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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, 2000
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:
7% Series A Cumulative Exchangeable Redeemable Convertible Preferred Stock, $.01
par value
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, 2001: approximately $3.5 billion.
The number of shares outstanding of the registrant's common stock as of January
31, 2001: 243,570,031
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 16, 2001 for
the Annual Meeting of Stockholders to be held
on May 17, 2001. III
SMURFIT-STONE CONTAINER CORPORATION
ANNUAL REPORT ON FORM 10-K
December 31, 2000
TABLE OF CONTENTS
Page No.
PART I
Item 1. Business................................................................................... 3
Item 2. Properties................................................................................. 9
Item 3. Legal Proceedings.......................................................................... 10
Item 4. Submission of Matters to a Vote of Security Holders........................................ 11
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters...................... 12
Item 6. Selected Financial Data.................................................................... 13
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations...... 15
Item 7a. Quantitative and Qualitative Disclosures About Market Risk................................. 24
Item 8. Financial Statements and Supplementary Data................................................ 25
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure....... 64
PART III
Item 10. Directors and Executive Officers of the Registrant......................................... 64
Item 11. Executive Compensation..................................................................... 66
Item 12. Security Ownership of Certain Beneficial Owners and Management............................. 66
Item 13. Certain Relationships and Related Transactions............................................. 67
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K............................ 67
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 we believe that, in making any such
statements, our 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.
There are important factors that could cause actual results to differ materially
from those in forward-looking statements, certain of which are beyond our
control. These factors, risks and uncertainties include among others, the
following:
. the impact of general economic conditions in North America and Europe and
in other locations in which we and our subsidiaries currently do business;
. general 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;
. fluctuations in energy prices; and
. obtaining required approvals, if any, of debt holders.
Our actual results, performance or achievement could differ materially from
those expressed in, or implied by, these forward-looking statements, and
accordingly, we can give no assurances that any of the events
1
anticipated by the forward-looking statements will transpire or occur, or if any
of them do so, what impact they will have on our results of operations or
financial condition. We expressly decline any obligation to publicly revise any
forward-looking statements that have been made to reflect the occurrence of
events after the date hereof.
2
PART I
ITEM 1. BUSINESS
--------
Unless the context otherwise requires, "we", "us", "our" or Smurfit-Stone refers
to the business of Smurfit-Stone Container Corporation and its subsidiaries.
GENERAL
- -------
Smurfit-Stone Container Corporation, a Delaware corporation, is the industry's
leading integrated manufacturer of paper and paper-based packaging, including
containerboard, corrugated containers, multiwall bags and clay-coated recycled
boxboard, and is the world's largest paper recycler. In addition, we are a
leading producer of solid bleached sulfate, folding cartons, paper tubes and
cores, and labels. For the year ended December 31, 2000, our net sales were
$8,796 million and net income available to common shareholders was $224 million.
We are a holding company with no business operations of our own. We conduct our
business operations through two wholly-owned subsidiaries: JSCE, Inc., a
Delaware corporation, and Stone Container Corporation, a Delaware corporation.
JSCE conducts all of its business operations through its wholly-owned subsidiary
Jefferson Smurfit Corporation (U.S.). We acquired Stone Container through the
November 18, 1998 merger of a wholly-owned subsidiary of Jefferson Smurfit
Corporation, now known as Smurfit-Stone, with and into Stone Container. Our
results contained herein reflect Stone Container's operations after November 18,
1998. Jefferson Smurfit Corporation (U.S.) and Stone Container collectively
have operations primarily in North America and Europe.
On May 31, 2000, Smurfit-Stone, through a subsidiary of Stone Container,
completed its acquisition of St. Laurent Paperboard, Inc. Pursuant to an Amended
and Restated Pre-Merger Agreement, each outstanding common share and restricted
share unit of St. Laurent was exchanged for 0.5 shares of Smurfit-Stone common
stock and $12.50 in cash. The total consideration paid in connection with the
St. Laurent acquisition was approximately $1.4 billion, consisting of
approximately $631 million in cash, approximately 25.3 million shares of
Smurfit-Stone common stock and the assumption of $376 million of St. Laurent's
debt. Amounts included in the discussion below include St. Laurent's operations
after May 31, 2000.
PRODUCTS
- --------
We report our results of operations in two industry segments: 1) Containerboard
and Corrugated Containers and 2) Consumer Packaging. For financial information
relating to the segments, see the information set forth in Note 20 in the Notes
to Consolidated Financial Statements.
CONTAINERBOARD AND CORRUGATED CONTAINERS SEGMENT
Sales for the Containerboard and Corrugated Containers segment in 2000 were
$6,171 million (including $177 million of intersegment sales). This segment
includes 21 paper mills (15 located in the United States and six in Canada), 145
container plants (137 located in the United States, two in Canada, five in
Mexico and one in Puerto Rico) and six wood products plants (five located in the
United States and one in Canada). In addition, we own approximately 1,112,000
acres of timberland and operate wood harvesting facilities in Canada. The
primary products of the Containerboard and Corrugated Containers segment
include:
. corrugated containers;
. containerboard;
. kraft paper;
. solid bleached sulfate; and
. market pulp.
Smurfit-Stone offers a full range of high quality corrugated containers designed
to protect, ship, store and display products and satisfy customers'
merchandising and distribution needs. Corrugated containers are
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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, computers, books, furniture
and many other products. We provide customers with innovative packaging
solutions to advertise and sell their products. Smurfit-Stone has the most
complete line of graphic capabilities in the industry, including flexographic
and lithographic preprint, colored and coated substrates, lithographic labels
and high resolution post print. In addition, we offer a complete line of retail
ready, point of purchase displays and a full line of specialty products,
including pizza boxes, corrugated clamshells for the food industry, Cordeck(R)
recyclable pallets and custom die-cut boxes to display packaged merchandise on
the sales floor. Our container plants serve local customers and large national
accounts.
Production for the paper mills and sales volume for the corrugated container
facilities for the last three years, including our proportionate share of
affiliates, were:
2000 1999 1998
---- ---- ----
Tons produced (in thousands)
Containerboard................................................... 6,505 5,973 2,479
Kraft paper...................................................... 290 437 63
Solid bleached sulfate........................................... 258 189 185
Market pulp...................................................... 550 572 71
Uncoated boxboard................................................ 43 47 47
Corrugated containers sold (in billion sq. ft.).................... 80.7 80.0 35.3
Our containerboard mills produce a full line of containerboard, which for 2000
included 3,875,000 tons of unbleached kraft linerboard, 690,000 tons of white
top linerboard and 1,940,000 tons of recycled medium. The containerboard mills
and corrugated container operations are highly integrated, with the majority of
containerboard produced by us used internally by our corrugated container
operations. In 2000, the corrugated container plants consumed 5,034,000 tons of
containerboard, representing an integration level of approximately 77%. A
significant portion of the kraft paper production is consumed by our specialty
packaging operations.
Smurfit-Stone also produces solid bleached sulfate, a portion of which is
consumed internally by our folding carton plants. In addition, we produce
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.
Sales volumes shown above include our proportionate share of the operations of
Smurfit-MBI, a Canadian producer of corrugated containers, and other affiliates
reported on an equity ownership basis. Smurfit-Stone and Jefferson Smurfit Group
plc (JS Group), our principal shareholder, each own a 50% interest in Smurfit-
MBI.
CONSUMER PACKAGING SEGMENT
Sales for the Consumer Packaging segment in 2000 were $1,086 million (including
$26 million of intersegment sales). This segment includes seven paper mills, 17
folding carton plants and eleven other converting plants located primarily in
the United States. The primary products of the Consumer Packaging segment
include:
. folding cartons;
. coated recycled boxboard;
. uncoated recycled boxboard;
. paper, foil and heat transfer labels; and
. rotogravure cylinders.
Folding cartons are used primarily to protect customers' products, while
providing point of purchase advertising. We offer a full range of carton styles,
appropriate to nearly all carton end uses. The folding carton plants offer
extensive converting capabilities, including sheet and web lithographic,
rotogravure and flexographic printing and laminating. The folding carton plants
also provide a full line of structural
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and graphic design services tailored to specific technical requirements, as well
as photography for packaging, sales promotion concepts and point of purchase
displays. Converting capabilities include gluing, tray forming, windowing,
waxing and laminating, plus other specialties. The customer base is made up
primarily of producers of packaged foods, beverages, fast food, detergents,
paper, pharmaceuticals and cosmetics. Our customers range from local accounts to
large national accounts.
All of our boxboard is made from 100 percent reclaimed fiber. Production for the
coated and uncoated boxboard mills and sales volume for the folding carton
facilities for the last three years were:
2000 1999 1998
---- ---- ----
Tons produced (in thousands)
Coated boxboard...................................... 590 581 582
Uncoated boxboard.................................... 126 118 128
Folding cartons sold (tons, in thousands).............. 561 550 507
Our coated boxboard mills produce the broadest range of recycled grades in the
industry, including clay-coated newsback, kraftback and whiteback, as well as
waxable and laminated grades. The coated boxboard mills and folding carton
operations are highly integrated, with the majority of coated boxboard
production used internally by the folding carton operations. In 2000, the
folding carton and lamination plants consumed 603,000 tons of recycled boxboard
and solid bleached sulfate, representing an integration level of approximately
68%.
Our uncoated boxboard production is used primarily in the manufacture of paper
tube and core products. Uncoated boxboard products include reclaimed fiber drum
stock, tube stock, bending chip, shoe boxboard, partitions and electrostatic
disapative board (PROTECH(R)).
We produce paper and metallized paper labels and DI-NA-CAL(R) heat transfer
labels which are used in a wide range of industrial and consumer product
applications. DI-NA-CAL(R) is a proprietary labeling system that applies high-
speed heat transfer labels to plastic containers. We also produce specialized
laminations of film, foil and paper and high-quality rotogravure cylinders. We
have a full-service organization experienced in the production of color
separations and lithographic film for the commercial printing, advertising and
packaging industries.
OTHER NON-REPORTABLE SEGMENTS
Specialty Packaging
Sales for the Specialty Packaging segment in 2000 were $720 million (including
$13 million of intersegment sales). We operate 37 Specialty Packaging plants
located in the United States and one in Canada. The primary products of the
Specialty Packaging segment include:
. multiwall bags;
. consumer bags;
. intermediate bulk containers;
. paper tubes and cores;
. solid fiber partitions; and
. flexible packaging products.
Multiwall bags 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. In 2000, the
Specialty Packaging plants consumed approximately 65% of the kraft paper
produced by our kraft paper mills. Multiwall bag shipments for 2000, 1999 and
for the period subsequent to the Stone Container merger date in 1998 were
247,000, 249,000 and 27,000 tons, respectively.
Paper tubes and cores are used primarily for paper, film and foil, yarn carriers
and other textile products and furniture components. Solid fiber partitions are
used by customers in the pharmaceutical, cosmetics, glass container, automotive
and medical supply industries. Flexible packaging is used in a wide range of
consumer product applications. In addition, our contract packaging plant
provides custom contract
5
packaging services, including cartoning, bagging, liquid-filling or powder-
filling and high-speed overwrapping.
Reclamation
Our reclamation operations procure fiber resources for our paper mills as well
as other producers. We operate 26 reclamation facilities in the United States
and one in Canada that collect, sort, grade and bale recovered paper. We also
collect aluminum and glass. In addition, we operate a nationwide brokerage
system whereby we purchase and resell recovered paper to our 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 our
recycled paper mills, ensuring availability of supply with minimal shipping
costs. Domestic tons of recovered paper collected for 2000, 1999 and 1998 were
6,768,000, 6,560,000 and 5,155,000, respectively. Sales of recycled materials in
2000 were $728 million (including $296 million of intersegment sales).
International
Sales for our international operations were $587 million in 2000. Our
international operations, which produce containerboard, coated recycled boxboard
and corrugated containers, are located predominantly in Europe. The European
operations include:
. three paper mills located in Hoya and Viersen, Germany and Cordoba, Spain;
. 20 corrugated container plants (eleven located in Germany, three in Spain,
four in Belgium and two in the Netherlands); and
. six reclamation plants (five located in Germany and one in Spain).
In addition, we operate one container plant in Indonesia and have several small
affiliate operations in Chile and China. Production for our international mills
and sales volume for our international corrugated container facilities for the
last three years were:
2000 1999 1998
---- ---- ----
Tons produced (in thousands)
Containerboard............................................... 405 380 40
Coated boxboard.............................................. 85 79 8
Corrugated containers sold (in billion sq. ft.)............... 12.1 11.6 1.2
In 2000, our foreign corrugated container plants consumed 734,000 tons of
containerboard.
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. Cladwood(R) is produced at two plants located in Oregon. Sales for
Cladwood(R) in 2000 were $16 million.
FIBER RESOURCES
- ---------------
Wood fiber and reclaimed fiber are the principal raw materials used in the
manufacture of our paper products. We satisfy the majority of our need for wood
fiber through purchases on the open market or under supply agreements. We
satisfy essentially all of our need for reclaimed fiber through the operation of
our reclamation facilities and our nationwide brokerage system.
Wood fiber and reclaimed 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 we procure wood fiber. Fluctuations in supply and
demand for reclaimed fiber have occasionally caused tight supplies of reclaimed
fiber and, at those times, we have experienced an increase in the cost of such
fiber. While we have not experienced any significant difficulty in satisfying
our need for wood fiber and reclaimed fiber, we can give no assurances that this
will continue to be the case for any or all of our mills.
6
MARKETING
- ---------
Our 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 our paperboard mills, we seek to meet the quality and
service needs of the customers of our package converting plants at the most
efficient cost, while balancing those needs against the demands of our open
market customers. Our 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.
We seek to serve a broad customer base for each of our segments and as a result
serve thousands of accounts from our 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. We
complement our 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.
Our business is not dependent upon a single customer or upon a small number of
major customers. We do not believe the loss of any one customer would have a
materially adverse effect on our business.
COMPETITION
- -----------
The markets in which we sell our principal products are highly competitive and
comprised of many participants. Although no single company is dominant, we do
face significant competitors in each of our businesses. Our competitors include
large vertically integrated companies as well as numerous smaller companies. The
industries in which we compete 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 our 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. We
do not have a significant backlog of orders as most orders are placed for
delivery within 30 days.
RESEARCH AND DEVELOPMENT
- ------------------------
Our research and development center, located in Carol Stream, Illinois, uses
state-of-the-art technology to assist all levels of the manufacturing and sales
processes from raw material 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 cost of our research and development activities
for 2000, 1999 and 1998 was approximately $6 million, $7 million and $4 million,
respectively.
We actively pursue applications for patents on new inventions and designs and
attempt to protect our patents against infringement. Nevertheless, we believe
our success and growth are more dependent on the quality of our products and our
relationships with customers than on the extent of our patent protection. We
hold or are licensed to use certain patents, licenses, trademarks and trade
names on products, but do not consider the successful continuation of any
material aspect of our business to be dependent upon such intellectual property.
7
EMPLOYEES
- ---------
We had approximately 39,700 employees at December 31, 2000, of which
approximately 32,900 were employees of U.S. operations. Of the domestic
employees, approximately 20,700 (63%) are represented by collective bargaining
units. The expiration dates of union contracts for our major paper mill
facilities are as follows:
. the Missoula, Montana mill, expiring in May 2001;
. the Jacksonville, Florida (Seminole) mill, expiring in June 2001;
. the Hopewell, Virginia mill, expiring in July 2002;
. the Brewton, Alabama mill, expiring in October 2002;
. the Panama City, Florida mill, expiring in March 2003;
. the Fernandina Beach, Florida mill, expiring in June 2003;
. the Florence, South Carolina mill, expiring in August 2003;
. the La Tuque, Quebec, Canada mill, expiring in August 2004:
. the Hodge, Louisiana mill, expiring in June 2006; and
. the West Point, Virginia mill, expiring in September 2008.
We believe our employee relations are generally good and we are currently in the
process of bargaining with unions representing production employees at a number
of our operations. In addition, while the terms of these agreements may vary, we
believe the material terms of our 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
- ------------------------
Our operations are subject to extensive environmental regulation by federal,
state and local authorities. In the past, we have made significant capital
expenditures to comply with water, air, solid and hazardous waste and other
environmental laws and regulations. We expect to make significant expenditures
in the future for environmental compliance. Because various environmental
standards are subject to change, it is difficult to predict with certainty the
amount of capital expenditures that will ultimately be required to comply with
future standards.
In particular, the United States Environmental Protection Agency (EPA) has
finalized significant parts of its comprehensive rule governing the pulp, paper
and paperboard industry, known as the "Cluster Rule". Compliance with this rule
has required and will continue to require substantial expenditures. We have
spent approximately $204 million (of which approximately $179 million was spent
in 2000) for capital projects to comply with the initial portions of the Cluster
Rule and anticipate additional spending of approximately $43 million in 2001 to
complete these projects. Additional portions of the Cluster Rule, some of which
are not yet finalized, could require up to $60 million of capital expenditures
over the next several years. The remaining cost of complying with the
regulations cannot be predicted with certainty until the remaining portions of
the Cluster Rule are finalized.
In addition to Cluster Rule compliance, we anticipate additional capital
expenditures related to environmental compliance. Excluding the spending on
Cluster Rule projects described above, for the past three years, we have spent
an average of approximately $11 million annually on capital expenditures for
environmental purposes. Since our principal competitors are 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 our competitive position.
8
ITEM 2. PROPERTIES
----------
We maintain manufacturing facilities and sales offices throughout North America
and Europe. Our facilities are properly maintained and equipped with machinery
suitable for their use. Our manufacturing facilities as of December 31, 2000 are
summarized below:
Number of Facilities State
------------------------------------------------
Total Owned Leased Locations
----- ----- ------ ---------
United States
Paper mills......................................... 22 22 15
Corrugated container plants......................... 137 87 50 33
Consumer packaging plants........................... 27 21 6 11
Specialty packaging plants.......................... 37 12 25 20
Reclamation plants.................................. 26 17 9 15
Cladwood(R) plants.................................. 2 2 1
Wood products plants................................ 5 5 3
----- ----- ------
Subtotal............................................ 256 166 90 39
Canada and Other North America
Paper mills......................................... 6 6 N/A
Corrugated container plants......................... 8 6 2 N/A
Consumer packaging plant............................ 1 1 N/A
Specialty packaging plant........................... 1 1 N/A
Reclamation plant................................... 1 1 N/A
Wood products plant................................. 1 1 N/A
Europe and Other
Paper mills......................................... 3 3 N/A
Corrugated container plants......................... 21 19 2 N/A
Reclamation plants.................................. 6 3 3 N/A
----- ----- ------
Total............................................ 304 206 98 N/A
The paper mills represent aproximately 70% of our investment in property, plant
and equipment. In addition to manufacturing facilities, we own approximately
1,112,000 acres of timberland and operate wood harvesting facilities in Canada.
The approximate annual tons of productive capacity of our paper mills, including
our proportionate share of affiliates' productive capacity, at December 31, 2000
were:
Annual Capacity
---------------
(in thousands)
United States
Containerboard........................................................................... 6,637
Kraft paper.............................................................................. 296
Solid bleached sulfate................................................................... 200
Coated and uncoated boxboard............................................................. 782
Market pulp.............................................................................. 351
------
Subtotal................................................................................. 8,266
Canada
Containerboard........................................................................... 1,165
Solid bleached sulfate................................................................... 123
Market pulp.............................................................................. 243
Europe
Containerboard........................................................................... 446
Coated boxboard.......................................................................... 66
------
Total.................................................................................. 10,309
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ITEM 3. LEGAL PROCEEDINGS
-----------------
LITIGATION
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Smurfit Newsprint Corporation, a subsidiary of JSCE, is a party to a Settlement
Agreement to implement a nationwide class action settlement of claims involving
Cladwood(R), a composite wood siding product manufactured by Smurfit Newsprint
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, Washington and also resolved all other pending class
actions. As a result of the settlement, Smurfit Newsprint paid $20 million into
a settlement fund, plus up to approximately $6.5 million of administrative
costs, plaintiffs' attorneys' fees and class representative payments. Smurfit
Newsprint retained a reversionary interest in a portion of the settlement fund
and, based on this interest, obtained a return of $10 million from the fund in
2000 in exchange for the posting of a letter of credit in the same amount. The
claims period is scheduled to expire in February 2002. We do not believe we will
incur liabilities in excess of the established reserves for this matter.
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. These complaints allege
that Stone Container 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 Jefferson Smurfit (U.S.) and Smurfit-Stone. 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. We believe we have meritorious defenses and
are vigorously defending these cases.
We are a defendant in a number of lawsuits and claims arising out of the conduct
of our business, including those related to environmental matters. While the
ultimate results of such suits or other proceedings against us cannot be
predicted with certainty, our management believes the resolution of these
matters will not have a material adverse effect on our consolidated financial
condition or results of operations.
ENVIRONMENTAL MATTERS
- ---------------------
In September 1997, Stone Container received a Notice of Violation and a
Compliance Order from the EPA alleging noncompliance with air emissions
limitations for the smelt dissolving tank at our Hopewell, Virginia mill and for
failure to comply with New Source Performance Standards applicable to certain
other equipment at the mill. In cooperation with the EPA, Stone Container
responded to information requests, conducted tests and took measures to ensure
continued compliance with applicable emission limits. In December 1997 and
November 1998, Stone Container received additional requests from the EPA for
information about past capital projects at the mill. In April 1999, the EPA
issued a Notice of Violation alleging that we "modified" the recovery boiler
and increased nitrogen oxide emissions without obtaining a required construction
permit. We responded to this notice and indicated the EPA's allegations were
without merit. We have entered into a tolling agreement with the EPA that defers
any further prosecution of this matter until at least July 2, 2001.
In April 1999, the EPA and the Virginia Department of Environmental Quality
(Virginia DEQ) each issued a Notice of Violation under the Clean Air Act to St.
Laurent's mill located in West Point, Virginia, which was acquired from
Chesapeake Corporation in May 1997. In general, the notices of violation allege
that, from 1984 to the present, the West Point mill installed certain equipment
and modified certain production processes without obtaining the required
permits. St. Laurent made a claim for indemnification from Chesapeake for its
costs relating to these Notices of Violation pursuant to the purchase agreement
between St. Laurent and Chesapeake, and the parties appointed a third-party
arbitrator to resolve the issues relating to the indemnification claim. The
arbitrator has established a binding cost-sharing formula between the parties as
to the cost of any required capital expenditures that might be required to
resolve the Notices of Violation, as well as any fines and penalties imposed in
connection therewith. St. Laurent
10
and Chesapeake are attempting to reach agreement with the EPA and Virginia DEQ
on a capital expenditure plan to remedy these Notices of Violation, and based on
the information developed to date and discussions with the EPA and Virginia DEQ,
we believe our share of the costs to resolve this matter will not be material
and will not exceed established reserves.
In August 1999, we received a Notice of Infraction from the Ministry of
Environment of the Province of Quebec alleging noncompliance with specified
environmental standards at our New Richmond, Quebec mill. The majority of the
citations alleged that we had discharged total suspended solids in the mill's
treated effluent which exceeded the regulatory limitations 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). We entered a plea of "not
guilty" as to all of the citations and are vigorously defending ourselves
against these allegations.
Federal, state and local environmental requirements are a significant factor in
our business. We employ processes in the manufacture of pulp, paperboard and
other products, which result in various discharges, emissions and wastes. These
processes are subject to numerous federal, state and local environmental laws
and regulations, including reporting and disclosure obligations. We operate and
expect to operate under permits and similar authorizations from various
governmental authorities that regulate such discharges, emissions and wastes.
We also face 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. We have received notice that
we are 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. Our relative percentage of waste deposited at a
majority of these sites is quite small. In addition to participating in the
remediation of sites owned by third parties, we have entered into consent
orders for the investigation and/or remediation of certain of our owned
properties.
Based on current information, we believe the probable costs of the potential
environmental enforcement matters discussed above, response costs under CERCLA
and similar state laws, and the remediation of owned property will not have a
material adverse effect on our financial condition or results of operations. We
believe our liability for these matters was adequately reserved at December 31,
2000.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
None
11
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
---------------------------------------------------------------------
MARKET INFORMATION
- ------------------
At December 31, 2000, our common stock was held by approximately 55,000
stockholders. Our common stock trades on The Nasdaq Stock Market under the
symbol "SSCC". The high and low trading prices of the stock were:
2000 1999
------------------------------------------------------------------------
High Low High Low
---- --- ---- ----
First Quarter................................ $25.00 $12.50 $20.13 $14.81
Second Quarter............................... $18.63 $11.25 $25.31 $17.88
Third Quarter................................ $14.44 $10.75 $25.75 $20.00
Fourth Quarter............................... $16.25 $ 9.13 $25.63 $17.75
DIVIDENDS ON COMMON STOCK
- -------------------------
We have not paid cash dividends on our common stock and do not intend to pay
dividends in the foreseeable future. Our ability to pay dividends in the future
is restricted by certain provisions contained in various agreements and
indentures relating to Jefferson Smurfit (U.S.)'s and Stone Container's
outstanding indebtedness. See Management's Discussion and Analysis of Financial
Condition and Results of Operations, Liquidity and Capital Resources.
12
ITEM 6. SELECTED FINANCIAL DATA (g)
-----------------------
(In millions, except per share and statistical data)
- --------------------------------------------------------------------------------------------------------------------
2000(a) 1999(b) 1998(c) 1997 1996
- --------------------------------------------------------------------------------------------------------------------
Summary of Operations(d)
Net sales (e)........................................... $ 8,796 $ 7,423 $ 3,612 $ 3,060 $ 3,218
Income (loss) from operations (f)....................... 933 423 (93) 176 333
Income (loss) from continuing operations before
extraordinary item and cumulative effect of
accounting change..................................... 219 163 (211) (19) 80
Discontinued operations, net of income tax provision.... 6 6 27 20 37
Net income (loss) available to common shareholders...... 224 157 (200) 1 112
Basic earnings per share of common stock
Income (loss) from continuing operations before
extraordinary item and cumulative effect of
accounting change................................... .94 .75 (1.70) (.17) .72
Net income (loss)..................................... .96 .72 (1.61) .01 1.01
Weighted average shares outstanding..................... 233 217 124 111 111
Diluted earnings per share of common stock
Income (loss) from continuing operations before
extraordinary item and cumulative effect of
accounting change................................... .93 .74 (1.70) (.17) .71
Net income (loss)..................................... .96 .71 (1.61) .01 1.00
Weighted average shares outstanding..................... 234 220 124 111 112
- --------------------------------------------------------------------------------------------------------------------
Other Financial Data
Net cash provided by operating activities............... $ 807 $ 183 $ 129 $ 88 $ 380
Net cash provided by (used for) investing activities.... (916) 1,487 (59) (175) (133)
Net cash provided by (used for) financing activities.... 131 (1,805) 73 87 (262)
Depreciation, depletion and amortization................ 432 430 168 127 125
Capital investments and acquisitions.................... 994 156 287 191 129
Working capital, net.................................... 470 73 635 71 34
Property, plant, equipment and timberland, net.......... 5,670 4,419 5,772 1,788 1,720
Total assets............................................ 11,280 9,859 11,631 2,771 2,688
Long-term debt.......................................... 5,342 4,793 6,633 2,040 1,944
Stockholders' equity (deficit).......................... 2,528 1,847 1,634 (374) (375)
- --------------------------------------------------------------------------------------------------------------------
Statistical Data (tons in thousands)
Containerboard production (tons)........................ 6,910 6,353 2,519 2,024 2,061
Kraft production (tons)................................. 290 437 63
Market pulp production (tons)........................... 550 572 71
Solid bleached sulfate production (tons)................ 258 189 185 190 189
Coated boxboard production (tons)....................... 675 660 590 585 538
Uncoated boxboard production (tons)..................... 169 165 175 176 213
Corrugated containers sold (billion sq. ft.)............ 92.8 91.6 36.5 31.7 30.0
Folding cartons sold (tons)............................. 561 550 507 463 449
Multiwall bags sold (tons).............................. 247 249 27
Fiber reclaimed and brokered (tons)..................... 6,768 6,560 5,155 4,832 4,464
Number of employees..................................... 39,700 36,300 38,000 15,800 15,800
13
Notes to Selected Financial Data
(a) Results for 2000 include St. Laurent's operations after May 31, 2000, the
date of the St. Laurent acquisition.
(b) We recorded $446 million of pretax gains on asset sales in 1999, resulting
from the sales of a majority of JSCE's timberlands and our interest in
Abitibi-Consolidated, Inc.
(c) Results for 1998 include Stone Container's operations after November 18,
1998, the date of the Stone Container merger.
(d) Smurfit Newsprint, a subsidiary of JSCE, completed its exit from the
newsprint business in May 2000. Accordingly, the newsprint operations are
presented as a discontinued operation for all periods.
(e) Net sales for all periods have been restated to comply with the Emerging
Issues Task Force Issue No. 00-10, "Accounting for Shipping and Handling
Fees and Costs". Previously, we recognized shipping and handling costs as
a reduction to net sales. Shipping and handling costs are now included in
costs of goods sold. The reclassification had no effect on income from
operations. The effect of this reclassification increased net sales and
cost of goods sold from previously reported amounts by $272 million in
1999, $127 million in 1998, $103 million in 1997 and $109 million in 1996.
(f) We recorded pretax charges of $310 million in the fourth quarter of 1998,
including $257 million of restructuring charges in connection with the
Stone Container merger, $30 million for settlement of Cladwood(R)
litigation and $23 million of merger-related costs. In 1999 and 2000, we
recorded additional restructuring charges of $10 million and $53 million,
respectively, related to additional Stone Container merger activities.
(g) Certain prior year amounts have been restated to conform to current year
presentation.
14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
-----------------------------------------------------------------------
OF OPERATIONS
-------------
GENERAL
- -------
Market conditions and demand for containerboard and corrugated containers, our
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 our profitability.
Market conditions were generally weak in 1997 and 1998 due primarily to excess
capacity within the industry. During the second half of 1998, the
containerboard industry took market related downtime, resulting in a significant
reduction in inventory levels. In addition, several paper companies, including
Smurfit-Stone, permanently shut down paper mill operations approximating 6% of
industry capacity. The balance between supply and demand for containerboard
improved as a result of the shutdowns and inventories were reduced. Corrugated
container shipments for the industry were strong in 1999, increasing
approximately 2% compared to 1998. As a result of these developments, linerboard
prices rose $90 per ton in 1999, and increased an additional $50 per ton in
February 2000. Domestic economic growth slowed in the second half of 2000. This
slowdown, in addition to weak export markets, exerted downward pressure on
containerboard demand. In order to maintain a balance between supply and demand,
the industry took extensive market related downtime in 2000. In January 2001,
sluggish corrugated demand resulted in a $15 per ton decline in linerboard
pricing to $465 per ton. We do not expect a recovery in demand for corrugated
containers until the U.S. economy strengthens.
Market conditions in the folding carton and boxboard mill industry, which were
weak in 1998, strengthened in the second half of 1999 and continued to improve
in 2000. With demand improving, sales price increases were implemented in the
fourth quarter of 1999 and the second quarter of 2000. On average, prices were
higher in 2000 compared to 1999. Industry shipments of folding cartons in 2000
increased 3% compared to 1999 although mill operating rates and production were
lower.
Market pulp is also subject to cyclical changes in the economy and changes in
industry capacity. 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, market prices increased approximately $160 per metric ton in 1999
and $100 per metric ton in 2000. Demand for market pulp weakened in the second
half of 2000 and pulp producers took market related downtime in the fourth
quarter. As a result of the weakening demand, significant price discounting has
occurred in certain markets.
Wood fiber and reclaimed fiber are the principal raw materials used in the
manufacture of our products. Demand for reclaimed fiber, which was weak in 1998,
grew stronger in 1999 primarily as a result of strong export demand. Reclaimed
fiber prices rose in 1999, but declined in the second half of 2000 due primarily
to lower demand brought about by the extensive market related downtime taken by
containerboard mills as described above. The price of old corrugated containers,
commonly known as OCC, the principal grade used in recycled containerboard
mills, was higher in 2000 compared to 1999 by approximately 8%. Wood fiber
prices declined 4% in 2000 compared to 1999.
ACQUISITION
- -----------
On May 31, 2000, through a subsidiary of Stone Container, Smurfit-Stone acquired
St. Laurent. The St. Laurent acquisition was accounted for as a purchase
business combination and, accordingly, the results of operations of St. Laurent
have been included in the Consolidated Statements of Operations after May 31,
2000. The cost to acquire St. Laurent has been preliminarily allocated to the
assets acquired and liabilities assumed according to estimated fair values and
is subject to adjustment when additional information concerning asset and
liability valuations is finalized. The preliminary allocation resulted in
acquired goodwill of approximately $195 million, which is being amortized on a
straight-line basis over 40 years. In connection with the St. Laurent
acquisition, we recorded exit liabilities of $10 million in 2000 for the
termination of certain St. Laurent employees, liabilities for long-term
commitments and the permanent shutdown of a container plant, which were included
in the preliminary allocation of the cost to acquire St. Laurent. Cash payments
for exit liabilities in 2000 were $3 million and future cash outlays will be $6
million in 2001 and $1 million in 2002.
15
Synergy savings of $50 million from the St. Laurent acquisition are targeted by
the end of 2001. These synergies will be achieved through a combination of
purchasing savings, supply chain management, manufacturing efficiencies and
administrative reductions.
MERGER AND RESTRUCTURING
- -------------------------
As previously discussed, on November 18, 1998, a wholly-owned subsidiary of
Smurfit-Stone merged with Stone Container. In connection with the merger, we
restructured our operations. The most significant elements of the restructuring
included the permanent closure of five paper mills, having approximately 1.2
million tons of containerboard capacity and approximately 400,000 tons of market
pulp capacity, and 20 converting facilities.
During the fourth quarter of 1998, we recorded pretax charges of $257 million
for Jefferson Smurfit (U.S.) restructuring cost and $23 million for merger-
related costs. In 1999 and 2000, we recorded additional restructuring charges of
$10 million and $53 million, respectively, related to additional Smurfit-Stone
merger restructuring activities.
The allocation of the cost to acquire Stone Container included, among other
things, adjustments to fair value of property, plant and equipment associated
with the closure of certain Stone Container facilities and establishment of
liabilities for the termination of certain employees, long-term commitments and
the resolution of litigation related to Stone Container's investment in Florida
Coast Paper Company, L.L.C.
The restructuring of our operations in connection with the merger was completed
in 2000. Annualized synergy savings in excess of $350 million were achieved
primarily as a result of optimization of the combined manufacturing systems of
Jefferson Smurfit (U.S.) and Stone Container, purchasing leverage and reduction
of selling and administrative cost.
Since the Stone Container merger date, through December 31, 2000, Smurfit-Stone
has incurred approximately $236 million (79%) of the planned cash expenditures
to close facilities and to pay severance and other exit liabilities.
Approximately 52% of the expenditure related to the Florida Coast settlement.
The exit liabilities remaining as of December 31, 2000 consisted of $65 million
of anticipated cash expenditures. Future cash outlays, principally for the long-
term commitments, are anticipated to be $18 million in 2001, $10 million in 2002
and $37 million thereafter. The remaining cash expenditures will continue to be
funded through operations as originally planned.
RESULTS OF OPERATIONS
- ---------------------
Segment Data
(In millions) 2000 1999 1998
------------------ ------------------ ------------------
Net Profit/ Net Profit/ Net Profit/
Sales (Loss) Sales (Loss) Sales (Loss)
--------------------------------------------------------------------------
Containerboard and corrugated containers........ $5,994 $ 958 $4,876 $ 517 $2,110 $ 141
Consumer packaging.............................. 1,060 98 952 91 913 103
Other operations................................ 1,742 107 1,595 97 589 22
------ ------ ------ ----- ------ ------
Total operations................................ $8,796 1,163 $7,423 705 $3,612 266
====== ====== ======
Restructuring charges........................... (53) (10) (257)
Interest expense, net........................... (527) (563) (247)
Other, net...................................... (149) 207 (98)
------ ----- ------
Income (loss) from continuing operations
before income taxes, minority interest,
extraordinary item and cumulative effect of
accounting change............................. $ 434 $ 339 $ (336)
====== ===== ======
Other, net includes corporate expenses, intracompany profit elimination and LIFO
expense, goodwill amortization, corporate charges to segments for working
capital interest, gains or losses on asset sales and other expenses not
allocated to segments.
16
2000 COMPARED TO 1999
- ---------------------
Improvements in containerboard and other markets in 2000 and the St. Laurent
acquisition were the primary reasons for the increases in net sales and
operating profits. Net sales increased 18% compared to 1999 and operating
profits increased 65%. Other, net, which included $446 million of gains on asset
sales in 1999, declined by $356 million. Other, net was favorably impacted by
lower intracompany profit elimination and LIFO expense and an expense in 1999 of
$26 million related to the cashless exercise of Smurfit-Stone stock options
under the Jefferson Smurfit Corporation stock option plan. Interest expense, net
decreased by $36 million due primarily to lower levels of debt outstanding. The
increases (decreases) in net sales for each of our segments are shown in the
chart below.
Income from continuing operations before income taxes, minority interest,
extraordinary item and cumulative effect of accounting change increased 28%
compared to 1999. Net income available to common shareholders was $224 million
in 2000 compared to $157 million in 1999.
(In millions) 2000 Compared to 1999
-----------------------------------------------------------------------------
Containerboard
& Corrugated Consumer Other
Containers Packaging Operations Total
-------------- --------- ---------- -----
Increase (decrease) in net sales due to:
Sales prices and product mix............... $ 710 $ 55 $117 $ 882
Sales volume............................... (175) 13 75 (87)
Acquisition and other...................... 771 44 815
Sold or closed facilities.................. (188) (4) (45) (237)
------ ---- ---- ------
Net increase................................. $1,118 $108 $147 $1,373
====== ==== ==== ======
Containerboard and Corrugated Containers Segment
Net sales for 2000 increased by 23% compared to 1999 due to higher sales prices
and the St. Laurent acquisition. Profits improved by $441 million to $958
million. Market conditions were stronger in the first half of the year, enabling
us to implement a linerboard increase on February 1, followed by corresponding
price increases for corrugated containers. Although shipments grew weaker as the
year progressed, we were able to maintain the price increases achieved earlier
in the year. On average, corrugated container prices improved by 15% compared to
last year and linerboard prices were higher by 17%. Strong demand for market
pulp drove prices higher in the first half of 2000. Demand for market pulp
weakened in the second half of 2000 and significant price discounting has
occurred in certain markets. The average price of market pulp for 2000 was 31%
higher compared to 1999.The average sales price of kraft paper increased 15%
compared to 1999. Solid bleached sulfate prices also increased during the year
and, on average, were 6% higher than last year.
Production of containerboard increased 9% compared to 1999 due to the St.
Laurent acquisition. Exclusive of St. Laurent, production of containerboard
declined 5% compared to last year as a result of the higher levels of market
related downtime. Shipments of corrugated containers were unchanged from last
year. Exclusive of St. Laurent, shipments of corrugated containers declined 4%
due to container plant closures and weaker demand in the second half of the
year. Production of market pulp declined 4% primarily due to market related
downtime taken in the fourth quarter of 2000 and kraft paper production declined
34% compared to 1999 primarily due to the shifting of available capacity from
kraft paper to containerboard. Solid bleached sulfate production increased 1%
compared to 1999.
Profits increased due to the higher average sales prices and the St. Laurent
acquisition. Profits were negatively impacted by market related downtime, higher
cost of energy and reclaimed fiber and elimination of JSCE's timberland
operations. Cost of goods sold as a percent of net sales decreased to 77% for
2000 compared to 81% for 1999 due primarily to higher average sales prices.
Consumer Packaging Segment
Net sales for 2000 increased by 11% compared to 1999 due to higher sales prices,
an increase in shipments and the St. Laurent acquisition. For the year, on
average, coated boxboard sales prices were 8% higher than 1999 and folding
carton sales prices were 6% higher. Uncoated boxboard sales prices were 10%
higher than 1999. Sales volume of folding cartons increased 2% compared to 1999.
Production of coated boxboard increased 2% compared to 1999 and production of
uncoated boxboard increased 7%.
17
Profits improved 8% compared to last year due primarily to the improvement in
sales prices. An increase in reclaimed fiber cost and higher energy cost
partially offset the improvement in pricing. Profits in the label operations
declined compared to last year due to competitive pricing and raw material cost
increases. Cost of goods sold as a percent of net sales increased from 83% in
1999 to 84% in 2000 due to the higher cost of energy and reclaimed fiber.
Other Operations
Net sales for 2000 increased by 9% compared to last year and profits increased
by $10 million to $107 million due primarily to the reclamation operations.
Reclamation operations benefited from higher sales prices and volume and lower
employee compensation cost in 2000 compared to 1999. Demand for reclaimed fiber
was strong in the first half of 2000, but weakened in the second half as more
paper mills took market related downtime to manage their inventories.
International and specialty packaging results were comparable to last year.
Costs and Expenses
Cost of goods sold in the Consolidated Statements of Operations increased
compared to 1999 due primarily to the St. Laurent acquisition. Cost of goods
sold as a percent of net sales decreased from 85% in 1999 to 80% in 2000 due
primarily to the higher sales prices. The improvements were partially offset by
the higher cost of energy and reclaimed fiber cost and the effects of the higher
level of market related downtime in 2000.
Selling and administrative expense as a percent of net sales declined from 9% in
1999 to 8% in 2000 due primarily to higher sales prices. Selling and
administrative expenses for 2000 increased compared to 1999 due primarily to the
St. Laurent acquisition.
Interest expense, net for 2000 decreased by $36 million compared to 1999 due
primarily to lower levels of debt outstanding. Our overall average effective
interest rate in 2000 was higher than 1999 by 0.5%.
Other, net in the Consolidated Statements of Operations for 2000 declined
compared to 1999. Other, net for 1999 included gains of $407 million on the sale
of JSCE's timberlands and $39 million on the sale of shares of Abitibi-
Consolidated, Inc.
The effective income tax rate for 2000 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.
For information concerning income taxes see Liquidity and Capital Resources and
Note 9 of the Notes to Consolidated Financial Statements.
Discontinued Operations
In February 1999, we adopted a formal plan to sell the operating assets of our
subsidiary, Smurfit Newsprint. Accordingly, the newsprint operations of Smurfit
Newsprint were accounted for as a discontinued operation for all periods
presented in the Consolidated Statements of Operations. In November 1999, we
sold our Newberg, Oregon newsprint mill for approximately $211 million. In May
2000, we transferred ownership of the Oregon City, Oregon newsprint mill to a
third party, thereby completing our exit from the newsprint business. We
received no proceeds from the transfer. The 1999 results of 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. In 2000, we recorded a
$6 million after-tax gain to reflect adjustments to estimates made in 1999 on
disposition of discontinued operations.
1999 COMPARED TO 1998
- ---------------------
Net sales and operating profits were significantly higher in 1999 compared to
1998 due primarily to the Stone Container merger and improvements in sales
prices. Other, net improved $305 million compared to 1998 due primarily to gains
recorded on the sale of assets in 1999. Other net in 1999 included higher
intracompany profit elimination and LIFO expense compared to 1998 and $26
million of expense related to the cashless exercise of Smurfit-Stone stock
options under the Jefferson Smurfit Corporation stock option plan. Other, net in
1998 included $30 million for the class action settlement of certain litigation
and
18
$23 million of other cost related to the Stone Container merger. The increases
(decreases) in net sales for each of our segments are shown in the chart below.
Income from continuing operations before income taxes, minority interest,
extraordinary item and cumulative effect of accounting change increased by $675
million compared to 1998. Net income in 1999 was $157 million compared to a net
loss of $200 million in 1998.
(In millions) 1999 Compared to 1998
--------------------------------------------------------------------------
Containerboard
& Corrugated Consumer Other
Containers Packaging Operations Total
-------------------- ------------------ ----------------- -------------
Increase (decrease) in net sales due to:
Sales prices and product mix............... $ 69 $(13) $ 29 $ 85
Sales volume............................... 13 52 26 91
Stone Container merger..................... 2,764 1 969 3,734
1998 acquisition........................... 26 26
Sold or closed facilities.................. (106) (1) (18) (125)
------ ---- ------ ------
Net increase................................. $2,766 $ 39 $1,006 $3,811
====== ==== ====== ======
Containerboard and Corrugated Containers Segment
Net sales and profits for 1999 increased significantly compared to 1998 due
primarily to the Stone Container merger and improved sales prices for
containerboard and corrugated containers. Net sales and profits for the Stone
Container operations for 1999 were $3,170 million and $322 million,
respectively, compared to net sales of $406 million and a loss of $22 million
for the period from the Stone Container merger date to December 31, 1998. We
were 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 prices increased 8% and 9%, respectively, compared to 1998. The
increase in corrugated prices reflects the price increases implemented and our
strategy to rationalize customer mix. Solid bleached sulfate prices were lower
than 1998 by 3%.
As a result of the Stone Container 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. Solid bleached sulfate production was higher than 1998 by 2%.
Corrugated container sales volume also increased compared to 1998 due primarily
to the Stone Container merger. Corrugated container shipments were negatively
impacted by the closure of four Jefferson Smurfit (U.S.) plants and the
rationalization of customer mix. Cost of goods sold as a percent of net sales
decreased to 81% for 1999 compared to 86% for 1998 due to higher sales prices,
plant shutdowns and cost saving initiatives undertaken in connection with the
Stone Container merger.
Consumer Packaging Segment
Net sales for 1999 increased by 4% compared to 1998 while profits decreased by
$12 million. The sales increase was due primarily to higher sales volume of
folding cartons, which increased by 9% compared to 1998. Production of coated
boxboard was comparable to 1998 . On average, coated boxboard prices were lower
than 1998 by 9% and folding carton sales prices were comparable to 1998.
Production of uncoated boxboard decreased 8% and, on average, uncoated boxboard
sales prices declined 8% compared to 1998. Profits declined compared to 1998 due
primarily to the lower sales prices for coated and uncoated boxboard and higher
reclaimed fiber cost. Cost of goods sold as a percent of net sales increased
from 81% in 1998 to 83% in 1999 due primarily to the effect of lower sales
prices and higher reclaimed fiber costs.
Other Operations
Net sales for 1999 increased by 171% compared to 1998 and profits increased by
$75 million due primarily to the specialty packaging and international
operations acquired in the Stone Container merger. Other operations also include
our reclamation operation. Our reclamation operations 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 Stone Container merger.
19
Costs and Expenses
Cost of goods sold for 1999 in our Consolidated Statements of Operations
increased compared to 1998 due primarily to the Stone Container merger. The
increase was partially offset by elimination of cost for certain containerboard
mill operations, which were permanently shut down in December 1998. Overall cost
of goods sold as a percent of net sales of 85% in 1999 was unchanged from 1998.
Selling and administrative expenses for 1999 increased compared to 1998 due
primarily to the Stone Container merger. Selling and administrative expenses as
a percent of net sales declined from 10% in 1998 to 9% in 1999 due primarily to
the effects of the Stone Container merger and higher sales prices. Staff
reductions and certain other merger synergies achieved in 1999 had a favorable
impact on our administrative expenses. We expensed $26 million related to the
cashless exercise of stock options under the Jefferson Smurfit Corporation stock
option plan in 1999. In 1998, we expensed $30 million for settlement of certain
litigation and $23 million of other Stone Container merger-related cost.
Interest expense, net for 1999 was higher than 1998 due primarily to the higher
levels of debt outstanding as a result of the Stone Container merger. Average
effective interest rates for 1999 were comparable to 1998.
Other, net in the Consolidated Statements of Operations for 1999 included gains
of $407 million on the sale of JSCE's timberlands and $39 million on the sale of
our shares of Abitibi-Consolidated, Inc.
The effective income tax rate for 1999 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.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
General
In 2000, net cash provided by operating activities of $807 million, borrowings
under bank credit facilities of $1,525 million, proceeds from the sale of assets
of $78 million and proceeds from exercise of stock options of $6 million were
used to fund the $631 million cash component of the St. Laurent acquisition, net
debt payments of $1,356 million, financing fees of $17 million and property
additions of $363 million. Debt repayments in 2000 included the redemption of
$559 million of outstanding Stone Container 9.875% senior notes due February 1,
2001, repayment of approximately $376 million of existing indebtedness of St.
Laurent, prepayments on our bank term loans and scheduled debt repayments.
On November 15, 2000, pursuant to an Agreement and Plan of Merger among Smurfit-
Stone, SCC Merger Co. and Stone Container, approximately 4.6 million shares of
$1.75 Series E Preferred Stock of Stone Container were converted into
approximately 4.6 million shares of 7% Series A Cumulative Exchangeable
Redeemable Convertible Preferred Stock of Smurfit-Stone. In addition a cash
payment of $6.4425 per share, totaling approximately $30 million, was made to
the holders of the Stone Container Preferred Stock. The cash payment was equal
to the accrued and unpaid dividends on each share of Stone Container Preferred
Stock, less $0.12 per share to cover certain transaction related expenses.
Following the completion of the Preferred Stock exchange, the holders of the
Smurfit-Stone Preferred Stock are entitled to dividends of $0.4375 per quarter,
payable in cash or, in certain circumstances, in additional shares of Smurfit-
Stone Preferred Stock, with the first dividend paid on February 15, 2001.
On May 31, 2000, Smurfit-Stone acquired St. Laurent. The total consideration
paid in connection with the St. Laurent acquisition was approximately $1.4
billion, consisting of approximately $631 million in cash, approximately 25.3
million shares of Smurfit-Stone common stock and the assumption of $376 million
of St. Laurent's debt. The cash portion of the purchase price was financed
through borrowings under certain of our credit facilities, including a new Stone
Container credit facility. The new credit facility consists of (i) $950 million
in the form of Tranche G and Tranche H term loans maturing on December 31, 2006,
and (ii) a $100 million revolving credit facility maturing on December 31, 2005.
The proceeds of the new credit facility were used to fund the cash component of
the St. Laurent acquisition, refinance certain existing indebtedness of St.
Laurent, and pay fees and expenses related to the acquisition. The new revolving
credit facility will be used for general corporate purposes. The new credit
facility is secured by a security interest in substantially all of the assets
acquired in the St. Laurent acquisition.
20
In May 2000, Stone Container sold the market pulp mill at its Port Wentworth,
Georgia mill site to a third party. Net proceeds of approximately $58 million
from the sale were used for debt reduction.
Financing Activities
On January 25, 2001, Stone Container issued $750 million of 9.75% senior notes
due 2011 and $300 million of 9.25% senior notes due 2008 (the New Stone Senior
Notes). The proceeds of this issuance, along with additional borrowings on the
Stone Container revolving credit facility of $34 million, were used on February
23, 2001 to redeem (i) $200 million aggregate principal amount of 10.75% senior
subordinated debentures due April 1, 2002, (ii) $100 million aggregate principal
amount of 10.75% senior subordinated debentures and 1.5% supplemental interest
certificates due April 1, 2002, (iii) $45 million aggregate principal of 6.75%
convertible subordinated debentures due February 15, 2007, (iv) $500 million
aggregate principal of 10.75% first mortgage notes due October 1, 2002, and (v)
$200 million aggregate principal of 11.50% senior notes due October 1, 2004. In
addition, the proceeds were used to pay $39 million in fees, call premiums and
other expenses related to these transactions. The New Stone Senior Notes have
not been registered under the Securities Act of 1933 and are subject to certain
transfer restrictions. If, by July 18, 2001, Stone Container does not
consummate a registered exchange offer for a series of notes or cause a shelf
registration statement with respect to resales of such series of notes to be
declared effective, the interest rate on the notes will be increased by 50 basis
points per annum until the consummation of a registered exchange offer or the
effectiveness of a shelf registration statement.
After giving effect to the issuance of the New Stone Senior Notes, we have
senior notes aggregating $1,368 million which are redeemable, in whole or in
part, at our option at various dates beginning in August 2001, at par plus a
weighted average premium of 3.81%.
On March 9, 2001, we amended the Jefferson Smurfit (U.S.) accounts receivable
securitization program to (i) reduce the total program size from $315 million
to $229 million, and (ii) extend the final maturity from February 2002 to
February 2004.
On November 30, 2000, Stone Container prepaid $147 million of the 10.75% senior
subordinated debentures and 1.50% supplemental interest certificates due April
1, 2002.
On March 31, 2000, Stone Container amended and restated its existing credit
agreement pursuant to which a group of financial institutions provided an
additional $575 million to Stone Container in the form of a Tranche F term loan
maturing on December 31, 2005 and extended the maturity date of the revolving
credit agreement to December 31, 2005. On April 28, 2000, Stone Container used
$559 million of the proceeds of the Tranche F term loan to redeem the 9.875%
senior notes due February 1, 2001.
The bank credit facilities of Jefferson Smurfit (U.S.) and Stone Container
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 bank
credit facilities also require prepayments if Jefferson Smurfit (U.S.) or Stone
Container have excess cash flows, as defined, or receive proceeds from certain
asset sales, insurance or incurrence of certain indebtedness. Jefferson Smurfit
(U.S.) generated excess cash flow of approximately $59 million in 2000. The
obligations under the Jefferson Smurfit (U.S.) bank credit facility are
unconditionally guaranteed by Smurfit-Stone and certain of its subsidiaries. The
obligations under the Jefferson Smurfit (U.S.) bank credit facility are secured
by a security interest in substantially all of the assets of Jefferson Smurfit
(U.S.). The obligations under the Stone Container bank credit facility are
secured by a security interest in substantially all of the assets of Stone
Container 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 facilities. Such
restrictions, together with our highly leveraged position, could restrict
corporate activities, including our ability to respond to market conditions, to
provide for unanticipated capital expenditures or to take advantage of business
opportunities.
21
The indentures governing Stone Container's 11.50% Senior Notes due 2006 and the
12.58% Rating Adjustable Senior Notes due 2016, totaling $325 million at
December 31, 2000, generally provide that in the event of a "change of control"
(as defined in the indentures), Stone Container must offer to repurchase these
senior notes. The Stone Container merger constituted such a change of control.
As a result, Stone Container is required to make an offer to repurchase these
senior notes at a price equal to 101% of the principal amount thereof (together
with accrued but unpaid interest thereon), provided however, if such repurchase
would constitute an event of default under our bank debt, prior to making an
offer to repurchase these senior notes, the indentures require that we either
pay our bank debt or obtain the consent of our bank lenders. A repurchase of
these senior notes is currently prohibited by the terms of our bank debt.
Although the terms of the these senior notes refer to an obligation to repay our
bank debt or obtain the consent of the bank lenders to such repurchase, the
terms do not expressly specify a deadline following the applicable change of
control for taking such actions. We have sought and intend to actively seek
commercially acceptable sources of financing to repay such bank debt or
alternative financing arrangements which would cause the bank lenders to consent
to the repurchase of these senior notes. There can be no assurance that we will
be successful in obtaining such financing or consents or as to the terms of any
such financing or consents. If we are unsuccessful in repaying our bank debt or
obtaining the requisite consents from the lenders thereunder, holders of these
senior notes may assert that we are obligated to offer to repurchase the notes
as a result of the change of control or may assert other damages.
Based upon covenants in certain of the Stone Container indentures, Stone
Container 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 Container 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 Container's equity level has
exceeded the minimum since April 1999.
We expect internally generated cash flows and existing financing resources will
be sufficient for the next several years to meet our obligations, including debt
service, expenditures under the Cluster Rule and other capital expenditures. We
intend to hold capital expenditures below our annual depreciation levels for the
next several years. Scheduled debt payments, after giving effect to the New
Stone Senior Notes and the related debt redemption on February 23, 2001, are $39
million in 2001 and $209 million in 2002 with increasing amounts thereafter. We
expect to use any excess cash flows provided by operations to make further debt
reductions. As of December 31, 2000, Jefferson Smurfit (U.S.) had $498 million
of unused borrowing capacity under the Jefferson Smurfit (U.S.) credit agreement
and Stone Container had $437 million of unused borrowing capacity under the
Stone Container credit agreements.
Income Tax Matters
At December 31, 2000, we had approximately $1,051 million of net operating loss
carryforwards for U.S. federal income tax purposes that expire from 2011 through
2019, with a tax value of $368 million. A valuation allowance of $152 million
has been established for a portion of these deferred tax assets. Further, we had
net operating loss carryforwards for state purposes with a tax value of $97
million, which expire from 2001 to 2020. A valuation allowance of $56 million
has been established for a portion of these deferred assets. We had
approximately $73 million of alternative minimum tax credit carryforwards for
U.S. federal income tax purposes, which are available indefinitely.
Environmental Matters
Our operations are subject to extensive environmental regulation by federal,
state and local authorities in the United States and regulatory authorities with
jurisdiction over our foreign operations. We have made, and expect to continue
to make, significant capital expenditures to comply with water, air, solid and
hazardous waste and other environmental laws and regulations. Capital
expenditures for environmental control equipment and facilities were
approximately $189 million in 2000 and $29 million in 1999. We anticipate that
environmental capital expenditures will approximate $51 million in 2001. The
majority of the expenditures in 2000 and 2001 relate to projects 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, more stringent requirements on air
emissions under the Clean Air Act for the pulp and paper industry. Although
portions of the Cluster Rule are not yet fully promulgated, we currently believe
we may be required to make additional capital expenditures of up to $60 million
during the next several years in order to meet the requirements of the
22
new regulations. Also, additional operating expenses will be incurred as capital
installations required by the Cluster Rule are put into service.
In addition, we are 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. We have been named as a PRP at a
number of sites, which are the subject of remedial activity under CERCLA or
comparable state laws. Although we are 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 our
liquidity during 2000. Future environmental regulations may have an
unpredictable adverse effect on our operations and earnings, but they are not
expected to adversely affect our 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 us 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 us.
Effects of Inflation
Although inflation has slowed in recent years, it is still a factor in the
economy and we continue to seek ways to mitigate its impact. In 2000, energy
resources were tight in certain areas of the United States and prices of natural
gas and purchased electricity escalated dramatically. Our paper mills are large
users of energy and we attempt to mitigate these cost increases through hedging
programs and supply contracts. With the exception of energy costs, inflationary
increases in operating costs have been moderate during the past three years and
have not had a material impact on our financial position or operating results.
We use the last-in, first-out method of accounting for approximately 61% of our
inventories. Under this method, the cost of goods sold reported in the financial
statements approximates current cost and thus provides a closer matching of
revenue and expenses in periods of increasing costs.
As a result of the Stone Container merger and the St. Laurent acquisition,
approximately 78% of our consolidated property, plant and equipment is valued at
fair value. For the remainder of our 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 June 1998, the Financial Accounting Standards Board issued Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities", which is
required to be adopted in years beginning after June 15, 2000. We will adopt
Statement No. 133 effective January 1, 2001. The statement requires us to
recognize all derivatives on the balance sheet at fair value. Derivatives that
are not hedges must be adjusted to fair value through income. If the derivative
is a hedge, depending on the nature of the hedge, changes in the fair value of
derivatives will either be offset against the change in fair value of the hedged
assets, liabilities, or firm commitments through earnings or recognized in other
comprehensive income until the hedged item is recognized in earnings. The
ineffective portion of a derivative's change in fair value will be immediately
recognized in earnings.
Based on our derivative positions at December 31, 2000, we estimate that upon
adoption we will record an asset for the fair value of existing derivatives of
approximately $9 million and a corresponding reduction in cost of goods sold.
23
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------
Foreign Currency Risk
We are exposed to foreign currency rate risk. Our principal foreign exchange
exposures are the Canadian dollar and the German mark. In general, with a net
asset exposure, a weakening of these currencies relative to the U.S. dollar has
a negative translation effect. Conversely, with a net asset exposure, a
strengthening of these currencies would have the opposite effect. The average
exchange rates for the German mark weakened against the U.S. dollar in 2000 by
15.2%, while the Canadian dollar remained unchanged.
Assets and liabilities outside the United States are primarily located in Canada
and Germany. The functional currency for the majority of our foreign operations
is the applicable local currency except for the operations in Canada. The
functional currency for the Canadian operations was changed from their local
currency to the U.S. dollar beginning June 1, 2000, in conjunction with the St.
Laurent acquisition. Our investments in foreign subsidiaries with a functional
currency other than the U.S. dollar are not hedged. The potential loss in fair
value resulting from a hypothetical 10% adverse change in the German Mark
exchange rate would be approximately $8 million and in the Canadian dollar
exchange rate would be $16 million at December 31, 2000. Any loss in fair value,
associated with the German mark, in the Consolidated Balance Sheets would be
reflected as a cumulative translation adjustment in Accumulated Other
Comprehensive Income and would not impact our net income. A gain or loss in fair
value, associated with the Canadian dollar, in the Consolidated Balance Sheets
would be recorded as a gain or loss on foreign currency transactions.
In 2000, 1999 and 1998, the average exchange rates for the Canadian dollar and
the German mark strengthened (weakened) against the U.S. dollar as follows:
Year ended December 31,
----------------------------------
2000 1999 1998
---- ---- ----
Canadian dollar.................................................. % (0.2)% (7.1)%
German mark...................................................... (15.2) (4.4) (1.4)
We also enter into foreign currency exchange agreements. There were no foreign
currency exchange agreements at December 31, 2000.
Interest Rate Risk
Our earnings and cash flows are significantly affected by the amount of interest
on our indebtedness. Our 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 Smurfit-Stone from interest rate volatility and reduce
or cap interest expense within acceptable levels of market risk. We may
periodically enter into interest rate swaps, caps or options to hedge interest
rate exposure and manage risk within company policy. We do 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. There were no interest rate derivatives outstanding
at December 31, 2000.
The table below presents principal amounts by year of anticipated maturity for
our 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 7 of the Notes to Consolidated Financial
Statements.
24
Short and Long-Term Debt
Outstanding as of December 31, 2000 There- Fair
(U.S.$, in millions) 2001 2002 2003 2004 2005 after Total Value
- -------------------------------------------------------------------------------------------------------------
Bank term loans and revolver
9.9% average interest rate (variable)... $ 13 $ 63 $ 630 $ 81 $ 851 $ 806 $ 2,444 $ 2,437
U.S. accounts receivable securitization
6.6% average interest rate (variable).... 15 212 227 227
U.S. senior and senior subordinated notes
10.7% average interest rate (fixed)...... 1 901 502 489 2 442 2,337 2,359
U.S. industrial revenue bonds
8.7% average interest rate (fixed)....... 3 13 17 13 13 192 251 251
Other U.S.................................. 19 14 8 3 1 7 52 52
German mark bank term loans
5.5% average interest rate (variable).... 5 5 1 1 12 12
Other foreign.............................. 3 3 3 2 2 6 19 19
----------------------------------------------------------------
Total debt................................. $ 44 $1,014 $1,373 $ 589 $ 869 $1,453 $ 5,342 $ 5,357
================================================================
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
Index to Financial Statements: Page No.
--------
Management's Responsibility for Financial Statements........................ 26
Report of Independent Auditors.............................................. 27
Consolidated Balance Sheets -- December 31, 2000 and 1999................... 28
For the years ended December 31, 2000, 1999 and 1998:
Consolidated Statements of Operations.................................. 29
Consolidated Statements of Stockholders' Equity........................ 30
Consolidated Statements of Cash Flows.................................. 31
Notes to Consolidated Financial Statements.................................. 32
The following consolidated financial statement schedule is included in Item
14(a):
II: Valuation and Qualifying Accounts and Reserves......................... 63
All other schedules specified under Regulation S-X 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.
25
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS
The management of Smurfit-Stone 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 us 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.
We maintain a system of internal accounting control, which we believe 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, Smurfit-Stone has an effective and responsive system of internal
accounting controls. The system is monitored by our 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)
26
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, 2000 and 1999, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 2000. 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, 2000 and 1999, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 2000 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 29, 2001,
except for paragraphs 1 and 14 of Note 7, as to which the
dates are February 23, 2001 and March 9, 2001, respectively.
27
SMURFIT-STONE CONTAINER CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, (In millions, except share data) 2000 1999
=========================================================================================================
Assets
Current assets
Cash and cash equivalents................................................. $ 45 $ 24
Receivables, less allowances of $53 in 2000 and $50 in 1999............... 687 647
Inventories
Work-in-process and finished goods...................................... 247 238
Materials and supplies.................................................. 509 496
-------------------------
756 734
Refundable income taxes................................................... 8 7
Deferred income taxes..................................................... 164 130
Prepaid expenses and other current assets................................. 60 69
-------------------------
Total current assets.................................................. 1,720 1,611
Net property, plant and equipment............................................ 5,609 4,395
Timberland, less timber depletion............................................ 61 24
Goodwill, less accumulated amortization of...................................
$240 in 2000 and $151 in 1999............................................. 3,368 3,328
Investment in equity of non-consolidated affiliates.......................... 176 176
Other assets................................................................. 346 325
-------------------------
$ 11,280 $ 9,859
=========================================================================================================
Liabilities and Stockholders' Equity
Current liabilities
Current maturities of long-term debt...................................... $ 44 $ 174
Accounts payable.......................................................... 694 662
Accrued compensation and payroll taxes.................................... 206 207
Interest payable.......................................................... 98 111
Other current liabilities................................................. 208 384
-------------------------
Total current liabilities............................................. 1,250 1,538
Long-term debt, less current maturities...................................... 5,298 4,619
Other long-term liabilities.................................................. 951 925
Deferred income taxes........................................................ 1,247 839
Minority interest............................................................ 6 91
Stockholders' equity
Preferred stock, aggregate liquidation preference of $116;
25,000,000 shares authorized; 4,599,300 issued and outstanding......... 73
Common stock, par value $.01 per share; 400,000,000 shares
authorized, 243,567,286 and 217,820,762 issued and
outstanding in 2000 and 1999, respectively............................. 2 2
Additional paid-in capital................................................ 3,828 3,436
Retained earnings (deficit)............................................... (1,362) (1,586)
Accumulated other comprehensive Income (loss)............................. (13) (5)
-------------------------
Total stockholders' equity............................................ 2,528 1,847
-------------------------
$ 11,280 $ 9,859
=========================================================================================================
See notes to consolidated financial statements.
28
SMURFIT-STONE CONTAINER CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31, (In millions, except per share data) 2000 1999 1998
==================================================================================================================
Net sales............................................................. $ 8,796 $ 7,423 $ 3,612
Costs and expenses
Cost of goods sold................................................... 7,070 6,294 3,079
Selling and administrative expenses.................................. 740 696 369
Restructuring charges................................................ 53 10 257
------------------------------------------
Income (loss) from operations....................................... 933 423 (93)
Other income (expense)
Interest expense, net................................................ (527) (563) (247)
Other, net........................................................... 28 479 4
------------------------------------------
Income (loss) from continuing operations before
income taxes, minority interest, extraordinary item
and cumulative effect of accounting change........................ 434 339 (336)
Benefit from (provision for) income taxes............................. (206) (168) 126
Minority interest expense............................................. (9) (8) (1)
------------------------------------------
Income (loss) from continuing operations before extraordinary
item and cumulative effect of accounting change..................... 219 163 (211)
Discontinued operations
Income from discontinued operations, net of income taxes
of $1 in 1999 and $17 in 1998....................................... 2 27
Gain on disposition of discontinued operations,
net of income taxes of $4 in 2000 and $2 in 1999.................... 6 4
------------------------------------------
Income (loss) before extraordinary item and
cumulative effect of accounting change.......................... 225 169 (184)
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)................................................... 225 157 (200)
Preferred stock dividends............................................. (1)
------------------------------------------
Net income (loss) available to common shareholders.................. $ 224 $ 157 $ (200)
==========================================
Basic earnings per common share
Income (loss) from continuing operations before
extraordinary item and cumulative effect of accounting change....... $ .94 $ .75 $ (1.70)
Discontinued operations.............................................. .01 .22
Gain on disposition of discontinued operations....................... .02 .01
Extraordinary item................................................... (.05) (.11)
Cumulative effect of accounting change............................... (.02)
------------------------------------------
Net income (loss)................................................... $ .96 $ .72 $ (1.61)
==========================================
Weighted average shares outstanding................................... 233 217 124
==========================================
Diluted earnings per common share
Income (loss) from continuing operations before
extraordinary item and cumulative effect of accounting change....... $ .93 $ .74 $ (1.70)
Discontinued operations.............................................. .01 .22
Gain on disposition of discontinued operations....................... .03 .01
Extraordinary item................................................... (.05) (.11)
Cumulative effect of accounting change............................... (.02)
------------------------------------------
Net income (loss)................................................... $ .96 $ .71 $ (1.61)
==========================================
Weighted average shares outstanding................................... 234 220 124
==================================================================================================================
See notes to consolidated financial statements.
29
SMURFIT-STONE CONTAINER CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In millions, except share data)
===================================================================================================================================
Common Stock Preferred Stock Accumulated
----------------- ---------------
Number Par Number Additional Retained Other
of Value, of Paid-In Earnings Comprehensive
Shares $.01 Shares Amount Capital (Deficit) Income (Loss) Total
-----------------------------------------------------------------------------
Balance at January 1, 1998........................... 110,996,794 $1 $ $ 1,168 $(1,543) $ $ (374)
Comprehensive income (loss)
Net loss........................................... (200) (200)
Other comprehensive income (loss), net of tax
Foreign currency translation adjustment.......... 3 3
Minimum pension liability adjustment............. (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), net of tax
Unrealized holding gain on marketable
securities....................................... 3 3
Foreign currency translation adjustment.......... (11) (11)
Minimum pension liability adjustment............. 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
Comprehensive income (loss)
Net income......................................... 225 225
Other comprehensive income (loss), net of tax
Foreign currency translation adjustment.......... (8) (8)
-----------------------------------------------------------------------------
Comprehensive income (loss)................... 225 (8) 217
Issuance of common stock for acquisition of
St. Laurent Paperboard, net of registration costs.. 25,335,381 392 392
Preferred stock transaction.......................... 4,599,300 73 (8) 65
Issuance of common stock under
stock option plan.................................. 411,143 8 8
Preferred stock dividends............................ (1) (1)
----------------------------------------------------------------------------
Balance at December 31, 2000......................... 243,567,286 $2 4,599,300 $73 $ 3,828 $(1,362) $ (13) $ 2,528
==================================================================================================================================
See notes to consolidated financial statements.
30
SMURFIT-STONE CONTAINER CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31, (In millions) 2000 1999 1998
====================================================================================================================
Cash flows from operating activities
Net income (loss)............................................................. $ 225 $ 157 $ (200)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities
Gain on disposition of discontinued operations............................. (10) (2)
Extraordinary loss from early extinguishment of debt....................... 1 19 22
Cumulative effect of accounting change for start-up costs.................. 5
Depreciation, depletion and amortization................................... 432 430 168
Amortization of deferred debt issuance costs............................... 10 14 8
Deferred income taxes...................................................... 213 137 (113)
Gain on sale of assets..................................................... (6) (446)
Non cash employee benefit (income) expense................................. (14) 31 9
Foreign currency transaction gains......................................... (7) (4)
Non cash restructuring charge.............................................. 32 4 179
Change in current assets and liabilities,
net of effects from acquisitions and dispositions
Receivables............................................................. 82 (186) 98
Inventories............................................................. 65 8 3
Prepaid expenses and other current assets............................... 31 38 (13)
Accounts payable and accrued liabilities................................ (76) 88 (77)
Interest payable........................................................ (17) (15) 26
Income taxes............................................................ (21) (9) (18)
Income tax benefit on exercise of employee stock options................ 2 15
Other, net................................................................. (142) (93) 36
----------------------------------
Net cash provided by operating activities..................................... 807 183 129
----------------------------------
Cash flows from investing activities
Property additions............................................................ (363) (156) (287)
Cash acquired with Stone Merger, net of merger costs.......................... 222
Proceeds from property and timberland
disposals and sale of businesses............................................ 78 1,417 6
Payments on acquisition, net of cash received................................. (631)
Net proceeds from sale of receivables......................................... 226
----------------------------------
Net cash provided by (used for) investing activities.......................... (916) 1,487 (59)
----------------------------------
Cash flows from financing activities
Borrowings under bank credit facilities....................................... 1,525 1,502
Net borrowings (repayments) under accounts
receivable securitization programs.......................................... 3 (211) (1)
Payments of long-term debt.................................................... (1,356) (1,611) (1,384)
Distributions to minority interests........................................... (30)
Proceeds from exercise of stock options....................................... 6 17
Deferred debt issuance costs.................................................. (17) (44)
----------------------------------
Net cash provided by (used for) financing activities.......................... 131 (1,805) 73
----------------------------------
Effect of exchange rate changes on cash (1) 4
----------------------------------
Increase (decrease) in cash and cash equivalents ............................... 21 (131) 143
Cash and cash equivalents
Beginning of year............................................................ 24 155 12
----------------------------------
End of year.................................................................. $ 45 $ 24 $ 155
====================================================================================================================
See notes to consolidated financial statements.
31
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 equity interest in JSCE, Inc. and Stone Container Corporation
("Stone"). On November 18, 1998, Stone merged with a wholly owned subsidiary of
the Company (the "Stone Merger"). 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.
On May 31, 2000, the Company, through a subsidiary of Stone, acquired (the "St.
Laurent Acquisition") St. Laurent Paperboard Inc. ("St. Laurent") (See Note 2).
Nature of Operations: The Company's major operations are containerboard and
corrugated containers, consumer packaging, specialty packaging and reclaimed
fiber resources. 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 14). The Company
transferred ownership of the Oregon City, Oregon newsprint mill to a third party
in May 2000, thereby completing its exit from the newsprint business.
The Company's paperboard mills procure virgin and reclaimed fiber and produce
paperboard for conversion into corrugated containers, folding cartons, 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. Customers and operations are
principally located in North America. 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 $18 million and $3 million were pledged at December 31,
2000 and 1999, as collateral for obligations associated with the accounts
receivable securitization program (See Note 7).
Revenue Recognition: In December 1999, the Securities and Exchange Commission
staff issued Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in
Financial Statements." SAB No. 101 further defines the basic principles of
revenue recognition and was adopted by the Company on October 1, 2000. The
Company recognizes revenue at the time products are shipped to external
customers. The adoption of SAB No. 101 did not have a material effect on the
2000 financial statements.
Shipping and Handling Costs: During 2000, the Emerging Issues Task Force
("EITF") issued EITF 00-10, "Accounting for Shipping and Handling Fees and
Costs." Previously, the Company recognized shipping and handling costs as a
reduction to net sales. Effective with the adoption of SAB No. 101 on October
1, 2000, EITF 00-10 requires shipping and handling costs to be included in cost
of goods sold. Accordingly, shipping and handling costs have been reclassified
to cost of goods sold for all periods presented. The effect of
32
adopting EITF 00-10 increased net sales and cost of goods sold from previously
reported amounts by $272 million and $127 million in 1999 and 1998,
respectively.
Inventories: Inventories are valued at the lower of cost or market, under the
last-in, first-out ("LIFO") method except for $294 million in 2000 and $225
million in 1999 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 $81 million and $64 million at December 31, 2000 and 1999,
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 to 20 years.
Property, plant and equipment acquired in the Stone Merger and the St. Laurent
Acquisition were recorded at fair value. These assets were assigned remaining
useful lives of 18 years for papermill machines and 12 years for major
converting equipment. (See Notes 2 and 3).
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.
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 9).
Foreign Currency Translation: The functional currency for the majority of the
Company's foreign operations is the applicable local currency except for the
operations of Canada. The functional currency for the Canadian operations was
changed from their local currency to the U.S. dollar beginning on June 1, 2000,
in conjunction with the St. Laurent Acquisition. This change had an
insignificant impact on the current year consolidated financial statements.
Assets and liabilities for foreign operations using the local currency as the
functional currency 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 (See Note
13). 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.
33
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. Gain or loss on sale of financial assets depends in part on the
previous carrying amount of the financial assets involved in the transfer,
allocated between the assets sold and the retained interests based on their
relative fair value at the date of the transfer. Quoted market prices are
generally not available for retained interests, so the Company generally
estimates fair value based on the present value of expected cash flows estimated
by using management's best estimates of key assumptions. The Company has
complied with the disclosure requirements of SFAS No. 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities."
SFAS No. 140 replaces SFAS No. 125, effective March 31, 2001, and more clearly
defines the accounting standards for transfers of financial assets (See Note 5).
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 12).
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 2000 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.
Prospective Accounting Pronouncements: In June 1998, the Financial Accounting
Standards Board issued SFAS No. 133, as amended by SFAS No. 138, "Accounting for
Derivative Instruments and Hedging Activities," which is required to be adopted
by the Company effective January 1, 2001. The statement requires the Company to
recognize all derivatives on the balance sheet at fair value. Derivatives that
are not hedges must be adjusted to fair value through income. If the derivative
is a hedge, depending on the nature of the hedge, changes in the fair value of
derivatives will either be offset against the change in fair value of the hedged
assets, liabilities, or firm commitments through earnings or recognized in other
comprehensive income until the hedged item is recognized in earnings. The
ineffective portion of a derivative's change in fair value will be immediately
recognized in earnings.
34
Based on the Company's derivative positions at December 31, 2000, the Company
estimates that upon adoption it will record an asset for the fair value of
existing derivatives of approximately $9 million and a corresponding reduction
in cost of goods sold.
2. St. Laurent Acquisition
The St. Laurent Acquisition was accounted for as a purchase business
combination, and accordingly, the results of operations of St. Laurent have been
included in the consolidated statements of operations of the Company after May
31, 2000. Each outstanding common share and restricted share unit of St. Laurent
was exchanged for 0.5 shares of SSCC common stock and $12.50 in cash. The total
consideration paid by the Company in connection with the St. Laurent Acquisition
was approximately $1.4 billion, consisting of approximately $631 million in
cash, approximately 25.3 million shares of SSCC common stock and the assumption
of $376 million of St. Laurent's debt. The cash portion of the purchase price
was financed through borrowings under certain of the Company's credit
facilities, including a new credit facility entered into by the Company.
The cost to acquire St. Laurent has been preliminarily allocated to the assets
acquired and liabilities assumed according to estimated fair values and is
subject to adjustment when additional information concerning asset and liability
valuations are finalized. The preliminary allocation has resulted in acquired
goodwill of approximately $195 million, which is being amortized on a straight-
line basis over 40 years.
The following unaudited pro forma information presents the results of operations
of the Company as if the St. Laurent Acquisition had taken place on January 1,
2000 and 1999, respectively:
2000 1999
----------------
Net sales........................................ $9,281 $8,356
Income before extraordinary item................. 216 149
Net income....................................... 216 137
Net income per common share
Basic.......................................... $ .89 $ .56
Diluted........................................ $ .88 $ .56
The 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 St. Laurent Acquisition occurred as
of January 1, 2000 and 1999, respectively.
The following is a summary of the exit liabilities recorded in the preliminary
allocation of the purchase price:
Severance Lease Commitments Other Commitments Total
--------------------------------------------------------------------------------------
Opening balance $ 4 $ 2 $ 4 $10
Payments (1) (2) (3)
--------------------------------------------------------------------------------------
Balance at December 31, 2000 $ 3 $ 2 $ 2 $ 7
--------------------------------------------------------------------------------------
Future cash outlays under the exit liabilities are anticipated to be $6 million
in 2001 and $1 million in 2002.
35
3. Stone Merger and Restructurings
Merger With Stone Container Corporation
Under the terms of the Stone 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 Stone
Merger, resulting in a total purchase price (including the fair value of stock
options and related fees) of approximately $2,245 million. The Stone 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.
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,
and the facilities were shut down.
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.
In October 1999, Florida Coast Paper Company L.L.C. ("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, Stone paid approximately $123 million to
satisfy the claims of creditors of FCPC. Stone received title to the FCPC mill,
and all claims under an output purchase agreement, as well as any obligations of
Stone involving FCPC or its affiliates, were released and discharged.
In May 2000, the Company sold the market pulp mill at its closed Port Wentworth
facility to a third party for approximately $63 million. Net cash proceeds of
$58 million from the sale were used for debt reduction. No gain or loss was
recognized.
36
The following table is a summary of the exit liabilities recorded as part of the
Stone Merger. The 2000 adjustments represent a reduction of exit liabilities of
$15 million, primarily due to the sale of the Port Wentworth facility and the
assumption of certain lease commitments by the buyer. The remaining long-term
lease commitments include the five converting facilities and the corporate
office.
Settlement of Mill
Lease of FCPC Other Closure
Severance Commitments Litigation Commitments Costs Total
---------------------------------------------------------------------------------------------
Opening balance $ 14 $ 38 $ 37 $ 19 $ 9 $ 117
Payments (4) (1) (6) (11)
---------------------------------------------------------------------------------------------
Balance at
December 31, 1988 10 37 37 13 9 106
Payments (13) (6) (1) (2) (7) (29)
Adjustments 8 8 87 4 (1) 106
---------------------------------------------------------------------------------------------
Balance at
December 31, 1999 5 39 123 15 1 183
Payments (3) (8) (123) (2) (1) (137)
Adjustments (2) (13) (15)
---------------------------------------------------------------------------------------------
Balance at
December 31, 2000 $ $ 18 $ $ 13 $ $ 31
---------------------------------------------------------------------------------------------
Restructurings
In connection with the Stone Merger, the Company recorded a 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. 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 sales and operating
loss of these facilities in 1999 prior to closure were $32 million and $7
million, respectively. The 1999 adjustments below include a reduction to 1998
exit liabilities of $5 million and a reclassification of pension liabilities of
$12 million.
During 2000, the Company recorded restructuring charges of $53 million related
to the permanent shutdown of a containerboard mill, five converting facilities,
a sawmill and a multiwall bag facility. The assets of these facilities were
adjusted to their estimated fair value less cost to sell. The sales and
operating loss of these shutdown facilities in 2000 prior to closure were $56
million and $17 million, respectively. The terminated employees included
approximately 220 employees at the containerboard mill and sawmill and
approximately 680 employees at the converting facilities, including the
multiwall bag facility.
37
The following is a summary of the restructuring liabilities recorded:
Write-down of
Property and Lease Pension Facility
Equipment to Commitments Curtailments Closure
Fair value Severance Costs Other Total
----------------------------------------------------------------------------------------------------
Opening balance $ 179 $ 27 $ 21 $ 9 $ 13 $ 8 $ 257
Payments (3) (1) (3) (7)
Adjustments (179) (179)
----------------------------------------------------------------------------------------------------
Balance at
December 31, 1998 24 20 9 10 8 71
Charge 4 5 3 1 2 15
Payments (27) (3) (3) (3) (36)
Adjustments (4) (12) (5) (21)
----------------------------------------------------------------------------------------------------
Balance at
December 31, 1999 2 17 8 2 29
Charge 32 12 4 4 1 53
Payments (10) (4) (1) (1) (16)
Adjustments (32) (32)
----------------------------------------------------------------------------------------------------
Balance at
December 31, 2000 $ $ 4 $ 17 $ $ 11 $ 2 $ 34
----------------------------------------------------------------------------------------------------
Other Stone Merger Related Charges
The Company recorded $23 million of Stone 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 Stone Merger, fees for management personnel changes and other Stone Merger
costs.
Cash Requirements
Future cash outlays under the restructuring of Stone and JSC(U.S.) operations
are anticipated to be $18 million in 2001, $10 million in 2002, $8 million in
2003, and $29 million thereafter.
Net Property, Plant and Equipment
Net property, plant and equipment at December 31 consists of:
2000 1999
-----------------------------------
Land.................................................... $ 132 $ 122
Buildings and leasehold improvements.................... 565 496
Machinery, fixtures and equipment....................... 6,033 4,662
Construction in progress................................ 186 127
-----------------------------------
6,916 5,407
Less accumulated depreciation and amortization.......... (1,307) (1,012)
-----------------------------------
Net property, plant and equipment.................. $ 5,609 $ 4,395
-----------------------------------
The total value assigned to the St. Laurent property, plant and equipment was
$1,320 million in St. Laurent's preliminary purchase price allocation (See Note
2). Depreciation and depletion expense was $343 million, $352 million and $153
million for 2000, 1999 and 1998, respectively. Net property, plant and
equipment include capitalized leases of $68 million and $76 million and related
accumulated amortization of $39 million and $32 million at December 31, 2000 and
1999, respectively.
38
5. Transfers of Financial Assets
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 has retained
servicing responsibilities and a subordinated interest in the trust. The
Company receives annual servicing fees of 1% of the unpaid balances of the
receivables and rights to future cash flows arising after the investors in the
securitization trust have received the return for which they have contracted.
The investors and securitization trusts have no recourse to the Company's other
assets for failure of debtors to pay when due.
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, 2000 and 1999, $295 million and $304 million of accounts
receivable had been sold under the program, of which $66 million and $73 million
were retained by the Company as a subordinated interest and recorded in accounts
receivable in the accompanying consolidated balance sheets. In 2000, the
Company recognized a loss on sales of receivables to SRC of $16 million, which
is included in other, net in the consolidated statements of operations.
Key economic assumptions used in measuring the retained interest at the date of
securitization resulting from securitizations completed during the year and at
December 31, 2000 are as follows:
Year Ended December 31,
December 31, 2000 2000
-------------------------------------
Residual cash flows discounted at..... 8.00% 8.00%
Expected loss and dilution rate....... 3.42-3.82% 5.45%
Variable return to investors.......... LIBOR plus 50 to 7.20%
180 basis points
At December 31, 2000, the sensitivity of the current fair value of residual cash
flows to immediate 10% and 20% adverse changes in the expected loss and dilution
rate was $1 million and $2 million, respectively. The effects of the
sensitivity analysis on the residual cash flow discount rate and the variable
return to investors were insignificant.
The table below summarizes certain cash flows received from and paid to SRC:
Year Ended
December 31, 2000
-----------------
Cash proceeds from sales of receivables $2,748
Servicing fees received 3
Other cash flows received on retained interest 30
Interest income 1
39
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
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. The residual interest included in other assets was $37 million and
$33 million at December 31, 2000 and 1999, respectively. The key economic
assumption used in measuring the residual interest at the date of monetization
was the rate at which the residual cash flows were discounted (9%). At December
31, 2000, the sensitivity on the current fair value of the residual cash flows
to immediate 10% and 20% adverse changes in the assumed rate at which the
residual cash flows were discounted (9%) was $2 million and $4 million,
respectively.
The gain of $407 million on the timberland sale and the related note
monetization program is included in other, net in the 1999 consolidated
statements of operations.
6. 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, 2000 is
Smurfit-MBI, a Canadian corrugated container company, in which the Company owns
a 50% interest. The remaining 50% interest is indirectly owned by Jefferson
Smurfit Group plc ("JS Group"), a significant shareholder of the Company.
Smurfit-MBI had net sales of $460 million and $402 million in 2000 and 1999,
respectively.
During 1999, the Company sold its interest in Abitibi-Consolidated, Inc.
("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:
2000 1999
---------------------------------------
Results of operations
Net sales................................................ $ 746 $ 693
Cost of sales............................................ 649 601
Income before income taxes, minority interest and
extraordinary charges.................................. 38 34
Net income............................................... 36 32
December 31, December 31,
2000 1999
-------------------------------------
Financial position:
Current assets........................................... $ 158 $ 160
Noncurrent assets........................................ 161 150
Current liabilities...................................... 99 111
Noncurrent liabilities................................... 112 107
Stockholders' equity..................................... 108 93
40
7. Long-Term Debt
Long-term debt, as of December 31 is as follows:
Bank Credit Facilities 2000 1999
-----------------------
JSC(U.S.)
- ---------
Tranche A Term Loan (8.3% weighted average variable rate), payable in various
installments through March 31, 2005.................................................... $ 275 $ 275
Tranche B Term Loan (10.1% weighted average variable rate), payable in various
installments through March 31, 2006.................................................... 65 115
Revolving Credit Facility (10.0% weighted average variable rate), due March 31, 2005.... 17 50
Stone
- -----
Tranche C Term Loan (10.3% weighted average variable rate), payable in various
installments through October 1, 2003 Ail 1, 2000....................................... 181 181
Tranche D Term Loan (10.3% weighted average variable rate), payable in various
installments through October 1, 2003.................................................. 173 173
Tranche E Term Loan (10.3% weighted average variable rate), payable in various
installments through October 1, 2003.................................................. 233 234
Tranche F Term Loan (9.7% weighted average variable rate), payable in various
installments through December 31, 2005................................................ 569
Tranche G Term Loan (10.3% weighted average variable rate), payable in various
installments through December 31, 2006................................................ 402
Tranche H Term Loan (10.3% weighted average variable rate), payable in various
installments through December 31, 2006................................................ 348
Revolving Credit Facility (10.5% weighted average variable rate), due December 31,
2005.................................................................................. 177 93
Revolving Credit Facility (Canada) (12.0% weighted average variable rate), due
December 31, 2005..................................................................... 3
4.98% to 7.96% term loans, denominated in foreign currencies, payable in varying
amounts through 2004................................................................. 12 40
-----------------------
2,455 1,161
Accounts Receivable Securitization Program Borrowings
JSC(U.S.) accounts receivable securitization program borrowings (6.6% weighted
average variable rate), due in February 2002.......................................... 227 224
Senior Notes
JSC(U.S.)
- ---------
11.25% Series A unsecured senior notes, due May 1, 2004................................ 287 300
10.75% Series B unsecured senior notes, due May 1, 2002................................ 100 100
9.75% unsecured senior notes, due April 1, 2003...................................... 500 500
41
2000 1999
-----------------------
Stone
- -----
10.75% first mortgage notes, due October 1, 2002 (plus unamortized premium of $9 and
$13)...................................................................................... 509 513
8.45% mortgage notes, payable in monthly installments through August 1, 2007 and $69
on September 1, 2007...................................................................... 80 81
9.875% unsecured senior notes, due February 1, 2001 (plus unamortized premium of $3
in 1999).................................................................................. 562
11.5% unsecured senior notes, due October 1, 2004 (plus unamortized premium of $8 and
$10)...................................................................................... 208 210
11.5% unsecured senior notes, due August 15, 2006 (plus unamortized premium of $4 and
$5)....................................................................................... 204 205
12.58% rating adjustable unsecured senior notes, due August 1, 2016 (plus unamortized
premium of $2 and $2)..................................................................... 127 127
-------------------
2,015 2,598
Other Debt
Other (including obligations under capitalized leases of $34 and $43)........................ 307 329
Stone Subordinated Debt
10.75% senior subordinated debentures and 1.5% supplemental interest certificates,
due on April 1, 2002 (less unamortized discount of $1 and $3)............................. 99 244
10.75% senior subordinated debentures, due April 1, 2002..................................... 200 200
6.75% convertible subordinated debentures (convertible at $34.28 per share), due
February 15, 2007 (less unamortized discount of $6 and $8)................................ 39 37
-----------------------
338 481
-----------------------
Total debt................................................................................. 5,342 4,793
Less current maturities.................................................................... (44) (174)
-----------------------
Total long-term debt....................................................................... $5,298 $4,619
-----------------------
The amounts of total debt outstanding at December 31, 2000 maturing during the
next five years are as follows:
2001.......................................... $ 44
2002.......................................... 1,014
2003.......................................... 1,373
2004.......................................... 589
2005.......................................... 869
Thereafter.................................... 1,453
Stone Bond Offering
Subsequent to year-end, on January 25, 2001, Stone closed on a bond offering
("Stone Bond Offering") to issue $750 million of 9.75% Senior Notes due 2011 and
$300 million of 9.25% Senior Notes due 2008. The proceeds of this issuance
along with additional borrowings on the Stone Revolving Credit Facility of $34
million were used on February 23, 2001 to redeem (i) $300 million in aggregate
principal of senior subordinated debentures due April 1, 2002, (ii) $45 million
in aggregate principal of convertible subordinated debentures due February 15,
2007, (iii) $500 million in aggregate principal of first mortgage notes due
October 1, 2002, and (iv) $200 million in aggregate principal of senior notes
due October 1, 2004. In addition, the proceeds were used to pay $39 million in
fees, call premiums and other expenses related to these transactions. The notes
have not been registered under the Securities Act of 1933 and are subject to
certain transfer restrictions. If, by July 18, 2001, Stone does not consummate
a registered exchange offer for a series of notes or cause a shelf registration
statement with respect to resales of such series of notes to
42
be declared effective, the interest rate on the notes will be increased by 50
basis points per annum until the consummation of a registered exchange offer or
the effectiveness of a shelf registration statement.
After adjusting for the Stone Bond Offering and the related debt redemptions,
the amounts of total debt outstanding at December 31, 2000 maturing during the
next five years are as follows:
2001.................................. $ 39
2002.................................. 209
2003.................................. 1,372
2004.................................. 388
2005.................................. 890
Thereafter............................ 2,459
Bank Credit Facilities
JSC(U.S.) Credit Agreement
- --------------------------
JSC(U.S.) has 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, and two
senior secured term loans (Tranche A and Tranche B) aggregating $340 million at
December 31, 2000. The JSC(U.S.) Credit Agreement was entered into in March
1998, and the net proceeds were used to repay the 1994 term loans and Revolving
Credit Facility. The write-off of related deferred debt issuance costs,
totaling $13 million (net of income tax benefits of $9 million) for 1998, is
reflected in the accompanying consolidated statements of operations as an
extraordinary item.
A commitment fee of 0.375% per annum is assessed on the unused portion of the
Revolving Credit Facility. At December 31, 2000, the unused portion of this
facility, after giving consideration to outstanding letters of credit, was $498
million.
On March 22, 2000, JSC(U.S.) and its bank group amended the JSC(U.S.) Credit
Agreement to (i) permit the acquisition of St. Laurent by the Company and (ii)
approve the divestiture of the Oregon City newsprint mill.
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
or incurrence of certain indebtedness. As a result of excess cash flow in 2000,
JSC(U.S.) is required to make a $59 million prepayment on the Tranche A term
loan prior to March 31, 2001. The Company intends to either fund the $59
million prepayment with available borrowings under the Revolving Credit Facility
or amend the JSC(U.S.) Credit Agreement, and therefore it is classified as long
term debt.
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
43
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 senior secured term
loans (Tranche C, Tranche D, Tranche E and Tranche F term loans), aggregating
$1,156 million at December 31, 2000 with maturities ranging from October 1, 2003
to December 31, 2005, and a $560 million senior secured revolving credit
facility, up to which $100 million may consist of letters of credit, maturing
December 31, 2005 (collectively the "Stone Credit Agreement"). Stone pays a
0.5% commitment fee on the unused portions of its revolving credit facility. At
December 31, 2000, the unused portion of this facility, after giving
consideration to outstanding letters of credit, was $359 million. The Stone
Credit Agreement is 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.
On March 31, 2000, Stone amended and restated the Stone Credit Agreement,
pursuant to which a group of financial institutions provided an additional $575
million to Stone in the form of a Tranche F term loan maturing on December 31,
2005 and extended the maturity dates of the revolving credit facilities under
the Stone Credit Agreement to December 31, 2005. On April 28, 2000, Stone used
$559 million of the proceeds of the Tranche F term loan to redeem the 9.875%
senior notes due February 1, 2001. An extraordinary gain of $2 million (net of
income tax of $1 million) was recorded on the early extinguishment of debt.
On May 31, 2000, Stone and certain of its wholly owned subsidiaries closed on
new credit facilities (the "Stone Additional Credit Agreement") with a group of
financial institutions consisting of (i) $950 million in the form of Tranche G
and Tranche H term loans maturing on December 31, 2006 and (ii) a $100 million
revolving credit facility maturing on December 31, 2005. The proceeds of the
Stone Additional Credit Agreement were used to fund the cash component of the
St. Laurent Acquisition, refinance certain existing indebtedness of St. Laurent,
and pay fees and expenses related to the St. Laurent Acquisition. The new
revolving credit facility will be used for general corporate purposes. At
December 31, 2000, the unused portion of this facility, after giving
consideration to outstanding letters of credit, was $78 million. The Stone
Additional Credit Agreement is secured by a security interest in substantially
all of the assets acquired in the St. Laurent Acquisition. Stone prepaid $48
million of Tranche G and $153 million of Tranche H resulting in an extraordinary
loss of $1 million (net of income tax of $1 million).
The Stone Credit Agreement and the Stone Additional Credit Agreement contain
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. Both credit agreements also require prepayments of the term
loans if Stone has excess cash flows, as defined, or receives proceeds from
certain asset sales, insurance or incurrence of certain indebtedness.
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 the Revolving Credit 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 $88 million available
for additional borrowing at December 31, 2000, subject to eligible accounts
receivable. Commercial paper borrowings under the program 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.
44
Under the current program, liquidation requirements were to begin in
December 2001. On March 9, 2001, the JSC(U.S.) Securitization Program was
amended to (i) reduce the borrowings available through the issuance of
commercial paper or under the Revolving Credit Facility from $300 million to
$214 million and (ii) extend the final maturity on these borrowings from
February 2002 to February 2004. The $15 million term loan remains outstanding
with a February 2002 maturity date, bringing, the total program size to $229
million. As a result, all debt under the JSU(U.S) Securitization Program is
classified as long term.
Senior Notes
JSC(U.S.)
- ---------
The 11.25% Series A unsecured senior notes are redeemable in whole or in part at
the option of JSC(U.S.), at any time on or after May 1, 2000 with a premium of
2.813% of the principal amount and after May 1, 2001 at par. The 10.75% Series
B unsecured senior notes and the 9.75% unsecured senior notes are not redeemable
prior to maturity. Holders of the JSC(U.S.) unsecured 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.
Stone
- -----
Stone's senior notes (the "Stone Senior Notes"), aggregating $1,048 million at
December 31, 2000, of which $700 million aggregate principal was paid off with
the proceeds from the Stone Bond Offering, are redeemable in whole or in part at
the option of Stone at various dates, at par plus a weighted average premium of
2.04%.
The indentures governing Stone's 11.5% senior notes due 2006 and the 12.58%
rating adjustable senior notes due 2016, totaling aggregate principal of $325
million at December 31, 2000, generally provide that in the event of a "change
of control" (as defined in the indentures), Stone must offer to repurchase the
senior notes. The Merger constituted such a change of control. As a result,
Stone is required to make an offer to repurchase the senior notes at a price
equal to 101% of the principal amount thereof (together with accrued but unpaid
interest thereon), provided however, if such repurchase would constitute an
event of default under Stone's bank debt, prior to making an offer to repurchase
the indentures require that Stone either pay the bank debt or obtain the consent
of its bank lenders to such repurchase. A repurchase of the senior notes is
currently prohibited by the terms of the Stone bank debt. Although the terms of
the senior notes refer to an obligation to repay the Stone bank debt or obtain
the consent of the bank lenders to such repurchase, the terms do not expressly
specify a deadline following the applicable change of control for taking such
actions. Stone has sought and intends to actively seek commercially acceptable
sources of financing to repay such bank debt or alternative financing
arrangements which would cause the bank lenders to consent to the repurchase of
the senior notes.
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.
45
Stone Subordinated Debt
The Stone Senior Subordinated Debentures, aggregating $338 million, were paid
off with the proceeds from the Stone Bond Offering. During the fourth quarter
of 2000, Stone prepaid $147 million of the 10.75% senior subordinated debentures
and 1.5% supplemental interest certificates due April 1, 2002, resulting in an
extraordinary loss of $1 million (net of income tax of $1 million).
Other
Interest costs capitalized on construction projects in 2000, 1999 and 1998
totaled $9 million, $4 million and $2 million, respectively. Interest payments
on all debt instruments for 2000, 1999 and 1998 were $550 million, $583 million
and $206 million, respectively.
8. 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 noncancelable terms in excess of one year,
excluding lease commitments on closed facilities, are reflected below:
2001.............................................................. $106
2002.............................................................. 83
2003.............................................................. 71
2004.............................................................. 58
2005.............................................................. 49
Thereafter........................................................ 96
-----
Total minimum lease payments.................................... $463
-----
Net rental expense for operating leases, including leases having a duration of
less than one year, was approximately $154 million, $156 million and $69 million
for 2000, 1999 and 1998, respectively.
9. Income Taxes
Significant components of the Company's deferred tax assets and liabilities at
December 31 are as follows:
2000 1999
----------------------------
Deferred tax liabilities
Property, plant and equipment and timberland.................................... $(1,597) $(1,350)
Inventory....................................................................... (47) (35)
Prepaid pension costs........................................................... (42) (42)
Investments in affiliates....................................................... (45) (45)
Timber installment sale......................................................... (129) (129)
Other........................................................................... (128) (151)
----------------------------
Total deferred tax liabilities.................................................. (1,988) (1,752)
----------------------------
46
Deferred tax assets
Employee benefit plans......................................................... 207 198
Net operating loss, alternative minimum tax and tax credit carryforwards....... 538 702
Deferred gain.................................................................. 56 29
Purchase accounting liabilities................................................ 94 132
Deferred debt issuance cost.................................................... 47 48
Restructuring.................................................................. 18 7
Other.......................................................................... 153 135
------------------------
Total deferred tax assets...................................................... 1,113 1,251
Valuation allowance for deferred tax asset..................................... (208) (208)
------------------------
Net deferred tax assets........................................................ 905 1,043
------------------------
Net deferred tax liabilities................................................... $(1,083) $ (709)
------------------------
At December 31, 2000, the Company had approximately $1,051 million of net
operating loss carryforwards for U.S. federal income tax purposes that expire
from 2011 through 2019, with a tax value of $368 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 $97 million, which expire from 2001 to 2020. A valuation
allowance of $56 million has been established for a portion of these deferred
tax assets. The Company had approximately $73 million of alternative minimum tax
credit carryforwards for U.S. federal income tax purposes, which are available
indefinitely.
Benefit from (provision for) income taxes on income (loss) from continuing
operations before income taxes, minority interest, extraordinary item and
cumulative effect of accounting change is as follows:
2000 1999 1998
----------------------------------
Current
Federal................................................................ $ (6) $ 7 $ 11
State and local........................................................ (2) 1 3
Foreign................................................................ (6) (19) (5)
----------------------------------
Total current benefit (expense)........................................ (14) (11) 9
Deferred
Federal................................................................ (144) (123) 103
State and local........................................................ (32) (27) 11
Foreign................................................................ (16) (7) 3
----------------------------------
Total deferred benefit (expense)....................................... (192) (157) 117
----------------------------------
Total benefit from (provision for) income taxes....................... $(206) $(168) $126
----------------------------------
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
item and cumulative effect of accounting change as follows:
2000 1999 1998
--------------------------------
U.S. federal income tax benefit (provision) at federal statutory rate........ $(152) $ (119) $ 119
Permanent differences from applying purchase accounting...................... (31) (29) (6)
Other permanent differences.................................................. (1) (3) (2)
State income taxes, net of federal income tax effect......................... (22) (17) 14
Other........................................................................ 1
--------------------------------
Total benefit from (provision for) income taxes.............................. $(206) $ (168) $ 126
--------------------------------
47
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:
2000 1999 1998
------------------------------
United States............................................................... $ 389 $ 282 $(338)
Foreign..................................................................... 45 57 2
------------------------------
Income (loss) from continuing operations before income taxes, minority
interest, extraordinary item and cumulative effect of accounting change... $ 434 $ 339 $(336)
-----------------------------
The Internal Revenue Service has examined the Company's tax returns for all
years through 1994, and the years have been closed through 1988. The years 1995
through 1998 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 $34 million, $47 million and $22 million
in 2000, 1999, and 1998, respectively.
10. Employee Benefit Plans
Defined Benefit Plans
The Company sponsors noncontributory defined benefit pension plans covering
substantially all employees. On December 31, 2000, the domestic defined benefit
plans of St. Laurent were merged with the defined benefit plans of Stone and
JSC(U.S.). The assets of these plans are available to meet the funding
requirements of the combined plans.
Approximately 34% of the Company's domestic pension plan assets at December 31,
2000 are invested in cash equivalents or debt securities, and 66% are invested
in equity securities. Equity securities at December 31, 2000 include 0.7
million shares of SSCC common stock with a market value of approximately $11
million and 26 million shares of JS Group common stock having a market value of
approximately $52 million. Dividends paid on JS Group common stock during 2000
and 1999 were approximately $2 million in each year.
The Company sponsors noncontributory defined benefit pension plans for its
foreign operations. Approximately 44% of the foreign pension plan assets at
December 31, 2000 are invested in cash equivalents or debt securities, and 56%
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") were 5.25% for the U.S. plans and 6.00% for the foreign plans at
December 31, 2000. The effect of a 1% increase in the assumed health care cost
trend rate would increase the APBO as of December 31, 2000 by $8 million and
have an immaterial effect on the annual net periodic postretirement benefit cost
for 2000.
48
The following provides a reconciliation of benefit obligations, plan assets, and
funded status of the plans:
Defined Benefit Plans Postretirement Plans
-----------------------------------------------------
2000 1999 2000 1999
-----------------------------------------------------
Change in benefit obligation:
Benefit obligation at January 1...................... $1,711 $1,789 $ 168 $ 178
Service cost......................................... 41 43 3 3
Interest cost........................................ 143 121 13 12
Amendments........................................... 15 10
Plan participants' contributions..................... 2 1 6 6
Curtailments......................................... (3) (3) (2)
Actuarial (gain) loss................................ 123 (150) 6 (9)
Acquisitions......................................... 278 22
Foreign currency rate changes........................ (16) (8) (1) 1
Benefits paid........................................ (112) (95) (27) (21)
-----------------------------------------------------
Benefit obligation at December 31.................... $2,182 $1,711 $ 187 $ 168
-----------------------------------------------------
Change in plan assets:
Fair value of plan assets at January 1............... $1,697 $1,512 $ $
Actual return on plan assets......................... 256
Employer contributions............................... 22 14 22 11
Plan participants' contributions..................... 5 4
Acquisitions......................................... 242
Foreign currency rate changes........................ (8) 10
Benefits paid........................................ (112) (95) (27) (15)
-----------------------------------------------------
Fair value of plan assets at December 31............. $1,841 $1,697 $ $
-----------------------------------------------------
Over (under) funded status:.......................... $ (341) $ (14) $ (187) $(168)
Unrecognized actuarial (gain) loss................... 9 (287) (5)
Unrecognized prior service cost...................... 55 50 (1) (2)
Net transition obligation............................ (1) ( 6)
-----------------------------------------------------
Net amount recognized................................ $ (278) $ (257) $ (188) $(175)
-----------------------------------------------------
Amounts recognized in the balance sheets:
Prepaid benefit cost................................. $ $ 71 $ $
Accrued benefit liability............................ (318) (328) (188) (175)
Additional minimum liability......................... (3)
Intangible asset..................................... 40 3
-----------------------------------------------------
Net amount recognized................................ $ (278) $ (257) $ (188) $(175)
-----------------------------------------------------
49
The weighted average assumptions used in the accounting for the defined benefit
plans and postretirement plans were:
Defined Benefit Plans Postretirement Plans
------------------------------------------------------------
2000 1999 2000 1999
------------------------------------------------------------
Weighted average discount rate:
U.S. plans............................... 7.50% 8.00% 7.50% 8.00%
Foreign plans............................ 7.00% 6.50-8.00% 7.00% 8.00%
Rate of compensation........................... 3.50-4.00% 3.00-4.50% N/A N/A
Expected return on assets...................... 7.80-9.50% 9.50% N/A N/A
Health care cost trend on covered charges...... N/A N/A 5.25-6.00% 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
------------------------------- ------------------------------
2000 1999 1998 20000 1999 1998
------------------------------- ------------------------------
Service cost.................................. $ 45 $ 48 $ 26 $ 2 $ 2 $ 1
Interest cost................................. 143 121 74 13 12 8
Expected return on plan assets................ (160) (138) (90)
Curtailment cost.............................. 6 2
Amortization of transitional asset............ (4) (4) (4)
Recognized actuarial loss..................... (11) 3 4 (1)
Multiemployer plans........................... 4 4 1 1
------------------------------- ------------------------------
Net periodic benefit cost..................... $ 17 $ 40 $ 12 $ 15 $15 $ 9
------------------------------- ------------------------------
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 $2,182 million, $1,928 million and $1,841 million,
respectively, as of December 31, 2000 and $144 million, $133 million and zero as
of December 31, 1999.
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
$19 million, $17 million and $10 million in 2000, 1999 and 1998, respectively.
11. SSCC Preferred Stock
On November 15, 2000, pursuant to an Agreement and Plan of Merger among SSCC,
SCC Merger Co. and Stone, approximately 4.6 million shares of $1.75 Series E
Preferred Stock of Stone (the "Stone Preferred Stock") were converted into
approximately 4.6 million shares of Series A Cumulative Exchangeable Redeemable
Convertible Preferred Stock of SSCC (the "SSCC Preferred Stock"). In addition,
a cash payment of $6.4425 per share, totaling approximately $30 million, was
made to the holders of the Stone Preferred Stock. The cash payment was equal to
the accrued and unpaid dividends on each share of Stone Preferred Stock, less
$0.12 per share to cover certain transaction related expenses.
The SSCC Preferred Stock was recorded at fair value of $73 million. The
issuance of the SSCC Preferred Stock and the $30 million cash payment eliminated
the Company's minority interest in the Stone Preferred Stock of $95 million,
resulting in an $8 million reduction to additional paid-in capital.
50
At December 31, 1999, Stone had accumulated dividend arrearages on the Stone
Preferred Stock of $22 million. The payment of dividends by Stone was
prohibited by covenants in certain of the agreements and indentures relating to
indebtedness of Stone.
The holders of the SSCC Preferred Stock are entitled to cumulative dividends of
$0.4375 per quarter, payable in cash except in certain circumstances, with the
first dividend paid on February 15, 2001. SSCC has approximately 4.6 million
shares of the SSCC Preferred Stock issued and outstanding as of December 31,
2000. The holders of SSCC Preferred Stock are not entitled to voting rights on
matters submitted to the Company's stockholders. The SSCC 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 0.729 shares of
SSCC Common Stock for each share of SSCC Preferred Stock), subject to adjustment
based on certain events. The SSCC Preferred Stock may alternatively be
exchanged, at the option of the Company, for new 7% Convertible Subordinated
Exchange Debentures due February 15, 2012. The SSCC Preferred Stock is
redeemable at the Company's option until February 15, 2012, at which time the
SSCC Preferred Stock must be redeemed. The SSCC Preferred Stock may be
redeemed, at the Company's option, with cash or SSCC Common Stock with an
equivalent fair value. The redemption price is 101.4% of the liquidation
preference until February 15, 2001, 100.7% until February 15, 2002 and 100%
thereafter. It is the Company's intention to redeem the SSCC Preferred Stock
with SSCC common stock, and therefore, the SSCC Preferred Stock has been
classified as equity in the accompanying consolidated balance sheets. The
liquidation preference is generally $25 per share plus dividends accrued and
unpaid.
12. Stock Option and Incentive Plans
Prior to the Stone 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 twelve 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 ten years from the date of grant or
termination of employment, death, or disability. Effective with the Stone
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
Stone 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 2000, 1999 and 1998 vest and become exercisable
eight years after the date of grant subject to acceleration based upon the
attainment of preestablished 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 ten 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 preestablished
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, 2000 and 1999.
51
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:
2000 1999 1998
-------------------------
Expected option life (years).............. 6 6 6
Risk-free weighted average interest rate.. 6.45% 5.43% 4.79%
Stock price volatility.................... 53.00% 52.80% 53.30%
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 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 2000 1999 1998
----------------------------------------
Net income (loss)...................................... $ 225 $ 157 $ (200)
Basic earnings (loss) per share........................ .96 .72 (1.61)
Diluted earnings (loss) per share...................... .96 .71 (1.61)
Pro Forma
Net income (loss)...................................... $ 216 $ 156 $ (209)
Basic earnings (loss) per share........................ .92 .72 (1.69)
Diluted earnings (loss) per share...................... .92 .71 (1.69)
The weighted average fair values of options granted during 2000, 1999 and 1998
were $7.90, $9.67 and $6.98 per share, respectively.
52
Additional information relating to the plans is as follows:
Weighted
Average
Shares Under Option Exercise
Option Price Range Price
--------------------------------------------------
Outstanding at January 1, 1998............................... 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
Granted.................................................. 2,705,717 10.56 - 16.13 13.65
Exercised................................................ 411,143 10.00 - 22.35 12.54
Cancelled................................................ 1,019,152 10.00 - 22.35 14.23
----------
Outstanding at December 31, 2000............................. 16,235,571 10.00 - 23.38 12.90
The following table summarizes information about stock options outstanding at
December 31, 2000:
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 5,089,443 $10.58 5.17 4,634,943 $10.59
12.81 - 13.51 7,335,554 13.00 7.45 5,260,332 13.07
14.06 - 16.13 2,820,963 14.48 7.88 1,455,251 14.47
17.19 - 23.38 989,611 19.55 6.31 806,778 19.61
---------- ----------
16,235,571 12,157,304
The number of options exercisable at December 31, 1999 and 1998 was 11,105,160
and 14,386,101 respectively. As of December 31, 2000, approximately 1,546,000
shares were available for grant under the 1998 Plan.
53
13. 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, 1999.............. $ 3 $(4) $ $ (1)
Current period change.............. (11) 4 3 (4)
-----------------------------------------------------------------------
Balance at December 31, 1999............ (8) 3 (5)
Current period change.............. (8) (8)
-----------------------------------------------------------------------
Balance at December 31, 2000............ $ (16) $ $ 3 $ (13)
-----------------------------------------------------------------------
14. 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 beginning with the 1998
consolidated financial statements. SNC consisted of two newsprint mills in
Oregon. In November 1999, the Company sold its Newberg, Oregon, newsprint mill
for proceeds of approximately $211 million. Net gain on disposition of
discontinued operations of $4 million in 1999 included the realized gain on the
sale of the Newberg, Oregon newsprint mill, an expected loss on the sale of the
Oregon City, Oregon, newsprint mill, actual results from the measurement date
through December 31, 1999 and the estimated losses on the Oregon City newsprint
mill through the expected disposition date.
On May 9, 2000, the Company transferred ownership of the Oregon City, Oregon,
newsprint mill to a third party, thereby completing its exit from the newsprint
business. No proceeds from the transfer were received. During the second
quarter of 2000, the Company recorded a $6 million after tax gain to reflect
adjustments to the previous estimates on disposition of discontinued operations.
SNC revenues were $43 million, $253 million and $324 million for 2000, 1999 and
1998, respectively. The net assets of SNC included in the accompanying
consolidated balance sheet as of December 31, 1999 consisted of the following:
1999
--------
Inventories and current assets....................................... $ 34
Net property, plant and equipment.................................... 48
Other assets......................................................... 11
Accounts payable and other current liabilities....................... (94)
Other liabilities.................................................... (4)
--------
Net assets (liabilities) of discontinued operations.................. $ (5)
--------
54
15. Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per
share:
2000 1999 1998
------------------------------------------
Numerator:
Income (loss) from continuing operations before extraordinary
item and cumulative effect of accounting change............... $ 219 $ 163 $ (211)
Preferred stock dividends......................................... (1)
------------------------------------------
Income (loss) available to common stockholders.................... 218 163 (211)
Denominator:
Denominator for basic earnings per share -
weighted average shares........................................ 233 217 124
Effect of dilutive securities:
Employee stock options......................................... 1 3
------------------------------------------
Denominator for diluted earnings per share -
adjusted weighted average shares and
assumed conversions............................................ 234 220 124
------------------------------------------
Basic earnings (loss) per share from continuing operations before
extraordinary item and cumulative effect of accounting change..... $ .94 $ .75 $(1.70)
------------------------------------------
Diluted earnings (loss) per share from continuing operations before
extraordinary item and cumulative effect of accounting change..... $ .93 $ .74 $(1.70)
------------------------------------------
For 2000, convertible debt to acquire one million shares of common stock with an
earnings effect of $2 million and convertible SSCC Preferred Stock (previously
minority interest shares - See Note 11) to acquire three million shares of
common stock with an earnings effect of $8 million are excluded from the diluted
earnings per share computation because they are antidilutive.
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.
55
16. Related Party Transactions
Transactions with JS Group
Transactions with JS Group, a significant shareholder of the Company, its
subsidiaries and affiliated companies were as follows:
2000 1999 1998
----------------------------------
Product sales................................................................ $ 70 $ 45 $ 39
Product and raw material purchases........................................... 32 21 54
Management services income................................................... 2 3 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
Receivables at December 31................................................... 6 2 5
Payables at December 31...................................................... 11 14 4
Note receivable at December 31............................................... 1
Sale of business............................................................. 2
Purchase of business......................................................... 2
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 the Stone Merger related activities, either paid
or reimbursed $16 million in legal fees, financial advisory fees and executive
compensation to JS Group in 1998.
56
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:
2000 1999 1998
-----------------------------
Product sales................................ $ 216 $ 303 $ 57
Product and raw material purchases........... 68 65
Receivables at December 31................... 32 43 70
Payables at December 31...................... 2 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 6), 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.
17. Fair Value of Financial Instruments
The carrying values and fair values of the Company's financial instruments are
as follows:
2000 1999
------------------------- ------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------------------- ------------------------
Cash and cash equivalents......................... $ 45 $ 45 $ 24 $ 24
Notes receivable and long-term investments........ 28 28 26 26
Residual interest in timber notes................. 37 37 33 33
Long-term debt including current maturities....... 5,342 5,357 4,793 4,860
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 in timber notes is based on
discounted future cash flows.
18. Other, Net
The significant components of other, net are as follows:
2000 1999 1998
-----------------------------------
Foreign currency transaction gains................................ $ $ 7 $ 4
Gain on redemption of convertible preferred
stock of Four M Corporation..................................... 13
Loss on sales of receivables to SRC............................... (16)
Gain on sale of assets (See Notes 5 and 6)........................ 6 446
Income from non-consolidated affiliates........................... 13 12 4
Other............................................................. 12 14 (4)
----------------------------------
Total other, ne................................................... $ 28 $ 479 $ 4
----------------------------------
57
19. Contingencies
The Company's past and present operations include activities which are subject
to federal, state and local environmental requirements, particularly relating to
air and water quality. The Company faces potential environmental liability as a
result of violations of permit terms and similar authorizations that have
occurred from time to time at its facilities. In addition, the Company faces
potential liability for response costs at various sites for which it has
received notice as being a potentially responsible party ("PRP") concerning
hazardous substance contamination. In estimating its reserves for environmental
remediation and future costs, the Company's estimated liability reflects only
the Company's expected share after consideration for the number of other PRPs at
each site, the identity and financial condition of such parties and experience
regarding similar matters.
The Company and SNC are parties to a Settlement Agreement 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 charge, including $20 million SNC paid into a settlement fund, and
additional amounts relating to administrative costs, plaintiff's attorneys'
fees, class representative payments and other costs. Based on the number and
magnitude of the claims paid out of the settlement fund and the fact that SNC
received a return of $10 million from the settlement fund in exchange for
posting a letter of credit, the Company reduced its estimated loss contingency
by $10 million, which was recorded as a reduction to selling and administrative
expenses in the 2000 financial statements.
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.
20. Business Segment Information
In the fourth quarter of 2000, the Company reorganized its business segments.
The Boxboard and Folding Carton segment was renamed as the Consumer Packaging
segment, and the Industrial Bag segment was renamed as the Specialty Packaging
segment. The operations previously included in the Specialty Packaging segment
were reassigned to the new Consumer Packaging segment and the new Specialty
Packaging segment. The St. Laurent facilities were assigned primarily to the
Containerboard and Corrugated Containers segment. In addition, during 2000,
corporate expenses previously allocated to business segments are no longer
allocated. The information for 1999 and 1998 has been restated from the prior
year in order to conform to the 2000 presentation.
The Company has two reportable segments: (1) Containerboard and Corrugated
Containers and (2) Consumer Packaging. 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 Consumer Packaging segment is also
highly integrated. It includes a system of mills and plants that produces a
broad range of coated recycled boxboard that is converted into folding cartons
and packaging labels. 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. Flexible packaging, paper and metalized paper labels and heat
transfer labels are used in a wide range of consumer applications.
The Company evaluates performance and allocates resources based on profit or
loss from operations
58
before income taxes, interest expense and other non-operating 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 corporate related items and
three nonreportable segments, including Specialty Packaging, Reclamation and
International. Corporate related items include goodwill, the elimination of
intercompany assets and intercompany profit and income and expense not allocated
to reportable segments including corporate expenses, restructuring charges,
goodwill amortization, interest expense and the adjustment to record inventory
at LIFO.
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 &
Corrugated Consumer
Containers Packaging Other Total
------------------------------------------------------
Year ended December 31, 2000
Revenues from external customers............................. $5,994 $1,060 $1,742 $ 8,796
Intersegment revenues........................................ 177 26 309 512
Depreciation, depletion and amortization..................... 266 29 137 432
Segment profit (loss)........................................ 958 98 (622) 434
Total assets................................................. 5,705 527 5,048 11,280
Capital expenditures......................................... 293 17 53 363
Year ended December 31, 1999
Revenues from external customers............................. $4,876 $ 952 $1,595 $ 7,423
Intersegment revenues........................................ 193 20 274 487
Depreciation, depletion and amortization..................... 188 28 203 419
Segment profit (loss)........................................ 517 91 (269) 339
Total assets................................................. 4,340 512 5,007 9,859
Capital expenditures......................................... 84 22 50 156
Year ended December 31, 1998
Revenues from external customers............................. $2,110 $ 913 $ 589 $ 3,612
Intersegment revenues........................................ 57 22 137 216
Depreciation, depletion and amortization..................... 85 26 44 155
Segment profit (loss)........................................ 141 103 (580) (336)
Total assets................................................. 5,808 516 5,307 11,631
Capital expenditures......................................... 221 31 35 287
59
The following table presents net sales to external customers by country of
origin:
2000 1999 1998
-------------------------------
United States.......................................................... $7,795 $6,594 $3,520
Canada................................................................. 351 217 23
Europe and other....................................................... 650 612 69
-------------------------------
Total net sales..................................................... $8,796 $7,423 $3,612
-------------------------------
The following table presents long-lived assets by country:
2000 1999 1998
--------------------------------
United States.......................................................... $ 4,601 $ 3,834 $5,186
Canada................................................................. 756 228 191
Europe and other....................................................... 313 357 395
---------------------------------
5,670 4,419 5,772
Goodwill............................................................... 3,368 3,328 2,869
---------------------------------
Total long-lived assets............................................. $ 9,038 $ 7,747 $8,641
---------------------------------
The Company's export sales from the United States were approximately $246
million for 2000, $208 million for 1999 and $40 million for 1998.
60
21. Quarterly Results (Unaudited)
The following is a summary of the unaudited quarterly results of operations:
First Second Third Fourth
Quarter Quarter Quarter Quarter
------------------------------------------------------
2000
Net sales............................................ $2,035 $2,191 $2,328 $2,242
Gross profit......................................... 384 418 479 445
Income from continuing operations before
extraordinary item................................. 40 31 79 69
Gain on disposition of discontinued operations....... 6
Extraordinary item................................... 1 (1)
Net income........................................... 40 38 79 68
Preferred dividends.................................. (1)
Net income available to common stockholders.......... 40 38 79 67
Basic earnings per share:
Income from continuing operations before.............
extraordinary item................................. .18 .14 .32 .28
Gain on disposition of discontinued operations....... .03
Extraordinary item................................... (.01)
----------------------------------------------------------
Net income........................................... .18 .17 .32 .27
Diluted earnings per share:
Income from continuing operations before
extraordinary item................................. .18 .14 .32 .28
Gain on disposition of discontinued operations....... .03
Extraordinary item................................... (.01)
----------------------------------------------------------
Net income........................................... .18 .17 .32 .27
1999
Net sales $1,774 $1,804 $1,858 $1,987
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
61
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
The effect of adopting EITF 00-10, "Accounting for Shipping and Handling Fees
and Costs," during the fourth quarter of 2000 was to increase net sales and cost
of goods sold from previously reported amounts in the first, second and third
quarters by $82 million, $87 million and $95 million, respectively.
62
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 Other Deductions End of
Description Period Expenses Describe Describe Period
- -----------------------------------------------------------------------------------------------------------------------
Allowance for doubtful accounts and
sales returns and allowances:
Year ended December 31, 2000.............. $ 50 $ 15 $ 3 (a) $ 15 (b) $ 53
-------------------------------------------------------------------------
Year ended December 31, 1999.............. $ 70 $ $ (9) (c) $ 11 (b) $ 50
-------------------------------------------------------------------------
Year ended December 31, 1998.............. $ 10 $ 3 $ 60 (d) $ 3 (b) $ 70
-------------------------------------------------------------------------
Stone exit liabilities:
Year ended December 31, 2000.............. $183 $ $ (5) (e) $140 (f) $ 38
-------------------------------------------------------------------------
Year ended December 31, 1999.............. $106 $ $106 (g) $ 29 (f) $183
-------------------------------------------------------------------------
Year ended December 31, 1998.............. $ $ $117 (g) $ 11 (f) $106
-------------------------------------------------------------------------
Restructuring:
Year ended December 31, 2000.............. $ 29 $ 53 $ $ 48 (f) $ 34
-------------------------------------------------------------------------
Year ended December 31, 1999.............. $ 71 $ 15 $ (5) (e) $ 52 (f) $ 29
-------------------------------------------------------------------------
Year ended December 31, 1998.............. $ $257 $ $186 (f) $ 71
-------------------------------------------------------------------------
(a) Amount acquired with the acquisition of St. Laurent.
(b) Uncollectible amounts written off, net of recoveries.
(c) Includes the effect of the accounts receivable securitization application
of SFAS No. 125.
(d) Amount related to the acquisition of Stone.
(e) Charges associated with the exit activities included in the purchase price
allocation of St. Laurent and reduction to Stone exit liabilities.
(f) Charges against the reserves.
(g) Charges associated with exit activities and litigation settlements included
in the purchase price allocation of Stone.
63
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 Smurfit-Stone's directors.
Ray M. Curran, born May 13, 1946, was named President and Chief Executive
Officer of Smurfit-Stone on 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 Chief
Executive Officer of Continental Glass & Plastic, Inc. Mr. Giesen is Chairman
and Chief Executive Officer of Continere Corporation and served as a director of
Stone Container from 1974 to 1998.
Alan E. Goldberg, born September 1, 1954, served as Chairman and Chief Executive
Officer of Morgan Stanley Dean Witter (MSDW) Private Equity from February 1998
through January 2001. Prior thereto, he was co-head of MSDW Private Equity. He
served as Managing Director of Morgan Stanley & Co. Incorporated from January
1988 through January 2001. 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. Mr. Kilroy retired from these positions in 1995. Mr. Kilroy
is a director of JS Group, CRH plc and Arnotts plc.
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 Corning Incorporated, The Tribune Company, UAL
Corporation, and various other Chicago business, 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 Technologies Corporation and Parson
Group L.L.C. and served as director of Stone Container from 1984 to 1998.
Thomas A. Reynolds, III, born May 12, 1952, has been a partner of Winston &
Strawn since 1984, a law firm that regularly represents Smurfit-Stone on
numerous matters. Mr. Reynolds is a member of Winston Strawn's executive
committee. He also serves as a director of Westell Technologies, Inc.
Anthony P. J. Smurfit, born December 19, 1963, is chief executive of the Smurfit
Europe Division of JS Group and has served as a member of JS Group's board of
directors since 1989. He previously served as Deputy Chief Executive of Smurfit
Europe, as well as Chief Executive of Smurfit France. Mr. Smurfit was first
elected a director in 2000. He is a director of Aer Rianta and The Irish
National Stud Company. He is the son of Dr. Michael W. J. Smurfit and a nephew
of Dr. Dermot F. Smurfit.
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 the World Containerboard
64
Organization 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 and an uncle of Anthony P. J. Smurfit.
Michael W. J. Smurfit, born August 7, 1936, is Chairman of the Board of
Directors of Smurfit-Stone. He has been Chairman and Chief Executive Officer of
JS Group since 1977. He was Chief Executive Officer of Jefferson Smurfit
Corporation prior to July 1990. He is a brother of Dr. Dermot F. Smurfit and
the father of Anthony P.J. Smurfit.
Executive Officers
Set forth below is information concerning the executive officers of Smurfit-
Stone.
Michael W. J. Smurfit - See Directors.
Ray M. Curran - See Directors.
Matthew Blanchard, born September 9, 1959, was appointed Vice President and
General Manager-Board Sales Division in July 2000. Mr. Blanchard was Vice
President Supply Chain Management for St. Laurent from 1998 until July 2000.
Prior to that, he held various managerial positions with St. Laurent, Avenor and
CIP since 1981.
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
Container from 1996 and held the same position with Smurfit-Stone until April
1999. Prior to 1996, he held various managerial positions in the Corrugated
Container Division of Stone Container since 1991.
James D. Duncan, born June 12, 1941, has been Vice President - Corporate Sales
and Marketing since October 2000. Prior to that, he was Vice President and
General Manager - Specialty Packaging Division from November 1998 to October
2000. 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.
Daniel J. Garand, born December 12, 1950, joined Smurfit-Stone in October 1999
as Vice President of Supply Chain Operations. For three years prior to joining
Smurfit-Stone, Mr. Garand held senior level positions in global supply chain
management for Allied Signal'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.
Michael F. Harrington, born August 6, 1940, has been Vice President - Human
Resources since November 18, 1998 and held the same position with Jefferson
Smurfit since January 1992.
Charles A. Hinrichs, born December 3, 1953, has been Vice President and
Treasurer since November 18, 1998 and held the same position with Jefferson
Smurfit since April 1995.
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 of Jefferson Smurfit from January 1993 to November 1998.
Paul K. Kaufmann, born May 11, 1954, has been Vice President and Corporate
Controller since November 18, 1998, and held the same position with Jefferson
Smurfit since July 1998. He was Corporate Controller of Jefferson Smurfit from
March 1998 to July 1998. Prior to that he was Division Controller for the
Containerboard Mill Division from November 1993 until March 1998.
65
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 Container from 1987 to November 1998.
F. Scott Macfarlane, born January 17, 1946, has been Vice President and General
Manager - Consumer Packaging Division since October 2000. Prior to that, he was
Vice President and General Manager - Folding Carton and Boxboard Mill Division
from November 1995 to October 2000.
Timothy McKenna, born March 25, 1948, has been Vice President - Investor
Relations and Communications since November 18, 1998, and held the same position
with Jefferson Smurfit since July 1997. He joined Jefferson Smurfit in October
1995 as Director of Investor Relations and Communications.
Patrick J. Moore, born September 7, 1954, has been Vice President and Chief
Financial Officer of Smurfit-Stone since November 18, 1998, and held the same
position with Jefferson Smurfit since October 1996. He was Vice President and
General Manager - Industrial Packaging Division of Jefferson Smurfit from
December 1994 to October 1996. He served as Vice President and Treasurer from
February 1993 to December 1994. He is a director of First Financial Planners,
Inc.
Mark R. O'Bryan, born January 15, 1963, joined Smurfit-Stone in October 1999 as
Vice President - Procurement. Prior to joining Smurfit-Stone, 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 November 18, 1998, and held the same position with Jefferson Smurfit since
May 1996. He was Director of Corporate Planning of Jefferson Smurfit from
September 1995 to May 1996.
John M. Riconosciuto, born September 4, 1952, has been Vice President and
General Manager - Specialty Packaging Division since October 2000. Prior to
that, he was 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 Container 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 Container.
David C. Stevens, born August 11, 1934, has been Vice President and General
Manager - Smurfit Recycling Company since January 1993.
William N. Wandmacher, born September 12, 1942, has been Vice President and
General Manager - Containerboard Mill Division since November 18, 1998, and held
the same position with Jefferson Smurfit since January 1993.
ITEM 11. EXECUTIVE COMPENSATION
----------------------
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 our Proxy Statement and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------
Information required in response to this item is set forth under the caption
"Principal Stockholders" in our Proxy Statement and is incorporated herein by
reference.
66
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
Information required in response to this item is set forth under the caption
"Certain Transactions" in our 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.
2.1 Agreement and Plan of Merger, dated as of August 8, 2000, by and among
Smurfit-Stone Container Corporation("SSCC"), SCC Merger Co. and Stone
Container Corporation ("Stone") (incorporated by reference to SSCC's
Registration Statement on Form S-4 (File No. 333-43656)).
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)).
4.2 Form of Certificate of Designation establishing the terms of SSCC's
Series A Preferred Stock (incorporated by reference to Exhibit 4.2 to
SSCC's Registration Statement on Form S-4 (File No. 333-43656)).
4.3 Certificate for SSCC's Series A Preferred Stock (incorporated by
reference to Exhibit 4.4 to SSCC's Registration Statement on Form S-4
(File No. 333-43656)).
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, Jefferson Smurfit Corporation
(U.S.) ("JSC(U.S.)"), Container Corporation of America and Smurfit
International B.V. ("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* Jefferson Smurfit Corporation 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* Jefferson Smurfit Corporation 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).
67
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).
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, Inc. ("JSCE"), JSC(U.S.) and the financial
institutions signatory thereto, The Chase Manhattan Bank and Bankers
Trust Company, as senior managing agents and The Chase Manhattan Bank,
as administrative agent and collateral agent (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 financial
institutions signatory thereto, The Chase Manhattan Bank and Bankers
Trust Company, as senior managing agents and The Chase Manhattan Bank,
as administrative agent and collateral agent (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 financial
institutions signatory thereto, The Chase Manhattan Bank and Bankers
Trust Company, as senior managing agents and The Chase Manhattan Bank,
as administrative agent and collateral agent (incorporated by
reference to Exhibit 10.1 to SSCC's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1999).
10.5(d) Third Amendment of Amended and Restated Credit Agreement, dated as of
March 22, 2000, among SSCC, JSCE, Inc., JSC(U.S.) and the financial
institutions signatory thereto, The Chase Manhattan Bank and Bankers
Trust Company, as senior managing agents and The Chase Manhattan Bank,
as administrative agent and collateral agent (incorporated by
reference to Exhibit 10.1 to SSCC's Quarterly Report on Form 10-Q for
the quarter ended September 30, 2000).
10.5(e) Fourth Amendment of Amended and Restated Credit Agreement, dated as of
July 31, 2000, among SSCC, JSCE, Inc., JSC(U.S.) and the financial
institutions signatory thereto, The Chase Manhattan Bank and Bankers
Trust Company, as senior managing agents and The Chase Manhattan Bank,
as administrative agent and collateral agent (incorporated by
reference to Exhibit 10.2 to SSCC's Quarterly Report on Form 10-Q for
the quarter ended September 30, 2000).
10.6(a) Term Loan Agreement, dated as of February 23, 1995, among Jefferson
Smurfit Finance Corporation ("JS Finance") and Bank Brussels Lambert,
New York Branch (incorporated by reference to Exhibit 10.1 to SSCC's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1995).
10.6(b) Depositary and Issuing and Paying Agent Agreement (Series A Commercial
Paper), dated as of February 23, 1995 (incorporated by reference to
Exhibit 10.2 to SSCC's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1995).
10.6(c) Depositary and Issuing and Paying Agent Agreement (Series B Commercial
Paper), dated as of February 23, 1995 (incorporated by reference to
Exhibit 10.3 to SSCC's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1995).
68
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, Morgan Stanley & 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 Smurfit Newsprint Corporation and SSCC (incorporated by
reference to Exhibit 10.4 to SSCC's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1996).
10.6(j) Amendment No. 2 to the Term Loan Agreement, dated as of August 19,
1997, 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 to the Receivables Purchase and Sale Agreement, dated
as of August 19, 1997, 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 to the Liquidity Agreement, dated as of August 19,
1997, 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 Amended and Restated Credit Agreement, dated as of March 31, 2000,
among Stone, the financial institutions signatory thereto and The
Chase Manhattan Bank and Bankers Trust Company, as Agents, and Bankers
Trust Company as Administrative Agent and Collateral Agent
(incorporated by reference to Exhibit 10.1 to Stone's Quarterly Report
on Form 10-Q for the quarter ended March 31, 2000).
10.8 Credit Agreement, dated as of May 31, 2000, among Stone, St. Laurent,
the financial institutions signatory thereto, The Chase Manhattan
Bank, as Agent, Bankers Trust Company, an Administrative Agent and
Deutsche Bank Canada, as Canadian Administrative Agent
69
(incorporated by reference to Exhibit 10.1 to Stone's Quarterly Report
on Form 10-Q for the quarter ended June 30, 2000).
10.9* 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).
10.10 Standstill Agreement, dated as of May 10, 1998, as amended, among
Jefferson Smurfit Group, plc, Morgan Stanley Leveraged Equity Fund
("MSLEF") and SSCC (incorporated by reference to Exhibit 10(a) to
SSCC's Registration Statement on Form S-4 (File No. 333-65431)).
10.11 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)).
10.12 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)).
10.13(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).
10.13(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).
10.14* 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)).
10.15* 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 Container Corporation 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).
70
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).
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,
as Seller and Stone Receivables Corporation, as 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'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'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 for Ray M. Curran (incorporated by reference to
Exhibit 10.27 to SSCC's Annual Report on Form 10-K for the fiscal year
ended December 31, 1999).
10.28* Employment Agreement for Patrick J. Moore (incorporated by reference
to Exhibit 10.28 to SSCC's Annual Report on Form 10-K for the fiscal
year ended December 31, 1999).
71
10.29* Employment Agreement of Joseph J. Gurandiano (incorporated by
reference to Exhibit 10.1 to SSCC's Quarterly Report on Form 10-Q for
the quarter end ed June 30, 2000).
10.30* Severance Benefits Agreement of Joseph J. Gurandiano (incorporated by
reference to Exhibit 10.2 to SSCC's Quarterly Report on Form 10-Q for
the quarter ended June 30, 2000).
10.31* Employment agreement of William N. Wandmacher.
10.32* Employment agreement of F. Scott Macfarlane.
21.1 Subsidiaries of SSCC.
23.1 Consent of Independent Auditors.
24.1 Powers of Attorney.
*Indicates a management contract or compensation plan or arrangement.
(b) Report on Form 8-K.
There were no Form 8-K filings during the three months ended December
31, 2000.
SSCC filed Form 8-K on January 17, 2001 regarding plans to sell $500
million of senior notes.
SSCC filed Form 8-K on January 19, 2001 announcing that it had entered
into an agreement to sell $750 million of 9.75% Senior Notes due 2011
and $300 million of 9.25% Senior Notes due 2008.
72
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
DATE March 13, 2001 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 13, 2001
- ---------------------------
Patrick J. Moore Officer (Principal Financial Officer)
/s/ Paul K. Kaufmann Vice President and Corporate Controller March 13, 2001
- ---------------------------
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
___________________________* Director
Anthony P. J. Smurfit
*By /s/ Patrick J. Moore pursuant to Powers of Attorney filed
- ---------------------------
Patrick J. Moore as a part of the Form 10-K.
73