<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended December 31, 1999
or
[_] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _______________ to ______________
Commission file number 0-11951
JSCE, INC.
(Exact name of registrant as specified in its charter)
Delaware 37-1337160
(State of incorporation or organization) (I.R.S. Employer Identification)
150 North Michigan Avenue
Chicago, IL 60601
(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number: (312) 346-6600
------------------------------
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes ___ No X
---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
As of January 31, 2000, none of the registrant's voting stock was held by non-
affiliates.
The number of shares outstanding of the registrant's common stock as of January
31, 2000: 1,000
DOCUMENTS INCORPORATED BY REFERENCE: Part of Form 10-K
Into Which
Document is
Document Incorporated
-------- ------------
Sections of the Smurfit-Stone Container Corporation's
Proxy Statement to be filed on or before April 30, 2000
for the Annual Meeting of Stockholders to be held on
May 18, 2000 III
<PAGE>
JSCE, Inc.
Annual Report on Form 10-K
December 31, 1999
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C> <C>
PART I Page No.
Item 1. Business................................................................................ 2
Item 2. Properties.............................................................................. 6
Item 3. Legal Proceedings....................................................................... 7
Item 4. Submission of Matters to a Vote of Security Holders..................................... 8
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters................... 8
Item 6. Selected Financial Data................................................................. 9
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations...10
Item 7a. Quantitative and Qualitative Disclosures About Market Risk..............................17
Item 8. Financial Statements and Supplementary Data.............................................19
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure....45
PART III
Item 10. Directors and Executive Officers of the Registrant......................................45
Item 11. Executive Compensation..................................................................47
Item 12. Security Ownership of Certain Beneficial Owners and Management..........................47
Item 13. Certain Relationships and Related Transactions..........................................47
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.........................47
</TABLE>
FORWARD-LOOKING STATEMENTS
Except for the historical information contained in this Annual Report on Form
10-K, certain matters discussed herein, including (without limitation) under
Part 1, Item 1, "Business--Environmental Compliance", under Part I, Item 3,
"Legal Proceedings" and under Part II, Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations," contain forward-
looking statements, within the meaning of Section 21 E of the Securities
Exchange Act of 1934, as amended. Although JSCE, Inc. believes that, in making
any such statements, its expectations are based on reasonable assumptions, any
such statement may be influenced by factors that could cause actual outcomes and
results to be materially different from those projected. When used in this
document, the words "anticipates," "believes," "expects," "intends," and similar
expressions as they relate to JSCE, Inc. or its management are intended to
identify such forward-looking statements. These forward-looking statements are
subject to numerous risks and uncertainties. Important factors that could cause
actual results to differ materially from those in forward-looking statements,
certain of which are beyond the control of JSCE, Inc., include the impact of
general economic conditions in the U.S. and in other countries in which JSCE,
Inc. and its subsidiaries currently do business; industry conditions, including
competition and product and raw material prices; fluctuations in exchange rates
and currency values; capital expenditure requirements; legislative or regulatory
requirements, particularly concerning environmental matters; interest rates;
access to capital markets; the timing of and value received in connection with
asset divestitures; and obtaining required approvals, if any, of debt holders.
The actual results, performance or achievement by JSCE, Inc. could differ
materially from those expressed in, or implied by, these forward-looking
statements, and accordingly, no assurances can be given that any of the events
anticipated by the forward-looking statements will transpire or occur, or if any
of them do so, what impact they will have on the results of operations or
financial condition of JSCE, Inc.
1
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PART I
ITEM 1. BUSINESS
GENERAL
JSCE, Inc., a Delaware corporation (the "Company" or "JSCE"), is an integrated
producer of containerboard, corrugated containers and other packaging products.
JSCE conducts all of its business operations through its wholly-owned subsidiary
Jefferson Smurfit Corporation (U.S.) ("JSC(U.S.)"). JSC(U.S.) has extensive
operations throughout the United States. For the year ended December 31, 1999,
JSCE had net sales of $3,295 million and net income of $272 million.
JSCE is a wholly-owned subsidiary of Smurfit-Stone Container Corporation, a
Delaware corporation ("SSCC"). SSCC is a holding company with no business
operations of its own. SSCC conducts business operations through two wholly-
owned subsidiaries: JSCE and Stone Container Corporation, a Delaware corporation
("Stone"). SSCC acquired Stone through the November 18, 1998 merger of a
wholly-owned subsidiary of Jefferson Smurfit Corporation ("JSC"), now known as
SSCC, with and into Stone (the "Merger").
PRODUCTS
CONTAINERBOARD AND CORRUGATED CONTAINERS SEGMENT
The primary products of the Company's Containerboard and Corrugated Containers
segment include corrugated containers, containerboard and solid bleached sulfate
("SBS"). This segment includes four paper mills and 48 container plants located
in the United States. Sales for the Company's Containerboard and Corrugated
Container segment in 1999 were $1,774 million (including $40 million of
intersegment sales). Production for the Company's paper mills and sales volume
for the corrugated container facilities for the last three years were:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Tons produced (in thousands)
Containerboard............................................ 1,592 1,978 2,024
Solid bleached sulfate.................................... 189 185 190
Corrugated containers sold (in billion sq. ft.).............. 29.1 29.9 31.7
</TABLE>
The Company's containerboard mills produce a full line of containerboard, which
for 1999 included 985,000 tons of unbleached kraft linerboard, 324,000 tons of
mottled white linerboard and 283,000 tons of recycled medium. The Company's
containerboard mills and corrugated container operations are highly integrated,
with the majority of containerboard produced by the Company used internally by
its corrugated container operations. In 1999, the Company's container plants
consumed 1,930,000 tons of containerboard.
Corrugated containers 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 provides innovative packaging solutions, stressing the value-added
aspects of its corrugated containers, including labeling and multicolor graphics
to differentiate its products and respond to customer requirements. The
Company's container plants are located nationwide, serving local customers and
large national accounts.
The Company also produces SBS, a portion of which is consumed internally by the
Company's folding carton plants.
2
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BOXBOARD AND FOLDING CARTONS SEGMENT
The primary products of the Company's Boxboard and Folding Cartons segment
include coated recycled boxboard and folding cartons. Sales for the Company's
Boxboard and Folding Cartons segment in 1999 were $836 million.
Production of coated recycled boxboard in 1999, 1998 and 1997 by the Company's
boxboard mills was 581,000, 582,000 and 585,000 tons, respectively. The
Company's boxboard and folding carton operations are integrated, with the
majority of tons produced by the Company's boxboard mills used internally by its
folding carton operations. In 1999, the Company's folding carton plants consumed
637,000 tons of recycled boxboard, SBS and coated natural kraft, representing an
integration level of approximately 78%.
Folding cartons are sold to manufacturers of consumable goods, especially food,
beverage, detergents, paper products and other consumer products. The Company's
folding carton plants offer extensive converting capabilities, including web and
sheet lithographic, rotogravure and flexographic printing, laminating and a full
line of structural and graphic design services tailored to specific technical
requirements, as well as photography for packaging, sales promotion concepts,
and point of purchase displays. Folding cartons are used primarily to provide
point of purchase advertising while protecting customers' products. 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 accounts. The Company's folding carton plants are located nationwide.
Folding carton sales volumes for 1999, 1998 and 1997 were 582,000, 536,000 and
488,000 tons, respectively.
The Company has focused its capital expenditures and its marketing activities in
this segment to support a strategy of enhancing product quality as it relates to
packaging graphics, increasing flexibility while reducing customer lead time,
and assisting customers in innovative package designs.
RECLAMATION SEGMENT
The Company's reclamation operations procure fiber resources for the Company's
paper mills as well as other producers. The Company operates reclamation
facilities that collect, sort, grade and bale recovered paper. The Company also
collects aluminum and glass. In addition, the Company operates a nationwide
brokerage system whereby it purchases and resells recovered paper to the
Company's recycled paper mills and other producers on a regional and national
contract basis. Brokerage contracts provide bulk purchasing, resulting in lower
prices and cleaner recovered paper. Many of the reclamation facilities are
located close to the Company's recycled paper mills, ensuring availability of
supply with minimal shipping costs. Tons of recovered paper collected for 1999,
1998 and 1997 were 6,560,000, 5,155,000 and 4,832,000, respectively. The
Company's sales of recycled materials in 1999 were $563 million (including $126
million of intersegment sales).
OTHER PRODUCTS
Specialty Packaging
The Company produces a wide variety of specialty packaging products including
uncoated recycled boxboard, papertubes and cores, solid fiber partitions and
consumer packaging. Papertubes and cores are used primarily for paper, film and
foil, yarn carriers and other textile products and furniture components.
Flexible packaging, paper and metallized paper labels and heat transfer labels
are used in a wide range of consumer product applications. In addition, a
contract packaging plant provides custom contract packaging services, including
cartoning, bagging, liquid-filling or powder-filling and high-speed
overwrapping. 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. In 1999, the Company's sales of specialty packaging products were
$286 million (including $19 million of intersegment sales).
3
<PAGE>
Cladwood(R)
Cladwood(R) is a wood composite panel used by the housing industry, manufactured
from sawmill shavings and other wood residuals and overlaid with recycled
newsprint. Smurfit Newsprint Corporation, a wholly-owned subsidiary of JSC(U.S.)
("SNC"), has two Cladwood(R) plants located in Oregon. Sales for Cladwood(R) in
1999 were $21 million.
Newsprint
The Company is in the process of divesting the newsprint mills owned by SNC, and
accordingly its newsprint operations, located in Newberg and Oregon City, OR
have been accounted for as a discontinued operation. The Newberg mill was sold
in November 1999. The Company is in negotiations to transfer ownership of the
Oregon City mill and does not expect to realize any significant proceeds from
the transaction.
In 1999, SNC produced approximately 510,000 metric tons and sold $235 million of
newsprint. For the past three years, an average of approximately 42% of SNC's
newsprint production was sold to The Times Mirror Company pursuant to a long-
term newsprint agreement.
FIBER RESOURCES
- ---------------
Wood fiber and recycled fiber are the principal raw materials used in the
manufacture of the Company's paper products. The Company satisfies virtually all
of its need for wood fiber through purchases on the open market or under supply
agreements and essentially all of its need for recycled fiber through the
operation of its reclamation facilities and nationwide brokerage system.
Wood fiber and recycled fiber are purchased in highly competitive, price-
sensitive markets, which have historically exhibited price and demand
cyclicality. Conservation regulations have caused, and will likely continue to
cause, a decrease in the supply of wood fiber and higher wood fiber costs in
some of the regions in which the Company procures wood fiber. Fluctuations in
supply and demand for recycled fiber have from time to time caused tight
supplies of recycled fiber, and at those times the Company has experienced an
increase in the cost of such fiber. While the Company has not experienced any
significant difficulty in obtaining wood fiber and recycled fiber in proximity
to its mills, there can be no assurances that this will continue to be the case
for any or all of its mills.
In October 1999, the Company sold 820,000 acres of owned timberland and assigned
its rights to 160,000 acres of leased timberland in the southeastern United
States. As part of the sales agreement, JSC(U.S.) entered into a two-year
supply contract with the buyer to purchase 1.4 million tons of timber during
2000 and 2001 at prevailing market prices.
MARKETING
- ---------
The Company's marketing strategy is to sell a broad range of paper-based
packaging products to marketers of industrial and consumer products. In
managing the marketing activities of its paperboard mills, the Company seeks to
meet the quality and service needs of the customers of its package converting
plants at the most efficient cost, while balancing those needs against the
demands of its open market customers. The Company's converting plants focus on
supplying both specialized packaging with high value graphics that enhance a
product's market appeal and high volume sales of commodity products. The
Company seeks to serve a broad customer base for each of its segments and as a
result serves thousands of accounts from its plants. Each plant has its own
sales force, and many have product design engineers and other service
professionals who are in close contact with customers to respond to their
specific needs. The Company complements the local plants' marketing and service
capabilities with regional and national design and service capabilities, as well
as national sales offices 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.
4
<PAGE>
The Company's business is not dependent upon a single customer or upon a small
number of major customers. The Company does not believe that the loss of any one
customer would have a material adverse effect on the Company.
COMPETITION
- -----------
The markets in which the Company sells its principal products are highly
competitive and 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 have historically been sensitive to price fluctuations brought
about by shifts in industry capacity and other cyclical industry conditions.
Other competitive factors include design, quality and service, with varying
emphasis depending on product line.
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. Backlogs are not a significant factor in the
industry. 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 uses state-of-the-art technology
to assist all levels of the manufacturing and sales processes 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 more dependent on the
quality of its products and its relationships with its customers than on the
extent of its patent protection. The Company holds or is licensed to use certain
patents, licenses, trademarks and tradenames on products, but does not consider
that the successful continuation of any material aspect of its business is
dependent upon such patents.
EMPLOYEES
- ---------
The Company had approximately 14,400 employees at December 31, 1999, of whom
approximately 8,900 (62%) are represented by collective bargaining units. The
expiration dates of union contracts for the Company's major paper mill
facilities are as follows: the Brewton, AL mill, expiring in October 2002 and
the Fernandina Beach, FL mill, expiring in June 2003. 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
operations. While the terms of these agreements may vary, the Company believes
that the material terms of its collective bargaining agreements are customary
for the industry and the type of facility, the classification of the employees
and the geographic location covered thereby.
ENVIRONMENTAL COMPLIANCE
- ------------------------
The Company's operations are subject to extensive environmental regulation by
federal, state, and local authorities. The Company in the past has made
significant capital expenditures to comply with water, air, solid and hazardous
waste and other environmental laws and regulations and expects to make
significant expenditures in the future for environmental compliance. Because
various environmental standards are subject to change, it is difficult to
predict with certainty the amount of capital expenditures that will ultimately
be required to comply with future standards. In particular, the United States
Environmental
5
<PAGE>
Protection Agency ("EPA") has finalized significant parts of its comprehensive
rule governing the pulp, paper and paperboard industry (the "Cluster Rule"),
which will require substantial expenditures to achieve compliance. The Company
estimates, based on engineering studies done to date, that compliance with these
portions of the Cluster Rule could require up to $130 million in capital
expenditures over the next several years. The ultimate cost of complying with
the regulations cannot be predicted with certainty until further engineering
studies are completed and additional regulations are finalized.
In addition to Cluster Rule compliance, the Company also anticipates additional
capital expenditures related to environmental compliance. For the past three
years, the Company has spent an average of approximately $17 million annually on
capital expenditures for environmental purposes. The anticipated spending for
such capital projects for fiscal 2000 is approximately $70 million. A
significant amount of the increased expenditures in 2000 will be due to
compliance with the Cluster Rule and is included in the estimate of up to $130
million referenced above. Since the Company's competitors are, or will be,
subject to comparable environmental standards, including the Cluster Rule,
management is of the opinion, based on current information, that compliance with
environmental standards will not adversely affect the Company's competitive
position.
ITEM 2. PROPERTIES
The Company maintains manufacturing facilities and sales offices throughout
North America. The Company's facilities are properly maintained and equipped
with machinery suitable for their use. The Company's manufacturing facilities,
excluding the discontinued newsprint operations, as of December 31, 1999 are
summarized below.
<TABLE>
<CAPTION>
Number of Facilities
------------------------------- State
Total Owned Leased Locations
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Paper mills....................................... 12 12 9
Corrugated container plants....................... 48 36 12 21
Folding carton plants............................. 20 16 4 10
Specialty packaging plants........................ 29 10 19 16
Reclamation plants................................ 26 17 9 15
Wood products plants.............................. 1 1 1
Cladwood(R)....................................... 2 2 1
--- --- ---
Total............................................. 138 94 44 30
</TABLE>
Approximately 58% of the Company's investment in property, plant and equipment
is represented by its paper mills.
The approximate annual tons of productive capacity of the Company's paper
mills, including the proportionate share of its affiliate's productive capacity,
at December 31, 1999 were:
Annual Capacity
---------------
(000 tons)
Containerboard.......................................... 1,612
Solid bleached sulfate.................................. 192
Recycled boxboard....................................... 779
-----
Total................................................... 2,583
6
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ITEM 3. LEGAL PROCEEDINGS
LITIGATION
Subsequent to an understanding reached in December 1998, the Company and SNC
entered into a Settlement Agreement in January 1999 to implement a nationwide
class action settlement of claims involving Cladwood(R), a composite wood siding
product manufactured by SNC that has been used primarily in the construction of
manufactured or mobile homes. The class action claimants alleged that
Cladwood(R) siding on their homes prematurely failed. The settlement was reached
in connection with a class action pending in King County, WA and also resolved
all other pending class actions. Pursuant to the settlement, SNC paid $20
million into a settlement fund, plus up to approximately $6.5 million of
administrative costs, plaintiffs' attorneys' fees, and class representative
payments. The Company has established reserves that it believes will be adequate
to pay eligible claims; however, the number of claims, and the number of
potential claimants who choose not to participate in the settlement, could cause
the Company to re-evaluate whether the liabilities in connection with the
Cladwood(R) cases could exceed established reserves.
In 1998, seven putative class action complaints were filed in the United States
District Court for the Northern District of Illinois and the United States
District Court for the Eastern District of Pennsylvania alleging that Stone
reached agreements in restraint of trade that affected the manufacture, sale and
pricing of corrugated products in violation of antitrust laws. The complaints
have been amended to name several other defendants, including JSC(U.S.) and
SSCC. The suits seek an unspecified amount of damages arising out of the sale
of corrugated products for the period from October 1,1993 through March 31,
1995. Under the provisions of the applicable statutes, any award of actual
damages could be trebled. The Federal Multidistrict Litigation Panel has
ordered all of the complaints to be transferred to and consolidated in the
United States District Court for the Eastern District of Pennsylvania. Stone,
JSC(U.S.) and SSCC believe they have meritorious defenses and intend to
vigorously defend these cases.
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 operations.
ENVIRONMENTAL MATTERS
In March 1999, management of SNC's Oregon City, OR newsprint mill became aware
of possible alterations by one of its employees of data utilized in determining
compliance with the mill's National Pollutant Discharge Elimination System
("NPDES") permit. SNC conducted a thorough internal investigation of this
matter and, based on this investigation, concluded that such alterations did
occur and that as a result, the mill may have violated its NPDES permit limits
on suspended solids on several occasions. SNC provided both the EPA and the
Oregon Department of Environmental Quality with a detailed report of its
investigation and the agencies are conducting an additional investigation based
on this report. SNC is fully cooperating with the investigation. SNC is unable
to predict the potential consequences of this matter.
Federal, state and local environmental requirements are a significant factor in
the Company's business. The Company employs processes in the manufacture of
paperboard and other products which result in various discharges, emissions, and
wastes and which are subject to numerous federal, state and local environmental
laws and regulations, including reporting and disclosure obligations. The
Company operates and expects to operate under permits and similar authorizations
from various governmental authorities that regulate such discharges, emissions,
and wastes.
7
<PAGE>
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 lawfulness 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 response action may be required and as a result may have joint and several
liability for cleanup costs at such sites. However, liability for CERCLA sites
is typically shared with other PRPs and costs are commonly allocated according
to relative amounts of waste deposited. The Company's relative percentage of
waste deposited at a majority of these sites is quite small. In addition to
participating in remediation of sites owned by third parties, the Company has
entered into consent orders for investigation and/or remediation of certain
Company-owned properties.
Based on current information, the Company believes that the probable costs of
the potential environmental enforcement matters discussed above, response costs
under CERCLA and similar state laws, and remediation of owned property will not
have a material adverse effect on the Company's financial condition or results
of operations. The Company believes that its liability for these matters was
adequately reserved at December 31, 1999.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders of the registrant during
the fourth quarter of 1999.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
The Company is a wholly-owned subsidiary of SSCC, and therefore, all of the
outstanding common stock of the Company ("JSCE Common Stock") is owned by SSCC.
As a result, there is no established public market for the JSCE Common Stock.
DIVIDENDS
The Company has not paid cash dividends on its common stock. The ability of the
Company to pay dividends in the future is restricted by certain provisions
contained in the JSC(U.S.) Credit Agreement (as defined) and the indentures
relating to the outstanding indebtedness of JSC(U.S.), which the Company
guarantees.
8
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
(In millions, except statistical data)
- -------------------------------------------------------------------------------------------------------------
1999(a) 1998(b) 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Summary of Operations(c)
Net sales............................................... $ 3,295 $ 3,043 $ 2,957 $ 3,109 $ 3,704
Income (loss) from operations........................... 226 (78) 176 333 598
Income (loss) from continuing operations before
extraordinary item and cumulative effect of
accounting change..................................... 276 (171) (19) 80 227
Discontinued operations, net of income tax provision.... 6 27 20 37 20
Net income (loss)....................................... 272 (160) 1 112 243
- -------------------------------------------------------------------------------------------------------------
Other Financial Data
Net cash provided by operating activities............... $ 103 $ 117 $ 88 $ 380 $ 393
Net cash provided by (used for) investing activities.... 829 (595) (175) (133) (160)
Net cash provided by (used for) financing activities.... (939) 484 87 (262) (268)
Depreciation, depletion and amortization................ 134 134 127 125 122
Capital investments and acquisitions.................... 69 265 191 129 170
Working capital......................................... 41 145 71 34 51
Property, plant, equipment and timberland, net.......... 1,309 1,760 1,788 1,720 1,709
Total assets............................................ 2,736 3,174 2,771 2,688 2,783
Long-term debt.......................................... 1,636 2,570 2,040 1,944 2,192
Stockholder's deficit................................... (235) (538) (374) (375) (487)
- -------------------------------------------------------------------------------------------------------------
Statistical Data (tons in thousands)
Containerboard and SBS production (tons)................ 1,781 2,163 2,214 2,250 2,176
Recycled boxboard production (tons)..................... 746 757 758 713 714
Corrugated shipments (billion sq. ft.).................. 29.1 29.9 31.7 30.0 29.4
Folding carton shipments (tons)......................... 582 536 488 474 476
Fiber reclaimed and brokered (tons)..................... 6,560 5,155 4,832 4,464 4,293
Number of employees..................................... 14,400 15,000 15,800 15,800 16,200
</TABLE>
(a) The Company recorded a pretax gain of $407 million on the sale of its
timberlands in 1999.
(b) The Company recorded pretax charges of $310 million ($187 million after
tax) in the fourth quarter of 1998, including $257 million of restructuring
charges in connection with the Merger, $30 million for settlement of its
Cladwood(R) litigation and $23 million of Merger-related costs.
(c) SNC's newsprint operations are presented as a discontinued operation for
all periods.
9
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
Market conditions and demand for containerboard and corrugated containers, the
Company's primary products, have historically been 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.
Market conditions were generally weak from 1996 to 1998 due primarily to excess
capacity within the industry. Linerboard prices, which peaked in 1995 at
approximately $535 per ton, declined dramatically thereafter, reaching a low of
$310 per ton in April 1997. Corrugated container prices followed this same
pricing trend during the period with somewhat less fluctuation. Prices remained
at reduced levels through the end of 1998.
During the second half of 1998, the containerboard industry took extensive
economic downtime, resulting in a significant reduction in inventory levels. In
addition, several paper companies, including the Company, permanently shut down
paper mill operations approximating 6% of industry capacity. The balance between
supply and demand for containerboard improved as a result of the shutdowns, and
inventories remained low throughout 1999. Corrugated container shipments for the
industry were strong in 1999, increasing approximately 2% compared to 1998.
Based on these developments, the Company was able to implement two price
increases during 1999, totaling $90 per ton for linerboard, bringing the price
at the end of 1999 to $430 per ton. In addition, the Company implemented a $50
per ton price increase in February 2000 for linerboard.
Market conditions in the folding carton and boxboard mill industry, which were
weak in 1998, began to strengthen in the second half of 1999. Demand for
recycled boxboard and SBS improved gradually and the Company was able to
implement price increases in the fourth quarter of 1999. On average, prices
were lower in 1999 as compared to 1998. Shipments of folding cartons for the
industry increased 2% compared to 1998 and mill operating rates were higher.
Wood fiber and recycled fiber are the principal raw materials used in the
manufacture of the Company's products. Fiber supplies can vary widely at times
and are highly dependent upon the demand of paper mills. Wood fiber and
reclaimed fiber prices declined in 1998 due primarily to the lower demand
brought about by extensive economic downtime taken by the containerboard
industry in 1998. The price of old corrugated containers ("OCC"), the principal
grade used in recycled containerboard mills, declined in 1998 to its lowest
level in five years. The Company's average wood fiber cost in 1999 declined
approximately 6% compared to 1998 due primarily to the number of permanent mill
closures in those areas where the Company competes for wood. Recycled fiber
prices increased approximately 11% compared to 1998, primarily as a result of
stronger export demand.
RESTRUCTURING AND MERGER
As previously discussed, a wholly-owned subsidiary of SSCC merged with Stone on
November 18, 1998. In connection with the Merger, SSCC restructured its
operations. The restructuring included the shutdown of approximately 1.1 million
tons, or 15%, of SSCC's North American containerboard mill capacity and
approximately 400,000 tons of SSCC's market pulp capacity. During the fourth
quarter of 1998, the Company recorded a pretax charge of $257 million for
restructuring costs related to the permanent shutdown on December 1, 1998 of
certain JSC(U.S.) mill operations and related facilities in connection with the
Merger. Three JSC(U.S.) containerboard mills with capacity of approximately
700,000 tons were closed. The restructuring charge of $257 million included
provisions for costs for JSC(U.S) associated with (1) adjustment of property,
plant and equipment of closed facilities to fair value less costs to sell of
$179 million, (2) facility closure costs of $42 million, (3) severance related
costs of $27 million and (4) other Merger-related costs of $9 million. As part
of the Company's continuing evaluation of all areas of its
10
<PAGE>
business in connection with its Merger integration, the Company recorded a $9
million restructuring charge in 1999 related to the permanent shutdown of eight
additional JSC(U.S.) facilities. The 1999 restructuring charge included
restructuring expense of $14 million related to the closures and a reduction in
the 1998 exit liabilities of $5 million.
The exit liabilities remaining for the Company as of December 31, 1999 consisted
of approximately $29 million of anticipated cash expenditures. Since the
Merger, through December 31, 1999, approximately $42 million (59%) of the cash
expenditures were incurred, the majority of which related to severance and
facility closure cost. Future cash outlays for restructuring are anticipated to
be $9 million in 2000, $4 million in 2001 and $16 million thereafter. The
remaining cash expenditures will continue to be funded through operations as
originally planned. Additional restructuring charges are expected in 2000 as
management finalizes its plans.
RESULTS OF OPERATIONS
- ---------------------
Segment Data
<TABLE>
<CAPTION>
(In millions) 1999 1998 1997
----------------------- ----------------------- -----------------------
Net Profit/ Net Profit/ Net Profit/
Sales (Loss) Sales (Loss) Sales (Loss)
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Containerboard and corrugated containers........ $1,734 $ 177 $1,696 $ 113 $1,607 $ 56
Boxboard and folding cartons.................... 836 62 784 67 752 68
Reclamation..................................... 437 13 265 (1) 292 6
Other operations................................ 288 29 298 33 306 33
------ ----- ------ ----- ------ -----
Total operations................................ $3,295 281 $3,043 212 $2,957 163
====== ====== ======
Restructuring charge............................ (9) (257)
Interest expense, net........................... (175) (196) (196)
Other, net...................................... 365 (38) 11
----- ----- -----
Income (loss) from continuing operations
before income taxes, extraordinary item $ 462 $(279) $ (22)
and cumulative effect of accounting change..... ===== ===== =====
</TABLE>
Other, net includes, among other things, corporate expenses and gains or losses
on asset sales.
1999 COMPARED TO 1998
- ---------------------
Net sales of $3,295 million for 1999 were higher than 1998 by 8% due primarily
to higher sales volumes and improvements in sales prices. Operating profits of
$281 million for 1999 were $69 million higher than 1998 due primarily to the
higher sales prices. Other, net in 1999 improved $403 million compared to 1998
due primarily to gain on sale of assets in 1999. Income from continuing
operations before income taxes, extraordinary item and cumulative effect of
accounting change was $462 million in 1999 as compared to a loss of $279 million
in 1998. The increases (decreases) in net sales for each of the Company's
segments are shown in the chart below.
<TABLE>
<CAPTION>
(In millions) 1999 Compared to 1998
------------------------------------------------------------------------------------------
Containerboard Boxboard
& Corrugated & Folding Other
Containers Cartons Reclamation Operations Total
-------------------- ---------------- ----------------- ----------------- -----------
<S> <C> <C> <C> <C> <C>
Increase (decrease) due to:
Sales prices and product mix.... $ 83 $(9) $ 38 $ 1 $ 113
Sales volume.................... 35 61 152 (11) 237
1998 acquisition................ 26 26
Sold or closed facilities....... (106) (18) (124)
----- --- ---- ---- -----
Net increase (decrease)........... $ 38 $52 $172 $(10) $ 252
===== === ==== ==== =====
</TABLE>
11
<PAGE>
Containerboard and Corrugated Containers Segment
Net sales of $1,734 million for 1999 increased by 2% compared to 1998. The
benefit from the improvement in sales prices was partially offset by plant
closures resulting from the Merger. Profits improved by $64 million compared to
1998 to $177 million in 1999 due primarily to the higher sales prices and the
effects of the Merger. The Company was able to implement two price increases for
containerboard in 1999, totaling $90 per ton for linerboard and $130 per ton for
medium. On average, linerboard and corrugated container prices increased 8% and
9%, respectively, compared to 1998. The increase in corrugated prices reflects
the price increases implemented and the Company's strategy to rationalize
customer mix. SBS prices were lower than 1998 by 3%.
Containerboard production of 1,592,000 tons in 1999 declined as compared to 1998
due primarily to the permanent shutdown of three JSC(U.S.) containerboard mills.
Production for 1999 was favorably impacted by the acquisition of a
containerboard machine from Jefferson Smurfit Group plc ("JS Group") in November
1998 (the "Fernandina No. 2 Paper Machine"). SBS shipments were higher than 1998
by 2%. Corrugated container sales volume declined compared to 1998 by 4% due
primarily to plant closures and the rationalization of customer mix. Cost of
goods sold as a percent of net sales decreased from 85% in 1998 to 81% in 1999
due primarily to higher sales prices, plant shutdowns and cost saving
initiatives undertaken in connection with the Merger.
Boxboard and Folding Cartons Segment
Net sales for 1999 increased by 7% compared to 1998 while profits decreased by
$5 million to $62 million. The sales increase was due primarily to higher sales
volume of folding cartons, which increased by 9% compared to 1998. Boxboard
shipments increased by 1% compared to 1998. On average, boxboard prices were
lower than 1998 by 9% and folding carton prices were comparable to 1998. Cost of
goods sold as a percent of net sales increased from 83% in 1998 to 84% in 1999
due primarily to the effect of lower sales prices and higher reclaimed fiber
costs.
Reclamation Segment
Net sales for 1999 increased 65% compared to 1998 due primarily to higher sales
volume resulting from the Merger and higher sales prices. Compared to 1998,
the average price of OCC increased approximately 11% and the total tons of fiber
reclaimed and brokered increased 27% due to the additional fiber requirements
resulting from the Merger. Profits increased $14 million compared to 1998 due
primarily to higher sales prices. Cost of goods sold as a percent of net sales
for 1999 was comparable to 1998.
Other Operations
Other operations include specialty packaging and Cladwood(R) operations. Net
sales and profits in 1999 were comparable to 1998.
Costs and Expenses
Cost of goods sold for 1999 in the Company's Consolidated Statements of
Operations increased compared to 1998 due primarily to costs associated with the
increase in sales of the reclamation segment, the addition of the Fernandina No.
2 Paper Machine and higher LIFO expense. Cost of goods sold in 1999 was
favorably impacted by the plant closures in 1998. The Company's overall cost of
goods sold as a percent of net sales in 1999 was comparable to 1998.
Selling and administrative expenses as a percent of net sales decreased from 11%
in 1998 to 9% in 1999. Selling and administrative expenses for 1999 included
expense of $26 million related to the cashless exercise of SSCC stock options
under the Jefferson Smurfit Corporation stock option plan. In 1998, the Company
expensed $30 million for the class action settlement of certain litigation and
$23 million of other Merger-related cost.
Interest expense, net in 1999 declined compared to 1998. Interest expense, net
includes interest income, which consists primarily of interest earned on the
Company's intercompany loan made to SSCC in November 1998 in connection with the
Merger. Interest income was $52 million for 1999 compared to $6
12
<PAGE>
million in 1998. While the Company's average debt level for 1999 was higher
compared to 1998 due primarily to borrowings related to the Merger, the higher
level of interest income more than offset the increase in interest expense. The
Company's overall average effective interest rate in 1999 was comparable to
1998.
Other, net in the Company's Consolidated Statements of Operations for 1999
included a gain on the sale of the Company's timberlands of $407 million.
The Company recorded income tax expense of $186 million in 1999. The effective
rate for the period differed from the federal statutory tax rate due to several
factors, the most significant of which was state income taxes. At December 31,
1999, the Company had approximately $95 million of net operating loss
carryforwards for U.S. federal income tax purposes that expire in 2018, with a
tax value of $33 million. At December 31, 1999, the Company had approximately
$43 million of net operating loss carryforwards for state purposes that expire
in the years 2000 through 2019. A valuation allowance of $10 million has been
established for a portion of these deferred tax assets. For information
concerning income taxes as well as information regarding the differences between
effective tax rates and statutory rates, see Note 7 of the Notes to Consolidated
Financial Statements.
Discontinued Operations
In February 1999, the Company adopted a formal plan to sell the operating assets
of its subsidiary, SNC. The Company subsequently decided to continue to operate
its Cladwood(R) business. Accordingly, SNC's newsprint results are accounted
for as a discontinued operation for all periods presented in the Company's
Consolidated Statements of Operations. In November 1999, the Company sold its
Newberg, OR newsprint mill for approximately $211 million (see "Liquidity and
Capital Resources"). The Company is in negotiations to transfer ownership of
the Oregon City mill and does not expect to realize any significant proceeds
from the transaction. Transfer of the Oregon City mill will complete the
Company's disposition of its newsprint business.
The 1999 results for the discontinued operations included the realized gain on
the sale of the Newberg mill, an expected loss on the transfer of the Oregon
City mill, the actual results from the measurement date through December 31,
1999 and the estimated losses on the Oregon City mill through the expected
disposition date.
1998 COMPARED TO 1997
- ---------------------
Net sales of $3,043 million and operating profits of $212 million were higher
than 1997 by 3% and 30%, respectively, due primarily to higher sales prices. The
increases (decreases) in net sales for each of the Company's segments are shown
in the chart below.
<TABLE>
<CAPTION>
(In millions) 1998 Compared to 1997
----------------------------------------------------------------------------------------
Containerboard Boxboard
& Corrugated & Folding Other
Containers Cartons Reclamation Operations Total
-------------------- ---------------- ----------------- --------------- -----------
<S> <C> <C> <C> <C> <C>
Increase (decrease) due to:
Sales prices and product mix..... $146 $(13) $(59) $ 11 $ 85
Sales volume..................... (63) 45 34 (12) 4
Acquisition...................... 9 9
Sold or closed facilities........ (3) (2) (7) (12)
---- ---- ---- ---- ----
Net increase (decrease)............ $ 89 $ 32 $(27) $ (8) $ 86
==== ==== ==== ==== ====
</TABLE>
Containerboard and Corrugated Containers Segment
Net sales of the Containerboard and Corrugated Containers segment increased 6%
compared to 1997 to $1,696 million and segment profits increased $57 million
compared to 1997 to $113 million. The increases in net sales and profits were
primarily the result of increased sales prices.
13
<PAGE>
Containerboard and corrugated container prices were higher in 1998 by 16% and
11%, respectively, compared to 1997. SBS prices declined 2% during the period.
Containerboard sales volume in 1998 declined 2% compared to 1997 due primarily
to the closure of three containerboard mills, effective December 1, 1998 and
higher levels of economic downtime. The Company also had 28 days of downtime in
1997 at its Brewton, AL mill associated with a rebuild and upgrade of its
mottled white paper machine. Sales volume for corrugated containers declined 6%
compared to 1997 due in part to the Company's strategy to rationalize customer
mix. Cost of goods sold as a percent of net sales decreased from 88% in 1997 to
85% in 1998 due primarily to the higher sales prices in 1998.
Boxboard and Folding Cartons Segment
Net sales of the Boxboard and Folding Cartons segment increased 4% compared to
1997 to $784 million and segment profits declined $1 million compared to 1997 to
$67 million. The increase in net sales was due primarily to increased sales
volume of folding cartons. Folding carton sales volume increased 10% compared to
1997, reflecting growth in new business acquired near the end of 1997. Sales
volume for the boxboard mills declined 1% compared to 1997. Boxboard prices were
higher in 1998 on average, increasing 3% compared to 1997. Folding carton prices
declined 3%, reflecting the change in product mix related to the new business
acquired. Cost of goods sold as a percent of net sales for 1998 was comparable
to 1997.
Reclamation Segment
Net sales of the Reclamation segment declined 9% compared to 1997 to $265
million and segment profit decreased $7 million compared to 1997 to a loss of $1
million. The decreases were due to lower prices. On average, sales prices for
reclaimed fiber were 16% lower in 1998 compared to 1997. The decline in price
was due to the reduced demand for fiber. In spite of the downturn in domestic
demand, the Company was able to increase overall sales volume nearly 7% over
1997 by increasing foreign sales and supply positions with major domestic
customers. Cost of goods sold as a percent of net sales increased from 87% in
1997 to 89% in 1998 due to the lower sales prices in 1998.
Costs and expenses
Cost of goods sold as a percent of net sales declined from 86% in 1997 to 84% in
1998 due primarily to the effects of the Merger and lower LIFO expense. Selling
and administrative expenses as a percent of net sales increased from 8% in 1997
to 11% in 1998. Selling and administrative expenses in 1998 included a $30
million pretax charge for the class action settlement of certain litigation and
$23 million of Merger-related costs.
Subsequent to an understanding reached in December 1998, the Company and SNC
entered into a Settlement Agreement in January 1999 to implement a nationwide
class action settlement of claims involving Cladwood(R). The Company recorded a
$30 million pretax charge in 1998 for amounts SNC agreed to pay into a
settlement fund for administrative costs, plaintiffs' attorneys' fees, class
representative payments and other costs. The Company believes its reserve is
adequate to pay eligible claims. However, the number of claims, and the number
of potential claimants who choose not to participate in the settlement, could
cause the Company to re-evaluate whether the liabilities in connection with the
Cladwood(R) cases could exceed established reserves (see Item 3. "Legal
Proceedings").
Interest expense, net for 1998 was $196 million, the same as for 1997. The
average effective interest rate for the Company's outstanding debt was lower in
1998, offsetting the impact of higher average debt levels outstanding.
The Company recorded an income tax benefit of $108 million in 1998. The
effective tax rate for the period differed from the federal statutory tax rate
due to several factors, the most significant of which was state income taxes.
14
<PAGE>
Discontinued Operations
As explained above, SNC's newsprint results are reflected as discontinued
operations for all periods presented in the Company's Consolidated Statements of
Operations. The Company had income from discontinued operations, net of tax, for
1998 of $27 million compared to $20 million in 1997. Net sales for discontinued
operations amounted to $303 million and $281 million for 1998 and 1997,
respectively.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
General
In 1999, proceeds from the sale of assets of $873 million, net cash provided by
operating activities of $103 million and proceeds of $25 million received from
SSCC in partial repayment of its intercompany loan were used to fund property
additions of $69 million and net debt payments of $939 million.
In October 1999, the Company sold 820,000 acres of owned timberland and assigned
its rights to 160,000 acres of leased timberland to a third party for $710
million, comprised of $225 million of cash and $485 million of installment
notes. The installment notes were monetized in a financing transaction
completed in November 1999, resulting in proceeds of $430 million. The proceeds
from the sale were used to pay down borrowings under the JSC(U.S.) Credit
Agreement. A bankruptcy remote qualified special purpose entity holds the
installment notes. The monetization transaction was accounted for under
Statement of Financial Accounting Standards ("SFAS") No. 125 "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities".
Accordingly, the financial assets transferred to this qualifying special purpose
entity and the liabilities of that entity are not included in the consolidated
financial statements of the Company (see Note 4 of the Notes to Consolidated
Financial Statements).
In November 1999, the Company sold its Newberg, OR newsprint mill. Proceeds of
approximately $211 million were used to pay down borrowings under the JSC(U.S.)
Credit Agreement.
Financing Activities
In October 1999, JSC(U.S.) amended the JSC(U.S.) Credit Agreement to (i) permit
the sale of the timberland operations and the Newberg mill, (ii) permit the cash
proceeds from these asset sales to be applied as prepayments against the
JSC(U.S.) Credit Agreement, (iii) ease certain quarterly financial covenants for
1999 and 2000 and (iv) permit certain prepayments of other indebtedness.
The JSC(U.S.) 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, (iii) limitations on capital expenditures and (iv) maintenance of
certain financial covenants. The JSC(U.S.) Credit Agreement also 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 JSC(U.S.) Credit Agreement
are unconditionally guaranteed by the Company and certain of its subsidiaries.
The obligations under the JSC(U.S.) Credit Agreement are secured by a security
interest in substantially all of the assets of JSC(U.S.). 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 Company expects that internally generated cash flows and existing financing
resources will be sufficient for the next several years to meet its ordinary
course obligations, including debt service, restructuring payments, expenditures
under the Cluster Rule and capital expenditures. Scheduled debt payments in 2000
and 2001 are $12 million and $9 million, respectively, with increasing amounts
thereafter. Capital expenditures for 2000 are expected to be approximately $85
million. The Company expects to use any excess cash flow provided by operations
to make further debt reductions. As of December 31, 1999, the Company had $485
million of unused borrowing capacity under the JSC(U.S.)
15
<PAGE>
Credit Agreement and $91 million of unused borrowing capacity under its $315
million accounts receivable securitization program, subject to JSC(U.S.)'s level
of eligible accounts receivable.
Year 2000
The year 2000 problem concerned the inability of computer systems and devices to
properly recognize and process date-sensitive information when the year changed
to 2000. The Company depends upon its information technology ("IT") and non-IT
(used to run manufacturing equipment that contain embedded hardware or software
that must handle dates) to conduct and manage the Company's business.
The Company utilized both internal and external resources to evaluate the
potential impact of the year 2000 problem and established a year 2000 Program
Management Office to guide and coordinate the efforts of its operating units in
developing and executing its plan. The year 2000 Program Management Office
instituted a seven-phase approach, which enabled the Company to identify all
systems and devices, which were determined to be susceptible to the year 2000
problem. Corrective actions were initiated and affected systems or devices were
replaced, repaired or upgraded. Through December 31, 1999, the Company spent
approximately $39 million to correct the year 2000 problem. The Company does not
expect to spend any significant amounts in the future on year 2000 related
problems.
Subsequent to midnight on December 31, 1999 (the "Rollover Date"), the
Company's financial and administrative systems, communication links, and process
control systems, which control and monitor production, power, emissions and
safety, were verified for operational capability. Only minor issues, relating to
these systems were noted. The Company has conducted and managed normal business
operations as planned, since the Rollover Date and has not experienced any loss
of production at any mill or converting facility as a result of the year 2000
problem. Minor issues, which surfaced at mills and converting facilities, were
addressed and resolved typically within one day. The Company was able to provide
customers, upon request, verification of operational capability on January 1,
2000. Furthermore, the Company was not adversely impacted by any disruption of
raw materials, supplies or services provided by key vendors or suppliers.
The Company's year 2000 Program Management Office continues to check for year
2000 issues. However, given the amount of system activity since the Rollover
Date, the Company does not expect any major problems related to the year 2000
problem,
Environmental Matters
The Company's operations are subject to extensive environmental regulation by
federal, state, and local authorities in the United States and regulatory
authorities with jurisdiction over its foreign operations. The Company has made,
and expects to continue to make, significant capital expenditures to comply with
water, air and solid and hazardous waste and other environmental laws and
regulations. Capital expenditures for environmental control equipment and
facilities were approximately $15 million in 1999 and $10 million in 1998. The
Company anticipates that environmental capital expenditures will approximate $70
million in 2000. The majority of the expenditures after 1999 relate to amounts
that the Company currently anticipates will be required to comply with the
Cluster Rule. In November 1997, the EPA issued the Cluster Rule, which made
existing requirements for discharge of wastewater under the Clean Water Act more
stringent and imposed new requirements on air emissions under the Clean Air Act
for the pulp and paper industry. Though the final rule is still not fully
promulgated, the Company currently believes it may be required to make
additional capital expenditures of up to $120 million during the next several
years in order to meet the requirements of the new regulations. Also, additional
operating expenses will be incurred as capital installations required by the
Cluster Rule are put into service.
In addition, the Company is from time to time subject to litigation and
governmental proceedings regarding environmental matters in which compliance
action and injunctive and/or monetary relief are sought. The Company has been
named as a PRP at a number of sites, which are the subject of remedial activity
under CERCLA or comparable state laws. Although the Company is subject to joint
and several liability imposed under CERCLA, at most of the multi-PRP sites there
are organized groups of PRPs and
16
<PAGE>
costs are being shared among PRPs. Payments related to cleanup at existing and
former operating sites and CERCLA sites were not material to the Company's
liquidity during 1999. Future environmental regulations may have an
unpredictable adverse effect on the Company's operations and earnings, but they
are not expected to adversely affect the Company's competitive position.
Although capital expenditures for environmental control equipment and facilities
and compliance costs in future years will depend on engineering studies and
legislative and technological developments which cannot be predicted at this
time, such costs could increase as environmental regulations become more
stringent. Environmental expenditures include projects which, in addition to
meeting environmental concerns, may yield certain benefits to the Company in the
form of increased capacity and production cost savings. In addition to capital
expenditures for environmental control equipment and facilities, other
expenditures incurred to maintain environmental regulatory compliance (including
any remediation costs) represent ongoing costs to the Company.
Effects of Inflation
Although inflation has slowed in recent years, it is still a factor in the
economy and the Company continues to seek ways to mitigate its impact to the
extent permitted by competition. Inflationary increases in operating costs have
been moderate since 1996, and have not had a material impact on the Company's
financial position or operating results during the last three years. The Company
uses the last-in, first-out method of accounting for approximately 83% of its
inventories. Under this method, the cost of products sold reported in the
financial statements approximates current costs and thus provides a closer
matching of revenue and expenses in periods of increasing costs. On the other
hand, depreciation charges represent the allocation of historical costs incurred
over past years and are significantly less than if they were based on the
current cost of productive capacity being consumed.
Prospective Accounting Standards
In 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
requires that all derivative Instruments be recorded on the balance sheet at
fair value. SFAS No. 133 is effective for all quarters of fiscal years beginning
after June 15, 2000. The Company is currently assessing what the impact of SFAS
No. 133 will be on the Company's future earnings and financial position.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
The Company's earnings and cash flows are significantly affected by the amount
of interest on its indebtedness. The Company's financing arrangements include
both fixed and variable rate debt in which changes in interest rates will impact
the fixed and variable debt differently. A change in the interest rate of fixed
rate debt will impact the fair value of the debt whereas a change in the
interest rate on the variable rate debt will impact interest expense and cash
flows. Management's objective is to protect the Company from interest rate
volatility and reduce or cap interest expense within acceptable levels of market
risk. The Company periodically enters into interest rate swaps, caps or options
to hedge interest rate exposure and manage risk within Company policy. The
Company does not utilize derivatives for speculative or trading purposes. Any
derivative would be specific to the debt instrument, contract or transaction,
which would determine the specifics of the hedge. At December 31, 1999 there
were no derivative contracts outstanding.
17
<PAGE>
The table below presents principal amounts by year of anticipated maturity for
the Company's debt obligations and related average interest rates based on the
weighted average interest rates at the end of the period. Variable interest
rates disclosed do not attempt to project future interest rates. This
information should be read in conjunction with Note 5 to the Notes to
Consolidated Financial Statements.
<TABLE>
<CAPTION>
Short and Long-Term Debt
Outstanding as of December 31, 1999 There- Fair
(in millions) 2000 2001 2002 2003 2004 after Total Value
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Bank term loans and revolver -
8.9% average interest rate (variable).... $ $ $ 51 $ 51 $ 76 $262 $ 440 $ 441
U.S. accounts receivable securitization-
5.94% average interest rate (variable)... 224 224 224
Senior notes -
10.36% average interest rate (fixed)..... 100 500 300 900 927
U.S. industrial revenue bonds -
7.28% average interest rate (fixed)...... 3 4 24 31 31
Other...................................... 9 9 11 5 2 5 41 41
----- ----- ----- ----- ----- ---- ------ ------
Total debt................................. $ 12 $ 9 $ 386 $ 560 $ 378 $291 $1,636 $1,664
=======================================================================
</TABLE>
18
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
<TABLE>
<CAPTION>
Index to Financial Statements: Page No.
--------
<S> <C>
Management's Responsibility for Financial Statements........................................... 20
Report of Independent Auditors................................................................. 21
Consolidated Balance Sheets - December 31, 1999 and 1998....................................... 22
For the years ended December 31, 1999, 1998 and 1997:
Consolidated Statements of Operations....................................................... 23
Consolidated Statements of Stockholder's Equity (Deficit)................................... 24
Consolidated Statements of Cash Flows....................................................... 25
Notes to Consolidated Financial Statements..................................................... 26
The following consolidated financial statement schedule of JSCE, Inc. is included in Item 14(a):
II. Valuation and Qualifying Accounts and Reserves............................................ 44
</TABLE>
All other schedules specified under Regulation S-X for JSCE, Inc. have been
omitted because they are not applicable, because they are not required or
because the information required is included in the financial statements or
notes thereto.
19
<PAGE>
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS
The management of the Company is responsible for the information contained in
the consolidated financial statements and in other parts of this report. The
consolidated financial statements have been prepared by the Company in
accordance with generally accepted accounting principles appropriate in the
circumstances, and necessarily include certain amounts based on management's
best estimate and judgment.
The Company maintains a system of internal accounting control, which it believes
is sufficient to provide reasonable assurance that in all material respects
transactions are properly authorized and recorded, financial reporting
responsibilities are met and accountability for assets is maintained. In
establishing and maintaining any system of internal control, judgment is
required to assess and balance the relative costs and expected benefits.
Management believes that through the careful selection of employees, the
division of responsibilities and the application of formal policies and
procedures, the Company has an effective and responsive system of internal
accounting controls. The system is monitored by the Company's staff of internal
auditors, who evaluate and report to management on the effectiveness of the
system.
The Audit Committee of the Board of Directors is composed of three directors who
meet with the independent auditors, internal auditors and management to discuss
specific accounting, reporting and internal control matters. Both the
independent auditors and internal auditors have full and free access to the
Audit Committee.
/s/ Ray M. Curran
- ----------------------------------------
Ray M. Curran
President and Chief Executive Officer
/s/ Paul K. Kaufmann
- ----------------------------------------
Paul K. Kaufmann
Vice President and Corporate Controller
(Principal Accounting Officer)
20
<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, 1999 and 1998, and the related consolidated statements of
operations, stockholders' equity (deficit) and cash flows for each of the three
years in the period ended December 31, 1999. Our audits also included the
financial statement schedule listed in the Index at Item 14(a). 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, 1999 and 1998, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended December 31, 1999
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 1 to the financial statements, in 1998 the Company changed
its method of accounting for start-up costs.
/s/Ernst & Young LLP
--------------------
Ernst & Young LLP
St. Louis, Missouri
January 24, 2000
21
<PAGE>
<TABLE>
<CAPTION>
JSCE, INC.
CONSOLIDATED BALANCE SHEETS
December 31, (In millions, except share data) 1999 1998
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents......................................... $ 11 $ 18
Receivables, less allowances of $9 in 1999 and $9 in 1998......... 396 294
Inventories
Work-in-process and finished goods.............................. 95 104
Materials and supplies.......................................... 139 124
---------------------
234 228
Refundable income taxes........................................... 7 22
Deferred income taxes............................................. 42 122
Prepaid expenses and other current assets......................... 22 10
---------------------
Total current assets............................................ 712 694
Net property, plant and equipment................................... 1,307 1,499
Timberland, less timber depletion................................... 2 261
Goodwill, less accumulated amortization
of $72 in 1999 and $65 in 1998.................................... 205 226
Notes receivable from SSCC.......................................... 364 342
Other assets........................................................ 146 152
---------------------
$ 2,736 $ 3,174
- -------------------------------------------------------------------------------------------
Liabilities and Stockholder's Deficit
Current liabilities
Current maturities of long-term debt.............................. $ 12 $ 44
Accounts payable.................................................. 389 276
Accrued compensation and payroll taxes............................ 88 75
Interest payable.................................................. 30 28
Other current liabilities......................................... 152 126
---------------------
Total current liabilities....................................... 671 549
Long-term debt, less current maturities............................. 1,624 2,526
Other long-term liabilities......................................... 253 278
Deferred income taxes............................................... 423 359
Stockholder's equity (deficit)
Common stock, par value $.01 per share; 1,000
shares authorized and outstanding
Additional paid-in capital........................................ 1,129 1,102
Retained earnings (deficit)....................................... (1,364) (1,636)
Accumulated other comprehensive income (loss)..................... (4)
---------------------
Total stockholder's equity (deficit)............................ (235) (538)
---------------------
$ 2,736 $ 3,174
- ------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
22
<PAGE>
JSCE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31, (In millions) 1999 1998 1997
====================================================================================================================================
<S> <C> <C> <C>
Net sales....................................................................................... $ 3,295 $ 3,043 $ 2,957
Costs and expenses
Cost of goods sold............................................................................. 2,753 2,542 2,532
Selling and administrative expenses............................................................ 307 322 249
Restructuring charge........................................................................... 9 257
----------------------------------
Income (loss) from operations................................................................. 226 (78) 176
Other income (expense)
Interest expense, net.......................................................................... (175) (196) (196)
Other, net..................................................................................... 411 (5) (2)
Income (loss) continuing operations before ----------------------------------
income taxes, extraordinary item and
cumulative effect of accounting change....................................................... 462 (279) (22)
Benefit from (provision for) income taxes....................................................... (186) 108 3
----------------------------------
Income (loss) from continuing operations before extraordinary
item and cumulative effect of accounting change.............................................. 276 (171)
Discontinued operations
Income from discontinued operations
net of income taxes of $(1) in 1999, $(17) in 1998
and $(14) in 1997............................................................................ 2 27 20
Gain on disposition of discontinued operations
net of income taxes of $2 in 1999............................................................. 4
----------------------------------
Income (loss) before extraordinary item and
cumulative effect of accounting change..................................................... 282 (144) 1
Extraordinary item
Loss from early extinguishment of debt, net of income
tax benefit of $6 in 1999 and $9 in 1998...................................................... (10) (13)
Cumulative effect of accounting change
Start-up costs, net of income tax benefit of $2............................................... (3)
----------------------------------
Net income (loss)............................................................................. $ 272 $ (160) $ 1
====================================================================================================================================
</TABLE>
See notes to consolidated financial statements.
23
<PAGE>
JSCE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY (DEFICIT)
<TABLE>
<CAPTION>
(In millions, except share data)
====================================================================================================================================
Common Stock
---------------- Accumulated
Number Par Additional Retained Other
of Value, Paid-In Earnings Comprehensive
Shares $.01 Capital (Deficit) Income (Loss) Total
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1997.......................... 1,000 $ $ 1,102 $ (1,477) $ $ (375)
Comprehensive income
Net income......................................... 1 1
Other comprehensive income, net of tax.............
--------------------------------------------------------------------------
Comprehensive income (loss)....................... 1 1
--------------------------------------------------------------------------
Balance at December 31, 1997 1,000 $ 1,102 (1,476) (378)
Comprehensive income
Net loss........................................... (160) (160)
Other comprehensive income, net of tax
Minimum pension liability adjustment............. (4) (4)
--------------------------------------------------------------------------
Comprehensive income........................... (160) (4) (164)
--------------------------------------------------------------------------
Balance at December 31, 1998........................ 1,000 1,102 (1,636) (4) (538)
SSCC stock option exercises....................... 26 26
SSCC capital contribution......................... 1 1
Comprehensive income
Net income......................................... 272 272
Other comprehensive income, net of tax
Minimum pension liability adjustment.............. 4 4
--------------------------------------------------------------------------
Comprehensive income ........................... 272 4 276
--------------------------------------------------------------------------
Balance at December 31, 1999........................ 1,000 $ $ 1,129 $ (1,364) $ $ (235)
====================================================================================================================================
</TABLE>
See notes to consolidated financial statements.
24
<PAGE>
JSCE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31, (In millions) 1999 1998 1997
=====================================================================================================
<S> <C> <C> <C>
Cash flows from operating activities
Net income (loss)...................................................... $ 272 $ (160) $ 1
Adjustments to reconcile net income (loss) to
net cash provided by operating activities
Gain on disposition of discontinued operations..................... (2)
Extraordinary loss from early extinguishment of debt............... 16 22
Cumulative effect of accounting change for start-up costs.......... 5
Depreciation, depletion and amortization........................... 134 134 127
Amortization of deferred debt issuance costs....................... 10 8 11
Deferred income taxes.............................................. 154 (92) 13
Gain on sale of assets............................................. (407)
Non-cash employee benefit expense.................................. 30 5 4
Non-cash restructuring charge...................................... 4 179
Change in current assets and liabilities,
Receivables.................................................... (100) 8 (24)
Inventories.................................................... (15) 3 (32)
Prepaid expenses and other current assets...................... (13) (1) 3
Accounts payable and accrued liabilities....................... 64 (16) (4)
Interest payable............................................... (46) (4) (5)
Income taxes................................................... 12 (16) (6)
Other, net......................................................... (10) 42
-----------------------------
Net cash provided by operating activities............................ 103 117 88
-----------------------------
Cash flows from investing activities
Property additions................................................... (69) (263) (166)
Timberland additions................................................. (2) (16)
Investments in affiliates and acquisitions........................... (9)
Notes receivable from SSCC........................................... 25 (336)
Construction funds held in escrow.................................... 9
Proceeds from property and timberland
disposals and sale of businesses................................... 873 6 7
-----------------------------
Net cash provided by (used for) investing activities................. 829 (595) (175)
-----------------------------
Cash flows from financing activities
Borrowings under bank credit facilities.............................. 1,441
Net borrowings (repayments) under accounts
receivable securitization program.................................. 15 (1) 30
Payments of long-term debt........................................... (954) (921) (7)
Other increases in long-term debt.................................... 64
Deferred debt issuance costs......................................... (35)
-----------------------------
Net cash provided by (used for) financing activities................. (939) 484 87
-----------------------------
Increase (decrease) in cash and cash equivalents....................... (7) 6
Cash and cash equivalents
Beginning of year.................................................... 18 12 12
-----------------------------
End of year.......................................................... $ 11 $ 18 $ 12
=====================================================================================================
</TABLE>
See notes to consolidated financial statements.
25
<PAGE>
JSCE, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in millions)
1. Significant Accounting Policies
Basis of Presentation: JSCE, Inc., hereafter referred to as the "Company," is a
wholly-owned subsidiary of Smurfit-Stone Container Corporation ("SSCC"),
formerly known as Jefferson Smurfit Corporation ("JSC"). On November 18, 1998 a
subsidiary of JSC was merged with Stone Container Corporation ("Stone"), an
action hereafter referred to as the "Merger," and Stone became a subsidiary of
SSCC. The Company owns 100% of the equity interest in Jefferson Smurfit
Corporation (U.S.) ("JSC(U.S.)") and is a guarantor of the senior unsecured
indebtedness of JSC(U.S.). The Company has no operations other than its
investment in JSC(U.S.). JSC(U.S.) has extensive operations throughout the
United States.
The deficit in stockholder's equity is primarily due to SSCC's 1989 purchase of
JSC(U.S.)'s common equity owned by Jefferson Smurfit Group plc ("JS Group") and
the acquisition by JSC(U.S.) of its common equity owned by the Morgan Stanley
Leveraged Equity Fund I, L.P., which were accounted for as purchases of treasury
stock.
Nature of Operations: The Company's major operations are in paper products,
recycled and renewable fiber resources, and consumer and specialty packaging. In
February 1999, the Company announced its intention to divest its newsprint
subsidiary, and accordingly, its newsprint segment is accounted for as a
discontinued operation (See Note 9). The Company's paperboard mills procure
virgin and recycled fiber and produce paperboard for conversion into corrugated
containers, folding cartons and specialty packaging at Company-owned facilities
and third-party converting operations. Paper product customers represent a
diverse range of industries including paperboard and paperboard packaging,
wholesale trade, retailing and agri-business. Recycling operations collect or
broker wastepaper for sale to Company-owned and third-party paper mills.
Specialty packaging produces labels and flexible packaging for use in
industrial, medical and consumer product applications. Customers and operations
are principally located in the United States. Credit is extended to customers
based on an evaluation of their financial condition.
Principles of Consolidation: The consolidated financial statements include the
accounts of the Company and majority-owned and controlled subsidiaries.
Significant intercompany accounts and transactions are eliminated in
consolidation.
Cash and Cash Equivalents: The Company considers all highly liquid investments
with an original maturity of three months or less to be cash equivalents. Cash
and cash equivalents of $3 million and $14 million were pledged at December 31,
1999 and 1998 as collateral for obligations associated with the accounts
receivable securitization program (See Note 5).
Revenue Recognition: Revenue is recognized at the time products are shipped to
external customers.
Inventories: Inventories are valued at the lower of cost or market, principally
under the last-in, first-out ("LIFO") method except for $39 million in 1999 and
$42 million in 1998 which are valued at the lower of average cost or market.
First-in, first-out ("FIFO") costs (which approximate replacement costs) exceed
the LIFO value by $52 million and $47 million at December 31, 1999 and 1998,
respectively.
Net Property, Plant and Equipment: Property, plant and equipment are carried at
cost. The costs of additions, improvements and major replacements are
capitalized, while maintenance and repairs are charged to expense as incurred.
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. Estimated useful lives of
papermill machines average 23 years, while major converting equipment and
folding carton presses have an estimated useful life ranging from 12 to 20
years.
26
<PAGE>
Timberland, less Timber Depletion: Timberland is stated at cost less
accumulated cost of timber harvested. 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. The Company sold approximately
980,000 acres of owned and leased timberlands in 1999 (See Note 4).
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.
Deferred Debt Issuance Costs: Deferred debt issuance costs included in other
assets are amortized over the terms of the respective debt obligations using the
interest method.
Long-Lived Assets: In accordance with Statement of Financial Accounting
Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed of," long-lived assets held and used by
the Company and the related goodwill are reviewed for impairment whenever events
or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable.
Income Taxes: The Company accounts for income taxes in accordance with the
liability method of accounting for income taxes. Under the liability method,
deferred assets and liabilities are recognized based upon anticipated future tax
consequences attributable to differences between financial statement carrying
amounts of assets and liabilities and their respective tax bases (See Note 7).
Financial Instruments: The Company periodically enters into interest rate swap
agreements that involve the exchange of fixed and floating rate interest
payments without the exchange of the underlying principal amount. For interest
rate instruments that effectively hedge interest rate exposures, the net cash
amounts paid or received on the agreements are accrued and recognized as an
adjustment to interest expense. If an arrangement is replaced by another
instrument and no longer qualifies as a hedge instrument, then it is marked to
market and carried on the balance sheet at fair value. Gains and losses realized
upon settlement of these agreements are deferred and amortized to interest
expense over a period relevant to the agreement if the underlying hedged
instrument remains outstanding, or immediately if the underlying hedged
instrument is settled.
Transfers of Financial Assets: The Company accounts for transfers of financial
assets in accordance with SFAS No. 125 "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities." Accordingly, financial
assets transferred to qualifying special purpose entities and the liabilities of
such entities are not reflected in the consolidated financial statements of the
Company (See Note 4).
Environmental Matters: The Company expenses environmental expenditures related
to existing conditions resulting from past or current operations from which no
current or future benefit is discernible. Expenditures that extend the life of
the related property or mitigate or prevent future environmental contamination
are capitalized. Reserves for environmental liabilities are established in
accordance with the American Institute of Certified Public Accountants ("AICPA")
Statement of Position ("SOP") 96-1, "Environmental Remediation Liabilities."
The Company records a liability at the time when it is probable and can be
reasonably estimated. Such liabilities are not discounted or reduced for
potential recoveries from insurance carriers.
Use of Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
27
<PAGE>
Reclassifications: Certain reclassifications of prior year presentations have
been made to conform to the 1999 presentation.
Start-up Costs: In April 1998, the AICPA issued SOP 98-5, "Reporting the Costs
of Start-Up Activities," which requires that costs related to start-up
activities be expensed as incurred. Prior to 1998, the Company capitalized
certain costs to open new plants or to start new production processes. The
Company adopted the provisions of the SOP in its financial statements as of the
beginning of 1998. The Company recorded a charge for the cumulative effect of
an accounting change of $3 million, net of taxes of $2 million, to expense costs
that had been capitalized prior to 1998.
Computer Software-Internal Use: In March 1998, the AICPA issued SOP 98-1,
"Accounting for Computer Software Developed or Obtained for Internal Use." SOP
98-1 is effective beginning on January 1, 1999 and requires that certain costs
incurred after the date of adoption in connection with developing or obtaining
software for internal use must be capitalized. The adoption of SOP 98-1 did not
have a material effect on the 1999 financial statements.
Prospective Accounting Pronouncements: In 1998, the Financial Accounting
Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities." SFAS No. 133 requires that all derivative instruments be
recorded on the balance sheet at fair value. SFAS No. 133 is effective for all
fiscal quarters of fiscal years beginning after June 15, 2000. The Company is
currently assessing what the impact of SFAS No. 133 will be on the Company's
future earnings and financial position.
2. Merger and Restructurings
During the fourth quarter of 1998, in connection with SSCC's Merger with Stone,
the Company recorded a pretax restructuring charge of $257 million related to
the permanent shutdown of certain containerboard mill operations and related
facilities formerly operated by JSC(U.S.), the termination of certain JSC(U.S.)
employees, and liabilities for lease commitments at the closed JSC(U.S.)
facilities. The containerboard mill facilities were permanently shut down on
December 1, 1998 and the Company is in various stages of dismantling these
facilities. The assets at these facilities were adjusted to their estimated
fair value less cost to sell based upon appraisals. The sales and operating
income of these mill facilities in 1998 prior to closure were $209 million and
$9 million respectively. The terminated employees included approximately 700
employees at these mills and 50 employees in the Company's corporate office.
These employees were terminated in December 1998.
During 1999, the Company permanently closed eight additional facilities, which
resulted in approximately 400 employees being terminated. A $14 million
restructuring charge was recorded related to these closures. The 1999
adjustments include a reduction to 1998 exit liabilities of $5 million and a
reclassification of pension liabilities of $12 million.
28
<PAGE>
The following is a summary of the restructuring liabilities recorded:
<TABLE>
<CAPTION>
Balance at Balance at
Opening Pay- Adjust- Dec. 31, Pay- Adjust- Dec. 31,
Balance ments Ments 1998 Charge ments ments 1999
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Write-down of property and
equipment to fair value........ $179 $ $(179) $ $ 4 $ $ (4) $
Severance....................... 27 (3) 24 4 (26) 2
Lease commitments............... 21 (1) 20 (3) 17
Pension curtailments............ 9 9 3 (12)
Facility closure costs.......... 13 (3) 10 1 (3) 8
Other........................... 8 8 2 (3) (5) 2
--------------------------------------------------------------------------------------------
$257 $(7) $(179) $ 71 $14 $(35) $(21) $ 29
--------------------------------------------------------------------------------------------
</TABLE>
Future cash outlays are anticipated to be $9 million in 2000, $4 million in
2001, $4 million in 2002, and $12 million thereafter. The Company is continuing
to evaluate all areas of its business in connection with its merger integration,
including the identification of additional converting facilities that might be
closed.
In addition, the Company recorded $23 million of Merger-related charges as
selling and administrative expenses during the fourth quarter of 1998. These
charges pertained to professional management fees to achieve operating
efficiencies from the Merger, fees for management personnel changes and other
Merger costs.
3. Net Property, Plant and Equipment
Net property, plant and equipment at December 31 consists of:
<TABLE>
<CAPTION>
1999 1998
------------------
<S> <C> <C>
Land...................................................................... $ 55 $ 61
Buildings and leasehold improvements...................................... 247 281
Machinery, fixtures and equipment......................................... 1,762 1,943
Construction in progress.................................................. 40 51
------------------
2,104 2,336
Less accumulated depreciation and amortization............................ (797) (837
------------------
Net property, plant and equipment......................................... $1,307 $1,499
------------------
</TABLE>
Depreciation and depletion expense was $127 million, $127 million and $119
million for 1999, 1998 and 1997, respectively. Property, plant and equipment
include capitalized leases of $58 million and $54 million and related
accumulated amortization of $30 million and $23 million at December 31, 1999 and
1998, respectively.
4. Timberland Sale and Note Monetization
The Company sold approximately 980,000 acres of owned and leased timberland in
Florida, Georgia and Alabama in October 1999. The final purchase price, after
adjustments, was $710 million. The Company received $225 million in cash, with
the balance $485 million in the form of installment notes.
The Company entered into a program to monetize the installment notes receivable.
The notes were sold to Timber Notes Holdings, a qualified special purpose entity
under the provisions of SFAS No. 125, for
29
<PAGE>
$430 million cash proceeds and a residual interest in the notes. The transaction
has been accounted for as a sale under SFAS No. 125. The cash proceeds from the
sale and the monetization transactions were used to prepay borrowings under the
JSC(U.S.) Credit Agreement. At December 31, 1999, the residual interest of $33
million was included in the other assets.
The pretax gain of $407 million on the timberland sale and the related note
monetization program is included in other, net in the consolidated statements
of operations.
5. Long-Term Debt
Long-term debt as of December 31, is as follows:
<TABLE>
<CAPTION>
1999 1998
--------------------
<S> <C> <C>
Bank Credit Facilities
Tranche A Term Loan (8.7% weighted average variable rate),
payable in various installments through March 31, 2005.............................. $ 275 $ 400
Tranche B Term Loan (9.4% weighted average variable rate),
payable in various installments through March 31, 2006.............................. 115 900
Revolving Credit Facility (9.0% weighted average
variable rate), due March 31, 2005.................................................. 50 85
Accounts Receivable Securitization Program Borrowings
Accounts receivable securitization program borrowings (5.9%
weighted average variable rate), due in February 2002............................... 224 209
Senior Unsecured Notes
11.25% Series A Senior Unsecured Notes, due May 1, 2004............................... 300 300
10.75% Series B Senior Unsecured Notes, due May 1, 2002............................... 100 100
9.75% Senior Notes due April 1, 2003.................................................. 500 500
Other Debt
Other (including obligations under capitalized leases
of $34 million and $37 million)..................................................... 72 76
--------------------
Total debt............................................................................ 1,636 2,570
Less current maturities............................................................... (12) (44)
--------------------
Long-term debt........................................................................ $1,624 $2,526
--------------------
</TABLE>
30
<PAGE>
The amounts of total debt outstanding at December 31, 1999 maturing during the
next five years are as follows:
2000............................ $ 12
2001............................ 9
2002............................ 386
2003............................ 560
2004............................ 378
Thereafter...................... 291
Bank Credit Facilities
In March 1998, JSC(U.S.) entered into a bank credit facility (the "JSC(U.S.)
Credit Agreement") consisting of a $550 million revolving credit facility
("Revolving Credit Facility") of which up to $150 million may consist of letters
of credit, a $400 million Tranche A Term Loan and a $350 million Tranche B Term
Loan. Net proceeds from the offering were used to repay the 1994 JSC(U.S.)
Tranche A, Tranche B, Tranche C Term Loans and Revolving Credit Facility. The
write-off of related deferred debt issuance costs, totaling $13 million (net of
income tax benefits of $9 million) for 1998, is reflected in the accompanying
consolidated statement of operations as an extraordinary item.
A commitment fee of .5% per annum is assessed on the unused portion of the
Revolving Credit Facility. At December 31, 1999, the unused portion of this
facility, after giving consideration to outstanding letters of credit, was $485
million.
On November 18, 1998, JSC(U.S.) and its bank group amended and restated the
JSC(U.S.) Credit Agreement to, among other things, (i) allow an additional $550
million borrowing on the Tranche B Term Loan, (ii) allow the purchase of a paper
machine from an affiliate (See Note 11), (iii) make a $300 million intercompany
loan to SSCC, which was contributed to Stone as additional paid-in capital, (iv)
permit the Merger, and (v) ease certain financial covenants.
On October 15, 1999 JSC(U.S.) and its bank group amended the JSC(U.S.) Credit
Agreement to (i), permit the sale of the timberlands and the Newberg newsprint
mill, (ii) permit the cash proceeds from these asset sales to be applied as
prepayments against the JSC(U.S.) Credit Agreement, (iii) permit certain
prepayments of other indebtedness, and (iv) ease certain quarterly financial
covenants for 1999 and 2000. The proceeds from the timberland sale and the
Newberg newsprint mill were used to reduce the balance of the Tranche A and
Tranche B Term Loans. The write-off of related deferred debt issuance costs,
totaling $10 million (net of income tax benefits of $6 million) for 1999 is
reflected in the accompanying consolidated statements of operations as an
extraordinary item.
The JSC(U.S.) Credit Agreement contains various covenants and restrictions
including, among other things, (i) limitations on dividends, redemptions and
repurchases of capital stock, (ii) limitations on the incurrence of
indebtedness, liens, leases and sale-leaseback transactions, (iii) limitations
on capital expenditures, and (iv) maintenance of certain financial covenants.
The JSC(U.S.) Credit Agreement also 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 JSC(U.S.) Credit Agreement are unconditionally
guaranteed by SSCC, 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 JSC(U.S.) Credit Agreement is also secured by a pledge of all
the capital stock of the Company and each of its material subsidiaries and by
certain intercompany notes.
31
<PAGE>
Accounts Receivable Securitization Program Borrowings
JSC(U.S.) has a $315 million accounts receivable securitization program (the
"Securitization Program") which 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"). The
accounts receivable purchases are financed through the issuance of commercial
paper or through borrowings under a revolving liquidity facility and a $15
million term loan. Under the Securitization Program, JS Finance has granted a
security interest in all its assets, principally cash and cash equivalents and
trade accounts receivable. The Company has $91 million available for additional
borrowing at December 31, 1999, subject to eligible accounts receivable.
Borrowings under the Securitization Program, which expire February 2002, 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.
Senior Unsecured Notes
The 11.25% Series A Senior Unsecured 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 after May 1, 2000 with a premium of 2.813% of the principal amount.
The 10.75% Series B Senior Unsecured Notes and the 9.75% Senior Notes are not
redeemable prior to maturity. Holders of the JSC(U.S.) 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.
The Senior Notes, which are unconditionally guaranteed on a senior basis by the
Company, rank pari passu with the JSC(U.S.) Credit Agreement and contain
business and financial covenants which are less restrictive than those contained
in the JSC(U.S.) Credit Agreement.
Other
Interest costs capitalized on construction projects in 1999, 1998 and 1997
totaled $3 million, $2 million and $5 million, respectively. Interest payments
on all debt instruments for 1999, 1998 and 1997 were $214 million, $184 million
and $188 million, respectively.
6. Leases
The Company leases certain facilities and equipment for production, selling and
administrative purposes under operating leases. Future minimum rental
commitments (exclusive of real estate taxes and other expense) under operating
leases having initial or remaining non-cancelable terms in excess of one year,
excluding lease commitments on closed facilities, are reflected below:
2000............................................. $ 29
2001............................................. 25
2002............................................. 21
2003............................................. 18
2004............................................. 16
Thereafter....................................... 43
----
Total minimum lease payments................... $152
----
Net rental expense for operating leases, including leases having a duration of
less than one year, was approximately $50 million, $54 million, and $50 million
for 1999, 1998 and 1997, respectively.
32
<PAGE>
7. Income Taxes
Significant components of the Company's deferred tax assets and liabilities at
December 31, are as follows:
<TABLE>
<CAPTION>
1999 1998
-----------------
<S> <C> <C>
Deferred tax liabilities
Property, plant and equipment and timberland........................................ $(399) $(335)
Inventory........................................................................... (20) (17)
Prepaid pension costs............................................................... (31) (30)
Timber installment sale............................................................. (129)
Other............................................................................... (82) (124)
-----------------
Total deferred tax liabilities.................................................... (661) (506)
-----------------
Deferred tax assets
Employee benefit plans.............................................................. 91 89
Net operating loss, alternative minimum tax and tax credit
carryforwards..................................................................... 148 103
Minimum pension liability........................................................... 2 2
Restructuring....................................................................... 7 49
Other............................................................................... 42 36
-----------------
Total deferred tax assets......................................................... 290 279
Valuation allowance for deferred tax assets......................................... (10) (10)
-----------------
Net deferred tax assets........................................................... 280 269
-----------------
Net deferred tax liabilities...................................................... $(381) $(237)
-----------------
</TABLE>
At December 31, 1999, the Company had approximately $95 million of net operating
loss carryforwards for U. S. Federal income tax purposes that expire in 2018,
with a tax value of $33 million. At December 31, 1999, the Company had
approximately $43 million of net operating loss carryforwards for state purposes
that expire in the years 2000 through 2019. A valuation allowance of $10
million has been established for a portion of these deferred tax assets. The
Company had approximately $72 million of alternative minimum tax credit
carryforwards for U.S. federal income tax purposes, which are available
indefinitely.
The benefit from (provision for) income taxes from continuing operations before
income taxes, extraordinary item and cumulative effect of accounting change is
as follows:
<TABLE>
<CAPTION>
1999 1998 1997
----------------------------
<S> <C> <C> <C>
Current
Federal............................................................. $ (10) $ 9 $10
State and local..................................................... 3
----------------------------
Total current benefit (expense)..................................... (10) 12 10
Deferred
Federal.............................................................. (147) 88 (5)
State and local...................................................... (29) 8 (2)
Net operating loss carryforwards.....................................
----------------------------
Total deferred benefit (expense)..................................... (176) 96 (7)
----------------------------
Total benefit from (provision for) income taxes..................... $(186) $108 $ 3
----------------------------
</TABLE>
33
<PAGE>
The Company's benefit from (provision for) income taxes differed from the amount
computed by applying the statutory U.S. federal income tax rate to income (loss)
from continuing operations before income taxes, extraordinary item and
cumulative effect of accounting change is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-----------------------------------
<S> <C> <C> <C>
U.S. federal income tax benefit (provision) at
federal statutory rate............................................... $(162) $ 99 $ 8
Permanent differences from applying purchase
accounting........................................................... (3) (3) (3)
Permanently non-deductible expenses.................................... (2) (2) (8)
State income taxes, net of federal income tax effect................... (19) 12 2
Effect of valuation allowances on deferred tax
assets, net of federal benefit....................................... 1 7
Other.................................................................. 1 (3)
-----------------------------------
Benefit from (provision for) income taxes.............................. $(186) $108 $ 3
-----------------------------------
</TABLE>
The IRS has examined the company tax returns for all years through 1991, and the
years have been closed through 1988. The years 1992 through 1994 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.
The Company made income tax payments of $33 million, $16 million and $8 million
in 1999, 1998 and 1997, respectively.
8. Employee Benefit Plans
Defined Benefit Plans
The Company participates in the SSCC sponsored noncontributory defined benefit
pension plans covering substantially all employees. On December 31, 1998, the
defined benefit plans of the Company were merged with the domestic defined
benefit plans of Stone and the assets of these plans are available to meet the
funding requirements of the combined plans. The Company intends to fund its
proportionate share of the future contributions based on the funded status of
the Company's plan determined on an actuarial basis. Therefore, the plan asset
information provided below is based on an actuarial estimate of assets and
liabilities, excluding the effect of the plan merger, in order to be consistent
with the presentation of the consolidated statements of operations and the
consolidated balance sheets.
The benefit obligation, fair value of plan assets and the under funded status of
the Stone domestic merged defined benefit plans at December 31, 1999 were $459
million, $360 million and $(99) million, respectively.
Approximately 29% of SSCC's domestic pension plan assets at December 31, 1999
are invested in cash equivalents or debt securities and 71% are invested in
equity securities. Equity securities at December 31, 1999 include .7 million
shares of SSCC common stock with a market value of approximately $18 million and
26 million shares of JS Group common stock having a market value of
approximately $79 million. Dividends paid on JS Group common stock during 1999
and 1998 were approximately $2 million in each year.
Postretirement Health Care and Life Insurance Benefits
The Company provides certain health care and life insurance benefits for all
salaried as well as certain hourly employees. The assumed health care cost
trend rate used in measuring the accumulated postretirement benefit obligation
("APBO") was 6.5% at December 31, 1999 decreasing to the ultimate rate of 5.25%.
The effect of a 1% increase in the assumed health care cost trend rate would
increase the
34
<PAGE>
APBO as of December 31, 1999 by $2 million and have an immaterial effect on the
annual net periodic postretirement benefit cost for 1999.
The following provides a reconciliation of benefit obligations, plan assets, and
funded status of the plans.
<TABLE>
<CAPTION>
Defined Postretirement
Benefit Plans Plans
-------------------- -------------------
1999 1998 1999 1998
-------------------- -------------------
<S> <C> <C> <C> <C>
Change in benefit obligation:
Benefit obligation at January 1..................... $1,011 $ 950 $ 105 $ 103
Service cost........................................ 21 18 2 1
Interest cost....................................... 69 68 7 7
Amendments.......................................... 5 8
Plan participants' contributions.................... 4 4
Curtailments........................................ (2)
Actuarial (gain) loss............................... (90) 22 (7) 3
Benefits paid....................................... (59) (55) (15) (13)
-------------------- -------------------
Benefit obligation at December 31................... $ 957 $1,011 $ 94 $ 105
-------------------- -------------------
Change in plan assets:
Fair value of plan assets at January 1.............. $1,008 $1,013 $ $
Actual return on plan assets........................ 205 49
Employer contributions.............................. 1 1 11 9
Plan participants' contributions.................... 4 4
Benefits paid....................................... (59) (55) (15) (13)
-------------------- -------------------
Fair value of plan assets at December 31............ $1,155 $1,008 $ $
-------------------- -------------------
Over (under) funded status: $ 198 $ (3) $ (94) $(105)
Unrecognized actuarial (gain) loss.................. (189) 20 (3) 6
Unrecognized prior service cost..................... 40 44 (2) (2)
Net transition asset................................ (6) (9)
-------------------- -------------------
Net amount recognized............................... $ 43 $ 52 $ (99) $(101)
-------------------- -------------------
Amounts recognized in the balance sheets:
Prepaid benefit cost................................ $ 71 $ 52 $ $
Accrued benefit liability........................... (28) (99) (101)
Additional minimum liability........................ (3) (16)
Intangible asset.................................... 3 10
Accumulated other comprehensive income.............. 4
Deferred tax........................................ 2
-------------------- -------------------
Net amount recognized............................... $ 43 $ 52 $ (99) $(101)
-------------------- -------------------
</TABLE>
35
<PAGE>
The weighted-average assumptions used in the accounting for the defined benefit
plans and postretirement plans were:
<TABLE>
<CAPTION>
Defined Benefit Postretirement
Plans Plans
------------------- -------------------
1999 1998 1999 1998
------------------- -------------------
<S> <C> <C> <C> <C>
Weighted discount rate............................... 8.00% 7.00% 8.00% 7.00%
Rate of compensation increase........................ 4.50% 3.75% N/A N/A
Expected return on assets............................ 9.50% 9.50% N/A N/A
Health care cost trend on covered charges............ N/A N/A 6.50% 6.50%
</TABLE>
The components of net pension expense for the defined benefit plans and the
components of the postretirement benefit costs follow:
<TABLE>
<CAPTION>
Defined Benefit Plans Postretirement Plans
------------------------- ----------------------
1999 1998 1997 1999 1998 1997
------------------------- ----------------------
<S> <C> <C> <C> <C> <C> <C>
Service cost................................. $ 26 $ 24 $ 19 $1 $1 $1
Interest cost................................ 69 68 65 7 7 7
Expected return on plan assets............... (91) (85) (80)
Amortization of transitional asset........... (4) (4)
Recognized actuarial loss.................... 4 4
Curtailment cost............................. 6 2
------------------------- ----------------------
Net periodic benefit cost.................... $ 10 $ 9 $ 4 $8 $8 $8
------------------------- ----------------------
</TABLE>
The projected benefit obligation, accumulated benefit obligation, and fair value
of plan assets for the pension plans with accumulated benefit obligations in
excess of plan assets were $33 million, $31 million and zero, respectively, as
of December 31, 1999 and $72 million, $70 million and $36 million as of December
31, 1998.
Savings Plans
The Company sponsors voluntary savings plans covering substantially all salaried
and certain hourly employees. The Company match is paid in SSCC common stock,
up to an annual maximum. The Company's expense for the savings plans totaled $9
million in each of 1999, 1998 and 1997.
9. Discontinued Operations
During February 1999, the Company adopted a formal plan to sell the operating
assets of its subsidiary, Smurfit Newsprint Corporation ("SNC"). Accordingly,
SNC was accounted for as a discontinued operation in the prior consolidated
financial statements. SNC consists of two newsprint mills in Oregon, and its
Cladwood operation, which consists of two plants which manufacture a wood
composite panel used in the housing industry. The Company subsequently decided
to continue to operate its Cladwood business and therefore, Cladwood's operating
income (loss) of $1 million in 1999, $(29) million in 1998 and $1 million in
1997 was reclassified to continuing operations. Cladwood's operating loss in
1998 includes a $30 million charge related to a class action settlement
agreement (See Note 13). The revenues and net assets of Cladwood were not
material to the consolidated financial statements in any of the periods
presented.
In November 1999, the Company sold its Newberg, Oregon newsprint mill for
proceeds of approximately $211 million. The Company is in negotiations to
transfer ownership of the Oregon City, Oregon newsprint mill and does not expect
to realize any significant proceeds from the transaction. Net gain on
disposition of
36
<PAGE>
discontinued operations of $4 million includes the realized gain on the sale of
the Newberg, Oregon newsprint mill, an expected loss on the sale of the Oregon
City, Oregon newsprint mill, actual results from the measurement date through
December 31, 1999 and the estimated losses on the Oregon City, Oregon newsprint
mill through the expected disposition date.
SNC newsprint revenues were $235 million, $303 million and $281 million for
1999, 1998 and 1997, respectively. The net assets of SNC newsprint included in
the accompanying consolidated balance sheets as of December 31, 1999 and 1998
consisted of the following:
<TABLE>
<CAPTION>
1999 1998
--------------------
<S> <C> <C>
Inventories and current assets........................................... $ 34 $ 36
Net property, plant and equipment........................................ 48 183
Other assets............................................................. 11 7
Accounts payable and other current liabilities........................... (94) (63)
Other liabilities........................................................ (4) (42)
--------------------
Net assets (liabilities) of discontinued operations...................... $ (5) $121
--------------------
</TABLE>
10. Employee Stock Options
Prior to the Merger, the Company's parent, SSCC, maintained the 1992 Jefferson
Smurfit Corporation stock option plan (the "1992 Plan") for selected employees
of the Company. The 1992 Plan included non-qualified stock options, issued at
prices equal to the fair market value of SSCC's common stock at the date of
grant, which expire upon the earlier of twelve years from the date of grant or
termination of employment, death or disability. Effective with the Merger, all
outstanding options became exercisable and fully vested.
In November 1998, SSCC adopted the 1998 Long-term Incentive Plan (the "1998
Plan") and reserved 8.5 million shares of SSCC common stock for non-
qualified stock options and performance awards. Certain employees of the Company
are covered under the 1998 Plan as are certain employees of Stone. The options
are exercisable at a price equal to the fair market value of SSCC's common stock
at the date of the grant and vest eight years after the date of grant subject to
accelerations based upon the attainment of pre-established stock price targets.
The options expire ten years after the date of grant.
The Company and its parent have elected to continue to follow APB Opinion No. 25
to account for stock awards granted to employees. If the Company adopted SFAS
No. 123 to account for stock awards granted to employees, the Company's net
income for the three years in the period ended December 31, 1999, based on a
Black-Scholes option pricing method, would not have been materially different.
The effects of applying SFAS No. 123 as described above may not be
representative of the effects on reported income for future years.
During the second quarter of 1999, the Company recorded a $26 million charge in
selling and administrative expenses, related to the cashless exercise of SSCC
stock options under the 1992 Plan. The charge was reflected in the consolidated
financial statements because the options were exercised by JSC(U.S.) employees.
No future stock option expense is expected.
11. Related Party Transactions
Transactions with JS Group
Transactions with JS Group, a significant shareholder of the Company, its
subsidiaries and affiliated companies were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------------------------
<S> <C> <C> <C>
Product sales.......................................................... $ 33 $ 39 $ 34
Product and raw material purchases..................................... 16 54 51
Management services income............................................. 3 4 4
Charges from JS Group for services provided............................ 1 1
Charges to JS Group for costs pertaining to the Fernandina
No. 2 paperboard machine through November 18, 1998................... 50 53
Receivables at December 31............................................. 1 5 3
Payables at December 31................................................ 13 4 11
</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 subsidiaries' or affiliates' gross sales.
In consideration for elective services, the Company is reimbursed for its direct
cost of providing such services.
37
<PAGE>
On November 18, 1998, the Company purchased the No. 2 paperboard machine located
in the Company's Fernandina Beach, Florida, paperboard mill (the "Fernandina
Mill") for $175 million from an affiliate of JS Group. Until that date the
Company and the affiliate were parties to an operating agreement whereby the
Company operated and managed the No. 2 paperboard machine. The Company was
compensated for its direct production and manufacturing costs and indirect
manufacturing, selling and administrative costs incurred for the entire
Fernandina Mill. The compensation was 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 Stone
Transactions with Stone after November 18, 1998 are included in related party
transactions. The Company sold and purchased containerboard from Stone,
primarily at market prices, as follows:
<TABLE>
<CAPTION>
1999 1998
----- -----
<S> <C> <C>
Product sales............................... $ 248 $ 14
Product and raw material purchases.......... 237 8
Receivables at December 31.................. 60 8
Payables at December 31..................... 32 4
</TABLE>
Corporate shared expenses are allocated between the Company and Stone based on
an established formula using a weighted average rate based on net book value of
fixed assets, number of employees and sales.
Transactions with SSCC
In connection with the Merger, a $300 million intercompany loan was made to
SSCC, which was contributed to Stone as additional paid-in capital. In
addition, a $36 million intercompany loan was made to SSCC to pay certain Merger
costs. These notes bear interest at the rate of 14.21% per annum, are payable
semi-annually on December 1 and June 1 of each year commencing June 1, 1999, and
have a maturity date of November 18, 2004. SSCC has the option, in lieu of
paying accrued interest in cash, to pay the accrued interest by adding the
amount of accrued interest to the principal amount of the notes. Interest
income of $48 million was recorded in 1999 and $6 million was recorded in 1998.
38
<PAGE>
12. Fair Value of Financial Instruments
The carrying values and fair values of the Company's financial instruments are
as follows:
<TABLE>
<CAPTION>
1999 1998
---------------------- ----------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------------------- ----------------------
<S> <C> <C> <C> <C>
Cash and cash equivalents............................ $ 11 $ 11 $ 18 $ 18
Notes receivable from SSCC........................... 364 364 342 342
Residual interest in timber notes.................... 33 33
Long-term debt, including current
maturities......................................... 1,636 1,664 2,570 2,600
</TABLE>
The carrying amount of cash equivalents approximates fair value because of the
short maturity of those instruments. The fair values of notes receivable are
based on discounted future cash flows. The fair value of the Company's 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 residual interest is based on discounted
future cash flows.
13. 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. In addition, the Company faces
potential liability for response costs at various sites for which it has
received notice as being a potentially responsible party ("PRP") 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 after consideration for the number of other PRPs at
each site, the identity and financial condition of such parties and experience
regarding similar matters.
Subsequent to an understanding reached in December 1998, the Company and SNC
entered into a Settlement Agreement in January 1999 to implement a nationwide
class action settlement of claims involving Cladwood(R), composite wood siding
product manufactured by SNC that has been used primarily in the construction of
manufactured or mobile homes. In 1998, the Company recorded a $30 million pre-
tax charge to reflect amounts SNC paid into a settlement fund, administrative
costs, plaintiffs' attorneys' fees, class representative payments and other
costs. The Company believes its reserve is adequate to pay eligible claims.
However, the number of claims, and the number of potential claimants who choose
not to participate in the settlement, could cause the Company to re-evaluate
whether the liabilities in connection with the Cladwood(R) cases could exceed
established reserves.
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 operations.
39
<PAGE>
14. Business Segment Information
The Company adopted SFAS No. 131, "Disclosures About Segments of an Enterprise
and Related Information," in 1998 which changes the way operating segment
information is presented. The information for 1998 and 1997 has been restated
from the prior year's presentation in order to conform to the 1999 presentation.
The Company has three reportable segments: (1) Containerboard and Corrugated
Containers, (2) Boxboard and Folding Cartons and (3) Reclamation. The
Containerboard and Corrugated Containers segment is highly integrated. It
includes a system of mills and plants that produces a full line of
containerboard that is converted into corrugated containers. Corrugated
containers are used to transport such diverse products as home appliances,
electric motors, small machinery, grocery products, produce, books, tobacco and
furniture. The Boxboard and Folding Cartons segment is also highly integrated.
It includes a system of mills and plants that produces a broad range of coated
recycled boxboard that is converted into folding cartons. Folding cartons are
used primarily to protect products such as food, fast food, detergents, paper
products, beverages, health and beauty aids and other consumer products, while
providing point of purchase advertising. The Reclamation segment collects
recovered paper generated by industrial, commercial and residential sources
which is used as raw material for the Company's containerboard and boxboard
mills as well as sales to external third party mills.
The Company evaluates performance and allocates resources based on profit or
loss from operations before income taxes. The accounting policies of the
reportable segments are the same as those described in the summary of
significant accounting policies except that the Company accounts for inventory
on a FIFO basis at the segment level compared to a LIFO basis at the
consolidated level. Intersegment sales and transfers are recorded at market
prices. Intercompany profit is eliminated at the corporate division level.
The Company's reportable segments are strategic business units that offer
different products. The reportable segments are each managed separately because
they manufacture distinct products. Other includes specialty packaging business
unit and corporate related items. Corporate related items include goodwill,
equity investments, income and expense not allocated to reportable segments
(goodwill amortization and interest expense), the adjustment to record inventory
at LIFO, and the elimination of intercompany assets and intercompany profit.
In 1998, corporate related items also included a $257 million restructuring
charge (See Note 2). The restructuring charge included $179 million for the
write-down of property, plant and equipment of the Containerboard and Corrugated
Containers segment. In 1999, corporate related items included a $407 million
gain on the timberland sale and related note monetization program (See Note 4).
40
<PAGE>
A summary by business segment follows:
<TABLE>
<CAPTION>
Container-
board & Boxboard &
Corrugated Folding Recla-
Containers Cartons mation Other Total
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1999
- ----
Revenues from external
customers..................................... $1,734 $836 $437 $ 288 $3,295
Intersegment revenues........................... 40 126 19 185
Depreciation, depletion and
amortization.................................. 68 24 3 28 123
Segment profit.................................. 177 62 13 210 462
Total assets at December 31..................... 1,195 449 110 982 2,736
Capital expenditures............................ 30 15 2 22 69
1998
- ----
Revenues from external
customers..................................... $1,696 $784 $265 $ 298 $3,043
Intersegment revenues........................... 39 132 17 188
Depreciation, depletion and
amortization.................................. 70 22 3 26 121
Segment profit (loss)........................... 113 67 (1) (458) (279)
Total assets at December 31..................... 1,410 450 78 1,236 3,174
Capital expenditures............................ 208 26 6 25 265
1997
- ----
Revenues from external
customers..................................... $1,607 $752 $292 $ 306 $2,957
Intersegment revenues........................... 35 154 13 202
Depreciation, depletion and
amortization.................................. 67 21 3 24 115
Segment profit (loss)........................... 56 68 6 (152) (22)
Total assets at December 31..................... 1,467 435 93 776 2,771
Capital expenditures............................ 101 37 7 37 182
</TABLE>
The following table presents net sales to external customers by country of
origin:
<TABLE>
<CAPTION>
1999 1998 1997
------------------------------------
<S> <C> <C> <C>
United States................................................................. $3,289 $3,038 $2,952
Foreign....................................................................... 6 5 5
------------------------------------
Total net sales............................................................. $3,295 $3,043 $2,957
------------------------------------
</TABLE>
41
<PAGE>
15. Summarized Financial Information JSC(U.S.)
The following summarized financial information is presented for JSC(U.S.), a
wholly owned subsidiary of the Company. Other wholly owned subsidiaries of the
Company, established in the third quarter of 1999, are not presented separately
due to their insignificance to the Company as a whole.
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
1999 1998
-------------------------------
<S> <C> <C>
Current assets..................................................................... $ 716 $ 694
Property, plant and equipment and timberlands, net................................. 1,309 1,760
Goodwill........................................................................... 205 226
Other assets....................................................................... 430 494
-------------------------------
Total assets..................................................................... $2,660 $3,174
-------------------------------
Current liabilities................................................................ $ 671 $ 549
Long-term debt..................................................................... 1,624 2,526
Other liabilities.................................................................. 605 637
Stockholder's deficit
Common stock.....................................................................
Additional paid-in capital....................................................... 1,124 1,102
Retained earnings (deficit)...................................................... (1,364) (1,636)
Accumulated other comprehensive income........................................... (4)
-------------------------------
Total stockholder's deficit...................................................... (240) (538)
-------------------------------
Total liabilities and stockholder's deficit...................................... $ 2,660 $ 3,174
-------------------------------
</TABLE>
Condensed Consolidated Statements of Operations
<TABLE>
<CAPTION>
1999 1998 1997
-------------------------------------------------
<S> <C> <C> <C>
Net sales.............................................................. $3,295 $3,043 $2,957
Cost and expenses...................................................... 3,064 3,121 2,781
Interest expense, net.................................................. 180 196 196
Other income (expense), net............................................ 411 (5) (2)
Income (loss) from continuing operations before
income taxes, extraordinary item, and
cumulative effect of accounting change............................... 462 (279) (22)
Benefit from (provision for) income taxes.............................. (186) 108 3
Discontinued operations................................................ 2 27 20
Gain on disposition of discontinued operations......................... 4
Extraordinary item
Loss from early extinguishment of debt, net of
income tax benefits................................................ (10) (13)
Cumulative effect of accounting change................................. (3)
-------------------------------------------------
Net income (loss)...................................................... $ 272 $ (160) $ 1
-------------------------------------------------
</TABLE>
42
<PAGE>
16. 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
-------------------------------------------
1999
- ----
<S> <C> <C> <C> <C>
Net sales..................................... $729 $786 $855 $ 925
Gross profit.................................. 95 141 140 166
Income (loss) from continuing
operations before extraordinary
item and cumulative effect of
accounting change........................... (17) (2) 9 286
Discontinued operations....................... 4 (1) (4) 3
Gain on disposition of discontinued
operations.................................. 4
Extraordinary item............................ (10)
Cumulative effect of accounting
change......................................
Net income (loss)............................. (13) (3) 5 283
1998
- ----
Net sales..................................... $769 $769 $763 $ 742
Gross profit.................................. 127 125 125 92
Income (loss) from continuing
operations before extraordinary
item and cumulative effect of
accounting change........................... 3 2 3 (179)
Discontinued operations....................... 8 9 5 5
Extraordinary item............................ (13)
Cumulative effect of accounting
change...................................... (3)
Net income (loss)............................. (5) 11 8 (174)
</TABLE>
43
<PAGE>
JSCE INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(in millions)
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
- --------------------------------------------------------------------------------------------------------------
Additions
Balance at Charged to Balance at
Beginning of Costs and Deductions End of
Description Period Expenses Describe Period
- --------------------------------------------------------------------------------------------------------------
Allowance for doubtful accounts
and sales returns and allowances:
<S> <C> <C> <C> <C>
Year ended December 31, 1999 $ 9 $ 1 $ 1(a) $ 9
Year ended December 31, 1998 $10 $ 2 $ 3(a) $ 9
Year ended December 31, 1997 $ 9 $ 2 $ 1(a) $10
Restructuring:
Year ended December 31, 1999 $71 $ 14 $ 56(b) $29
Year ended December 31, 1998 $ $257 $186(b) $71
</TABLE>
(a) Uncollectible amounts written off, net of recoveries.
(b) Charges against the restructuring reserves and adjustment to 1998 exit
liabilities.
44
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors
Set forth below is information concerning the directors of the Company.
Ray M. Curran, born May 13, 1946, was named to succeed Roger W. Stone as
President and Chief Executive Officer of the Company as of April 1, 1999. He
was Executive Vice President and Deputy Chief Executive Officer from November
1998 until March 31, 1999. He was Financial Director of JS Group from February
1996 to November 1998 and prior to that served as Chief Financial Officer of JS
Group since 1992.
Patrick J. Moore, born September 7, 1954, has been Vice President and Chief
Financial Officer of the Company since October 1996. He was Vice President and
General Manager - Industrial Packaging Division from December 1994 to October
1996. He served as Vice President and Treasurer from February 1993 to December
1994 and was Treasurer from October 1990 to February 1993. He joined the
Company in 1987 as Assistant Treasurer. He is a director of First Financial
Planners, Inc.
Executive Officers
Set forth below is information concerning the executive officers of the Company.
Ray M. Curran - See Directors.
Peter F. Dages, born December 13, 1950, was appointed Vice President and General
Manager - Corrugated Container Division in April 1999. Mr. Dages was Vice
President and Regional Manager of the Corrugated Container Division of Stone
from 1996 until April 1999. Prior to that, he held various managerial positions
in the Corrugated Container Division of Stone since 1991.
James D. Duncan, born June 12, 1941, has been Vice President and General Manager
- - Specialty Packaging Division since November 1998. Mr. Duncan was Vice
President and General Manager - Industrial Packaging Division from October 1996
to November 1998. He was Vice President and General Manager, Converting
Operations - Industrial Packaging Division from April 1994 to October 1996 and
served as General Manager, Converting Operations - Industrial Packaging Division
from February 1993 to April 1994. Prior to that, he was President and Chief
Executive Officer of Sequoia Pacific Systems, an affiliate of JS Group, which he
joined in August 1989.
Daniel J. Garand, born December 12, 1950, joined the Company in October 1999 as
Vice President of Supply Chain Operations. For three years prior to joining the
Company, Mr. Garand held senior level positions in global supply chain
management for AlliedSignal's Automotive Products Group. Prior to that, he was
employed by Digital Equipment Company for 26 years in a variety of management
positions in logistics, acquisitions and distribution.
Edwin C. Goffard, born October 30, 1963, joined the Company in May 1999 as Vice
President to develop the Company's synergy program. Prior to joining the
Company, Mr. Goffard was director of purchasing for Pepsi-Cola Company since
1996. Prior to that, he was a consultant for McKinsey & Company since 1989.
45
<PAGE>
Michael F. Harrington, born August 6, 1940, has been Vice President - Employee
Relations since January 1992. Prior to joining the Company, he was Corporate
Director of Labor Relations/Safety and Health with Boise Cascade Corporation for
more than five years.
Charles A. Hinrichs, born December 3, 1953, has been Vice President and
Treasurer since April 1995. Prior to joining the Company, Mr. Hinrichs held
senior level positions at The Boatmen's National Bank of St. Louis for 13 years,
where most recently he was Senior Vice President and Chief Credit Officer.
Craig A. Hunt, born May 31, 1961, has been Vice President, Secretary and General
Counsel since November 1998. Prior to that he was Senior Counsel and Assistant
Secretary from January 1993 to November 1998. He joined the Company in 1990 as
Staff Counsel.
Paul K. Kaufmann, born May 11, 1954, has been Vice President and Corporate
Controller since July 1998. He was Corporate Controller from March 1998 to July
1998. Prior to that, he was Division Controller for the Containerboard Mill
Division from November 1993 until March 1998. Prior to that, he held other
accounting positions since joining the Company in 1990.
Jay D. Lamb, born September 25, 1947, has been Vice President and General
Manager of SNC since May 1996. He was Director of Operations of SNC from May
1995 to May 1996. Prior to that, he held various accounting and managerial
positions with SNC since joining the Company in 1970.
Leslie T. Lederer, born July 20, 1948, has been Vice President - Strategic
Investment Dispositions since November 1998. He was Vice President, Secretary
and General Counsel of Stone from 1987 to November 1998.
F. Scott Macfarlane, born January 17, 1946, has been Vice President and General
Manager - Folding Carton and Boxboard Mill Division since November 1995. He
served as Vice President and General Manager of the Folding Carton Division from
December 1993 to November 1995. Prior to that, he held various managerial
positions within the Folding Carton Division since joining the Company in 1971.
Timothy McKenna, born March 25, 1948, has been Vice President - Investor
Relations and Communications since July 1997. He joined the Company in October
1995 as Director of Investor Relations and Communications. Prior to joining the
Company, he was employed by Union Camp Corporation for 14 years, where most
recently he was Director of Investor Relations.
Patrick J. Moore - See Directors.
Mark R. O'Bryan, born January 15, 1963, joined the Company in October 1999 as
Vice President - Procurement. Prior to joining the Company, Mr. O'Bryan was
employed for 13 years at General Electric Corporation, where he held senior
level positions in global sourcing and materials management at several of
General Electric Corporation's manufacturing businesses.
Thomas A. Pagano, born January 21, 1947, has been Vice President - Planning
since May 1996. He was Director of Corporate Planning from September 1995 to
May 1996. Prior to that, Mr. Pagano held various managerial positions within
the Company's Container Division since joining the Company in 1971, including
Area Regional General Manager from January 1994 to September 1995.
John M. Riconosciuto, born September 4, 1952, has been Vice President and
General Manager - Bag Packaging Division since November 1998. He was Vice
President and General Manager - Industrial Bag and Specialty Packaging Division
of Stone from January 1997 to November 1998. From July 1995 to January 1997, he
was Vice President and General Manager of the Multiwall Group of Stone, and
prior to that, Vice President of Marketing and Specialty Packaging of the
Industrial and Specialty Packaging Division of Stone since 1993.
46
<PAGE>
David C. Stevens, born August 11, 1934, has been Vice President and General
Manager - Smurfit Recycling Company since January 1993. Prior to that, he was
General Sales Manager for the Reclamation Division since joining the Company in
1987.
William N. Wandmacher, born September 12, 1942, 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. Prior
to that, he held various positions in production, plant management and planning
since joining the Company in 1966.
ITEM 11. EXECUTIVE COMPENSATION
The information required in response to this item is set forth under the
captions "Executive Compensation", "Report of the Compensation Committee on
Executive Compensation" and "Compensation Committee Interlocks and Insider
Participation" in the SSCC Proxy Statement and is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
All of the outstanding JSC(U.S.) Common Stock is owned by JSCE, and all of the
JSCE Common Stock is owned by SSCC. Additional information required in response
to this item is set forth under the caption "Principal Stockholders" in the SSCC
Proxy Statement and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required in response to this item is set forth under the caption
"Certain Transactions" in the SSCC Proxy Statement and is incorporated herein by
reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) and (2) The list of Financial Statements and Financial Statement
Schedules required by this item is included in Item 8.
(3) Exhibits
3.1 Certificate of Incorporation of JSCE (incorporated by reference to
Exhibit 3.1 to JSCE's Annual Report on Form 10-K for the fiscal year
ended December 31, 1994).
3.2 By-laws of JSCE (incorporated by reference to Exhibit 3.2 to JSCE's
Annual Report on Form 10-K for the fiscal year ended December 31,
1994).
Indentures and other debt instruments with respect to other long-term debt, none
of which exceeds 10 percent of the total assets of JSCE and its subsidiaries on
a consolidated basis, are not filed herewith. (The Registrant agrees to furnish
a copy of such documents to the Commission upon request).
4.1 Indenture for the Series A 1994 Senior Notes (incorporated by
reference to Exhibit 4.1 to SSCC's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1994).
4.2 Indenture for the Series B 1994 Senior Notes (incorporated by
reference to Exhibit 4.2 to SSCC's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1994).
4.3 Indenture for the 1993 Senior Notes (incorporated by reference to
Exhibit 4.4 to SSCC's Registration Statement on Form S-1 (File No. 33-
75520)).
47
<PAGE>
4.4 First Supplemental Indenture to the 1993 Senior Note Indenture
(incorporated by reference to Exhibit 4.5 to SSCC's Registration
Statement on Form S-1 (File No. 33-75520)).
10.1 Subscription Agreement among SSCC, JSC(U.S.), CCA and SIBV
(incorporated by reference to Exhibit 10.4 to SSCC's Quarterly Report
on Form 10-Q for the quarter ended March 31, 1994).
10.2* JSC(U.S.) Deferred Compensation Plan, as amended (incorporated by
reference to Exhibit 10.7 to SSCC's Annual Report on Form 10-K for the
fiscal year ended December 31, 1996).
10.3* JSC(U.S.) Management Incentive Plan (incorporated by reference to
Exhibit 10.10 to SSCC's Annual Report on Form 10-K for the fiscal year
ended December 31, 1995).
10.4* Jefferson Smurfit Corporation Amended and Restated 1992 Stock Option
Plan dated as of May 1, 1997 (incorporated by reference to Exhibit
10.10 to SSCC's Annual Report on Form 10-K for the fiscal year ended
December 31, 1997).
10.5(a) Amended and Restated Credit Agreement, dated as of November 18, 1998,
among SSCC, JSCE, JSC(U.S.) and the Banks party thereto (incorporated
by reference to Exhibit 10.6 to SSCC's Annual Report on Form 10-K for
the fiscal year ended December 31, 1998).
10.5(b) First Amendment of Amended and Restated Credit Agreement, dated as of
June 30, 1999, among SSCC, JSCE, JSC(U.S.) and the Banks party thereto
(incorporated by reference to Exhibit 10.1 to SSCC's Quarterly Report
on Form 10-Q for quarter ended June 30, 1999).
10.5(c) Second Amendment of Amended and Restated Credit Agreement dated as of
October 15, 1999, among SSCC, JSCE, Inc, JSC(U.S.) and the banks party
thereto (incorporated by reference to Exhibit 10.1 to SSCC's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1999).
10.6(a) Term Loan Agreement dated as of February 23, 1995 among JS Finance and
Bank Brussels Lambert, New York Branch (incorporated by reference to
Exhibit 10.1 to SSCC's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1995).
10.6(b) Depositary and Issuing and Paying Agent Agreement (Series A Commercial
Paper) dated as of February 23, 1995 (incorporated by reference to
Exhibit 10.2 to SSCC's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1995).
10.6(c) Depositary and Issuing and Paying Agent Agreement (Series B Commercial
Paper) dated as of February 23, 1995 (incorporated by reference to
Exhibit 10.3 to SSCC's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1995).
10.6(d) Receivables Purchase and Sale Agreement dated as of February 23, 1995
among JSC(U.S.), as the Initial Servicer and JS Finance, as the
Purchaser (incorporated by reference to Exhibit 10.4 to SSCC's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1995).
10.6(e) Liquidity Agreement dated as of February 23, 1995 among JS Finance,
the Financial Institutions party thereto as Banks, Bankers Trust
Company as Facility Agent and Bankers Trust Company as Collateral
Agent (incorporated by reference to Exhibit 10.6 to SSCC's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1995).
48
<PAGE>
10.6(f) Commercial Paper Dealer Agreement dated as of February 23, 1995 among
BT Securities Corporation, MS&Co., JSC(U.S.) and JS Finance
(incorporated by reference to Exhibit 10.7 to SSCC's Quarterly Report
on Form 10-Q for the quarter ended March 31, 1995).
10.6(g) Addendum dated March 6, 1995 to Commercial Paper Dealer Agreement
(incorporated by reference to Exhibit 10.8 to SSCC's Quarterly Report
on Form 10-Q for the quarter ended March 31, 1995).
10.6(h) First Omnibus Amendment dated as of March 31, 1996 to the Receivables
Purchase and Sale Agreement among JSC(U.S.), JS Finance and the Banks
party thereto (incorporated by reference to Exhibit 10.3 to SSCC's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1996).
10.6(i) Affiliate Receivables Sale Agreement dated as of March 31, 1996
between SNC and SSCC (incorporated by reference to Exhibit 10.4 to
SSCC's Quarterly Report on Form 10-Q for the quarter ended June 30,
1996).
10.6(j) Amendment No. 2 dated as of August 19, 1997 to the Term Loan Agreement
among JS Finance and Bank Brussels Lambert, New York Branch and
JSC(U.S.) as Servicer (incorporated by reference to Exhibit 10.12(j)
to SSCC's Annual Report on Form 10-K for the fiscal year ended
December 31, 1997).
10.6(k) Amendment No. 2 dated as of August 19, 1997 to the Receivables
Purchase and Sale Agreement among JSC(U.S.) as the Seller and
Servicer, JS Finance as the Purchaser, Bankers Trust Company as
Facility Agent and Bank Brussels Lambert, New York Branch as the Term
Bank (incorporated by reference to Exhibit 10.12(k) to SSCC's Annual
Report on Form 10-K for the fiscal year ended December 31, 1997).
10.6(l) Amendment No. 2 dated as of August 19, 1997 to the Liquidity Agreement
among JS Finance, Bankers Trust Company as Facility Agent, JSC(U.S.)
as Servicer, Bank Brussels Lambert, New York Branch as Term Bank and
the Financial Institutions party thereto as Banks (incorporated by
reference to Exhibit 10.12(l) to SSCC's Annual Report on Form 10-K for
the fiscal year ended December 31, 1997).
10.7* Consulting Agreement dated as of October 24, 1996 by and between James
S. Terrill and JSC(U.S.) (incorporated by reference to Exhibit 10.15
to SSCC's Annual Report on Form 10-K for the fiscal year ended
December 31, 1996).
10.8 Registration Rights Agreement dated as of May 10, 1998 among MSLEF,
SIBV, SSCC and the other parties identified on the signature pages
thereto (incorporated by reference to Exhibit 10(e) to SSCC's
Registration Statement on Form S-4 (File No. 333-65431)).
10.9 Voting Agreement dated as of May 10, 1998, as amended, among SIBV,
MSLEF and Mr. Roger W. Stone (incorporated by reference to Exhibit
10(f) to SSCC's Registration Statement on Form S-4 (File No. 333-
65431)).
10.10(a)* SSCC 1998 Long Term Incentive Plan (incorporated by reference to
Exhibit 10.14 to SSCC's Annual Report on Form 10-K for the fiscal year
ended December 31, 1998).
10.10(b)* First Amendment of the SSCC 1998 Long Term Incentive Plan
(incorporated by reference to Exhibit 10.2 to SSCC's Quarterly Report
on Form 10-Q for the quarter ended September 30, 1999).
49
<PAGE>
10.11* Forms of Employment Security Agreements (incorporated by reference to
Exhibit 10(h) to SSCC's Registration Statement on Form S-4 (File No.
333-65431)).
10.12* Stone Container Corporation Directors' Deferred Compensation Plan
(incorporated by reference to Exhibit 10(b) to Stone's Annual Report
on Form 10-K for the fiscal year ended December 31, 1997).
10.13* Stone Container Corporation 1982 Incentive Stock Option Plan
(incorporated by reference to Appendix A to the Prospectus included in
Stone's Form S-8 Registration Statement, Registration Number 2-79221,
effective September 27, 1982).
10.14* Stone Container Corporation 1993 Stock Option Plan (incorporated by
reference to Appendix A to Stone's Proxy Statement dated as of April
10, 1992).
10.15* Stone Container Corporation 1992 Long-Term Incentive Program
(incorporated by reference to Exhibit A to Stone's Proxy Statement
dated as of April 11, 1991).
10.16* Stone Container Corporation 1995 Long-Term Incentive Plan
(incorporated by reference to Exhibit A to Stone's Proxy Statement
dated as of April 7, 1995).
10.17(a) Purchase and Sale Agreement, effective as of July 28, 1999, between
Rayonier, Inc. and JSC(U.S.) (incorporated by reference to Exhibit 2.1
to JSCE's Current Report on Form 8-K dated October 25, 1999).
10.17(b) First Amendment to Purchase and Sale Agreement, dated October 21,
1999, between Rayonier, Inc. and JSC(U.S.) (incorporated by reference
to Exhibit 2.2 to JSCE's Current Report on Form 8-K dated October 25,
1999).
10.18* Employment Agreement of Ray M. Curran (incorporated by reference to
Exhibit 10.27 to SSCC's Annual Report on Form 10-K for the fiscal year
ended December 31, 1999).
10.19* Employment Agreement of Patrick J. Moore (incorporated by reference to
Exhibit 10.27 to SSCC's Annual Report on Form 10-K for the fiscal year
ended December 31, 1999).
21.1 Subsidiaries of JSCE.
27.1 Financial Data Schedule.
*Indicates a management contract or compensation plan or arrangement.
(b) Report on Form 8-K.
Form 8-K dated October 25, 1999 was filed with the Securities and Exchange
Commission in connection with the sale by JSC(U.S.) of timberlands to a third
party for $710 million.
50
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
DATE March 14, 2000 JSCE, Inc.
------------------ ------------
(Registrant)
BY /s/ Patrick J. Moore
----------------------
Patrick J. Moore
Vice President and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant in
the capacities and on the date indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/Ray M. Curran President and Chief Executive March 14, 2000
- --------------------- Officer And Director (Principal
Ray M. Curran Executive Officer)
/s/Patrick J. Moore Vice President and Chief March 14, 2000
- --------------------- Financial Officer (Principal
Patrick J. Moore Financial Officer)
/s/Paul K. Kaufmann Vice President and Corporate March 14, 2000
- --------------------- Controller (Principal Accounting
Paul K. Kaufmann Officer)
51
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF THE COMPANY
<TABLE>
<CAPTION>
State or Jurisdiction of
Incorporation or
Organization % Owned
------------ -------
<S> <C> <C>
Jefferson Smurfit Corporation (U.S.) Delaware 100%
Smurfit Newsprint Corporation Delaware 100%
Packaging Unlimited, Inc. Delaware 100%
JSC International Sales, Inc. Barbados 100%
CCA de Baja California, S.A. de C.V. Mexico D.F. 100%
Jefferson Smurfit Finance Corporation Delaware 100%
Groveton Paper Board, Inc. New Hampshire 62.94%
JSC Brewton, Inc. Delaware 100%
Timber Capital Holdings LLC Delaware 100%
Timber Note Holdings LLC Delaware 100%
JSC Active Medical Management, Inc. Delaware 100%
JSC Retiree Medical Management, Inc. Delaware 100%
Wakecon Associates (Partnership) Massachusetts 50%
WCO Enterprises (Partnership) Florida 50%
CIMIC Packaging Paper Co. Ltd. British Virgin Islands 42.5%
Shanghai Smurfit/CIMIC Packaging Co., Ltd. China 42.5%
Zhejiang CIMIC Nanyang Paper Products Co., Ltd. China 19.55%
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<CIK> 0000727742
<NAME> JSCE, Inc.
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 11
<SECURITIES> 0
<RECEIVABLES> 405
<ALLOWANCES> 9
<INVENTORY> 234
<CURRENT-ASSETS> 712
<PP&E> 2,104
<DEPRECIATION> 797
<TOTAL-ASSETS> 2,743
<CURRENT-LIABILITIES> 671
<BONDS> 1,624
0
0
<COMMON> 0
<OTHER-SE> (235)
<TOTAL-LIABILITY-AND-EQUITY> 2,743
<SALES> 3,295
<TOTAL-REVENUES> 3,295
<CGS> 2,753
<TOTAL-COSTS> 2,753
<OTHER-EXPENSES> 307
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 175
<INCOME-PRETAX> 462
<INCOME-TAX> 186
<INCOME-CONTINUING> 276
<DISCONTINUED> 6
<EXTRAORDINARY> (10)
<CHANGES> 0
<NET-INCOME> 272
<EPS-BASIC> .00
<EPS-DILUTED> .00
</TABLE>
