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Securities and Exchange Commission
Washington, D.C. 20549
Form 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 For the fiscal year ended December 31, 1999
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the transition period from ______________ to _______________
Commission file number 0-23876
Smurfit-Stone Container Corporation
(Exact name of registrant as specified in its charter)
Delaware 43-1531401
(State of incorporation or organization) (I.R.S. Employer Identification)
150 North Michigan Avenue
Chicago, IL 60601
(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number: (312) 346-6600
______________
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock $.01 par value
---------------------------
Title of Class
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. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of January 31, 2000: approximately $4.3 billion.
The number of shares outstanding of the registrant's common stock as of January
31, 2000: 218,182,382
DOCUMENTS INCORPORATED BY REFERENCE: Part of Form 10-K
Into Which
Document is
Document Incorporated
-------- ------------
Sections of the Registrant's Proxy
Statement to be filed on or before April 30,
2000 for the Annual Meeting of Stockholders
to be held on May 18, 2000 III
SMURFIT-STONE CONTAINER CORPORATION
ANNUAL REPORT ON FORM 10-K
December 31, 1999
TABLE OF CONTENTS
Page No.
PART I
Item 1. Business......................................................................................... 2
Item 2. Properties....................................................................................... 7
Item 3. Legal Proceedings................................................................................ 8
Item 4. Submission of Matters to a Vote of Security Holders.............................................. 10
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters............................ 11
Item 6. Selected Financial Data.......................................................................... 12
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations............ 13
Item 7a. Quantitative and Qualitative Disclosures About Market Risk....................................... 22
Item 8. Financial Statements and Supplementary Data...................................................... 23
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure............. 59
PART III
Item 10. Directors and Executive Officers of the Registrant............................................... 59
Item 11. Executive Compensation........................................................................... 62
Item 12. Security Ownership of Certain Beneficial Owners and Management................................... 62
Item 13. Certain Relationships and Related Transactions................................................... 62
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.................................. 62
FORWARD-LOOKING STATEMENTS
Except for the historical information contained in this Annual Report on Form
10-K, certain matters discussed herein, including (without limitation) under
Part I, Item 1, "Business -- Environmental Compliance", under Part 1, Item 3,
"Legal Proceedings" and under Part II, Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations," contain forward-
looking statements, within the meaning of Section 21 E of the Securities
Exchange Act of 1934, as amended. Although the Company believes that, in making
any such statements, its expectations are based on reasonable assumptions, any
such statement may be influenced by factors that could cause actual outcomes and
results to be materially different from those projected. When used in this
document, the words "anticipates," "believes," "expects," "intends," and similar
expressions as they relate to Smurfit-Stone Container Corporation or its
management are intended to identify such forward-looking statements. These
forward-looking statements are subject to numerous risks and uncertainties.
Important factors that could cause actual results to differ materially from
those in forward-looking statements, certain of which are beyond the control of
Smurfit-Stone Container Corporation, include the impact of general economic
conditions in the U.S. and Canada and in other countries in which Smurfit-Stone
Container Corporation and its subsidiaries currently do business (including
Europe and Latin America); industry conditions, including competition and
product and raw material prices; fluctuations in exchange rates and currency
values; capital expenditure requirements; legislative or regulatory
requirements, particularly concerning environmental matters; interest rates;
access to capital markets; the timing of and value received in connection with
asset divestitures; and obtaining required approvals, if any, of debt holders.
The actual results, performance or achievement by Smurfit-Stone Container
Corporation could differ materially from those expressed in, or implied by,
these forward-looking statements, and accordingly, no assurances can be given
that any of the events anticipated by the forward-looking statements will
transpire or occur, or if any of them do so, what impact they will have on the
results of operations or financial condition of Smurfit-Stone Container
Corporation.
PART I
ITEM 1. BUSINESS
--------
GENERAL
- -------
Smurfit-Stone Container Corporation, a Delaware corporation (the "Company" or
"SSCC"), is an integrated producer of containerboard, corrugated containers and
other packaging products. SSCC is the industry's leading manufacturer of paper
and paper-based packaging, including containerboard, corrugated containers,
industrial bags and clay-coated recycled boxboard, and is the world's largest
paper recycler. In addition, SSCC is a leading producer of solid bleached
sulfate, folding cartons, paper tubes and cores, and labels. For the year ended
December 31, 1999, SSCC had net sales of $7,151 million and net income of $157
million.
SSCC is a holding company with no business operations of its own. SSCC conducts
its business operations through two wholly-owned subsidiaries: JSCE, Inc., a
Delaware corporation ("JSCE"), and Stone Container Corporation, a Delaware
corporation ("Stone"). JSCE conducts all of its business operations through its
wholly-owned subsidiary Jefferson Smurfit Corporation (U.S.) ("JSC(U.S.)"). SSCC
acquired Stone through the November 18, 1998 merger of a wholly-owned subsidiary
of Jefferson Smurfit Corporation ("JSC"), now known as SSCC, with and into Stone
(the "Merger"). The Company's results contained herein reflect Stone's
operations after November 18, 1998 (the "Merger Date"). JSC(U.S.) and Stone
collectively have operations throughout the United States, Canada, Europe and
Latin America.
On February 23, 2000, SSCC, Stone and a newly-formed subsidiary of Stone entered
into a Pre-Merger Agreement with St. Laurent Paperboard Inc., a corporation
organized under the laws of Canada ("St. Laurent"), pursuant to which the
Company will acquire St. Laurent for approximately $1.4 billion, consisting of
approximately $625 million in cash, the issuance of approximately 25 million
shares of SSCC common stock and the assumption of approximately $386 million of
St. Laurent's debt. St. Laurent is a leading North American producer, supplier
and converter of high-quality, value-added specialty containerboard and high
impact graphics packaging. Consummation of the transaction, which is subject to
St. Laurent shareholder and certain regulatory approvals, is expected to occur
in the second quarter of 2000.
PRODUCTS
CONTAINERBOARD AND CORRUGATED CONTAINERS SEGMENT
The primary products of the Company's Containerboard and Corrugated Containers
segment include corrugated containers, containerboard, kraft paper, solid
bleached sulfate ("SBS") and pulp. This segment includes 15 paper mills and 129
container plants located in the United States and three paper mills located in
Canada. Sales for the Company's Containerboard and Corrugated Containers segment
in 1999 were $4,829 million (including $193 million of intersegment sales).
Production for the Company's paper mills and sales volume for its corrugated
container facilities for the last three years, including Stone's operations
subsequent to the Merger Date, are included in the table below.
1999 1998 1997
---- ---- ----
Tons produced (in thousands)
Containerboard........................................... 5,973 2,479 2,024
Kraft paper.............................................. 437 63
Solid bleached sulfate................................... 189 185 190
Market pulp.............................................. 572 71
Corrugated containers sold (in billion sq. ft.)............. 79.2 35.2 31.7
2
The Company's containerboard mills produce a full line of containerboard, which
for 1999 included 3,858,000 tons of unbleached kraft linerboard, 324,000 tons of
mottled white linerboard and 1,791,000 tons of recycled medium. The Company's
containerboard mills and corrugated container operations are highly integrated,
with the majority of containerboard produced by the Company used internally by
its corrugated container operations. In 1999, the Company's corrugated container
plants consumed 5,755,000 tons of containerboard, representing an integration
level of approximately 84%. A significant portion of the kraft paper production
is consumed by the Company's industrial bag operations.
Corrugated containers are sold to a broad range of manufacturers of consumable
goods. Corrugated containers are used to ship such diverse products as home
appliances, electric motors, small machinery, grocery products, produce, books,
tobacco and furniture and for many other applications, including point of
purchase displays. The Company provides innovative packaging solutions,
stressing the value-added aspects of its corrugated containers, including
labeling and multicolor graphics to differentiate its products and respond to
customer requirements. The Company's corrugated container plants are located
nationwide, serving local customers and large national accounts.
Sales volumes shown above include the Company's proportionate share of the
operations of Smurfit-MBI (formerly MacMillan Bathurst, Inc.), a Canadian
producer of corrugated containers, and other affiliates reported on an equity
ownership basis. The Company and Jefferson Smurfit Group plc ("JS Group"), a
principal shareholder of SSCC, each own a 50% interest in Smurfit-MBI.
The Company also produces SBS, portions of which are consumed internally by the
Company's folding carton plants. In addition, the Company produces bleached
northern and southern hardwood pulp, which is sold to manufacturers of paper
products, including photographic and other specialty papers, as well as the
printing and writing sectors.
BOXBOARD AND FOLDING CARTONS SEGMENT
The primary products of the Company's Boxboard and Folding Cartons segment
include coated recycled boxboard and folding cartons. Sales for the Company's
Boxboard and Folding Cartons segment in 1999 were $836 million.
Production of coated recycled boxboard in 1999, 1998 and 1997 by the Company's
boxboard mills was 581,000, 582,000 and 585,000 tons, respectively. The
Company's boxboard and folding carton operations are integrated, with the
majority of tons produced by the Company's boxboard mills used internally by its
folding carton operations. In 1999, the Company's folding carton plants consumed
637,000 tons of recycled boxboard, SBS and coated natural kraft, representing an
integration level of approximately 78%.
Folding cartons are sold to manufacturers of consumable goods, especially food,
beverage, detergents, paper products and other consumer products. The Company's
folding carton plants offer extensive converting capabilities, including web and
sheet lithographic, rotogravure and flexographic printing, laminating and a full
line of structural and graphic design services tailored to specific technical
requirements, as well as photography for packaging, sales promotion concepts,
and point of purchase displays. Folding cartons are used primarily to provide
point of purchase advertising while protecting customers' products. The Company
makes folding cartons for a wide variety of applications, including food and
fast foods, detergents, paper products, beverages, health and beauty aids and
other consumer products. Customers range from small local accounts to large
national accounts. The Company's folding carton plants are located nationwide.
Folding carton sales volumes for 1999, 1998 and 1997 were 583,000, 536,000 and
488,000 tons, respectively.
The Company has focused its capital expenditures and its marketing activities in
this segment to support a strategy of enhancing product quality as it relates to
packaging graphics, increasing flexibility while reducing customer lead time,
and assisting customers in innovative package designs.
3
OTHER PRODUCTS
Industrial Bags
The Company produces multiwall bags, consumer bags and intermediate bulk
containers that are designed to safely and effectively ship a wide range of
industrial and consumer products, including fertilizers, chemicals, concrete,
flour, sugar, feed, seed, pet foods, popcorn, charcoal and salt . The Company's
bag plants are located nationwide. The Company believes that it is the largest
producer of industrial bags in the United States. In 1999, the Company's bag
plants consumed approximately 45% of the kraft paper produced by the Company's
kraft paper mills. Bag shipments for 1999 and for the period subsequent to the
Merger Date in 1998 were 316,000 and 34,000 tons, respectively. The Company's
sales of industrial bags in 1999 were $513 million.
Specialty Packaging
The Company produces a wide variety of specialty packaging products, including
uncoated recycled boxboard, paper tubes and cores, solid fiber partitions and
consumer packaging. Paper tubes and cores are used primarily for paper, film and
foil, yarn carriers and other textile products and furniture components.
Flexible packaging, paper and metallized paper labels and heat transfer labels
are used in a wide range of consumer product applications. In addition, a
contract packaging plant provides custom contract packaging services, including
cartoning, bagging, liquid-filling or powder-filling and high-speed
overwrapping. The Company produces high-quality rotogravure cylinders and has a
full-service organization experienced in the production of color separations and
lithographic film for the commercial printing, advertising and packaging
industries. In 1999, the Company's sales of specialty packaging products were
$288 million (including $24 million of intersegment sales).
Reclamation Operations
The Company's reclamation operations procure fiber resources for the Company's
paper mills as well as other producers. The Company operates reclamation
facilities in the United States that collect, sort, grade and bale recovered
paper. The Company also collects aluminum and glass. In addition, the Company
operates a nationwide brokerage system whereby it purchases and resells
recovered paper to the Company's recycled paper mills and other producers on a
regional and national contract basis. Brokerage contracts provide bulk
purchasing, resulting in lower prices and cleaner recovered paper. Many of the
reclamation facilities are located close to the Company's recycled paper mills,
ensuring availability of supply with minimal shipping costs. Domestic tons of
recovered paper collected for 1999, 1998 and 1997 were 6,560,000, 5,155,000 and
4,832,000, respectively. The Company's sales of recycled materials in 1999 were
$563 million (including $263 million of intersegment sales).
International Operations
The Company produces containerboard, boxboard and corrugated containers in
Europe and Latin America. The Company's European operations include three paper
mills (located in Hoya and Viersen, Germany and Cordoba, Spain), 21 corrugated
container plants (eleven located in Germany, three in Spain, three in Belgium,
two in France and two in the Netherlands) and six reclamation plants (five
located in Germany and one in Spain). In addition, the Company operates four
container plants in Mexico and several small affiliate operations which also
produce corrugated containers. Production for the Company's international mills
and sales volume for its foreign corrugated container facilities for 1999 and
for the period subsequent to the Merger Date in 1998 were:
1999 1998
---- ----
Tons produced (in thousands)
Containerboard....................................................... 380 40
Recycled boxboard.................................................... 79 8
Corrugated containers sold (in billion sq. ft.)...................... 12.5 1.3
In 1999, the Company's foreign corrugated container plants consumed 761,000 tons
of containerboard. The Company's sales for its foreign operations were $581
million.
4
Cladwood(R)
Cladwood(R) is a wood composite panel used by the housing industry, manufactured
from sawmill shavings and other wood residuals and overlaid with recycled
newsprint. Smurfit Newsprint Corporation, a wholly-owned subsidiary of JSC(U.S.)
("SNC"), has two Cladwood(R) plants located in Oregon. Sales for Cladwood(R) in
1999 were $21 million.
Newsprint
The Company is in the process of divesting the newsprint mills owned by SNC, and
accordingly its newsprint operations located in Newberg and Oregon City, OR have
been accounted for as a discontinued operation. The Newberg mill was sold in
November 1999. The Company is in negotiations to transfer ownership of the
Oregon City mill and does not expect to realize any significant proceeds from
the transaction.
In 1999, SNC produced approximately 510,000 metric tons and sold $235 million of
newsprint. For the past three years, an average of approximately 42% of SNC's
newsprint production was sold to The Times Mirror Company pursuant to a
long-term newsprint agreement.
FIBER RESOURCES
- ---------------
Wood fiber and recycled fiber are the principal raw materials used in the
manufacture of the Company's paper products. The Company satisfies virtually all
of its need for wood fiber through purchases on the open market or under supply
agreements and essentially all of its need for recycled fiber through the
operation of its reclamation facilities and nationwide brokerage system.
Wood fiber and recycled fiber are purchased in highly competitive,
price-sensitive markets, which have historically exhibited price and demand
cyclicality. Conservation regulations have caused, and will likely continue to
cause, a decrease in the supply of wood fiber and higher wood fiber costs in
some of the regions in which the Company procures wood fiber. Fluctuations in
supply and demand for recycled fiber have from time to time caused tight
supplies of recycled fiber, and at those times the Company has experienced an
increase in the cost of such fiber. While the Company has not experienced any
significant difficulty in obtaining wood fiber and recycled fiber in proximity
to its mills, there can be no assurances that this will continue to be the case
for any or all of its mills.
In October 1999, the Company sold 820,000 acres of owned timberland and assigned
its rights to 160,000 acres of leased timberland located in the southeastern
United States. As part of the sales agreement, JSC(U.S.) entered into a two-year
supply contract with the buyer to purchase 1.4 million tons of timber each year
during 2000 and 2001 at prevailing market prices. As of December 31, 1999, the
Company owned approximately 132,000 acres of timberland in Canada and operates
wood harvesting facilities.
MARKETING
- ---------
The Company's marketing strategy is to sell a broad range of paper-based
packaging products to marketers of industrial and consumer products. In managing
the marketing activities of its paperboard mills, the Company seeks to meet the
quality and service needs of the customers of its package converting plants at
the most efficient cost, while balancing those needs against the demands of its
open market customers. The Company's converting plants focus on supplying both
specialized packaging with high value graphics that enhance a product's market
appeal and high-volume sales of commodity products. The Company seeks to serve a
broad customer base for each of its segments and as a result serves thousands of
accounts from its plants. Each plant has its own sales force, and many have
product design engineers and other service professionals who are in close
contact with customers to respond to their specific needs. The Company
complements the local plants' marketing and service capabilities with regional
and national design and service capabilities, as well as national sales offices
for customers who purchase through a centralized purchasing office. National
account business may be allocated to more than one plant because of production
capacity and equipment requirements.
5
The Company's business is not dependent upon a single customer or upon a small
number of major customers. The Company does not believe that the loss of any one
customer would have a material adverse effect on the Company.
COMPETITION
- -----------
The markets in which the Company sells its principal products are highly
competitive and comprised of many participants. Although no single company is
dominant, the Company does face significant competitors in each of its
businesses. The Company's competitors include large vertically integrated
companies as well as numerous smaller companies. The industries in which the
Company competes have historically been sensitive to price fluctuations brought
about by shifts in industry capacity and other cyclical industry conditions.
Other competitive factors include design, quality and service, with varying
emphasis depending on product line.
BACKLOG
- -------
Demand for the Company's major product lines is relatively constant throughout
the year and seasonal fluctuations in marketing, production, shipments and
inventories are not significant. Backlogs are not a significant factor in the
industry. The Company does not have a significant backlog of orders, as most
orders are placed for delivery within 30 days.
RESEARCH AND DEVELOPMENT
- ------------------------
The Company's research and development center located in Carol Stream, IL uses
state-of-the-art technology to assist all levels of the manufacturing and sales
processes from raw materials supply through finished packaging performance.
Research programs have provided improvements in coatings and barriers,
stiffeners, inks and printing. The technical staff conducts basic, applied and
diagnostic research, develops processes and products and provides a wide range
of other technical services. The Company actively pursues applications for
patents on new inventions and designs and attempts to protect its patents
against infringement. Nevertheless, the Company believes that its success and
growth are more dependent on the quality of its products and its relationships
with its customers than on the extent of its patent protection. The Company
holds or is licensed to use certain patents, licenses, trademarks and trade
names on products, but does not consider that the successful continuation of any
material aspect of its business is dependent upon such intellectual property.
The cost of the Company's research and development activities for 1999, 1998 and
1997 was approximately $7 million, $4 million and $3 million, respectively.
EMPLOYEES
- ---------
The Company had approximately 36,300 employees at December 31, 1999, of whom
approximately 30,800 were employees of U.S. operations and the remainder were
employees of foreign operations. Of the domestic employees, approximately 20,500
(67%) are represented by collective bargaining units. The expiration dates of
union contracts for the Company's major paper mill facilities are as follows:
the Hodge, LA mill, expiring in June 2000; the Missoula, MT mill, expiring in
May 2001; the Jacksonville, FL (Seminole) mill, expiring in June 2001; the
Hopewell, VA mill, expiring in July 2002; the Brewton, AL mill, expiring in
October 2002; the Panama City, FL mill, expiring in March 2003; the Fernandina
Beach, FL mill, expiring in June 2003; and the Florence, SC mill, expiring in
August 2003. The Company believes that its employee relations are generally good
and is currently in the process of bargaining with unions representing
production employees at a number of its operations. While the terms of these
agreements may vary, the Company believes that the material terms of its
collective bargaining agreements are customary for the industry and the type of
facility, the classification of the employees and the geographic location
covered thereby.
ENVIRONMENTAL COMPLIANCE
- ------------------------
The Company's operations are subject to extensive environmental regulation by
federal, state, and local authorities. The Company in the past has made
significant capital expenditures to comply with water, air, solid and hazardous
waste and other environmental laws and regulations and expects to make
significant
6
expenditures in the future for environmental compliance. Because various
environmental standards are subject to change, it is difficult to predict with
certainty the amount of capital expenditures that will ultimately be required to
comply with future standards. In particular, the United States Environmental
Protection Agency ("EPA") has finalized significant parts of its comprehensive
rule governing the pulp, paper and paperboard industry (the "Cluster Rule"),
which will require substantial expenditures to achieve compliance. The Company
estimates, based on engineering studies done to date, that compliance with these
portions of the Cluster Rule could require up to $310 million in capital
expenditures over the next several years. The ultimate cost of complying with
the regulations cannot be predicted with certainty until further engineering
studies are completed and additional regulations are finalized.
In addition to Cluster Rule compliance, the Company also anticipates additional
capital expenditures related to environmental compliance. For the past three
years, the Company has spent an average of approximately $35 million annually on
capital expenditures for environmental purposes. The anticipated spending for
such capital projects for fiscal 2000 is approximately $200 million. A
significant amount of the increased expenditures in 2000 will be due to
compliance with the Cluster Rule and is included in the estimate of up to $310
million set forth above. Since the Company's principal competitors are, or will
be, subject to comparable environmental standards, including the Cluster Rule,
management is of the opinion, based on current information, that compliance with
environmental standards will not adversely affect the Company's competitive
position.
ITEM 2. PROPERTIES
----------
The Company maintains manufacturing facilities and sales offices throughout
North America, Europe and Latin America. The Company's facilities are properly
maintained and equipped with machinery suitable for their use. The Company's
manufacturing facilities, excluding the discontinued newsprint operations, as of
December 31, 1999 are summarized below.
Number of Facilities State
-------------------------------------------
Total Owned Leased Locations
----- ----- ------ ---------
United States
Paper mills........................................... 23 23 0 16
Corrugated container plants........................... 129 82 47 34
Folding carton plants................................. 20 16 4 10
Bag packaging plants.................................. 15 8 7 13
Specialty packaging plants............................ 29 10 19 16
Reclamation plants.................................... 26 17 9 15
Cladwood(R)........................................... 2 2 0 1
Wood products plants.................................. 2 2 0 2
-------- -------- --------
Subtotal............................................ 246 160 86 39
Canada
Paper mills........................................... 3 3 0 N/A
Wood products plants.................................. 1 1 0 N/A
Europe and Other
Paper mills........................................... 3 3 0 N/A
Corrugated container plants........................... 26 23 3 N/A
Reclamation plants.................................... 6 3 3 N/A
-------- -------- --------
Total............................................... 285 193 92 N/A
Approximately 71% of the Company's investment in property, plant and equipment
is represented by its paper mills. In addition to its manufacturing facilities,
the Company owns approximately 132,000 acres of timberland in Canada and also
operates wood harvesting facilities.
7
The approximate annual tons of productive capacity of the Company's paper mills,
including the proportionate share of its affiliates' productive capacity, based
on ownership percentage, at December 31, 1999 were:
Annual Capacity
---------------
(000 U.S. tons)
United States
Containerboard............................................................................. 5,620
Kraft paper................................................................................ 437
Solid bleached sulfate..................................................................... 192
Recycled boxboard.......................................................................... 779
Market pulp................................................................................ 341
------
Sub-total.................................................................................... 7,369
Canada
Containerboard............................................................................. 477
Market pulp................................................................................ 240
Europe and Other
Containerboard............................................................................. 418
Recycled boxboard.......................................................................... 79
-------
Total.................................................................................... 8,583
ITEM 3. LEGAL PROCEEDINGS
-----------------
LITIGATION
Stone was a party to an Output Purchase Agreement (the "OPA") with Four M
Corporation ("Four M") and Florida Coast Paper Company, L.L.C. ("FCPC"), a joint
venture owned 50% by each of Stone and Four M. The OPA required that Stone and
Four M each purchase one-half of the linerboard produced at FCPC's mill in Port
St. Joe, FL (the "FCPC Mill") at a minimum price sufficient to cover certain
obligations of FCPC. The OPA also required Stone and Four M to use their best
efforts to cause the FCPC Mill to operate at a production rate not less than the
reported average capacity utilization of the U.S. linerboard industry. FCPC
indefinitely discontinued production at the FCPC Mill in August 1998, and FCPC
and certain of its affiliates filed for Chapter 11 bankruptcy protection in
April 1999. Certain creditors of FCPC filed an adverse proceeding in the
bankruptcy against Stone and Four M, and certain of their officers and
directors, alleging, among other things, default with respect to the obligations
of Stone and Four M under the OPA. On October 20, 1999 FCPC and a committee
representing the holders of the FCPC debt securities filed a bankruptcy
reorganization plan (the "Plan") that provided for the settlement of all
outstanding claims in exchange for cash payments. Under the Plan, which was
confirmed and consummated in January 2000, Stone paid approximately $123 million
to satisfy the claims of creditors of FCPC, Stone received title to the FCPC
mill, and all claims under the OPA, as well as any obligations of Stone
involving FCPC or its affiliates, were released and discharged. In addition,
Four M issued $25 million of convertible preferred stock to Stone in connection
with the consummation of the Plan.
Subsequent to an understanding reached in December 1998, SSCC and SNC entered
into a Settlement Agreement in January 1999 to implement a nationwide class
action settlement of claims involving Cladwood(R), a composite wood siding
product manufactured by SNC that has been used primarily in the construction of
manufactured or mobile homes. The class action claimants alleged that
Cladwood(R) siding on their homes prematurely failed. The settlement was reached
in connection with a class action pending in King County, WA and also resolved
all other pending class actions. Pursuant to the settlement, SNC paid $20
million into a settlement fund, plus up to approximately $6.5 million of
administrative costs, plaintiffs' attorneys' fees, and class representative
payments. The Company has established reserves that it believes will be adequate
to pay eligible claims; however, the number of claims, and the number of
potential claimants who choose not to participate in the settlement, could cause
the Company to re-evaluate whether the liabilities in connection with the
Cladwood(R) cases could exceed established reserves.
In 1998, seven putative class action complaints were filed in the United States
District Court for the Northern District of Illinois and the United States
District Court for the Eastern District of Pennsylvania
8
alleging that Stone reached agreements in restraint of trade that affected the
manufacture, sale and pricing of corrugated products in violation of antitrust
laws. The complaints have been amended to name several other defendants,
including JSC(U.S.) and SSCC. The suits seek an unspecified amount of damages
arising out of the sale of corrugated products for the period from October 1,
1993 through March 31, 1995. Under the provisions of the applicable statutes,
any award of actual damages could be trebled. The Federal Multidistrict
Litigation Panel has ordered all of the complaints to be transferred to and
consolidated in the United States District Court for the Eastern District of
Pennsylvania. Stone, JSC(U.S.) and SSCC believe they have meritorious defenses
and intend to vigorously defend these cases.
The Company is a defendant in a number of lawsuits and claims arising out of the
conduct of its business, including those related to environmental matters. While
the ultimate results of such suits or other proceedings against the Company
cannot be predicted with certainty, the management of the Company believes that
the resolution of these matters will not have a material adverse effect on its
consolidated financial condition or results of operations.
ENVIRONMENTAL MATTERS
In March 1999, management of SNC's Oregon City, OR newsprint mill became aware
of possible alterations by one of its employees of data utilized in determining
compliance with the mill's National Pollutant Discharge Elimination System
("NPDES") permit. SNC conducted a thorough internal investigation of this matter
and, based on this investigation, concluded that such alterations did occur and,
as a result, the mill may have violated its NPDES permit limits on suspended
solids on several occasions. SNC provided both the EPA and the Oregon Department
of Environmental Quality with a detailed report of its investigation, and the
agencies are conducting an additional investigation based on this report. SNC is
fully cooperating with the investigation. SNC is unable to predict the potential
consequences of this matter.
In October 1992, the Florida Department of Environmental Regulation, predecessor
to the Department of Environmental Protection ("DEP"), filed a civil complaint
in the Circuit Court of Bay County, FL against Stone seeking injunctive relief,
an unspecified amount of fines and civil penalties, and other relief based on
alleged groundwater contamination at Stone's Panama City, FL mill. In addition,
the complaint alleged operation of a solid waste facility without a permit and
discrepancies in hazardous waste shipping manifests. At the parties' request,
the case was stayed pending the conclusion of a related administrative
proceeding petitioned by Stone in June 1992 following DEP's proposal to deny
Stone a permit renewal to continue operating its wastewater pretreatment
facility at the mill site. The administrative proceeding was referred to a
hearing officer for an administrative hearing on the consolidated issues of
compliance with a prior consent order, denial of the permit renewal, completion
of a contamination assessment and denial of a sodium exemption. In March 1999,
DEP and the Company entered into a Consent Agreement pursuant to which DEP
issued an operating permit for the wastewater treatment system, DEP granted the
sodium exemption and the Company agreed to install and operate a hydrologic
barrier well system. As part of the settlement, the enforcement action with
respect to the groundwater contamination was dismissed.
In September 1997, the Company received a Notice of Violation ("NOV") and a
Compliance Order from the EPA alleging noncompliance with air emissions
limitations for the smelt dissolving tank at the Company's Hopewell, VA mill and
for failure to comply with New Source Performance Standards applicable to
certain other equipment at the mill. In cooperation with the EPA, the Company
responded to information requests, conducted tests and took measures to ensure
continued compliance with applicable emission limits. In December 1997 and
November 1998, the Company received additional requests from the EPA for
information about past capital projects at the mill. In April 1999, the EPA
issued a NOV alleging that the Company "modified" the recovery boiler and
increased nitrogen oxide emissions without obtaining a required construction
permit. The Company responded to this NOV and indicated that the EPA's
allegations were without merit.
In August 1999, the Company received a Notice of Infraction from the Ministry of
Environment of the Province of Quebec (the "Ministry") alleging noncompliance
with specified environmental standards at the Company's New Richmond, Quebec
mill. The majority of the citations alleged that the Company had discharged
total suspended solids in the mill's treated effluent which exceeded the
regulatory limitations
9
for the rolling 30-day average. The remainder of the citations were for
monitoring, reporting and administrative deficiencies uncovered during an
inspection performed by the Ministry earlier in the year. The total fine
demanded by the Ministry for all of the alleged violations is $6.5 million
(Canadian). The Company entered a plea of "not guilty" as to all of the
citations and intends to vigorously defend itself against these alleged
violations.
Federal, state and local environmental requirements are a significant factor in
the Company's business. The Company employs processes in the manufacture of
pulp, paperboard and other products which result in various discharges,
emissions, and wastes and which are subject to numerous federal, state and local
environmental laws and regulations, including reporting and disclosure
obligations. The Company operates and expects to operate under permits and
similar authorizations from various governmental authorities that regulate such
discharges, emissions, and wastes.
The Company also faces potential liability as a result of releases, or
threatened releases, of hazardous substances into the environment from various
sites owned and operated by third parties at which Company-generated wastes have
allegedly been deposited. Generators of hazardous substances sent to off-site
disposal locations at which environmental problems exist, as well as the owners
of those sites and certain other classes of persons (generally referred to as
"potentially responsible parties" or "PRPs"), are, in most instances, subject to
joint and several liability for response costs for the investigation and
remediation of such sites under the Comprehensive Environmental Response,
Compensation and Liability Act ("CERCLA") and analogous state laws, regardless
of fault or the lawfulness of the original disposal. The Company has received
notice that it is or may be a PRP at a number of federal and/or state sites
where response action may be required and as a result may have joint and several
liability for cleanup costs at such sites. However, liability for CERCLA sites
is typically shared with other PRPs and costs are commonly allocated according
to relative amounts of waste deposited. The Company's relative percentage of
waste deposited at a majority of these sites is quite small. In addition to
participating in remediation of sites owned by third parties, the Company has
entered into consent orders for investigation and/or remediation of certain
Company-owned properties.
Based on current information, the Company believes that the probable costs of
the potential environmental enforcement matters discussed above, response costs
under CERCLA and similar state laws, and remediation of owned property will not
have a material adverse effect on the Company's financial condition or results
of operations. The Company believes that its liability for these matters was
adequately reserved at December 31, 1999.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
No matters were submitted to a vote of security holders during the fourth
quarter of 1999.
10
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
---------------------------------------------------------------------
MARKET INFORMATION
- ------------------
At December 31, 1999, the Company's common stock was held by approximately
48,000 stockholders. The Company's common stock trades on The Nasdaq Stock
Market under the symbol "SSCC". The high and low trading prices of the stock
were:
1999 1998
---------------------------------------------
High Low High Low
---- --- ---- ---
First Quarter.................. $20.13 $14.81 $17.75 $13.00
Second Quarter................. $25.31 $17.88 $22.00 $15.00
Third Quarter.................. $25.75 $20.00 $16.75 $ 9.75
Fourth Quarter................. $25.63 $17.75 $16.44 $10.00
DIVIDENDS
- ---------
The Company has not paid cash dividends on its common stock and does not intend
to pay dividends on its common stock in the foreseeable future. The ability of
the Company to pay dividends in the future is restricted by certain provisions
contained in various agreements and indentures relating to JSC(U.S.)'s and
Stone's outstanding indebtedness.
11
ITEM 6. SELECTED FINANCIAL DATA
-----------------------
- ------------------------------------------------------------------------------------------------------------------------------
In millions, except per share and statistical data 1999(a) 1998(b)(c) 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------
Summary of Operations(d)
Net sales.................................................... $ 7,151 $ 3,485 $ 2,957 $ 3,109 $ 3,704
Income (loss) from operations................................ 423 (93) 176 333 598
Income (loss) from continuing operations before
extraordinary item and cumulative effect of
accounting change.......................................... 163 (211) (19) 80 227
Discontinued operations, net of income tax provision......... 6 27 20 37 20
Net income (loss)............................................ 157 (200) 1 112 243
Basic earnings per share of common stock
Income (loss) from continuing operations before
extraordinary item and cumulative effect of
accounting change........................................ .75 (1.70) (.17) .72 2.05
Net income (loss)............................................ .72 (1.61) .01 1.01 2.19
Weighted average shares outstanding.......................... 217 124 111 111 111
Diluted earnings per share of common stock
Income (loss) from continuing operations before
extraordinary item and cumulative effect of
accounting change........................................ .74 (1.70) (.17) .71 2.03
Net income (loss)............................................ .71 (1.61) .01 1.00 2.17
Weighted average shares outstanding.......................... 220 124 111 112 112
- ------------------------------------------------------------------------------------------------------------------------------
Other Financial Data
Net cash provided by operating activities.................... $ 183 $ 129 $ 88 $ 380 $ 393
Net cash provided by (used for) investing activities......... 1,487 (59) (175) (133) (160)
Net cash provided by (used for) financing activities......... (1,805) 73 87 (262) (268)
Depreciation, depletion and amortization..................... 430 168 127 125 122
Capital investments and acquisitions......................... 156 287 191 129 170
Working capital.............................................. 42 635 71 34 51
Property, plant, equipment and timberland, net............... 4,419 5,772 1,788 1,720 1,709
Total assets................................................. 9,859 11,631 2,771 2,688 2,783
Long-term debt............................................... 4,793 6,633 2,040 1,944 2,192
Stockholders' equity (deficit)............................... 1,847 1,634 (374) (375) (487)
- ------------------------------------------------------------------------------------------------------------------------------
Statistical Data (tons in thousands)
Containerboard, SBS and kraft production (tons).............. 6,979 2,767 2,214 2,250 2,176
Market pulp production (tons)................................ 572 71
Recycled boxboard production (tons).......................... 825 765 758 713 714
Corrugated shipments (billion sq. ft.)....................... 91.7 36.5 31.7 30.0 29.4
Folding carton shipments (tons).............................. 583 536 488 474 476
Industrial bag shipments (tons).............................. 316 34
Fiber reclaimed and brokered (tons).......................... 6,560 5,155 4,832 4,464 4,293
Number of employees.......................................... 36,300 38,000 15,800 15,800 16,200
(a) The Company recorded $446 million of pretax gains on asset sales in 1999,
resulting from the sales of a majority of its timberlands and its interest
in Abitibi Consolidated, Inc. ("Abitibi").
(b) On November 18, 1998, Stone merged with a wholly-owned subsidiary of the
Company. Results for 1998 include Stone after November 18, 1998. The
Company issued approximately 104 million shares of common stock in the
Merger, resulting in a total purchase price (including the fair value of
stock options and related fees) of approximately $2,245 million.
(c) The Company recorded pretax charges of $310 million ($187 million after
tax) in the fourth quarter of 1998, including $257 million of restructuring
charges in connection with the Merger, $30 million for settlement of its
Cladwood(R) litigation and $23 million of Merger-related costs.
(d) SNC's newsprint operations are presented as a discontinued operation for
all periods.
12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
---------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
GENERAL
- -------
Market conditions and demand for containerboard and corrugated containers, the
Company's primary products, have historically been subject to cyclical changes
in the economy and changes in industry capacity, both of which can significantly
impact selling prices and the Company's profitability.
Market conditions were generally weak from 1996 to 1998 due primarily to excess
capacity within the industry. Linerboard prices, which peaked in 1995 at
approximately $535 per ton, declined dramatically thereafter, reaching a low of
$310 per ton in April 1997. Corrugated container prices followed this same
pricing trend during the period with somewhat less fluctuation. Prices remained
at reduced levels through the end of 1998.
During the second half of 1998, the containerboard industry took extensive
economic downtime, resulting in a significant reduction in inventory levels. In
addition, several paper companies, including the Company, permanently shut down
paper mill operations, approximating 6% of industry capacity. The balance
between supply and demand for containerboard has improved as a result of the
shutdowns, and inventories remained low throughout 1999. Corrugated container
shipments for the industry were strong in 1999, increasing approximately 2%
compared to 1998. Based on these developments, the Company was able to implement
two price increases during 1999, totaling $90 per ton for linerboard, bringing
the price at the end of 1999 to $430 per ton. In addition, the Company
implemented a $50 per ton price increase in February 2000 for linerboard.
Market pulp is also subject to the cyclical changes in the economy and changes
in industry capacity. The price of market pulp declined from 1996 to 1998 as a
result of excess capacity worldwide. Mill closures, market related downtime and
the recovery of the Asian markets resulted in tighter supplies and a recovery in
prices in 1999. As a result, the Company was able to implement price increases
totaling approximately $160 per metric ton for market pulp during 1999. In
addition, the Company implemented a $30 per metric ton price increase in January
2000 for market pulp.
Market conditions in the folding carton and boxboard mill industry, which were
weak in 1998, began to strengthen in the second half of 1999. Demand for
recycled boxboard and SBS improved gradually and the Company was able to
implement price increases in the fourth quarter of 1999. On average, prices were
lower in 1999 as compared to 1998. Shipments of folding cartons for the industry
increased 2% compared to 1998 and mill operating rates were higher.
Wood fiber and recycled fiber are the principal raw materials used in the
manufacture of the Company's products. Fiber supplies can vary widely at times
and are highly dependent upon the demand of paper mills. Wood fiber and
reclaimed fiber prices declined in 1998 due primarily to the lower demand
brought about by extensive economic downtime taken by the containerboard
industry in 1998. The price of old corrugated containers ("OCC"), the principal
grade used in recycled containerboard mills, declined in 1998 to its lowest
level in five years. The Company's average wood fiber cost in 1999 declined
approximately 6% compared to 1998 due primarily to the number of permanent mill
closures in those areas where the Company competes for wood. Recycled fiber
prices increased approximately 11% compared to 1998, primarily as a result of
stronger export demand.
RESTRUCTURING AND MERGER
- ------------------------
As previously discussed, a wholly-owned subsidiary of the Company merged with
Stone on November 18, 1998. In connection with the Merger, the Company
restructured its operations. The restructuring included the shutdown of
approximately 1.1 million tons, or 15%, of the Company's North American
containerboard mill capacity and approximately 400,000 tons of the Company's
market pulp capacity. During the fourth quarter of 1998, the Company recorded a
pretax charge of $257 million for restructuring costs related to the permanent
shutdown on December 1, 1998 of certain JSC(U.S.) mill operations and
13
related facilities in connection with the Merger. The restructuring charge of
$257 million included provisions for costs for JSC(U.S.) associated with (1)
adjustment of property, plant and equipment of closed facilities to fair value
less costs to sell of $179 million, (2) facility closure costs of $42 million,
(3) severance related costs of $27 million and (4) other Merger-related costs of
$9 million. As part of the Company's continuing evaluation of all areas of its
business in connection with its Merger integration, the Company recorded a $10
million restructuring charge in 1999 related to the permanent shutdown of eight
additional JSC(U.S.) facilities. The 1999 restructuring charge included
restructuring expense of $15 million related to the closures and a reduction in
the 1998 exit liabilities of $5 million.
The restructuring included the permanent shutdown on December 1, 1998 of certain
Stone containerboard mill and pulp mill facilities and five Stone converting
facilities during the allocation period in 1999. The adjustment to fair value of
property, plant and equipment associated with the permanent shutdown of Stone's
facilities, liabilities for the termination of certain Stone employees and the
liabilities for long-term commitments were included in the allocation of cost to
acquire Stone.
The allocation of the cost to acquire Stone was completed during the fourth
quarter of 1999 and included, among other things, adjustments for final
appraisals of assets, adjustments to exit liabilities, the resolution of
litigation related to the Company's investment in FCPC (See Part 1, Item 3.
Legal Proceedings) and the related deferred taxes. The final allocation resulted
in acquired goodwill of $3,202 million, which is being amortized on a straight-
line basis over 40 years.
The exit liabilities remaining for JSC(U.S.) and Stone as of December 31, 1999
consisted of approximately $212 million of anticipated cash expenditures. Since
the Merger, through December 31, 1999, approximately $83 million (28%) of the
cash expenditures were incurred, the majority of which related to severance and
facility closure costs. Future cash outlays under the restructuring of Stone and
JSC(U.S.) operations are anticipated to be $158 million (including the $123
million FCPC payment) in 2000, $11 million in 2001 and $43 million thereafter.
The remaining cash expenditures will continue to be funded through operations as
originally planned. Additional restructuring charges are expected in 2000 as
management finalizes its plans.
Merger synergies of $350 million are targeted by the end of 2000. Approximately
half of this amount is projected to come from optimizing the combined
manufacturing systems of JSC(U.S.) and Stone. Merger synergies achieved in 1999,
including the benefits of mill shutdowns at the end of 1998 and staff headcount
reductions, totaled approximately $284 million. The cost to implement the
savings achieved was approximately $41 million in 1999.
RESULTS OF OPERATIONS
- ---------------------
SSCC's results include the results of Stone for 1999 and for the period after
November 18, 1998.
Segment Data
(In millions)
1999 1998 1997
------------- ------------ ------------
Net Profit/ Net Profit/ Net Profit/
Sales (Loss) Sales (Loss) Sales (Loss)
-----------------------------------------------------------------
Containerboard and corrugated containers......... $4,636 $ 478 $2,014 $ 117 $1,607 $ 56
Boxboard and folding cartons..................... 836 62 785 67 752 68
Other operations................................. 1,679 101 686 40 598 39
------ ----- ------ ------ ------ ------
Total operations................................. $7,151 641 $3,485 224 $2,957 163
====== ====== ======
Restructuring charge............................. (10) (257)
Interest expense, net............................ (563) (247) (196)
Other, net....................................... 271 (56) 11
----- ------ ------
Income (loss) from continuing operations
before income taxes, minority interest,
extraordinary item and cumulative effect of
accounting change.............................. $ 339 $ (336) $ (22)
===== ====== ======
Other, net includes, among other things, corporate expenses and gains or losses
on asset sales.
14
1999 COMPARED TO 1998
- ---------------------
Net sales of $7,151 million and operating profits of $641 million were
significantly higher in 1999 compared to 1998 due primarily to the Merger and
improvements in sales prices. Other, net improved $327 million compared to 1998
due primarily to gains recorded on sales of assets in 1999. Income from
continuing operations before income taxes, minority interest, extraordinary item
and cumulative effect of accounting change was $339 million in 1999, as compared
to a loss of $336 million in 1998. The increases (decreases) in net sales for
each of the Company's segments are shown in the chart below.
(In millions) 1999 Compared to 1998
--------------------------------------------------------
Containerboard Boxboard
& Corrugated & Folding Other
Containers Cartons Operations Total
-------------- --------- ---------- -----
Increase (decrease) due to:
Sales prices and product mix......... $ 78 $ (9) $ 37 $ 106
Sales volume......................... 61 3 64
Stone merger......................... 2,624 971 3,595
1998 acquisition..................... 26 26
Sold or closed facilities............ (106) (1) (18) (125)
------- ---- ----- -------
Net increase........................... $ 2,622 $ 51 $ 993 $ 3,666
======= ==== ===== =======
Containerboard and Corrugated Containers Segment
Net sales of $4,636 million and profits of $478 million for 1999 increased
significantly compared to 1998 due primarily to the Merger and improved sales
prices for containerboard and corrugated containers. Net sales and profits for
the Stone operations for 1999 were $2,902 million and $301 million,
respectively, as compared to $318 million and $10 million, respectively, for the
period from the Merger Date to December 31, 1998. The Company was able to
implement two price increases for containerboard in 1999, totaling $90 per ton
for linerboard and $130 per ton for medium. On average, linerboard and
corrugated container prices increased 8% and 9%, respectively, compared to 1998.
The increase in corrugated prices reflects the price increases implemented and
the Company's strategy to rationalize customer mix. SBS prices were lower than
1998 by 3%.
As a result of the Merger, containerboard, kraft paper and market pulp
production increased significantly in 1999. Production was also favorably
impacted by the acquisition of a containerboard machine from JS Group in
November 1998. SBS shipments were higher than 1998 by 2%. Corrugated container
sales volume also increased compared to 1998 due primarily to the Merger.
Corrugated container shipments were negatively impacted by the closure of four
JSC(U.S.) plants and the rationalization of customer mix. Cost of goods sold as
a percent of net sales decreased to 80% for 1999 compared to 86% for 1998 due to
higher sales prices, plant shutdowns and cost saving initiatives undertaken in
connection with the Merger.
Boxboard and Folding Cartons Segment
Net sales for 1999 increased by 7% compared to 1998 while profits decreased by
$5 million to $62 million. The sales increase was due primarily to higher sales
volume of folding cartons, which increased by 9% compared to 1998. Boxboard
shipments increased by 1% compared to last year. On average, boxboard prices
were lower than 1998 by 9% and folding carton prices were comparable to 1998.
Cost of goods sold as a percent of net sales increased from 83% in 1998 to 84%
in 1999 due primarily to the effect of lower sales prices and higher reclaimed
fiber costs.
Other Operations
Net sales of $1,679 million for the Company's other operations for 1999
increased $993 million compared to 1998 and profits increased by $61 million to
$101 million due primarily to the industrial bag and international operations
acquired in the Merger. Other operations also include the Company's reclamation
and specialty packaging operations. Reclamation benefited from higher sales
prices in 1999 as a result of increased demand. Compared to 1998, the average
price of OCC increased approximately 11% and the total tons of fiber reclaimed
and brokered increased 27% due to the additional fiber requirements resulting
from the Merger.
15
Costs and Expenses
Cost of goods sold for 1999 in the Company's Consolidated Statements of
Operations increased compared to 1998 due primarily to the Merger. The increase
was partially offset by elimination of cost for certain containerboard mill
operations which were permanently shut down in December 1998. The Company's
overall cost of goods sold as a percent of net sales decreased from 85% in 1998
to 84% in 1999 due primarily to the effects of the Merger and higher sales
prices.
Selling and administrative expenses for 1999 increased compared to 1998 due
primarily to the Merger. Staff reductions and certain other merger synergies
achieved in 1999 had a favorable impact on the Company's administrative
expenses. The Company expensed $26 million related to the cashless exercise of
stock options under the Jefferson Smurfit Corporation stock option plan in 1999.
In 1998, the Company expensed $30 million for settlement of certain litigation
and $23 million of other Merger-related cost. The Company's overall selling and
administrative expense as a percent of net sales declined from 11% in 1998 to
10% in 1999 due primarily to the effects of the Merger and higher sales prices.
Interest expense, net for 1999 was higher than 1998 due primarily to the higher
levels of debt outstanding as a result of the Merger. Average effective interest
rates for 1999 were comparable to last year.
Other, net in the Company's Consolidated Statements of Operations for 1999
included gains on the sale of the Company's timberlands of $407 million and $39
million on the sale of shares of Abitibi.
The Company recorded income tax expense of $168 million in 1999. The effective
rate for the period differed from the federal statutory tax rate due to several
factors, the most significant of which were state income taxes and the effect of
permanent differences from applying purchase accounting. At December 31, 1999,
the Company had approximately $1,420 million of net operating loss carryforwards
for U.S. federal income tax purposes that expire from 2009 through 2019, with a
tax value of $497 million. A valuation allowance of $152 million has been
established for a portion of these deferred tax assets. Further, the Company had
net operating loss carryforwards for state purposes with a tax value of $111
million, which expire from 2000 to 2019. A valuation allowance of $56 million
has been established for a portion of these deferred assets. For information
concerning income taxes as well as information regarding differences between
effective tax rates and statutory rates, see Note 8 of the Notes to Consolidated
Financial Statements.
Discontinued Operations
In February 1999, the Company adopted a formal plan to sell the operating assets
of its subsidiary, SNC. The Company subsequently decided to continue to operate
its Cladwood(R) business. Accordingly, SNC's newsprint results are accounted for
as a discontinued operation for all periods presented in the Company's
Consolidated Statements of Operations. In November 1999, the Company sold its
Newberg, OR newsprint mill for approximately $211 million (see "Liquidity and
Capital Resources"). The Company is in negotiations to transfer ownership of the
Oregon City mill and does not expect to realize any significant proceeds from
the transaction. Transfer of the Oregon City mill will complete the Company's
disposition of its newsprint business.
The 1999 results of the discontinued operations included the realized gain on
the sale of the Newberg mill, an expected loss on the transfer of the Oregon
City mill, the actual results from the measurement date through December 31,
1999 and the estimated losses on the Oregon City mill through the expected
disposition date.
16
1998 COMPARED TO 1997
- ---------------------
Net sales of $3,485 million and operating profits of $224 million were higher
than 1997 by 18% and 37%, respectively, due primarily to the Merger and higher
sales prices for containerboard and corrugated containers. The increases
(decreases) in net sales for each of the Company's segments are shown in the
chart below.
(In millions) 1998 Compared to 1997
--------------------------------------------------------
Containerboard Boxboard
& Corrugated & Folding Other
Containers Cartons Operations Total
-------------- --------- ---------- -----
Increase (decrease) due to:
Sales prices and product mix........ $ 146 $(13) $ (53) $ 80
Sales volume........................ (63) 45 22 4
Stone merger........................ 318 1 128 447
Acquisition......................... 9 9
Sold or closed facilities........... (3) (9) (12)
----- ---- ----- -----
Net increase.......................... $ 407 $ 33 $ 88 $ 528
===== ==== ===== =====
Containerboard and Corrugated Containers Segment
Net sales of the Containerboard and Corrugated Containers segment increased 25%
compared to 1997 to $2,014 million and segment profits increased $61 million
over 1997 to $117 million. The increase in net sales was due primarily to the
Merger and improved sales prices. The profit increase was due primarily to the
improvements in sales price. Net sales and profits for the Stone operations
included in this segment for the period after November 18, 1998 were $318
million and $10 million, respectively.
Containerboard and corrugated container prices were higher in 1998 by 16% and
11%, respectively, compared to 1997. SBS prices declined 2% during the period.
Containerboard sales volume for the Company's mills in 1998 declined 2% compared
to 1997 due to the closure of three JSC(U.S.) containerboard mills, effective
December 1, 1998 (See "Restructuring and Merger") and higher levels of economic
downtime. The Company also had 28 days of downtime in 1997 at its Brewton, AL
mill associated with a rebuild and upgrade of its mottled white paper machine.
Sales volume for the Company's corrugated container facilities declined 5%
compared to 1997 due in part to the Company's strategy to rationalize customer
mix. Cost of goods sold as a percent of net sales decreased from 88% in 1997 to
86% in 1998 due primarily to the higher sales prices in 1998.
Boxboard and Folding Cartons Segment
Net sales of the Boxboard and Folding Cartons segment increased 4% compared to
1997 to $785 million and segment profits declined $1 million compared to 1997 to
$67 million. The increase in net sales was due primarily to increased sales
volume of folding cartons. Folding carton sales volume increased 10% compared to
1997, reflecting growth in new business acquired near the end of 1997. Sales
volume for the boxboard mills declined 1% compared to 1997. Boxboard prices were
higher in 1998 on average, increasing 3% compared to 1997. Folding carton prices
declined 3%, reflecting the change in product mix related to the new business
acquired. Cost of goods sold as a percent of net sales for 1998 was comparable
to 1997.
Costs and Expenses
The increases in cost of goods sold and selling and administrative expenses in
1998 compared to 1997 were due primarily to the Merger. The Company's overall
cost of goods sold as a percent of net sales decreased from 86% in 1997 to 85%
in 1998. Selling and administrative expenses in 1998 also included a $30 million
pretax charge for the settlement of certain litigation (described below) and $23
million of Merger-related costs. Selling and administrative expenses as a
percent of net sales increased from 8% in 1997 to 11% in 1998.
Subsequent to an understanding reached in December 1998, the Company and SNC
entered into a Settlement Agreement in January 1999 to implement a nationwide
class action settlement of claims involving Cladwood(R). The Company recorded a
$30 million pretax charge in 1998 for amounts SNC
17
agreed to pay into a settlement fund for administrative costs, plaintiffs'
attorneys' fees, class representative payments and other costs (see Item 3.
"Legal Proceedings"). The Company believes its reserve is adequate to pay
eligible claims. However, the number of claims, and the number of potential
claimants who choose not to participate in the settlement, could cause the
Company to re-evaluate whether the liabilities in connection with the
Cladwood(R) cases could exceed established reserves.
Interest expense, net for 1998 was $247 million, an increase of $51 million
compared to 1997. The increase was due to higher levels of debt as a result of
the Merger.
The Company recorded an income tax benefit of $126 million in 1998. The
effective rate for the period differed from the federal statutory tax rate due
to several factors, the most significant of which were state income taxes and
the effect of permanent differences from applying purchase accounting.
Discontinued Operations
As explained above, SNC's newsprint results are reflected as discontinued
operations for all periods presented in the Company's Consolidated Statements of
Operations. The Company had income from discontinued operations, net of tax, in
1998 of $27 million compared to $20 million in 1997. Net sales for discontinued
operations amounted to $303 million and $281 million for 1998 and 1997,
respectively.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
General
In 1999, proceeds from the sale of assets of $1,643 million, net cash provided
by operating activities of $183 million, proceeds from the exercise of stock
options of $17 million and available cash of $131 million were used to fund
property additions of $156 million and net debt payments of $1,822 million.
In January 1999, the Company sold 7.8 million shares of its interest in Abitibi
for approximately $80 million and in April 1999, the Company sold its remaining
interest in Abitibi for approximately $414 million. Proceeds were sufficient to
prepay the entire outstanding balance of Stone's Tranche B term loan and, in
accordance with the Stone Credit Agreement (as defined below), the revolving
credit maturity date was extended from April 30, 2000 to December 31, 2000.
In October 1999, the Company sold 820,000 acres of owned timberland and assigned
its rights to 160,000 acres of leased timberland to a third party for $710
million, comprised of $225 million of cash and $485 million of installment
notes. The installment notes were monetized in a financing transaction completed
in November 1999, resulting in proceeds of $430 million. The proceeds from the
sale were used to pay down borrowings under the JSC(U.S.) Credit Agreement. A
bankruptcy remote special purpose entity holds the installment notes. The
monetization transaction was accounted for under Statement of Financial
Accounting Standards ("SFAS") No. 125 "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities". Accordingly, the financial
assets transferred to this qualifying special purpose entity and the liabilities
of that entity are not included in the consolidated financial statements of the
Company (see Note 4 of the Notes to Consolidated Financial Statements).
In November 1999, the Company sold its Newberg, OR newsprint mill. Proceeds of
approximately $211 million were used to pay down borrowings under the JSC(U.S.)
Credit Agreement.
On February 23, 2000, SSCC, Stone and a newly-formed subsidiary of Stone entered
into a Pre-Merger Agreement with St. Laurent pursuant to which the Company will
acquire St. Laurent for approximately $1.4 billion, consisting of approximately
$625 million in cash, the issuance of approximately 25 million shares of SSCC
common stock and the assumption of approximately $386 million of St. Laurent's
debt. Stone expects to borrow $1,050 million to finance the acquisition of St.
Laurent. Consummation of the transaction, which is subject to St. Laurent
shareholder and certain regulatory approvals, is expected to occur in the
second quarter of 2000.
Financing Activities
In January 1999, Stone obtained a waiver from its bank group for relief from
certain financial covenant requirements under the Stone Credit Agreement as of
December 31, 1998. Subsequently, on March 23,
18
1999, Stone and its bank group amended the Stone Credit Agreement to further
ease certain quarterly financial covenant requirements for 1999.
In August 1999, Stone repaid its $120 million 11.0% senior subordinated
debentures at maturity with borrowings under its revolving credit facility.
In October 1999, JSC(U.S.) amended the JSC(U.S.) Credit Agreement to, (i) permit
the sale of the timberland operations and the Newberg mill (ii) permit the cash
proceeds from these asset sales to be applied as prepayments against the
JSC(U.S.) Credit Agreement, (iii) ease certain quarterly financial covenants for
1999 and 2000 and (iv) permit certain prepayments of other indebtedness.
In October 1999, Stone entered into a new accounts receivable securitization
program (the "Stone Securitization Program"). The Stone Securitization Program
provides for certain trade accounts receivables to be sold without recourse to
Stone Receivables Corporation, a wholly-owned non-consolidated bankruptcy remote
qualified special purpose entity. The proceeds from the transaction were used to
prepay the borrowings under the prior Stone accounts receivable securitization
program.
The credit facilities of JSC(U.S.) and Stone (collectively, the "Credit
Agreements") contain various business and financial covenants including, among
other things, (i) limitations on dividends, redemptions and repurchases of
capital stock, (ii) limitations on the incurrence of indebtedness, (iii)
limitations on capital expenditures and (iv) maintenance of certain financial
covenants. The Credit Agreements also require prepayments if JSC(U.S.) or Stone
have excess cash flows, as defined, or receive proceeds from certain asset
sales, insurance, issuance of certain equity securities or incurrence of certain
indebtedness. Stone generated excess cash flow in the fourth quarter of 1999 of
approximately $43 million, which is classified as current maturities of
long-term debt in the Company's December 31, 1999 Consolidated Balance Sheet.
The obligations under the JSC(U.S.) Credit Agreement are unconditionally
guaranteed by the Company and certain of its subsidiaries. The obligations under
the JSC(U.S.) Credit Agreement are secured by a security interest in
substantially all of the assets of JSC(U.S.). The obligations under the Stone
Credit Agreement are secured by a security interest in substantially all of the
assets of Stone and 65% of the stock of its Canadian subsidiary. The security
interest excludes cash, cash equivalents, certain trade receivables, four paper
mills and the land and buildings of the corrugated container plants. 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 declaration of dividends by the Board of Directors is subject to, among
other things, certain restrictive provisions contained in the Credit Agreements
and certain note indentures. At December 31, 1999, Stone had accumulated
dividend arrearages of approximately $22 million related to a series of its
preferred stock.
Stone's senior notes, aggregating $1,698 million (the "Stone Senior Notes") are
redeemable in whole or in part at the option of Stone at various dates beginning
in February 1999, at par plus a weighted average premium of 2.57%. The Stone
senior subordinated debentures (the "Stone Senior Subordinated Debentures"),
aggregating $481 million, are redeemable as of December 31, 1999, in whole or in
part, at the option of Stone at par plus a weighted average premium of .16%. The
indentures governing the Stone Senior Notes and the Stone Senior Subordinated
Debentures (the "Stone Indentures") generally provide that in the event of a
change of control (as defined), Stone must, subject to certain exemptions, offer
to repurchase the Stone Senior Notes and the Stone Senior Subordinated
Debentures. The Merger constituted such a change in control. As a result, Stone
is required to offer to repurchase the Stone Senior Notes and the Stone Senior
Subordinated Debentures at a price equal to 101% of the principal amount,
together with accrued interest. However, because the Stone Credit Agreement
prohibits Stone from making an offer to repurchase the Stone Senior Notes and
the Stone Senior Subordinated Debentures, Stone could not make the offer.
Although the terms of the Stone Senior Notes refer to an obligation to repay the
bank debt or obtain the consent of the bank lenders to such repurchase, the
terms do not specify a deadline, if any, following the Merger for repayment of
bank debt or obtaining such consent. The Company intends to actively seek
commercially acceptable sources of financing to repay the outstanding
indebtedness under the Stone Credit Agreement or alternative financing
arrangements which would cause the bank lenders to consent to the repurchase.
There can be no assurance that the
19
Company will be successful in obtaining such financing or consents or as to the
terms of such financing or consents.
Based upon covenants in the Stone Indentures, Stone is required to maintain
certain levels of equity. If the minimum equity levels are not maintained for
two consecutive quarters, the applicable interest rates on the Stone Indentures
are increased by 50 basis points per semiannual interest period (up to a maximum
of 200 basis points) until the minimum equity level is attained. Stone's equity
level was below the minimum equity level during most of 1998. As a result, the
interest rates increased. The interest rates on the Stone Indentures returned to
the original interest rates on April 1, 1999 due to Stone's equity levels
exceeding the minimum on December 31, 1998. Stone's equity level exceeded the
minimum on December 31, 1999.
The Company expects that internally generated cash flows, proceeds from asset
divestitures and existing financing resources will be sufficient for the next
year to meet its obligations, including debt service, restructuring payments,
settlement of the FCPC reorganization plan, expenditures under the Cluster Rule
and capital expenditures. Scheduled debt payments in 2000 and 2001 are $174
million and $612 million, respectively, with increasing amounts thereafter.
Capital expenditures for 2000 are expected to be approximately $260 million. The
Company expects to use any excess cash flow provided by operations to make
further debt reductions. As of December 31, 1999, JSC(U.S.) had $485 million of
unused borrowing capacity under the JSC(U.S.) Credit Agreement and Stone had
$447 million of unused borrowing capacity under the Stone Credit Agreement.
In March 2000, Stone entered into a commitment letter under which a financial
institution agreed to provide a new $575 million Tranche F term loan, the
proceeds of which will be used to redeem Stone's 9-7/8% Senior Notes maturing
February 1, 2001. The Tranche F term loan will mature on December 31, 2005 and
will be provided through an amendment and restatement of the Stone Credit
Agreement. In connection with such amendment and restatement, the Company has
requested that the maturity date of the revolving facility under the Stone
Credit Agreement be extended from December 31, 2000 to December 31, 2005. The
transaction is expected to close in the first quarter of 2000.
Year 2000
The year 2000 problem concerned the inability of computer systems and devices to
properly recognize and process date-sensitive information when the year changed
to 2000. The Company depends upon its information technology ("IT") and non-IT
(used to run manufacturing equipment that contain embedded hardware and software
that must handle dates) to conduct and manage the Company's business.
The Company utilized both internal and external resources to evaluate the
potential impact of the year 2000 problem and established a year 2000 Program
Management Office to guide and coordinate the efforts of its operating units in
developing and executing its plan. The year 2000 Program Management Office
instituted a seven-phase approach, which enabled the Company to identify all
systems and devices, which were determined to be susceptible to the year 2000
problem. Corrective actions were initiated and affected systems or devices were
replaced, repaired or upgraded. Through December 31, 1999, the Company spent
approximately $54 million to correct the year 2000 problem. The Company does not
expect to spend any significant amounts in the future on year 2000 related
problems.
Subsequent to midnight on December 31, 1999 (the "Rollover Date"), the Company's
financial and administrative systems, communication links and process control
systems, which control and monitor production, power, emissions and safety, were
verified for operational capability. Only minor issues relating to these systems
were noted. The Company has conducted and managed normal business operations as
planned since the Rollover Date and has not experienced any loss of production
at any mill or converting facility as a result of the year 2000 problem. Minor
issues, which surfaced at mills and converting facilities, were addressed and
resolved typically within one day. The Company was able to provide customers,
upon request, verification of operational capability on January 1, 2000.
Furthermore, the Company was not adversely impacted by any disruptions of raw
materials, supplies or services provided by key vendors or suppliers.
20
The Company's year 2000 Program Management Office continues to check for year
2000 issues. However, given the amount of system activity since the Rollover
Date, the Company does not expect any major problems related to the year 2000
problem.
Environmental Matters
The Company's operations are subject to extensive environmental regulation by
federal, state and local authorities in the United States and regulatory
authorities with jurisdiction over its foreign operations. The Company has made,
and expects to continue to make, significant capital expenditures to comply with
water, air and solid and hazardous waste and other environmental laws and
regulations. Capital expenditures for environmental control equipment and
facilities were approximately $18 million in 1998 and approximately $29 million
in 1999. The Company anticipates that environmental capital expenditures will
approximate $200 million in 2000. The majority of the expenditures after 1999
relate to amounts that the Company currently anticipates will be required to
comply with the Cluster Rule. In November 1997, the EPA issued the Cluster Rule,
which made existing requirements for discharge of wastewater under the Clean
Water Act more stringent and imposed new requirements on air emissions under the
Clean Air Act for the pulp and paper industry. Though the final rule is still
not fully promulgated, the Company currently believes it may be required to make
additional capital expenditures of up to $290 million during the next several
years in order to meet the requirements of the new regulations. Also, additional
operating expenses will be incurred as capital installations required by the
Cluster Rule are put into service.
In addition, the Company is from time to time subject to litigation and
governmental proceedings regarding environmental matters in which compliance
action and injunctive and/or monetary relief are sought. The Company has been
named as a PRP at a number of sites, which are the subject of remedial activity
under CERCLA or comparable state laws. Although the Company is subject to joint
and several liability imposed under CERCLA, at most of the multi-PRP sites there
are organized groups of PRPs and costs are being shared among PRPs. Payments
related to cleanup at existing and former operating sites and CERCLA sites were
not material to the Company's liquidity during 1999. Future environmental
regulations may have an unpredictable adverse effect on the Company's operations
and earnings, but they are not expected to adversely affect the Company's
competitive position.
Although capital expenditures for environmental control equipment and facilities
and compliance costs in future years will depend on engineering studies and
legislative and technological developments which cannot be predicted at this
time, such costs could increase as environmental regulations become more
stringent. Environmental expenditures include projects, which, in addition to
meeting environmental concerns, may yield certain benefits to the Company in the
form of increased capacity and production cost savings. In addition to capital
expenditures for environmental control equipment and facilities, other
expenditures incurred to maintain environmental regulatory compliance (including
any remediation costs) represent ongoing costs to the Company.
Effects of Inflation
Although inflation has slowed in recent years, it is still a factor in the
economy and the Company continues to seek ways to mitigate its impact to the
extent permitted by competition. Inflationary increases in operating costs have
been moderate since 1996, and have not had a material impact on the Company's
financial position or operating results during the past three years. The Company
uses the last-in, first-out method of accounting for approximately 69% of its
inventories. Under this method, the cost of products sold reported in the
financial statements approximates current costs and thus provides a closer
matching of revenue and expenses in periods of increasing costs. As a result of
the Merger, approximately 70% of consolidated property, plant and equipment is
valued at fair value. For the remainder of the Company's property, plant and
equipment, depreciation charges represent the allocation of historical costs
incurred over past years and are significantly less than if they were based on
the current cost of productive capacity being consumed.
Prospective Accounting Standards
In 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
requires that all derivative instruments be recorded on the balance sheet at
fair value. SFAS No. 133 is effective for all quarters of fiscal years beginning
after June 15, 2000. The Company is currently assessing what the impact of SFAS
No. 133 will be on the Company's future earnings and financial position.
21
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------
Foreign Currency Risk
The Company is exposed to foreign currency rate risk. The Company's foreign
exchange exposures are the Canadian dollar and the German mark. In general, a
weakening of these currencies relative to the U.S. dollar has a negative
translation effect. Conversely, a strengthening of these currencies would have
the opposite effect. The average exchange rates for the Canadian dollar and the
German mark weakened against the U.S. dollar in 1999 by 0.2% and 4.4%,
respectively.
Assets and liabilities outside the United States are primarily located in Canada
and Germany. The Company's investments in foreign subsidiaries with a functional
currency other than the U.S. dollar are not hedged. The net assets in foreign
subsidiaries translated into U.S. dollars using the year-end exchange rates were
approximately $640 million at December 31, 1999. The potential loss in fair
value resulting from a hypothetical 10% adverse change in foreign currency
exchange rates would be approximately $64 million at December 31, 1999. Any loss
in fair value would be reflected as a cumulative translation adjustment in
Accumulated Other Comprehensive Income and would not impact the net income of
the Company.
The Company has experienced foreign currency transaction gains and losses on the
translation of U.S. dollar denominated obligations of certain of its Canadian
subsidiaries, non-consolidated affiliates and a German mark obligation. The
Company incurred foreign currency transaction gains of $7 million in 1999 that
have been recorded in Other, net on the Company's Consolidated Statements of
Operations. During 1998, the transaction gains and losses on this obligation
were immaterial to the Company.
The Company also enters into foreign currency exchange agreements, the amount of
which was not material to the consolidated financial position of the Company at
December 31, 1999.
Interest Rate Risk
The Company's earnings and cash flows are significantly affected by the amount
of interest on its indebtedness. The Company's financing arrangements include
both fixed and variable rate debt in which changes in interest rates will impact
the fixed and variable debt differently. A change in the interest rate of fixed
rate debt will impact the fair value of the debt, whereas a change in the
interest rate on the variable rate debt will impact interest expense and cash
flows. Management's objective is to protect the Company from interest rate
volatility and reduce or cap interest expense within acceptable levels of market
risk. The Company periodically enters into interest rate swaps, caps or options
to hedge interest rate exposure and manage risk within Company policy. The
Company does not utilize derivatives for speculative or trading purposes. Any
derivative would be specific to the debt instrument, contract or transaction,
which would determine the specifics of the hedge. The amount of interest rate
swaps entered into by the Company was not material to the consolidated
financial position of the Company at December 31, 1999.
The table below presents principal amounts by year of anticipated maturity for
the Company's debt obligations and related average interest rates based on the
weighted average interest rates at the end of the period. Variable interest
rates disclosed do not attempt to project future interest rates. This
information should be read in conjunction with Note 6 to the Notes to
Consolidated Financial Statements.
22
Short and Long-Term Debt
Outstanding as of December 31, 1999 There- Fair
(U.S.$, in millions) 2000 2001 2002 2003 2004 after Total Value
- ----------------------------------------------------------------------------------------------------------------------
Bank term loans and revolver
9.4% average interest rate (variable)...... $ 136 $ 7 $ 58 $ 582 $ 76 $262 $1,121 $1,123
U.S. accounts receivable securitization
5.9% average interest rate (variable)...... 224 224 224
U.S. senior and senior subordinated notes
10.7% average interest rate (fixed)........ 10 566 1,054 503 503 444 3,080 3,145
U.S. industrial revenue bonds
8.5% average interest rate (fixed)......... 4 13 13 17 13 206 266 266
Other U.S.................................... 11 11 12 6 3 7 50 50
German mark bank term loans
5.2% average interest rate (variable)...... 11 12 15 1 1 40 40
Other foreign................................ 2 3 2 2 2 1 12 12
---------------------------------------------------------------------
Total debt................................... $174 $612 $1,378 $1,111 $598 $920 $4,793 $4,860
=====================================================================
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
Index to Financial Statements: Page No.
--------
Management's Responsibility for Financial Statements............ 24
Report of Independent Auditors.................................. 25
Consolidated Balance Sheets -- December 31, 1999 and 1998....... 26
For the years ended December 31, 1999, 1998 and 1997:
Consolidated Statements of Operations......................... 27
Consolidated Statements of Stockholders' Equity............... 28
Consolidated Statements of Cash Flows......................... 29
Notes to Consolidated Financial Statements...................... 30
The following consolidated financial statement schedule of Smurfit-Stone
Container Corporation is included in Item 14(a):
II: Valuation and Qualifying Accounts and Reserves............. 58
All other schedules specified under Regulation S-X for Smurfit-Stone Container
Corporation have been omitted because they are not applicable, because they are
not required or because the information required is included in the financial
statements or notes thereto.
23
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS
The management of the Company is responsible for the information contained in
the consolidated financial statements and in other parts of this report. The
consolidated financial statements have been prepared by the Company in
accordance with accounting principles generally accepted in the United States
appropriate in the circumstances and necessarily include certain amounts based
on management's best estimate and judgment.
The Company maintains a system of internal accounting control, which it believes
is sufficient to provide reasonable assurance that in all material respects
transactions are properly authorized and recorded, financial reporting
responsibilities are met and accountability for assets is maintained. In
establishing and maintaining any system of internal control, judgment is
required to assess and balance the relative costs and expected benefits.
Management believes that through the careful selection of employees, the
division of responsibilities and the application of formal policies and
procedures, the Company has an effective and responsive system of internal
accounting controls. The system is monitored by the Company's staff of internal
auditors, who evaluate and report to management on the effectiveness of the
system.
The Audit Committee of the Board of Directors is composed of three directors who
meet with the independent auditors, internal auditors and management to discuss
specific accounting, reporting and internal control matters. Both the
independent auditors and internal auditors have full and free access to the
Audit Committee.
/s/ Ray M. Curran /s/ Paul K. Kaufmann
- ------------------------------------- -----------------------------------
Ray M. Curran Paul K. Kaufmann
President and Chief Executive Officer Vice President and Corporate
Controller (Principal Accounting
Officer)
24
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Smurfit-Stone Container Corporation
We have audited the accompanying consolidated balance sheets of Smurfit-Stone
Container Corporation as of December 31, 1999 and 1998, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 1999. Our audits also
included the financial statement schedule listed in the Index at Item 14(a).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. 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 Smurfit-Stone
Container Corporation at December 31, 1999 and 1998, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1999 in conformity with accounting principles
generally accepted in the United States. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
As discussed in Note 1 to the financial statements, in 1998 the Company changed
its method of accounting for start-up costs.
/s/ ERNST & YOUNG LLP
------------------------------
ERNST & YOUNG LLP
St. Louis, Missouri
January 24, 2000
except for Note 20, as to which the date is February 23, 2000
25
SMURFIT-STONE CONTAINER CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, (In millions, except share data) 1999 1998
- --------------------------------------------------------------------------------------------------------------
Assets
Current assets
Cash and cash equivalents.................................................. 24 $ 155
Receivables, less allowances of $50 in 1999 and $70 in 1998................ 647 743
Inventories
Work-in-process and finished goods...................................... 238 227
Materials and supplies.................................................. 496 546
-----------------------
734 773
Refundable income taxes.................................................... 7 24
Deferred income taxes...................................................... 130 160
Prepaid expenses and other current assets.................................. 69 129
-----------------------
Total current assets.................................................. 1,611 1,984
Net property, plant and equipment............................................ 4,395 5,496
Timberland, less timber depletion............................................ 24 276
Goodwill, less accumulated amortization of
$151 in 1999 and $73 in 1998............................................... 3,328 2,869
Investment in equity of non-consolidated affiliates.......................... 176 638
Other assets................................................................. 325 368
-----------------------
9,859 $ 11,631
- --------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Current liabilities
Current maturities of long-term debt....................................... 174 $ 205
Accounts payable........................................................... 662 533
Accrued compensation and payroll taxes..................................... 238 181
Interest payable........................................................... 111 126
Other current liabilities.................................................. 384 304
-----------------------
Total current liabilities............................................. 1,569 1,349
Long-term debt, less current maturities...................................... 4,619 6,428
Other long-term liabilities.................................................. 894 1,026
Deferred income taxes........................................................ 839 1,113
Minority interest............................................................ 91 81
Stockholders' equity
Preferred stock, par value $.01 per share; 25,000,000 shares authorized;
none issued and outstanding
Common stock, par value $.01 per share; 400,000,000 shares
authorized, 217,820,762 and 214,959,041 issued and
and outstanding in 1999 and 1998, respectively......................... 2 2
Additional paid-in capital................................................ 3,436 3,376
Retained earnings (deficit)............................................... (1,586) (1,743)
Accumulated other comprehensive income (loss)............................. (5) (1)
-----------------------
Total stockholders' equity............................................ 1,847 1,634
-----------------------
9,859 $ 11,631
- --------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
26
SMURFIT-STONE CONTAINER CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31, (In millions, except per share data) 1999 1998 1997
================================================================================================================================
Net sales............................................................................. $ 7,151 $3,485 $2,957
Costs and expenses
Cost of goods sold................................................................... 6,022 2,952 2,532
Selling and administrative expenses.................................................. 696 369 249
Restructuring charge................................................................. 10 257
-----------------------------------
Income (loss) from operations....................................................... 423 (93) 176
Other income (expense)
Interest expense, net................................................................ (563) (247) (196)
Other, net........................................................................... 479 4 (2)
-----------------------------------
Income (loss) from continuing operations before
income taxes, minority interest, extraordinary item
and cumulative effect of accounting change........................................ 339 (336) (22)
Benefit from (provision for) income taxes............................................. (168) 126 3
Minority interest expense............................................................. (8) (1)
-----------------------------------
Income (loss) from continuing operations before extraordinary
item and cumulative effect of accounting change..................................... 163 (211) (19)
Discontinued operations
Income from discontinued operations,
net of income taxes of $(1) in 1999,
$(17) in 1998 and $(14) in 1997..................................................... 2 27 20
Gain on disposition of discontinued operations,
net of income taxes of $2........................................................... 4
-----------------------------------
Income (loss) before extraordinary item and
cumulative effect of accounting change........................................ 169 (184) 1
Extraordinary item
Loss from early extinguishment of debt, net of income
tax benefit of $7 in 1999 and $9 in 1998............................................ (12) (13)
Cumulative effect of accounting change
Start-up costs, net of income tax benefit of $2..................................... (3)
-----------------------------------
Net income (loss)................................................................... 157 $ (200) $ 1
===================================
Basic earnings per common share
Income (loss) from continuing operations before
extraordinary item and cumulative effect of accounting change....................... .75 $(1.70) $ (.17)
Discontinued operations.............................................................. .01 .22 .18
Gain on disposition of discontinued operations....................................... .01
Extraordinary item................................................................... (.05) (.11)
Cumulative effect of accounting change............................................... (.02)
-----------------------------------
Net income (loss)................................................................... .72 $(1.61) $ .01
===================================
Weighted average shares outstanding................................................... 217 124 111
===================================
Diluted earnings per common share
Income (loss) from continuing operations before
extraordinary item and cumulative effect of accounting change....................... .74 $(1.70) $ (.17)
Discontinued operations.............................................................. .01 .22 .18
Gain on disposition of discontinued operations....................................... .01
Extraordinary item................................................................... (.05) (.11)
Cumulative effect of accounting change............................................... (.02)
-----------------------------------
Net income (loss)................................................................... .71 $(1.61) $ .01
===================================
Weighted average shares outstanding................................................... 220 124 111
================================================================================================================================
See notes to consolidated financial statements.
27
SMURFIT-STONE CONTAINER CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In millions, except share data)
- --------------------------------------------------------------------------------
Common Stock Accumulated
------------------------
Number Par Additional Retained Other
of Value, Paid-In Earnings Comprehensive
Shares $.01 Capital (Deficit) Income (Loss) Total
-----------------------------------------------------------------------------
Balance at January 1, 1997.......................... 110,989,156 $ 1 $ 1,168 $ (1,544) $ $ (375)
Comprehensive income
Net income....................................... 1 1
Other comprehensive income, net of tax...........
-----------------------------------------------------------------------------
Comprehensive income........................... 1 1
Issuance of common stock under
stock option plan.............................. 7,638
-----------------------------------------------------------------------------
Balance at December 31, 1997........................ 110,996,794 1 1,168 (1,543) (374)
Comprehensive income (loss)
Net loss......................................... (200) (200)
Other comprehensive income (loss)
Foreign currency translation adjustment,
net of tax of $2........................... 3 3
Minimum pension liability adjustment,
net of tax of $(2)......................... (4) (4)
-----------------------------------------------------------------------------
Comprehensive income (loss).............. (200) (1) (201)
Issuance of common stock for acquisition
of Stone Container Corporation, net of
registration costs............................... 103,954,782 1 2,168 2,169
Fair value of Smurfit-Stone Container
Corporation stock options issued to
convert Stone Container Corporation
stock options.................................... 40 40
Issuance of common stock under
stock option plan................................ 7,465
-----------------------------------------------------------------------------
Balance at December 31, 1998........................ 214,959,041 2 3,376 (1,743) (1) 1,634
Comprehensive income (loss)
Net income....................................... 157 157
Other comprehensive income (loss)
Unrealized holding gain on marketable
securities, net of tax of $2............... 3 3
Foreign currency translation adjustment,
net of tax of $(7)......................... (11) (11)
Minimum pension liability adjustment,
net of tax of $2........................... 4 4
-----------------------------------------------------------------------------
Comprehensive income (loss).............. 157 (4) 153
Issuance of common stock under
stock option plan................................ 2,861,721 60 60
-----------------------------------------------------------------------------
Balance at December 31, 1999........................ 217,820,762 $ 2 $ 3,436 $ (1,586) $ (5) $ 1,847
- ------------------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
28
SMURFIT-STONE CONTAINER CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31, (In millions) 1999 1998 1997
================================================================================================================
Cash flows from operating activities
Net income (loss)................................................ 157 $ (200) $ 1
Adjustments to reconcile net income (loss) to net cash provided
by operating activities
Gain on disposition of discontinued operations............... (2)
Extraordinary loss from early extinguishment of debt......... 19 22
Cumulative effect of accounting change for start-up costs.... 5
Depreciation, depletion and amortization..................... 430 168 127
Amortization of deferred debt issuance costs................. 14 8 11
Deferred income taxes........................................ 137 (113) 13
Gain on sale of assets....................................... (446)
Non-cash employee benefit expense............................ 31 9 4
Foreign currency transaction gains........................... (7) (4)
Noncash restructuring charge................................. 4 179
Change in current assets and liabilities, net of effects
from acquisitions and dispositions Receivables............. (186) 98 (24)
Inventories.............................................. 8 3 (32)
Prepaid expenses and other current assets................ 38 (13) 3
Accounts payable and accrued liabilities................. 88 (77) (4)
Interest payable......................................... (15) 26 (5)
Income taxes............................................. 6 (18) (6)
Other, net................................................... (93) 36
----------------------------------------
Net cash provided by operating activities........................ 183 129 88
----------------------------------------
Cash flows from investing activities
Property additions............................................... (156) (285) (166)
Timberland additions............................................. (2) (16)
Investments in affiliates and acquisitions....................... (9)
Cash acquired with acquisition, net of acquisition costs......... 222
Construction funds held in escrow................................ 9
Proceeds from property and timberland disposals and sale
of businesses.................................................. 1,417 6 7
Net proceeds from sale of receivables............................ 226
----------------------------------------
Net cash provided by (used for) investing activities............. 1,487 (59) (175)
----------------------------------------
Cash flows from financing activities
Borrowings under bank credit facilities.......................... 1,502
Net borrowings (repayments) under accounts receivable
securitization programs........................................ (211) (1) 30
Payments of long-term debt....................................... (1,611) (1,384) (7)
Other increases in long-term debt................................ 64
Proceeds from exercise of stock options.......................... 17
Deferred debt issuance costs..................................... (44)
----------------------------------------
Net cash provided by (used for) financing activities............. (1,805) 73 87
----------------------------------------
Effect of exchange rate changes on cash.......................... 4
----------------------------------------
Increase (decrease) in cash and cash equivalents................... (131) 143
Cash and cash equivalents
Beginning of year................................................ 155 12 12
----------------------------------------
End of year...................................................... 24 $ 155 $ 12
================================================================================================================
See notes to consolidated financial statements.
29
SMURFIT-STONE CONTAINER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in millions, except share data)
1. Significant Accounting Policies
Basis of Presentation: Smurfit-Stone Container Corporation ("SSCC"), formerly
Jefferson Smurfit Corporation and hereafter referred to as the "Company," owns
100% of the common equity interest in JSCE, Inc. and Stone Container Corporation
("Stone"). The Company has no operations other than its investments in JSCE,
Inc. and Stone. JSCE, Inc. owns 100% of the equity interest in Jefferson Smurfit
Corporation (U.S.) ("JSC(U.S.)") and is the guarantor of the senior unsecured
indebtedness of JSC(U.S.). JSCE, Inc. has no operations other than its
investment in JSC(U.S.). JSC(U.S.) has operations throughout the United States.
Stone has domestic and international operations.
Nature of Operations: The Company's major operations are in paper products,
recycled and renewable fiber resources, and consumer and specialty packaging. In
February 1999, the Company announced its intention to divest its newsprint
subsidiary, and accordingly, its newsprint segment is accounted for as a
discontinued operation (See Note 13). The Company's paperboard mills procure
virgin and recycled fiber and produce paperboard for conversion into corrugated
containers, folding cartons, industrial bags and industrial packaging at
Company-owned facilities and third-party converting operations. Paper product
customers represent a diverse range of industries including paperboard and
paperboard packaging, wholesale trade, retailing and agri-business. Recycling
operations collect or broker wastepaper for sale to Company-owned and third-
party paper mills. Specialty packaging produces labels and flexible packaging
for use in industrial, medical and consumer product applications. Customers and
operations are principally located in the United States. Credit is extended to
customers based on an evaluation of their financial condition.
Principles of Consolidation: The consolidated financial statements include the
accounts of the Company and majority-owned and controlled subsidiaries.
Investments in majority-owned affiliates where control does not exist and non-
majority owned affiliates are accounted for on the equity method. Significant
intercompany accounts and transactions are eliminated in consolidation.
Cash and Cash Equivalents: The Company considers all highly liquid investments
with an original maturity of three months or less to be cash equivalents. Cash
and cash equivalents of $3 million and $55 million were pledged at December 31,
1999 and 1998 as collateral for obligations associated with the accounts
receivable securitization programs (See Note 6).
Revenue Recognition: Revenue is recognized at the time products are shipped to
external customers.
Inventories: Inventories are valued at the lower of cost or market, principally
under the last-in, first-out ("LIFO") method except for $225 million in 1999 and
$303 million in 1998 which are valued at the lower of average cost or market.
First-in, first-out ("FIFO") costs (which approximate replacement costs) exceed
the LIFO value by $64 million and $45 million at December 31, 1999 and 1998,
respectively.
Net Property, Plant and Equipment: Property, plant and equipment are carried at
cost. The costs of additions, improvements and major replacements are
capitalized, while maintenance and repairs are charged to expense as incurred.
Provisions for depreciation and amortization are made using straight-line rates
over the estimated useful lives of the related assets and the terms of the
applicable leases for leasehold improvements. Papermill machines have been
assigned a useful life of 23 years, while major converting equipment and folding
carton presses have been assigned useful lives ranging from 12-20 years.
Property, plant and equipment acquired in the Merger were recorded at fair value
based on the final appraisal results (See Note 2). These assets were assigned
remaining useful lives of 18 years for papermill machines and 12 years for major
converting equipment.
30
Timberland, less Timber Depletion: Timberland is stated at cost less accumulated
cost of timber harvested. The portion of the costs of timberland attributed to
standing timber is charged against income as timber is cut, at rates determined
annually, based on the relationship of unamortized timber costs to the estimated
volume of recoverable timber. The costs of seedlings and reforestation of
timberland are capitalized. The Company sold approximately 980,000 acres of
owned and leased timberlands in 1999 (See Note 4).
Goodwill: The excess of cost over the fair value assigned to the net assets
acquired is recorded as goodwill and is being amortized using the straight-line
method over 40 years.
Deferred Debt Issuance Costs: Deferred debt issuance costs included in other
assets are amortized over the terms of the respective debt obligations using the
interest method.
Long-lived Assets: In accordance with Statement of Financial Accounting
Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-lived Assets
and for Long-lived Assets to be Disposed of," long-lived assets held and used by
the Company and the related goodwill are reviewed for impairment whenever events
or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable.
Income Taxes: The Company accounts for income taxes in accordance with the
liability method of accounting for income taxes. Under the liability method,
deferred assets and liabilities are recognized based upon anticipated future tax
consequences attributable to differences between financial statement carrying
amounts of assets and liabilities and their respective tax bases (See Note 8).
Foreign Currency Translation: The functional currency for the majority of the
Company's foreign operations is the applicable local currency. Accordingly,
assets and liabilities are translated at the exchange rate in effect at the
balance sheet date, and income and expenses are translated at average exchange
rates prevailing during the year. Translation gains or losses are included
within stockholders' equity as part of Accumulated Other Comprehensive Income.
Foreign currency transaction gains or losses are credited or charged to income.
The functional currency for foreign operations operating in highly inflationary
economies is the U.S. dollar and any gains or losses are credited or charged to
income.
Financial Instruments: The Company periodically enters into interest rate swap
agreements that involve the exchange of fixed and floating rate interest
payments without the exchange of the underlying principal amount. For interest
rate instruments that effectively hedge interest rate exposures, the net cash
amounts paid or received on the agreements are accrued and recognized as an
adjustment to interest expense. If an arrangement is replaced by another
instrument and no longer qualifies as a hedge instrument, then it is marked to
market and carried on the balance sheet at fair value. Gains and losses realized
upon settlement of these agreements are deferred and amortized to interest
expense over a period relevant to the agreement if the underlying hedged
instrument remains outstanding, or immediately if the underlying hedged
instrument is settled.
Transfers of Financial Assets: The Company accounts for transfers of financial
assets in accordance with SFAS No. 125 "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities." Accordingly, financial
assets transferred to qualifying special-purpose entities and the liabilities of
such entities are not reflected in the consolidated financial statements of the
Company (See Note 4).
Employee Stock Options: Accounting for stock-based plans is in accordance with
Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued
to Employees," and related interpretations. Under APB 25, because the exercise
price of the Company's employee stock options equals the market price of the
underlying stock on the date of grant, no compensation expense is recognized.
The Company has adopted the disclosure-only provisions of SFAS No. 123
"Accounting for Stock-Based Compensation" (See Note 11).
31
Environmental Matters: The Company expenses environmental expenditures related
to existing conditions resulting from past or current operations from which no
current or future benefit is discernible. Expenditures that extend the life of
the related property or mitigate or prevent future environmental contamination
are capitalized. Reserves for environmental liabilities are established in
accordance with the American Institute of Certified Public Accountants ("AICPA")
Statement of Position ("SOP") 96-1, "Environmental Remediation Liabilities." The
Company records a liability at the time when it is probable and can be
reasonably estimated. Such liabilities are not discounted or reduced for
potential recoveries from insurance carriers.
Use of Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Reclassifications: Certain reclassifications of prior year presentations have
been made to conform to the 1999 presentation.
Start-up Costs: In April 1998, the AICPA issued SOP 98-5, "Reporting the Costs
of Start-Up Activities," which requires that costs related to start-up
activities be expensed as incurred. Prior to 1998, the Company capitalized
certain costs to open new plants or to start new production processes. The
Company adopted the provisions of the SOP in its financial statements as of the
beginning of 1998. The Company recorded a charge for the cumulative effect of an
accounting change of $3 million, net of taxes of $2 million ($.02 per share), to
expense costs that had been capitalized prior to 1998.
Computer Software-Internal Use: In March 1998, the AICPA issued SOP 98-1,
"Accounting for Computer Software Developed or Obtained for Internal Use," which
requires that certain costs incurred in connection with developing or obtaining
software for internal-use must be capitalized. The adoption of SOP 98-1 did not
have a material effect on the 1999 financial statements.
Prospective Accounting Pronouncements: In 1998, the Financial Accounting
Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities." SFAS No. 133 requires that all derivative instruments be
recorded on the balance sheet at fair value. SFAS No. 133 is effective for all
fiscal quarters of fiscal years beginning after June 15, 2000. The Company is
currently assessing what the impact of SFAS No. 133 will be on the Company's
future earnings and financial position.
2. Merger and Restructurings
Merger with Stone Container Corporation
On November 18, 1998, Stone merged with a wholly-owned subsidiary of the Company
("the Merger"). Under the terms of the Merger, each share of Stone common stock
was exchanged for the right to receive .99 of one share of Company common stock.
A total of 104 million shares of Company common stock were issued in the Merger,
resulting in a total purchase price (including the fair value of stock options
and related fees) of approximately $2,245 million. The Merger was accounted for
as a purchase business combination and, accordingly, the results of operations
of Stone have been included in the consolidated statements of operations of the
Company after November 18, 1998. The purchase price allocation was completed
during the fourth quarter of 1999, and includes adjustments for the final
appraisals on property, plant and equipment and investments in non-consolidated
affiliates, resulting in a decrease in valuations of $726 million and $38
million, respectively; the resolution of litigation related to the Company's
investment in Florida Coast Paper Company L.L.C ("FCPC") and Stone Savannah
River Pulp and Paper Corporation ("SSR"); the shutdown of converting facilities;
and the related deferred taxes.
32
The final allocation resulted in acquired goodwill of $3,202 million, which is
being amortized on a straight-line basis over 40 years.
In October 1999, FCPC and a committee representing the holders of the FCPC
secured debt filed a bankruptcy reorganization plan to resolve all matters
relating to the bankruptcies of the FCPC Companies. In January 2000, the plan
was confirmed and consummated and Stone paid approximately $123 million to
satisfy the claims of creditors of FCPC, Stone received title to the FCPC mill,
and all claim of the Output Purchase Agreement, as well as any obligations of
Stone involving FCPC or its affiliates, were released and discharged. In
addition, Four M Corporation ("Four M") issued $25 million of convertible
preferred stock to Stone in connection with the consummation of the plan. (See
Note 18).
The litigation related to the Company's purchase of the common stock of SSR was
settled for cash payments of approximately $32 million during the third quarter
of 1999.
The following unaudited pro forma combined information presents the results of
operations of the Company as if the Merger had taken place on January 1, 1998
and 1997, respectively:
Pro Forma Information 1998 1997
----------------
Net sales.................................................... $7,550 $7,748
Loss from continuing operations before extraordinary item
and cumulative effect of accounting change................ (999) (453)
Net loss..................................................... (992) (445)
Net loss per common share
Basic..................................................... (4.61) (2.08)
Diluted................................................... (4.61) (2.08)
These unaudited pro forma results of operations have been prepared for
comparative purposes only and do not purport to be indicative of the results of
operations which actually would have resulted had the Merger occurred as of
January 1, 1998 and 1997, respectively.
Stone Purchase Allocation
Included in the allocation of the cost to acquire Stone is the adjustment to
fair value of property and equipment associated with the permanent shutdown of
certain containerboard mill and pulp mill facilities of Stone, liabilities for
the termination of certain Stone employees, and liabilities for long-term
commitments. The assets at these facilities were recorded at their estimated
fair value less cost to sell based upon appraisals. The terminated employees
included approximately 550 employees at these mill facilities and 200 employees
in Stone's corporate office. These employees were terminated in December 1998.
The facilities were shut down during 1998 and the Company is in the process of
either selling or dismantling these facilities. The long-term commitments
consist of lease commitments and funding commitments on debt guarantees that are
associated with the shutdown of Stone's containerboard mill and pulp mill
facilities or other investments in which the Company will no longer participate
as a result of its merger plan.
During 1999, the Company permanently closed five Stone converting facilities.
Included in the purchase price allocation for these facilities are the
adjustment to fair value of property, plant and equipment less the costs to
sell, liabilities for the termination of employees, and liabilities for
long-term commitments, primarily leases. Approximately 500 employees were
terminated in 1999. The amounts associated with these closures are included in
the following table of exit liabilities as part of the 1999 adjustments.
The following is a summary of the exit liabilities recorded in the allocation of
the cost of Stone:
33
Balance at Balance at
Opening Dec. 31, Dec. 31,
Balance Payments 1998 Payments Adjustments 1999
---------------------------------------------------------------------------
Severance......................... $ 14 $ (4) $ 10 $(13) $ 8 $ 5
Lease commitments................. 38 (1) 37 (6) 8 39
Settlement of FCPC litigation..... 37 37 (1) 87 123
Other commitments................. 19 (6) 13 (2) 4 15
Mill closure costs................ 9 9 (7) (1) 1
---------------------------------------------------------------------------
$117 $(11) $106 $(29) $106 $183
---------------------------------------------------------------------------
Restructuring
In connection with the Merger, the Company recorded a pretax restructuring
charge of $257 million in 1998 related to the permanent shutdown of certain
containerboard mill operations and related facilities formerly operated by
JSC(U.S.), the termination of certain JSC(U.S.) employees, and liabilities for
lease commitments at the closed JSC(U.S.) facilities. The containerboard mill
facilities were permanently shut down on December 1, 1998 and the Company is in
various stages of dismantling these facilities. The assets at these facilities
were adjusted to their estimated fair value less cost to sell based upon
appraisals. The sales and operating income of these mill facilities in 1998
prior to closure were $209 million and $9 million respectively. The terminated
employees included approximately 700 employees at these mills and 50 employees
in the Company's corporate office. These employees were terminated in December
1998. During 1999, the Company permanently closed eight facilities, which
resulted in approximately 400 employees being terminated. A $15 million
restructuring charge was recorded related to the facility closures. The 1999
adjustments below include a reduction to 1998 exit liabilities of $5 million and
a reclassification of pension liabilities of $12 million.
The following is a summary of the restructuring liabilities recorded:
Balance at Balance at
Opening Dec. 31, Dec. 31,
Balance Payment Adjustments 1998 Charge Payments Adjustments 1999
----------------------------------------------------------------------------------------
Write-down of property and
equipment to fair value...... $179 $ $(179) $ $ 4 $ $ (4) $
Severance...................... 27 (3) 24 5 (27) 2
Lease commitments.............. 21 (1) 20 (3) 17
Pension curtailments........... 9 9 3 (12)
Facility closure costs......... 13 (3) 10 1 (3) 8
Other 8 8 2 (3) (5) 2
----------------------------------------------------------------------------------------
$257 $(7) $(179) $71 $15 $(36) $(21) $29
----------------------------------------------------------------------------------------
Other Merger Related Charges
In addition, the Company recorded $23 million of Merger related charges as
selling and administrative expenses during the fourth quarter of 1998. These
charges pertained to professional management fees to achieve operating
efficiencies from the Merger, fees for management personnel changes and other
Merger cost.
34
Cash Requirements
Future cash outlays under the restructuring of Stone and JSC(U.S.) operations
are anticipated to be $158 million in 2000 (including the $123 million FCPC
settlement), $11 million in 2001, $11 million in 2002, and $32 million
thereafter. The Company is continuing to evaluate all areas of its business in
connection with its merger integration, including the identification of
additional converting facilities that might be closed.
3. Net Property, Plant and Equipment
Net property, plant and equipment at December 31 consists of:
1999 1998
-------------------------
Land............................................... $ 122 $ 145
Buildings and leasehold improvements............... 496 780
Machinery, fixtures and equipment.................. 4,662 5,279
Construction in progress........................... 127 156
-------------------------
5,407 6,360
Less accumulated depreciation and amortization..... (1,012) (864)
-------------------------
Net property, plant and equipment.............. $ 4,395 $ 5,496
-------------------------
Property, plant and equipment was adjusted by $726 million in Stone's final
purchase price allocation (See Note 2). Depreciation and depletion expense was
$352 million, $153 million, $119 million for 1999, 1998 and 1997 respectively.
Net property, plant and equipment include capitalized leases of $76 million and
$68 million and related accumulated amortization of $32 million and $23 million
at December 31, 1999 and 1998, respectively.
4. SFAS No. 125 Transactions
Stone Receivables Securitization Program
On October 15, 1999, the Company entered into a new six-year $250 million
accounts receivable securitization program whereby the Company sells, without
recourse, on an ongoing basis, certain of its accounts receivable to Stone
Receivables Corporation ("SRC"), a wholly-owned non-consolidated subsidiary of
the Company. SRC transfers the receivables to a trust for which it has sold
beneficial interest to third-party investors. The Company retained a junior
interest in the trust which has been classified as accounts receivable in the
accompanying consolidated balance sheet.
SRC is a qualified special-purpose entity under the provisions of SFAS No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities". Accordingly accounts receivable sold to SRC for which the
Company did not retain an interest, are not included in the Company's
consolidated balance sheets.
At December 31, 1999, $304 million of accounts receivable had been sold under
the program, of which $79 million was retained by the Company as a junior
interest and recorded as an accounts receivable in the accompanying consolidated
balance sheets.
Timberland Sale and Note Monetization
The Company sold approximately 980,000 acres of owned and leased timberland in
Florida, Georgia and Alabama in October 1999. The final purchase price, after
adjustments, was $710 million. The Company received $225 million in cash, with
the balance of $485 million in the form of installment notes.
The Company entered into a program to monetize the installment notes receivable.
The notes were sold to Timber Notes Holdings, a qualified special purpose entity
under the provisions of SFAS No. 125, for $430 million cash proceeds and a
residual interest in the notes. The transaction has been accounted for as a
35
sale under SFAS No. 125. The cash proceeds from the sale and the monetization
transactions were used to prepay borrowings under the JSC(U.S.) Credit
Agreement. At December 31, 1999 the residual interest of $33 million was
included in other assets.
The pretax gain of $407 million on the timberland sale and the related note
monetization program is included in Other, net in the consolidated statements of
operations.
5. Non-Consolidated Affiliates
The Company has several non-consolidated affiliates that are engaged in paper
and packaging operations in North America, South America and Europe. The
Company's significant non-consolidated affiliate at December 31, 1999 is
Smurfit-MBI (formerly MacMillian Bathurst, Inc.), a Canadian corrugated
container company, in which the Company owns a 50% interest. The remaining 50%
interest is owned by an affiliate of Jefferson Smurfit Group plc. Smurfit-MBI
had net sales of $389 million and $351 million in 1999 and 1998, respectively.
As of December 31, 1998, the Company owned 25% of Abitibi Consolidated Inc.
("Abitibi"), which had sales of $2,313 million in 1998. In 1999, the Company
sold its interest in Abitibi and recorded a $39 million gain, which is reflected
in Other, net in the consolidated statements of operations.
Combined summarized financial information for all of the Company's
non-consolidated affiliates that are accounted for under the equity method of
accounting is presented as follows:
1999 1998
----------------------------
Results of operations
Net sales..................................... $ 668 $ 417
Cost of sales................................. 576 384
Loss before income taxes, minority interest
and extraordinary charges................... 34 (55)
Net income (loss)............................. 32 (43)
December 31, December 31,
1999 1998
----------------------------
Financial position:
Current assets................................ $ 160 $ 964
Non-current assets............................ 150 4,238
Current liabilities........................... 111 782
Non-current liabilities....................... 107 1,973
Stockholders' equity.......................... 93 2,447
36
6. Long-Term Debt
Long-term debt, as of December 31, is as follows:
Bank Credit Facilities 1999 1998
------------------------
JSC(U.S.)
- ---------
1998 Tranche A Term Loan (8.7% weighted average variable rate), payable in
various installments through March 31, 2005..................................... $ 275 $ 400
1998 Tranche B Term Loan (9.4% weighted average variable rate), payable in
various installments through March 31, 2006..................................... 115 900
Revolving Credit Facility (9.0% weighted average variable rate), due
March 31, 2005.................................................................. 50 85
Stone
- -----
Tranche B Term Loan, payable in various installments through April 1, 2000........ 368
Tranche C Term Loan (9.5% weighted average variable rate), payable in various
installments through October 1, 2003............................................ 181 194
Tranche D Term Loan (9.5% weighted average variable rate), payable in various
installments through October 1, 2003............................................ 173 185
Tranche E Term Loan (9.5% weighted average variable rate), payable in various
installments through October 1, 2003............................................ 234 248
Revolving Credit Facility (10.6% weighted average rate), due December 31, 2000.... 93 161
4.98% to 7.96% term loans, denominated in foreign currencies, payable in
varying amounts through 2004.................................................... 40 79
------------------------
1,161 2,620
Accounts Receivable Securitization Program Borrowings
JSC(U.S.) accounts receivable securitization program borrowings (5.9% weighted
average variable rate), due in February 2002................................... 224 209
Stone accounts receivable securitization program term loans (6.2% weighted
average variable rate), due December 15, 2000.................................. 210
------------------------
224 419
Senior Notes
JSC(U.S.)
- ---------
11.25% Series A unsecured senior notes, due May 1, 2004......................... 300 300
10.75% Series B unsecured senior notes, due May 1, 2002......................... 100 100
9.75% unsecured senior notes, due April 1, 2003................................ 500 500
37
Stone
- -----
10.75% first mortgage notes, due October 1, 2002 (plus unamortized premium
of $13 and $18)............................................................... 513 518
8.45% mortgage notes, payable in monthly installments through August 1, 2007
and $69 on September 1, 2007.................................................. 81 82
9.875% unsecured senior notes, due February 1, 2001 (plus unamortized premium
of $3 and $7)................................................................. 562 578
11.5% unsecured senior notes, due October 1, 2004 (plus unamortized premium
of $10 and $12)............................................................... 210 212
11.5% unsecured senior notes, due August 15, 2006 (plus unamortized premium
of $5 and $6)................................................................. 205 206
12.58% rating adjustable unsecured senior notes, due August 1, 2016 (plus
unamortized premium of $2 and $2)............................................. 127 127
------------------------
2,598 2,623
Other Debt
- ----------
Other (including obligations under capitalized leases of $43 and $44)........... 329 344
Stone Subordinated Debt
10.75% senior subordinated debentures and 1.5% supplemental interest
certificates, due on April 1, 2002 (less unamortized discount of $3 and $5)... 244 270
10.75% senior subordinated debentures, due April 1, 2002 (less unamortized
discount of $1 at December 31, 1998).......................................... 200 200
11.0% senior subordinated debentures, due August 15, 1999 (plus unamortized
premium of $1 at December 31, 1998)........................................... 120
6.75% convertible subordinated debentures (convertible at $34.28 per share),
due February 15, 2007 (less unamortized discount of $8 and $8)................ 37 37
------------------------
481 627
------------------------
Total debt..................................................................... 4,793 6,633
Less current maturities........................................................ (174) (205)
------------------------
Total long-term debt........................................................... $4,619 $6,428
------------------------
The amounts of total debt outstanding at December 31, 1999 maturing during the
next five years are as follows:
2000............................................... $ 174
2001............................................... 612
2002............................................... 1,378
2003............................................... 1,111
2004............................................... 598
Thereafter......................................... 920
Bank Credit Facilities
JSC(U.S.) Credit Agreement
- --------------------------
In March 1998, JSC(U.S.) entered into a bank credit facility (the "JSC(U.S.)
Credit Agreement") consisting of a $550 million revolving credit facility
("Revolving Credit Facility") of which up to $150 million may consist of letters
of credit, a $400 million Tranche A Term Loan and a $350 million Tranche B Term
Loan. Net proceeds from the offering were used to repay the 1994 JSC(U.S.)
Tranche A, Tranche B, and Tranche C Term Loans and revolving credit facility.
The write-off of related deferred debt issuance costs totaling $13
38
million (net of income tax benefits of $9 million) for 1998 is reflected in the
accompanying consolidated statements of operations as an extraordinary item.
A commitment fee of .5% per annum is assessed on the unused portion of the
Revolving Credit Facility. At December 31, 1999, the unused portion of this
facility, after giving consideration to outstanding letters of credit, was $485
million.
On November 18, 1998, JSC(U.S.) and its bank group amended and restated the
JSC(U.S.) Credit Agreement to, among other things, (i) allow an additional $550
million borrowing on the Tranche B Term Loan, (ii) allow the purchase of a paper
machine from an affiliate (See Note 15), (iii) make a $300 million intercompany
loan to SSCC, which was contributed to Stone as additional paid-in capital, (iv)
permit the Merger, and (v) ease certain financial covenants.
On October 15, 1999 JSC(U.S.) and its bank group amended the JSC(U.S.) Credit
Agreement to (i) permit the sale of the timberlands and the Newberg newsprint
mill, (ii) permit the cash proceeds from these asset sales to be applied as
prepayments against the JSC(U.S.) Credit Agreement, (iii) permit certain
prepayments of other indebtedness, and (iv) ease certain quarterly financial
covenants for 1999 and 2000. The proceeds from the timberland sale and the
Newberg newsprint mill were used to reduce the balance of the Tranche A and
Tranche B Term Loans. The write-off of related deferred debt issuance costs
totaling $10 million (net of income tax benefits of $6 million) for 1999 is
reflected in the accompanying consolidated statements of operations as an
extraordinary item.
The JSC(U.S.) Credit Agreement contains various covenants and restrictions
including, among other things, (i) limitations on dividends, redemptions and
repurchases of capital stock, (ii) limitations on the incurrence of
indebtedness, liens, leases and sale-leaseback transactions, (iii) limitations
on capital expenditures, and (iv) maintenance of certain financial covenants.
The JSC(U.S.) Credit Agreement also requires prepayments if JSC(U.S.) has excess
cash flows, as defined, or receives proceeds from certain asset sales,
insurance, issuance of certain equity securities or incurrence of certain
indebtedness.
The obligations under the JSC(U.S.) Credit Agreement are unconditionally
guaranteed by the Company and 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 JSC(U.S.) Credit Agreement is also secured by a pledge of all
the capital stock of JSCE, Inc. and each of its material subsidiaries and by
certain intercompany notes.
Stone Credit Agreement
- ----------------------
Stone has a bank credit agreement which provides for four secured senior term
loans (Tranche B, Tranche C, Tranche D, and Tranche E Term Loans), aggregating
$588 million at December 31, 1999 which mature through October 1, 2003 and a
$560 million senior secured revolving credit facility, up to which $62 million
may consist of letters of credit, maturing December 31, 2000 (collectively the
"Stone Credit Agreement"). Stone pays a .5% commitment fee on the unused
portions of its revolving credit facility. At December 31, 1999, the unused
portion of this facility, after giving consideration to outstanding letters of
credit, was $447 million.
On November 18, 1998, Stone and its bank group amended and restated the Stone
Credit Agreement to, among other things, (i) extend the maturity date on the
Tranche B Term Loan $190 million payment due on October 1, 1999 to April 1,
2000, (ii) extend the maturity date of the revolving credit facility to April 1,
2000 and to provide a further extension to December 31, 2000 upon repayment of
the Tranche B Term Loan on or before its maturity date of April 1, 2000, (iii)
permit the use of the net proceeds from the sale of the newsprint and related
assets at the Snowflake, AZ, facility to repay a portion of Stone's 11.875%
Senior Notes due December 1, 1998, (iv) permit the Merger, and (v) ease certain
financial covenants. On April 23, 1999, the Company repaid all outstanding
amounts under Tranche B Term Loan with proceeds from the sale of Abitibi.
39
The Stone Credit Agreement (as amended) contains various covenants and
restrictions including, among other things, (i) limitations on dividends,
redemptions and repurchases of capital stock, (ii) limitations on the incurrence
of indebtedness, liens, leases and sale-leaseback transactions, (iii)
limitations on capital expenditures, and (iv) maintenance of certain covenants.
The Stone Credit Agreement also requires prepayments of the term loans if Stone
has excess cash flows, as defined, or receives proceeds from certain asset
sales, insurance, issuance of certain equity securities or incurrence of certain
indebtedness. Current maturities include $43 million of excess cash flow
payments due prior to April 5, 2000. Any prepayments are allocated against the
term loan amortization in inverse order of maturity.
During January 1999, the Company obtained a waiver from its bank group for
relief from certain financial covenant requirements under the Stone Credit
Agreement as of December 31, 1998. Subsequently, on March 23, 1999 the Company
and its bank group amended the Stone Credit Agreement to ease certain quarterly
financial covenant requirements for 1999.
At December 31, 1999, borrowings and accrued interest outstanding under the
Stone Credit Agreement were secured by a security interest in substantially all
of the assets of Stone and 65% of the stock of its Canadian subsidiary. The
security interest excludes cash, cash equivalents, certain trade receivables,
five paper mills and the land and buildings of the corrugated container plants.
Accounts Receivable Securitization Program Borrowings
JSC(U.S.) Securitization Program
- --------------------------------
JSC(U.S.) has a $315 million accounts receivable securitization program (the
"JSC(U.S.) Securitization Program") which provides for the sale of certain of
the Company's trade receivables to a wholly owned, bankruptcy remote, limited
purpose subsidiary, Jefferson Smurfit Finance Corporation ("JS Finance"). The
accounts receivable purchases are financed through the issuance of commercial
paper or through borrowings under a revolving liquidity facility and a $15
million term loan. Under the JSC(U.S.) Securitization Program, JS Finance has
granted a security interest in all its assets, principally cash and cash
equivalents and trade accounts receivable. The Company has $91 million available
for additional borrowing at December 31, 1999, subject to eligible accounts
receivable. Borrowings under the JSC(U.S.) Securitization Program, which expire
February 2002, have been classified as long-term debt because of the Company's
intent to refinance this debt on a long-term basis and the availability of such
financing under the terms of the program.
Stone Securitization Program
- ----------------------------
On October 15, 1999, the Company entered into the Stone Securitization Program,
which is accounted for under SFAS No. 125 (See Note 4). Proceeds from the Stone
Securitization Program were used to repay borrowings outstanding under its prior
$210 million accounts receivable securitization program.
Senior Notes
JSC(U.S.)
- ---------
The 11.25% 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 a premium of
5.625% and after May 1, 2000 with a premium of 2.813% of the principal amount.
The 10.75% Series B Senior Notes and the 9.75% Senior Notes are not redeemable
prior to maturity. Holders of the JSC(U.S.) Senior Notes have the right, subject
to certain limitations, to require JSC(U.S.) to repurchase their securities at
101% of the principal amount plus accrued and unpaid interest, upon the
occurrence of a change in control or, in certain events, from proceeds of major
asset sales, as defined.
The Senior Notes, which are unconditionally guaranteed on a senior basis by
JSCE, Inc., rank pari passu with the JSC(U.S.) Credit Agreement and contain
business and financial covenants which are less restrictive than those contained
in the JSC(U.S.) Credit Agreement.
40
Stone
- -----
Stone's senior notes (the "Stone Senior Notes"), aggregating $1,698 million at
December 31, 1999, are redeemable in whole or in part at the option of Stone at
various dates, at par plus a weighted average premium of 2.57%. The Merger
constituted a "Change of Control" under the Stone Senior Notes and Stone's $481
million outstanding senior subordinated debentures (the "Stone Senior
Subordinated Debentures"). As a result, Stone is required, subject to certain
limitations, to offer to repurchase the Stone Senior Notes and the Stone Senior
Subordinated Debentures at a price equal to 101% of the principal amount,
together with accrued interest. However, because the Stone Credit Agreement
prohibits Stone from making an offer to repurchase the Stone Senior Notes and
the Stone Senior Subordinated Debentures, Stone could not make the offer.
Although the terms of the Stone Senior Notes refer to an obligation to repay the
bank debt or obtain the consent of the bank lenders to such repurchase, the
terms do not specify a deadline, if any, following the Merger for repayment of
bank debt or obtaining such consent. Stone intends to actively seek commercially
acceptable sources of financing to repay the outstanding indebtedness under the
Stone Credit Agreement or alternative financing arrangements which would cause
the bank lenders to consent to the repurchase. There can be no assurance that
the Company will be successful in obtaining such financing or consents.
In the event Stone does not maintain the minimum Subordinated Capital Base (as
defined) of $1 billion for two consecutive quarters, the indentures governing
the Stone Senior Notes require Stone to semiannually offer to purchase 10% of
such outstanding indebtedness at par until the minimum Subordinated Capital Base
(as defined) is attained. In the event the Stone Credit Agreement prohibits such
an offer to repurchase, the interest rate on the Stone Senior Notes is increased
by 50 basis points per semiannual coupon period up to a maximum of 200 basis
points until the minimum Subordinated Capital Base is attained.
Stone's Subordinated Capital Base (as defined) was $2,998 million and $3,096
million at December 31, 1999 and December 31, 1998, respectively; however, it
was below the $1 billion minimum at September 30, June 30, and March 31, 1998.
In April 1998, Stone offered to repurchase 10% of the outstanding Stone Senior
Notes. Approximately $1 million of such indebtedness was redeemed under this
offer. Effective February 1, 1999 the interest rate on the 9.875% Senior Notes
due February 1, 2001 and 12.58% Senior Notes due August 1, 2016 was increased by
50 basis points. Effective February 15, 1999 the interest rate on the 11.5%
Senior Notes due August 15, 2006 was also increased 50 basis points. The
interest rates on all of the Stone Senior Notes returned to the original
interest rate on April 1, 1999 due to Stone's Subordinated Capital Base
exceeding the minimum on December 31, 1998.
The 10.75% first mortgage notes are secured by the assets at four of Stone's
containerboard mills. The 8.45% mortgage notes are secured by the assets at 37
of Stone's corrugated container plants.
Stone Subordinated Debt
The Stone Senior Subordinated Debentures, aggregating $481 million, are
redeemable as of December 31, 1999, in whole or in part at the option of Stone
with premiums of the principal amount at par plus a weighted average premium of
.16%.
In the event Stone does not maintain a minimum Net Worth, as defined, of $500
million, for two consecutive quarters, the interest rate on Stone's 10.75%
senior subordinated debentures and 11.0% senior subordinated debentures will be
increased by 50 basis points per semiannual coupon period up to a maximum amount
of 200 basis points, until the minimum Net Worth is attained.
Stone's Net Worth (as defined) was $2,506 million and $2,590 million at December
31, 1999 and 1998, respectively; however, it was below the $500 million minimum
at September 30, June 30 and March 31, 1998. The interest rate on the 11.0%
senior subordinated debentures was increased 50 basis points on August 15, 1998
and 50 basis points on February 15, 1999. The interest rate on the 10.75% senior
subordinated debentures and the 10.75% senior subordinated debentures with the
1.5% supplemental interest certificates was increased 50 basis points on October
1, 1998. The interest rate on all of the
41
Stone Senior Subordinated Debentures returned to the original interest rate on
April 1, 1999, due to Stone's Net Worth exceeding the minimum at December 31,
1998.
On August 15, 1999, the Company repaid its $120 million 11.0% Senior
Subordinated Debentures at maturity with borrowings under its revolving credit
facility.
Other
Interest costs capitalized on construction projects in 1999, 1998 and 1997
totaled $4 million, $2 million and $5 million, respectively. Interest payments
on all debt instruments for 1999, 1998 and 1997 were $583 million, $206 million
and $188 million, respectively.
7. Leases
The Company leases certain facilities and equipment for production, selling and
administrative purposes under operating leases. Future minimum rental
commitments (exclusive of real estate taxes and other expenses) under operating
leases having initial or remaining non-cancelable terms in excess of one year,
excluding lease committments on closed facilities, are reflected below:
2000................................................. $ 99
2001................................................. 78
2002................................................. 64
2003................................................. 54
2004................................................. 45
Thereafter........................................... 116
----
Total minimum lease payments.................... $456
====
Net rental expense for operating leases, including leases having a duration of
less than one year, was approximately $156 million, $69 million and $50 million
for 1999, 1998 and 1997, respectively.
8. Income Taxes
Significant components of the Company's deferred tax assets and liabilities at
December 31 are as follows:
1999 1998
------------------------
Deferred tax liabilities
Property, plant and equipment and timberland...... $(1,350) $(1,622)
Inventory......................................... (35) 2
Prepaid pension costs............................. (42) (41)
Investments in affiliates......................... (45) (57)
Timber installment sale........................... (129)
Other............................................. (151) (153)
------------------------
Total deferred tax liabilities.................... (1,752) (1,871)
------------------------
42
1999 1998
------------------------
Deferred tax assets
Employee benefit plans............................ 198 227
Net operating loss, alternative minimum tax and
tax credit carryforwards........................ 702 559
Deferred gain..................................... 29 23
Purchase accounting liabilities................... 132 103
Deferred debt issuance cost....................... 48 52
Restructuring..................................... 7 49
Other............................................. 135 113
------------------------
Total deferred tax assets....................... 1,251 1,126
Valuation allowance for deferred tax asset...... (208) (208)
------------------------
Net deferred tax assets......................... 1,043 918
------------------------
Net deferred tax liabilities.................... $ (709) $ (953)
------------------------
At December 31, 1999, the Company had approximately $1,420 million of net
operating loss carryforwards for U. S. federal income tax purposes that expire
from 2009 through 2019, with a tax value of $497 million. A valuation allowance
of $152 million has been established for a portion of these deferred tax assets.
Further, the Company had net operating loss carryforwards for state purposes
with a tax value of $111 million, which expire from 2000 to 2019. A valuation
allowance of $56 million has been established for a portion of these deferred
tax assets. The Company had approximately $94 million of alternative minimum tax
credit carryforwards for U.S. federal income tax purposes, which are available
indefinitely.
Benefit from (provision for) income taxes from continuing operations before
income taxes, minority interest, extraordinary item and cumulative effect of
accounting change is as follows:
1999 1998 1997
-----------------------
Current
Federal $ 7 $ 11 $10
State and local..................................... 1 3
Foreign............................................. (19) (5)
-----------------------
Total current benefit (expense)..................... (11) 9 10
Deferred
Federal............................................. (123) 103 (5)
State and local..................................... (27) 11 (2)
Foreign............................................. (7) 3
-----------------------
Total deferred benefit (expense).................... (157) 117 (7)
-----------------------
Total benefit from (provision for) income taxes... $(168) $126 $ 3
-----------------------
43
The Company's benefit from (provision for) income taxes differed from the amount
computed by applying the statutory U.S. federal income tax rate to income (loss)
from continuing operations before income taxes, minority interest, extraordinary
items, and cumulative effect of accounting change is as follows:
1999 1998 1997
--------------------------------
U.S. federal income tax benefit (provision) at federal statutory rate............ $(119) $119 $ 8
Permanent differences from applying purchase accounting.......................... (29) (6) (3)
Permanently non-deductible expenses.............................................. (3) (2) (8)
State income taxes, net of federal income tax effect............................. (17) 14 2
Effect of valuation allowances on deferred tax assets, net of federal benefit.... 7
Other............................................................................ 1 (3)
--------------------------------
Total benefit from (provision for) income taxes.................................. $(168) $126 $ 3
--------------------------------
The components of the income (loss) from continuing operations before income
taxes, minority interest, extraordinary item and cumulative effect of accounting
change are as follows:
1999 1998 1997
--------------------------------
United States................................................................... $282 $(338) $(22)
Foreign......................................................................... 57 2
--------------------------------
Income (loss) from continuing operations before income taxes, minority
interest, extraordinary item and cumulative effect of accounting change....... $339 $(336) $(22)
--------------------------------
The IRS has examined the company tax returns for all years through 1991, and the
years have been closed through 1988. The years 1992 through 1994 are currently
under examination. While the ultimate results cannot be predicted with
certainty, the Company's management believes that the examination will not have
a material adverse effect on its consolidated financial condition or results of
operations.
The Company made income tax payments of $47 million, $22 million and $8 million
in 1999, 1998 and 1997, respectively.
9. Employee Benefit Plans
Defined Benefit Plans
The Company sponsors noncontributory defined benefit pension plans covering
substantially all employees. The defined benefit plans of JSCE, Inc. were merged
with the domestic defined benefit plans of Stone on December 31, 1998 and assets
of these plans are available to meet the funding requirements of the combined
plans. Approximately 29% of the Company's domestic pension plan assets at
December 31, 1999 are invested in cash equivalents or debt securities and 71%
are invested in equity securities. Equity securities at December 31, 1999
include .7 million shares of SSCC common stock with a market value of
approximately $18 million and 26 million shares of JS Group common stock having
a market value of approximately $79 million. Dividends paid on JS Group common
stock during 1999 and 1998 were approximately $2 million in each year.
The Company sponsors noncontributory defined benefit pension plans for its
foreign operations. Approximately 21% of the foreign pension plan assets at
December 31, 1999, are invested in cash equivalents or debt securities and 79%
are invested in equity securities.
Postretirement Health Care and Life Insurance Benefits
The Company provides certain health care and life insurance benefits for all
salaried as well as certain hourly employees. The assumed health care cost trend
rates used in measuring the accumulated postretirement benefit obligation
("APBO") range from 5.25% to 6.5% at December 31, 1999 decreasing to the
ultimate rate of 5.25%. The effect of a 1% increase in the assumed health care
cost trend rate would
44
increase the APBO as of December 31, 1999 by $9 million and have an immaterial
effect on the annual net periodic postretirement benefit cost for 1999.
The following provides a reconciliation of benefit obligations, plan assets, and
funded status of the plans:
Defined Benefit Plans Postretirement Plans
----------------------------------------------------
1999 1998 1999 1998
----------------------------------------------------
Change in benefit obligation:
Benefit obligation at January 1....................... $1,789 $ 950 $ 178 $ 103
Service cost.......................................... 43 18 3 1
Interest cost......................................... 121 68 12 7
Amendments............................................ 10 8
Plan participants' contributions...................... 1 6 4
Curtailments.......................................... (2)
Actuarial (gain) loss................................. (150) 22 (9) 3
Acquisitions.......................................... 778 73
Foreign currency rate changes......................... (8) 1
Benefits paid......................................... (95) (55) (21) (13)
----------------------------------------------------
Benefit obligation at December 31..................... $1,711 $1,789 $ 168 $ 178
----------------------------------------------------
Change in plan assets:
Fair value of plan assets at January 1................ $1,512 $1,013 $ $
Actual return on plan assets.......................... 256 49
Employer contributions................................ 14 1 11 9
Plan participants' contributions...................... 4 4
Acquisitions.......................................... 504
Foreign currency rate changes......................... 10
Benefits paid......................................... (95) (55) (15) (13)
----------------------------------------------------
Fair value of plan assets at December 31.............. $1,697 $1,512 $ $
----------------------------------------------------
Over (under) funded status:........................... (14) $ (277) $(168) $(178)
Unrecognized actuarial (gain) loss.................... (287) (9) (5) 6
Unrecognized prior service cost....................... 50 44 (2) (2)
Net transition obligation............................. (6) (9)
----------------------------------------------------
Net amount recognized................................. $ (257) $ (251) $(175) $(174)
----------------------------------------------------
Amounts recognized in the balance sheets:
Prepaid benefit cost.................................. $ 71 $ 52 $ $
Accrued benefit liability............................. (328) (303) (175) (174)
Additional minimum liability.......................... (3) (32)
Intangible asset...................................... 3 26
Accumulated other comprehensive income................ 4
Deferred tax.......................................... 2
----------------------------------------------------
Net amount recognized................................. $ (257) $ (251) $(175) $(174)
----------------------------------------------------
The weighted-average assumptions used in the accounting for the defined benefit
plans and postretirement plans were:
Defined Benefit Plans Postretirement Plans
------------------------------------------------------------
1999 1998 1999 1998
------------------------------------------------------------
Weighted average discount rate:
U.S. Plans....................................... 8.00% 7.00% 8.00% 7.00%
Foreign Plans.................................... 6.50-8.00% 6.00-7.00% 8.00% 7.00%
Rate of compensation................................. 3.00-4.50% 3.00-3.75% N/A N/A
Expected return on assets............................ 9.50% 9.50% N/A N/A
Health care cost trend on covered charges............ N/A N/A 6.50% 6.50%
The components of net pension expense for the defined benefit plans and the
components of the postretirement benefit costs are as follows:
Defined Benefit Plans Postretirement Plans
------------------------------------------------------------
1999 1998 1997 1999 1998 1997
------------------------------------------------------------
Service cost......................................... $ 48 26 $ 19 $ 2 $1 $1
Interest cost........................................ 121 74 65 12 8 7
Expected return on plan assets....................... (138) (90) (80)
Curtailment cost..................................... 6 2
Amortization of transitional asset................... (4) (4)
Recognized actuarial loss............................ 3 44
Multi-employer plans................................. 4 1
------------------------------------------------------------
Net periodic benefit cost............................ $ 40 $ 12 $ 4 $15 $9 $8
------------------------------------------------------------
The projected benefit obligation, accumulated benefit obligation, and fair value
of plan assets for the pension plans with accumulated benefit obligations in
excess of plan assets were $144 million, $133 million and zero, respectively, as
of December 31, 1999 and $795 million, $778 million and $601 million as of
December 31, 1998.
Savings Plans
The Company sponsors voluntary savings plans covering substantially all salaried
and certain hourly employees. The Company match is paid in SSCC common stock, up
to an annual maximum. The Company's expense for the savings plans totaled $17
million, $10 million and $9 million in 1999, 1998 and 1997, respectively.
10. Minority Interest
Stone has approximately 4.6 million shares of $1.75 Series E Cumulative
Convertible Exchangeable Preferred Stock, $.01 par value, (the "Preferred
Stock") issued and outstanding. Each share of Preferred Stock is entitled to one
vote on all matters submitted to a vote of Stone's stockholders. The Preferred
Stock is convertible, at the option of the holder, into shares of SSCC common
stock at a conversion price of $34.28 (equivalent to a conversion rate of .729
shares of SSCC common stock for each share of Preferred Stock), subject to
adjustment based on certain events. The Preferred Stock may alternatively be
exchanged, at the option of Stone, for new 7% Convertible Subordinated Exchange
Debentures of Stone due February 15, 2007 in a principal amount equal to $25.00
per share of Preferred Stock so exchanged. Additionally, the Preferred Stock is
redeemable at the option of Stone, in whole or in part, from time to time.
Preferred dividends are reflected as a minority interest in the Company's
Consolidated Statements of Operations. At December 31, 1999 and 1998, Stone had
accumulated dividend arrearages on the Preferred Stock of $22 million and $14
million, respectively. The payment of dividends is prohibited by covenants in
certain of the agreements and indentures relating to indebtedness of Stone.
However, the
accumulated dividend arrearages on the preferred stock are payable upon their
conversion, exchange or redemption.
11. Stock Option and Incentive Plans
Prior to the Merger, the Company and Stone each maintained incentive plans for
selected employees. The Company's plan included non-qualified stock options
issued at prices equal to the fair market value of the Company's stock at the
date of grant which expire upon the earlier of 12 years from the date of grant
or termination of employment, death, or disability. The Stone plans included
incentive stock options and non-qualified stock options issued at prices equal
to the fair market value of Stone's common stock at the date of grant which
expire upon the earlier of 10 years from the date of grant or termination of
employment, death, or disability. Effective with the Merger, options outstanding
under the Stone plans were converted into options to acquire SSCC common stock,
with the number of shares and exercise price being adjusted in accordance with
the exchange ratio of .99 to one established in the Merger Agreement, and all
outstanding options under both the Company and the Stone plans became
exercisable and fully vested.
In November 1998, the stockholders approved the 1998 Long-Term Incentive Plan
(the "1998 Plan") reserving 8.5 million shares of Company common stock for non-
qualified stock options and performance awards to officers, key employees, and
non-employee directors of the Company. The stock options are exercisable at a
price equal to the fair market value of the Company's common stock on the date
of grant. The vesting schedule and other terms and conditions of options granted
under the 1998 Plan are established separately for each grant. The stock options
granted during 1999 and 1998 vest and become exercisable eight years after the
date of grant subject to acceleration based upon the attainment of pre-
established stock price targets. The number of options that become vested and
exercisable in any one year may not exceed one-third of the options granted for
certain participants and may not exceed one-fourth of the options granted for
other participants. In general, options expire 10 years from the date of grant.
The performance awards permit the holder to receive amounts, denominated in
shares of Company common stock, based on the Company's performance during the
period between the date of grant and a pre-established future date. Performance
criteria, the length of the performance period, and the form and time of payment
of the award are established separately for each grant. There were no
performance awards outstanding under the 1998 Plan at December 31, 1999 and
1998.
During the second quarter of 1999, the Company recorded a $26 million charge in
selling and administrative expenses related to the cashless exercise of SSCC
stock options under the Jefferson Smurfit Corporation stock option plan.
Pro forma information regarding net income and earnings per share is required by
SFAS No. 123 and has been determined as if the Company had accounted for its
employee stock options issued subsequent to December 31, 1994 under the fair
value method. The pro forma net income information required by SFAS No. 123 is
not likely to be representative of the effects on reported net income for future
years. The fair value for these options was estimated at the date of grant using
a Black-Scholes option pricing model with the following assumptions:
1999 1998 1997
-----------------------------
Expected option life (years).................. 6 6 5
Risk-free weighted average interest rate...... 5.43% 4.79% 6.49%
Stock price volatility........................ 52.80% 53.30% 44.20%
Dividend yield................................ 0.0% 0.0% 0.0%
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the
47
Company's employee stock options have characteristics significantly different
from those of traded options and because changes in the subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's
unaudited pro forma information is as follows:
As Reported 1999 1998 1997
---------------------------------
Net income (loss)........................ $ 157 $ (200) $ 1
Basic earnings (loss) per share.......... .72 (1.61) .01
Diluted earnings (loss) per share........ .71 (1.61) .01
Pro Forma
Net income (loss)........................ $ 156 $ (209) $ (1)
Basic earnings (loss) per share.......... .72 (1.69) (.01)
Diluted earnings (loss) per share........ .71 (1.69) (.01)
The weighted average fair values of options granted during 1999, 1998 and 1997
were $9.67, $6.98 and $6.63 per share, respectively.
Additional information relating to the plans is as follows:
Weighted
Average
Shares Under Option Exercise
Option Price Range Price
--------------------------------------------
Outstanding at January 1, 1997........ 7,117,473 $10.00 - 17.63 $10.91
Granted............................. 1,238,500 13.13 - 15.81 13.43
Exercised........................... 23,825 10.00 10.00
Cancelled........................... 164,375 10.00 - 15.81 12.98
-------------
Outstanding at December 31, 1997...... 8,167,773 10.00 - 17.63 11.25
Granted............................. 4,728,000 12.81 - 15.81 12.94
Exercised........................... 36,950 10.00 10.00
Cancelled........................... 9,918 11.13 - 22.35 13.67
Stone addition...................... 6,050,196 11.87 - 29.59 14.35
-------------
Outstanding at December 31, 1998...... 18,899,101 10.00 - 29.59 12.67
Granted............................. 636,500 12.81 - 23.38 17.14
Exercised........................... 4,475,476 10.00 - 22.35 12.37
Cancelled........................... 99,976 10.00 - 29.59 13.77
-------------
Outstanding at December 31, 1999...... 14,960,149 10.00 - 23.38 12.86
48
The following table summarizes information about stock options outstanding at
December 31, 1999:
Weighted Average Weighted
Range of Average Remaining Average
Exercise Options Exercise Contractual Options Exercise
Prices Outstanding Price Life (Years) Exercisable Price
- ---------------------------------------------------------------------------------------------------
$10.00 - 12.50 4,688,619 $10.57 5.63 4,688,619 $10.57
12.81 - 13.51 7,723,164 13.01 8.41 4,320,675 13.16
14.06 - 15.81 1,486,281 14.47 7.63 1,486,281 14.47
17.19 - 23.38 1,062,085 19.63 7.03 609,585 20.18
------------ ------------
14,960,149 11,105,160
The number of options exercisable at December 31, 1998 and 1997 was 14,386,101
and 483,100 respectively. As of December 31, 1999, approximately 3,357,000
shares were available for grant under the 1998 Plan.
12. Accumulated Other Comprehensive Income (Loss)
Accumulated other comprehensive income (loss) is as follows:
Foreign Unrealized Accumulated
Currency Minimum Holding Gain on Other
Translation Pension Marketable Comprehensive
Adjustment Liability Securities Income (Loss)
-------------------------------------------------------------------
Balance at January 1, 1998....... $ $ $ $
Current period change......... 3 (4) (1)
-------------------------------------------------------------------
Balance at December 31, 1998..... 3 (4) (1)
Current period change......... (11) 4 3 (4)
-------------------------------------------------------------------
Balance at December 31, 1999..... $ (8) $ $3 $(5)
-------------------------------------------------------------------
13. Discontinued Operations
During February 1999, the Company adopted a formal plan to sell the operating
assets of its subsidiary, Smurfit Newsprint Corporation ("SNC"). Accordingly,
SNC was accounted for as a discontinued operation in the prior consolidated
financial statements. SNC consists of two newsprint mills in Oregon, and its
Cladwood (R) operation, which consists of two plants which manufacture a wood
composite panel used in the housing industry. The Company subsequently decided
to continue to operate its Cladwood(R) business and therefore Cladwood's (R).
The operating income (loss) of $1 million in 1999, $(29) million in 1998 and $1
million in 1997 was reclassified to continuing operations. Cladwood's (R)
operating loss in 1998 includes the $30 million charge related to a class action
settlement agreement (See Note 18). The revenues and net assets of Cladwood(R)
were not material to the consolidated financial statements in any of the periods
presented.
In November 1999, the Company sold its Newberg, Oregon newsprint mill for
proceeds of approximately $211 million. The Company is in negotiations to
transfer ownership of the Oregon City newsprint mill and does not expect to
realize any significant proceeds from the transaction. Net gain on disposition
of discontinued operations of $4 million includes the realized gain on the sale
of the Newberg, Oregon newsprint mill, an expected loss on the sale
49
of the Oregon City, Oregon newsprint mill, actual results from the measurement
date through December 31, 1999 and the estimated losses on the Oregon City
newsprint mill through the expected disposition date.
SNC newsprint revenues were $235 million, $303 million and $281 million for
1999, 1998 and 1997, respectively. The net assets of SNC newsprint included in
the accompanying consolidated balance sheets as of December 31, 1999 and 1998
consisted of the following:
1999 1998
-----------------
Inventories and current assets.......................................... $ 34 $ 36
Net property, plant and equipment....................................... 488 183
Other assets............................................................ 11 7
Accounts payable and other current liabilities.......................... (94) (63)
Other liabilities....................................................... (4) (42)
-----------------
Net assets (liabilities) of discontinued operations................... $ (5) $121
-----------------
14. Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per
share:
1999 1998 1997
----------------------------------
Numerator:
Income (loss) from continuing operations before extraordinary
Item and cumulative effect of accounting change........................... $163 $(211) $ (19)
Denominator:
Denominator for basic earnings per share -
weighted average shares................................................... 217 124 111
Effect of dilutive securities:
Employee stock options.................................................... 3
----------------------------------
Denominator for diluted earnings per share -
adjusted weighted average shares and
assumed conversions....................................................... 220 124 111
----------------------------------
Basic earnings (loss) per share from continuing operations before
extraordinary item and cumulative effect of accounting change............. $.75 $(1.70) $(.17)
----------------------------------
Diluted earnings (loss) per share from continuing operations before
extraordinary item and cumulative effect of accounting change............. $.74 $(1.70) $(.17)
----------------------------------
For 1999, convertible debt to acquire one million shares of common stock with an
earnings effect of $2 million and additional minority interest shares of three
million with an earnings effect of $8 million are excluded from the diluted
earnings per share computation because they are antidilutive.
For 1998, options to purchase one million shares of common stock under the
treasury stock method, convertible debt to acquire one million shares of common
stock with an earnings effect of $2 million, and additional minority interest
shares of three million with an earnings effect of $1 million are excluded from
the diluted earnings (loss) per share computation because they are antidilutive.
Options to purchase an immaterial number of shares of common stock for 1997 were
outstanding, but not included in the computation of diluted earnings (loss) per
share because the option exercise price was greater than the average market
price of the common shares for the year.
50
15. Related Party Transactions
Transactions with JS Group
Transactions with Jefferson Smurfit Group plc ("JS Group"), a significant
shareholder of the Company, its subsidiaries and affiliated companies were as
follows:
1999 1998 1997
------------------------------
Product sales.................................................................... $45 $39 $34
Product and raw material purchases............................................... 21 54 51
Management services income....................................................... 3 4 4
Charges from JS Group for services provided...................................... 1 1
Charges to JS Group for costs pertaining to the Fernandina No. 2
paperboard machine through November 18, 1998.................................. 50 53
Receivables at December 31....................................................... 2 5 3
Payables at December 31.......................................................... 14 4 11
Product sales to and purchases from JS Group, its subsidiaries and affiliates
are consummated on terms generally similar to those prevailing with unrelated
parties.
The Company provides certain subsidiaries and affiliates of JS Group with
general management and elective management services under separate Management
Services Agreements. In consideration for general management services, the
Company is paid a fee up to 2% of the subsidiaries' or affiliates' gross sales.
In consideration for elective services, the Company is reimbursed for its direct
cost of providing such services.
On November 18, 1998 the Company purchased the No. 2 paperboard machine located
in the Company's Fernandina Beach, Florida, paperboard mill (the "Fernandina
Mill") for $175 million from an affiliate of JS Group. Until that date, the
Company and the affiliate were parties to an operating agreement whereby the
Company operated and managed the No. 2 paperboard machine. The Company was
compensated for its direct production and manufacturing costs and indirect
manufacturing, selling and administrative costs incurred for the entire
Fernandina Mill. The compensation was determined by applying various formulas
and agreed-upon amounts to the subject costs. The amounts reimbursed to the
Company are reflected as reductions of cost of goods sold and selling and
administrative expenses in the accompanying consolidated statements of
operations.
Stone's Canadian subsidiary, Stone Container (Canada) Inc. ("Stone Canada") owns
a 50% interest in Smurfit-MBI. On September 4, 1998, Stone Canada purchased the
remaining 50% of Smurfit-MBI from MacMillan Bloedel Ltd. for $185 million
(Canadian). Simultaneously, Stone Canada sold the newly acquired 50% interest to
JS Group for the same amount.
The Company, in connection with Merger related activities, either paid or
reimbursed $16 million in legal fees, financial advisory fees and executive
compensation to JS Group in 1998.
Transactions with Non-consolidated Affiliates
The Company sold paperboard, market pulp and fiber to and purchased
containerboard and kraft paper from various non-consolidated affiliates. The
following table summarizes the Company's related party transactions with its
non-consolidated affiliates for each year presented:
51
1999 1998
------------------
Product sales............................................ $303 $57
Product and raw material purchases....................... 65
Receivables at December 31............................... 43 70
Payables at December 31.................................. 3
On October 15, 1998, the Company sold its Snowflake, Arizona newsprint
manufacturing operations and related assets to Abitibi for approximately $250
million. The Company retained ownership of a corrugating medium machine located
in the facility that Abitibi operated on behalf of the Company pursuant to an
operating agreement entered into as part of the sale. Payments made to Abitibi,
prior to the sale of the Company's remaining interest (see Note 5), were $17
million in the period from January 1 to April 23, 1999 and $4 million in the
period from November 19 to December 31, 1998.
16. Fair Value of Financial Instruments
The carrying values and fair values of the Company's financial instruments are
as follows:
1999 1998
----------------------- ----------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
----------------------- ----------------------
Cash and cash equivalents.................................... $ 24 $ 24 $ 155 $ 155
Notes receivable and long-term investments................... 26 26 22 22
Residual interest in timber notes............................ 33 33
Long-term debt including current maturities.................. 4,793 4,860 6,633 6,690
The carrying amount of cash equivalents approximates fair value because of the
short maturity of those instruments. The fair values of notes receivable and
long-term investments are based on discounted future cash flows or the
applicable quoted market price. The fair value of the Company's debt is
estimated based on the quoted market prices for the same or similar issues or on
the current rates offered to the Company for debt of the same remaining
maturities. The fair value of the residual interest is based on discounted
future cash flows.
17. Other, Net
The significant components of other, net are as follows:
1999 1998 1997
------------------------------
Foreign currency transaction gains............................... $ 7 $ 4 $
Gain on sale of assets (See Note 4 and 5)........................ 446
Income from non-consolidated affiliates.......................... 12 4
Other 14 (4) (2)
------------------------------
Total other, net................................................. $479 $ 4 $ (2)
------------------------------
18. Contingencies
The Company's past and present operations include activities which are subject
to federal, state and local environmental requirements, particularly relating to
air and water quality. The Company faces potential environmental liability as a
result of violations of permit terms and similar authorizations that have
occurred from time to time at its facilities. In addition, the Company faces
potential liability for response
52
costs at various sites for which it has received notice as being a potentially
responsible party ("PRP") concerning hazardous substance contamination. In
estimating its reserves for environmental remediation and future costs, the
Company's estimated liability reflects only the Company's expected share after
consideration for the number of other PRPs at each site, the identity and
financial condition of such parties and experience regarding similar matters.
Stone was a party to an Output Purchase Agreement (the "OPA") with Four M
Corporation ("Four M") and Florida Coast Paper Company, L.L.C. ("FCPC"), a joint
venture owned 50% by each of Stone and Four M. The OPA required that Stone and
Four M each purchase one-half of the linerboard produced at FCPC's mill in Port
St. Joe, FL (the "FCPC Mill") at a minimum price sufficient to cover certain
obligations of FCPC. The OPA also required Stone and Four M to use their best
efforts to cause the FCPC Mill to operate at a production rate not less than the
reported average capacity utilization of the U.S. linerboard industry. FCPC
indefinitely discontinued production at the FCPC Mill in August 1998, and FCPC
and certain of its affiliates filed for Chapter 11 bankruptcy protection in
April 1999. Certain creditors of FCPC filed an adverse proceeding in the
bankruptcy against Stone and Four M, and certain of their officers and
directors, alleging among other things, default with respect to the obligations
of Stone and Four M under the OPA. On October 20, 1999, FCPC and a committee
representing the holders of the FCPC debt securities filed a bankruptcy
reorganization plan ("Plan") that provided for the settlement of all outstanding
claims in exchange for cash payments. Under the Plan, which was confirmed and
consummated in January 2000, Stone paid approximately $123 million to satisfy
the claims of creditors of FCPC, Stone received title to the FCPC mill, and all
claims under the OPA, as well as any obligations of Stone involving FCPC or its
affiliates, were released and discharged. In addition, Four M issued $25 million
of convertible preferred stock to Stone in connection with the consummation of
the Plan.
Subsequent to an understanding reached in December 1998, the Company and SNC
entered into a Settlement Agreement in January 1999 to implement a nationwide
class action settlement of claims involving Cladwood(R), a composite wood siding
product manufactured by SNC that has been used primarily in the construction of
manufactured or mobile homes. In 1998, the Company recorded a $30 million
pre-tax charge to reflect amounts SNC has paid into a settlement fund,
administrative costs, plaintiff's attorneys' fees, class representative payments
and other costs. The Company believes its reserve is adequate to pay eligible
claims. However, the number of claims, and the number of potential claimants who
choose not to participate in the settlement, could cause the Company to
re-evaluate whether the liabilities in connection with the Cladwood(R) cases
could exceed established reserves.
The Company is a defendant in a number of lawsuits and claims arising out of the
conduct of its business, including those related to environmental matters. While
the ultimate results of such suits or other proceedings against the Company
cannot be predicted with certainty, the management of the Company believes that
the resolution of these matters will not have a material adverse effect on its
consolidated financial condition or results of operations.
19. Business Segment Information
The Company adopted SFAS No. 131, "Disclosures About Segments of an Enterprise
and Related Information," in 1998 which changes the way operating segment
information is presented. The information for 1998 and 1997 has been restated
from the prior year's presentation in order to conform to the 1999 presentation.
The Company has two reportable segments: (1) Containerboard and Corrugated
Containers, and (2) Boxboard and Folding Cartons. The Containerboard and
Corrugated Containers segment is highly integrated. It includes a system of
mills and plants that produces a full line of containerboard that is converted
into corrugated containers. Corrugated containers are used to transport such
diverse products as home appliances, electric motors, small machinery, grocery
products, produce, books, tobacco and furniture. The Boxboard and Folding
Cartons segment is also highly integrated. It includes a system of
53
mills and plants that produces a broad range of coated recycled boxboard that is
converted into folding cartons. Folding cartons are used primarily to protect
products, such as food, fast food, detergents, paper products, beverages, health
and beauty aids and other consumer products, while providing point of purchase
advertising.
The Company evaluates performance and allocates resources based on profit or
loss from operations before income taxes, and other gains and losses. The
accounting policies of the reportable segments are the same as those described
in the summary of significant accounting policies except that the Company
accounts for inventory on a FIFO basis at the segment level compared to a LIFO
basis at the consolidated level. Intersegment sales and transfers are recorded
at market prices. Intercompany profit is eliminated at the corporate division
level.
The Company's reportable segments are strategic business units that offer
different products. The reportable segments are each managed separately because
they manufacture distinct products. Other includes four non-reportable segments,
specialty packaging, industrial bags, reclamation, international and corporate
related items. Corporate related items include goodwill, equity investments,
income and expense not allocated to reportable segments (goodwill amortization,
interest expense and depreciation expense related to the fair value adjustments
made to the historical basis of Stone property, plant and equipment in the
purchase price allocation), the adjustment to record inventory at LIFO, and the
elimination of intercompany assets and intercompany profit.
In 1998, corporate related items also included a $257 million restructuring
charge (See Note 2). The restructuring charge included $179 million for the
write-down of property, plant and equipment of the Containerboard and Corrugated
Containers segment. In 1999, corporate related items included a $407 million
gain on the timberland sale and related note monetization program and a $39
million gain on the sale of Abitibi.
Container-
board & Boxboard &
Corrugated Folding
Containers Cartons Other Total
-----------------------------------------------
Year ended December 31, 1999
Revenues from external customers............................ $4,636 $836 $1,679 $ 7,151
Intersegment revenues....................................... 193 287 480
Depreciation, depletion and amortization.................... 187 24 208 419
Segment profit (loss)....................................... 478 62 (201) 339
Total assets................................................ 4,288 449 5,122 9,859
Capital expenditures........................................ 81 15 60 156
Year ended December 31, 1998
Revenues from external customers............................ $2,014 $785 $686 $ 3,485
Intersegment revenues....................................... 57 149 206
Depreciation, depletion and amortization.................... 85 22 48 155
Segment profit (loss)....................................... 117 67 (520) (336)
Total assets................................................ 5,765 454 5,412 11,631
Capital expenditures........................................ 221 26 40 287
54
Container-
board &
Corrugated Boxboard &
Containers Folding
Cartons Other Total
---------------------------------------------
Year ended December 31, 1997
Revenues from external customers......................... $1,607 $752 $598 $ 2,957
Intersegment revenues.................................... 35 167 202
Depreciation, depletion and amortization................. 67 21 27 115
Segment profit (loss).................................... 56 68 (146) (22)
Total assets............................................. 1,467 435 869 2,771
Capital expenditures..................................... 101 37 44 182
The following table presents net sales to external customers by country of
origin:
1999 1998 1997
---------------------------------
United States....................................................... $6,359 $3,395 $2,952
Canada.............................................................. 211 22 5
Europe and other.................................................... 581 68
---------------------------------
Total net sales.................................................. $7,151 $3,485 $2,957
---------------------------------
The following table presents long-lived assets by country:
1999 1998 1997
---------------------------------
United States...................................................... $3,902 $5,254 $1,787
Canada............................................................. 228 191 1
Europe and other................................................... 289 327
---------------------------------
4,419 5,772 1,788
Goodwill........................................................... 3,328 2,869 237
---------------------------------
Total long lived assets......................................... $7,747 $8,641 $2,025
---------------------------------
20. Subsequent Event
On February 23, 2000, SSCC, Stone and a newly-formed subsidiary of Stone entered
into a Pre-Merger Agreement with St. Laurent Paperboard Inc. pursuant to which
the Company will acquire St. Laurent for approximately $1.4 billion, consisting
of approximately $625 million in cash, the issuance of approximately 25 million
shares of SSCC common stock and the assumption of approximately $386 million of
St. Laurent's debt. Stone expects to borrow $1,050 million to finance the
acquisition of St. Laurent. Consummation of the transaction, which is subject to
St. Laurent shareholder and certain regulatory approvals, is expected to occur
in the second quarter of 2000.
55
21. Quarterly Results (Unaudited)
The following is a summary of the unaudited quarterly results of operations:
First Second Third Fourth
Quarter Quarter Quarter Quarter
----------------------------------------------------
1999
Net sales....................................................... $1,705 $1,730 $1,792 $1,924
Gross profit.................................................... 191 273 304 361
Income (loss) from continuing operations before extraordinary
item and cumulative effect of accounting change................ (92) (23) (11) 289
Discontinued operations......................................... 4 (1) (4) 3
Gain on disposition of discontinued operations.................. 4
Extraordinary item.............................................. (1) (1) (10)
Net income (loss)............................................... (88) (25) (16) 286
Basic earnings (loss) per share:
Income (loss) from continuing operations before extraordinary
item and cumulative effect of accounting change................ (.43) (.11) (.05) 1.33
Discontinued operations......................................... .02 (.01) (.02) .03
Extraordinary item.............................................. (.05)
Net income (loss)............................................... (.41) (.12) (.07) 1.31
Diluted earnings (loss) per share:
Income (loss) from continuing operations before extraordinary
item and cumulative effect of accounting change................ (.43) (.11) (.05) 1.29
Discontinued operations......................................... .02 (.01) (.02) .03
Extraordinary item.............................................. (.04)
Net income (loss)............................................... (.41) (.12) (.07) 1.28
1998
Net sales....................................................... $ 769 $ 769 $ 763 $1,184
Gross profit.................................................... 128 126 125 154
Income (loss) from continuing operations before extraordinary
item and cumulative effect of accounting change................ 3 2 3 (219)
Discontinued operations......................................... 8 9 5 5
Extraordinary item.............................................. (13)
Cumulative effect of accounting change.......................... (3)
Net income (loss)............................................... (5) 11 8 (214)
Basic earnings (loss) per share:
Income (loss) from continuing operations before extraordinary
item and cumulative effect of accounting change................ .03 .02 .03 (1.36)
Discontinued operations......................................... .07 .08 .04 .03
Extraordinary item.............................................. (.12)
Cumulative effect of accounting change.......................... (.03)
----------------------------------------------------
Net income (loss)............................................... (.05) .10 .07 (1.33)
56
Diluted earnings (loss) per share:
Income (loss) from continuing operations before extraordinary
item and cumulative effect of accounting change............ .03 .02 .03 (1.36)
Discontinued operations......................................... .07 .08 .04 .03
Extraordinary item.............................................. (.11)
Cumulative effect of accounting change.......................... (.03)
----------------------------------------------------
Net income (loss)............................................... (.04) .10 .07 (1.33)
57
SMURFIT-STONE CONTAINER CORPORATION
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(in millions)
Column A Column B Column C Column D Column E Column F
- -------------------------------------------------------------------------------------------------------------------------------
Additions
Balance at Charged to Balance at
Beginning of Costs and Deductions End of
Description Period Expenses Other Describe Period
- -------------------------------------------------------------------------------------------------------------------------------
Allowance for doubtful accounts and
sales returns and allowances:
Year ended December 31, 1999................. $ 70 $ $ (9) (a) $ 11 (b) $ 50
-----------------------------------------------------------------------------
Year ended December 31, 1998................. $ 10 $ 3 $ 60 (c) $ 3 (b) $ 70
-----------------------------------------------------------------------------
Year ended December 31, 1997................. $ 9 $ 2 $ $ 1 (b) $ 10
-----------------------------------------------------------------------------
Stone exit liabilities:
Year ended December 31, 1999 $ 106 $ 106 (d) $ 29 (e) $183
-----------------------------------------------------------------------------
Year ended December 31, 1998 $ $ $ 117 (d) $ 11 (e) $106
-----------------------------------------------------------------------------
Restructuring:
Year ended December 31, 1999 $ 71 $ 15 $ (5) (f) $ 52 (e) $ 29
-----------------------------------------------------------------------------
Year ended December 31, 1998 $ $ 257 $ $ 186 (e) $ 71
-----------------------------------------------------------------------------
(a) Includes the effect of the accounts receivable securitization application
of SFAS No. 125.
(b) Uncollectible amounts written off, net of recoveries.
(c) Amount related to the acquisition of Stone.
(d) Charges associated with exit activities and litigation settlements included
in the purchase price allocation of Stone.
(e) Charges against the reserves.
(f) Reduction to 1998 exit liabilities.
58
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
---------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
--------------------------------------------------
Directors
Set forth below is information concerning the directors of the Company.
Ray M. Curran, born May 13, 1946, was named to succeed Roger W. Stone as
President and Chief Executive Officer of the Company as of April 1, 1999. He was
Executive Vice President and Deputy Chief Executive Officer from November 1998
until March 31, 1999. He was Financial Director of JS Group from February 1996
to November 1998 and prior to that served as Chief Financial Officer of JS Group
since 1992.
Richard A. Giesen, born October 7, 1929, is Chairman of the Board and CEO of
Continental Glass & Plastic, Inc. Mr. Giesen is a director of GATX Corporation
and Chairman and Chief Executive Officer of Continere Corporation and served as
a director of Stone from 1974 to 1998.
Alan E. Goldberg, born September 1, 1954, has been Chairman and CEO of Morgan
Stanley Dean Witter ("MSDW") Private Equity since February 1998. Prior thereto,
he was co-head of MSDW Private Equity. He has been a Managing Director of Morgan
Stanley & Co. Incorporated since January 1988. Mr. Goldberg also serves as a
director of Allegiance Telecom, Inc., Catalytica, Inc., Equant, N.V. and several
private companies.
Howard E. Kilroy, born January 30, 1936, was named a director in July 1999. He
joined JS Group in 1973 and was appointed Chief Operations Director in 1978 and
President in 1986. He was also Senior Vice President of the Company. Mr. Kilroy
retired from these positions in 1995. Mr. Kilroy is a director of JS
Group and CRH plc, and is Governor of the Bank of Ireland.
James J. O'Connor, born March 15, 1937, is the former Chairman and Chief
Executive Officer of Unicom Corporation and its subsidiary, Commonwealth Edison
Company. He is a director of American National Can, Corning Incorporated, The
Tribune Company, United Airlines, and various other Chicago businesses, cultural
and charitable organizations.
Jerry K. Pearlman, born March 27, 1939, is the retired Chairman of the Board and
Chief Executive Officer of Zenith Electronics Corporation. Mr. Pearlman is a
director of Ryerson-Tull Inc., Nanophase, Inc. and Parsons Group L.L.C. and
served as director of Stone from 1984 to 1998.
Thomas A. Reynolds, III, born May 12, 1952, has been a Partner since 1984 with
Winston & Strawn, a law firm that regularly represents the Company on numerous
matters. Mr. Reynolds is an adjunct faculty member in trial advocacy at
Northwestern University School of Law. He also serves as a director of Westell
Technologies, Inc.
Dermot F. Smurfit, born October 8, 1944, has been Joint Deputy Chairman of JS
Group since January 1984 and World Vice President - Marketing and Sales since
July 1997. Prior to July 1997, he held various senior positions in JS Group. Dr.
Dermot Smurfit is Chairman of Kraft Manufacturers Institute (KMI) and a member
of the Board of the Confederation of European Paper Industries, and a director
of JS Group and ACE Ltd. He is a brother of Dr. Michael W. J. Smurfit.
59
Michael W. J. Smurfit, born August 7, 1936, is Chairman of the Board of
Directors of the Company. He has been Chairman and Chief Executive Officer of JS
Group since 1977. Dr. Smurfit was Chief Executive Officer of the Company prior
to July 1990. He is a brother of Dr. Dermot F. Smurfit.
Executive Officers
Set forth below is information concerning the executive officers of the Company.
Michael W. J. Smurfit - See Directors.
Ray M. Curran - See Directors.
Peter F. Dages, born December 13, 1950, was appointed Vice President and General
Manager - Corrugated Container Division in April 1999. Mr. Dages was Vice
President and Regional Manager of the Corrugated Container Division of Stone
from 1996 until April 1999. Prior to that, he held various managerial positions
in the Corrugated Container Division of Stone since 1991.
James D. Duncan, born June 12, 1941, has been Vice President and General Manager
- - Specialty Packaging Division since November 1998. Mr. Duncan was Vice
President and General Manager - Industrial Packaging Division from October 1996
to November 1998. He was Vice President and General Manager, Converting
Operations - Industrial Packaging Division from April 1994 to October 1996 and
served as General Manager, Converting Operations - Industrial Packaging Division
from February 1993 to April 1994. Prior to that, he was President and Chief
Executive Officer of Sequoia Pacific Systems, an affiliate of JS Group, which he
joined in August 1989.
Daniel J. Garand, born December 12, 1950, joined the Company in October 1999 as
Vice President of Supply Chain Operations. For three years prior to joining the
Company, Mr. Garand held senior level positions in global supply chain
management for AlliedSignal's Automotive Products Group. Prior to that, he was
employed by Digital Equipment Company for 26 years in a variety of management
positions in logistics, acquisitions and distribution.
Edwin C. Goffard, born October 30, 1963, joined the Company in May 1999 as Vice
President to develop the Company's synergy program. Prior to joining the
Company, Mr. Goffard was director of purchasing for Pepsi-Cola Company since
1996. Prior to that, he was a consultant for McKinsey & Company since 1989.
Michael F. Harrington, born August 6, 1940, has been Vice President - Employee
Relations since January 1992. Prior to joining the Company, he was Corporate
Director of Labor Relations/Safety and Health with Boise Cascade Corporation for
more than five years.
Charles A. Hinrichs, born December 3, 1953, has been Vice President and
Treasurer since April 1995. Prior to joining the Company, Mr. Hinrichs held
senior level positions at The Boatmen's National Bank of St. Louis for 13 years,
where most recently he was Senior Vice President and Chief Credit Officer.
Craig A. Hunt, born May 31, 1961, has been Vice President, Secretary and General
Counsel since November 1998. Prior to that he was Senior Counsel and Assistant
Secretary from January 1993 to November 1998. He joined the Company in 1990 as
Staff Counsel.
Paul K. Kaufmann, born May 11, 1954, has been Vice President and Corporate
Controller since July 1998. He was Corporate Controller from March 1998 to July
1998. Prior to that he was Division Controller for the Containerboard Mill
Division from November 1993 until March 1998. Prior to that, he held other
accounting positions since joining the Company in 1990.
60
Jay D. Lamb, born September 25, 1947, has been Vice President and General
Manager of SNC since May 1996. He was Director of Operations of SNC from May
1995 to May 1996. Prior to that, he held various accounting and managerial
positions with SNC since joining the Company in 1970.
Leslie T. Lederer, born July 20, 1948, has been Vice President - Strategic
Investment Dispositions since November 1998. He was Vice President, Secretary
and General Counsel of Stone from 1987 to November 1998.
F. Scott Macfarlane, born January 17, 1946, has been Vice President and General
Manager - Folding Carton and Boxboard Mill Division since November 1995. He
served as Vice President and General Manager of the Folding Carton Division from
December 1993 to November 1995. Prior to that, he held various managerial
positions within the Folding Carton Division since joining the Company in 1971.
Timothy McKenna, born March 25, 1948, has been Vice President - Investor
Relations and Communications since July 1997. He joined the Company in October
1995 as Director of Investor Relations and Communications. Prior to joining the
Company, he was employed by Union Camp Corporation for 14 years, where most
recently he was Director of Investor Relations.
Patrick J. Moore, born September 7, 1954, has been Vice President and Chief
Financial Officer of the Company since October 1996. He was Vice President and
General Manager - Industrial Packaging Division from December 1994 to October
1996. He served as Vice President and Treasurer from February 1993 to December
1994 and was Treasurer from October 1990 to February 1993. He joined the Company
in 1987 as Assistant Treasurer. He is a director of First Financial Planners,
Inc.
Mark R. O'Bryan, born January 15, 1963, joined the Company in October 1999 as
Vice President - Procurement. Prior to joining the Company, Mr. O'Bryan was
employed for 13 years at General Electric Corporation, where he held senior
level positions in global sourcing and materials management at several of
General Electric Corporation's manufacturing businesses.
Thomas A. Pagano, born January 21, 1947, has been Vice President - Planning
since May 1996. He was Director of Corporate Planning from September 1995 to May
1996. Prior to that, Mr. Pagano held various managerial positions within the
Company's Container Division since joining the Company in 1971, including Area
Regional General Manager from January 1994 to September 1995.
John M. Riconosciuto, born September 4, 1952, has been Vice President and
General Manager - Bag Packaging Division since November 1998. He was Vice
President and General Manager - Industrial Bag and Specialty Packaging Division
of Stone from January 1997 to November 1998. From July 1995 to January 1997, he
was Vice President and General Manager of the Multiwall Group of Stone, and
prior to that, Vice President of Marketing and Specialty Packaging of the
Industrial and Specialty Packaging Division of Stone since 1993.
David C. Stevens, born August 11, 1934, has been Vice President and General
Manager - Smurfit Recycling Company since January 1993. Prior to that, he was
General Sales Manager for the Reclamation Division since joining the Company in
1987.
William N. Wandmacher, born September 12, 1942, has been Vice President and
General Manager - Containerboard Mill Division since January 1993. He served as
Division Vice President - Medium Mills from October 1986 to January 1993. Prior
to that, he held various positions in production, plant management and planning
since joining the Company in 1966.
61
ITEM 11. EXECUTIVE COMPENSATION
----------------------
The information required in response to this item is set forth under the
captions "Executive Compensation", "Report of the Compensation Committee on
Executive Compensation" and "Compensation Committee Interlocks and Insider
Participation" in the SSCC Proxy Statement and is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------
All of the outstanding JSC(U.S.) Common Stock is owned by JSCE, and all of the
JSCE Common Stock is owned by SSCC. Additional information required in response
to this item is set forth under the caption "Principal Stockholders" in the SSCC
Proxy Statement and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
The information required in response to this item is set forth under the caption
"Certain Transactions" in the SSCC Proxy Statement and is incorporated herein by
reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
---------------------------------------------------------------
(a) (1) and (2) The list of Financial Statements and Financial Statement
Schedules required by this item is included in Item 8.
(3) Exhibits.
3.1 Restated Certificate of Incorporation of SSCC (incorporated by
reference to Exhibit 3(a) to SSCC's Registration Statement on Form
S-4 (File No. 333-65431)).
3.2 Restated Bylaws of SSCC (incorporated by reference to Exhibit 3(b)
to SSCC's Registration Statement on Form S-4 (File No. 333-65431)).
4.1 Certificate for SSCC's Common Stock (incorporated by reference to
Exhibit 4.3 to SSCC's Registration Statement on Form S-8 (File No.
33-57085)).
Indentures and other debt instruments with respect to long-term debt, none of
which exceeds 10 percent of the total assets of SSCC and its subsidiaries on a
consolidated basis, are not filed herewith. The Registrant agrees to furnish a
copy of such documents to the Commission upon request.
10.1 Subscription Agreement among SSCC, JSC(U.S.), CCA and SIBV
(incorporated by reference to Exhibit 10.4 to SSCC's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1994).
10.2* JSC(U.S.) Deferred Compensation Plan as amended (incorporated by
reference to Exhibit 10.7 to SSCC's Annual Report on Form 10-K for
the fiscal year ended December 31, 1996).
10.3* JSC(U.S.) Management Incentive Plan (incorporated by reference to
Exhibit 10.10 to SSCC's Annual Report on Form 10-K for the fiscal
year ended December 31, 1995).
10.4(a)* Jefferson Smurfit Corporation Amended and Restated 1992 Stock Option
Plan dated as of May 1, 1997 (incorporated by reference to Exhibit
10.10 to SSCC's Annual Report on Form 10-K for the fiscal year ended
December 31, 1997).
62
10.4(b) Amendment of the Jefferson Smurfit Corporation Amended and Restated
1992 Stock Option Plan (incorporated by reference to Exhibit 10.3 to
SSCC's Quarterly Report on Form 10-Q for the quarter ended September
30, 1999).
10.5(a) Amended and Restated Credit Agreement, dated as of November 18,
1998, among SSCC, JSCE, JSC(U.S.) and the banks party thereto
(incorporated by reference to Exhibit 10.6 to SSCC's Annual Report
on Form 10-K for the fiscal year ended December 31, 1998).
10.5(b) First Amendment of Amended and Restated Credit Agreement, dated as
of June 30, 1999, among SSCC, JSCE, JSC(U.S.) and the Banks party
thereto (incorporated by reference to Exhibit 10.1 to SSCC's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1999).
10.5(c) Second Amendment of Amended and Restated Credit Agreement, dated as
of October 15, 1999, among SSCC, JSCE, JSC(U.S.) and the Banks party
thereto (incorporated by reference to Exhibit 10.1 to SSCC's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1999).
10.6(a) Term Loan Agreement dated as of February 23, 1995 among JS Finance
and Bank Brussels Lambert, New York Branch (incorporated by
reference to Exhibit 10.1 to SSCC's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1995).
10.6(b) Depositary and Issuing and Paying Agent Agreement (Series A
Commercial Paper) as of February 23, 1995 (incorporated by reference
to Exhibit 10.2 to SSCC's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1995).
10.6(c) Depositary and Issuing and Paying Agent Agreement (Series B
Commercial Paper) as of February 23, 1995 (incorporated by reference
to Exhibit 10.3 to SSCC's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1995).
10.6(d) Receivables Purchase and Sale Agreement dated as of February 23,
1995 among JSC(U.S.), as the Initial Servicer and JS Finance, as the
Purchaser (incorporated by reference to Exhibit 10.4 to SSCC's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1995).
10.6(e) Liquidity Agreement dated as of February 23, 1995 among JS Finance,
the Financial Institutions party thereto, as Banks, Bankers Trust
Company, as Facility Agent and Bankers Trust Company as Collateral
Agent (incorporated by reference to Exhibit 10.6 to SSCC's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1995).
10.6(f) Commercial Paper Dealer Agreement dated as of February 23, 1995
among BT Securities Corporation, MS&Co., JSC(U.S.) and JS Finance
(incorporated by reference to Exhibit 10.7 to SSCC's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1995).
10.6(g) Addendum dated March 6, 1995 to Commercial Paper Dealer Agreement
(incorporated by reference to Exhibit 10.8 to SSCC's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1995).
10.6(h) First Omnibus Amendment dated as of March 31, 1996 to the
Receivables Purchase and Sale Agreement among JSC(U.S.), JS Finance
and the Banks party thereto (incorporated by reference to Exhibit
10.3 to SSCC's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1996).
10.6(i) Affiliate Receivables Sale Agreement dated as of March 31, 1996
between SNC and SSCC (incorporated by reference to Exhibit 10.4 to
SSCC's Quarterly Report on Form 10-Q for the quarter ended June 30,
1996).
63
10.6(j) Amendment No. 2 dated as of August 19, 1997 to the Term Loan
Agreement among JS Finance and Bank Brussels Lambert, New York
Branch and JSC(U.S.) as Servicer (incorporated by reference to
Exhibit 10.12(j) to SSCC's Annual Report on Form 10-K for the fiscal
year ended December 31, 1997).
10.6(k) Amendment No. 2 dated as of August 19, 1997 to the Receivables
Purchase and Sale Agreement among JSC(U.S.) as the Seller and
Servicer and JS Finance as the Purchaser, Bankers Trust Company as
Facility Agent and Bank Brussels Lambert, New York Branch as the
Term Bank (incorporated by reference to Exhibit 10.12(k) to SSCC's
Annual Report on Form 10-K for the fiscal year ended December 31,
1997).
10.6(l) Amendment No. 2 dated as of August 19, 1997 to the Liquidity
Agreement among JS Finance, Bankers Trust Company as Facility Agent,
JSC(U.S.) as Servicer, Bank Brussels Lambert, New York Branch as
Term Bank and the Financial Institutions party thereto as Banks
(incorporated by reference to Exhibit 10.12(l) to SSCC's Annual
Report on Form 10-K for the fiscal year ended December 31, 1997).
10.7(a) Amended and Restated Credit Agreement dated as of November 18, 1998
among Stone, the Financial Institutions signatory thereto, and
Bankers Trust Company, as agent (incorporated by reference to
Exhibit 15 to Stone's Report on Form 8-A/A dated November 18, 1998).
10.7(b) First Amendment of Amended and Restated Credit Agreement dated as of
March 23, 1999, among Stone, the Financial Institutions signatory
thereto, and Bankers Trust Company, as agent (incorporated by
reference to Exhibit 4(b)(ii) to Stone's Annual Report on Form 10-K
for the fiscal year ended December 31, 1998).
10.7(c) Second Amendment of Amended and Restated Credit Agreement, dated as
of June 30, 1999, among Stone, the Financial Institutions signatory
thereto and Bankers Trust Company, as agent (incorporated by
reference to Exhibit 10.1 to Stone's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1999).
10.8* Consulting Agreement dated as of October 24, 1996 by and between
James E. Terrill and JSC(U.S.) (incorporated by reference to Exhibit
10.15 to SSCC's Annual Report on Form 10-K for the fiscal year ended
December 31, 1996).
10.9 Standstill Agreement dated as of May 10, 1998, as amended, among
JSG, MSLEF and SSCC (incorporated by reference to Exhibit 10(a) to
SSCC's Registration Statement on Form S-4 (File No. 333-65431)).
10.10 Registration Rights Agreement dated as of May 10, 1998 among MSLEF,
SIBV, SSCC and the other parties identified on the signature pages
thereto (incorporated by reference to Exhibit 10(e) to SSCC's
Registration Statement on Form S-4 (File No. 333-65431)).
10.11 Voting Agreement dated as of May 10, 1998, as amended, among SIBV,
MSLEF and Mr. Roger W. Stone (incorporated by reference to Exhibit
10(f) to SSCC's Registration Statement on Form S-4 (File No. 333-
65431)).
10.12(a)* SSCC 1998 Long Term Incentive Plan (incorporated by reference to
Exhibit 10.14 to SSCC's Annual Report on Form 10-K for the fiscal
year ended December 31, 1998).
10.12(b)* First Amendment of the SSCC 1998 Long-Term Incentive Plan
(incorporated by reference to Exhibit 10.2 to SSCC's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1999).
64
10.13* Forms of Employment Security Agreements (incorporated by reference
to Exhibit 10(h) to SSCC's Registration Statement on Form S-4 (File
No. 333-65431)).
10.14* Stone Container Corporation Directors' Deferred Compensation Plan
(incorporated by reference to Exhibit 10(b) to Stone's Annual
Report on Form 10-K for the fiscal year ended December 31, 1997).
10.15* Stone Container Corporation 1982 Incentive Stock Option Plan
(incorporated by reference to Appendix A to the Prospectus included
in Stone's Form S-8 Registration Statement, Registration Number
2-79221, effective September 27, 1982).
10.16(a)* Stone Container Corporation 1993 Stock Option Plan (incorporated by
reference to Appendix A to Stone's Proxy Statement dated as of
April 10, 1992).
10.16(b)* Amendment of the Stone 1993 Stock Option Plan (incorporated by
reference to Exhibit 10.3 to Stone's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1999).
10.17* Stone Container Corporation 1992 Long-Term Incentive Program
(incorporated by reference to Exhibit A to Stone's Proxy Statement
dated as of April 11, 1991).
10.18(a)* Stone Container Corporation 1995 Long-Term Incentive Plan
(incorporated by reference to Exhibit A to Stone's Proxy Statement
dated as of April 7, 1995).
10.18(b)* Amendment of the 1995 Long-Term Incentive Plan of Stone
(incorporated by reference to Exhibit 10.2 to Stone's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1999).
10.19 Management Services Agreement, dated January 1, 1993, by and between
SSCC, Smurfit Packaging Corporation and SNC (incorporated by
reference to Exhibit 10.28 to SSCC's Annual Report on Form 10-K for
the fiscal year ended December 31, 1998).
10.20 Management Services Agreement, dated January 1, 1993, by and between
SSCC and Smurfit Packaging Corporation (incorporated by reference to
Exhibit 10.29 to SSCC's Annual Report on Form 10-K for the fiscal
year ended December 31, 1998).
10.21 Management Services Agreement, dated January 1, 1993, by and between
SSCC and Sequoia Pacific Voting Equipment, Inc. (incorporated by
reference to Exhibit 10.30 to SSCC's Annual Report on Form 10-K for
the fiscal year ended December 31, 1998).
10.22 Pension and Insurance Services Agreement, dated January 1, 1997, by
and between SSCC and Smurfit Packaging Corporation (incorporated by
reference to Exhibit 10.31 to SSCC's Annual Report on Form 10-K for
the fiscal year ended December 31, 1998).
10.23 Pension and Insurance Services Agreement, dated January 1, 1997, by
and between SSCC and Smurfit Latin America, a division of Smurfit
Packaging Corporation (incorporated by reference to Exhibit 10.32 to
SSCC's Annual Report on Form 10-K for the fiscal year ended December
31, 1998).
10.24(a) Pooling and Servicing Agreement, dated October 1, 1999 by and among
Stone Receivables Corporation, as Transferor, Stone, as Securer, and
The Chase Manhattan Bank, as Trustee (incorporated by reference to
Exhibit 10.1(a) to Stone's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1999).
65
10.24(b) Series 1999-1 Supplement, dated as of October 15, 1999, among Stone
Receivables Corporation, as Transferor, Stone as Servicer, and The
Chase Manhattan Bank, as Trustee, under the Pooling and Servicing
Agreement (incorporated by reference to Exhibit 10.1(b) to Stone's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1999).
10.24(c) Series 1999-2 Supplement, dated as of October 15, 1999, among Stone
Receivables Corporation, as Transferor, Stone as Servicer, and The
Chase Manhattan Bank, as Trustee, under the Pooling and Servicing
Agreement (incorporated by reference to Exhibit 10.1(c) to Stone's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1999).
10.24(d) Receivables Purchase Agreement, dated October 15, 1999, between
Stone, the Seller and Stone Receivables Corporation, the Purchaser
(incorporated by reference to Exhibit 10.1(d) to Stone's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1999).
10.25(a) Purchase and Sale Agreement, effective as of July 28, 1999, between
Rayonier, Inc. and JSC(U.S.) (incorporated by reference to Exhibit
2.1 to JSCE, Inc.'s Current Report on Form 8-K dated October 25,
1999).
10.25(b) First Amendment to Purchase and Sale Agreement, dated October 21,
1999, between Rayonier, Inc. and JSC(U.S.) (incorporated by
reference to Exhibit 2.2 to JSCE, Inc.'s Current Report on Form 8-K
dated October 25, 1999).
10.26 Pre-Merger Agreement, dated as of February 23, 2000, among SSCC,
Stone, 3038727 Nova Scotia Company and St. Laurent Paperboard Inc.
(incorporated by reference to Exhibit 99.2 to SSCC's Current Report
on Form 8-K dated February 23, 2000).
10.27* Employment Agreement of Ray M. Curran.
10.28* Employment Agreement of Patrick J. Moore.
21.1 Subsidiaries of SSCC.
23.1 Consent of Independent Auditors.
24.1 Powers of Attorney.
27.1 Financial Data Schedule.
*Indicates a management contract or compensation plan or arrangement.
(b) Report on Form 8-K.
Form 8-K dated October 25, 1999 was filed with the Securities and Exchange
Commission in connection with the sale by JSC(U.S.) of timberlands to a third
party for approximately $710 million.
Form 8-K dated February 23, 2000 was filed with the Securities and Exchange
Commission in connection with the agreement by the Company to acquire St.
Laurent Paperboard Inc. for approximately $1.4 billion.
66
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
DATE March 14, 2000 SMURFIT-STONE CONTAINER CORPORATION
-------------- -----------------------------------
(Registrant)
BY /s/ Patrick J. Moore
--------------------------------
Patrick J. Moore
Vice President and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant in
the capacities and on the date indicated.
SIGNATURE TITLE DATE
--------- ----- ----
* Chairman of the Board
______________________________
Michael W. J. Smurfit and Director
* President and Chief Executive Officer
______________________________
Ray M. Curran and Director (Principal Executive Officer)
/s/ Patrick J. Moore Vice President and Chief Financial March 14, 2000
- ------------------------------
Patrick J. Moore Officer (Principal Financial Officer)
/s/ Paul K. Kaufmann Vice President and Corporate Controller March 14, 2000
- ------------------------------
Paul K. Kaufmann (Principal Accounting Officer)
* Director
______________________________
Richard A. Giesen
* Director
______________________________
Alan E. Goldberg
* Director
______________________________
Howard E. Kilroy
* Director
______________________________
James J. O'Connor
* Director
______________________________
Jerry K. Pearlman
* Director
______________________________
Thomas A. Reynolds, III
* Director
______________________________
Dermot F. Smurfit
*By /s/ Patrick J. Moore pursuant to Powers of Attorney filed
- ------------------------------
Patrick J. Moore as a part of the Form 10-K.
67