, as the case
may be, is 3:1 or more, the calculation in the preceding proviso shall be
inapplicable and such transaction shall be deemed to have complied with the
requirements of this clause (iii); (iv) immediately after giving effect to such
transaction on a pro forma basis, JSCE, CCA or any Person becoming the successor
obligor of the Senior Notes shall have a Consolidated Net Worth equal to or
greater than the Consolidated Net Worth of JSCE or CCA, as the case may be,
immediately prior to such transaction; and (v) JSCE or CCA, as the case may be,
delivers to the Trustee an Officers' Certificate (attaching the arithmetic
computations to demonstrate compliance with clauses (iii) and (iv)) and Opinion
of Counsel, in each case stating that such consolidation, merger or transfer and
such supplemental indenture comply with this provision and that all conditions
precedent provided for herein relating to such transaction have been complied
with (in no event, however, shall such Opinion of Counsel cover financial
ratios, the solvency of any Person or any other financial or statistical data or
information); provided, however, that clauses (iii) and (iv) above do not apply
if, in the good faith determination of the Board of Directors of JSCE or CCA, as
the case may be, whose determination shall be evidenced by a Board Resolution,
the principal purpose of such transaction is to change the state of
incorporation of JSCE or CCA, as the case may be; and provided further that any
such transaction shall not have as one of its purposes the evasion of the
foregoing limitations.
JSCE shall be released from all of its obligations under its Guarantee of
the Senior Notes and the Indenture if the purchaser of Capital Stock of CCA
having a majority of the voting rights thereunder, or the parent of CCA (other
than JSCE) following a consolidation or merger of CCA, satisfies the
requirements of clauses (iii) and (iv) of the preceding sentence with respect to
JSCE.
Notwithstanding the foregoing, nothing in clause (ii), (iii), (iv) or (v)
above shall prevent the occurrence of (i) a merger or consolidation of JSCE and
CCA, or either of their respective successors, (ii) the sale of all or
substantially all of the assets of CCA to JSCE, (iii) the sale of all or
substantially all of the assets of JSCE to CCA or (iv) the assumption by JSCE of
the Indebtedness represented by the Senior Notes. (Section 4.01)
In the event (i) JSCE merges into CCA and (ii) in connection therewith a
direct or indirect Wholly Owned Subsidiary of JSC ('Interco'), of which CCA is
at such time a direct or indirect Wholly Owned Subsidiary, (x) guarantees the
obligations of CCA on the Senior Notes on the same terms and to the same extent
as JSCE had guaranteed such obligations prior to the aforesaid merger, and (y)
assumes all obligations of JSCE set forth in the Indenture (without giving
effect to the effect of the aforesaid merger on such obligations) (collectively,
the 'Substitution Transaction') then, notwithstanding anything to the contrary
in the Indenture, upon delivery of an Officers' Certificate to the effect that
the foregoing has occurred and the execution and delivery by CCA and Interco of
a supplemental indenture evidencing such merger and guarantee and assumption,
and without regard to the requirements set forth in clauses (i) through (v) of
the first paragraph under 'Consolidation, Merger and Sale of Assets', (a) all
references in the Indenture to 'CCA' shall continue to refer to CCA, as the
survivor in such
94
<PAGE>
merger, (b) all references to 'JSCE' and to 'JSCE's guarantee' shall refer to
Interco and to Interco's guarantee contemplated by clause (ii) above,
respectively; and (c) no breach or default under the Indenture shall be deemed
to have occurred solely by reason of the Substitution Transaction. (Section
4.03)
DEFEASANCE
Defeasance and Discharge. The Indenture will provide that JSCE and CCA will
be deemed to have paid and will be discharged from any and all obligations in
respect of the Senior Notes on the 123rd day after the deposit referred to
below, and the provisions of the Indenture will no longer be in effect with
respect to the Senior Notes or JSCE's Guarantee of the Senior Notes (except for,
among other matters, certain obligations to register the transfer or exchange of
the Senior Notes, to replace stolen, lost or mutilated Senior Notes to maintain
paying agencies and to hold monies for payment in trust) if, among other things,
(A) CCA has deposited with the Trustee, in trust, money and/or U.S. Government
Obligations that through the payment of interest and principal in respect
thereof in accordance with their terms will provide money in an amount
sufficient to pay the principal of, premium, if any, and accrued interest on the
outstanding Senior Notes on the Stated Maturity of such payments in accordance
with the terms of the Indenture and the Senior Notes (B) JSCE or CCA has
delivered to the Trustee (i) either an Opinion of Counsel to the effect that
Holders will not recognize income, gain or loss for federal income tax purposes
as a result of CCA's exercise of its option under this 'Defeasance' provision
and will be subject to federal income tax on the same amount and in the same
manner and at the same times as would have been the case if such deposit,
defeasance and discharge had not occurred, which Opinion of Counsel must be
accompanied by a ruling of the Internal Revenue Service to the same effect
unless there has been a change in applicable federal income tax law after the
date of the Indenture such that a ruling is no longer required or a ruling
directed to the Trustee received from the Internal Revenue Service to the same
effect as the aforementioned Opinion of Counsel and (ii) an Opinion of Counsel
to the effect that the creation of the defeasance trust does not violate the
Investment Company Act of 1940 and after the passage of 123 days following the
deposit, the trust fund will not be subject to the effect of Section 547 of the
United States Bankruptcy Code or Section 15 of the New York Debtor and Creditor
Law, (C) immediately after giving effect to such deposit on a pro forma basis,
no Event of Default, or event that after the giving of notice or lapse of time
or both would become an Event of Default, shall have occurred and be continuing
on the date of such deposit or during the period ending on the 123rd day after
the date of such deposit, and such deposit shall not result in a breach or
violation of, or constitute a default under, any other agreement or instrument
to which JSCE or CCA is a party or by which JSCE or CCA is bound, and (D) if at
such time the Senior Notes are listed on a national securities exchange, CCA has
delivered to the Trustee an Opinion of Counsel to the effect that the Senior
Notes will not be delisted as a result of such deposit, defeasance and
discharge. (Section 7.02)
Defeasance of Certain Covenants and Certain Events of Default. The
Indenture further will provide that the provisions of the Indenture will no
longer be in effect with respect to clauses (iii) and (iv) under 'Consolidation,
Merger and Sale of Assets' and all the covenants described herein under
'Covenants,' clause (c) under 'Events of Default with respect to such covenants
and clauses (iii) and (iv) under 'Consolidation, Merger and Sale of Assets,' and
clauses (d), (e), (h) and (i) under 'Events of Default' shall be deemed not to
be Events of Default, upon, among other things, the deposit with the Trustee, in
trust, of money and/or U.S. Government Obligations that through the payment of
interest and principal in respect thereof in accordance with their terms will
provide money in an amount sufficient to pay the principal of, premium, if any,
and accrued interest on the outstanding Senior Notes on the Stated Maturity of
such payments in accordance with the terms of the Indenture and the Senior
Notes, the satisfaction of the provisions described in clauses (B)(ii), (C), and
(D) of the preceding paragraph and the delivery by CCA to the Trustee of an
Opinion of Counsel to the effect that, among other things, the Holders will not
recognize income, gain or loss for federal income tax purposes as a result of
such deposit and defeasance of certain covenants and Events of Default and will
be subject to federal income tax on the same amount and in the same manner and
at the same times as would have been the case if such deposit and defeasance had
not occurred. (Section 7.03)
95
<PAGE>
Defeasance and Certain Other Events of Default. In the event CCA exercises
its option to omit compliance with certain covenants and provisions of the
Indenture with respect to the Senior Notes as described in the immediately
preceding paragraph and the Senior Notes are declared due and payable because of
the occurrence of an Event of Default that remains applicable, the amount of
money and/or U.S. Government Obligations on deposit with the Trustee will be
sufficient to pay amounts due on the Senior Notes at the time of their Stated
Maturity but may not be sufficient to pay amounts due on the Senior Notes at the
time of the acceleration resulting from such Event of Default. However, CCA will
remain liable for such payments and JSCE's Guarantee with respect to such
payments will remain in effect.
The Credit Agreement contains a covenant prohibiting defeasance of the
Senior Notes. See 'Description of Certain Indebtedness -- Terms of New Credit
Agreement'.
MODIFICATION AND WAIVER
Modifications and amendments of the Indenture may be made by JSCE, CCA and
the Trustee with the consent of the Holders of not less than a majority in
aggregate principal amount of the outstanding Series A Senior Notes and Series B
Senior Notes taken together as one class or, in the case of any such
modification or amendment which affects only one class of Senior Notes, a
majority in aggregate principal amount of the outstanding Series A Senior Notes
or Series B Senior Notes, as the case may be, provided, however, that no such
modification or amendment may, without the consent of each Holder affected
thereby, (i) change the Stated Maturity of the principal of, or any installment
of interest on, any Senior Note, (ii) reduce the principal amount of, or
premium, if any, or interest on, any Senior Note, (iii) change the place or
currency of payment of principal of, or premium, if any, or interest on, any
Senior Note, (iv) impair the right to institute suit for the enforcement of any
payment on or after the Stated Maturity (or, in the case of a redemption, on or
after the Redemption Date) of any Senior Note, (v) reduce the above-stated
percentage of outstanding Senior Notes, the consent of whose Holders is
necessary to modify or amend the Indenture, (vi) waive a default in the payment
of principal of, premium, if any, or interest on the Senior Notes, (vii) reduce
the percentage of aggregate principal amount of outstanding Senior Notes, the
consent of whose Holders is necessary for waiver of compliance with certain
provisions of the Indenture or for waiver of certain defaults, or (viii) release
JSCE from its Guarantee of the Senior Notes. The provisions requiring the
consent or approval of specified percentages of Holders of either class of
Senior Notes or both classes of Senior Notes jointly cannot be modified or
amended without the consent of a majority in aggregate principal amount of the
Holders of such class of Senior Notes or such two classes of Senior Notes
jointly, as the case may be. (Section 8.02)
To the extent that modifications and amendments of the Indenture may be
made with the consent of a majority in aggregate principal amount of the
outstanding Series A Senior Notes and Series B Senior Notes taken together as
one class, modifications and amendments of the Series B Senior Note Indenture
could be made without the consent of any Holder of Series B Senior Notes.
The Credit Agreement contains a covenant prohibiting JSCE or CCA from
consenting to any modification of the Indenture or waiver of any provision
thereof without the consent of a specified percentage of the lenders under the
Credit Agreement. See 'Description of Certain Indebtedness -- Terms of 1994
Credit Agreement'.
NO PERSONAL LIABILITY OF INCORPORATORS, SHAREHOLDERS, OFFICERS, DIRECTORS OR
EMPLOYEES
The Indenture provides that no recourse for the payment of the principal
of, premium, if any, or interest on any of the Senior Notes or for any claim
based thereon or otherwise in respect thereof, and no recourse under or upon any
obligation, covenant or agreement of JSCE or CCA in the Indenture, or in any of
the Senior Notes or because of the creation of any Indebtedness represented
thereby, shall be had against any incorporator, shareholder, officer, director,
employee or controlling person of JSCE or CCA or of any successor Person
thereof. Each Holder, by accepting the Senior Notes, waives and releases all
such liability. (Section 9.09)
96
<PAGE>
CONCERNING THE TRUSTEE
The Indenture provides that, except during the continuance of an Event of
Default, the Trustee will perform only such duties as are specifically set forth
in such Indenture. If an Event of Default has occurred and is continuing, the
Trustee will exercise such rights and powers vested in it under the Indenture
and use the same degree of care and skill in its exercise as a prudent person
would exercise under the circumstances in the conduct of such person's own
affairs. (Section 6.01)
The Indenture and provisions of the Trust Indenture Act of 1939, as
amended, incorporated by reference therein contain limitations on the rights of
the Trustee, should it become a creditor of CCA or JSCE, to obtain payment of
claims in certain cases or to realize on certain property received by it in
respect of any such claims, as security or otherwise. The Trustee is permitted
to engage in other transactions; provided, however, that if it acquires any
conflicting interest, it must eliminate such conflict or resign.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following is a discussion of certain federal income tax consequences
relevant to purchasers of the Senior Notes under currently applicable law. The
discussion does not cover all aspects of federal taxation that may be relevant
to particular purchasers, and does not address state, local, foreign or other
tax laws. Certain holders (including insurance companies, tax-exempt
organizations, financial institutions, broker-dealers, taxpayers subject to the
alternative minimum tax and foreign persons) may be subject to special rules not
discussed below. PROSPECTIVE PURCHASERS ARE URGED TO CONSULT THEIR TAX ADVISORS
AS TO THE PRECISE FEDERAL, STATE, LOCAL AND FOREIGN INCOME AND OTHER TAX
CONSEQUENCES OF ACQUIRING, OWNING AND DISPOSING OF THE SENIOR NOTES.
Market Discount. The federal income tax treatment of the Senior Notes may
be affected by the market discount provisions of the Code. These rules generally
provide that a holder who purchases Senior Notes subsequent to their original
issuance for an amount which is less than their stated redemption price at
maturity (which in the case of the Senior Notes is their face amount) will be
considered to have purchased the Senior Notes at a 'market discount' equal to
the amount of such difference. Such a holder will generally be required to treat
any gain realized upon the disposition (including a disposition by gift) of such
Senior Notes as ordinary income to the extent of the market discount that is
treated as having accrued during the period such holder held such Senior Notes,
unless the holder elects to include such market discount in income on a current
basis. A holder of Senior Notes who has acquired the Senior Notes at a market
discount and who does not elect to include market discount in income on a
current basis may also be required to defer the deduction of a portion of the
interest on any indebtedness incurred or maintained to purchase or carry the
Senior Notes until such holder disposes of such Senior Notes in a taxable
transaction.
Amortizable Bond Premium. If a holder purchases Senior Notes for an amount
that is greater than their stated redemption price at maturity, such holder will
be considered to have purchased such Senior Notes with 'amortizable bond
premium' equal in amount to such excess. Such a holder may elect (in accordance
with applicable Code provisions) to amortize such premium, using a constant
yield method over the remaining term of the Senior Notes, generally resulting in
an offset of amounts otherwise required to be included in income in respect of
such Senior Notes during any taxable year by the amortized amount of such excess
for such taxable year.
MARKET-MAKING ACTIVITIES OF MS&CO.
This Prospectus is to be used by MS&Co. in connection with offers and sales
of the Senior Notes in market-making transactions at negotiated prices related
to prevailing market prices at the time of sale. MS&Co. may act as principal or
agent in such transactions. MS&Co. has no obligation to make a market for the
Senior Notes and may discontinue or suspend its market-making activities at any
time without notice.
MS&Co. acted as underwriter in connection with the original offering of the
Senior Notes and received an underwriting discount of $10.0 million in
connection therewith.
97
<PAGE>
Following the consummation of the Equity Offerings and the SIBV Investment,
affiliates of MS&Co. owned approximately 28.7% of the outstanding shares of JSC
Common Stock. See 'Security Ownership of Certain Beneficial Owners'. Donald P.
Brennan, Alan E. Goldberg, David R. Ramsay and G. Thompson Hutton, directors of
JSC, JSC(U.S.) and JSCE, are designees of MSLEF II. For a description of certain
transactions between JSC, JSC(U.S.), JSCE, MSLEF II, MS&Co. and affiliates of
MS&Co., see 'Certain Transactions'.
LEGAL MATTERS
The validity of the Senior Notes and the guarantees thereof have been
passed upon for the Company by Skadden, Arps, Slate, Meagher & Flom, New York,
New York. Certain legal matters have been passed upon for the Underwriter by
Shearman & Sterling, New York, New York. Skadden, Arps, Slate, Meagher & Flom
also represented MSLEF II and JSC in connection with the 1989 Transaction,
certain transactions among JSC, CCA and certain of their security holders which
occurred in August 1992, the Recapitalization Plan and regularly represents
MS&Co. and MSLEF II on a variety of legal matters. Shearman & Sterling regularly
represents MSLEF II on a variety of legal matters.
EXPERTS
The consolidated financial statements of each of JSCE and JSC(U.S.) at
December 31, 1994 and 1993, and for each of the three years in the period ended
December 31, 1994, appearing in this Prospectus and the Registration Statement
of which this Prospectus forms a part, have been audited by Ernst & Young LLP,
independent auditors, as set forth in their report thereon appearing elsewhere
herein and in the Registration Statement and are included in reliance upon such
report given upon the authority of such firm as experts in accounting and
auditing.
The consolidated financial statements of each of JSCE and JSC(U.S.) for the
year ended December 31, 1994, appearing in this Prospectus and the Registration
Statement of which this Prospectus forms a part, have been audited by Ernst &
Young LLP, independent auditors, as set forth in their report thereon included
therein and incorporated herein by reference. Such consolidated financial
statements are incorporated herein by reference in reliance upon such report
given upon the authority of such firm as experts in accounting and auditing.
98
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Consolidated Financial Statements of JSCE, Inc.:
Report of Independent Auditors................................................................. F-2
Consolidated Balance Sheets at December 31, 1994 and 1993...................................... F-3
For the Years Ended December 31, 1994, 1993 and 1992:
Consolidated Statements of Operations....................................................... F-4
Consolidated Statements of Stockholder's Deficit............................................ F-5
Consolidated Statements of Cash Flows....................................................... F-6
Notes to Consolidated Financial Statements..................................................... F-7
Consolidated Financial Statements of Jefferson Smurfit Corporation (U.S.):
Report of Independent Auditors................................................................. F-22
Consolidated Balance Sheets at December 31, 1994 and 1993...................................... F-23
For the Years Ended December 31, 1994, 1993 and 1992:
Consolidated Statements of Operations....................................................... F-24
Consolidated Statements of Stockholder's Deficit............................................ F-25
Consolidated Statements of Cash Flows....................................................... F-26
Notes to Consolidated Financial Statements..................................................... F-27
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
JSCE, INC.
We have audited the accompanying consolidated balance sheets of JSCE, Inc.
as of December 31, 1994 and 1993, and the related consolidated statements of
operations, stockholder's deficit and cash flows for each of the three years in
the period ended December 31, 1994. Our audits also included the financial
statement schedule listed in the Index at Item 16(b) of the Registration
Statement. These financial statements and schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and schedule 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 consolidated financial position of JSCE, Inc. at
December 31, 1994 and 1993, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended December 31, 1994
in conformity with generally accepted accounting principles. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
As discussed in Note 5 and Note 6 to the financial statements, in 1993, the
Company changed its method of accounting for income taxes and postretirement
benefits.
ERNST & YOUNG LLP
St. Louis, Missouri
January 30, 1995 except
as to Note 14, as to which
the date is February 23, 1995
F-2
<PAGE>
JSCE, INC.
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1994 1993
--------- ---------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents........................................................... $ 61.8 $ 44.2
Receivables, less allowances of $8.6 in 1994 and $9.2 in 1993....................... 316.3 243.2
Inventories
Work-in-process and finished goods............................................. 86.9 96.1
Materials and supplies......................................................... 136.8 137.2
--------- ---------
223.7 233.3
Deferred income taxes............................................................... 38.1 41.9
Prepaid expenses and other current assets........................................... 6.6 5.9
--------- ---------
Total current assets...................................................... 646.5 568.5
Net property, plant and equipment.............................................. 1,427.1 1,374.5
Timberland, less timber depletion........................................................ 259.0 261.5
Goodwill, less accumulated amortization of $35.0 in 1994 and $27.6 in 1993............... 257.1 261.4
Other assets............................................................................. 169.3 131.2
--------- ---------
$ 2,759.0 $ 2,597.1
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current liabilities
Current maturities of long-term debt................................................ $ 50.2 $ 10.3
Accounts payable.................................................................... 348.8 270.6
Accrued compensation and payroll taxes.............................................. 114.3 110.1
Interest payable.................................................................... 48.3 52.6
Other accrued liabilities........................................................... 74.4 84.9
--------- ---------
Total current liabilities................................................. 636.0 528.5
Long-term debt, less current maturities.................................................. 2,391.7 2,619.1
Other long-term liabilities.............................................................. 237.5 257.1
Deferred income taxes.................................................................... 207.7 232.2
Minority interest........................................................................ 16.4 18.0
Stockholder's deficit
Common stock, par value $.01 per share;
1,000 shares authorized and outstanding
Additional paid-in capital.......................................................... 1,102.4 731.8
Retained earnings (deficit)......................................................... (1,832.7) (1,789.6)
--------- ---------
Total stockholder's deficit............................................... (730.3) (1,057.8)
--------- ---------
$ 2,759.0 $ 2,597.1
--------- ---------
--------- ---------
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
JSCE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN MILLIONS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
Net sales...................................................................... $3,233.3 $2,947.6 $2,998.4
Costs and expenses
Cost of goods sold........................................................ 2,718.7 2,567.2 2,495.4
Selling and administrative expenses....................................... 223.7 239.2 231.4
Restructuring charge...................................................... 96.0
Environmental and other charges........................................... 54.0
-------- -------- --------
Income (loss) from operations........................................ 290.9 (8.8) 271.6
Other income (expense)
Interest expense.......................................................... (268.5) (254.2) (300.1)
Other, net................................................................ 6.3 5.4 4.5
-------- -------- --------
Income (loss) before income taxes, extraordinary item and cumulative
effect of accounting changes....................................... 28.7 (257.6) (24.0)
Provision for (benefit from) income taxes...................................... 16.4 (83.0) 10.0
-------- -------- --------
Income (loss) before extraordinary item and cumulative effect of
accounting changes................................................. 12.3 (174.6) (34.0)
Extraordinary item
Loss from early extinguishment of debt, net of income tax benefit of $33.7
in 1994, $21.7 in 1993 and $25.8 in 1992................................ (55.4) (37.8) (49.8)
Cumulative effect of accounting changes
Postretirement benefits, net of income tax benefit of $21.9............... (37.0)
Income taxes.............................................................. 20.5
-------- -------- --------
Net loss............................................................. $ (43.1) $ (228.9) $ (83.8)
-------- -------- --------
-------- -------- --------
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
JSCE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S DEFICIT
(IN MILLIONS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK
-------------------
PAR NUMBER ADDITIONAL RETAINED
VALUE OF PAID-IN EARNINGS
$.01 SHARES CAPITAL (DEFICIT)
--------- ------ ---------- ---------
<S> <C> <C> <C> <C>
Balance at January 1, 1992.......................................... $ 1,000 $ 500.0 $(1,476.9)
Net loss............................................................ (83.8)
Capital contribution, net of related expenses....................... 231.8
--------- ------ ---------- ---------
Balance at December 31, 1992........................................ 1,000 731.8 (1,560.7)
Net loss............................................................ (228.9)
--------- ------ ---------- ---------
Balance at December 31, 1993........................................ 1,000 731.8 (1,789.6)
Net loss............................................................ (43.1)
Capital contribution, net of related expenses....................... 370.6
--------- ------ ---------- ---------
Balance at December 31, 1994........................................ $ 1,000 $1,102.4 $(1,832.7)
--------- ------ ---------- ---------
--------- ------ ---------- ---------
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
JSCE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1994 1993 1992
--------- ------- -------
<S> <C> <C> <C>
Cash flows from operating activities
Net loss................................................................... $ (43.1) $(228.9) $ (83.8)
Adjustments to reconcile net loss to net cash provided by operating
activities
Extraordinary loss from early extinguishment of debt.................. 89.1 59.5 75.6
Cumulative effect of accounting changes
Postretirement benefits.......................................... 58.9
Income taxes..................................................... (20.5)
Restructuring charge.................................................. 96.0
Environmental and other charges....................................... 54.0
Depreciation, depletion and amortization.............................. 131.6 130.8 134.9
Amortization of deferred debt issuance costs.......................... 10.1 7.9 14.6
Deferred income taxes................................................. (20.8) (156.9) .1
Non-cash interest..................................................... 18.9 18.0 33.6
Non-cash employee benefit expense..................................... (9.4) (12.5) (18.8)
Change in current assets and liabilities, net of effects from
acquisitions
Receivables...................................................... (73.0) .7 12.9
Inventories...................................................... 9.8 14.2 (10.4)
Prepaid expenses and other current assets........................ (.9) 5.0 (2.9)
Accounts payable and accrued liabilities......................... 42.1 26.2 14.9
Interest payable................................................. (7.2) 4.7 (4.9)
Income taxes..................................................... .8 16.2 (17.3)
Other, net............................................................ 1.3 4.9 (2.8)
--------- ------- -------
Net cash provided by operating activities.................................. 149.3 78.2 145.7
--------- ------- -------
Cash flows from investing activities
Property additions......................................................... (143.7) (97.2) (77.5)
Timberland additions....................................................... (19.5) (20.2) (20.4)
Investments in affiliates and acquisitions................................. (3.7) (.1) (5.8)
Proceeds from property and timberland disposals and sale of businesses..... 4.4 24.5 1.8
--------- ------- -------
Net cash used for investing activities..................................... (162.5) (93.0) (101.9)
--------- ------- -------
Cash flows from financing activities
Capital contribution, net of related expenses.............................. 370.6 231.8
Borrowings under bank credit facilities.................................... 1,371.8 400.0
Borrowings under senior notes.............................................. 400.0 500.0
Net borrowings (repayments) under accounts receivable securitization
program.................................................................. 34.8 6.4 (8.8)
Other increases in long-term debt.......................................... 3.4 12.0 56.8
Payments of long-term debt and related premiums............................ (2,072.9) (479.2) (698.6)
Deferred debt issuance costs............................................... (76.9) (25.2) (40.4)
--------- ------- -------
Net cash provided by (used for) financing activities....................... 30.8 14.0 (59.2)
--------- ------- -------
Increase (decrease) in cash and cash equivalents................................ 17.6 (.8) (15.4)
Cash and cash equivalents
Beginning of year.......................................................... 44.2 45.0 60.4
--------- ------- -------
End of year................................................................ $ 61.8 $ 44.2 $ 45.0
--------- ------- -------
--------- ------- -------
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
JSCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABULAR AMOUNTS IN MILLIONS)
1. BASIS OF PRESENTATION
JSCE, Inc. hereafter referred to as the 'Company' is a wholly-owned
subsidiary of Jefferson Smurfit Corporation ('JSC'). JSC has no operations other
than its investment in JSCE, Inc. On December 31, 1994, Jefferson Smurfit
Corporation (U.S.), a wholly-owned subsidiary of the Company, merged into its
wholly-owned subsidiary, Container Corporation of America ('CCA'), with CCA
surviving and changing its name to Jefferson Smurfit Corporation (U.S.)
('JSC(U.S.)'). The Company has no operations other than its investment in
JSC(U.S.). In 1994, JSC contributed 100% of the common stock of JSC(U.S.) to the
Company. This transaction has been accounted for in a manner similar to a
pooling of interests and accordingly, the consolidated financial statements for
all periods presented include the accounts of JSC(U.S.). Prior to May 4, 1994,
JSC had been named 'SIBV/MS Holdings' and JSC(U.S.) had been named 'Jefferson
Smurfit Corporation'. Prior to May 4, 1994, 50% of the voting stock of JSC was
owned by Smurfit Packaging Corporation ('SPC') and Smurfit Holdings B.V.
('SHBV'), indirect wholly-owned subsidiaries of Jefferson Smurfit Group plc ('JS
Group'), a public corporation organized under the laws of the Republic of
Ireland. The remaining 50% was owned by The Morgan Stanley Leveraged Equity Fund
II, L.P. ('MSLEF II') and certain other investors.
In May 1994, JSC completed a recapitalization plan (the 'Recapitalization')
to repay and refinance a substantial portion of its indebtedness. In connection
with the Recapitalization, (i) JSC issued and sold 19,250,000 shares of common
stock pursuant to a registered public offering at an initial public offering
price of $13.00 per share, (ii) JS Group, through its wholly-owned subsidiary
Smurfit International B.V. ('SIBV'), purchased an additional 11,538,462 shares
of common stock for $150 million, and (iii) JSC(U.S.) issued and sold $300
million aggregate principal amount of unsecured 11.25% Series A Senior Notes due
2004 and $100 million aggregate principal amount of unsecured 10.75% Series B
Senior Notes due 2002 (the '1994 Senior Notes') pursuant to a registered public
offering. The proceeds from the equity and debt offerings, the sale of shares to
SIBV and $1,200 million of borrowings under a new bank credit facility (see Note
4) were used to refinance JSC(U.S.)'s 1989 and 1992 term loans, the 1989
revolving credit facility, and JSC(U.S.)'s senior secured notes and pay related
fees and expenses. Proceeds were also used to redeem JSC(U.S.)'s subordinated
debentures and pay related premiums and accrued interest. Premiums paid in
connection with the debt payments, the write-off of related deferred debt
issuance costs, and losses on interest rate swap agreements totalling $51.6
million (net of income tax benefits of $31.6 million) are reflected in the
accompanying 1994 consolidated statement of operations as an extraordinary item.
Net proceeds from the shares issued totalled $370.6 million.
For financial accounting purposes, JSC's 1989 purchases of JSC(U.S.)'s
common equity owned by JS Group and the acquisition by JSC(U.S.) of its common
equity owned by MSLEF I Group were accounted for as purchases of treasury stock
and resulted in a deficit balance of $1,425.9 million in stockholder's equity in
the accompanying consolidated financial statements.
2. SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation: The consolidated financial statements include
the accounts of the Company and its majority-owned subsidiaries. Significant
intercompany accounts and transactions are eliminated in consolidation.
Cash Equivalents: The Company considers all highly liquid investments with
an original maturity of three months or less to be cash equivalents. At December
31, 1994 cash and cash equivalents of $62.4 million are maintained as collateral
for obligations under the accounts receivable securitization program (see Note
4).
Revenue Recognition: Revenue is recognized at the time products are
shipped.
Inventories: Inventories are valued at the lower of cost or market,
principally under the last-in, first-out ('LIFO') method except for $55.2
million in 1994 and $50.6 million in 1993 which are valued at the
F-7
<PAGE>
JSCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(TABULAR AMOUNTS IN MILLIONS)
lower of average cost or market. First-in, first-out costs (which approximate
replacement costs) exceed the LIFO value by $58.5 million and $44.7 million at
December 31, 1994 and 1993, respectively.
Property, Plant and Equipment: Property, plant and equipment are carried at
cost. Provisions for depreciation and amortization are made using straight-line
rates over the estimated useful lives of the related assets and the terms of the
applicable leases for leasehold improvements.
Effective January 1, 1993, the Company changed its estimate of the useful
lives of certain machinery and equipment. Based upon historical experience and
comparable industry practice, the depreciable lives of the papermill machines
that previously ranged from 16 to 20 years were increased to an average of 23
years, while major converting equipment and folding carton presses that
previously averaged 12 years were increased to an average of 20 years. These
changes were made to better reflect the estimated periods during which such
assets will remain in service. The change had the effect of reducing
depreciation expense by $17.8 million and decreasing net loss by $11.0 million
in 1993.
Timberland: The portion of the costs of timberland attributed to standing
timber is charged against income as timber is cut, at rates determined annually,
based on the relationship of unamortized timber costs to the estimated volume of
recoverable timber. The costs of seedlings and reforestation of timberland are
capitalized.
Deferred Debt Issuance Costs: Deferred debt issuance costs are amortized
over the terms of the respective debt obligations using the interest method.
Goodwill: The excess of cost over the fair value assigned to the net assets
acquired is recorded as goodwill and is being amortized using the straight-line
method over 40 years.
Interest Rate Swap and Cap Agreements: The Company enters into interest
rate swap and cap agreements to reduce the impact of interest rate fluctuations.
Swap agreements involve the exchange of fixed and floating rate interest
payments without the exchange of the underlying principal amount. Cap agreements
provide that the Company will receive a certain amount when short term interest
rates exceed a threshold rate. Periodic amounts to be paid or received under
interest rate swap and cap agreements are accrued and recognized as adjustments
to interest expense. Premiums paid on cap agreements are included in interest
payable and amortized to interest expense over the life of the agreements.
Reclassifications: Certain reclassifications of prior year presentations
have been made to conform to the 1994 presentation.
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at December 31 consists of:
<TABLE>
<CAPTION>
1994 1993
-------- --------
<S> <C> <C>
Land............................................................................. $ 59.7 $ 60.2
Buildings and leasehold improvements............................................. 253.7 241.3
Machinery, fixtures and equipment................................................ 1,696.3 1,601.1
-------- --------
2,009.7 1,902.6
Less accumulated depreciation and amortization................................... 657.2 563.2
-------- --------
1,352.5 1,339.4
Construction in progress......................................................... 74.6 35.1
-------- --------
Net property, plant and equipment........................................... $1,427.1 $1,374.5
-------- --------
-------- --------
</TABLE>
F-8
<PAGE>
JSCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(TABULAR AMOUNTS IN MILLIONS)
4. LONG-TERM DEBT
Long-term debt at December 31 consists of:
<TABLE>
<CAPTION>
1994 1993
----------------------- -----------------------
CURRENT CURRENT
MATURITIES LONG-TERM MATURITIES LONG-TERM
---------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Tranche A term loan..................................... $ 45.0 $ 855.0 $ $
Tranche B term loan..................................... 1.0 299.0
1992 term loan.......................................... 201.3
1989 term loan.......................................... 412.3
Revolving loans......................................... 43.0 196.5
Senior secured notes.................................... 270.5
Accounts receivable securitization program loans........ 217.2 182.3
1994 series A senior notes.............................. 300.0
1994 series B senior notes.............................. 100.0
1993 senior notes....................................... 500.0 500.0
Other................................................... 4.2 77.5 10.3 76.5
---------- --------- ---------- ---------
Total non-subordinated........................ 50.2 2,391.7 10.3 1,839.4
13.5% Senior subordinated notes......................... 350.0
14.0% Subordinated debentures........................... 300.0
15.5% Junior subordinated accrual debentures............ 129.7
---------- --------- ---------- ---------
Total subordinated............................ 779.7
---------- --------- ---------- ---------
$ 50.2 $2,391.7 $ 10.3 $2,619.1
---------- --------- ---------- ---------
---------- --------- ---------- ---------
</TABLE>
Aggregate annual maturities of long-term debt at December 31, 1994, for the
next five years are $50.2 million in 1995, $349.8 million in 1996, $158.8
million in 1997, $164.6 million in 1998 and $174.7 million in 1999.
1994 CREDIT AGREEMENT
In connection with the Recapitalization JSC(U.S.) entered into a new bank
credit facility (the '1994 Credit Agreement') which consists of a $450 million
revolving credit facility (the 'New Revolving Credit Facility') of which up to
$150 million may consist of letters of credit, a $900 million Tranche A Term
Loan and a $300 million Tranche B Term Loan. The New Revolving Credit Facility
matures in 2001. The Tranche A Term Loan matures in various installments from
1995 to 2001. The Tranche B Term Loan matures in various installments from 1995
to 2002.
Outstanding loans under the Tranche A Term Loan and the New Revolving
Credit Facility bear interest at rates selected at the option of the JSC(U.S.)
equal to the alternate base rate ('ABR') plus 1.5% per annum or the adjusted
LIBOR Rate plus 2.5% per annum (8.77% at December 31, 1994). Interest on
outstanding loans under the Tranche B Term Loan is payable at a rate per annum
selected at the option of JSC(U.S.), equal to the prime rate plus 2% per annum
or the adjusted LIBOR rate plus 3% per annum (8.56% at December 31, 1994). The
ABR rate is defined as the highest of Chemical Bank's prime lending rate, 1/2 of
1% in excess of the Federal Funds Rate or 1% in excess of the base certificate
of deposit rate.
A commitment fee of 1/2 of 1% per annum is assessed on the unused portion
of the New Revolving Credit Facility. At December 31, 1994, the unused portion
of this facility, after giving consideration to outstanding letters of credit,
was $303.2 million.
F-9
<PAGE>
JSCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(TABULAR AMOUNTS IN MILLIONS)
The Tranche A and Tranche B Term Loans and the New Revolving Credit
Facility may be prepaid at any time, in whole or in part, at the option of
JSC(U.S.). The 1994 Credit Agreement requires prepayments if JSC(U.S.) has
excess cash flows, as defined, or receives proceeds from: certain asset sales,
insurance, issuance of equity securities, or incurrence of certain indebtedness.
The obligations under the 1994 Credit Agreement are unconditionally
guaranteed by JSC, the Company and its subsidiaries and are secured by a
security interest in substantially all of the assets of JSC(U.S.) and its
material subsidiaries, with the exception of cash, cash equivalents and trade
receivables. The 1994 Credit Agreement is also secured by a pledge of all the
capital stock of each material subsidiary of JSC and by certain intercompany
notes.
The 1994 Credit Agreement contains various business and financial covenants
including, among other things, (i) limitations on dividends, redemptions and
repurchases of capital stock, (ii) limitations on the incurrence of
indebtedness, liens, leases, sale-leaseback transactions, (iii) limitations on
capital expenditures, (iv) maintenance of minimum levels of consolidated
earnings before depreciation, interest, taxes and amortization and (v)
maintenance of minimum interest coverage ratios.
1994 SENIOR NOTES
In connection with the Recapitalization, JSC(U.S.) issued and sold $300
million aggregate principal amount of unsecured 11.25% Series A Senior Notes due
2004 and $100 million aggregate principal amount of unsecured 10.75% Series B
Senior Notes due 2002. The Series A Senior Notes are redeemable in whole or in
part at the option of JSC(U.S.), at any time on or after May 1, 1999 with
premiums of 5.625% and 2.813% of the principal amount if redeemed during the
12-month periods commencing May 1, 1999 and 2000, respectively. In addition, up
to $100 million aggregate principal amount of Series A Senior Notes are
redeemable at 110% of the principal amount prior to May 1, 1997 in connection
with certain stock issuances. The Series B Senior Notes are not redeemable prior
to maturity.
The 1994 Senior Notes, which are unconditionally guaranteed on a senior
basis by JSCE, Inc., rank pari passu with the 1994 Credit Agreement and the 1993
Senior Notes. The 1994 Senior Notes agreements contain business and financial
covenants which are less restrictive than those contained in the 1994 Credit
Agreement.
Holders of the 1994 Senior Notes have the right, subject to certain
limitations, to require JSC(U.S.) to repurchase their securities at 101% of the
principal amount plus accrued and unpaid interest, upon the occurrence of a
change of control or in certain events from proceeds of major asset sales, as
defined.
ACCOUNTS RECEIVABLE SECURITIZATION PROGRAM LOANS
The $230.0 million accounts receivable securitization program
('Securitization Program') provides for the sale of certain of the Company's
trade receivables to a wholly-owned, bankruptcy remote, limited purpose
subsidiary, Jefferson Smurfit Finance Corporation ('JS Finance'), which finances
its purchases of the receivables, through borrowings from a limited purpose
finance company (the 'Issuer') unaffiliated with the Company. The Issuer, which
is restricted to making loans to JS Finance, issued $95 million in fixed rate
term notes, issued $13.8 million under a subordinated loan, and may issue up to
$121.2 million in trade receivables-backed commercial paper or obtain up to
$121.2 million under a revolving liquidity facility to fund loans to JS Finance.
At December 31, 1994, $12.0 million was available for additional borrowing.
Borrowings under the Securitization Program, which expires April 1996, have been
classified as long-term debt because of the Company's intent to refinance this
debt on a long-term basis and the availability of such financing under the terms
of the program.
At December 31, 1994, all assets of JS Finance, principally cash and cash
equivalents of $62.4 million and trade receivables of $213.8 million, are
pledged as collateral for obligations of JS Finance to
F-10
<PAGE>
JSCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(TABULAR AMOUNTS IN MILLIONS)
the Issuer. Interest rates on borrowings under this program are at a fixed rate
of 9.56% for $95.0 million of the borrowings and at a variable rate on the
remainder (6.37% at December 31, 1994).
1993 SENIOR NOTES
In April 1993, JSC(U.S.) issued $500.0 million of unsecured 9.75% Senior
Notes (the '1993 Senior Notes') due 2003 which are not redeemable prior to
maturity. The 1993 Senior Notes, which are unconditionally guaranteed on a
senior basis by JSCE, Inc., rank pari passu with the 1994 Credit Agreement and
the 1994 Senior Notes. The 1993 Senior Notes agreement contains business and
financial covenants which are substantially less restrictive than those
contained in the 1994 Credit Agreement and substantially similar to those
contained in the 1994 Senior Notes agreements.
Holders of the 1993 Senior Notes have the right, subject to certain
limitations, to require JSC(U.S.) to repurchase their securities at 101% of the
principal amount plus accrued and unpaid interest, upon the occurrence of a
change in control or in certain events, from proceeds of major asset sales, as
defined.
Net proceeds from the offering were used to partially repay amounts
outstanding under the 1989 and 1992 term loans and the 1989 revolving credit
facility. The write-off of related deferred debt issuance costs and losses on
interest rate swap agreements, totalling $37.8 million (net of income tax
benefits of $21.7 million), are reflected in the accompanying 1993 consolidated
statement of operations as an extraordinary item.
OTHER NON-SUBORDINATED DEBT
Other non-subordinated long-term debt at December 31, 1994, is payable in
varying installments through the year 2028. Interest rates on these obligations
averaged approximately 9.93% at December 31, 1994.
INTEREST RATE SWAP AND CAP AGREEMENTS
The Company utilizes interest rate swap and cap agreements to manage its
interest rate exposure on long-term debt. At December 31, 1994, the Company has
interest rate swap agreements with a notional amount of $282.5 million which
effectively fix (for remaining periods up to 3 years) the interest rate on
variable rate borrowings. The Company is currently paying a weighted average
fixed interest rate of 6.4% and receiving a weighted average variable interest
rate of 6.0%, calculated on the notional amount. The Company has a cap agreement
with a notional amount of $100.0 million on variable rate debt (through 1996)
which caps the Company's variable interest rates at 7.5% on the notional amount.
In addition, the Company has a cap agreement with a notional amount of $100.0
million (through 1996) on variable rate debt which limits the Company's interest
payments to a range of 5.5 - 7.0% on the notional amount. The Company is party
to interest rate swap agreements on fixed rate borrowings with a notional amount
of $500.0 million which effectively convert the fixed rate borrowings to
variable rate borrowings maturing at various dates through May 1995. The Company
is currently receiving a weighted average fixed interest rate of 4.6% and paying
a weighted average variable interest rate of 7.1%, calculated on the notional
amount.
The Company has interest rate swaps with a notional amount of $525 million
not associated with existing debt at December 31, 1994, due to previous debt
extinguishments, which are carried at fair market value with changes to the fair
value reflected in interest expense. The Company is currently paying a weighted
average fixed rate of 8.1% and receiving a weighted average variable rate of
5.4% on swaps with a notional amount of $250.0 million (for remaining periods up
to 1997). The Company is currently receiving a weighted average fixed rate of
7.3% and paying a weighted average variable rate of 7.4% on swaps with a
notional amount of $95 million (through 1995). In addition, the Company has
F-11
<PAGE>
JSCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(TABULAR AMOUNTS IN MILLIONS)
swap agreements with a notional amount of $180 million (through 1996) whereby
the Company is receiving a weighted average variable rate of 5.2% and pays a
weighted average variable rate of 6.1%.
The Company is exposed to credit loss in the event of non-performance by
the other parties to the interest rate swap agreements. However, the Company
does not anticipate non-performance by the counter parties.
OTHER
Interest costs capitalized on construction projects in 1994, 1993 and 1992
totalled $3.9 million, $3.4 million and $4.2 million, respectively. Interest
payments on all debt instruments for 1994, 1993 and 1992 were $247.0 million,
$226.2 million and $257.6 million, respectively.
5. INCOME TAXES
Effective January 1, 1993, the Company changed its method of accounting for
income taxes from the deferred method to the liability method required by
Statement of Financial Accounting Standards ('SFAS') No. 109, 'Accounting for
Income Taxes.' Prior years' financial statements have not been restated.
The cumulative effect of adopting SFAS No. 109 as of January 1, 1993 was to
increase net income by $20.5 million. For 1993, application of SFAS No. 109
increased the pretax loss by $14.5 million because of increased depreciation
expense as a result of the requirement to report assets acquired in prior
business combinations at pretax amounts.
In adopting this new accounting principle, the Company (i) adjusted assets
acquired and liabilities assumed in prior business combinations from their
net-of-tax amounts to their pretax amounts and recognized the related deferred
tax assets and liabilities for those temporary differences, (ii) adjusted
deferred income tax assets and liabilities to statutory income tax rates and for
previously unrecognized tax benefits related to certain state net operating loss
carryforwards and, (iii) adjusted asset and liability accounts arising from
previous acquisitions and recapitalizations to recognize potential tax
liabilities related to those transactions. The net effect of these adjustments
on assets and liabilities was to increase inventory $23.0 million, increase
property, plant and equipment and timberlands $196.5 million, increase goodwill
$42.0 million, increase liabilities by $12.6 million, and increase deferred
income taxes by $228.4 million.
At December 31, 1994, the Company has net operating loss carryforwards for
federal income tax purposes of approximately $460.5 million (expiring in the
years 2005 through 2009), none of which are available for utilization against
alternative minimum taxes.
F-12
<PAGE>
JSCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(TABULAR AMOUNTS IN MILLIONS)
Significant components of the Company's deferred tax assets and liabilities
at December 31 are as follows:
<TABLE>
<CAPTION>
1994 1993
------ ------
<S> <C> <C>
Deferred tax liabilities:
Depreciation and depletion........................................ $365.1 $354.5
Pensions.......................................................... 31.0 26.7
Other............................................................. 106.7 104.0
------ ------
Total deferred tax liabilities............................... 502.8 485.2
------ ------
Deferred tax assets:
Retiree medical................................................... 49.6 44.6
Other employee benefit and insurance plans........................ 70.5 70.3
Restructuring and other charges................................... 32.1 49.3
Net operating loss and tax credit carryforwards................... 161.6 108.4
Other............................................................. 44.5 47.1
------ ------
Total deferred tax assets.................................... 358.3 319.7
Valuation allowance for deferred tax assets............................ (25.1) (24.8)
------ ------
Net deferred tax assets........................................... 333.2 294.9
------ ------
Net deferred tax liabilities...................................... $169.6 $190.3
------ ------
------ ------
</TABLE>
Provisions for (benefit from) income taxes before extraordinary item and
cumulative effect of accounting changes were as follows:
<TABLE>
<CAPTION>
DEFERRED
LIABILITY METHOD METHOD
---------------------- --------
YEAR ENDED DECEMBER 31,
----------------------------------
1994 1993 1992
--------- --------- --------
<S> <C> <C> <C>
Current
Federal............................................................ $ 1.4 $ 28.1 $ (2.2)
State and local.................................................... 2.1 2.2 2.1
--------- --------- --------
3.5 30.3 (.1)
Deferred
Federal............................................................ 38.6 (53.5) 9.7
State and local.................................................... 3.8 6.0 .4
Benefits of net operating loss carryforwards....................... (29.5) (71.5)
--------- --------- --------
12.9 (119.0) 10.1
Adjustment of deferred tax assets and liabilities for enacted tax rate
change................................................................ 5.7
--------- --------- --------
$ 16.4 $ (83.0) $ 10.0
--------- --------- --------
--------- --------- --------
</TABLE>
The Company increased its deferred tax assets and liabilities in 1993 as a
result of legislation enacted during 1993 increasing the corporate federal
statutory tax rate from 34% to 35% effective January 1, 1993.
The federal income tax returns for 1989 through 1991 are currently under
examination. While the ultimate results of such examination cannot be predicted
with certainty, the Company's management believes that the examination will not
have a material adverse effect on its consolidated financial condition or
results of operations.
F-13
<PAGE>
JSCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(TABULAR AMOUNTS IN MILLIONS)
The components of the provision for deferred taxes for the year ended
December 31, 1992 were as follows:
<TABLE>
<CAPTION>
1992
------
<S> <C>
Depreciation and depletion........................................................... $ 15.2
Alternative minimum tax.............................................................. 10.2
Tax loss carryforwards............................................................... (24.3)
Equity in affiliates................................................................. 6.8
Other employee benefits.............................................................. 2.7
Other, net........................................................................... (.5)
------
$ 10.1
------
------
</TABLE>
A reconciliation of the difference between the statutory Federal income tax
rate and the effective income tax rate as a percentage of income (loss) before
income taxes, extraordinary item, and cumulative effect of accounting changes is
as follows:
<TABLE>
<CAPTION>
DEFERRED
LIABILITY METHOD METHOD
---------------------- --------
YEAR ENDED DECEMBER 31,
----------------------------------
1994 1993 1992
--------- --------- --------
<S> <C> <C> <C>
U.S. Federal statutory rate.............................................. 35.0% (35.0)% (34.0)%
Adjustment of deferred tax assets and liabilities for enacted tax rate
change................................................................. 2.2
State and local taxes, net of Federal tax benefit........................ (4.8) (2.0) 6.6
Permanent differences from applying purchase accounting.................. 23.7 3.5 71.1
Effect of valuation allowances on deferred tax assets, net of Federal
benefit................................................................ 1.1 1.2
Other, net............................................................... 2.1 (2.1) (2.0)
--------- --------- --------
57.1% (32.2)% 41.7%
--------- --------- --------
--------- --------- --------
</TABLE>
The Company made income tax payments of $2.6 million, $33.0 million, and
$6.6 million in 1994, 1993, and 1992, respectively.
6. EMPLOYEE BENEFIT PLANS
PENSION PLANS
The Company sponsors noncontributory defined benefit pension plans covering
substantially all employees not covered by multi-employer plans. Plans that
cover salaried and management employees provide pension benefits that are based
on the employee's five highest consecutive calendar years' compensation during
the last ten years of service. Plans covering non-salaried employees generally
provide benefits of stated amounts for each year of service. These plans provide
reduced benefits for early retirement. The Company's funding policy is to make
minimum annual contributions required by applicable regulations. The Company
also participates in several multi-employer pension plans, which provide defined
benefits to certain union employees.
F-14
<PAGE>
JSCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(TABULAR AMOUNTS IN MILLIONS)
In order to minimize significant year-to-year fluctuations in pension cost
caused by financial market volatility, the Company changed, effective as of
January 1, 1993 the method of accounting used for determining the market-related
value of plan assets. The method changed from a fair market value to a
calculated value that recognizes all changes in a systematic manner over a
period of four years and eliminates the use of a corridor approach for
amortizing gains and losses. The effect of this change on 1993 results of
operations, including the cumulative effect of prior years, was not material.
Assumptions used in the accounting for the defined benefit plans were:
<TABLE>
<CAPTION>
1994 1993 1992
----- ----- -----
<S> <C> <C> <C>
Weighted average discount rates............................................ 8.5% 7.6% 8.75%
Rates of increase in compensation levels................................... 5.0% 4.0% 5.5%
Expected long-term rate of return on assets................................ 10.0% 10.0% 10.0%
</TABLE>
The components of net pension income for the defined benefit plans and the
total contributions charged to pension expense for the multi-employer plans
follow:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1994 1993 1992
----- ----- -----
<S> <C> <C> <C>
Defined benefit plans:
Service cost-benefits earned during the period........................ $14.3 $12.7 $12.1
Interest cost on projected benefit obligations........................ 53.7 54.0 50.1
Actual return on plan assets.......................................... (7.4) (91.1) (26.4)
Net amortization and deferral......................................... (71.3) 8.8 (54.6)
Multi-employer plans....................................................... 2.1 2.2 2.1
----- ----- -----
Net pension income............................................... $(8.6) $(13.4) $(16.7)
----- ----- -----
----- ----- -----
</TABLE>
The following table sets forth the funded status and amounts recognized in
the consolidated balance sheets at December 31 for the Company's and its
subsidiaries' defined benefit pension plans:
<TABLE>
<CAPTION>
1994 1993
------ ------
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligations...................................................... $631.7 $616.7
------ ------
------ ------
Accumulated benefit obligations................................................. $669.9 $664.3
------ ------
------ ------
Projected benefit obligations................................................... $699.6 $716.0
Plan assets at fair value............................................................ 739.8 778.1
------ ------
Plan assets in excess of projected benefit obligations............................... 40.2 62.1
Unrecognized net loss................................................................ 63.1 34.5
Unrecognized net asset at December 31, being recognized over 14 to 15 years.......... (25.2) (29.2)
------ ------
Net pension asset.......................................................... $ 78.1 $ 67.4
------ ------
------ ------
</TABLE>
Approximately 40% of plan assets at December 31, 1994 are invested in cash
equivalents or debt securities and 60% are invested in equity securities,
including common stock of JS Group having a market value of $117.2 million.
SAVINGS PLANS
The Company sponsors voluntary savings plans covering substantially all
salaried and certain hourly employees. The Company match, which is paid in JSC
stock, is fifty percent of each participant's contributions up to an annual
maximum. The Company's expense for the savings plans totalled $5.3 million, $5.3
million and $5.0 million in 1994, 1993 and 1992, respectively.
F-15
<PAGE>
JSCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(TABULAR AMOUNTS IN MILLIONS)
POSTRETIREMENT HEALTH CARE AND LIFE INSURANCE BENEFITS
The Company provides certain health care and life insurance benefits for
all salaried and certain hourly employees. The Company has various plans under
which the cost may be borne either by the Company, the employee or partially by
each party. The Company does not currently fund these plans. These benefits are
discretionary and are not a commitment to long-term benefit payments. The plans
were amended effective January 1, 1993 to allow employees who retire on or after
January 1, 1994 to become eligible for these benefits only if they retire after
age 60 while working for the Company.
Effective January 1, 1993, the Company adopted SFAS No. 106, 'Employers'
Accounting for Postretirement Benefits Other Than Pensions', which requires
companies to accrue the expected cost of retiree benefit payments, other than
pensions, during employees' active service period. The Company elected to
immediately recognize the accumulated liability, measured as of January 1, 1993.
The cumulative effect of this change in accounting principle resulted in a
charge of $37.0 million (net of income tax benefits of $21.9 million). The
Company had previously recorded an obligation of $36.0 million in connection
with prior business combinations. In 1992, the cost of the postretirement
benefits of $6.4 million was recognized as claims were paid.
The following table sets forth the accumulated postretirement benefit
obligation ('APBO') with respect to these benefits as of December 31:
<TABLE>
<CAPTION>
1994 1993
----- ------
<S> <C> <C>
Retirees.......................................................... $52.6 $ 58.3
Active employees.................................................. 33.9 51.8
----- ------
Total accumulated postretirement benefit obligation............... 86.5 110.1
Unrecognized net gain (loss)...................................... 12.9 (11.9)
----- ------
Accrued postretirement benefit cost............................... $99.4 $ 98.2
----- ------
----- ------
</TABLE>
Net periodic postretirement benefit cost included the following components:
<TABLE>
<CAPTION>
1994 1993
----- ------
<S> <C> <C>
Service cost of benefits earned................................... $1.5 $1.5
Interest cost on accumulated postretirement benefit obligation.... 6.8 8.3
Net amortization.................................................. (.6)
----- ------
Net periodic postretirement benefit cost.......................... $7.7 $9.8
----- ------
----- ------
</TABLE>
F-16
<PAGE>
JSCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(TABULAR AMOUNTS IN MILLIONS)
A weighted-average discount rate of 8.5% and 7.6% was used in determining
the APBO at December 31, 1994 and 1993, respectively. The weighted-average
annual assumed rate of increase in the per capita cost of covered benefits
('healthcare cost trend rate') was 10.5%, with an annual decline of 1% until the
rate reaches 5.5%. The effect of a 1% increase in the assumed healthcare cost
trend rate would increase both the APBO as of December 31, 1994 by $2.9 million
and the annual net periodic postretirement benefit cost for 1994 by $.3 million.
7. RELATED PARTY TRANSACTIONS
TRANSACTIONS WITH JS GROUP
Transactions with JS Group, its subsidiaries and affiliates were as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
Product sales..................................... $ 36.5 $ 18.4 $ 22.8
Product and raw material purchases................ 71.0 49.3 60.1
Management services income........................ 4.3 5.8 5.6
Charges from JS Group for services provided....... .6 .4 .3
Charges from JS Group for letter of credit,
commitment fees and related expenses............ 2.8 2.9
Charges to JS Group for costs pertaining to the
No. 2 paperboard machine........................ 54.0 62.2 54.7
Receivables at December 31........................ 3.7 1.7 3.3
Payables at December 31........................... 10.9 11.6 10.2
</TABLE>
Product sales to and purchases from JS Group, its subsidiaries, and
affiliates are consummated on terms generally similar to those prevailing with
unrelated parties.
The Company provides certain subsidiaries and affiliates of JS Group with
general management and elective management services under separate Management
Services Agreements. In consideration for general management services, the
Company is paid a fee up to 2% of the subsidiary's or affiliate's gross sales.
In consideration for elective services, the Company is reimbursed for its direct
cost of providing such services.
In 1991, an affiliate of JS Group completed a rebuild of the No. 2
paperboard machine owned by the affiliate that is located in the Company's
Fernandina Beach, Florida paperboard mill (the 'Fernandina Mill'). Pursuant to
an operating agreement between the Company and the affiliate, the Company
operates and manages the No. 2 paperboard machine and is compensated for its
direct production and manufacturing costs and indirect manufacturing, selling
and administrative costs incurred by the Company for the entire Fernandina Mill.
The compensation is determined by applying various formulas and agreed upon
amounts to the subject costs. The amounts reimbursed to the Company are
reflected as reductions of cost of goods sold and selling and administrative
expenses in the accompanying consolidated statements of operations.
F-17
<PAGE>
JSCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(TABULAR AMOUNTS IN MILLIONS)
TRANSACTIONS WITH TIMES MIRROR
Under the terms of a long-term agreement, Smurfit Newsprint Corporation
('SNC'), a majority-owned subsidiary of the Company, supplies newsprint to Times
Mirror, a minority shareholder of SNC, at amounts which approximate prevailing
market prices. The obligations of the Company and Times Mirror to supply and
purchase newsprint are wholly or partially terminable upon the occurrence of
certain defined events. Sales to Times Mirror for 1994, 1993 and 1992 were
$113.0 million, $115.2 million and $114.0 million, respectively.
TRANSACTIONS WITH MORGAN STANLEY & CO.
In connection with the Recapitalization, Morgan Stanley & Co., in its
capacity as underwriter of public equity and debt securities, received fees from
the Company of $15.5 million.
8. LEASES
The Company leases certain facilities and equipment for production, selling
and administrative purposes under operating leases. Future minimum lease
payments at December 31, 1994, required under operating leases that have initial
or remaining noncancelable lease terms in excess of one year are $31.1 million
in 1995, $21.5 million in 1996, $15.6 million in 1997, $10.9 million in 1998,
$8.6 million in 1999 and $19.5 million thereafter.
Net rental expense was $45.5 million, $45.0 million, and $42.2 million for
1994, 1993 and 1992, respectively.
9. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------
1994 1993
-------------------- --------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Assets
Cash and cash equivalents..................................... $ 61.8 $ 61.8 $ 44.2 $ 44.2
Unrealized gain on interest rate swap agreements.............. 3.7 5.5
Liabilities
Long-term debt, including current maturities.................. 2,441.9 2,401.7 2,629.4 2,686.4
Unrealized loss on interest rate swap agreements.............. 7.7 12.2
Realized loss on interest rate swap agreements marked to
market...................................................... 4.1 4.1 12.0 12.0
</TABLE>
The carrying amount of cash equivalents approximates fair value because of
the short maturity of those instruments. The fair value of the Company's
long-term debt is estimated based on the quoted market prices for the same or
similar issues or on the current rates offered to the Company for debt of the
same remaining maturities. The fair value of the interest rate swap agreements
is the estimated amount the Company would pay or receive, net of accrued
interest expense, to terminate the agreements at December 31, 1994 and 1993,
taking into account current interest rates and the current credit worthiness of
the swap counterparties.
F-18
<PAGE>
JSCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(TABULAR AMOUNTS IN MILLIONS)
10. RESTRUCTURING CHARGE
During 1993, the Company recorded a pretax charge of $96.0 million to
recognize the effects of a restructuring program designed to improve the
Company's long-term competitive position of which $43 million related to the
write-down of assets at closed facilities and other nonproductive assets and $53
million represented cash expenditures. The charge included a provision for
direct expenses associated with plant closures, reductions in workforce,
realignment and consolidation of various manufacturing operations and
write-downs of nonproductive assets. The restructuring program is proceeding as
originally planned and no significant adjustment to the reserve is anticipated
at this time.
11. CONTINGENCIES
The Company's past and present operations include activities which are
subject to federal, state and local environmental requirements, particularly
relating to air and water quality. The Company faces potential environmental
liability as a result of violations of permit terms and similar authorizations
that have occurred from time to time at its facilities.
The Company faces potential liability for response costs at various sites
with respect to which the Company has received notice that it may be a
'potentially responsible party' (PRP) as well as contamination of certain
Company-owned properties, under the Comprehensive Environmental Response,
Compensation and Liability Act concerning hazardous substance contamination. In
estimating its reserves for environmental remediation and future costs, the
Company's estimated liability reflects only the Company's expected share. In
determining the liability, the estimate takes into consideration the number of
other PRP's at each site, the identity and financial condition of such parties
and experience regarding similar matters. No amounts have been recorded for
potential recoveries from insurance carriers.
During 1993, the Company recorded a pretax charge of $54.0 million of which
$39.0 million represents asbestos and PCB removal, solid waste cleanup at
existing and former operating sites and expenses for response costs at various
sites where the Company has received notice that it is a potentially responsible
party.
The Company is a defendant in a number of lawsuits and claims arising out
of the conduct of its business, including those related to environmental
matters. While the ultimate results of such suits or other proceedings against
the Company cannot be predicted with certainty, the management of the Company
believes that the resolution of these matters will not have a material adverse
effect on its consolidated financial condition or results of operation.
12. BUSINESS SEGMENT INFORMATION
The Company's business segments are paperboard/packaging products and
newsprint. Substantially all the Company's operations are in the United States.
The Company's customers represent a diverse range of industries including
paperboard and paperboard packaging, consumer products, wholesale trade,
retailing, agri-business, and newspaper publishing located throughout the United
States. Credit is extended based on an evaluation of the customer's financial
condition. The paperboard/packaging products segment includes the manufacture
and distribution of containerboard, boxboard and cylinderboard, corrugated
containers, folding cartons, fibre partitions, spiral cores and tubes, labels
and
F-19
<PAGE>
JSCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(TABULAR AMOUNTS IN MILLIONS)
flexible packaging. A summary by business segment of net sales, operating
profit, identifiable assets, capital expenditures and depreciation, depletion
and amortization follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
Net sales
Paperboard/packaging products............................................. $2,973.7 $2,699.5 $2,751.0
Newsprint................................................................. 259.6 248.1 247.4
-------- -------- --------
$3,233.3 $2,947.6 $2,998.4
-------- -------- --------
-------- -------- --------
Operating profit (loss)
Paperboard/packaging products............................................. $ 310.9 $ 16.5 $ 284.6
Newsprint................................................................. (16.5) (21.4) (10.3)
-------- -------- --------
Total operating profit (loss)........................................ 294.4 (4.9) 274.3
Interest expense, net..................................................... (265.7) (252.7) (298.3)
-------- -------- --------
Income (loss) before income taxes, extraordinary item, and cumulative
effect of accounting changes....................................... $ 28.7 $ (257.6) $ (24.0)
-------- -------- --------
-------- -------- --------
Identifiable assets
Paperboard/packaging products............................................. $2,256.2 $2,153.4 $1,960.6
Newsprint................................................................. 231.0 224.9 235.1
Corporate assets.......................................................... 271.8 218.8 240.7
-------- -------- --------
$2,759.0 $2,597.1 $2,436.4
-------- -------- --------
-------- -------- --------
Capital expenditures
Paperboard/packaging products............................................. $ 146.0 $ 107.2 $ 91.6
Newsprint................................................................. 17.2 10.2 6.3
-------- -------- --------
$ 163.2 $ 117.4 $ 97.9
-------- -------- --------
-------- -------- --------
Depreciation, depletion and amortization
Paperboard/packaging products............................................. $ 115.1 $ 115.2 $ 121.2
Newsprint................................................................. 16.5 15.6 13.7
-------- -------- --------
$ 131.6 $ 130.8 $ 134.9
-------- -------- --------
-------- -------- --------
</TABLE>
Sales and transfers between segments are not material. Export sales are
less than 10% of total sales. Corporate assets consist principally of cash and
cash equivalents, deferred income taxes, deferred debt issuance costs and other
assets which are not specific to a segment.
F-20
<PAGE>
JSCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(TABULAR AMOUNTS IN MILLIONS)
13. QUARTERLY RESULTS (UNAUDITED)
The following is a summary of the unaudited quarterly results of
operations:
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
<S> <C> <C> <C> <C>
1994
Net sales................................................... $727.7 $765.9 $858.4 $881.3
Gross profit................................................ 98.5 111.0 135.6 169.5
Income from operations...................................... 46.8 55.6 80.5 108.0
Income (loss) before extraordinary item..................... (11.8 ) (8.4 ) 5.8 26.7
Loss from early extinguishment of debt...................... (51.6 ) (3.8 )
Net income (loss)........................................... (11.8 ) (60.0 ) 5.8 22.9
1993
Net sales................................................... $735.9 $734.9 $745.7 $731.1
Gross profit................................................ 101.5 100.5 97.5 80.9
Income (loss) from operations(1)............................ 41.2 41.1 (109.9 ) 18.8
Loss before extraordinary item and cumulative effect of
accounting changes........................................ (15.5 ) (14.6 ) (116.7 ) (27.8 )
Loss from early extinguishment of debt...................... (37.8 )
Cumulative effect of changes in accounting principles
Postretirement benefits................................ (37.0 )
Income taxes........................................... 20.5
Net loss.................................................... (32.0 ) (52.4 ) (116.7 ) (27.8 )
</TABLE>
- ------------
(1) In the third quarter of 1993, the Company recorded a pretax charge of $96.0
million to recognize the effects of a restructuring program designed to
improve the Company's long-term competitive position and recorded a pretax
charge of $54.0 million relating primarily to environmental matters.
14. SUBSEQUENT EVENTS
On February 23, 1995, JSC(U.S.) entered into a $315.0 million accounts
receivable securitization program (the '1995 Securitization') consisting of a
$300.0 million trade receivables-backed commercial paper program and a $15.0
million term loan. The proceeds of the 1995 Securitization were used to
extinguish JSC(U.S.)'s borrowings under the 1991 Securitization Program of
$230.0 million.
F-21
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
JEFFERSON SMURFIT CORPORATION (U.S.)
We have audited the accompanying consolidated balance sheets of Jefferson
Smurfit Corporation (U.S.) as of December 31, 1994 and 1993, and the related
consolidated statements of operations, stockholder's deficit and cash flows for
each of the three years in the period ended December 31, 1994. Our audits also
included the financial statement schedule listed in the Index at Item 16(b) of
the Registration Statement. These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule 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 consolidated financial position of Jefferson
Smurfit Corporation (U.S.) at December 31, 1994 and 1993, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1994 in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
As discussed in Note 5 and Note 6 to the financial statements, in 1993, the
Company changed its method of accounting for income taxes and postretirement
benefits.
ERNST & YOUNG LLP
St. Louis, Missouri
January 30, 1995 except
as to Note 14, as to which
the date is February 23, 1995
F-22
<PAGE>
JEFFERSON SMURFIT CORPORATION (U.S.)
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1994 1993
--------- ---------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents........................................................... $ 61.8 $ 44.2
Receivables, less allowances of $8.6 in 1994 and $9.2 in 1993....................... 316.3 243.2
Inventories
Work-in-process and finished goods............................................. 86.9 96.1
Materials and supplies......................................................... 136.8 137.2
--------- ---------
223.7 233.3
Deferred income taxes............................................................... 38.1 41.9
Prepaid expenses and other current assets........................................... 6.6 5.9
--------- ---------
Total current assets...................................................... 646.5 568.5
Net property, plant and equipment.............................................. 1,427.1 1,374.5
Timberland, less timber depletion........................................................ 259.0 261.5
Goodwill, less accumulated amortization of $35.0 in 1994 and $27.6 in 1993............... 257.1 261.4
Other assets............................................................................. 169.3 131.2
--------- ---------
$ 2,759.0 $ 2,597.1
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current liabilities
Current maturities of long-term debt................................................ $ 50.2 $ 10.3
Accounts payable.................................................................... 348.8 270.6
Accrued compensation and payroll taxes.............................................. 114.3 110.1
Interest payable.................................................................... 48.3 52.6
Other accrued liabilities........................................................... 74.4 84.9
--------- ---------
Total current liabilities................................................. 636.0 528.5
Long-term debt, less current maturities.................................................. 2,391.7 2,619.1
Other long-term liabilities.............................................................. 237.5 257.1
Deferred income taxes.................................................................... 207.7 232.2
Minority interest........................................................................ 16.4 18.0
Stockholder's deficit
Common stock, par value $.01 per share;
1,000 shares authorized and outstanding
Additional paid-in capital.......................................................... 1,102.4 731.8
Retained earnings (deficit)......................................................... (1,832.7) (1,789.6)
--------- ---------
Total stockholder's deficit............................................... (730.3) (1,057.8)
--------- ---------
$ 2,759.0 $ 2,597.1
--------- ---------
--------- ---------
</TABLE>
See notes to consolidated financial statements.
F-23
<PAGE>
JEFFERSON SMURFIT CORPORATION (U.S.)
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN MILLIONS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
Net sales...................................................................... $3,233.3 $2,947.6 $2,998.4
Costs and expenses
Cost of goods sold........................................................ 2,718.7 2,567.2 2,495.4
Selling and administrative expenses....................................... 223.7 239.2 231.4
Restructuring charge...................................................... 96.0
Environmental and other charges........................................... 54.0
-------- -------- --------
Income (loss) from operations........................................ 290.9 (8.8) 271.6
Other income (expense)
Interest expense.......................................................... (268.5) (254.2) (300.1)
Other, net................................................................ 6.3 5.4 4.5
-------- -------- --------
Income (loss) before income taxes, extraordinary item and cumulative
effect of accounting changes....................................... 28.7 (257.6) (24.0)
Provision for (benefit from) income taxes...................................... 16.4 (83.0) 10.0
-------- -------- --------
Income (loss) before extraordinary item and cumulative effect of
accounting changes................................................. 12.3 (174.6) (34.0)
Extraordinary item
Loss from early extinguishment of debt, net of income tax benefit of $33.7
in 1994, $21.7 in 1993 and $25.8 in 1992................................ (55.4) (37.8) (49.8)
Cumulative effect of accounting changes
Postretirement benefits, net of income tax benefit of $21.9............... (37.0)
Income taxes.............................................................. 20.5
-------- -------- --------
Net loss............................................................. $ (43.1) $ (228.9) $ (83.8)
-------- -------- --------
-------- -------- --------
</TABLE>
See notes to consolidated financial statements.
F-24
<PAGE>
JEFFERSON SMURFIT CORPORATION (U.S.)
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S DEFICIT
(IN MILLIONS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK
-----------------
PAR NUMBER ADDITIONAL RETAINED
VALUE OF PAID-IN EARNINGS
$.01 SHARES CAPITAL (DEFICIT)
------- ------ ---------- ---------
<S> <C> <C> <C> <C>
Balance at January 1, 1992.......................................... $ 1,000 $ 500.0 $(1,476.9)
Net loss............................................................ (83.8)
Capital contribution, net of related expenses....................... 231.8
------- ------ ---------- ---------
Balance at December 31, 1992........................................ 1,000 731.8 (1,560.7)
Net loss............................................................ (228.9)
------- ------ ---------- ---------
Balance at December 31, 1993........................................ 1,000 731.8 (1,789.6)
Net loss............................................................ (43.1)
Capital contribution, net of related expenses....................... 370.6
------- ------ ---------- ---------
Balance at December 31, 1994........................................ $ 1,000 $1,102.4 $(1,832.7)
------- ------ ---------- ---------
------- ------ ---------- ---------
</TABLE>
See notes to consolidated financial statements.
F-25
<PAGE>
JEFFERSON SMURFIT CORPORATION (U.S.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1994 1993 1992
--------- ------- -------
<S> <C> <C> <C>
Cash flows from operating activities
Net loss................................................................... $ (43.1) $(228.9) $ (83.8)
Adjustments to reconcile net loss to net cash provided by operating
activities
Extraordinary loss from early extinguishment of debt.................. 89.1 59.5 75.6
Cumulative effect of accounting changes
Postretirement benefits.......................................... 58.9
Income taxes..................................................... (20.5)
Restructuring charge.................................................. 96.0
Environmental and other charges....................................... 54.0
Depreciation, depletion and amortization.............................. 131.6 130.8 134.9
Amortization of deferred debt issuance costs.......................... 10.1 7.9 14.6
Deferred income taxes................................................. (20.8) (156.9) .1
Non-cash interest..................................................... 18.9 18.0 33.6
Non-cash employee benefit expense..................................... (9.4) (12.5) (18.8)
Change in current assets and liabilities, net of effects from
acquisitions
Receivables...................................................... (73.0) .7 12.9
Inventories...................................................... 9.8 14.2 (10.4)
Prepaid expenses and other current assets........................ (.9) 5.0 (2.9)
Accounts payable and accrued liabilities......................... 42.1 26.2 14.9
Interest payable................................................. (7.2) 4.7 (4.9)
Income taxes..................................................... .8 16.2 (17.3)
Other, net............................................................ 1.3 4.9 (2.8)
--------- ------- -------
Net cash provided by operating activities.................................. 149.3 78.2 145.7
--------- ------- -------
Cash flows from investing activities
Property additions......................................................... (143.7) (97.2) (77.5)
Timberland additions....................................................... (19.5) (20.2) (20.4)
Investments in affiliates and acquisitions................................. (3.7) (.1) (5.8)
Proceeds from property and timberland disposals and sale of businesses..... 4.4 24.5 1.8
--------- ------- -------
Net cash used for investing activities..................................... (162.5) (93.0) (101.9)
--------- ------- -------
Cash flows from financing activities
Capital contribution, net of related expenses.............................. 370.6 231.8
Borrowings under bank credit facilities.................................... 1,371.8 400.0
Borrowings under senior notes.............................................. 400.0 500.0
Net borrowings (repayments) under accounts receivable securitization
program.................................................................. 34.8 6.4 (8.8)
Other increases in long-term debt.......................................... 3.4 12.0 56.8
Payments of long-term debt and related premiums............................ (2,072.9) (479.2) (698.6)
Deferred debt issuance costs............................................... (76.9) (25.2) (40.4)
--------- ------- -------
Net cash provided by (used for) financing activities....................... 30.8 14.0 (59.2)
--------- ------- -------
Increase (decrease) in cash and cash equivalents................................ 17.6 (.8) (15.4)
Cash and cash equivalents
Beginning of year.......................................................... 44.2 45.0 60.4
--------- ------- -------
End of year................................................................ $ 61.8 $ 44.2 $ 45.0
--------- ------- -------
--------- ------- -------
</TABLE>
See notes to consolidated financial statements.
F-26
<PAGE>
JEFFERSON SMURFIT CORPORATION (U.S.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABULAR AMOUNTS IN MILLIONS)
1. BASIS OF PRESENTATION
Jefferson Smurfit Corporation (U.S.) hereafter referred to as the 'Company'
or 'JSC(U.S.)' is a wholly-owned subsidiary of JSCE, Inc. JSCE, Inc. is a
wholly-owned subsidiary of Jefferson Smurfit Corporation ('JSC'). On December
31, 1994, Jefferson Smurfit Corporation (U.S.), a wholly-owned subsidiary of
JSC, merged into its wholly-owned subsidiary, Container Corporation of America
('CCA'), with CCA surviving and changing its name to JSC(U.S.). Prior to May 4,
1994, 50% of the voting stock of JSC was owned by Smurfit Packaging Corporation
('SPC') and Smurfit Holdings B.V. ('SHBV'), indirect wholly-owned subsidiaries
of Jefferson Smurfit Group plc ('JS Group'), a public corporation organized
under the laws of the Republic of Ireland. The remaining 50% was owned by The
Morgan Stanley Leveraged Equity Fund II, L.P. ('MSLEF II') and certain other
investors.
In May 1994, JSC completed a recapitalization plan (the 'Recapitalization')
to repay and refinance a substantial portion of its indebtedness. In connection
with the Recapitalization, (i) JSC issued and sold 19,250,000 shares of common
stock pursuant to a registered public offering at an initial public offering
price of $13.00 per share, (ii) JS Group, through its wholly-owned subsidiary
Smurfit International B.V. ('SIBV'), purchased an additional 11,538,462 shares
of common stock for $150 million, and (iii) the Company issued and sold $300
million aggregate principal amount of unsecured 11.25% Series A Senior Notes due
2004 and $100 million aggregate principal amount of unsecured 10.75% Series B
Senior Notes due 2002 (the '1994 Senior Notes') pursuant to a registered public
offering. The proceeds from the equity and debt offerings, the sale of shares to
SIBV and $1,200 million of borrowings under a new bank credit facility (see Note
4) were used to refinance the Company's 1989 and 1992 term loans, the 1989
revolving credit facility, and the Company's senior secured notes and pay
related fees and expenses. Proceeds were also used to redeem the Company's
subordinated debentures and pay related premiums and accrued interest. Premiums
paid in connection with the debt payments, the write-off of related deferred
debt issuance costs, and losses on interest rate swap agreements totalling $51.6
million (net of income tax benefits of $31.6 million) are reflected in the
accompanying 1994 consolidated statement of operations as an extraordinary item.
Net proceeds from the shares issued totalled $370.6 million.
For financial accounting purposes, JSC's 1989 purchase of JSC(U.S.)'s
common equity owned by JS Group and the acquisition by JSC(U.S.) of its common
equity owned by MSLEF I Group were accounted for as purchases of treasury stock
and resulted in a deficit balance of $1,425.9 million in stockholder's equity in
the accompanying consolidated financial statements.
2. SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation: The consolidated financial statements include
the accounts of the Company and its majority-owned subsidiaries. Significant
intercompany accounts and transactions are eliminated in consolidation.
Cash Equivalents: The Company considers all highly liquid investments with
an original maturity of three months or less to be cash equivalents. At December
31, 1994 cash and cash equivalents of $62.4 million are maintained as collateral
for obligations under the accounts receivable securitization program (see Note
4).
Revenue Recognition: Revenue is recognized at the time products are
shipped.
Inventories: Inventories are valued at the lower of cost or market,
principally under the last-in, first-out ('LIFO') method except for $55.2
million in 1994 and $50.6 million in 1993 which are valued at the lower of
average cost or market. First-in, first-out costs (which approximate replacement
costs) exceed the LIFO value by $58.5 million and $44.7 million at December 31,
1994 and 1993, respectively.
F-27
<PAGE>
JEFFERSON SMURFIT CORPORATION (U.S.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(TABULAR AMOUNTS IN MILLIONS)
Property, Plant and Equipment: Property, plant and equipment are carried at
cost. Provisions for depreciation and amortization are made using straight-line
rates over the estimated useful lives of the related assets and the terms of the
applicable leases for leasehold improvements.
Effective January 1, 1993, the Company changed its estimate of the useful
lives of certain machinery and equipment. Based upon historical experience and
comparable industry practice, the depreciable lives of the papermill machines
that previously ranged from 16 to 20 years were increased to an average of 23
years, while major converting equipment and folding carton presses that
previously averaged 12 years were increased to an average of 20 years. These
changes were made to better reflect the estimated periods during which such
assets will remain in service. The change had the effect of reducing
depreciation expense by $17.8 million and decreasing net loss by $11.0 million,
in 1993.
Timberland: The portion of the costs of timberland attributed to standing
timber is charged against income as timber is cut, at rates determined annually,
based on the relationship of unamortized timber costs to the estimated volume of
recoverable timber. The costs of seedlings and reforestation of timberland are
capitalized.
Deferred Debt Issuance Costs: Deferred debt issuance costs are amortized
over the terms of the respective debt obligations using the interest method.
Goodwill: The excess of cost over the fair value assigned to the net assets
acquired is recorded as goodwill and is being amortized using the straight-line
method over 40 years.
Interest Rate Swap and Cap Agreements: The Company enters into interest
rate swap and cap agreements to reduce the impact of interest rate fluctuations.
Swap agreements involve the exchange of fixed and floating rate interest
payments without the exchange of the underlying principal amount. Cap agreements
provide that the Company will receive a certain amount when short term interest
rates exceed a threshold rate. Periodic amounts to be paid or received under
interest rate swap and cap agreements are accrued and recognized as adjustments
to interest expense. Premiums paid on cap agreements are included in interest
payable and amortized to interest expense over the life of the agreements.
Reclassifications: Certain reclassifications of prior year presentations
have been made to conform to the 1994 presentation.
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at December 31 consists of:
<TABLE>
<CAPTION>
1994 1993
-------- --------
<S> <C> <C>
Land............................................................................. $ 59.7 $ 60.2
Buildings and leasehold improvements............................................. 253.7 241.3
Machinery, fixtures and equipment................................................ 1,696.3 1,601.1
-------- --------
2,009.7 1,902.6
Less accumulated depreciation and amortization................................... 657.2 563.2
-------- --------
1,352.5 1,339.4
Construction in progress......................................................... 74.6 35.1
-------- --------
Net property, plant and equipment........................................... $1,427.1 $1,374.5
-------- --------
-------- --------
</TABLE>
F-28
<PAGE>
JEFFERSON SMURFIT CORPORATION (U.S.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(TABULAR AMOUNTS IN MILLIONS)
4. LONG-TERM DEBT
Long-term debt at December 31 consists of:
<TABLE>
<CAPTION>
1994 1993
----------------------- -----------------------
CURRENT CURRENT
MATURITIES LONG-TERM MATURITIES LONG-TERM
---------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Tranche A Term Loan..................................... $ 45.0 $ 855.0 $ $
Tranche B Term Loan..................................... 1.0 299.0
1992 term loan.......................................... 201.3
1989 term loan.......................................... 412.3
Revolving loans......................................... 43.0 196.5
Senior secured notes.................................... 270.5
Accounts receivable securitization program loans........ 217.2 182.3
1994 series A senior notes.............................. 300.0
1994 series B senior notes.............................. 100.0
1993 senior notes....................................... 500.0 500.0
Other................................................... 4.2 77.5 10.3 76.5
---------- --------- ---------- ---------
Total non-subordinated........................ 50.2 2,391.7 10.3 1,839.4
13.5% Senior subordinated notes......................... 350.0
14.0% Subordinated debentures........................... 300.0
15.5% Junior subordinated accrual debentures............ 129.7
---------- --------- ---------- ---------
Total subordinated............................ 779.7
---------- --------- ---------- ---------
$ 50.2 $2,391.7 $ 10.3 $2,619.1
---------- --------- ---------- ---------
---------- --------- ---------- ---------
</TABLE>
Aggregate annual maturities of long-term debt at December 31, 1994, for the
next five years are $50.2 million in 1995, $349.8 million in 1996, $158.8
million in 1997, $164.6 million in 1998 and $174.7 million in 1999.
1994 CREDIT AGREEMENT
In connection with the Recapitalization, the Company entered into a new
bank credit facility (the '1994 Credit Agreement') which consists of a $450
million revolving credit facility (the 'New Revolving Credit Facility') of which
up to $150 million may consist of letters of credit, a $900 million Tranche A
Term Loan and a $300 million Tranche B Term Loan. The New Revolving Credit
Facility matures in 2001. The Tranche A Term Loan matures in various
installments from 1995 to 2001. The Tranche B Term Loan matures in various
installments from 1995 to 2002.
Outstanding loans under the Tranche A Term Loan and the New Revolving
Credit Facility bear interest at rates selected at the option of the Company
equal to the alternate base rate ('ABR') plus 1.5% per annum or the adjusted
LIBOR Rate plus 2.5% per annum (8.77% at December 31, 1994). Interest on
outstanding loans under the Tranche B Term Loan is payable at a rate per annum
selected at the option of the Company, equal to the prime rate plus 2% per annum
or the adjusted LIBOR rate plus 3% per annum (8.56% at December 31, 1994). The
ABR rate is defined as the highest of Chemical Bank's prime lending rate, 1/2 of
1% in excess of the Federal Funds Rate or 1% in excess of the base certificate
of deposit rate.
A commitment fee of 1/2 of 1% per annum is assessed on the unused portion
of the New Revolving Credit Facility. At December 31, 1994, the unused portion
of this facility, after giving consideration to outstanding letters of credit,
was $303.2 million.
F-29
<PAGE>
JEFFERSON SMURFIT CORPORATION (U.S.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(TABULAR AMOUNTS IN MILLIONS)
The Tranche A and Tranche B Term Loans and the New Revolving Credit
Facility may be prepaid at any time, in whole or in part, at the option of the
Company. The 1994 Credit Agreement requires prepayments if the Company has
excess cash flows, as defined, or receives proceeds from: certain asset sales,
insurance, issuance of equity securities, or incurrence of certain indebtedness.
The obligations under the 1994 Credit Agreement are unconditionally
guaranteed by JSC, JSCE, Inc. and its subsidiaries and are secured by a security
interest in substantially all of the assets of JSC (U.S.) and its material
subsidiaries, with the exception of cash, cash equivalents and trade
receivables. The 1994 Credit Agreement is also secured by a pledge of all the
capital stock of each material subsidiary of JSC and by certain intercompany
notes.
The 1994 Credit Agreement contains various business and financial covenants
including, among other things, (i) limitations on dividends, redemptions and
repurchases of capital stock, (ii) limitations on the incurrence of
indebtedness, liens, leases, sale-leaseback transactions, (iii) limitations on
capital expenditures, (iv) maintenance of minimum levels of consolidated
earnings before depreciation, interest, taxes and amortization and (v)
maintenance of minimum interest coverage ratios.
1994 SENIOR NOTES
In connection with the Recapitalization, JSC(U.S.) issued and sold $300
million aggregate principal amount of unsecured 11.25% Series A Senior Notes due
2004 and $100 million aggregate principal amount of unsecured 10.75% Series B
Senior Notes due 2002. The Series A Senior Notes are redeemable in whole or in
part at the option of JSC(U.S.), at any time on or after May 1, 1999 with
premiums of 5.625% and 2.813% of the principal amount if redeemed during the
12-month periods commencing May 1, 1999 and 2000, respectively. In addition, up
to $100 million aggregate principal amount of Series A Senior Notes are
redeemable at 110% of the principal amount prior to May 1, 1997 in connection
with certain stock issuances. The Series B Senior Notes are not redeemable prior
to maturity.
The 1994 Senior Notes, which are unconditionally guaranteed on a senior
basis by JSCE, Inc., rank pari passu with the 1994 Credit Agreement and the 1993
Senior Notes. The 1994 Senior Notes agreements contain business and financial
covenants which are less restrictive than those contained in the 1994 Credit
Agreement.
Holders of the 1994 Senior Notes have the right, subject to certain
limitations, to require JSC (U.S.) to repurchase their securities at 101% of the
principal amount plus accrued and unpaid interest, upon the occurrence of a
change of control or in certain events from proceeds of major asset sales, as
defined.
ACCOUNTS RECEIVABLE SECURITIZATION PROGRAM LOANS
The $230.0 million accounts receivable securitization program
('Securitization Program') provides for the sale of certain of the Company's
trade receivables to a wholly-owned, bankruptcy remote, limited purpose
subsidiary, Jefferson Smurfit Finance Corporation ('JS Finance'), which finances
its purchases of the receivables, through borrowings from a limited purpose
finance company (the 'Issuer') unaffiliated with the Company. The Issuer, which
is restricted to making loans to JS Finance, issued $95 million in fixed rate
term notes, issued $13.8 million under a subordinated loan, and may issue up to
$121.2 million in trade receivables-backed commercial paper or obtain up to
$121.2 million under a revolving liquidity facility to fund loans to JS Finance.
At December 31, 1994, $12.0 million was available for additional borrowing.
Borrowings under the Securitization Program, which expires April 1996, have been
classified as long-term debt because of the Company's intent to refinance this
debt on a long-term basis and the availability of such financing under the terms
of the program.
F-30
<PAGE>
JEFFERSON SMURFIT CORPORATION (U.S.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(TABULAR AMOUNTS IN MILLIONS)
At December 31, 1994, all assets of JS Finance, principally cash and cash
equivalents of $62.4 million and trade receivables of $213.8 million, are
pledged as collateral for obligations of JS Finance to the Issuer. Interest
rates on borrowings under this program are at a fixed rate of 9.56% for $95.0
million of the borrowings and at a variable rate on the remainder (6.37% at
December 31, 1994).
1993 SENIOR NOTES
In April 1993, JSC(U.S.) issued $500.0 million of unsecured 9.75% Senior
Notes (the '1993 Senior Notes') due 2003 which are not redeemable prior to
maturity. The 1993 Senior Notes, which are unconditionally guaranteed on a
senior basis by JSCE, Inc., rank pari passu with the 1994 Credit Agreement and
the 1994 Senior Notes. The 1993 Senior Notes agreement contains business and
financial covenants which are substantially less restrictive than those
contained in the 1994 Credit Agreement and substantially similar to those
contained in the 1994 Senior Notes agreements.
Holders of the 1993 Senior Notes have the right, subject to certain
limitations, to require JSC (U.S.) to repurchase their securities at 101% of the
principal amount plus accrued and unpaid interest, upon the occurrence of a
change in control or in certain events, from proceeds of major asset sales, as
defined.
Net proceeds from the offering were used to partially repay amounts
outstanding under the 1989 and 1992 term loans and the 1989 revolving credit
facility. The write-off of related deferred debt issuance costs and losses on
interest rate swap agreements, totalling $37.8 million (net of income tax
benefits of $21.7 million), are reflected in the accompanying 1993 consolidated
statement of operations as an extraordinary item.
OTHER NON-SUBORDINATED DEBT
Other non-subordinated long-term debt at December 31, 1994, is payable in
varying installments through the year 2028. Interest rates on these obligations
averaged approximately 9.93% at December 31, 1994.
INTEREST RATE SWAP AND CAP AGREEMENTS
The Company utilizes interest rate swap and cap agreements to manage its
interest rate exposure on long-term debt. At December 31, 1994, the Company has
interest rate swap agreements with a notional amount of $282.5 million which
effectively fix (for remaining periods up to 3 years) the interest rate on
variable rate borrowings. The Company is currently paying a weighted average
fixed interest rate of 6.4% and receiving a weighted average variable interest
rate of 6.0%, calculated on the notional amount. The Company has a cap agreement
with a notional amount of $100.0 million on variable rate debt (through 1996)
which caps the Company's variable interest rates at 7.5% on the notional amount.
In addition, the Company has a cap agreement with a notional amount of $100.0
million (through 1996) on variable rate debt which limits the Company's interest
payments to a range of 5.5-7.0% on the notional amount. The Company is party to
interest rate swap agreements on fixed rate borrowings with a notional amount of
$500.0 million which effectively convert the fixed rate borrowings to variable
rate borrowings maturing at various dates through May 1995. The Company is
currently receiving a weighted average fixed interest rate of 4.6% and paying a
weighted average variable interest rate of 7.1%, calculated on the notional
amount.
The Company has interest rate swaps with a notional amount of $525 million
not associated with existing debt at December 31, 1994, due to previous debt
extinguishments, which are carried at fair market value with changes to the fair
value reflected in interest expense. The Company is currently paying a weighted
average fixed rate of 8.1% and receiving a weighted average variable rate of
5.4% on swaps with a notional amount of $250.0 million (for remaining periods up
to 1997). The Company is
F-31
<PAGE>
JEFFERSON SMURFIT CORPORATION (U.S.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(TABULAR AMOUNTS IN MILLIONS)
currently receiving a weighted average fixed rate of 7.3% and paying a weighted
average variable rate of 7.4% on swaps with a notional amount of $95 million
(through 1995). In addition, the Company has swap agreements with a notional
amount of $180 million (through 1996) whereby the Company is receiving a
weighted average variable rate of 5.2% and pays a weighted average variable rate
of 6.1%.
The Company is exposed to credit loss in the event of non-performance by
the other parties to the interest rate swap agreements. However, the Company
does not anticipate non-performance by the counter parties.
OTHER
Interest costs capitalized on construction projects in 1994, 1993 and 1992
totalled $3.9 million, $3.4 million and $4.2 million, respectively. Interest
payments on all debt instruments for 1994, 1993 and 1992 were $247.0 million,
$226.2 million and $257.6 million, respectively.
5. INCOME TAXES
Effective January 1, 1993, the Company changed its method of accounting for
income taxes from the deferred method to the liability method required by
Statement of Financial Accounting Standards ('SFAS') No. 109, 'Accounting for
Income Taxes.' Prior years' financial statements have not been restated.
The cumulative effect of adopting SFAS No. 109 as of January 1, 1993 was to
increase net income by $20.5 million. For 1993, application of SFAS No. 109
increased the pretax loss by $14.5 million because of increased depreciation
expense as a result of the requirement to report assets acquired in prior
business combinations at pretax amounts.
In adopting this new accounting principle, the Company (i) adjusted assets
acquired and liabilities assumed in prior business combinations from their
net-of-tax amounts to their pretax amounts and recognized the related deferred
tax assets and liabilities for those temporary differences, (ii) adjusted
deferred income tax assets and liabilities to statutory income tax rates and for
previously unrecognized tax benefits related to certain state net operating loss
carryforwards and, (iii) adjusted asset and liability accounts arising from
previous acquisitions and recapitalizations to recognize potential tax
liabilities related to those transactions. The net effect of these adjustments
on assets and liabilities was to increase inventory $23.0 million, increase
property, plant and equipment and timberlands $196.5 million, increase goodwill
$42.0 million, increase liabilities by $12.6 million, and increase deferred
income taxes by $228.4 million.
At December 31, 1994, the Company has net operating loss carryforwards for
federal income tax purposes of approximately $460.5 million (expiring in the
years 2005 through 2009), none of which are available for utilization against
alternative minimum taxes.
F-32
<PAGE>
JEFFERSON SMURFIT CORPORATION (U.S.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(TABULAR AMOUNTS IN MILLIONS)
Significant components of the Company's deferred tax assets and liabilities
at December 31 are as follows:
<TABLE>
<CAPTION>
1994 1993
------ ------
<S> <C> <C>
Deferred tax liabilities:
Depreciation and depletion............................................ $365.1 $354.5
Pensions.............................................................. 31.0 26.7
Other................................................................. 106.7 104.0
------ ------
Total deferred tax liabilities................................... 502.8 485.2
------ ------
Deferred tax assets:
Retiree medical....................................................... 49.6 44.6
Other employee benefit and insurance plans............................ 70.5 70.3
Restructuring and other charges....................................... 32.1 49.3
Net operating loss and tax credit carryforwards....................... 161.6 108.4
Other................................................................. 44.5 47.1
------ ------
Total deferred tax assets........................................ 358.3 319.7
Valuation allowance for deferred tax assets................................ (25.1) (24.8)
------ ------
Net deferred tax assets............................................... 333.2 294.9
------ ------
Net deferred tax liabilities.......................................... $169.6 $190.3
------ ------
------ ------
</TABLE>
Provisions for (benefit from) income taxes before extraordinary item and
cumulative effect of accounting changes were as follows:
<TABLE>
<CAPTION>
DEFERRED
LIABILITY METHOD METHOD
---------------------- --------
YEAR ENDED DECEMBER 31,
----------------------------------
1994 1993 1992
--------- --------- --------
<S> <C> <C> <C>
Current
Federal............................................................ $ 1.4 $ 28.1 $ (2.2)
State and local.................................................... 2.1 2.2 2.1
--------- --------- --------
3.5 30.3 (.1)
Deferred
Federal............................................................ 38.6 (53.5) 9.7
State and local.................................................... 3.8 6.0 .4
Benefits of net operating loss carryforwards....................... (29.5) (71.5)
--------- --------- --------
12.9 (119.0) 10.1
Adjustment of deferred tax assets and liabilities for enacted tax rate
change................................................................ 5.7
--------- --------- --------
$ 16.4 $ (83.0) $ 10.0
--------- --------- --------
--------- --------- --------
</TABLE>
The Company increased its deferred tax assets and liabilities in 1993 as a
result of legislation enacted during 1993 increasing the corporate federal
statutory tax rate from 34% to 35% effective January 1, 1993.
The federal income tax returns for 1989 through 1991 are currently under
examination. While the ultimate results of such examination cannot be predicted
with certainty, the Company's management believes that the examination will not
have a material adverse effect on its consolidated financial condition or
results of operations.
F-33
<PAGE>
JEFFERSON SMURFIT CORPORATION (U.S.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(TABULAR AMOUNTS IN MILLIONS)
The components of the provision for deferred taxes for the year ended
December 31, 1992 were as follows:
<TABLE>
<CAPTION>
1992
------
<S> <C>
Depreciation and depletion........................................................... $ 15.2
Alternative minimum tax.............................................................. 10.2
Tax loss carryforwards............................................................... (24.3)
Equity in affiliates................................................................. 6.8
Other employee benefits.............................................................. 2.7
Other, net........................................................................... (.5)
------
$ 10.1
------
------
</TABLE>
A reconciliation of the difference between the statutory Federal income tax
rate and the effective income tax rate as a percentage of income (loss) before
income taxes, extraordinary item, and cumulative effect of accounting changes is
as follows:
<TABLE>
<CAPTION>
DEFERRED
LIABILITY METHOD METHOD
---------------------- --------
YEAR ENDED DECEMBER 31,
----------------------------------
1994 1993 1992
--------- --------- --------
<S> <C> <C> <C>
U.S. Federal statutory rate.............................................. 35.0% (35.0%) (34.0%)
Adjustment of deferred tax assets and liabilities for enacted tax rate
change................................................................. 2.2
State and local taxes, net of Federal tax benefit........................ (4.8) (2.0) 6.6
Permanent differences from applying purchase accounting.................. 23.7 3.5 71.1
Effect of valuation allowances on deferred tax assets, net of Federal
benefit................................................................ 1.1 1.2
Other, net............................................................... 2.1 (2.1) (2.0)
--------- --------- --------
57.1% (32.2%) 41.7%
--------- --------- --------
--------- --------- --------
</TABLE>
The Company made income tax payments of $2.6 million, $33.0 million, and
$6.6 million in 1994, 1993, and 1992, respectively.
6. EMPLOYEE BENEFIT PLANS
PENSION PLANS
The Company sponsors noncontributory defined benefit pension plans covering
substantially all employees not covered by multi-employer plans. Plans that
cover salaried and management employees provide pension benefits that are based
on the employee's five highest consecutive calendar years' compensation during
the last ten years of service. Plans covering non-salaried employees generally
provide benefits of stated amounts for each year of service. These plans provide
reduced benefits for early retirement. The Company's funding policy is to make
minimum annual contributions required by applicable regulations. The Company
also participates in several multi-employer Pension Plans, which provide defined
benefits to certain union employees.
In order to minimize significant year-to-year fluctuations in pension cost
caused by financial market volatility, the Company changed, effective as of
January 1, 1993 the method of accounting used for determining the market-related
value of plan assets. The method changed from a fair market value to a
calculated value that recognizes all changes in a systematic manner over a
period of four years and eliminates the use of a corridor approach for
amortizing gains and losses. The effect of this change on 1993 results of
operations, including the cumulative effect of prior years, was not material.
F-34
<PAGE>
JEFFERSON SMURFIT CORPORATION (U.S.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(TABULAR AMOUNTS IN MILLIONS)
Assumptions used in the accounting for the defined benefit plans were:
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- -----
<S> <C> <C> <C>
Weighted average discount rates.................................................. 8.5% 7.6% 8.75%
Rates of increase in compensation levels......................................... 5.0% 4.0% 5.5 %
Expected long-term rate of return on assets...................................... 10.0% 10.0% 10.0 %
</TABLE>
The components of net pension income for the defined benefit plans and the
total contributions charged to pension expense for the multi-employer plans
follow:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1994 1993 1992
----- ------ ------
<S> <C> <C> <C>
Defined benefit plans:
Service cost-benefits earned during the period.......................... $14.3 $ 12.7 $ 12.1
Interest cost on projected benefit obligations.......................... 53.7 54.0 50.1
Actual return on plan assets............................................ (7.4) (91.1) (26.4)
Net amortization and deferral........................................... (71.3) 8.8 (54.6)
Multi-employer plans......................................................... 2.1 2.2 2.1
----- ------ ------
Net pension income................................................. $(8.6) $(13.4) $(16.7)
----- ------ ------
----- ------ ------
</TABLE>
The following table sets forth the funded status and amounts recognized in
the consolidated balance sheets at December 31 for the Company's and its
subsidiaries' defined benefit pension plans:
<TABLE>
<CAPTION>
1994 1993
------ ------
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligations...................................................... $631.7 $616.7
------ ------
------ ------
Accumulated benefit obligations................................................. $669.9 $664.3
------ ------
------ ------
Projected benefit obligations................................................... $699.6 $716.0
Plan assets at fair value............................................................ 739.8 778.1
------ ------
Plan assets in excess of projected benefit obligations............................... 40.2 62.1
Unrecognized net loss................................................................ 63.1 34.5
Unrecognized net asset at December 31, being recognized over 14 to 15 years.......... (25.2) (29.2)
------ ------
Net pension asset.................................................................... $ 78.1 $ 67.4
------ ------
------ ------
</TABLE>
Approximately 40% of plan assets at December 31, 1994 are invested in cash
equivalents or debt securities and 60% are invested in equity securities,
including common stock of JS Group having a market value of $117.2 million.
SAVINGS PLANS
The Company sponsors voluntary savings plans covering substantially all
salaried and certain hourly employees. The Company match, which is paid in JSC
stock, is fifty percent of each participant's contributions up to an annual
maximum. The Company's expense for the savings plans totalled $5.3 million, $5.3
million and $5.0 million in 1994, 1993 and 1992 respectively.
F-35
<PAGE>
JEFFERSON SMURFIT CORPORATION (U.S.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(TABULAR AMOUNTS IN MILLIONS)
POSTRETIREMENT HEALTH CARE AND LIFE INSURANCE BENEFITS
The Company provides certain health care and life insurance benefits for
all salaried and certain hourly employees. The Company has various plans under
which the cost may be borne either by the Company, the employee or partially by
each party. The Company does not currently fund these plans. These benefits are
discretionary and are not a commitment to long-term benefit payments. The plans
were amended effective January 1, 1993 to allow employees who retire on or after
January 1, 1994 to become eligible for these benefits only if they retire after
age 60 while working for the Company.
Effective January 1, 1993, the Company adopted SFAS No. 106, 'Employers'
Accounting for Postretirement Benefits Other Than Pensions', which requires
companies to accrue the expected cost of retiree benefit payments, other than
pensions, during employees' active service period. The Company elected to
immediately recognize the accumulated liability, measured as of January 1, 1993.
The cumulative effect of this change in accounting principle resulted in a
charge of $37.0 million (net of income tax benefits of $21.9 million). The
Company had previously recorded an obligation of $36.0 million in connection
with prior business combinations. In 1992, the cost of the postretirement
benefits of $6.4 million was recognized as claims were paid.
The following table sets forth the accumulated postretirement benefit
obligation ('APBO') with respect to these benefits as of December 31:
<TABLE>
<CAPTION>
1994 1993
----- -----
<S> <C> <C>
Retirees............................................................................... $52.6 $58.3
Active Employees....................................................................... 33.9 51.8
----- -----
Total accumulated postretirement benefit obligation.................................... 86.5 110.1
Unrecognized net gain (loss)........................................................... 12.9 (11.9)
----- -----
Accrued postretirement benefit cost.................................................... $99.4 $98.2
----- -----
----- -----
</TABLE>
Net periodic postretirement benefit cost included the following components:
<TABLE>
<CAPTION>
1994 1993
----- -----
<S> <C> <C>
Service cost of benefits earned........................................................ $ 1.5 $ 1.5
Interest cost on accumulated postretirement benefit obligation......................... 6.8 8.3
Net amortization....................................................................... (.6)
----- -----
Net periodic postretirement benefit cost............................................... $ 7.7 $ 9.8
----- -----
----- -----
</TABLE>
A weighted-average discount rate of 8.5% and 7.6% was used in determining
the APBO at December 31, 1994 and 1993, respectively. The weighted-average
annual assumed rate of increase in the per capita cost of covered benefits
('healthcare cost trend rate') was 10.5%, with an annual decline of 1% until the
rate reaches 5.5%. The effect of a 1% increase in the assumed healthcare cost
trend rate would increase both the APBO as o December 31, 1994 by $2.9 million
and the annual net periodic postretirement benefit cost for 1994 by $.3 million.
F-36
<PAGE>
JEFFERSON SMURFIT CORPORATION (U.S.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(TABULAR AMOUNTS IN MILLIONS)
7. RELATED PARTY TRANSACTIONS
TRANSACTIONS WITH JS GROUP
Transactions with JS Group, its subsidiaries and affiliates were as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1994 1993 1992
----- ----- -----
<S> <C> <C> <C>
Product sales............................................................... $36.5 $18.4 $22.8
Product and raw material purchases.......................................... 71.0 49.3 60.1
Management services income.................................................. 4.3 5.8 5.6
Charges from JS Group for services provided................................. .6 .4 .3
Charges from JS Group for letter of credit, commitment fees and related
expenses.................................................................. 2.8 2.9
Charges to JS Group for costs pertaining to the No. 2 paperboard machine.... 54.0 62.2 54.7
Receivables at December 31.................................................. 3.7 1.7 3.3
Payables at December 31..................................................... 10.9 11.6 10.2
</TABLE>
Product sales to and purchases from JS Group, its subsidiaries, and
affiliates are consummated on terms generally similar to those prevailing with
unrelated parties.
The Company provides certain subsidiaries and affiliates of JS Group with
general management and elective management services under separate Management
Services Agreements. In consideration for general management services, the
Company is paid a fee up to 2% of the subsidiary's or affiliate's gross sales.
In consideration for elective services, the Company is reimbursed for its direct
cost of providing such services.
In 1991, an affiliate of JS Group completed a rebuild of the No. 2
paperboard machine owned by the affiliate that is located in the Company's
Fernandina Beach, Florida paperboard mill (the 'Fernandina Mill'). Pursuant to
an operating agreement between the Company and the affiliate, the Company
operates and manages the No. 2 paperboard machine and is compensated for its
direct production and manufacturing costs and indirect manufacturing, selling
and administrative costs incurred by the Company for the entire Fernandina Mill.
The compensation is determined by applying various formulas and agreed upon
amounts to the subject costs. The amounts reimbursed to the Company are
reflected as reductions of cost of goods sold and selling and administrative
expenses in the accompanying consolidated statements of operations.
TRANSACTIONS WITH TIMES MIRROR
Under the terms of a long-term agreement, Smurfit Newsprint Corporation
('SNC'), a majority-owned subsidiary of the Company, supplies newsprint to Times
Mirror, a minority shareholder of SNC, at amounts which approximate prevailing
market prices. The obligations of the Company and Times Mirror to supply and
purchase newsprint are wholly or partially terminable upon the occurrence of
certain defined events. Sales to Times Mirror for 1994, 1993 and 1992 were
$113.0 million, $115.2 million and $114.0 million, respectively.
F-37
<PAGE>
JEFFERSON SMURFIT CORPORATION (U.S.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(TABULAR AMOUNTS IN MILLIONS)
TRANSACTIONS WITH MORGAN STANLEY & CO.
In connection with the Recapitalization, Morgan Stanley & Co., in its
capacity as underwriter of public equity and debt securities, received fees from
the Company of $15.5 million.
8. LEASES
The Company leases certain facilities and equipment for production, selling
and administrative purposes under operating leases. Future minimum lease
payments at December 31, 1994, required under operating leases that have initial
or remaining noncancelable lease terms in excess of one year are
$31.1 million in 1995, $21.5 million in 1996, $15.6 million in 1997, $10.9
million in 1998, $8.6 million in 1999 and $19.5 million thereafter.
Net rental expense was $45.5 million, $45.0 million, and $42.2 million for
1994, 1993 and 1992, respectively.
9. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------
1994 1993
------------------- -------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Assets
Cash and cash equivalents.......................................... $ 61.8 $ 61.8 $ 44.2 $ 44.2
Unrealized gain on interest rate swap agreements................... 3.7 5.5
Liabilities
Long-term debt, including current maturities....................... 2,441.9 2,401.7 2,629.4 2,686.4
Unrealized loss on interest rate swap agreements................... 7.7 12.2
Realized loss on interest rate swap agreements marked to market.... 4.1 4.1 12.0 12.0
</TABLE>
The carrying amount of cash equivalents approximates fair value because of
the short maturity of those instruments. The fair value of the Company's
long-term debt is estimated based on the quoted market prices for the same or
similar issues or on the current rates offered to the Company for debt of the
same remaining maturities. The fair value of the interest rate swap agreements
is the estimated amount the Company would pay or receive, net of accrued
interest expense, to terminate the agreements at December 31, 1994 and 1993,
taking into account current interest rates and the current credit worthiness of
the swap counterparties.
10. RESTRUCTURING CHARGE
During 1993, the Company recorded a pretax charge of $96.0 million to
recognize the effects of a restructuring program designed to improve the
Company's long-term competitive position of which $43 million related to the
write-down of assets at closed facilities and other nonproductive assets and $53
million represented cash expenditures. The charge included a provision for
direct expenses associated with plant closures, reductions in workforce,
realignment and consolidation of various manufacturing operations and
write-downs of nonproductive assets. The restructuring program is proceeding as
originally planned and no significant adjustment to the reserve is anticipated
at this time.
F-38
<PAGE>
JEFFERSON SMURFIT CORPORATION (U.S.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(TABULAR AMOUNTS IN MILLIONS)
11. CONTINGENCIES
The Company's past and present operations include activities which are
subject to federal, state and local environmental requirements, particularly
relating to air and water quality. The Company faces potential environmental
liability as a result of violations of permit terms and similar authorizations
that have occurred from time to time at its facilities.
The Company faces potential liability for response costs at various sites
with respect to which the Company has received notice that it may be a
'potentially responsible party' (PRP) as well as contamination of certain
Company-owned properties, under the Comprehensive Environmental Response,
Compensation and Liability Act concerning hazardous substance contamination. In
estimating its reserves for environmental remediation and future costs, the
Company's estimated liability reflects only the Company's expected share. In
determining the liability, the estimate takes into consideration the number of
other PRP's at each site, the identity and financial condition of such parties
and experience regarding similar matters. No amounts have been recorded for
potential recoveries from insurance carriers.
During 1993, the Company recorded a pretax charge of $54.0 million of which
$39.0 million represents asbestos and PCB removal, solid waste cleanup at
existing and former operating sites and expenses for response costs at various
sites where the Company has received notice that it is a potentially responsible
party.
The Company is a defendant in a number of lawsuits and claims arising out
of the conduct of its business, including those related to environmental
matters. While the ultimate results of such suits or other proceedings against
the Company cannot be predicted with certainty, the management of the Company
believes that the resolution of these matters will not have a material adverse
effect on its consolidated financial condition or results of operation.
12. BUSINESS SEGMENT INFORMATION
The Company's business segments are paperboard/packaging products and
newsprint. Substantially all the Company's operations are in the United States.
The Company's customers represent a diverse range of industries including
paperboard and paperboard packaging, consumer products, wholesale trade,
retailing, agri-business, and newspaper publishing located throughout the United
States. Credit is extended based on an evaluation of the customer's financial
condition. The paperboard/packaging products segment includes the manufacture
and distribution of containerboard, boxboard and cylinderboard, corrugated
containers, folding cartons, fibre partitions, spiral cores and tubes, labels
and
F-39
<PAGE>
JEFFERSON SMURFIT CORPORATION (U.S.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(TABULAR AMOUNTS IN MILLIONS)
flexible packaging. A summary by business segment of net sales, operating
profit, identifiable assets, capital expenditures and depreciation, depletion
and amortization follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------
1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
Net sales
Paperboard/packaging products................................... $2,973.7 $2,699.5 $2,751.0
Newsprint....................................................... 259.6 248.1 247.4
-------- -------- --------
$3,233.3 $2,947.6 $2,998.4
-------- -------- --------
-------- -------- --------
Operating profit (loss)
Paperboard/packaging products................................... $ 310.9 $ 16.5 $ 284.6
Newsprint....................................................... (16.5) (21.4) (10.3)
-------- -------- --------
Total operating profit (loss).............................. 294.4 (4.9) 274.3
Interest expense, net........................................... (265.7) (252.7) (298.3)
-------- -------- --------
Income (loss) before income taxes, extraordinary item, and
cumulative effect of accounting changes.................. $ 28.7 $ (257.6) $ (24.0)
-------- -------- --------
-------- -------- --------
Identifiable assets
Paperboard/packaging products................................... $2,256.2 $2,153.4 $1,960.6
Newsprint....................................................... 231.0 224.9 235.1
Corporate assets................................................ 271.8 218.8 240.7
-------- -------- --------
$2,759.0 $2,597.1 $2,436.4
-------- -------- --------
-------- -------- --------
Capital expenditures
Paperboard/packaging products................................... $ 146.0 $ 107.2 $ 91.6
Newsprint....................................................... 17.2 10.2 6.3
-------- -------- --------
$ 163.2 $ 117.4 $ 97.9
-------- -------- --------
-------- -------- --------
Depreciation, depletion and amortization
Paperboard/packaging products................................... $ 115.1 $ 115.2 $ 121.2
Newsprint....................................................... 16.5 15.6 13.7
-------- -------- --------
$ 131.6 $ 130.8 $ 134.9
-------- -------- --------
-------- -------- --------
</TABLE>
Sales and transfers between segments are not material. Export sales are
less than 10% of total sales. Corporate assets consist principally of cash and
cash equivalents, deferred income taxes, deferred debt issuance costs and other
assets which are not specific to a segment.
F-40
<PAGE>
JEFFERSON SMURFIT CORPORATION (U.S.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(TABULAR AMOUNTS IN MILLIONS)
13. QUARTERLY RESULTS (UNAUDITED)
The following is a summary of the unaudited quarterly results of
operations:
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
<S> <C> <C> <C> <C>
1994
Net sales............................................................. $727.7 $765.9 $858.4 $881.3
Gross profit.......................................................... 98.5 111.0 135.6 169.5
Income from operations................................................ 46.8 55.6 80.5 108.0
Income (loss) before extraordinary item............................... (11.8 ) (8.4 ) 5.8 26.7
Loss from early extinguishment of debt................................ (51.6 ) (3.8 )
Net income (loss)..................................................... (11.8 ) (60.0 ) 5.8 22.9
1993
Net sales............................................................. $735.9 $734.9 $745.7 $731.1
Gross profit.......................................................... 101.5 100.5 97.5 80.9
Income (loss) from operations(1)...................................... 41.2 41.1 (109.9 ) 18.8
Loss before extraordinary item and cumulative effect of accounting
changes............................................................. (15.5 ) (14.6 ) (116.7 ) (27.8 )
Loss from early extinguishment of debt................................ (37.8 )
Cumulative effect of changes in accounting principles
Postretirement benefits.......................................... (37.0 )
Income taxes..................................................... 20.5
Net loss.............................................................. (32.0 ) (52.4 ) (116.7 ) (27.8 )
</TABLE>
- ------------
(1) In the third quarter of 1993, the Company recorded a pretax charge of $96.0
million to recognize the effects of a restructuring program designed to
improve the Company's long-term competitive position and recorded a pretax
charge of $54.0 million relating primarily to environmental matters.
14. SUBSEQUENT EVENTS
On February 23, 1995, the Company entered into a $315.0 million accounts
receivable securitization program (the '1995 Securitization') consisting of a
$300.0 million trade receivables-backed commercial paper program and a $15.0
million term loan. The proceeds of the 1995 Securitization were used to
extinguish the Company's borrowing under the 1991 Securitization of $230.0
million.
F-41
<PAGE>
[Logo]
JEFFERSON SMURFIT CORPORATION (U.S.)
JSCE, INC.
<PAGE>
STATEMENT OF DIFFERENCES
The registration symbol shall be expressed as............. 'r'
