Securities and Exchange Commission
Washington, D.C. 20549
Form 10-K
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended Commission File
December 31, 1994 Number 1-10373
Jefferson Smurfit Corporation (U.S.)
(Formerly named Container Corporation of America)
(Exact name of registrant as specified in its charter)
Delaware 36-2659288
(State of incorporation (I.R.S. Employer
or organization Identification)
Jefferson Smurfit Centre
8182 Maryland Avenue
St. Louis, Missouri 63105
(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number: (314) 746-1100
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 x No
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not
be contained, to the best of the Registrant's knowledge, in
definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of February 10, 1995, 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 February 10, 1995: 1,000
DOCUMENTS INCORPORATED BY REFERENCE: NONE
<PAGE>
JEFFERSON SMURFIT CORPORATION (U.S.)
Annual Report on Form 10-K
December 31, 1994
TABLE OF CONTENTS
PART I
Page
Item 1 Business. . . . . . . . . . . . . . . . . . . . . . . . .1
Item 2. Properties. . . . . . . . . . . . . . . . . . . . . . . .8
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . .8
Item 4. Submission of Matters to a Vote of Security Holders . . 12
PART II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters . . . . . . . . . . . . . . 12
Item 6. Selected Financial Data . . . . . . . . . . . . . . . . 13
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . 15
Item 8. Financial Statements and Supplementary Data . . . . . . 24
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure. . . . . . . . . 48
PART III
Item 10. Directors and Executive Officers of the Registrant. . . 48
Item 11. Executive Compensation. . . . . . . . . . . . . . . . . 52
Item 12. Security Ownership of Certain Beneficial Owners and
Management. . . . . . . . . . . . . . . . . . . . . . . 63
Item 13. Certain Relationships and Related Transactions. . . . . 64
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K . . . . . . . . . . . . . . . . . . . . . . 67
<PAGE>
PART I
ITEM 1. BUSINESS
SUMMARY OF SIGNIFICANT TRANSACTIONS
Jefferson Smurfit Corporation (formerly SIBV/MS Holdings, Inc.),
hereinafter referred to as the "JSC", owns 100% of the equity
interest in JSCE, Inc., hereinafter referred to as "JSCE". JSC has
no operations other than its investment in JSCE. On December 31,
1994, Jefferson Smurfit Corporation (U.S.), a wholly-owned
subsidiary of JSC, merged into its wholly-owned subsidiary,
Container Corporation of America ("CCA"), with CCA surviving and
changing its name to Jefferson Smurfit Corporation (U.S.) ("JSC
(U.S.)"). JSCE owns a 100% equity interest JSC (U.S.) and is the
guarantor of JSC (U.S.)'s senior indebtedness. Prior to May 4,
1994, 50% of the voting stock of JSC was owned by Smurfit Packaging
Corporation and Smurfit Holdings B.V., indirect wholly-owned
subsidiaries of Jefferson Smurfit Group plc ("JS Group"), a public
corporation organized under the laws of the Republic of Ireland.
The remaining 50% was owned by The Morgan Stanley Leveraged Equity
Fund II, L.P. ("MSLEF II") and certain other investors.
In May 1994, JSC completed a recapitalization plan (the
"Recapitalization") to repay or refinance a substantial portion of
its indebtedness in order to improve operating and financial
flexibility. In connection with the Recapitalization, (i) JSC
issued and sold 19,250,000 shares of common stock pursuant to a
registered public offering at an initial public offering price of
$13.00 per share, (ii) JS Group, through its wholly-owned
subsidiary Smurfit International B.V. ("SIBV"), purchased an
additional 11,538,462 shares of common stock for $150 million,
(iii) JSC (U.S.) issued and sold $300 million aggregate principal
amount of 11.25% Series A Senior Notes due 2004 and $100 million
aggregate principal amount of 10.75% Series B Senior Notes due 2002
pursuant to a registered public offering (the "1994 Senior Notes")
and (iv) JSC (U.S.) entered into a new bank credit facility (the
"1994 Credit Agreement") which consists of a $450 million revolving
credit facility (the "New Revolving Credit Facility") of which up
to $150 million may consist of letters of credit, a $900 million
Tranche A term loan and a $300 million Tranche B term loan. The
proceeds from the equity and debt offerings, the sale to SIBV and
borrowings under a new bank facility were used, among other things,
to repay outstanding bank debt. The new bank facility enabled JSC
(U.S.) to consummate the Subordinated Debt Refinancing which
consisted of the redemption of the 13.5% Senior Subordinated Notes
due 1999, 14.0% Subordinated Debentures due 2001 and 15.5% Junior
Subordinated Accrual Debentures due 2004 (collectively, the
"Subordinated Debt") and the payment of related premiums on
December 1, 1994.
All references hereinafter to the "Company" shall, as the context
may require, refer collectively to CCA and Jefferson Smurfit
Corporation (U.S.) prior to the Merger or JSC, JSCE and JSC (U.S.).
GENERAL
The Company operates in two business segments, Paperboard/Packaging
Products and Newsprint. The Company believes it is one of the
nation's largest producers of paperboard and packaging products and
is the largest producer of recycled paperboard and recycled
packaging products. In addition, the Company believes it is one of
the nation's largest producers of recycled newsprint.
<PAGE>
The Company's Paperboard/Packaging Products segment includes a
system of 16 paperboard mills that, in 1994, produced 1,932,000
tons of virgin and recycled containerboard, 767,000 tons of coated
and uncoated recycled boxboard and solid bleached sulfate ("SBS")
and 209,000 tons of recycled cylinderboard, which were sold to the
Company's own converting operations and to third parties. The
Company's converting operations consist of 52 corrugated container
plants, 18 folding carton plants, and 20 industrial packaging
plants located across the country, with three plants located
outside the U.S. In 1994, the Company's container plants converted
2,018,000 tons of containerboard, an amount equal to approximately
104.5% of the amount it produced, its folding carton plants
converted 543,000 tons of SBS, recycled boxboard and coated natural
kraft, an amount equal to approximately 70.8% of the amount of
boxboard it produced, and its industrial packaging plants converted
128,000 tons of recycled cylinderboard, an amount equal to
approximately 61.1% of the amount it produced. The Company's
Paperboard/Packaging Products segment contributed 92.0% of the
Company's net sales in 1994.
The Company's paperboard operations are supported by its
reclamation division, which processed or brokered 4.1 million tons
of wastepaper in 1994, and by its timber division which manages
approximately one million acres of owned or leased timberland
located in close proximity to its virgin fibre mills. The
paperboard/packaging products operations also include 15 consumer
packaging plants.
The Company's Newsprint segment includes two newsprint mills in
Oregon, which produced 615,000 tons of recycled newsprint in 1994,
and two facilities that produce Cladwood, a construction material
produced from newsprint and wood by-products. The Company's
newsprint mills are also supported by the Company's reclamation
division.
<PAGE>
PRODUCTS
PAPERBOARD/PACKAGING PRODUCTS SEGMENT
CONTAINERBOARD AND CORRUGATED SHIPPING CONTAINERS
The Company's containerboard operations are highly integrated.
Tons of containerboard produced and converted for the last three
years were:
<TABLE>
<CAPTION>
1992 1993 1994
(Ton in thousands)
<S> <C> <C> <C>
Containerboard
Production 1,918 1,840 1,932
Consumption 1,898 1,942 2,018
</TABLE>
The Company's mills produce a full line of containerboard,
including unbleached kraft linerboard, mottled white linerboard and
recycled medium. Unbleached kraft linerboard is produced at the
Company's mills located in Fernandina Beach and Jacksonville,
Florida and mottled white linerboard is produced at its Brewton,
Alabama mill. Recycled medium is produced at the Company's mills
located in Alton, Illinois, Carthage, Indiana, Circleville, Ohio
and Los Angeles, California. In 1994, the Company produced
1,085,000, 317,000 and 530,000 tons of unbleached kraft linerboard,
mottled white linerboard and recycled medium, respectively.
<PAGE>
Large capital investment is required to sustain the Company's
containerboard mills, which employ state-of-the-art computer
controlled machinery in their manufacturing processes. During the
last five years, the Company has invested approximately $181
million to enhance product quality, reduce costs, expand capacity
and increase production efficiency, as well as make required
improvements to stay in compliance with environmental regulations.
Major capital projects completed in the last five years include (i)
a rebuild of Jacksonville's linerboard machine to produce high
performance, lighter weight grades now experiencing higher demand,
(ii) modifications to Brewton's mottled white machine to increase
run speed by 100 tons per day and (iii) a chip thickness screening
project for the Fernandina Beach linerboard mill.
The Company's sales of containerboard in 1994 were $786.4 million
(including $424.9 million of intracompany sales). During the first
part of 1994, sales of containerboard to its container plants were
reflected at prices based upon those published by Official Board
Markets which were generally higher than those paid by third
parties except in exchange contracts. Beginning in September 1994,
the sales price of containerboard to the container plants was the
same as market price.
Corrugated shipping containers, manufactured from containerboard in
converting plants, are used to ship such diverse products as home
appliances, electric motors, small machinery, grocery products,
produce, books, tobacco and furniture, and for many other
applications, including point of purchase displays. The Company
stresses the value added aspects of its corrugated containers, such
as labeling and multi-color graphics, to differentiate its products
and respond to customer requirements. The Company's 52 container
plants serve local customers and large national accounts and are
located nationwide, generally in or near large metropolitan areas.
The Company's total sales of corrugated shipping containers in 1994
were $1,282.7 million (including $91.4 million of intracompany
sales). Total corrugated shipping container sales volumes for
1992, 1993 and 1994 were 28,095, 29,394 and 30,822 million square
feet, respectively.
RECYCLED BOXBOARD, SBS AND FOLDING CARTONS
The Company's recycled boxboard, SBS and folding carton operations
are also integrated. Tons of recycled boxboard and SBS produced
and converted for the last three years were:
<TABLE>
<CAPTION>
1992 1993 1994
(Tons in thousands)
<S> <C> <C> <C>
Recycled Boxboard and SBS
Production 745 744 767
Consumption 551 542 543
</TABLE>
The Company's mills produce recycled coated and uncoated boxboard
and SBS. Coated recycled boxboard is produced at the Company's
mills located in Middletown, Ohio, Philadelphia, Pennsylvania,
Santa Clara, California and Wabash, Indiana. The Company produces
uncoated recycled boxboard at its Los Angeles, California mill and
SBS at its Brewton, Alabama mill. The table above excludes
production of approximately 87,000 and 85,000 tons in 1992 and
1993, respectively, from the Lockland, Ohio boxboard mill that was
closed in January 1994 as part of the Company's Restructuring
Program (as discussed in Item 7. - Management's Discussion and
<PAGE>
Analysis of Financial Condition and Results of Operations). In
1994, the Company produced 586,000 and 181,000 tons of recycled
boxboard and SBS, respectively. The Company's total sales of
recycled boxboard and SBS in 1994 were $390.9 million (including
$197.5 million of intracompany sales).
The Company's folding carton plants offer a broad range of
converting capabilities, including web and sheet litho, rotogravure
and flexo printing and a full line of structural and design
graphics services. The Company's 18 folding carton plants convert
recycled boxboard and SBS, including approximately 52% of the
boxboard and SBS produced by the Company, into folding cartons.
Folding cartons are used primarily to protect customers' products
while providing point of purchase advertising. The Company makes
folding cartons for a wide variety of applications, including food
and fast foods, detergents, paper products, beverages, health and
beauty aids and other consumer products. Customers range from
small local accounts to large national and multinational accounts.
The Company's folding carton plants are located nationwide,
generally in or near large metropolitan areas. The Company's sales
of folding cartons in 1994 were $644.7 million (including $1.8
million of intracompany sales). Folding carton sales volumes for
1992, 1993 and 1994 were 487,000, 475,000 and 486,000 tons,
respectively.
The Company has focused its capital expenditures in these
operations and its marketing activities to support a strategy of
enhancing product quality as it relates to packaging graphics,
increasing flexibility while reducing customer response time and
assisting customers in innovating package designs.
The Company provides marketing consultation and research activities
through its Design and Market Research (DMR) Laboratory. It
provides customers with graphic and product design tailored to the
specific technical requirements of lithographic, rotogravure and
flexographic printing, as well as photography for packaging, sales
promotion concepts, and point of purchase displays.
RECYCLED CYLINDERBOARD AND INDUSTRIAL PACKAGING
The Company's recycled cylinderboard and industrial packaging
operations are also integrated. Tons of recycled cylinderboard
produced and converted for the last three years were:
<TABLE>
<CAPTION>
1992 1993 1994
(Tons in thousands)
<S> <C> <C> <C>
Recycled Cylinderboard
Production 213 206 209
Consumption 120 123 128
</TABLE>
The Company's recycled cylinderboard mills are located in Tacoma,
Washington, Monroe, Michigan (2 mills), Lafayette, Indiana, and
Cedartown, Georgia. In 1994, total sales of recycled cylinderboard
were $67.8 million (including $28.9 million of intracompany sales).
The Company's 20 industrial packaging plants convert recycled
cylinderboard, including a portion of the recycled cylinderboard
produced by the Company, into papertubes and cores. Papertubes and
cores are used primarily for paper, film and foil, yarn carriers
and other textile products and furniture components. The Company
also produces solid fibre partitions for the pharmaceutical,
<PAGE>
electronics, glass, cosmetics and plastics industries. In
addition, the Company produces a patented self-locking partition
especially suited for automated packaging and product protection.
Also, the Company manufactures corrugated pallets that are made
entirely from corrugated components and are lightweight yet
extremely strong and are fully recyclable. The Company's
industrial packaging sales in 1994 were $94.0 million (including
$1.6 million in intracompany sales).
CONSUMER PACKAGING
The Company manufactures a wide variety of consumer packaging
products. These products include flexible packaging, paper and
metallized paper labels, and labels that are heat transferred to
plastic containers for a wide range of industrial and consumer
product applications. The contract packaging plants provide
cartoning, bagging, liquid- or powder-filling, high-speed
overwrapping and fragranced advertising products. The Company
produces high-quality rotogravure cylinders and has a full-service
organization experienced in the production of color separations and
lithographic film for the commercial printing, advertising and
packaging industries. The Company also designs, manufactures and
sells custom machinery including specialized machines that apply
labels to customers' packaging. The Company currently has 15
facilities including the engineering service center referred to
below and has improved their competitiveness by installing state-
of-the-art production equipment.
In addition, the Company has an engineering services center,
specializing in automated production systems and highly specialized
machinery, providing expert consultation, design and equipment
fabrication for consumer and industrial products manufacturers,
primarily from the pharmaceutical, agricultural and specialty
products industries.
Total sales of consumer packaging products and services in 1994
were $179.7 million (including $14.2 million of intracompany
sales).
RECLAMATION OPERATIONS; FIBRE RESOURCES AND TIMBER PRODUCTS
The raw materials essential to the Company's business are reclaimed
fibre from wastepaper and wood, in the form of logs or chips. The
Brewton, Circleville, Jacksonville and Fernandina mills use
primarily wood fibres, while the other paperboard mills use
reclaimed fibre exclusively. The newsprint mills use approximately
45% wood fibre and 55% reclaimed fibre.
The use of recycled products in the Company's operations begins
with its reclamation division which operates 26 facilities that
collect, sort, grade and bale wastepaper, as well as collect
aluminum and glass. The reclamation division provides valuable
fibre resources to both the paperboard and newsprint segments of
the Company as well as to other producers. Many of the reclamation
facilities are located in close proximity to the Company's recycled
paperboard and newsprint mills, assuring availability of supply,
when needed, with minimal shipping costs. In 1994, the Company
processed 4.1 million tons of wastepaper. The amount of wastepaper
collected and the proportions sold internally and externally by the
Company's reclamation division for the last three years were:
<TABLE>
<CAPTION>
1992 1993 1994
(Tons in thousands)
<S> <C> <C> <C>
Wastepaper collected by Reclamation Division 3,846 3,907 4,134
Percent sold internally 49.7% 48.8% 45.5%
Percent sold to third parties 50.3% 51.2% 54.5%
</TABLE>
<PAGE>
The reclamation division also operates a nationwide brokerage
system whereby it purchases and resells wastepaper (including
wastepaper for use in its recycled fibre mills) on a regional and
national contract basis. Such contracts provide bulk purchasing,
resulting in lower prices and cleaner wastepaper. Total sales of
recycled materials for 1994 were $428.2 million (including $190.2
million of intracompany sales).
During 1994, the wastepaper which was reclaimed by the Company's
reclamation plants and brokerage operations satisfied all of the
Company's mill requirements for reclaimed fibre.
The Company's timber division manages approximately one million
acres of owned and leased timberland. In 1994, approximately 61%
of the timber harvested by the Company was used in its
Jacksonville, Fernandina and Brewton Mills. The Company harvested
953,000 cords of timber which would satisfy approximately 37% of
the Company's requirements for wood fibres. The Company's wood
fibre requirements not satisfied internally are purchased on the
open market or under long-term contracts. In the past, the Company
has not experienced difficulty obtaining an adequate supply of wood
through its own operations or open market purchases. The Company
is not aware of any circumstances that would adversely affect its
ability to satisfy its wood requirements in the foreseeable future.
In recent years, a shortage of wood fibre in the spotted owl
regions in the Northwest has resulted in increases in the cost of
virgin wood fibre. In 1994, the Company's total sales of timber
products were $235.2 million (including $185.4 million of
intracompany sales).
NEWSPRINT SEGMENT
NEWSPRINT MILLS
The Company's newsprint mills are located in Newberg and Oregon
City, Oregon. During 1992, 1993 and 1994, the Company produced
615,000, 615,000 and 615,000 tons of newsprint, respectively. In
1994, total sales of newsprint were $231.4 million (none of which
were intracompany sales).
For the past three years, an average of approximately 54% of the
Company's newsprint production has been sold to The Times Mirror
Company ("Times Mirror") pursuant to a long-term newsprint
agreement (the "Newsprint Agreement") entered into in connection
with the Company's acquisition of Smurfit Newsprint Corporation
("SNC") stock in February 1986. Under the terms of the Newsprint
Agreement, the Company supplies newsprint to Times Mirror generally
at prevailing West Coast market prices. Sales of newsprint to
Times Mirror in 1994 amounted to $113.0 million.
CLADWOOD
Cladwood is a wood composite panel used by the housing industry,
manufactured from sawmill shavings and other wood residuals and
overlaid with recycled newsprint. The Company has two Cladwood
plants located in Oregon. Total sales for Cladwood in 1994 were
$28.7 million ($.5 million of which were intracompany sales).
MARKETING
The marketing strategy for the Company's mills is to maximize sales
of products to manufacturers located within an economical shipping
area. The strategy in the converting plants focuses on both
specialty products tailored to fit customers' needs and high volume
<PAGE>
sales of commodity products. The Company also seeks to broaden the
customer base for each of its segments rather than to concentrate
on only a few accounts for each plant. These objectives have led
to decentralization of marketing efforts, such that each plant has
its own sales force, and many have product design engineers, who
are in close contact with customers to respond to their specific
needs. National sales offices are also maintained for customers
who purchase through a centralized purchasing office. National
account business may be allocated to more than one plant because of
production capacity and equipment requirements.
COMPETITION
The paperboard and packaging products markets are highly
competitive and are comprised of many participants. Although no
single company is dominant, the Company does face significant
competitors in each of its businesses. The Company's competitors
include large vertically integrated companies as well as numerous
smaller companies. The industries in which the Company competes
are particularly sensitive to price fluctuations as well as other
competitive factors including design, quality and service, with
varying emphasis on these factors depending on product line. The
market for the Newsprint segment is also highly competitive.
BACKLOG
Demand for the Company's major product lines is relatively constant
throughout the year and seasonal fluctuations in marketing,
production, shipments and inventories are not significant. The
Company does not have a significant backlog of orders, as most
orders are placed for delivery within 30 days.
RESEARCH AND DEVELOPMENT
The Company's research and development center works with its
manufacturing and sales operations, providing state-of-the-art
technology, from raw materials supply through finished packaging
performance. Research programs have provided improvements in
coatings and barriers, stiffeners, inks and printing. The
technical staff conducts basic, applied and diagnostic research,
develops processes and products and provides a wide range of other
technical services.
The Company actively pursues applications for patents on new
inventions and designs and attempts to protect its patents against
infringement. Nevertheless, the Company believes that its success
and growth are dependent on the quality of its products and its
relationships with its customers, rather than on the extent of its
patent protection. The Company holds or is licensed to use certain
patents, but does not consider that the successful continuation of
any important phase of its business is dependent upon such patents.
<PAGE>
EMPLOYEES
The Company had approximately 16,600 employees at December 31,
1994, of which approximately 11,200 employees (68%), are
represented by collective bargaining units. The expiration date of
union contracts for the Company's major facilities are as follows:
the Newberg mill, expiring March 1995; the Oregon City mill,
expiring March 1997; the Brewton mill, expiring October 1997; the
Fernandina mill, expiring June 1998; a group of 12 properties,
including 4 paper mills and 8 corrugated container plants, expiring
June 1998; and the Jacksonville mill, expiring June 1999. Although
<PAGE>
the contract for the Alton mill expired in June 1994, production at
the mill has not been interrupted and the Company is currently in
the process of bargaining with the union representing the mill
employees. The Company believes that its employee relations are
generally good and is currently in the process of bargaining with
unions representing production employees at a number of its other
operations.
ITEM 2. PROPERTIES
The Company's properties at December 31, 1994 are summarized in the
table below. Approximately 59% of the Company's investment in
property, plant and equipment is represented by its paperboard and
newsprint mills.
<TABLE>
<CAPTION>
Number
of State
Facilities Locations
<S> <C> <C>
Paperboard mills:
Containerboard mills 7 6
Boxboard mills 4 4
Cylinderboard mills 5 4
Newsprint mills 2 1
Reclamation plants 26 12
Converting facilities:
Corrugated container plants 52 22
Folding carton plants 18 10
Industrial packaging plants 20 13
Consumer packaging plants 15 9
Cladwood plants 2 1
Wood product plants 1 1
Total 152 28
</TABLE>
In addition to its manufacturing facilities, the Company owns and
leases approximately 758,000 acres and 226,000 acres of timberland,
respectively, and also operates wood harvesting facilities.
ITEM 3. LEGAL PROCEEDINGS
Litigation
In May 1993, the Company received a notice of default on behalf of
Otis B. Ingram, as executor of the estate of Naomi M. Ingram, and
Ingram-LeGrand Lumber Company with respect to certain timber
purchase agreements and timber management agreements between the
Company and such parties dated November 22, 1967 pertaining to
approximately 30,000 acres of property in Georgia (the
"Agreements"). In June 1993, the Company filed suit against such
parties in the United States District Court, Middle District of
Georgia, seeking declaratory and injunctive relief and damages in
excess of $3 million arising out of the defendants' alleged breach
and anticipatory repudiation of the Agreements. The defendants
have filed an answer and counterclaim seeking damages in excess of
$14 million based on allegations that the Company breached the
Agreements and failed to pay for timber allegedly stolen or
otherwise removed from the property by the Company or third
parties. The case is set for trial in June 1995. The alleged
thefts of timber are being investigated by the Georgia Bureau of
Investigation, which has advised the Company that it is not
presently a target of this investigation. Management does not
believe that the outcome of this litigation will have a material
adverse effect on the Company's financial condition or operations.
<PAGE>
The Company is a defendant in a number of other lawsuits which have
arisen in the normal course of business. While any litigation has
an element of uncertainty, the management of the Company believes
that the outcome of such suits will not have a material adverse
effect on its financial condition or operations.
Environmental Matters
Federal, state and local environmental requirements, particularly
relating to air and water quality, are a significant factor in the
Company's business. The Company employs processes in the
manufacture of pulp, paperboard and other products, resulting in
various discharges and emissions that are subject to numerous
federal, state and local environmental control statutes,
regulations and ordinances. The Company operates and expects to
operate under permits and similar authorizations from various
governmental authorities that regulate such discharges and
emissions.
Occasional violations of permit terms have occurred from time to
time at the Company's facilities, resulting in administrative
actions, legal proceedings or consent decrees and similar
arrangements. Pending proceedings include the following:
In March 1992, the Company entered into an administrative consent
order with the Florida Department of Environmental Regulation to
carry out any necessary assessment and remediation of Company-
owned property in Duval County, Florida that was formerly the
site of a sawmill that dipped lumber into a chemical solution.
Assessment is on-going, but initial data indicates soil and
groundwater contamination that may require nonroutine
remediation. Management believes that the probable costs of this
site, taken alone or with potential costs at other Company-owned
properties where some contamination has been found, will not have
a material adverse effect on its financial condition or
operations.
In February 1994, the Company entered into a consent decree with
the State of Ohio in full satisfaction of all liability for
alleged violations of applicable standards for particulate and
opacity emissions with respect to two coal-fired boilers at its
Lockland, Ohio recycled boxboard mill (which was permanently
closed as part of the Company's Restructuring Program). The
Company paid $122,000 in penalties and enforcement costs pursuant
to such consent decree. The United States Environmental
Protection Agency also issued a notice of violation with respect
to such emissions, but has informally advised the Company's
counsel that no Federal enforcement is likely to be commenced in
light of the settlement with the State of Ohio.
In the fourth quarter of 1994, the Company learned of possible
noncompliance with certain provisions of its
construction/operation permit at its D-Graphics labels plant
located in Jacksonville, Florida. In October, 1994, the Company
voluntarily reported such possible noncompliance to state and
local environmental authorities and suspended operations at this
facility for several days until temporary operating authority was
obtained. Subsequently, a settlement agreement was signed
between the Company, the Florida Department of Environmental
Protection and the City of Jacksonville Regulatory and
Environmental Services Division to resolve all civil and
administrative issues regarding this matter, pursuant to which
the Company has paid an aggregate of $1.5 million in fines and
penalties. An operating permit allowing the plant to be operated
on a continuing basis has also been obtained. The United States
Department of Justice is currently conducting a criminal
investigation of the matters reported by the Company and it is
uncertain whether any criminal action will be forthcoming.
<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 legality of the original disposal. The
Company has received notice that it is or may be a PRP at a number
of federal and/or state sites where remedial action may be
required, and as a result may have joint and several liability for
cleanup costs at such sites. However, liability of CERCLA sites is
typically shared with the other PRPs and costs are commonly
allocated according to relative amounts of waste deposited.
Because the Company's relative percentage of waste deposited at the
majority of these sites is quite small, management of the Company
believes that its probable liability under CERCLA, taken on a case
by case basis or in the aggregate, will not have a material adverse
effect on its financial condition or operations. Pending CERCLA
proceedings include the following:
Miami County, Ohio Site
In January 1990, the Company filed a motion for leave to
intervene and for modification of the consent decree in United
States v. General Refuse Services, a case pending in the United
States District Court for the Southern District of Ohio. The
Company contended that it should have been allowed to participate
in the proposed consent decree, which provided for remediation of
alleged releases or threatened releases of hazardous substances
at a site in Miami County, near Troy, Ohio, according to a plan
approved by the United States Environmental Protection Agency,
Region V (the "Agency"). The Court granted the Company's motion
to intervene in this litigation, but denied the Company's motion
for an order denying entry of the consent decree. Consequently,
the consent decree was entered without the Company's being
included as a party to the decree, meaning that the Company had
some exposure to potential claims for contribution to remediation
costs incurred by other participants and for non-reimbursed
response costs incurred by the Agency.
In December 1991, the United States filed a civil action against
the Company in United States District Court, Southern District of
Ohio, to recover its unreimbursed costs at the Miami County site,
and the Company subsequently filed a third-party complaint
against certain entities that had joined the original consent
decree. The Company and the United States have executed a
consent decree which was lodged with the Court in January 1995,
pursuant to which the Company will pay $3.1 million in
satisfaction of its alleged and/or potential liability for past
and future response costs in connection with this site.
<PAGE>
In October 1993, the United States filed an additional suit
against the Company in the same court seeking injunctive relief
and damages up to $25,000 per day from March 27, 1989 to the
present, based on the Company's alleged failure to properly
respond to the Agency's document and information requests in
connection with this site. The Company and the United States
have reached an agreement in principle pursuant to which the
Company will pay $1.2 million in settlement of the pending
litigation concerning the Company's allegedly improper responses
to the document requests of the Environmental Protection Agency
in connection with this site.
In July 1993, counsel for the Company was advised by the Office
of the United Stated Attorney, Northern District of Illinois that
a criminal inquiry is also underway relating to the Company's
responses to the Agency's document and information requests. The
Company is investigating the circumstances regarding its
responses. It is uncertain whether any criminal action will be
forthcoming.
Monterey Park, California Site
The Company has paid approximately $768,000 pursuant to two
partial consent decrees entered into in 1990 and 1991 with
respect to clean-up obligations at the Operating Industries site
in Monterey Park, California. It is anticipated that there will
be further remedial measures beyond those covered by these
partial settlements.
Griffin, Indiana Site
The Company entered into a settlement with the United States, the
State of Indiana and certain other parties pursuant to which
their obligations in connection with a superfund site in Griffin,
Indiana were satisfied in exchange for aggregate payments of
approximately $588,000.
Kankakee County, Illinois Site
The Company has paid $258,000 and agreed to pay an additional
amount of approximately $50,000 in full settlement of its
obligations in connection with a superfund site in Kankakee
County, Illinois.
In addition to other Federal and State laws regarding hazardous
substance contamination at sites owned or operated by the Company,
the New Jersey Industrial Site Recovery Act ("ISRA") requires that
a "Negative Declaration" or a "Cleanup Plan" be filed and approved
by the New Jersey Department of Environmental Protection and Energy
("DEPE") as a precondition to the "transfer" of an "industrial
establishment". The ISRA regulations provide that a transferor may
close a transaction prior to the DEPE's approval of a negative
declaration if the transferor enters into an administrative consent
order with the DEPE. The Company is currently a signatory to
administrative consent orders with respect to two formerly leased
or owned industrial establishments and has recently closed a
facility and received a negative declaration with respect thereto.
Management believes that any requirements that may be imposed by
the DEPE with respect to these sites will not have a materially
adverse effect on the financial condition or operations of the
Company.
The Company's paperboard and newsprint mills are large consumers of
energy, using either natural gas or coal. Approximately 68% of the
Company's total paperboard tonnage is produced by mills which have
coal-fired boilers. The cost of energy is dependent, in part, on
environmental regulations concerning sulfur dioxide and particulate
emissions.
<PAGE>
Because various pollution control standards are subject to change,
it is not possible at this time to predict the amount of capital
expenditures that will ultimately be required to comply with future
standards. In particular, the United States Environmental
Protection Agency has proposed a comprehensive rule governing the
pulp, paper and paperboard industry, which could require
substantial expenditures to achieve compliance on the part of the
Company. For the past three years, the Company has spent an
average of approximately $10.0 million annually on capital
expenditures for environmental purposes. Further sums may be
required in the future, although, in the opinion of management,
such expenditures will not have a material effect on its financial
condition or results of operations. The amount budgeted for such
capital expenditures for fiscal 1995 is approximately $20.0
million. Since the Company's competitors are, or will be, subject
to comparable pollution control standards, including the proposed
rule discussed above, if implemented, management is of the opinion
that compliance with future pollution standards will not adversely
affect the Company's competitive position.
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 1994.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
MARKET INFORMATION
The Company is a wholly-owned subsidiary of JSCE. All of the
outstanding common stock of the Company ("JSC (U.S.) Common Stock")
is owned by JSCE. As a result, there is no established public
market for the JSC (U.S.) Common Stock.
DIVIDENDS
There have been no dividends on the JSC (U.S.) Common Stock since
the date of the 1989 Transaction (as defined in the Company's
Registration Statement on Form S-2 (File No. 33-52383)).
The ability of the Company to pay dividends in the future is
restricted by certain provisions contained in the 1994 Credit
Agreement and the indentures relating to the Company's outstanding
indebtedness. Delaware law generally requires that dividends are
payable only out of a company's surplus or current net profits in
accordance with the General Corporation Law of Delaware. Such
Delaware law limitations apply to the payment of dividends by the
Company. Any determination to pay cash dividends in the future
will be at the discretion of the Board of Directors and will be
dependent upon the Company's results of operations, financial
condition, contractual restrictions and other factors deemed
relevant at the time by the Board of Directors.
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
(In millions, except statistical data)
<TABLE>
<CAPTION>
1994 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C>
Summary of Operations
Net sales $3,233.3 $2,947.6 $2,998.4 $2,940.1 $2,910.9
Cost of goods sold 2,718.7 2,567.2 2,495.4 2,407.3 2,294.2
Gross profit 514.6 380.4 503.0 532.8 616.7
Selling and administrative expenses 223.7 239.2 231.4 225.2 218.8
Restructuring charge 96.0
Environmental and other charges 54.0
Income (loss) from operations 290.9 (8.8) 271.6 307.6 397.9
Interest expense (268.5) (254.2) (300.1) (335.2) (337.8)
Other, net <F1> 6.3 5.4 4.5 (39.5) (2.9)
Income (loss) before income taxes,
extraordinary item and cumulative
effect of accounting changes 28.7 (257.6) (24.0) (67.1) 57.2
Provision for (benefit from)
income taxes 16.4 (83.0) 10.0 10.0 35.4
Income (loss) before
extraordinary item and cumulative
effect of accounting changes 12.3 (174.6) (34.0) (77.1) 21.8
Extraordinary item
Loss from early extinguishment
of debt, net of income tax benefit (55.4) (37.8) (49.8)
Cumulative effect of accounting
changes (16.5)
Net income (loss) $ (43.1) $ (228.9) $ (83.8) $ (77.1) $ 21.8
Other Financial Data
Net cash provided by operating
activities $ 149.3 $ 78.2 $ 145.7 $ 133.0 $ 299.1
Depreciation, depletion and
amortization 131.6 130.8 134.9 130.0 122.6
Property and timberland additions 163.2 117.4 97.9 118.9 192.0
Working capital 10.5 40.0 105.7 76.9 60.7
Property, plant and equipment and
timberland, net 1,686.1 1,636.0 1,496.5 1,525.9 1,527.3
Total assets 2,759.0 2,597.1 2,436.4 2,460.1 2,447.9
Long-term debt 2,391.7 2,619.1 2,503.0 2,650.4 2,636.7
Deferred income tax liability 207.7 232.2 159.8 158.3 168.6
Stockholder's deficit (730.3) (1,057.8) (828.9) (976.9) (899.4)
Statistical Data (tons in thousands)
Containerboard production (tons) 1,932 1,840 1,918 1,830 1,797
Boxboard production (tons)<F2> 767 744 745 726 718
Newsprint production (tons) 615 615 615 614 623
Corrugated shipments (billion sq. ft.) 30.8 29.4 28.1 26.4 24.7
Folding carton shipments (tons) 486 475 487 482 455
Fibre reclaimed and brokered (tons) 4,134 3,907 3,846 3,666 3,547
Timberland owned or leased
(thousand acres) 985 984 978 978 968
Number of employees 16,600 17,300 17,800 18,100 17,600
<FN>
<F1> Other, net in 1991 includes after-tax charges of $29.3 million
and $6.7 million for the write-off of the Company's equity
investments in Temboard and Company Limited Partnership, Inc.
and PCL Industries Limited, respectively.
<F2> Amounts shown for 1993, 1992, 1991 and 1990 exclude production
from the Lockland, Ohio boxboard mill that was closed in
January 1994 as part of the Company's Restructuring Program
(as discussed in Item 7. - Management's Discussion and
Analysis of Financial Condition and Results of Operations).
</FN>
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
General
Markets for containerboard, corrugated shipping containers and
newsprint, three of the Company's most important products, are
generally subject to cyclical changes in the economy and changes in
industry capacity, both of which can significantly impact selling
prices and the Company's profitability. The sluggish U.S. economy
in 1991, 1992 and 1993, coupled with a decline in export markets,
caused an imbalance of supply and demand, which resulted in excess
inventories and lower prices for these products. From the first
quarter of 1991 through the third quarter of 1993, reported
linerboard prices fell from approximately $350 per ton to
approximately $280 per ton. Similarly, newsprint prices were
depressed over the same period. As a result, profits of companies
in these industries, including profits of the Company, fell sharply
in 1993.
Containerboard markets began to recover in late 1993 and, based on
increasing demand, a price increase was successfully implemented in
the fourth quarter of 1993. As the economy gained strength and
export shipments increased during 1994, demand for containerboard
products improved. Excess inventories were sold and additional
price increases were rapidly implemented. By the end of 1994, the
reported price of linerboard had risen to $430 per ton and
increased an additional $50 per ton on January 1, 1995. An
additional price increase for containerboard has been announced by
the Company for April 1, 1995. Demand for newsprint improved in
the second half of 1994 and price increases were implemented by the
Company in August and December of 1994, for a total price increase
of $87 per ton. Additional newsprint increases have been announced
by the Company effective March 1 and May 1, 1995.
Prices for the Company's other products showed mixed performance
for 1994. Recycled boxboard prices were comparable to 1993, but
SBS prices, although rising in the second half of 1994, were 5%
lower on average compared to last year. Recycled cylinderboard
prices were higher by approximately 8% compared to last year.
As the economic recovery progressed, unprecedented demand for
recycled fibre caused shortages of this material and prices
escalated at a dramatic rate beginning in the second quarter of the
year. While the effect of the reclaimed fibre price increases is
favorable to the Company's reclamation products division, it is
unfavorable to the Company overall because of the increase in fibre
cost to the paper mills that use reclaimed fibre. The Company
believes that its cost of fibre, a key raw material, will remain
substantially higher than in prior years, although it does not
anticipate a problem satisfying its need for this material in the
foreseeable future.
With the exception of recycled fibre, the moderate level of
inflation during the past few years has not had a material impact
on the Company's financial position or operating results. The
Company uses the LIFO method of accounting for approximately 80% of
its inventories. Under this method, the cost of products sold
reported in the financial statements approximates current cost and
thus reduces the distortion in reported income due to increasing
costs.
<PAGE>
Cost Reduction Initiatives
The cyclical downturn of the early 1990's led management to
undertake several major cost reduction initiatives. In 1991, the
Company implemented an austerity program to freeze staff levels,
defer certain discretionary spending programs and more aggressively
manage capital expenditures and working capital in order to
conserve cash and reduce interest expense. While these measures
successfully reduced expenses and increased cash flow, the length
and extent of the industry downturn led the Company, in 1993, to
initiate a new six year plan to reduce costs, increase volume and
improve product mix (the "Cost Reduction Initiatives").
The Cost Reduction Initiatives include systematic Company-wide
efforts designed to improve the cost competitiveness of all the
Company's operating facilities and staff functions. In addition to
increases in volume and improvements in product mix resulting from
less commodity oriented business at its converting operations, the
program focuses on opportunities to reduce costs and other
measures, including (i) productivity improvements, (ii) capital
projects which provide high returns and quick paybacks, (iii)
reductions in the purchase cost of materials, (iv) reductions in
personnel costs and (v) reductions in waste cost.
Restructuring Program
To further counteract the downturn in the industries in which the
Company operates, management examined its cost and operating
structure and developed a restructuring program (the "Restructuring
Program") to improve its long-term competitive position. As a
result of management's review, in September 1993, the Company
recorded a pre-tax charge of $96 million including a provision for
direct expenses associated with (i) plant closures (consisting
primarily of employee severance and termination benefits, lease
termination costs and environmental costs, (ii) asset write-downs
(consisting primarily of write-offs of machinery no longer used in
production and nonperforming machine upgrades, (iii) employee
severance and termination benefits for the elimination of salaried
and hourly personnel in operating and management realignment and
(iv) relocation of employees and consolidation of plant operations.
The restructuring charge consisted of approximately $43 million for
the write-down of assets at closed facilities and other
nonproductive assets and $53 million of anticipated cash
expenditures. Approximately $23.9 million (45%) of the cash
expenditures were incurred through 1994, the majority of which
related to plant closure costs. The remaining cash expenditures
will continue to be funded through operations, a majority of which
will be paid in 1995 and 1996, as originally planned. Based on
expenditures to date and those anticipated by the original plan, no
significant adjustment to the reserve balance is expected at this
time.
Environmental Matters
In 1993, the Company recorded a provision of $54 million of which
$39 million relates to environmental matters, representing asbestos
and PCB removal, solid waste cleanup at existing and former
operating sites, and expenses for response costs at various sites
where the Company has received notice that it is a potentially
responsible party ("PRP"). During 1994, the Company incurred $6.1
million in cash expenditures related to these environmental
matters. The Company, as well as other companies in the industry,
<PAGE>
faces potential environmental liability related to various sites at
which wastes have allegedly been deposited. The Company has
received notice that it is or may be a PRP at a number of federal
and state sites (the "Sites") where remedial action may be
required. Because the laws that govern the clean up of waste
disposal sites have been construed to authorize joint and several
liability, government agencies or other parties could seek to
recover all response costs for any Site from any one of the PRPs
for such Site, including the Company, despite the involvement of
other PRPs. Although the Company is unable to estimate the
aggregate response costs in connection with the remediation of all
Sites, if the Company were held jointly and severally liable for
all response costs at some or all of the Sites, it would have a
material adverse effect on the financial condition and results of
operations of the Company. However, joint and several liability
generally has not in the past been imposed on PRPs, and, based on
such past practice, the Company's past experience and the financial
conditions of other PRPs with respect to the Sites, the Company
does not expect to be held jointly and severally liable for all
response costs at any Site. Liability at waste disposal sites is
typically shared with other PRPs and costs generally are allocated
according to relative volumes of waste deposited. At most Sites,
the waste attributed to the Company is a very small portion of the
total waste deposited at the Site (generally significantly less
than 1%). There are approximately ten Sites where final settlement
has not been reached and where the Company's potential liability is
expected to exceed de minimis levels. Accordingly, the Company believes that
its estimated total probable liability for response costs at the Sites was
adequately reserved at December 31, 1994. Further, the estimate takes into
consideration the number of other PRPs at each site, the identity, and
financial position of such parties, in light of the joint and several nature
of the liability, but does not take into account possible insurance coverage
or other similar reimbursement.
<TABLE>
Results of Operations
<CAPTION>
(In millions) 1994 1993 1992
Operating Operating Operating
Net profit Net profit Net profit
sales (loss) sales (loss) sales (loss)
<S> <C> <C> <C> <C> <C> <C>
Paperboard/
Packaging Products $2,973.7 $310.9 $2,699.5 $16.5 $2,751.0 $284.6
Newsprint 259.6 (16.5) 248.1 (21.4) 247.4 (10.3)
Total $3,233.3 $294.4 $2,947.6 $(4.9) $2,998.4 $274.3
</TABLE>
1994 Compared to 1993
Results for 1994 reflect the accelerating demand for the Company's
products. Net sales of $3.23 billion for 1994 set a record, up
9.7% compared to 1993. Increases/(decreases) in sales for each of
the Company's segments are shown in the chart below.
<PAGE>
<TABLE>
<CAPTION>
(In millions) 1994 Compared to 1993
Paperboard/
Packaging
Products Newsprint Total
<S> <C> <C> <C>
Increase (decrease) due to:
Sales price and product mix $183.8 $11.6 $195.4
Sales volume 199.5 (.1) 199.4
Acquisitions and new facilities 5.3 5.3
Plant closings and asset distributions (114.4) (114.4)
Total net sales increase $274.2 $11.5 $285.7
</TABLE>
Net sales in the Paperboard/Packaging Products segment for 1994
increased $274.2 million, up 10.2% compared to 1993, due to higher
sales prices and increased sales volume. Record sales volume was
achieved for several major products, including: containerboard up
3.8%; corrugated shipping containers up 4.7%; and reclamation
products up 5.8%. Sales growth for this segment was mitigated by
the shutdown of several operating facilities in late 1993 and early
1994, including a coated recycled boxboard mill, five converting
plants and two reclamation products facilities, in connection with
the Company's Restructuring Program.
Net sales in the Newsprint segment for 1994 increased $11.5
million, up 4.6% compared to 1993, due primarily to higher sales
prices in the second half of the year.
Costs and expenses in both segments in 1994 were favorably impacted
by the Cost Reduction Initiatives begun in 1993 and by the
Restructuring Program (together, the "Plans"). Cost of goods sold
as a percent of net sales in the Paperboard/Packaging Products
segment declined from 85.6% in 1993 to 82.5% in 1994, primarily as
a result of higher sales prices, improved capacity utilization and
other benefits associated with the Plans. Cost of goods sold as a
percent of net sales in the Newsprint segment improved modestly
from 102.8% in 1993 to 102.2% in 1994, primarily as a result of
higher sales prices. Selling and administrative expenses in both
segments in 1994 were also favorably impacted by the Plans.
The Company increased its weighted average discount rate in
measuring its pension obligations from 7.6% to 8.5% and its rate of
increase in compensation levels from 4.0% to 5.0% at December 31,
1994. The net effect of changing these assumptions was the primary
reason for the decrease in projected benefit obligations and the
changes are expected to decrease pension cost in 1995 by
approximately $3.9 million.
Average debt levels outstanding decreased in 1994 as a result of
the Recapitalization discussed below; however, interest expense of
$268.5 million for 1994 increased 5.6% compared to 1993 due to the
impact of higher effective interest rates in 1994.
The tax provision for 1994 was $16.4 million compared to a tax
benefit for 1993 of $83.0 million. The Company's effective tax
rate for 1994 was higher than the Federal statutory tax rate due to
several factors, the most significant of which was the effect of
permanent differences between book and tax accounting.
<PAGE>
The Company recorded an extraordinary loss from the early
extinguishment of debt (net of income tax benefits) amounting to
$55.4 million in 1994 and $37.8 million in 1993. The Company
adopted Statement of Financial Accounting Standards ("SFAS") No.
112 "Employers' Accounting for Postemployment Benefits" in 1994,
the effect of which was not material.
1993 Compared to 1992
The Company's net sales for 1993 decreased 1.7% to $2.95 billion
compared to $3.0 billion in 1992. Increases/(decreases) in each of
the Company's segment sales are shown in the chart below.
<TABLE>
<CAPTION>
(In millions) 1993 Compared to 1992
Paperboard/
Packaging
Products Newsprint Total
<S> <C> <C> <C>
Increase (decrease) due to:
Sales price and product mix $(91.2) $(3.0) $(94.2)
Sales volume 15.8 3.7 19.5
Acquisitions and new facilities 34.9 34.9
Plant closings and asset distribution (11.0) (11.0)
Total net sales increase (decrease) $(51.5) $ .7 $(50.8)
</TABLE>
Net sales decreased 1.9% in the Paperboard/Packaging Products
segment in 1993. The decrease was due primarily to lower prices
and changes in product mix for containerboard, corrugated shipping
containers and folding cartons. This decrease was partially offset
by an increase in sales volume primarily of corrugated shipping
containers, which set a record in 1993. A newly constructed
corrugated container facility and several minor acquisitions in
1992 caused net sales to increase $34.9 million for 1993.
Net sales increased 0.3% in the Newsprint segment as a result of an
increase in sales volume in 1993 compared to 1992, partially offset
by a decline in sales prices.
Cost of goods sold as a percent of net sales for the
Paperboard/Packaging Products segment rose from 81.8% in 1992 to
85.6% in 1993 due primarily to the aforementioned changes in
pricing and product mix. Cost of good sold as a percent of net
sales in the Newsprint segment rose from 99.0% in 1992 to 102.8% in
1993 due primarily to the higher cost of energy and fibre and
decreases in sales price. In 1993, the Company changed the
estimated depreciable lives of its paper machines and major
converting equipment. These changes were made to better reflect
the estimated periods during which the assets will remain in
service and were based upon the Company's historical experience and
comparable industry practice. These changes were made effective
January 1, 1993 and had the effect of reducing depreciation expense
by $17.8 million and decreasing the 1993 net loss by $11.0 million.
Selling and administrative expenses increased to $239.2 million
(3.4%) for 1993 compared to $231.4 million for 1992. The increase
was due primarily to higher provisions for retirement costs,
acquisitions, new facilities and other costs.
In order to minimize significant year-to-year fluctuations in
pension cost caused by financial market volatility, the Company
changed, effective January 1, 1993, the method of accounting for
the recognition of fluctuations in the market value of pension
assets. The effect of this change on 1993 results of operations,
including the cumulative effect of prior years, was not material.
See Note 6 to the Company's consolidated financial statements.
<PAGE>
The Company reduced its weighted average discount rate in measuring
its pension obligations from 8.75% to 7.6% and its rate of increase
in compensation levels from 5.5% to 4.0% at December 31, 1993. The
net effect of changing these assumptions was the primary reason for
the increase in the projected benefit obligations and the changes
are expected to increase pension cost by approximately $3.4 million
in 1994.
Interest expense for 1993 declined $45.9 million due to lower
effective interest rates and the lower level of subordinated debt
outstanding resulting primarily from a $231.8 million capital
contribution received in August 1992.
The benefit from income taxes for 1993 was $83.0 million compared
to a tax provision of $10.0 million in 1992. The significant
difference in the income tax provision from 1993 to 1992 results
from the use of the liability method of accounting which restored
deferred income taxes and increased the related asset values for
tax effects previously recorded as a reduction to the carrying
amount of the related assets under prior business combinations.
The Company's effective tax rate for 1993 was lower than the
Federal statutory tax rate due to the effect of permanent
differences between book and tax accounting and a $5.7 million
provision to adjust deferred tax assets and liabilities in 1993 due
to the enacted Federal income tax rate change from 34% to 35%.
Effective January 1, 1993, the Company adopted SFAS No. 109,
"Accounting for Income Taxes" and SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions". The
cumulative effect of adopting SFAS No. 109 was to increase net
income for 1993 by approximately $20.5 million. The cumulative
effect of adopting SFAS No. 106 was to decrease net income for 1993
by approximately $37.0 million.
Liquidity and Capital Resources
The Company completed a recapitalization plan in May 1994 (the
"Recapitalization") in order to improve its operating and financial
flexibility by reducing the level and overall cost of its debt,
extending maturities of indebtedness, increasing stockholder's
equity and increasing its access to capital markets. In connection
with the Recapitalization, (i) JSC issued and sold 19,250,000
shares of common stock pursuant to a registered public offering at
an initial public offering price of $13.00 per share, (ii) JS
Group, through its wholly-owned subsidiary Smurfit International
B.V. ("SIBV"), purchased an additional 11,538,462 shares of common
stock for $150 million, (iii) the Company issued and sold $300
million aggregate principal amount of 11.25% Series A Senior Notes
due 2004 and $100 million aggregate principal amount of 10.75%
Series B Senior Notes due 2002 pursuant to a registered public
offering (the "1994 Senior Notes") and (iv) the Company entered
into a new bank credit facility (the "1994 Credit Agreement")
consisting of a $450 million revolving credit facility (the "New
Revolving Credit Facility") of which up to $150 million may consist
of letters of credit, a $300 million Tranche A Term Loan and a $900
million Tranche B Term Loan. Proceeds of the Recapitalization,
including $370.6 million from the shares issued to the public and
SIBV, $400.0 million from the sale of the 1994 Senior Notes and
borrowings under the 1994 Credit Agreement were used to extinguish
the Company's 1989 and 1992 term loans, the 1989 revolving credit
<PAGE>
facility, the Company's senior secured notes and redeem the
Company's subordinated debentures, including related premiums and
accrued interest, and pay related fees and expenses. Had the
Recapitalization occurred on January 1, 1994, the Company's income
before extraordinary item would have been $42.0 million and the net
loss would have been $15.1 million for 1994.
Outstanding loans under the Tranche A Term Loan and the New
Revolving Credit Facility bear interest at rates selected at the
option of the Company equal to the alternate base rate ("ABR") plus
1.5% per annum or the adjusted LIBOR Rate plus 2.5% per annum
(8.77% at December 31, 1994). Interest on outstanding loans under
the Tranche B Term Loan is payable at a rate per annum selected at
the option of the Company, equal to the prime rate plus 2% per
annum or the adjusted LIBOR rate plus 3% per annum (8.56% at
December 31, 1994). The ABR rate is defined as the highest of
Chemical Bank's prime lending rate, 1/2 of 1% in excess of the
Federal Funds Rate or 1% in excess of the base certificate of
deposit rate. The New Revolving Credit Facility matures in 2001.
The Tranche A Term Loan matures in various installments from 1995
to 2001. The Tranche B Term Loan matures in various installments
from 1995 to 2002.
The 1994 Credit Agreement contains various business and financial
covenants including, among other things, (i) limitations on
dividends, redemptions and repurchases of capital stock, (ii)
limitations on the incurrence of indebtedness, liens, leases, sale-
leaseback transactions, (iii) limitations on capital expenditures,
(iv) maintenance of minimum levels of consolidated earnings before
depreciation, interest, taxes and amortization and (v) maintenance
of minimum interest coverage ratios. Such restrictions, together
with the highly leveraged position of the Company, could restrict
corporate activities, including the Company's ability to respond to
market conditions, to provide for unanticipated capital
expenditures or to take advantage of business opportunities.
The 1994 Credit Agreement imposes an annual limit on future capital
expenditures of $150.0 million. The capital spending limit is
subject to increase by an amount up to $75.0 million in any year if
the prior year's spending was less than the maximum amount allowed.
The Company has a carryover of $62.4 million for 1995. Capital
expenditures in 1994, including property and timberland additions
and acquisitions, were $166.9 million. Because the Company has
invested heavily in its core businesses in prior years, management
believes the annual limitation for capital expenditures does not
impair its plans for maintenance, expansion and continued
modernization of its facilities.
The Company's earnings are significantly affected by the amount of
interest on its indebtedness. The Company enters into interest
rate swap, cap and option agreements to manage its interest rate
exposure on its indebtedness. Management's objective is to protect
the Company from interest rate volatility and reduce or cap
interest expense within acceptable levels of risk. Periodic
amounts to be paid or received under these agreements are accrued
and recognized as adjustments to interest expense. The Company
amends existing agreements or enters into agreements with
offsetting effects when necessary to change its net position.
During 1994, as interest rates increased, the Company amended
several of its agreements and entered new agreements, including
options, to respond to those rate changes. Significant option
positions entered into to offset increasing rates in 1994 expired
unexercised, and there are no significant options outstanding at
December 31, 1994.
<PAGE>
The table below shows certain interest rate swap agreements
outstanding at December 31, 1994 the related maturities for the
years thereafter and the contracted pay and receive rates for such
agreements. Included are swaps with a notional amount of $345.0
million not associated with existing debt at December 31, 1994, due
to previous debt extinguishments, which are carried at fair market
value with changes to the fair value reflected in interest expense.
<TABLE>
<CAPTION>
Interest rate
swaps at Interest rate
December 31, swap maturities
(In millions) 1994 1995 1996 1997
<S> <C> <C> <C> <C>
Pay fixed interest rate swaps $532.5 $(150.0) $(150.0) $(232.5)
Pay rate 7.180% 7.180% 6.990% 7.474%
Receive rate 5.732%
Receive fixed interest rate swaps $595.0 $(595.0)
Pay rate 7.161%
Receive rate 5.041% 5.041%
</TABLE>
In addition, the Company has swap agreements not associated with
existing debt at December 31, 1994 with a notional amount of $180
million (of which $100 million matures in 1995 and $80 million
matures in 1996) whereby the Company is receiving a weighted
average variable rate of 5.2% and pays a weighted average variable
rate of 6.1%.
The Company has a cap agreement with a notional amount of $100.0
million, which matures in 1996, on variable rate debt which caps
the Company's variable interest rates at 7.5% on the notional
amount. In addition, the Company has a cap agreement with a
notional amount of $100.0 million, which matures in 1996, on
variable rate debt which limits the Company's interest payments to
a range of 5.5-7.0% on the notional amount.
Operating activities have historically been the major source of
cash for the Company's working capital needs, capital expenditures
and debt payments. Net cash provided by operating activities for
1994 improved $71.1 million (90.9%) over 1993. Scheduled payments
due in 1995 and 1996 under the 1994 Credit Agreement are $46.0
million and $117.0 million, respectively, with increasing amounts
thereafter. The Company believes that cash provided by operating
activities and available financing sources will be sufficient for
the next several years to pay interest on the Company's
obligations, amortize its term loans and fund capital expenditures.
At December 31, 1994, the Company had $303.2 million of unused
borrowing capacity under its 1994 Credit Agreement and borrowing
capacity of $12.0 million under its $230.0 million accounts
receivable securitization program (the "1991 Securitization
Program") subject to the Company's level of eligible accounts
receivable. In the first quarter of 1995, the Company entered into
a new $315.0 million accounts receivable securitization program
(the "1995 Securitization"), consisting of a $300.0 million trade
receivables-backed commercial paper program and a $15.0 million
term loan. Proceeds of the 1995 Securitization were used to
extinguish the Company's 1991 Securitization Program.
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Page No.
The following consolidated financial statements of Jefferson
Smurfit Corporation (U.S.) are included in this report:
Consolidated balance sheets - December 31, 1994 and 1993 . . . . . 27
For the years ended December 31, 1994, 1993 and 1992:
Consolidated statements of operations. . . . . . . . . . . . . 28
Consolidated statements of stockholder's deficit . . . . . . . 29
Consolidated statements of cash flows. . . . . . . . . . . . . 30
Notes to consolidated financial statements. . . . . . . . . . . . . 31
The following consolidated financial statement schedules of
Jefferson Smurfit Corporation (U.S.) are included in Item 14(a):
VIII: Valuation and Qualifying Accounts . . . . . . . . . . . 71
All other schedules specified under Regulation S-X for Jefferson
Smurfit Corporation (U.S.) have been omitted because they are
either not applicable, not required or because the information
required is included in the financial statements or notes thereto.
<PAGE>
MANAGEMENT'S STATEMENT OF RESPONSIBILITY
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.
James E. Terrill
President, Chief Executive Officer
John R. Funke
Vice President and Chief Financial Officer
(Principal Accounting Officer)
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Jefferson Smurfit Corporation (U.S.)
We have audited the accompanying consolidated balance sheets of
Jefferson Smurfit Corporation (U.S.) as of December 31, 1994 and
1993, and the related consolidated statements of operations,
stockholder's deficit and cash flows for each of the three years in
the period ended December 31, 1994. Our audits also included the
financial statement schedule listed in the Index at Item 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 Jefferson Smurfit Corporation (U.S.) at December 31,
1994 and 1993, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended
December 31, 1994 in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material
respects the information set forth therein.
As discussed in Note 5 and Note 6 to the financial statements, in
1993, the Company changed its method of accounting for income taxes
and postretirement benefits.
Ernst & Young LLP
St. Louis, Missouri
January 30, 1995 except
as to Note 14, as to which
the date is February 23, 1995
<PAGE>
<TABLE>
JEFFERSON SMURFIT CORPORATION (U.S.)
CONSOLIDATED BALANCE SHEETS
(In millions)
<CAPTION>
December 31, 1994 1993
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 61.8 $ 44.2
Receivables, less allowances of
$8.6 in 1994 and $9.2 in 1993 316.3 243.2
Inventories
Work-in-process and finished goods 86.9 96.1
Materials and supplies 136.8 137.2
223.7 233.3
Deferred income taxes 38.1 41.9
Prepaid expenses and other current assets 6.6 5.9
Total current assets 646.5 568.5
Net property, plant and equipment 1,427.1 1,374.5
Timberland, less timber depletion 259.0 261.5
Goodwill, less accumulated amortization of
$35.0 in 1994 and $27.6 in 1993 257.1 261.4
Other assets 169.3 131.2
$2,759.0 $2,597.1
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current liabilities
Current maturities of long-term debt $ 50.2 $ 10.3
Accounts payable 348.8 270.6
Accrued compensation and payroll taxes 114.3 110.1
Interest payable 48.3 52.6
Other accrued liabilities 74.4 84.9
Total current liabilities 636.0 528.5
Long-term debt, less current maturities 2,391.7 2,619.1
Other long-term liabilities 237.5 257.1
Deferred income taxes 207.7 232.2
Minority interest 16.4 18.0
Stockholder's deficit
Common stock, par value $.01 per share;
1,000 shares authorized and outstanding
Additional paid-in capital 1,102.4 731.8
Retained earnings (deficit) (1,832.7) (1,789.6)
Total stockholder's deficit (730.3) (1,057.8)
$ 2,759.0 $ 2,597.1
</TABLE>
See notes to consolidated financial statements.
<TABLE>
JEFFERSON SMURFIT CORPORATION (U.S.)
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions)
<CAPTION>
Year Ended December 31, 1994 1993 1992
<S> <C> <C> <C>
Net sales $3,233.3 $2,947.6 $2,998.4
Costs and expenses
Cost of goods sold 2,718.7 2,567.2 2,495.4
Selling and administrative expenses 223.7 239.2 231.4
Restructuring charge 96.0
Environmental and other charges 54.0
Income (loss) from operations 290.9 (8.8) 271.6
Other income (expense)
Interest expense (268.5) (254.2) (300.1)
Other, net 6.3 5.4 4.5
Income (loss) before income taxes,
extraordinary item and cumulative
effect of accounting changes 28.7 (257.6) (24.0)
Provision for (benefit from) income taxes 16.4 (83.0) 10.0
Income (loss) before extraordinary item and
cumulative effect of accounting changes 12.3 (174.6) (34.0)
Extraordinary item
Loss from early extinguishment of debt,
net of income tax benefit of $33.7 in
1994, $21.7 in 1993 and $25.8 in 1992 (55.4) (37.8) (49.8)
Cumulative effect of accounting changes
Postretirement benefits, net of income tax
benefit of $21.9 (37.0)
Income taxes 20.5
Net loss $ (43.1) $ (228.9) $ (83.8)
</TABLE>
See notes to consolidated financial statements.
<PAGE>
<TABLE>
JEFFERSON SMURFIT CORPORATION (U.S.)
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S DEFICIT
(In millions except share data)
<CAPTION>
Common Stock
Par Number Additional Retained
Value of Paid-In Earnings
$.01 Shares Capital (Deficit)
<S> <C> <C> <C> <C>
Balance at January 1, 1992 $ 1,000 $ 500.0 $(1,476.9)
Net loss (83.8)
Capital contribution,
net of related expenses 231.8
Balance at December 31, 1992 1,000 731.8 (1,560.7)
Net loss (228.9)
Balance at December 31, 1993 1,000 731.8 (1,789.6)
Net loss (43.1)
Capital contribution,
net of related expenses 370.6
Balance at December 31, 1994 $ 1,000 $1,102.4 $(1,832.7)
</TABLE>
See notes to consolidated financial statements.
<PAGE>
<TABLE>
JEFFERSON SMURFIT CORPORATION (U.S.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
<CAPTION>
Year Ended December 31, 1994 1993 1992
<S> <C> <C> <C>
Cash flows from operating activities
Net loss $ (43.1) $(228.9) $ (83.8)
Adjustments to reconcile net loss to net
cash provided by operating activities
Extraordinary loss from early
extinguishment of debt 89.1 59.5 75.6
Cumulative effect of accounting changes
Postretirement benefits 58.9
Income taxes (20.5)
Restructuring charge 96.0
Environmental and other charges 54.0
Depreciation, depletion and amortization 131.6 130.8 134.9
Amortization of deferred debt issuance costs 10.1 7.9 14.6
Deferred income taxes (20.8) (156.9) .1
Non-cash interest 18.9 18.0 33.6
Non-cash employee benefit expense (9.4) (12.5) (18.8)
Change in current assets and liabilities,
net of effects from acquisitions
Receivables (73.0) .7 12.9
Inventories 9.8 14.2 (10.4)
Prepaid expenses and other current assets (.9) 5.0 (2.9)
Accounts payable and accrued liabilities 42.1 26.2 14.9
Interest payable (7.2) 4.7 (4.9)
Income taxes .8 16.2 (17.3)
Other, net 1.3 4.9 (2.8)
Net cash provided by operating activities 149.3 78.2 145.7
Cash flows from investing activities
Property additions (143.7) (97.2) (77.5)
Timberland additions (19.5) (20.2) (20.4)
Investments in affiliates and acquisitions (3.7) (.1) (5.8)
Proceeds from property and timberland
disposals and sale of businesses 4.4 24.5 1.8
Net cash used for investing activities (162.5) (93.0) (101.9)
Cash flows from financing activities
Capital contribution, net of related expenses 370.6 231.8
Borrowings under bank credit facilities 1,371.8 400.0
Borrowings under senior notes 400.0 500.0
Net borrowings (repayments) under accounts
receivable securitization program 34.8 6.4 (8.8)
Other increases in long-term debt 3.4 12.0 56.8
Payments of long-term debt and related premiums (2,072.9) (479.2) (698.6)
Deferred debt issuance costs (76.9) (25.2) (40.4)
Net cash provided by (used for) financing activities 30.8 14.0 (59.2)
Increase (decrease) in cash and cash equivalents 17.6 (.8) (15.4)
Cash and cash equivalents
Beginning of year 44.2 45.0 60.4
End of year $ 61.8 $ 44.2 $ 45.0
</TABLE>
See notes to consolidated financial statements.
<PAGE>
JEFFERSON SMURFIT CORPORATION (U.S.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in millions)
1. -- Basis of Presentation
Jefferson Smurfit Corporation (U.S.) hereafter referred to as (the
"Company" or "JSC (U.S.)") is a wholly-owned subsidiary of JSCE, Inc.
JSCE, Inc. is a wholly-owned subsidiary of Jefferson Smurfit Corporation
("JSC"). On December 31, 1994, Jefferson Smurfit Corporation (U.S.), a
wholly-owned subsidiary of JSC, merged into its wholly-owned subsidiary,
Container Corporation of America ("CCA"), with CCA surviving and
changing its name to JSC (U.S.). Prior to May 4, 1994, 50% of the
voting stock of JSC was owned by Smurfit Packaging Corporation ("SPC")
and Smurfit Holdings B.V. ("SHBV"), indirect wholly-owned subsidiaries
of Jefferson Smurfit Group plc ("JS Group"), a public corporation
organized under the laws of the Republic of Ireland. The remaining 50%
was owned by The Morgan Stanley Leveraged Equity Fund II, L.P. ("MSLEF
II") and certain other investors.
In May 1994, JSC completed a recapitalization plan (the
"Recapitalization") to repay and refinance a substantial portion of its
indebtedness. In connection with the Recapitalization, (i) JSC issued
and sold 19,250,000 shares of common stock pursuant to a registered
public offering at an initial public offering price of $13.00 per share,
(ii) JS Group, through its wholly-owned subsidiary Smurfit International
B.V. ("SIBV"), purchased an additional 11,538,462 shares of common stock
for $150 million, and (iii) the Company issued and sold $300 million
aggregate principal amount of unsecured 11.25% Series A Senior Notes due
2004 and $100 million aggregate principal amount of unsecured 10.75%
Series B Senior Notes due 2002 (the "1994 Senior Notes") pursuant to a
registered public offering. The proceeds from the equity and debt
offerings, the sale of shares to SIBV and $1,200 million of borrowings
under a new bank credit facility (see Note 4) were used to refinance the
Company's 1989 and 1992 term loans, the 1989 revolving credit facility,
and the Company's senior secured notes and pay related fees and
expenses. Proceeds were also used to redeem the Company's subordinated
debentures and pay related premiums and accrued interest. Premiums paid
in connection with the debt payments, the write-off of related deferred
debt issuance costs, and losses on interest rate swap agreements
totalling $51.6 million (net of income tax benefits of $31.6 million)
are reflected in the accompanying 1994 consolidated statement of
operations as an extraordinary item. Net proceeds from the shares
issued totalled $370.6 million.
For financial accounting purposes, JSC's 1989 purchase of JSC (U.S.)'s
common equity owned by JS Group and the acquisition by JSC (U.S.) of its
common equity owned by MSLEF I Group were accounted for as purchases of
treasury stock and resulted in a deficit balance of $1,425.9 million in
stockholder's equity in the accompanying consolidated financial
statements.
<PAGE>
2. -- Significant Accounting Policies
Principles of Consolidation: The consolidated financial statements
include the accounts of the Company and its majority-owned subsidiaries.
Significant intercompany accounts and transactions are eliminated in
consolidation.
Cash Equivalents: The Company considers all highly liquid investments
with an original maturity of three months or less to be cash
equivalents. At December 31, 1994 cash and cash equivalents of $62.4
million are maintained as collateral for obligations under the accounts
receivable securitization program (see Note 4).
Revenue Recognition: Revenue is recognized at the time products are
shipped.
Inventories: Inventories are valued at the lower of cost or market,
principally under the last-in, first-out ("LIFO") method except for
$55.2 million in 1994 and $50.6 million in 1993 which are valued at the
lower of average cost or market. First-in, first-out costs (which
approximate replacement costs) exceed the LIFO value by $58.5 million
and $44.7 million at December 31, 1994 and 1993, respectively.
Property, Plant and Equipment: Property, plant and equipment are
carried at cost. Provisions for depreciation and amortization are made
using straight-line rates over the estimated useful lives of the related
assets and the terms of the applicable leases for leasehold
improvements.
Effective January 1, 1993, the Company changed its estimate of the
useful lives of certain machinery and equipment. Based upon historical
experience and comparable industry practice, the depreciable lives of
the papermill machines that previously ranged from 16 to 20 years were
increased to an average of 23 years, while major converting equipment
and folding carton presses that previously averaged 12 years were
increased to an average of 20 years. These changes were made to better
reflect the estimated periods during which such assets will remain in
service. The change had the effect of reducing depreciation expense by
$17.8 million and decreasing net loss by $11.0 million, in 1993.
Timberland: The portion of the costs of timberland attributed to
standing timber is charged against income as timber is cut, at rates
determined annually, based on the relationship of unamortized timber
costs to the estimated volume of recoverable timber. The costs of
seedlings and reforestation of timberland are capitalized.
Deferred Debt Issuance Costs: Deferred debt issuance costs are
amortized over the terms of the respective debt obligations using the
interest method.
Goodwill: The excess of cost over the fair value assigned to the net
assets acquired is recorded as goodwill and is being amortized using the
straight-line method over 40 years.
<PAGE>
2. -- Significant Accounting Policies (cont)
Interest Rate Swap and Cap Agreements: The Company enters into interest
rate swap and cap agreements to reduce the impact of interest rate
fluctuations. Swap agreements involve the exchange of fixed and floating
rate interest payments without the exchange of the underlying principal
amount. Cap agreements provide that the Company will receive a certain
amount when short term interest rates exceed a threshold rate. Periodic
amounts to be paid or received under interest rate swap and cap
agreements are accrued and recognized as adjustments to interest
expense. Premiums paid on cap agreements are included in interest
payable and amortized to interest expense over the life of the
agreements.
Reclassifications: Certain reclassifications of prior year
presentations have been made to conform to the 1994 presentation.
3. -- Property, Plant and Equipment
<TABLE>
Property, plant and equipment at December 31 consists of:
<CAPTION>
1994 1993
<S> <C> <C>
Land $ 59.7 $ 60.2
Buildings and leasehold improvements 253.7 241.3
Machinery, fixtures and equipment 1,696.3 1,601.1
2,009.7 1,902.6
Less accumulated depreciation and amortization 657.2 563.2
1,352.5 1,339.4
Construction in progress 74.6 35.1
Net property, plant and equipment $1,427.1 $1,374.5
</TABLE>
<PAGE>
4. -- Long-Term Debt
<TABLE>
Long-term debt at December 31 consists of:
<CAPTION>
1994 1993
Current Current
maturities Long-term maturities Long-term
<S> <C> <C> <C> <C>
Tranche A term loan $45.0 $ 855.0 $ $
Tranche B term loan 1.0 299.0
1992 term loan 201.3
1989 term loan 412.3
Revolving loans 43.0 196.5
Senior secured notes 270.5
Accounts receivable securitization
program loans 217.2 182.3
1994 series A senior notes 300.0
1994 series B senior notes 100.0
1993 senior notes 500.0 500.0
Other 4.2 77.5 10.3 76.5
Total non-subordinated 50.2 2,391.7 10.3 1,839.4
13.5% Senior subordinated notes,
due 1999 350.0
14.0% Subordinated debentures,
due 2001 300.0
15.5% Junior subordinated accrual
debentures, due 2004 129.7
Total subordinated 779.7
$50.2 $2,391.7 $10.3 $2,619.1
</TABLE>
Aggregate annual maturities of long-term debt at December 31, 1994, for
the next five years are $50.2 million in 1995, $349.8 million in 1996,
$158.8 million in 1997, $164.6 million in 1998 and $174.7 million in
1999.
1994 Credit Agreement
In connection with the Recapitalization, the Company entered into a new
bank credit facility (the "1994 Credit Agreement") which consists of a
$450 million revolving credit facility (the "New Revolving Credit
Facility") of which up to $150 million may consist of letters of credit,
a $900 million Tranche A Term Loan and a $300 million Tranche B Term
Loan. The New Revolving Credit Facility matures in 2001. The Tranche
A Term Loan matures in various installments from 1995 to 2001. The
Tranche B Term Loan matures in various installments from 1995 to 2002.
Outstanding loans under the Tranche A Term Loan and the New Revolving
Credit Facility bear interest at rates selected at the option of the
Company equal to the alternate base rate ("ABR") plus 1.5% per annum or
the adjusted LIBOR Rate plus 2.5% per annum (8.77% at December 31,
1994). Interest on outstanding loans under the Tranche B Term Loan is
payable at a rate per annum selected at the option of the Company, equal
to the prime rate plus 2% per annum or the adjusted LIBOR rate plus 3%
per annum (8.56% at December 31, 1994). The ABR rate is defined as the
highest of Chemical Bank's prime lending rate, 1/2 of 1% in excess of
the Federal Funds Rate or 1% in excess of the base certificate of
deposit rate.
<PAGE>
4. -- Long-Term Debt (cont)
A commitment fee of 1/2 of 1% per annum is assessed on the unused
portion of the New Revolving Credit Facility. At December 31, 1994, the
unused portion of this facility, after giving consideration to
outstanding letters of credit, was $303.2 million.
The Tranche A and Tranche B Term Loans and the New Revolving Credit
Facility may be prepaid at any time, in whole or in part, at the option
of the Company. The 1994 Credit Agreement requires prepayments if the
Company has excess cash flows, as defined, or receives proceeds from:
certain asset sales, insurance, issuance of equity securities, or
incurrence of certain indebtedness.
The obligations under the 1994 Credit Agreement are unconditionally
guaranteed by JSC, JSCE, Inc. and its subsidiaries and are secured by a
security interest in substantially all of the assets of JSC (U.S.) and
its material subsidiaries, with the exception of cash, cash equivalents
and trade receivables. The 1994 Credit Agreement is also secured by a
pledge of all the capital stock of each material subsidiary of JSC and
by certain intercompany notes.
The 1994 Credit Agreement contains various business and financial
covenants including, among other things, (i) limitations on dividends,
redemptions and repurchases of capital stock, (ii) limitations on the
incurrence of indebtedness, liens, leases, sale-leaseback transactions,
(iii) limitations on capital expenditures, (iv) maintenance of minimum
levels of consolidated earnings before depreciation, interest, taxes and
amortization and (v) maintenance of minimum interest coverage ratios.
1994 Senior Notes
In connection with the Recapitalization, JSC (U.S.) issued and sold $300
million aggregate principal amount of unsecured 11.25% Series A Senior
Notes due 2004 and $100 million aggregate principal amount of unsecured
10.75% Series B Senior Notes due 2002. The Series A Senior Notes are
redeemable in whole or in part at the option of JSC (U.S.), at any time
on or after May 1, 1999 with premiums of 5.625% and 2.813% of the
principal amount if redeemed during the 12-month periods commencing May
1, 1999 and 2000, respectively. In addition, up to $100 million
aggregate principal amount of Series A Senior Notes are redeemable at
110% of the principal amount prior to May 1, 1997 in connection with
certain stock issuances. The Series B Senior Notes are not redeemable
prior to maturity.
The 1994 Senior Notes, which are unconditionally guaranteed on a senior
basis by JSCE, Inc., rank pari passu with the 1994 Credit Agreement and
the 1993 Senior Notes. The 1994 Senior Notes agreements contain
business and financial covenants which are less restrictive than those
contained in the 1994 Credit Agreement.
Holders of the 1994 Senior Notes have the right, subject to certain
limitations, to require JSC (U.S.) to repurchase their securities at
101% of the principal amount plus accrued and unpaid interest, upon the
occurrence of a change of control or in certain events from proceeds of
major asset sales, as defined.
<PAGE>
4. -- Long-Term Debt (cont)
Accounts Receivable Securitization Program Loans
The $230.0 million accounts receivable securitization program
("Securitization Program") provides for the sale of certain of the
Company's trade receivables to a wholly-owned, bankruptcy remote,
limited purpose subsidiary, Jefferson Smurfit Finance Corporation ("JS
Finance"), which finances its purchases of the receivables, through
borrowings from a limited purpose finance company (the "Issuer")
unaffiliated with the Company. The Issuer, which is restricted to
making loans to JS Finance, issued $95 million in fixed rate term notes,
issued $13.8 million under a subordinated loan, and may issue up to
$121.2 million in trade receivables-backed commercial paper or obtain up
to $121.2 million under a revolving liquidity facility to fund loans to
JS Finance. At December 31, 1994, $12.0 million was available for
additional borrowing. Borrowings under the Securitization Program,
which expires April 1996, have been classified as long-term debt because
of the Company's intent to refinance this debt on a long-term basis and
the availability of such financing under the terms of the program.
At December 31, 1994, all assets of JS Finance, principally cash and
cash equivalents of $62.4 million and trade receivables of $213.8
million, are pledged as collateral for obligations of JS Finance to the
Issuer. Interest rates on borrowings under this program are at a fixed
rate of 9.56% for $95.0 million of the borrowings and at a variable rate
on the remainder (6.37% at December 31, 1994).
1993 Senior Notes
In April 1993, JSC (U.S.) issued $500.0 million of unsecured 9.75%
Senior Notes (the "1993 Senior Notes") due 2003 which are not redeemable
prior to maturity. The 1993 Senior Notes, which are unconditionally
guaranteed on a senior basis by JSCE, Inc., rank pari passu with the
1994 Credit Agreement and the 1994 Senior Notes. The 1993 Senior Notes
agreement contains business and financial covenants which are
substantially less restrictive than those contained in the 1994 Credit
Agreement and substantially similar to those contained in the 1994
Senior Notes agreements.
Holders of the 1993 Senior Notes have the right, subject to certain
limitations, to require JSC (U.S.) to repurchase their securities at
101% of the principal amount plus accrued and unpaid interest, upon the
occurrence of a change in control or in certain events, from proceeds of
major asset sales, as defined.
Net proceeds from the offering were used to partially repay amounts
outstanding under the 1989 and 1992 term loans and the 1989 revolving
credit facility. The write-off of related deferred debt issuance costs
and losses on interest rate swap agreements, totalling $37.8 million
(net of income tax benefits of $21.7 million), are reflected in the
accompanying 1993 consolidated statement of operations as an
extraordinary item.
Other Non-subordinated Debt
Other non-subordinated long-term debt at December 31, 1994, is payable
in varying installments through the year 2028. Interest rates on these
obligations averaged approximately 9.93% at December 31, 1994.
<PAGE>
4. -- Long-Term Debt (cont)
Interest Rate Swap and Cap Agreements
The Company utilizes interest rate swap and cap agreements to manage its
interest rate exposure on long-term debt. At December 31, 1994, the
Company has interest rate swap agreements with a notional amount of
$282.5 million which effectively fix (for remaining periods up to 3
years) the interest rate on variable rate borrowings. The Company is
currently paying a weighted average fixed interest rate of 6.4% and
receiving a weighted average variable interest rate of 6.0%, calculated
on the notional amount. The Company has a cap agreement with a notional
amount of $100.0 million on variable rate debt (through 1996) which caps
the Company's variable interest rates at 7.5% on the notional amount.
In addition, the Company has a cap agreement with a notional amount of
$100.0 million (through 1996) on variable rate debt which limits the
Company's interest payments to a range of 5.5-7.0% on the notional
amount. The Company is party to interest rate swap agreements on fixed
rate borrowings with a notional amount of $500.0 million which
effectively convert the fixed rate borrowings to variable rate
borrowings maturing at various dates through May 1995. The Company is
currently receiving a weighted average fixed interest rate of 4.6% and
paying a weighted average variable interest rate of 7.1%, calculated on
the notional amount.
The Company has interest rate swaps with a notional amount of $525
million not associated with existing debt at December 31, 1994, due to
previous debt extinguishments, which are carried at fair market value
with changes to the fair value reflected in interest expense. The
Company is currently paying a weighted average fixed rate of 8.1% and
receiving a weighted average variable rate of 5.4% on swaps with a
notional amount of $250.0 million (for remaining periods up to 1997).
The Company is currently receiving a weighted average fixed rate of 7.3%
and paying a weighted average variable rate of 7.4% on swaps with a
notional amount of $95 million (through 1995). In addition, the Company
has swap agreements with a notional amount of $180 million (through
1996) whereby the Company is receiving a weighted average variable rate
of 5.2% and pays a weighted average variable rate of 6.1%.
The Company is exposed to credit loss in the event of non-performance by
the other parties to the interest rate swap agreements. However, the
Company does not anticipate non-performance by the counter parties.
Other
Interest costs capitalized on construction projects in 1994, 1993 and
1992 totalled $3.9 million, $3.4 million and $4.2 million, respectively.
Interest payments on all debt instruments for 1994, 1993 and 1992 were
$247.0 million, $226.2 million and $257.6 million, respectively.
5. -- Income Taxes
Effective January 1, 1993, the Company changed its method of accounting
for income taxes from the deferred method to the liability method
required by Statement of Financial Accounting Standards ("SFAS") No.
109, "Accounting for Income Taxes." Prior years' financial statements
have not been restated.
<PAGE>
5. -- Income Taxes (cont)
The cumulative effect of adopting SFAS No. 109 as of January 1, 1993 was
to increase net income by $20.5 million. For 1993, application of SFAS
No. 109 increased the pretax loss by $14.5 million because of increased
depreciation expense as a result of the requirement to report assets
acquired in prior business combinations at pretax amounts.
In adopting this new accounting principle, the Company (i) adjusted
assets acquired and liabilities assumed in prior business combinations
from their net-of-tax amounts to their pretax amounts and recognized the
related deferred tax assets and liabilities for those temporary
differences, (ii) adjusted deferred income tax assets and liabilities to
statutory income tax rates and for previously unrecognized tax benefits
related to certain state net operating loss carryforwards and, (iii)
adjusted asset and liability accounts arising from previous acquisitions
and recapitalizations to recognize potential tax liabilities related to
those transactions. The net effect of these adjustments on assets and
liabilities was to increase inventory $23.0 million, increase property,
plant and equipment and timberlands $196.5 million, increase goodwill
$42.0 million, increase liabilities by $12.6 million, and increase
deferred income taxes by $228.4 million.
At December 31, 1994, the Company has net operating loss carryforwards
for federal income tax purposes of approximately $460.5 million
(expiring in the years 2005 through 2009), none of which are available
for utilization against alternative minimum taxes.
Significant components of the Company's deferred tax assets and
liabilities at December 31 are as follows:
<TABLE>
<CAPTION>
1994 1993
Deferred tax liabilities:
<S> <C> <C>
Depreciation and depletion $365.1 $354.5
Pensions 31.0 26.7
Other 106.7 104.0
Total deferred tax liabilities 502.8 485.2
Deferred tax assets:
Retiree medical 49.6 44.6
Other employee benefit and insurance plans 70.5 70.3
Restructuring and other charges 32.1 49.3
Net operating loss and tax credit carryforwards 161.6 108.4
Other 44.5 47.1
Total deferred tax assets 358.3 319.7
Valuation allowance for deferred tax assets (25.1) (24.8)
Net deferred tax assets 333.2 294.9
Net deferred tax liabilities $169.6 $190.3
</TABLE>
<PAGE>
5. -- Income Taxes (cont)
Provisions for (benefit from) income taxes before extraordinary item and
cumulative effect of accounting changes were as follows:
<TABLE>
<CAPTION>
Deferred
Liability Method Method
Year Ended December 31,
1994 1993 1992
<S> <C> <C> <C>
Current
Federal $ 1.4 $ 28.1 $(2.2)
State and local 2.1 2.2 2.1
3.5 30.3 (.1)
Deferred
Federal 38.6 (53.5) 9.7
State and local 3.8 6.0 .4
Benefits of net operating loss carryforwards (29.5) (71.5)
12.9 (119.0) 10.1
Adjustment of deferred tax assets and
liabilities for enacted tax rate change 5.7
$ 16.4 $( 83.0) $10.0
</TABLE>
The Company increased its deferred tax assets and liabilities in 1993 as
a result of legislation enacted during 1993 increasing the corporate
federal statutory tax rate from 34% to 35% effective January 1, 1993.
The federal income tax returns for 1989 through 1991 are currently under
examination. While the ultimate results of such examination cannot be
predicted with certainty, the Company's management believes that the
examination will not have a material adverse effect on its consolidated
financial condition or results of operations.
The components of the provision for deferred taxes for the year ended
December 31, 1992 were as follows:
<TABLE>
<CAPTION>
1992
<S> <C>
Depreciation and depletion $15.2
Alternative minimum tax 10.2
Tax loss carryforwards (24.3)
Equity in affiliates 6.8
Other employee benefits 2.7
Other, net (.5)
$10.1
</TABLE>
<PAGE>
5. -- Income Taxes (cont)
A reconciliation of the difference between the statutory Federal income
tax rate and the effective income tax rate as a percentage of income
(loss) before income taxes, extraordinary item, and cumulative effect of
accounting changes is as follows:
<TABLE>
<CAPTION>
Deferred
Liability Method Method
Year Ended December 31,
1994 1993 1992
<S> <C> <C> <C>
U.S. Federal statutory rate 35.0% (35.0%) (34.0%)
Adjustment of deferred tax assets
and liabilities for enacted
tax rate change 2.2
State and local taxes, net
of Federal tax benefit (4.8) (2.0) 6.6
Permanent differences from applying
purchase accounting 23.7 3.5 71.1
Effect of valuation allowances on
deferred tax assets, net of
Federal benefit 1.1 1.2
Other, net 2.1 (2.1) (2.0)
57.1% (32.2%) 41.7%
</TABLE>
The Company made income tax payments of $2.6 million, $33.0 million, and
$6.6 million in 1994, 1993, and 1992, respectively.
6. -- Employee Benefit Plans
Pension Plans
The Company sponsors noncontributory defined benefit pension plans
covering substantially all employees not covered by multi-employer
plans. Plans that cover salaried and management employees provide
pension benefits that are based on the employee's five highest
consecutive calendar years' compensation during the last ten years of
service. Plans covering non-salaried employees generally provide
benefits of
stated amounts for each year of service. These plans provide reduced
benefits for early retirement. The Company's funding policy is to make
minimum annual contributions required by applicable regulations. The
Company also participates in several multi-employer pension plans, which
provide defined benefits to certain union employees.
In order to minimize significant year-to-year fluctuations in pension
cost caused by financial market volatility, the Company changed,
effective as of January 1, 1993 the method of accounting used for
determining the market-related value of plan assets. The method changed
from a fair market value to a calculated value that recognizes all
changes in a systematic manner over a period of four years and
eliminates the use of a corridor approach for amortizing gains and
losses. The effect of this change on 1993 results of operations,
including the cumulative effect of prior years, was not material.
<PAGE>
6. -- Employee Benefit Plans (cont)
Assumptions used in the accounting for the defined benefit plans were:
<TABLE>
<CAPTION>
1994 1993 1992
<S> <C> <C> <C>
Weighted average discount rates 8.5% 7.6% 8.75%
Rates of increase in compensation levels 5.0% 4.0% 5.50%
Expected long-term rate of return on assets 10.0% 10.0% 10.00%
</TABLE>
The components of net pension income for the defined benefit plans and
the total contributions charged to pension expense for the multi-
employer plans follow:
<TABLE>
<CAPTION>
Year Ended December 31,
1994 1993 1992
<S> <C> <C> <C>
Defined benefit plans:
Service cost-benefits earned during the period $ 14.3 $ 12.7 $ 12.1
Interest cost on projected benefit obligations 53.7 54.0 50.1
Actual return on plan assets (7.4) (91.1) (26.4)
Net amortization and deferral (71.3) 8.8 (54.6)
Multi-employer plans 2.1 2.2 2.1
Net pension income $ (8.6) $(13.4) $(16.7)
</TABLE>
The following table sets forth the funded status and amounts recognized
in the consolidated balance sheets at December 31 for the Company's and
its subsidiaries' defined benefit pension plans:
<TABLE>
<CAPTION>
1994 1993
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligations $631.7 $616.7
Accumulated benefit obligations $669.9 $664.3
Projected benefit obligations $699.6 $716.0
Plan assets at fair value 739.8 778.1
Plan assets in excess of projected benefit obligations 40.2 62.1
Unrecognized net loss 63.1 34.5
Unrecognized net asset at December 31,
being recognized over 14 to 15 years (25.2) (29.2)
Net pension asset $ 78.1 $ 67.4
</TABLE>
Approximately 40% of plan assets at December 31, 1994 are invested in
cash equivalents or debt securities and 60% are invested in equity
securities, including common stock of JS Group having a market value of
$117.2 million.
<PAGE>
6. -- Employee Benefit Plans (cont)
Savings Plans
The Company sponsors voluntary savings plans covering substantially all
salaried and certain hourly employees. The Company match, which is paid
in JSC stock, is fifty percent of each participant's contributions up to
an annual maximum. The Company's expense for the savings plans totalled
$5.3 million, $5.3 million and $5.0 million in 1994, 1993 and 1992
respectively.
Postretirement Health Care and Life Insurance Benefits
The Company provides certain health care and life insurance benefits for
all salaried and certain hourly employees. The Company has various
plans under which the cost may be borne either by the Company, the
employee or partially by each party. The Company does not currently
fund these plans. These benefits are discretionary and are not a
commitment to long-term benefit payments. The plans were amended
effective January 1, 1993 to allow employees who retire on or after
January 1, 1994 to become eligible for these benefits only if they
retire after age 60 while working for the Company.
Effective January 1, 1993, the Company adopted SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions", which
requires companies to accrue the expected cost of retiree benefit
payments, other than pensions, during employees' active service period.
The Company elected to immediately recognize the accumulated liability,
measured as of January 1, 1993. The cumulative effect of this change in
accounting principle resulted in a charge of $37.0 million (net of
income tax benefits of $21.9 million). The Company had previously
recorded an obligation of $36.0 million in connection with prior
business combinations. In 1992 the cost of the postretirement benefits
of $6.4 million was recognized as claims were paid.
The following table sets forth the accumulated postretirement benefit
obligation ("APBO") with respect to these benefits as of December 31:
<TABLE>
<CAPTION>
1994 1993
<S> <C> <C>
Retirees $ 52.6 $ 58.3
Active Employees 33.9 51.8
Total accumulated postretirement benefit obligation 86.5 110.1
Unrecognized net gain (loss) 12.9 (11.9)
Accrued postretirement benefit cost $ 99.4 $ 98.2
</TABLE>
Net periodic postretirement benefit cost included the following components:
<TABLE>
<CAPTION>
1994 1993
<S> <C> <C>
Service cost of benefits earned $ 1.5 $ 1.5
Interest cost on accumulated postretirement
benefit obligation 6.8 8.3
Net amortization (.6)
Net periodic postretirement benefit cost $ 7.7 $ 9.8
</TABLE>
<PAGE>
6. -- Employee Benefit Plans (cont)
A weighted-average discount rate of 8.5% and 7.6% was used in
determining the APBO at December 31, 1994 and 1993, respectively. The
weighted-average annual assumed rate of increase in the per capita cost
of covered benefits ("healthcare cost trend rate") was 10.5%, with an
annual decline of 1% until the rate reaches 5.5%. The effect of a 1%
increase in the assumed healthcare cost trend rate would increase both
the APBO as of December 31, 1994 by $2.9 million and the annual net
periodic postretirement benefit cost for 1994 by $.3 million.
7. -- Related Party Transactions
Transactions with JS Group
Transactions with JS Group, its subsidiaries and affiliates were as
follows:
<TABLE>
<CAPTION>
Year Ended December 31,
1994 1993 1992
<S> <C> <C> <C>
Product sales $36.5 $18.4 $22.8
Product and raw material purchases 71.0 49.3 60.1
Management services income 4.3 5.8 5.6
Charges from JS Group for services provided .6 .4 .3
Charges from JS Group for letter of credit,
commitment fees and related expenses 2.8 2.9
Charges to JS Group for costs pertaining to
the No. 2 paperboard machine 54.0 62.2 54.7
Receivables at December 31 3.7 1.7 3.3
Payables at December 31 10.9 11.6 10.2
</TABLE>
Product sales to and purchases from JS Group, its subsidiaries, and
affiliates are consummated on terms generally similar to those
prevailing with unrelated parties.
The Company provides certain subsidiaries and affiliates of JS Group
with general management and elective management services under separate
Management Services Agreements. In consideration for general management
services, the Company is paid a fee up to 2% of the subsidiaries' or
affiliate's gross sales. In consideration for elective services, the
Company is reimbursed for its direct cost of providing such services.
In 1991 an affiliate of JS Group completed a rebuild of the No. 2
paperboard machine owned by the affiliate that is located in the
Company's Fernandina Beach, Florida paperboard mill (the "Fernandina
Mill"). Pursuant to an operating agreement between the Company and the
affiliate, the Company operates and manages the No. 2 paperboard machine
and is compensated for its direct production and manufacturing costs and
indirect manufacturing, selling and administrative costs incurred by the
Company for the entire Fernandina Mill. The compensation is determined
by applying various formulas and agreed upon amounts to the subject
costs. The amounts reimbursed to the Company are reflected as
reductions of cost of goods sold and selling and administrative expenses
in the accompanying consolidated statements of operations.
<PAGE>
7. -- Related Party Transactions (cont)
Transactions with Times Mirror
Under the terms of a long-term agreement, Smurfit Newsprint Corporation
("SNC"), a majority-owned subsidiary of the Company, supplies newsprint
to Times Mirror, a minority shareholder of SNC, at amounts which
approximate prevailing market prices. The obligations of the Company
and Times Mirror to supply and purchase newsprint are wholly or
partially terminable upon the occurrence of certain defined events.
Sales to Times Mirror for 1994, 1993 and 1992 were $113.0 million,
$115.2 million and $114.0 million, respectively.
Transactions with Morgan Stanley & Co.
In connection with the Recapitalization, Morgan Stanley & Co., in its
capacity as underwriter of public equity and debt securities, received
fees from the Company of $15.5 million.
8. -- Leases
The Company leases certain facilities and equipment for production,
selling and administrative purposes under operating leases. Future
minimum lease payments at December 31, 1994, required under operating
leases that have initial or remaining noncancelable lease terms in
excess of one year are $31.1 million in 1995, $21.5 million in 1996,
$15.6 million in 1997, $10.9 million in 1998, $8.6 million in 1999 and
$19.5 million thereafter.
Net rental expense was $45.5 million, $45.0 million, and $42.2 million
for 1994, 1993 and 1992, respectively.
9. -- Fair Value of Financial Instruments
The estimated fair values of the Company's financial instruments are as
follows:
<TABLE>
<CAPTION>
December 31,
1994 1993
Carrying Fair Carrying Fair
Amount Value Amount Value
<S> <C> <C> <C> <C>
Assets
Cash and cash equivalents $ 61.8 $ 61.8 $ 44.2 $ 44.2
Unrealized gain on interest
rate swap agreements 3.7 5.5
Liabilities
Long-term debt, including
current maturities 2,441.9 2,401.7 2,629.4 2,686.4
Unrealized loss on interest
rate swap agreements 7.7 12.2
Realized loss on interest
rate swap agreements marked
to market 4.1 4.1 12.0 12.0
</TABLE>
<PAGE>
9. -- Fair Value of Financial Instruments (cont)
The carrying amount of cash equivalents approximates fair value because
of the short maturity of those instruments. The fair value of the
Company's long-term debt is estimated based on the quoted market prices
for the same or similar issues or on the current rates offered to the
Company for debt of the same remaining maturities. The fair value of
the interest rate swap agreements is the estimated amount the Company
would pay or receive, net of accrued interest expense, to terminate the
agreements at December 31, 1994 and 1993, taking into account current
interest rates and the current credit worthiness of the swap
counterparties.
10. -- Restructuring Charge
During 1993, the Company recorded a pretax charge of $96.0 million to
recognize the effects of a restructuring program designed to improve the
Company's long-term competitive position of which $43 million related to
the write-down of assets at closed facilities and other nonproductive
assets and $53 million represented cash expenditures. The charge
included a provision for direct expenses associated with plant closures,
reductions in workforce, realignment and consolidation of various
manufacturing operations and write-downs of nonproductive assets. The
restructuring program is proceeding as originally planned and no
significant adjustment to the reserve is anticipated at this time.
11. -- Contingencies
The Company's past and present operations include activities which are
subject to federal, state and local environmental requirements,
particularly relating to air and water quality. The Company faces
potential environmental liability as a result of violations of permit
terms and similar authorizations that have occurred from time to time at
its facilities.
The Company faces potential liability for response costs at various
sites with respect to which the Company has received notice that it may
be a "potentially responsible party" (PRP) as well as contamination of
certain Company-owned properties, under the Comprehensive Environmental
Response, Compensation and Liability Act concerning hazardous substance
contamination. In estimating its reserves for environmental remediation
and future costs, the Company's estimated liability reflects only the
Company's expected share. In determining the liability, the estimate
takes into consideration the number of other PRP's at each site, the
identity and financial condition of such parties and experience
regarding similar matters. No amounts have been recorded for potential
recoveries from insurance carriers.
During 1993, the Company recorded a pretax charge of $54.0 million of
which $39.0 million represents asbestos and PCB removal, solid waste
cleanup at existing and former operating sites and expenses for response
costs at various sites where the Company has received notice that it is
a potentially responsible party.
The Company is a defendant in a number of lawsuits and claims arising
out of the conduct of its business, including those related to
environmental matters. While the ultimate results of such suits or
other proceedings against the Company cannot be predicted with
certainty, the management of the Company believes that the resolution of
these matters will not have a material adverse effect on its
consolidated financial condition or results of operation.
<PAGE>
12. -- Business Segment Information
The Company's business segments are paperboard/packaging products and
newsprint. Substantially all the Company's operations are in the United
States. The Company's customers represent a diverse range of industries
including paperboard and paperboard packaging, consumer products,
wholesale trade, retailing, agri-business, and newspaper publishing
located throughout the United States. Credit is extended based on an
evaluation of the customer's financial condition. The
paperboard/packaging products segment includes the manufacture and
distribution of containerboard, boxboard and cylinderboard, corrugated
containers, folding cartons, fibre partitions, spiral cores
and tubes, labels and flexible packaging. A summary by business segment
of net sales, operating profit, identifiable assets, capital
expenditures and depreciation, depletion and amortization follows:
<TABLE>
<CAPTION>
Year Ended December 31,
1994 1993 1992
<S> <C> <C> <C>
Net sales
Paperboard/packaging products $2,973.7 $2,699.5 $2,751.0
Newsprint 259.6 248.1 247.4
$3,233.3 $2,947.6 $2,998.4
Operating profit (loss)
Paperboard/packaging products $ 310.9 $ 16.5 $ 284.6
Newsprint (16.5) (21.4) (10.3)
Total operating profit (loss) 294.4 (4.9) 274.3
Interest expense, net (265.7) (252.7) (298.3)
Income (loss) before income taxes,
extraordinary item, and cumulative
effect of accounting changes $ 28.7 $ (257.6) $ (24.0)
Identifiable assets
Paperboard/packaging products $2,256.2 $2,153.4 $1,960.6
Newsprint 231.0 224.9 235.1
Corporate assets 271.8 218.8 240.7
$2,759.0 $2,597.1 $2,436.4
Capital expenditures
Paperboard/packaging products $ 146.0 $ 107.2 $ 91.6
Newsprint 17.2 10.2 6.3
$ 163.2 $ 117.4 $ 97.9
Depreciation, depletion and amortization
Paperboard/packaging products $ 115.1 $ 115.2 $ 121.2
Newsprint 16.5 15.6 13.7
$ 131.6 $ 130.8 $ 134.9
</TABLE>
Sales and transfers between segments are not material. Export sales are
less than 10% of total sales. Corporate assets consist principally of
cash and cash equivalents, deferred income taxes, deferred debt issuance
costs and other assets which are not specific to a segment.
<PAGE>
13. -- Quarterly Results (Unaudited)
The following is a summary of the unaudited quarterly results of
operations:
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
<C> <C> <C> <C> <C>
1994
Net sales $727.7 $765.9 $858.4 $881.3
Gross profit 98.5 111.0 135.6 169.5
Income from operations 46.8 55.6 80.5 108.0
Income (loss) before
extraordinary item (11.8) (8.4) 5.8 26.7
Loss from early extinguishment
of debt (51.6) (3.8)
Net income (loss) (11.8) (60.0) 5.8 22.9
1993
Net sales $735.9 $734.9 $745.7 $731.1
Gross profit 101.5 100.5 97.5 80.9
Income (loss) from operations<F1> 41.2 41.1 (109.9) 18.8
Loss before extraordinary item
and cumulative effect of
accounting changes (15.5) (14.6) (116.7) (27.8)
Loss from early extinguishment
of debt (37.8)
Cumulative effect of changes in
accounting principles
Postretirement benefits (37.0)
Income taxes 20.5
Net loss (32.0) (52.4) (116.7) (27.8)
<FN>
<F1> In the third quarter of 1993, the Company recorded a pretax charge
of $96.0 million to recognize the effects of a restructuring program
designed to improve the Company's long-term competitive position and
recorded a pretax charge of $54.0 million relating primarily to
environmental matters.
</FN>
</TABLE>
14. -- Subsequent Events
On February 23, 1995, the Company entered into a $315.0 million accounts
receivable securitization program (the "1995 Securitization") consisting
of a $300.0 million trade receivables-backed commercial paper program
and a $15.0 million term loan. The proceeds of the 1995 Securitization
were used to extinguish the Company's borrowings under the 1991
Securitization Program of $230.0 million.
<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
The following table sets forth the names and ages of the directors of
the Company.
Name Age
Michael W.J. Smurfit 58
Howard E. Kilroy 59
James E. Terrill 61
James R. Thompson 58
Donald P. Brennan 54
Alan E. Goldberg 40
David R. Ramsay 31
G. Thompson Hutton 39
The Board of Directors currently consists of eight directors.
Executive Officers
The following table sets forth the names, ages and positions of the
executive officers of the Company.
Name Age Position
Michael W.J. Smurfit 58 Chairman of the Board and Director
James E. Terrill 61 President, Chief Executive Officer
and Director
Howard E. Kilroy 59 Senior Vice President and Director
Richard W. Graham 60 Senior Vice President
Raymond G. Duffy 53 Vice President - Planning
Michael C. Farrar 54 Vice President - Environmental and
Governmental Affairs
John R. Funke 53 Vice President and Chief Financial
Officer
Richard J. Golden 52 Vice President - Purchasing
Michael F. Harrington 54 Vice President - Personnel and
Human Resources
Alan W. Larson 56 Vice President and General Manager
- Consumer Packaging Division
Edward F. McCallum 60 Vice President and General Manager
- Container Division
Lyle L. Meyer 58 Vice President
Patrick J. Moore 40 Vice President and General Manager
- Industrial Packaging Division
David C. Stevens 60 Vice President and General Manager
- Reclamation Division
Truman L. Sturdevant 60 Vice President and General Manager
of SNC
Michael E. Tierney 46 Vice President and General Counsel
and Secretary
Richard K. Volland 56 Vice President - Physical
Distribution
William N. Wandmacher 52 Vice President and General Manager
- Containerboard Mill Division
Gary L. West 52 Vice President - Sales and
Marketing
<PAGE>
Biographies
Donald P. Brennan has been a Director of the Company since 1989.
Mr. Brennan joined Morgan Stanley & Co. Incorporated ("MS&Co.") in
1982 and has been a Managing Director of MS&Co. since 1984. He is
responsible for MS&Co.'s Merchant Banking Division and is Chairman
and President of Morgan Stanley Leveraged Equity Fund II, Inc.
("MSLEF II, Inc.") and Chairman of Morgan Stanley Capital Partners
III, Inc. ("MSCP III, Inc."). Mr. Brennan serves as Director of
Fort Howard Corporation, Hamilton Services Limited, PSF Finance
Holdings, Inc., Shuttleway, Stanklav Holdings, Inc. and Waterford
Wedgwood U.K. plc and is Deputy Chairman of Waterford Wedgwood plc.
Raymond G. Duffy has been Vice President - Planning since July 1983
and served as Director of Corporate Planning from 1980 to 1983.
Michael C. Farrar was appointed Vice President - Environmental and
Governmental Affairs in March 1992. Prior to joining the Company,
he was Vice President of the American Paper Institute and the
National Forest Products Association for more than 5 years.
John R. Funke has been Vice President and Chief Financial Officer
since April 1989 and was Corporate Controller and Secretary from
1982 to April 1989.
Richard J. Golden has been Vice President - Purchasing since
January 1985 and was Director of Corporate Purchasing from October
1981 to January 1985. In January 1994, he was assigned
responsibility for world-wide purchasing for JS Group.
Alan E. Goldberg has been a Director of the Company since 1989.
Mr. Goldberg joined MS&Co. in 1979 and has been a member of
MS&Co.'s Merchant Banking Division since its formation in 1985 and
a Managing Director of MS&Co. since 1988. Mr. Goldberg is a
Director of MSLEF II, Inc. and a Vice Chairman of MSCP III, Inc.
Mr. Goldberg also serves as Director of Amerin Guaranty
Corporation, CIMIC Holdings Limited, Centre Cat Limited, Hamilton
Services Limited and Risk Management Solutions, Inc.
Richard W. Graham was appointed Senior Vice President in February
1994. He served as Vice President and General Manager - Folding
Carton and Boxboard Mill Division from February 1991 to January
1994. Mr. Graham was Vice President and General Manager - Folding
Carton Division from October 1986 to February 1991.
Michael F. Harrington was appointed Vice President - Personnel and
Human Resources in January 1992. Prior to joining the Company, he
was Corporate Director of Labor Relations/Safety and Health with
Boise Cascade Corporation for more than 5 years.
<PAGE>
G. Thompson Hutton was elected to the Board of Directors in
December 1994. Mr. Hutton has been President and Chief Executive
Officer of Risk Management Solutions, Inc., an information services
company based in Menlo Park, California, since 1991. Prior to that
he was Engagement Manager with McKinsey & Company, Inc. from 1986
to 1991. He also serves as a Director of K2 Technologies, Express
Yachts and is a Trustee of Colorado Outward Bound School.
Howard E. Kilroy has been Chief Operations Director of JS Group
since 1978 and President of JS Group since October 1986. He was a
member of the Supervisory Board of SIBV from January 1978 to
January 1992. He has been a Director of the Company since 1989 and
Senior Vice President for more than 5 years. He will retire from
his executive positions with JS Group and the Company at the end of
March 1995, but will remain a Director of JS Group and the Company.
In addition, he is Governor (Chairman) of Bank of Ireland and a
Director of Aran Energy plc.
Alan W. Larson has been Vice President and General Manager -
Consumer Packaging Division since October 1988. Prior to joining
the Company in 1988, he was Executive Vice President of The Black
and Decker Corporation.
Edward F. McCallum has been Vice President and General Manager -
Container Division since October 1992. He served as Vice President
and General Manager of the Industrial Packaging Division from
January 1991 to October 1992. Prior to that time, he served in
various positions in the Container Division since joining the
Company in 1971.
Lyle L. Meyer has been Vice President since April 1989. He served
as President of Smurfit Pension and Insurance Services Company
("SPISCO") from 1982 until 1992, when SPISCO was merged into the
Company.
Patrick J. Moore has been Vice President and General Manager -
Industrial Packaging Division since December 1994. He served as
Vice President and Treasurer from February 1993 to December 1994
and was Treasurer from October 1990 to February 1993. Prior to
joining the Company in 1987 as Assistant Treasurer, Mr. Moore was
with Continental Bank in Chicago where he served in various
corporate lending, international banking and administrative
capacities.
David R. Ramsay has been a Director of the Company since 1989. Mr.
Ramsay joined MS&Co. in 1989 and is a Vice President of MS&Co.'s
Merchant Banking Division. Mr. Ramsay also serves as a Director
of ARM Financial Group Inc., Integrity Life Insurance Company,
National Integrity Life Insurance Company, Consolidated Hydro,
Inc., Hamilton Services Limited, A/S Bulkhandling, Stanklav
Holdings, Inc. and Risk Management Solutions, Inc. and is President
and a Director of PSF Finance Holdings, Inc.
Michael W.J. Smurfit has been Chairman and Chief Executive Officer
of JS Group since 1977. Dr. Smurfit has been Chairman of the Board
of the Company since 1989. He was Chief Executive Officer of the
Company prior to July 1990.
David C. Stevens has been Vice President and General Manager -
Reclamation Division since January 1993. He joined the Company in
1987 as General Sales Manager and was named Vice President later
that year. He held various management positions with International
Paper and was President of Mead Container Division prior to joining
the Company.
<PAGE>
Truman L. Sturdevant has been Vice President and General Manager of
SNC since August 1990. Mr. Sturdevant joined the Company in 1984
as Vice President and General Manager of the Oregon City newsprint
mill.
James E. Terrill was named a Director and President and Chief
Executive Officer in February 1994. He served as Executive Vice
President - Operations from August 1990 to February 1994. He also
served as Executive Vice President of SNC from February 1993 to
February 1994 and was President of SNC from February 1986 to
February 1993.
James R. Thompson was elected to the Board of Directors in July
1994. He is Chairman of Winston & Strawn, a law firm that
regularly represents the Company on numerous matters. He served as
Governor of the State of Illinois from 1977 to 1991. Mr. Thompson
also serves as a Director of FMC Corporation, the Chicago Board of
Trade, Chicago and North Western Transportation Company, United
Fidelity, Inc., International Advisory Council of the Bank of
Montreal, Prime Retail, Inc., Pechiney International, Wackenhut
Corrections Corporation and American Publishing Corporation.
Michael E. Tierney has been Vice President, General Counsel and
Secretary since January 1993. He served as Senior Counsel and
Assistant Secretary since joining the Company in 1987.
Richard K. Volland has been Vice President - Physical Distribution
since 1978.
William N. Wandmacher has been Vice President and General Manager -
Containerboard Mill Division since January 1993. He served as
Division Vice President - Medium Mills from October 1986 to January
1993. Since joining the Company in 1966, he has held increasingly
responsible positions in production, plant management and planning,
both domestic and foreign.
Gary L. West has been Vice President - Sales and Marketing since
December 1994. He was Vice President and General Manager -
Industrial Packaging Division from October 1992 to December 1994.
He served as Vice President - Converting and Marketing for the
Industrial Packaging Division from January 1991 to October 1992.
Prior to that time, he held various management positions in the
Container and Consumer Packaging divisions since joining the
Company in 1980.
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
EXECUTIVE COMPENSATION
The following table sets forth the cash and noncash compensation
for each of the last three fiscal years awarded to or earned by the
Chief Executive Officer of JSC and the four other most highly
compensated executive officers of JSC (the "Named Executive
Officers") during 1994. The table also includes Mr. James B.
Malloy, who retired from the position of President and Chief
Executive Officer on February 1, 1994.
<PAGE>
<TABLE>
SUMMARY COMPENSATION TABLE
<CAPTION>
Long Term Compensation
Awards Payouts All Other
Annual Compensation Securities LTIP Compen-
1997 Other Annual Underlying Payouts ation($)
Name and Principal Position Year Salary($) Bonus($) Bonus<F1> Compensation($) Options(#) ($)<F2> <F3>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
James E. Terrill, President and 1994 $678,333 $251,029 $1,000,000 $224,577 319,000 $ 346,604 $ 26,235
Chief Executive Officer, 1993 440,000 0 0 17,318 0 0 19,545
formerly Executive Vice 1992 367,500 243,477 0 944 181,000 0 16,346
President -- Operations <F4>
Michael W.J. Smurfit, Chairman 1994 834,000 299,084 0 30,000 0 1,964,088 11,922
of the Board 1993 832,369 0 0 30,000 0 0 16,775
1992 793,273 526,605 0 0 1,026,000 0 15,764
Richard W. Graham, Senior Vice 1994 378,667 110,876 475,000 9,270 9,000 173,302 9,937
President 1993 337,000 0 0 5,215 0 0 10,817
1992 286,760 29,336 0 2,223 91,000 0 9,075
John R. Funke, Vice President 1994 300,000 107,584 500,000 28,599 29,000 231,069 10,779
and Chief Financial Officer 1993 300,000 0 0 13,163 0 0 10,167
1992 232,000 153,705 0 1,647 121,000 0 10,435
David C. Stevens, Vice President 1994 200,000 311,709 200,000 6,515 5,000 34,660 7,719
and General Manager -- 1993 200,000 48,954 0 1,402 0 0 7,965
Reclamation Division 1992 161,000 44,012 0 985 45,000 0 5,947
James B. Malloy, Retired, 1994 82,667 0 0 43,163 0 1,386,415 367,122
formerly President and Chief 1993 992,000 0 0 17,867 0 0 21,902
Executive Officer <F4> 1992 945,000 626,082 0 8,003 724,000 0 23,294
<FN>
<F1> Amounts awarded in 1994 pursuant to the JSC's 1994 Long-Term
Incentive Plan. These awards are not due and payable until
April 30, 1997 and may be subject to forfeiture if the executive's
employment is terminated, other than for death or disability, prior
to such date.
<F2> Aggregate long-term incentive payment of $7.67 million was made in
1994 prior to consummation of JSC's initial public offering of
Common Stock on May 4, 1994 (the "Equity Offerings") to a number of
JSC's and its affiliates' officers, including the Named Executive
Officers and officers of JS Group and its affiliates. These amounts
represent deferred settlement of the cancellation in 1992 of the
Company's 1990 Long-Term Management Incentive Plan. The amount paid
to the officers of JS Group and its affiliates (exclusive of
Dr. Smurfit) was $1.69 million.
<F3> Amounts shown under "All Other Compensation" for 1994 include a $3,500
Company contribution to JSC's Savings Plan for each Named Executive
Officer (other than Dr. Smurfit) and JSC-paid split-dollar term life
insurance premiums for Dr. Smurfit ($11,922) and Messrs. Terrill
($22,735), Graham ($6,437), Funke ($5,374), Stevens ($4,219) and Malloy
(none). Messrs. Malloy and Funke also had reportable (above 120%
of the applicable federal long-term rate) earnings equal to $7,688
and $1,905, respectively, credited to their accounts under JSC's
Deferred Compensation Capital Enhancement Plan. In addition, Mr.
Malloy received $64,859 of unused vacation pay and $291,075 of
retirement benefits.
<F4> James B. Malloy retired, as of February 1, 1994, as President and
Chief Executive Officer, and James E. Terrill succeeded to Mr.
Malloy's positions as President and Chief Executive Officer.
Previously, Mr. Terrill was Executive Vice President--Operations.
</FN>
</TABLE>
<PAGE>
1992 STOCK OPTION PLAN
JSC's 1992 Stock Option Plan, as amended (the "Plan") became
effective on August 26, 1992 and will continue in effect until the
later of August 26, 2004 and the expiration of all outstanding
options granted thereunder unless terminated sooner by JSC's Board
of Directors (the "Board"); no options may be granted under the
Plan after August 25, 2004 or such earlier date determined by the
Board.
The purpose of the Plan is to advance the interests of JSC, its
subsidiaries and affiliates and their prospective stockholders by
providing certain eligible employees of JSC, its subsidiaries and
affiliates with an opportunity to acquire a proprietary interest in
JSC. Each salaried employee is eligible to be an optionee,
provided he/she is approved by the Board of Directors. In 1994,
JSC awarded 640,250 stock options, including 448,000 to all
executive officers as a group (12 persons), none to directors (with
the exception of Mr. Terrill) and 192,250 to employees other than
executive officers, at an exercise or base price of $12.50 with an
expiration date of February 14, 2006. As of December 31, 1994,
there were 351 participants in the Plan.
The Plan provides for the granting of nonstatutory stock options,
which are options that do not qualify as incentive stock options
within the meaning of the Code.
The Plan is administered by a committee of the Board (the "Option
Plan Committee") consisting solely of two or more directors of JSC
who are "disinterested" within the meaning of Rule 16b-3 ("Rule
16b-3") promulgated under Section 16 of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"). Members of the Option
Plan Committee do not receive any remuneration from the Plan.
Option Plan Committee members serve at the discretion of the Board.
The number of shares reserved for issuance under the Plan is
8,050,000, subject to adjustment upon changes in capitalization.
Shares may be treasury shares or authorized but unissued shares.
Under the Plan, the Named Executive Officers and certain other
eligible employees have been granted options to purchase shares of
Common Stock. Options may not be exercised unless they are both
"exercisable" and "vested". The vesting schedule varies according
to the schedule set forth in each Option Agreement and provides for
vesting over a period of time. The options which have been granted
to date generally become fully vested four years from the date of
grant. Options vest in their entirety upon the death, disability
or retirement, as defined in the Plan, of the optionee. Non-vested
options are forfeited upon any other termination of employment.
The Option Plan Committee, with the consent of the Board, may
accelerate the vesting of options at such times and under such
circumstances as it deems appropriate.
Exercisability is determined in accordance with the following
rules. Upon the earliest to occur of (i) MSLEF II's transfer of
all its Common Stock or, if MSLEF II distributes its Common Stock
to its partners pursuant to its dissolution, the transfer by such
partners of at least 50% of the aggregate Common Stock received
from MSLEF II pursuant to its dissolution, (ii) the 11th
anniversary of the grant date of the options, and (iii) a public
offering of Common Stock by MSLEF II (a "MSLEF II Public Offering")
(each, a "Trigger Date"), all vested options shall become
exercisable and all options which vest subsequently shall become
<PAGE>
exercisable upon vesting; provided, however, that if a public
offering occurs prior to the Threshold Date (defined below) all
vested options and all options which vest subsequent to the public
offering but prior to the Threshold Date shall be exercisable in an
amount (as of periodic determination dates) equal to the product of
(a) the number of shares of Common Stock vested pursuant to the
option (whether previously exercised or not) and (b) the Morgan
Percentage (as defined below) as of such date; provided further
that, in any event, (i) ten percent of stock options granted prior
to 1993 became exercisable on January 1, 1995, and (ii) a holder's
options shall become exercisable from time to time in an amount
equal to the percentage that the number of shares sold or
distributed to its partners by MSLEF II represents of its aggregate
ownership of shares on May 11, 1994 (with vested options becoming
exercisable up to such number before any non-vested options become
so exercisable) less the number of options, if any, which became
exercisable on January 1, 1995. The Threshold Date is the earlier
of (x) the date the members of the MSLEF II Group (as defined in
the Option Plan) shall have received collectively $200,000,000 in
cash and/or other property as a return of their investment in JSC
(as a result of sales of shares of JSC's common equity) and (y) the
date that the members of the MSLEF II Group shall have transferred
an aggregate of at least 30% of JSC's common equity owned by the
MSLEF II Group as of August 26, 1992. The Morgan Percentage as of
any date is the percentage determined from the quotient of (a) the
number of shares of JSC's common equity held as of August 26, 1992,
that were transferred by the MSLEF II Group as of the determination
date and (b) the number of shares of JSC's common equity
outstanding as of such date.
The purchase price of the stock purchased pursuant to the exercise
of an option is $10 per share for options granted as of August 26,
1992 and $12.50 per share for options granted as of February 15,
1994; and for all other options, such price must be the fair market
value of the stock on the day the option is granted. The option
price may be adjusted in accordance with the antidilution
provisions of the Plan. Upon the exercise of any option, the
purchase price must be fully paid in cash or its equivalent or with
already owned shares or shares otherwise issuable upon exercise.
Certain Federal Income Tax Effects -- The following discussion of
certain federal income tax effects applicable to options granted
under the Plan is a summary only, and reference is made to the
Code, the regulations and rulings issued thereunder and judicial
decisions relating thereto for a complete statement of all relevant
federal tax provisions.
An employee generally will not be taxed upon the grant of an
option. Rather, at the time of exercise of such option the
employee will recognize ordinary income for federal income tax
purposes in an amount equal to the excess of the fair market value
of the shares purchased over the option price. JSC, or its
affiliates and subsidiaries, as the case may be, will generally be
entitled to a tax deduction at such time and in the same amount
that the employee recognizes ordinary income. Different rules may
apply in the case of an employee who is subject to the reporting
requirements of Section 16(a) of the Exchange Act.
If shares acquired upon exercise of an option are later sold or
exchanged, then the difference between the sales price and the fair
market value of such shares on the date that ordinary income was
recognized with respect thereto will generally be taxable as long-
term or short-term capital gain or loss (if the shares are a
capital asset of the employee) depending upon whether the shares
have been held for more than one year after such date.
<PAGE>
According to a published ruling of the Internal Revenue Service, an
employee who pays the option price upon exercise of a nonqualified
stock option, in whole or in part, by delivering shares already
owned by him will recognize no gain or loss for federal income tax
purposes on the shares surrendered, but otherwise will be taxed
according to the rules described above. With respect to shares
acquired upon exercise that are equal in number to the shares
surrendered, the basis of such shares will be equal to the basis of
the shares surrendered, and the holding period of shares acquired
will include the holding period of the shares surrendered. The
basis of additional shares received upon exercise will be equal to
the fair market value of such shares on the date that governs the
determination of the employee's ordinary income, and the holding
period for such additional shares will commence on such date.
Option Grants in Last Fiscal Year -- The following table provides
information concerning stock options granted to the Named Executive
Officers effective as of February 15, 1994.
<TABLE>
OPTION GRANTS IN 1994
<CAPTION>
Potential Realizable Value
Number of Sec- % of Total at Annual Rates of
urities Under- Options Granted Exercise or Stock Price Appreciation
lying Options to employees Base Price Expiration for Option Term <F2>
Name Granted in Fiscal Year ($ Per Share)<F1> Date 5% 10%
<S> <C> <C> <C> <C> <C> <C>
James E. Terrill 319,000 49.9% $12.50 2/14/2006 $3,173,477 $8,526,983
Michael W.J. Smurfit 0 N/A N/A N/A N/A N/A
Richard W. Graham 9,000 1.4% 12.50 2/14/2006 89,534 240,573
John R. Funke 29,000 4.5% 12.50 2/14/2006 288,498 775,180
David C. Stevens 5,000 0.8% 12.50 2/14/2006 49,741 133,652
James B. Malloy 0 N/A N/A N/A N/A N/A
<FN>
<F1> The 1994 options were granted on February 15, 1994 and the
exercise price was set prior to JSC's initial public offering
on May 4, 1994.
<F2> The dollar amounts under these columns are the result of
calculations at 5% and 10% rates, as set by the Securities and
Exchange Commission's executive compensation disclosure rules.
Actual gains, if any, on stock option exercises depend on
future performance of the Common Stock and overall stock market
conditions. No assurance can be made that the amounts
reflected in these columns will be achieved.
<F3> On February 9, 1995, 91,750 options were granted to 37
individuals, including 10,000 to Mr. Graham, at an exercise
price of $17.625 per share.
</FN>
</TABLE>
<PAGE>
Option Exercises and Year-End Value Table -- The following table summarizes
the exercise of options and the value of options held by the Named Executive
Officers as of the end of 1994.
<TABLE>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND YEAR-END OPTION VALUE
<CAPTION>
Number of
Securities Underlying Value of Unexercised
Shares Unexercised Options In-the-Money Options
Acquired on Value at January 1, 1995 (#)<F1> at January 1, 1994($)<F2>
Name Exercise(#) Realized($) Exercisable/Unexercisable Exercisable/Unexercisable
<S> <C> <C> <C> <C>
James E. Terrill 0 N/A 18,100 / 481,900 $126,700 /$2,575,800
Michael W.J. Smurfit 0 N/A 102,600 / 923,400 718,200 / 6,463,800
Richard W. Graham 0 N/A 9,100 / 90,900 63,700 / 613,800
John R. Funke 0 N/A 12,100 / 137,900 84,700 / 892,800
David C. Stevens 0 N/A 4,500 / 45,500 31,500 / 306,000
James B. Malloy 0 N/A 72,400 / 651,600 506,800 / 4,561,200
<FN>
<F1> No stock appreciation rights have been granted to any Named Executive Officers. Ten
percent of the outstanding options granted prior to 1993 became exercisable on January
1, 1995. None were exercisable on December 31, 1994.
<F2> Value is the difference between the market value of the Common Stock on the date of
exercise or December 31, 1994 and the exercise price. The market price at December 31,
1994 was $17.00 per share.
</FN>
</TABLE>
<PAGE>
PENSION PLANS
Salaried Employees' Pension Plan and Supplemental Income Pension
Plans
JSC and its subsidiaries maintain a non-contributory pension plan
for salaried employees (the "Pension Plan") and two non-
contributory supplemental income pension plans (the "SIP I" and
"SIP II", together, the "SIP Plans") for certain key executive
officers, under which benefits are determined by final average
earnings and years of credited service and are offset by a certain
portion of social security benefits. For purposes of the Pension
Plan, final average earnings equals the average of the highest five
consecutive years of the participants' last 10 years of service,
including overtime and certain bonuses, but excluding bonus
payments under the Management Incentive Plan, deferred or
acquisition bonuses, fringe benefits and certain other
compensation. For purposes of each SIP, final average earnings
equals the participant's average earnings, including bonus payments
made under the Management Incentive Plan, for the five consecutive
highest-paid calendar years out of the last 10 years of service.
SIP I recognizes up to 20 years of credited service and SIP II
recognizes 22.5 years of credited service.
The pension benefits for the Named Executive Officers can be
calculated pursuant to the following table, which shows the total
estimated single life annuity payments that would be payable to the
Named Executive Officers participating in the Pension Plan and one
of the SIP Plans after various years of service at selected
compensation levels. Payments under the SIP Plans are an unsecured
liability of JSC.
<PAGE>
<TABLE>
<CAPTION>
SIP I Participants
Annual Benefits (Single Life Annuity)
Upon Final Retirement with Final
Final Years of Service Indicated
Average (Prior to Adjustment for Social Security)
Earnings 5 years 10 years 15 years 20 years
<C> <C> <C> <C> <C>
$ 200,000. . . . . . . . . . $ 25,000 $ 50,000 $ 75,000 $ 100,000
400,000. . . . . . . . . . 50,000 100,000 150,000 200,000
600,000. . . . . . . . . . 75,000 150,000 225,000 300,000
800,000. . . . . . . . . . 100,000 200,000 300,000 400,000
1,000,000. . . . . . . . . . 125,000 250,000 375,000 500,000
1,200,000. . . . . . . . . . 150,000 300,000 450,000 600,000
1,400,000. . . . . . . . . . 175,000 350,000 525,000 700,000
1,600,000. . . . . . . . . . 200,000 400,000 600,000 800,000
1,800,000. . . . . . . . . . 225,000 450,000 675,000 900,000
2,000,000. . . . . . . . . . 250,000 500,000 750,000 1,000,000
</TABLE>
<TABLE>
<CAPTION>
SIP II Participants
Annual Benefits (Single Life Annuity)
Upon Final Retirement with Final
Final Years of Service Indicated
Average (Prior to Adjustment for Social Security)
Earnings 5 years 10 years 15 years 20 years 22.5 years
<C> <C> <C> <C> <C> <C>
$ 200,000. . . . . . $ 20,000 $ 40,000 $ 60,000 $ 80,000 $ 90,000
400,000. . . . . . 40,000 80,000 120,000 160,000 180,000
600,000. . . . . . 60,000 120,000 180,000 240,000 270,000
800,000. . . . . . 80,000 160,000 240,000 320,000 360,000
1,000,000. . . . . . 100,000 200,000 300,000 400,000 450,000
1,200,000. . . . . . 120,000 240,000 360,000 480,000 540,000
1,400,000. . . . . . 140,000 280,000 420,000 560,000 630,000
1,600,000. . . . . . 160,000 320,000 480,000 640,000 720,000
1,800,000. . . . . . 180,000 360,000 540,000 720,000 810,000
2,000,000. . . . . . 200,000 400,000 600,000 800,000 900,000
</TABLE>
Dr. Smurfit and Mr. Malloy participate in SIP Plan I and have
39 and 15 years of credited service, respectively. SIP Plan
II became effective January 1, 1993, and Messrs. Terrill,
Graham, Funke and Stevens participate in such plan and have
23, 36, 18 and 7 years of credited service, respectively.
Estimated final average earnings for each of the Named
Executive Officers are as follows: Dr. Smurfit ($1,069,000);
Mr. Terrill ($516,000); Mr. Graham ($340,000); Mr. Funke
($322,000); and Mr. Stevens ($199,000). Mr. Malloy received
approximately $208,000 of SIP Plan I payments in 1994.
<PAGE>
EMPLOYMENT CONTRACTS AND TERMINATION, SEVERANCE AND CHANGE OF
CONTROL ARRANGEMENTS
Mr. Malloy has a deferred compensation agreement with a subsidiary
of JSC, pursuant to which he became entitled upon his retirement to
lifetime payments of $70,000 annually in addition to his accrued
benefits under SIP Plan I.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Prior to the Equity Offerings, JSC did not maintain a formal
compensation committee. Dr. Smurfit, Mr. Malloy and Mr. Kilroy,
executive officers of JSC at the beginning of 1994, participated in
deliberations of the Board of Directors on executive compensation
matters for 1994.
Dr. Smurfit and Mr. Kilroy are both directors and executive
officers of JS Group and JSC, and Mr. Malloy is a director of JS
Group and a former director and executive officer of JSC.
REPORT OF THE COMPENSATION COMMITTEE ONEXECUTIVE COMPENSATION
The Compensation Committee (the "Committee") was established in
connection with the Equity Offerings in 1994. The Committee
consists of three members of JSC's Board of Directors who are not
employees of JSC and who have no interlocking relationships
requiring disclosure. The Committee oversees the administration of
executive compensation programs and determines the compensation of
the executive officers, including the Named Executive Officers.
The goals of JSC's executive compensation program are as follows:
to attract, retain and motivate qualified executives with
outstanding abilities; to tie a significant portion of the overall
compensation of executive officers to JSC's profitability; and to
seek to enhance JSC's profitability by aligning the interests of
executive officers with those of JSC's stockholders.
In determining base salaries for each of the Named Executive
Officers, as well as other executive officers, consideration is
given to national and local salary surveys and the results of an
informal, internal review of salaries paid to officers with
comparable qualifications, experience and responsibilities at other
companies of similar size. As part of the cost reduction
initiatives implemented by JSC in 1993, salaries were frozen at
1993 levels for 1994.
JSC's executive officers, as well as other key employees of JSC,
participate in an annual management incentive plan (the "MIP"),
with awards based upon the attainment of pre-established individual
goals and profit targets for JSC.
Each fiscal year the Committee considers the desirability of
granting awards under JSC's 1992 Stock Option Plan to executive
officers, including the Named Executive Officers. In determining
the amount and nature of awards under the Plan to executive
officers other than the Chief Executive Officer, an initial
recommendation is made by the Option Plan Committee, taking into
account the respective scope of accountability, strategic and
operational goals, and anticipated performance requirements and
contributions of each executive officer. The stock options awarded
to the Chief Executive Officer are established separately and are
described below under CEO Compensation. The Committee believes
that past grants of stock options have successfully focused JSC's
senior management on building profitability and shareholder value.
<PAGE>
Beginning with 1994, Section 162(m) of the Code ("Section 162(m)")
generally limits to $1,000,000 per person a publicly held
corporation's federal income tax deduction for compensation paid in
any year to its Chief Executive Officer and each of its four other
highest paid executive officers to the extent such compensation is
not "performance based" within the meaning of Section 162(m).
Section 162(m) does not apply to JSC for either of its 1994 or 1995
tax years because JSC is not "publicly held" as defined for this
purpose in the Code. JSC has historically set compensation and
bonuses based upon performance, and JSC intends to continue this
practice. At such time as Section 162(m) becomes applicable to
JSC, the Committee will, in general, seek to qualify compensation
paid to its executive officers for deductibility under Section
162(m) although the Committee believes it is appropriate to retain
the flexibility to authorize payments of compensation that may not
qualify for deductibility if, in the Committee's judgment, it is in
JSC's best interest to do so.
CEO Compensation
Mr. Terrill's salary as the new Chief Executive Officer was set by
Dr. Smurfit, in consultation with representatives of the major
stockholders. Mr. Terrill's salary was based on an informal review
of salaries paid to officers with comparable qualifications,
experience and responsibilities at other companies of similar size.
Based on this assessment, the Chief Executive Officer was awarded
a base salary for 1994 of $700,000, effective February 1, 1994.
Pursuant to the terms of the MIP, he received a performance based
incentive award of $251,029 for 1994. The Chief Executive Officer
was also awarded stock options covering an aggregate of 319,000
shares of JSC's common stock in February 1994 in recognition of his
new position. The award was based on the Board's evaluation of the
Chief Executive Officer's past and expected contributions toward
the achievement of JSC's long-term strategic initiatives, including
the positive results realized by JSC from the significant
restructuring completed and cost savings measures instituted in
1993.
Commencing on the date of the Equity Offerings, the Committee
undertook the responsibility for reviewing the salary level and the
overall compensation of the Chief Executive Officer based upon a
periodic review of peer group companies, the performance of JSC in
relation to its peers and the performance of the individual. The
evaluation recognizes the major role of the Chief Executive Officer
in strategic initiatives to be accomplished by JSC, including cost
savings measures instituted under the tenure of the Chief Executive
Officer; growth in the market price for JSC's securities; and
favorable corporate developments for increased sales volume.
Submitted by the Compensation Committee of JSC's Board of
Directors.
D.P. Brennan
A.E. Goldberg
D.R. Ramsay
<PAGE>
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 outstanding JSCE Common Stock is owned by JSC.
Security Ownership of Certain Beneficial Owners
The table below sets forth certain information regarding the
beneficial ownership of the common stock of JSC (the "Common
Stock") by each person who is known to JSC to be the beneficial
owner of more than 5% of JSC's voting stock as of March 1, 1995.
Except as set forth below, the stockholders named below have sole
voting and investment power with respect to all shares of Common
Stock shown as being beneficially owned by them.
<TABLE>
<CAPTION>
Amount and
Nature of Percent of
Name and Address of Beneficial Common
Beneficial Owner Ownership Stock
<S> <C> <C>
SIBV 51,638,462 46.5%
Smurfit International B.V.
Strawinskylaan 2001
Amsterdam 1077ZZ, The Netherlands
Attention: Rokin Corporate Services B.V.
MSLEF II Associated Entities <F1> 31,800,000 28.7%
c/o Morgan Stanley & Co. Incorporated
1221 Avenue of the Americas
New York, NY 10020
Attention: Donald Patrick Brennan
Mellon Bank, N.A., as Trustee for
First Plaza Group Trust <F2> 5,000,000 4.5%
One Mellon Bank Center
Pittsburgh, PA 15258
<FN>
<F1> As previously reported in JSC's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1994, representatives of
MSLEF II have informed JSC that they expect, subject to market
and other conditions, to dispose of MSLEF II's shares of
Common Stock through an underwritten offering, a distribution
to MSLEF II's partners, or otherwise, during 1995. No
assurances can be given whether or when disposal of any or all
of such shares will occur.
<F2> Amounts shown exclude shares of Common Stock owned by MSLEF
II, of which First Plaza Group Trust is a limited partner. If
MSLEF II were to distribute its shares of Common Stock to its
partners, First Plaza Group Trust would receive a number of
shares based on its pro rata ownership of MSLEF II.
</FN>
</TABLE>
Security Ownership of Management
The table below sets forth certain information regarding the
beneficial ownership of the Common Stock as of February 10, 1995
for (i) each of the directors of JSC, (ii) each of the Named
Executive Officers (as defined below), and (iii) all directors and
executive officers of JSC as a group.
<TABLE>
<CAPTION>
Shares of Common Stock
Amount and
Nature of Percent
Beneficial of Common
Beneficial Owner Ownership<F1><F2> Stock<F3>
<S> <C> <C>
Michael W.J. Smurfit<F4> 102,600 0.1%
James B. Malloy 72,400 0.1%
Howard E. Kilroy<F4> 42,300
James E. Terrill<F4> 18,100
John R. Funke 13,600
Richard W. Graham 9,100
David C. Stevens 4,600
Donald P. Brennan<F5> 0
Alan E. Goldberg<F5> 0
David R. Ramsay<F5> 0
G. Thompson Hutton 0
James R. Thompson 0
All directors and
executive officers as
a group (24 persons,
excluding Mr. Malloy)<F4><F5> 255,700 0.2%
<FN>
<F1> Shares shown as beneficially owned include the number of
shares of Common Stock that executive officers have the right
to acquire within 60 days after February 10, 1995 pursuant to
exercisable options under JSC's 1992 Stock Option Plan.
<F2> Shares shown exclude any shares that may be held by JSC's
Savings Plan.
<F3> Based upon a total of 110,988,681 shares of Common Stock
issued and outstanding on March 1, 1995.
<F4> Excludes shares of Common Stock owned by JS Group. JS Group,
through its indirect wholly-owned subsidiary SIBV, owns 46.5%
of the Common Stock. Dr. Smurfit, Mr. Kilroy and Mr. Terrill
own 6.6%, 0.9% and less than 0.1%, respectively, of the
outstanding shares of JS Group. Dr. Smurfit and Mr. Kilroy
are officers of JS Group.
<F5> Excludes shares of Common Stock owned by MSLEF II.
</FN>
</TABLE>
The Company's obligations under the 1994 Credit Agreement are
secured by, among other things, the JSCE Common Stock and the JSC
(U.S.) Common Stock. If an Event of Default occurs and is
continuing under the 1994 Credit Agreement, the banks will have the
right to foreclose upon such stock.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
CERTAIN TRANSACTIONS
In connection with JSC's recapitalization plan implemented in May
1994, JSC issued 19.25 million shares of Common Stock at an initial
public offering price of $13.00 per share and the Company issued
and sold $400 million of senior notes (the "Debt Offerings"). In
its capacity as underwriter of the Equity Offerings and Debt
<PAGE>
Offerings, MS&Co. received net discounts and commissions of $5.5
million and $10.0 million, respectively, in 1994. The Company paid
$.5 million to SIBV for legal fees incurred by SIBV in connection
with the recapitalization of the Company in 1994.
In connection with its issuance in 1993 of $500 million unsecured
9.75% Senior Notes, the Company entered into an agreement with SIBV
whereby SIBV committed to purchase up to $200 million aggregate
principal amount of 11 1/2% Junior Subordinated Notes maturing 2005
(the "Notes") to be issued by the Company. Proceeds of the Notes
were to be used to repurchase or otherwise retire subordinated debt
of the Company. The agreement was terminated upon the consummation
of the Equity Offerings. In accordance with the agreement, the
Company paid $.4 million to SIBV for letter of credit fees incurred
by SIBV in connection with this commitment, $1.0 million for annual
commitment fees of 1.375% on the undrawn principal amount and $.9
million for certain costs of SIBV associated with such commitments
and the termination thereof.
Net sales by the Company to JS Group, its subsidiaries and
affiliates were $36.5 million for the year ended December 31, 1994.
Net sales by JS Group, its subsidiaries and affiliates to the
Company were $71.0 million for the year ended December 31, 1994.
Product sales to and purchases from JS Group, its subsidiaries and
affiliates were consummated on terms generally similar to those
prevailing with unrelated parties.
The Company provides certain subsidiaries and affiliates of JS
Group with general management and elective management services
under separate management services agreements. The services
provided include, but are not limited to, management information
services, accounting, tax and internal auditing services, financial
management and treasury services, manufacturing and engineering
services, research and development services, employee benefit plan
and management services, purchasing services, transportation
services and marketing services. In consideration of general
management services, the Company is paid a fee up to 2% of the
subsidiaries' or affiliates' gross sales, which fee amounted to
$1.5 million for 1994. In consideration for elective services
provided in 1994, the Company received reimbursements of
approximately $2.8 million in 1994. In addition, the Company paid
JS Group and its affiliates $.6 million in 1994 for management
services and certain other services.
In October 1991, an affiliate of JS Group completed a rebuild of
the No. 2 paperboard machine owned by it, located in the Company's
Fernandina Beach, Florida paperboard mill (the "Fernandina Mill").
Pursuant to the Fernandina Operating Agreement, the Company
operates and manages the machine, which is owned by a subsidiary of
SIBV. As compensation to the Company for its services, the
affiliate of JS Group agreed to reimburse the Company for
production and manufacturing costs directly attributable to the No.
2 paperboard machine and to pay the Company a portion of the
indirect manufacturing, selling and administrative costs incurred
by the Company for the entire Fernandina Mill. The compensation is
determined by applying various formulas and agreed upon amounts to
the subject costs. The amounts reimbursed to the Company totaled
$54.0 million in 1994.
The Registration Rights Agreement
Pursuant to the Registration Rights Agreement, dated as of May 3,
1994, among MSLEF II, SIBV, JSC and certain other parties (the
"Registration Rights Agreement"), each of MSLEF II and SIBV have
certain rights, upon giving a notice as provided in the
<PAGE>
Registration Rights Agreement, to cause JSC to use its best efforts
to register under the Securities Act of 1933 the shares of Common
Stock owned by MSLEF II (including its partners) and certain other
entities (including their affiliates) and certain shares of Common
Stock owned by SIBV and its affiliates. Under the terms of the
Registration Rights Agreement, JSC may not effect a common stock
registration for its own account until the earlier of (i) such time
as MSLEF II shall have effected two demand registrations and (ii)
July 31, 1996. The Registration Rights Agreement contains
customary terms and provisions with respect to, among other things,
registration procedures and certain rights to indemnification and
contribution granted by parties thereunder in connection with the
registration of Common Stock subject to such agreement.
The Stockholders Agreement
Pursuant to the Stockholders Agreement, dated as of May 3, 1994,
among MSLEF II, SIBV, JSC and certain other parties, SIBV and the
MS Holders (as defined in the Stockholders Agreement) shall vote
their shares of Common Stock subject to the Stockholders Agreement
to elect as directors of JSC a certain number of individuals
selected by SIBV and a certain number of individuals selected by
MSLEF II, with such numbers varying depending on the amount of
Common Stock collectively owned by the MS Holders, the amount of
Common Stock owned by SIBV and the magnitude of the Initial Return
(as defined in the Stockholders Agreement) received by the MS
Holders on their investment of Common Stock. Currently, JSC's
Board of Directors consists of four directors selected by MSLEF II
(one of whom is not affiliated with MSLEF II or JSC) and four
directors selected by SIBV (one of whom is not affiliated with SIBV
or JSC). Pursuant to the Stockholders Agreement, SIBV and MSLEF II
have agreed to ensure the Board of Directors will consist of only
eight directors (unless they otherwise agree). Depending on the
amount of Common Stock collectively owned by the MS Holders and the
magnitude of the Initial Return received by the MS Holders on their
investment of Common Stock, approval of certain specified actions
of the Board shall require certain approval as specified in the
Stockholders Agreement.
<PAGE>
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 are included in
Item 8 on page 24.
(3) Exhibits.
3.1 Restated Certificate of Incorporation of the Company
(incorporated by reference to Exhibit 3.2 to the
Company's Registration Statement on Form S-2 (File No.
33-58348)).
3.2 By-laws of the Company (incorporated by reference to
Exhibit 3.4 to the Company's Registration Statement on
Form S-2 (File No. 33-58348)).
4.1 Indenture for the Series A 1994 Senior Notes
(incorporated by reference to Exhibit 4.1 to JSC'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 JSC'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 JSC's Registration Statement
on Form S-1 (File No. 33-75520)).
4.4 First Supplemental Indenture to the 1993 Senior Note
Indenture (incorporated by reference to Exhibit 4.5 to
JSC's Registration Statement on Form S-1 (File No. 33-
75520)).
10.1 Second Amended and Restated Organization Agreement, as of
August 26, 1992, among JSC (U.S.), CCA, MSLEF II, Inc.,
SIBV, JSC and MSLEF II (incorporated by reference to
Exhibit 10.1(d) to JSC (U.S.)'s quarterly report on Form
10-Q for the quarter ended September 30, 1992).
10.2 Stockholders Agreement among JSC, SIBV, MSLEF II and
certain related entities (incorporated by reference to
Exhibit 10.2 to JSC's quarterly report on Form 10-Q for
the quarter ended March 31, 1994).
10.3 Registration Rights Agreement among JSC, MSLEF II and
SIBV (incorporated by reference to Exhibit 10.3 to JSC's
quarterly report on Form 10-Q for the quarter ended March
31, 1994).
10.4 Subscription Agreement among JSC, JSC (U.S.), CCA and
SIBV (incorporated by reference to Exhibit 10.4 to JSC's
quarterly report on Form 10-Q for the quarter ended March
31, 1994).
10.5(a) Shareholders Agreement, dated as of February 21, 1986,
between JSC (U.S.) and Times Mirror (incorporated by
reference to Exhibit 4.2 to JSC (U.S.)'s Current Report
on Form 8-K, dated February 21, 1986).
10.5(b) Amendment No. 1 to the Shareholders Agreement
(incorporated by reference to Exhibit 10.5(b) to JSC's
Registration Statement on Form S-1 (File No. 33-75520)).
10.6(a) Restated Newsprint Agreement, dated January 1, 1990, by
and between SNC and The Times Mirror Company
(incorporated by reference to Exhibit 10.39 to JSC
(U.S.)'s Annual Report on Form 10-K for the fiscal year
ended December 31, 1990). Portions of this exhibit have
been excluded pursuant to Rule 24b-2 of the Securities
Exchange Act of 1934, as amended.
10.6(b) Amendment No. 1 to the Restated Newsprint Agreement
(incorporated by reference to Exhibit 10.6(b) to JSC's
Registration Statement on Form S-1 (File No. 33-75520)).
<PAGE>
10.7 Operating Agreement, dated as of April 30, 1992, by and
between CCA and Smurfit Paperboard, Inc. (incorporated by
reference to Exhibit 10.42 to JSC (U.S.)'s quarterly
report on Form 10-Q for the quarter ended March 31,
1992).
10.8 Deferred Compensation Agreement, dated January 1, 1979,
between JSC (U.S.) and James B. Malloy, as amended and
effective November 10, 1983 (incorporated by reference to
Exhibit 10(m) to JSC (U.S.)'s Registration Statement on
Form S-1 (File No. 2-86554)).
10.9(a) JSC (U.S.) Deferred Compensation Capital Enhancement Plan
(incorporated by reference to Exhibit 10(r) to JSC
(U.S.)'s quarterly report on Form 10-Q for the quarter
ended September 30, 1985).
10.9(b) Amendment No. 1 to the Deferred Compensation Capital
Enhancement Plan (incorporated by reference to Exhibit
10.37 to JSC (U.S.)/CCA's Annual Report on Form 10-K for
the fiscal year ended December 31, 1989).
10.10 Letter Agreement, dated November 24, 1982, between C.
Larry Bradford and Alton Packaging Corporation, as
amended and effective November 10, 1983 (incorporated by
reference to Exhibit 10(g) to JSC (U.S.)'s Registration
Statement on Form S-1 (File No. 2-86554)).
10.11(a) JSC (U.S.) Deferred Director's Fee Plan (incorporated by
reference to Exhibit 10.33 to JSC (U.S.)/CCA's Annual
Report on Form 10-K for the fiscal year ended December
31, 1989).
10.11(b) Amendment No. 1 to JSC (U.S.) Deferred Director's Fee
Plan (incorporated by reference to Exhibit 10.34 to JSC
(U.S.)/CCA's Annual Report on Form 10-K for the fiscal
year ended December 31, 1989).
10.12 Jefferson Smurfit Corporation Management Incentive Plan
1994 (incorporated by reference to Exhibit 10.14 to JSC's
Registration Statement on Form S-1 (File No. 33-75520)).
10.13 Jefferson Smurfit Corporation (U.S.) 1994 Long-Term
Incentive Plan (incorporated by reference to Exhibit
10.13 to JSC's Registration Statement on Form S-1 (File
No. 33-75520)).
10.14 Rights Agreement, dated as of April 30, 1992, among CCA,
Smurfit Paperboard, Inc. and Bankers Trust Company, as
collateral trustee (incorporated by reference to Exhibit
10.43 to JSC (U.S.)'s quarterly report on Form 10-Q for
the quarter ended March 31, 1992).
10.15(a) 1992 SIBV/MS Holdings, Inc. Stock Option Plan
(incorporated by reference to Exhibit 10.48 to JSC
(U.S.)'s quarterly report on Form 10-Q for the quarter
ended September 30, 1992).
10.15(b) Amendment No. 1 to 1992 SIBV/MS Holdings, Inc. Stock
Option Plan (incorporated by reference to Exhibit
10.16(b) to JSC's Registration Statement on Form S-1
(File No. 33-75520)).
10.16 Amended and Restated Commitment Letter, dated February
10, 1994, among JSC (U.S.), CCA, Chemical, Bankers Trust,
CSI and BTSC (incorporated by reference to Exhibit 10.17
to JSC's Registration Statement on Form S-1 (File No. 33-
75520)).
10.17 Credit Agreement, among JSC (U.S.), CCA and the banks
parties thereto (incorporated by reference to Exhibit
10.1 to JSC's quarterly report on Form 10-Q for the
quarter ended March 31, 1994).
18.1 Letter regarding change in accounting for pension plans
(incorporated by reference to Exhibit 18.1 to JSC
(U.S.)'s quarterly report on Form 10-Q for the quarter
ended September 30, 1993).
21.1 Subsidiaries of the Company.
24.1 Powers of Attorney (incorporated by reference to Exhibit
24.1 to JSC's Annual Report on form 10-K for the fiscal
year ended December 31, 1994).
<PAGE>
25.1 Statement on Form T-1 of the eligibility of NationsBank
of Georgia, National Association, as Trustee under the
1993 Senior Note Indenture (incorporated by reference to
Exhibit 25.1 to JSC (U.S.)/CCA's Registration Statement
on Form S-2 (File No. 33-58348)).
27.1 Financial Data Schedule.
(b) Report on Form 8-K.
The Company did not file any reports on Form 8-K during the
three months ended December 31, 1994.
<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 7, 1995 JEFFERSON SMURFIT CORPORATION (U.S.)
(Registrant)
BY /s/ John R. Funke
John R. Funke
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
* Chairman of the Board
Michael W. J. Smurfit and Director
* President, Chief Executive
James E. Terrill Officer and Director (Principal
Executive Officer)
/s/ John R. Funke Vice-President and Chief March 7, 1995
John R. Funke Financial Officer (Principal
Accounting Officer)
* Director
Howard E. Kilroy
* Director
Donald P. Brennan
* Director
Alan E. Goldberg
* Director
David R. Ramsay
* Director
James R. Thompson
* Director
G. Thompson Hutton
* By /s/ John R. Funke , pursuant to Powers of Attorney
John R. Funke filed as a part of the Form 10-K.
As Attorney in Fact
<PAGE>
<TABLE>
JEFFERSON SMURFIT CORPORATION (U.S.)
SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS
(In Millions)
<CAPTION>
Column A Column B Column C Column D Column E
Balance at
Beginning of Charged
Period, as Charged to to Other Deductions Balance
Previously Costs and Accounts Describe at End
Description Reported Expenses Describe <F1> of Period
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1994
Allowance for doubtful accounts $9.2 $1.1 $ $1.7 $8.6
Year ended December 31, 1993
Allowance for doubtful accounts $7.8 $4.0 $ $2.6 $9.2
Year ended December 31, 1992
Allowance for doubtful accounts $8.2 $3.5 $ $3.9 $7.8
<FN>
<F1> Uncollectible accounts written off, net of recoveries.
</FN>
</TABLE>
EXHIBIT 21.1
SUBSIDIARIES OF THE COMPANY
State or
Jurisdiction of
Incorporation or
Organization% Owned
(1) Smurfit Newsprint Corporation Delaware 80%
(2) Packaging Unlimited, Inc. Delaware 100%
(3) JSC International Sales, Inc. Barbados 100%
(4) CCA de Baja California, S.A. de C.V. Mexico D.F. 100%
(5) Jefferson Smurfit Finance Corporation Delaware 100%
(6) Groveton Paper Board, Inc. New Hampshire 62.94%
(7) CorFab, Inc. California 66.67%
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000798916
<NAME> JEFFERSON SMURFIT CORPORATION (U.S.)
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> DEC-31-1994
<CASH> 61800
<SECURITIES> 0
<RECEIVABLES> 324900
<ALLOWANCES> 8600
<INVENTORY> 223700
<CURRENT-ASSETS> 646500
<PP&E> 2084300
<DEPRECIATION> 657200
<TOTAL-ASSETS> 2759000
<CURRENT-LIABILITIES> 636000
<BONDS> 2391700
<COMMON> 0
0
0
<OTHER-SE> (730300)
<TOTAL-LIABILITY-AND-EQUITY> 2759000
<SALES> 3233300
<TOTAL-REVENUES> 3233300
<CGS> 2718700
<TOTAL-COSTS> 2718700
<OTHER-EXPENSES> 223700
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 268500
<INCOME-PRETAX> 28700
<INCOME-TAX> 16400
<INCOME-CONTINUING> 12300
<DISCONTINUED> 0
<EXTRAORDINARY> (55400)
<CHANGES> 0
<NET-INCOME> (43100)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
