Back to GetFilings.com
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, 2001
[_] 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 1-3439
STONE CONTAINER CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 36-2041256
(State of incorporation or organization) (I.R.S. Employer Identification)
150 North Michigan Avenue, Chicago, Illinois 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:
Name of each exchange
Title of each class on which registered
------------------- --------------------------
Rating Adjustable Senior Notes New York Stock Exchange
due August 1, 2016
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether registrant: (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No __
--
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
As of February 28, 2002, none of the registrant's voting stock was held by
non-affiliates.
The number of shares outstanding of the registrant's common stock as of
February 28, 2002: 1,000
DOCUMENTS INCORPORATED BY REFERENCE:
Part of Form 10-K
Document Into Which Document is Incorporated
- -------- ----------------------------------------------
None
The registrant meets the conditions set forth in General Instruction (I) (1)
(a) and (b) of Form 10-K and is therefore filing this form with the reduced
disclosure format permitted thereby.
STONE CONTAINER CORPORATION
Annual Report on Form 10-K
December 31, 2001
TABLE OF CONTENTS
PART I Page No.
Item 1. Business...................................................... 2
Item 2. Properties.................................................... 7
Item 3. Legal Proceedings............................................. 8
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters........................................ 10
Item 6. Selected Financial Data....................................... 11
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................ 13
Item 7a. Quantitative and Qualitative Disclosures About
Market Risk................................................ 23
Item 8. Financial Statements and Supplementary Data................... 25
Item 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure........................ 56
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K........................................ 56
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 21E 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 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 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 interest rates, exchange rates and currency values;
. unanticipated capital expenditure requirements;
. legislative or regulatory requirements, particularly concerning
environmental matters;
. access to capital markets;
. fluctuations in energy prices; and
. obtaining required consents or waivers of lenders in the event we are unable
to satisfy covenants in our debt instruments.
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 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.
1
PART I
ITEM 1. BUSINESS
--------
Unless the context otherwise requires, "we", "us", "our" or Stone Container
refers to the business of Stone Container Corporation and its subsidiaries.
GENERAL
- -------
Stone Container Corporation, a Delaware corporation, is an integrated producer
of containerboard, corrugated containers, multiwall bags and other packaging
products. We have operations primarily in North America and Europe. For the
year ended December 31, 2001, our net sales were $5,757 million and net income
was $10 million.
We are a wholly-owned subsidiary of Smurfit-Stone Container Corporation, a
Delaware corporation. Smurfit-Stone is a holding company with no business
operations of its own. Smurfit-Stone conducts its business operations through
two wholly-owned subsidiaries: Stone Container and JSCE, Inc., a Delaware
corporation. Smurfit-Stone acquired Stone Container through the November 18,
1998 merger of a wholly-owned subsidiary of Smurfit-Stone, with and into Stone
Container.
On May 31, 2000, Stone Container, through a subsidiary, acquired St. Laurent
Paperboard, Inc. Amounts included in the discussion below include St. Laurent's
operations after May 31, 2000.
PRODUCTS
- --------
We report our results of operations in four industry segments, two of which are
reportable, 1) Containerboard and Corrugated Containers and 2) International.
For financial information relating to our segments, see the information set
forth in Note 19 in the Notes to Consolidated Financial Statements.
CONTAINERBOARD AND CORRUGATED CONTAINERS SEGMENT
The Containerboard and Corrugated Containers segment includes 17 paper mills
(11 located in the United States and six in Canada), 96 container plants (90
located in the United States, two in Canada and four in Mexico) and one wood
products plant in the United States. In addition, we own approximately 1.1
million acres of timberland and operate wood harvesting facilities in Canada.
Our primary products include:
. corrugated containers
. containerboard
. kraft paper
. market pulp
We produce a full range of high quality corrugated containers designed to
protect, ship, store and display products made to our customers' merchandising
and distribution specifications. Corrugated containers are sold to a broad
range of manufacturers of consumable goods. Corrugated containers are used to
ship such diverse products as home appliances, electric motors, small
machinery, grocery products, produce, computers, books, furniture and many
other products. We provide customers with innovative packaging solutions to
advertise and sell their products. In addition, we manufacture and sell a
variety 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.
2
Our containerboard mills produce a full line of containerboard, which is used
primarily in the production of corrugated packaging. We produced 2,930,000 tons
of unbleached kraft linerboard, 713,000 tons of white top linerboard and
1,662,000 tons of recycled medium in 2001. Our containerboard mills and
corrugated container operations are highly integrated, with the majority of our
containerboard used internally by our corrugated container operations or by
JSCE's corrugated container operations. In 2001, our corrugated container
plants consumed 3,259,000 tons of containerboard, representing an integration
level of approximately 61%.
Our paper mills also produce solid bleached liner, kraft paper, market pulp and
other specialty products. Kraft paper is used in numerous products, including
consumer and industrial bags, grocery and shopping bags, counter rolls, handle
stock, refuse bags and circuit board. A significant portion of our kraft paper
is consumed by our specialty packaging operations. 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.
Production for our paper mills and sales volume for our corrugated container
facilities for the last three years were:
2001 2000 1999
----- ----- -----
Tons produced (in thousands)
Containerboard....................................... 5,306 5,072 4,381
Kraft paper.......................................... 287 290 437
Market pulp.......................................... 545 550 572
Solid bleached sulfate............................... 119 68
Corrugated containers sold (in billion sq. ft.)......... 52.0 52.0 50.9
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. Both we and Jefferson Smurfit Group plc,
the largest stockholder of Smurfit-Stone, own a 50% interest in Smurfit-MBI.
INTERNATIONAL SEGMENT
The International operations are predominantly located in Europe and include
three paper mills (located in Hoya and Viersen, Germany and Cordoba, Spain), 21
corrugated container plants (11 located in Germany, three in Spain, four in
Belgium, two in the Netherlands and one in France) and five reclamation plants
located in Germany. Our primary products include:
. corrugated containers
. containerboard
. coated recycled boxboard
In addition, we operate one corrugated container plant in Indonesia and have a
small affiliate operation in China. Production for our international mills and
sales volume for our international corrugated container facilities for the last
three years were:
2001 2000 1999
---- ---- ----
Tons produced (in thousands)
Containerboard....................................... 411 405 380
Coated boxboard...................................... 78 85 79
Corrugated containers sold (in billion sq. ft.)......... 12.3 12.1 11.6
In 2001, our foreign corrugated container plants in Europe consumed 735,000
tons of containerboard.
3
OTHER NON-REPORTABLE SEGMENTS
Specialty Packaging
The Specialty Packaging segment includes 15 plants located in the United States
and one in Canada. Our primary products include:
. multiwall bags
. consumer bags
Multiwall bags are designed to safely and effectively ship a wide range of
industrial and commercial products, including fertilizers, chemicals,
pharmaceuticals, building products, concrete, food, feed, seed and salt. Bags
can be customized with easy-open features, handles and resealable closures,
with a variety of liners, coatings and other treatments. We have developed and
patented many innovative styles, including Cap-Sac(r), PeelPak(r), Soni-Loc(r),
Peel-N-Pour(tm), SquareStack(tm) and SquareSak(tm). We also manufacture small
consumer bags for food and other products sold at retail outlets, including pet
food and litter, cookies, flour, baking mixes and microwave popcorn. In 2001,
our specialty packaging operations consumed approximately 63% of the kraft
paper produced by our kraft paper mills. Multiwall bag shipments for 2001, 2000
and 1999 were 256,000, 247,000 and 249,000 tons, respectively.
Consumer Packaging
The Consumer Packaging segment includes one plant in the United States and one
in Canada. Our primary products include microflute packaging and laminated
paperboard for the food service industry, including cup stock and bacon board.
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 Smurfit-Stone's
reclamation operations and national 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.
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 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
commodity products.
We seek to serve a broad customer base for each of our industry segments and as
a result we 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 due to production capacity, logistics and equipment requirements.
4
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
material 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. Our technical staff conducts basic, applied and
diagnostic research, develops processes and products and provides a wide range
of other technical services.
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 we do not consider the successful continuation of any
material aspect of our business to be dependent upon such intellectual property.
EMPLOYEES
- ---------
We had approximately 24,700 employees at December 31, 2001, of which
approximately 18,300 were employees of U.S. operations. Approximately 11,500
(63%) of our domestic employees are represented by collective bargaining units.
The expiration dates of union contracts for our major paper mill facilities are
as follows:
. Hopewell, Virginia - July 2002
. Florence, South Carolina - August 2003
. La Tuque, Quebec, Canada - August 2004
. Jacksonville, Florida (Seminole) - June 2005
. Hodge, Louisiana - June 2006
. Missoula, Montana - June 2007
. Panama City, Florida - March 2008
. West Point, Virginia - September 2008
We believe our employee relations are generally good. We are currently in the
process of bargaining with unions representing production employees at a number
of our operations. There were no significant or material work stoppages during
2001. While the terms of our collective bargaining agreements may vary,
5
we believe the material terms of the agreements are customary for the industry,
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 portions of its comprehensive rule governing the pulp,
paper and paperboard industry, known as the "Cluster Rule". Phase I of the
Cluster Rule required us to convert our bleached market pulp mill at Panama
City, Florida to an elemental chlorine free bleaching process, to install
systems at several of our mills for the collection and destruction of low
volume, high concentration gases and to implement best management practices,
such as spill controls. These projects have been substantially completed at a
cost of approximately $155 million (of which approximately $21 million was
spent in 2001). Phase II of the Cluster Rule will require the implementation of
systems to collect high volume, low concentration gases at various mills and
has a compliance date of 2006. Phase III of the Cluster Rule will require
control of particulate from recovery boilers, smelt tanks and lime kilns and
has a compliance date of 2005. We continue to study possible means of
compliance with Phases II and III of the Cluster Rule. Based on currently
available information, we estimate that the aggregate compliance cost of Phases
II and III of the Cluster Rule is likely to be in the range of $70 million to
$90 million, and that such cost will be incurred over the next five years.
In recent years, the EPA has undertaken significant air quality initiatives
associated with nitrogen oxide emissions, regional haze and national ambient
air quality standards. Several of our mills are located in states affected by
these EPA initiatives. When regulatory requirements for new and changing
standards are finalized, we will add any resulting future cost projections to
our expenditure forecast.
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 $7 million annually on capital expenditures for
environmental purposes. Since our principal competitors are subject to
comparable environmental standards, including the Cluster Rule, it is our
opinion, based on current information, that compliance with environmental
standards should not adversely affect our competitive position. However, we
could incur significant expenditures due to changes in law or the discovery of
new information, which could have a material adverse effect on our operating
results.
6
ITEM 2. PROPERTIES
We maintain manufacturing facilities and sales offices throughout North America
and Europe. We believe that our facilities are adequately insured, properly
maintained and equipped with machinery suitable for their use. Our
manufacturing facilities as of December 31, 2001 are summarized below:
Number of Facilities State
------------------------
Total Owned Leased Locations/(a)/
----- ----- ------ -------------
United States
Paper mills..................... 11 11 9
Corrugated container plants..... 90 54 36 32
Specialty packaging plants...... 15 7 8 13
Consumer packaging plant........ 1 1 1
Wood products plant............. 1 1 1
--- --- ---
Subtotal........................ 118 74 44 36
Canada and Other North America
Paper mills..................... 6 6 N/A
Corrugated container plants..... 6 4 2 N/A
Specialty packaging plant....... 1 1 N/A
Consumer packaging plant........ 1 1 N/A
--- --- ---
Subtotal........................ 14 12 2 N/A
Europe and Other
Paper mills..................... 3 3 N/A
Corrugated container plants..... 22 20 2 N/A
Reclamation plants.............. 5 3 2 N/A
--- --- ---
Subtotal........................ 30 26 4 N/A
--- --- ---
Total......................... 162 112 50
(a) Reflects the number of states in which we have at least one manufacturing
facility.
7
The paper mills represent approximately 74% of our investment in property,
plant and equipment. In addition to manufacturing facilities, we own
approximately 1.1 million acres of timberland and operate wood harvesting
facilities in Canada. The approximate annual tons of productive capacity of our
paper mills at December 31, 2001 were:
Annual Capacity
---------------
(in thousands)
United States
Containerboard............................. 5,010
Kraft paper................................ 296
Market pulp................................ 351
-----
Subtotal................................... 5,657
Canada
Containerboard............................. 1,133
Market pulp................................ 243
Solid bleached sulfate..................... 123
-----
Subtotal................................... 1,499
Europe
Containerboard............................. 447
Coated boxboard............................ 79
-----
Subtotal................................... 526
-----
Total.................................. 7,682
Substantially all of our North American operating facilities have been pledged
as collateral under our various credit agreements. See Part II, Item 7,
Management's Discussion and Analysis of Financial Condition and Results of
Operations-Liquidity and Capital Resources-Financing Activities.
ITEM 3. LEGAL PROCEEDINGS
-----------------
LITIGATION
- ----------
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
alleged that we 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 complaints have been transferred to and consolidated in the United
States District Court for the Eastern District of Pennsylvania, which has
certified two plaintiff classes. The defendants' appeal of the class
certification rulings is pending in the Third Circuit Court of Appeals. We 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, we believe the resolution of these matters will
not have a material adverse effect on our consolidated financial condition or
results of operations.
8
ENVIRONMENTAL MATTERS
- ---------------------
In September 1997, we received a Notice of Violation and a Compliance Order
from the EPA alleging non-compliance 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, we responded to information requests,
conducted tests and took measures to ensure continued compliance with
applicable emission limits. In December 1997 and November 1998, we 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 entered into a tolling
agreement with the EPA that deferred any further prosecution of this matter
until at least March 31, 2002. Upon expiration of the tolling agreement, the
EPA may bring suit against us.
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 St. Laurent 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 and Chesapeake are attempting to reach
agreement with the EPA and Virginia DEQ on a capital expenditure plan to remedy
the 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. We entered into a tolling agreement with the EPA that defers any
further prosecution of this matter until at least June 28, 2002. Upon
expiration of the tolling agreement, the EPA may bring suit against St. Laurent.
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. In October 2001, we settled this matter by pleading guilty to 23
charges filed by the Government of Quebec under its Regulations respecting pulp
and paper facilities, and paid $571,000 (Canadian), or $360,000 (U.S.), in
fines and costs incurred by the Government in the prosecution of the charges.
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 continue 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
9
such sites under the Comprehensive Environmental Response, Compensation and
Liability Act of 1980 (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 these
sites is 1% or less. In addition to participating in the remediation of sites
owned by third parties, we have entered into consent orders for 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. As
of December 31, 2001, we had approximately $30 million reserved for
environmental liabilities. We believe our liability for these matters was
adequately reserved at December 31, 2001.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
---------------------------------------------------------------------
MARKET INFORMATION
- ------------------
We are a wholly-owned subsidiary of Smurfit-Stone, and therefore, all of our
outstanding common stock is owned by Smurfit-Stone. As a result, there is no
established public market for our common stock.
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 restrictive provisions contained in our credit
agreement, senior note indentures and restated certificate of incorporation.
See Item 7, Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources.
10
ITEM 6. SELECTED FINANCIAL DATA (e)
-----------------------
(In millions, except per share and statistical data)
Predecessor(b)
------------------------
Period from Period from
Year Ended December 31, November 19 January 1 to Year Ended
---------------------------- to December November December
2001 2000(a) 1999 31, 1998(b) 18, 1998 31, 1997
- -----------------------------------------------------------------------------------------------------------------------
Summary of Operations
Net sales...................................... $ 5,757 $ 5,738 $ 4,500 $ 480 $ 4,399 $ 4,849
Income (loss) from operations(c)............... 380 593 236 (15) (115) (88)
Income (loss) before extraordinary item........ 14 115 (75) (36) (749) (405)
Net income (loss).............................. 10 115 (77) (36) (749) (418)
Basic earnings per share of common stock(d)
Loss before extraordinary item................ (7.43) (4.16)
Net loss...................................... (7.43) (4.29)
Weighted average shares outstanding............ 102 99
Diluted earnings per share of common stock(d)
Loss before extraordinary item................ (7.43) (4.16)
Net loss...................................... (7.43) (4.29)
Weighted average shares outstanding............ 102 99
- -----------------------------------------------------------------------------------------------------------------------
Other Financial Data
Net cash provided by (used for) operating
activities.................................... $ 414 $ 558 $ 72 $ 12 $ (16) $ (259)
Net cash provided by (used for) investing
activities.................................... (117) (808) 683 (22) 35 (174)
Net cash provided by (used for) financing
activities.................................... (306) 262 (883) (111) 128 438
Depreciation and amortization.................. 354 313 296 34 239 302
Capital investments and acquisitions........... 146 878 87 22 219 150
Working capital, net........................... 256 369 32 488 507
Property, plant, equipment and timberlands,
net........................................... 4,203 4,406 3,110 4,012 2,427
Total assets................................... 8,638 9,051 7,565 8,793 5,824
Long-term debt................................. 3,539 3,813 3,157 4,063 4,351
Redeemable preferred stock..................... 78 78 115
Stockholders' equity........................... 2,957 3,003 2,506 2,590 277
- -----------------------------------------------------------------------------------------------------------------------
Statistical Data (tons in thousands)
Containerboard production (tons)............... 5,717 5,477 4,761 541 4,271 4,935
Kraft production (tons)........................ 287 290 437 63 394 436
Market pulp production (tons).................. 545 550 572 71 568 1,127
Solid bleached sulfate production (tons)....... 119 68
Coated boxboard production (tons).............. 78 85 79 8 70 76
Corrugated containers sold (billion sq. ft.)... 64.3 64.1 62.5 6.6 55.8 55.7
Multiwall bags sold (tons)..................... 256 247 249 27 217 248
Number of employees............................ 24,700 25,600 21,900 23,000 24,600
11
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) On November 18, 1998, we completed a merger with a wholly-owned subsidiary
of Smurfit-Stone. The merger was accounted for as a purchase business
combination, and accordingly, purchase accounting adjustments, including
goodwill, have been pushed down and are reflected in our financial
statements subsequent to November 18, 1998. The financial statements for
periods before November 18, 1998 were prepared using the historical basis
of accounting and are designated as "Predecessor". The comparability of
operating results for the Predecessor periods and the periods subsequent
to November 18, 1998 are affected by the purchase accounting adjustments.
(c) In 2000 and 2001, we recorded restructuring charges of $53 million and $6
million, respectively.
(d) Subsequent to the 1998 merger with Smurfit-Stone, earnings per share
information is no longer presented because we are a wholly-owned
subsidiary of Smurfit-Stone.
(e) Certain prior year amounts have been restated to conform to current year
presentation.
12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
-----------------------------------------------------------------------
OF OPERATIONS
-------------
GENERAL
- -------
Market conditions and demand for containerboard and corrugated containers, 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 strong in 1999 and the first half of 2000.
Linerboard prices increased to $480 per ton during this period and held through
the end of 2000. Corrugated container shipments for the industry in 1999
increased approximately 2% compared to 1998. Domestic economic growth began to
slow in the second half of 2000, however, and corrugated container shipments
for the industry in 2000 declined 1% compared to 1999. Market conditions
continued to deteriorate in 2001 and industry demand for corrugated containers
declined 6% compared to 2000, the worst performance since 1975. This slowdown
in the U.S. economy, in addition to weak export markets, exerted downward
pressure on containerboard demand. In order to maintain a balance between
supply and demand, the containerboard industry took extensive market related
downtime in 2000 and 2001. The sluggish corrugated demand in 2001 and the
excess supply of containerboard resulted in an 11% decline in linerboard
pricing to $425 per ton by the end of 2001. Corrugated container prices also
declined during this period. In February 2002, linerboard declined an
additional $5 per ton to $420 per ton. We do not expect a recovery in demand
for corrugated containers until the U.S. economy strengthens.
Market pulp is also subject to cyclical changes in the economy and changes in
industry capacity. Market conditions strengthened in 1999 and remained strong
in the first half of 2000. Prices rose during this period, reaching $690 per
metric ton by the end of 2000. Demand for market pulp weakened in the second
half of 2000 and pulp producers began taking market related downtime to reduce
inventories. Market conditions were very weak in 2001 and prices declined
rapidly. Prices were down to $440 per metric ton by the end of 2001.
Wood fiber and reclaimed fiber are the principal raw materials used in the
manufacture of our products. Demand for reclaimed fiber was strong in 1999
primarily as a result of strong export demand. Demand weakened however, in the
second half of 2000 as the containerboard industry took extensive market
related downtime. Prices declined in 2000 and continued to be depressed
throughout 2001 as more paper mills took downtime to manage their inventories.
The price of old corrugated containers, commonly known as OCC, the principal
grade used in recycled containerboard mills, was lower in 2001 compared to 2000
by approximately 40%. Wood fiber prices, in areas where we procure wood,
increased 1% in 2001 compared to 2000.
13
RESULTS OF OPERATIONS
- ---------------------
Segment Data
(In millions)
2001 2000 1999
------------------- ------------------- -------------------
Net Profit/ Net Profit/ Net Profit/
Sales (Loss) Sales (Loss) Sales (Loss)
--------- --------- --------- --------- --------- ---------
Containerboard and corrugated containers. $ 4,577 $ 458 $ 4,590 $ 738 $ 3,407 $ 322
International............................ 575 36 587 37 567 30
Other operations......................... 605 35 561 30 526 34
--------- ------- --------- ------ --------- ------
Total operations...................... $ 5,757 529 $ 5,738 805 $ 4,500 386
========= ========= =========
Restructuring charges.................... (6) (53)
Gain on sale of assets................... 9 2 39
Interest expense, net.................... (330) (371) (340)
Corporate expenses and other............. (133) (142) (160)
--------- --------- ---------
Income (loss) before income taxes and
extraordinary item.................... $ 69 $ 241 $ (75)
========= ========= =========
Corporate expenses and other include corporate expenses, intracompany profit
elimination and LIFO expense, goodwill amortization, corporate charges to
segments for working capital interest and other expenses not allocated to
segments. The effects of lower intracompany profit elimination and LIFO expense
favorably impacted corporate expenses and other in 2000 and 2001.
2001 COMPARED TO 2000
- ---------------------
Consolidated net sales of $5.8 billion increased marginally compared to 2000
due to the inclusion of results for St. Laurent for a full year. The effect of
including St. Laurent operations for the full year and the acquisition of a
multiwall bag facility added $444 million to our net sales compared to 2000.
St. Laurent's results of operations have been included in our consolidated
results since May 31, 2000, the date of the acquisition. Poor market conditions
for our major products led to lower sales prices for containerboard, corrugated
containers and market pulp, and reduced shipments of corrugated containers. In
addition, we closed four and sold three operating facilities. The increase
(decrease) in net sales for each of our segments is summarized in the chart
below.
Container-
board &
Corrugated Other
(In millions) Containers International Operations Total
---------- ------------- ---------- -----
Sales price and product mix....... $ (288) $ (25) $ 8 $ (305)
Sales volume...................... (29) 19 (11) (21)
Acquisitions...................... 387 57 444
Closed or sold facilities......... (83) (6) (10) (99)
---- ----- ---- -----
Total............................ $ (13) $ (12) $ 44 $ 19
==== ===== ==== =====
Income before income tax and extraordinary item was $69 million, a decrease of
$172 million compared to 2000. The decrease was due primarily to the decline in
earnings of our operating segments, particularly in the Containerboard and
Corrugated Containers segment. Interest expense and restructuring charges were
lower compared to 2000, partially offsetting the declines in segment earnings.
Net income in 2001 was $10 million as compared to $108 million in 2000.
14
Costs and Expenses
Consolidated cost of goods sold increased due to inclusion of St. Laurent's
cost for a full year and higher energy cost of $26 million. Cost of goods sold
was favorably impacted by lower reclaimed fiber cost of $69 million. Cost of
goods sold as a percent of net sales increased to 85% in 2001 from 81% in 2000
due primarily to the lower average sales prices.
Selling and administrative expenses for 2001 increased due primarily to the St.
Laurent acquisition. Selling and administrative expense as a percent of net
sales increased to 9% in 2001 from 8% in 2000 due primarily to the lower
average sales prices.
Gain on sale of assets in the Consolidated Statements of Operations increased
in 2001 due primarily to a gain of $7 million related to the sale of a sawmill
operation.
During 2001, we recorded a restructuring charge of $6 million related to the
permanent shutdown of two converting facilities and two wood products
operations.
Interest expense, net decreased $41 million due to the favorable impact of $48
million from lower interest rates, which was partially offset by the
unfavorable impact of $7 million on higher average borrowings. Our overall
average effective interest rate in 2001 was lower than 2000 by 1.3%.
The effective income tax rate for 2001 differed from the federal statutory tax
rate due to several factors, the most significant of which was the effect of
permanent differences from applying purchase accounting. For information
concerning income taxes, see Liquidity and Capital Resources and Note 10 of the
Notes to Consolidated Financial Statements.
Containerboard and Corrugated Containers Segment
Net sales for 2001 decreased slightly due to lower average sales prices for
containerboard, corrugated containers and market pulp and lower sales volume
for corrugated containers. Net sales were favorably impacted by the St. Laurent
acquisition. The weak market conditions during 2001 resulted in excessive
supplies of containerboard and prices declined. We took market related downtime
in order to maintain a lower level of inventory. On average, corrugated
container prices decreased by 3% and linerboard prices were lower by 5%. The
average sales price of kraft paper decreased 2%. The lower demand for market
pulp in the second half of 2000 and throughout 2001 had a significant effect on
pricing. The average price for market pulp dropped $250 per metric ton from
January to December 2001, reducing our average price for the year by 34%
compared to 2000.
Production of containerboard increased 5% due to the St. Laurent acquisition.
We took approximately 776,000 tons of containerboard market related downtime in
2001 compared to 533,000 tons in 2000. Shipments of corrugated containers were
comparable to last year. Production of kraft paper declined by 1%. Our
production of market pulp declined by 1% compared to last year.
Profits decreased by $280 million due to the lower average sales prices. The
higher levels of market related downtime taken in 2001 and higher energy costs
also had a negative impact on profits. Profits were favorably impacted by the
St. Laurent acquisition and lower reclaimed fiber cost. Cost of goods sold as a
percent of net sales increased to 83% for 2001 compared to 77% for 2000 due
primarily to the lower average sales prices.
International Segment
Net sales for 2001 decreased by 2% and profit decreased $1 million to $36
million. The decrease in net sales was due to lower average sales prices for
reclaimed fiber, containerboard and corrugated containers and the sale of a
converting facility. Profits were favorably impacted by lower reclaimed fiber
costs at the containerboard mills. Cost of goods sold as a percent of net sales
decreased to 86% in 2001 from 87% in 2000 due primarily to the lower reclaimed
fiber cost.
15
Other Operations
Net sales increased 8% compared to last year due primarily to the consumer
packaging operations acquired as part of the St. Laurent acquisition and the
acquisition of a multiwall bag packaging facility. Net sales were also
favorably impacted by higher average prices of multiwall bags. Profits improved
by $5 million due primarily to the higher sales prices and lower operating cost.
2000 COMPARED TO 1999
- ---------------------
Improvements in containerboard and other markets and the St. Laurent
acquisition were the primary reasons for the increases in net sales and
operating profits in 2000. Net sales increased 28% compared to 1999 and
operating profits increased 109%. The increase in net sales for each of our
segments is summarized in the chart below.
Container-
board &
Corrugated Other
(In millions) Containers International Operations Total
---------- ------------- ---------- -----
Sales price and product mix....... $ 573 $ 1 $ 27 $ 601
Sales volume...................... (22) 25 (18) (15)
Acquisitions and other............ 754 44 798
Closed or sold facilities......... (122) (6) (18) (146)
----- ------ ----- -----
Total............................ $1,183 $ 20 $ 35 $1,238
===== ====== ===== =====
Income before income taxes and extraordinary item improved $316 million
compared to 1999. Net income in 2000 was $108 million as compared to a loss of
$85 million in 1999.
Costs and Expenses
Consolidated cost of goods sold increased compared to 1999 due primarily to the
St. Laurent acquisition. In addition, energy cost was higher by $66 million and
reclaimed fiber cost was higher by $21 million. Cost of goods sold as a percent
of net sales decreased from 87% in 1999 to 81% in 2000 due primarily to the
higher average sales prices.
Selling and administrative expenses as a percent of net sales decreased from 9%
in 1999 to 8% in 2000 due primarily to higher average sales prices. Selling and
administrative expenses for 2000 increased due primarily to the St. Laurent
acquisition.
Interest expense, net increased $31 million due to the interest impact of $16
million on higher average borrowings, related primarily to the St. Laurent
acquisition, and the interest impact of $15 million due to higher average
interest rates. Our overall average effective interest rate in 2000 was higher
than in 1999 by 0.5%.
Gain on sale of assets in the Consolidated Statements of Operations declined in
2000 due primarily to a $39 million gain recorded in 1999 on the sale of our
equity interest in Abitibi-Consolidated, Inc.
Other, net income declined compared to 1999 due primarily to foreign currency
transaction gains, which were more favorable in 1999.
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 10 of the Notes to Consolidated Financial Statements.
16
Containerboard and Corrugated Containers Segment
Net sales for 2000 increased by 35% due to higher sales prices and the St.
Laurent acquisition. Profits improved by $416 million to $738 million. Market
conditions were stronger in the first half of 2000, enabling us to implement a
linerboard price 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% 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 occurred in certain
markets. The average price of market pulp increased by 31% in 2000 and the
average price of kraft paper increased by 15%.
Production of containerboard increased 16% due to the St. Laurent acquisition.
Exclusive of St. Laurent, production of containerboard declined 3% as a result
of the higher levels of market related downtime. Shipments of corrugated
containers increased 1%. Exclusive of St. Laurent, shipments of corrugated
containers declined 6% due to 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. Kraft paper production
declined 34% primarily due to the shifting of available capacity from kraft
paper to containerboard.
Profits increased due to the higher average prices and the St. Laurent
acquisition. Profits were negatively impacted by market related downtime and
higher cost of energy and fiber. Cost of goods sold as a percent of net sales
decreased to 77% for 2000 compared to 82% for 1999 due primarily to the higher
average sales prices.
International Segment
Net sales for 2000 increased by 4% and profit increased $7 million to $37
million. The increase in net sales was due to increases in volume for
corrugated container operations and higher sales prices for containerboard and
reclaimed fiber. Sales were negatively impacted by the sale of a corrugated
container operation located in Australia. Profits increased primarily due to
higher sales prices and a non-recurring gain on sale of land. Cost of goods
sold as a percent of net sales increased from 85% in 1999 to 87% in 2000 due
primarily to the inability of the corrugated container operations to pass on
increased containerboard cost to customers.
Other Operations
Net sales increased 7% due primarily to St. Laurent's consumer packaging
facilities, which were acquired on May 31, 2000. Sales prices for our specialty
packaging operations improved compared to 1999, but sales volume was lower due
to plant closures and a labor strike at one of our operating facilities.
Profits declined $4 million due primarily to the effects of the labor strike.
Other operations in 1999 included non-consolidated affiliates, which were
subsequently sold.
ST. LAURENT ACQUISITION, RESTRUCTURINGS AND SMURFIT-STONE MERGER
- ----------------------------------------------------------------
As previously discussed, we acquired St. Laurent on May 31, 2000. The
acquisition was accounted for as a purchase business combination and,
accordingly, the cost to acquire St. Laurent was preliminarily allocated to the
assets acquired and liabilities assumed according to estimated fair values. The
purchase price allocation was finalized during the second quarter of 2001,
resulting in acquired goodwill of $222 million. The preliminary allocation was
adjusted primarily for final fixed asset valuations. The allocation of the cost
to acquire St. Laurent included exit liabilities of $12 million for the
termination of certain employees, liabilities for long-term commitments and the
permanent shutdown of a container plant. Approximately $60 million of
annualized synergy savings have been achieved through a combination of
procurement savings, supply chain management, manufacturing efficiencies and
administrative reductions. Cash payments for exit liabilities for 2001 related
to the St. Laurent acquisition were $6 million. Since the date of the
acquisition through December 31, 2001, approximately $9 million (75%) of these
cash expenditures were incurred. Future cash outlays are expected to be $2
million in 2002 and $1
17
million thereafter. The remaining cash expenditures for exit liabilities in
connection with the acquisition will continue to be funded through operations
as originally planned.
In 2001, we recorded restructuring charges of $6 million related to the closure
of two converting operations and two wood products operations. The assets of
the facilities closed in 2001 were adjusted to their estimated fair values less
cost to sell, resulting in a $4 million non-cash write down. These shutdowns
resulted in approximately 235 employees being terminated.
As explained in our 2000 Annual Report on Form 10-K, we had $42 million of exit
liabilities remaining as of December 31, 2000 related to our merger with
Smurfit-Stone and from our restructuring activities. During 2001, we incurred,
exclusive of the St. Laurent liabilities, approximately $10 million of cash
expenditures for exit liabilities. The exit liabilities remaining as of
December 31, 2001 totaled $34 million. Since the merger with Smurfit-Stone,
through December 31, 2001, we have incurred approximately $197 million (85%) of
the planned cash expenditures to close facilities, pay severance cost and pay
other exit liabilities. Future cash outlays, principally for long-term
commitments, are expected to be $10 million in 2002, $5 million in 2003 and $19
million thereafter. The remaining cash expenditures in connection with the
Smurfit-Stone merger and related restructurings will continue to be funded
through operations as originally planned.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
General
Cash provided by operating activities in 2001 totaled $414 million compared to
$558 million in 2000. The largest factor in the 2001 decrease was the decline
in earnings of our Containerboard and Corrugated Containers segment, although
the decline was partially offset by a reduction in net interest expense and
lower restructuring expenditures. In 2001, we had additional cash provided from
new borrowings, which, net of financing fees, call premiums and other
refinancing costs, totaled $1,013 million and asset sales of $29 million. Our
primary uses of cash in 2001 were $1,319 million for debt repayments and $146
million for property, plant and equipment and acquisitions.
We expect internally generated cash flows, available borrowing capacity under
our credit agreements and future financing activities will be sufficient for
the next several years to meet our obligations, including debt service,
expenditures relating to environmental compliance and other capital
expenditures. Scheduled debt payments for 2002 and 2003 are $62 million and
$471 million, respectively, with increasing amounts thereafter. We are
exploring a number of options to repay or refinance these debt maturities. We
have historically had good access to capital markets and expect to be able to
repay or refinance these debt maturities before their maturity dates. Although
we believe we will have access to the capital markets in the future, these
markets are volatile and we cannot predict the condition of the markets or the
timing of any related transactions. Access to the capital markets may be
limited or unavailable due to an unpredictable material adverse event unrelated
to our operational or financial performance. In such an event, we would explore
additional options, including, but not limited to, the sale or monetization of
assets.
We intend to hold capital expenditures for 2002 significantly below our
anticipated annual depreciation level of $291 million. As of December 31, 2001,
we had authorized commitments for capital expenditures of $80 million,
including $27 million for environmental projects, $19 million to maintain
competitiveness and $34 million for upgrades, modernization and expansion.
We expect to use any excess cash flows provided by operations to make further
debt reductions. As of December 31, 2001, we and Smurfit-Stone Container Canada
Inc. collectively had $573 million of unused borrowing capacity under our
credit agreements.
18
Financing Activities
In January 2001, we issued $750 million of 9.75% senior notes due 2011 and $300
million of 9.25% senior notes due 2008 (the New Senior Notes). The proceeds of
this issuance, along with additional borrowings on the Stone Container
revolving credit facility of $32 million, were used 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 $37 million in fees, call premiums and
other expenses related to these transactions. We commenced a registered
exchange offer for the New Senior Notes on June 13, 2001. On July 13, 2001, we
completed the exchange of substantially all of the New Senior Notes for a like
amount of senior notes which have been registered under the Securities Act of
1933. We did not receive any proceeds from the exchange offer.
The obligations under our credit agreement, which provide for our revolving
credit facility and our Tranche C, Tranche D, Tranche E and Tranche F term
loans, are unconditionally guaranteed by certain of our subsidiaries, other
than subsidiaries acquired or created in connection with the St. Laurent
acquisition. The obligations under our credit agreement are secured by a
security interest in substantially all of our assets and our U.S. subsidiaries,
other than the assets acquired in the St. Laurent transaction, and 65% of the
stock of Smurfit-Stone Container Canada Inc. The security interest under our
credit agreement excludes cash, cash equivalents, certain trade receivables,
four paper mills and the land and buildings of the corrugated container
facilities. The Tranche G term loan under the Stone Container/Smurfit-Stone
Container Canada Inc. credit agreement is unconditionally guaranteed by the
U.S. subsidiaries acquired or created in connection with the St. Laurent
acquisition and is secured by a security interest in substantially all of the
U.S. assets acquired in the St. Laurent acquisition. The Tranche H term loan
and revolving credit facility provided to Smurfit-Stone Container Canada Inc.
under the Stone Container/Smurfit-Stone Container Canada Inc. credit agreement
are unconditionally guaranteed by Stone Container and the U.S. and Canadian
subsidiaries acquired or created in connection with the St. Laurent acquisition
and are secured by a security interest in substantially all of the U.S. and
Canadian assets acquired in the St. Laurent acquisition.
The credit agreements 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 financial covenants. The credit
agreements also require prepayments of the term loans from excess cash flow, as
defined, and proceeds from certain asset sales, insurance, and incurrence of
certain indebtedness. We are required to pay $38 million in March 2002 related
to our excess cash flows in 2001. The loan 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. We believe the
likelihood of our breaching the debt covenants in 2002 is remote absent any
material adverse event affecting the U.S. economy as a whole. We also believe
that if a material adverse event would affect us, our lenders' would provide us
waivers if necessary. However, our expectations of future operating results and
continued compliance with our debt covenants cannot be assured and we cannot
control our lenders' actions. If our debt is placed in default, we would
experience a material adverse impact on our financial condition.
Our Tranche C, Tranche D and Tranche E term loans bear interest at rates
selected at our option, equal to adjusted LIBOR plus 3.5% or ABR plus 2.5%.
Loans under our Tranche F, Tranche G and Tranche H term loans bear interest at
variable rates equal to adjusted LIBOR plus a margin ranging from 3.5% to 2.75%
or ABR plus a margin ranging from 2.5% to 1.75%. Outstanding loans under our
revolving credit facilities bear interest at variable rates equal to adjusted
LIBOR plus a margin ranging from 3.0% to 2.0% or ABR plus a margin ranging from
2.0% to 1.0%. The margins are determined by the ratio of total indebtedness to
EBITDA, as defined in the applicable credit agreement.
19
The indentures governing our 11.50% Senior Notes due 2006 and the 12.58% Rating
Adjustable Senior Notes due 2016, with an outstanding aggregate principal
amount of $325 million at December 31, 2001, generally provide that in the
event of a "change of control" (as defined in the indentures), we must offer to
repurchase these senior notes. Our merger with Smurfit-Stone constituted such a
change of control. As a result, we are 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 senior notes, other than the 12.58% Rating Adjustable Senior
Notes, is currently prohibited by the terms of our bank debt. Although the
terms of 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 indentures, we are 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 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. Our equity level
has exceeded the minimum since April 1999.
Pension Obligations
As of December 31, 2001, our pension benefit obligations exceeded the fair
value of pension plan assets by $502 million, up from $362 million at the end
of 2000. The increase in the under funded status was due primarily to interest
cost on our pension obligations, the actuarial loss resulting primarily from
the change in the discount rate used for plan liabilities and negative returns
on plan assets. As a result, our pension expense and cash contributions to the
plans will likely be higher in the future.
Environmental Matters
Phase I of the Cluster Rule required us to convert our bleached market pulp
mill at Panama City, Florida to an elemental chlorine free bleaching process,
to install systems at several of our mills for the collection and destruction
of low volume, high concentration gases and to implement best management
practices, such as spill controls. These projects were substantially completed
at a cost of approximately $155 million as of December 31, 2001 (of which
approximately $21 million was spent in 2001). Phase II of the Cluster Rule will
require the implementation of systems to collect high volume, low concentration
gases at various mills and has a compliance date of 2006. Phase III of the
Cluster Rule will require control of particulate from recovery boilers, smelt
tanks and lime kilns and has a compliance date of 2005. We continue to study
possible means of compliance with Phases II and III of the Cluster Rule. Based
on currently available information, we estimate that the aggregate compliance
cost of Phases II and III of the Cluster Rule is likely to be in the range of
$70 million to $90 million and that such cost will be incurred over the next
five years.
In recent years, the EPA has undertaken significant air quality initiatives
associated with nitrogen oxide emissions, regional haze and national ambient
air quality standards. Several of our mills are located in states affected by
these EPA initiatives. When regulatory requirements for new and changing
standards are finalized, we will add any resulting future cost projections to
our expenditure forecast.
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
20
three years we have spent an average of approximately $7 million annually on
capital expenditures for environmental purposes. We anticipate that
environmental capital expenditures will be approximately $13 million in 2002.
TRANSFER OF FINANCIAL ASSETS
- ----------------------------
At December 31, 2001, we had one off-balance sheet financing arrangement with a
special purpose entity. In 1999, we entered into a six-year $250 million
accounts receivable securitization program whereby we sell, without recourse,
on an ongoing basis, certain of our accounts receivable to Stone Receivables
Corporation (SRC). SRC is a wholly-owned, non-consolidated subsidiary of Stone
Container and a qualified special-purpose entity under the provisions of
Statement of Financial Accounting Standards (SFAS) No. 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities." SRC transfers the receivables to a trust for which it has sold
beneficial interest to third-party investors. At December 31, 2001, $271
million of accounts receivable had been sold under the program, of which $33
million was retained by us as a subordinated interest and recorded in accounts
receivable in the accompanying consolidated balance sheet. The investors and
securitization trusts have no recourse to us for the failure of debtors to pay
when due.
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 cost increases through
hedging programs and supply contracts. Natural gas prices increased
significantly in 2000 and held through the second quarter of 2001. Prices began
to decrease in the third quarter and, by the end of 2001, had returned to more
traditional levels. 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 51% 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 our merger with Smurfit-Stone and the St. Laurent acquisition,
our property, plant and equipment was adjusted to estimated fair value in the
allocations of the purchase price in both transactions. Therefore, depreciation
expense in future years will approximate current cost of productive capacity
being consumed.
CRITICAL ACCOUNTING POLICIES
- ----------------------------
Certain accounting issues require management estimates and judgments for the
preparation of financial statements. Our most significant policies requiring
the use of estimates and judgments are listed below.
Accounts Receivable
We evaluate the collectibility of our accounts receivable on a case-by-case
basis, and make adjustments to the bad debt reserve for expected losses. We
consider such things as ability to pay, bankruptcy, credit ratings and payment
history. For all other accounts, we estimate reserves for bad debts based on
historical experience and past due status of the accounts. Our write-offs in
2001 and 2000 were $1 million and $2 million, respectively.
Pension
Our defined benefit pension plans, which cover substantially all of our
employees, are accounted for in accordance with SFAS No. 87, "Employers'
Accounting for Pensions". The most significant elements in determining our
pension expense in accordance with SFAS No. 87 are the expected return on plan
assets and the discount rate used to discount plan liabilities. Our expected
return on plan assets is
21
generally 9.5%. We believe that our assumption of future returns is reasonable.
Although the plan assets earned substantially less over the past two years, our
pension plan assets have earned in excess of the expected rate over the
long-term. Our discount rate assumption is developed using the Moody's Average
Aa-Rated Corporate Bonds index as a benchmark. At December 31, 2001 the
discount rate used by us was 7.25% for our U.S. plans and 6.5% for our foreign
plans. See Note 11 of the Notes to Consolidated Financial Statements.
Income Tax Matters
At December 31, 2001, we had approximately $1,068 million of net operating loss
carryforwards for U.S. federal income tax purposes that expire from 2011
through 2019, with a tax value of $374 million and $38 million of capital loss
carryforwards for U.S. federal income tax purposes that expire from 2004 to
2005, with a tax value of $13 million. A valuation allowance of $152 million
has been established for a portion of these deferred tax assets. We had net
operating loss carryforwards for state purposes with a tax value of $77
million, which expire from 2002 through 2020. A valuation allowance of $46
million has been established for a portion of these deferred taxes. Further, we
had approximately $86 million of net operating loss carryforwards for Canadian
tax purposes that expire from 2004 to 2007, with a tax value of $29 million. We
had approximately $32 million of alternative minimum tax credit carryforwards
for U.S. federal income tax purposes, which are available indefinitely. The
realization of these deferred tax assets is dependent upon future taxable
income. Based upon recent levels of taxable income, we expect that our deferred
tax assets, net of valuation allowances, will be fully realized. Essentially
all of our valuation allowances were recorded in the purchase price allocation
at the time of the merger with Smurfit-Stone. As a result, if the valuation
allowance is reduced, goodwill will be reduced by a corresponding amount.
Should additional valuation allowances be necessary because of changes in
economic circumstances, those allowances would be established through a charge
to income tax expense.
We frequently face challenges from domestic and foreign tax authorities
regarding the amount of taxes due. These challenges include questions regarding
the timing and amount of deductions and the allocation of income among various
tax jurisdictions. In evaluating the exposure associated with our various
filing positions, we record reserves for probable exposures. Based on our
evaluation of our tax position, we believe we have appropriately accrued for
probable exposures. To the extent we were to prevail in matters for which
accruals have been established or be required to pay amounts in excess of our
reserves, our effective tax rate in a given financial statement period may be
materially impacted.
Environmental Liabilities
We accrue environmental expenditures related to existing conditions, resulting
from past or current operations, when they become probable and estimable. Our
estimates are based on our knowledge of the particular site, environmental
regulations, or the potential enforcement matter. Based on current information,
we believe the probable costs of the potential environmental enforcement
matters, response costs under CERCLA and similar state laws, and the
remediation of owned property discussed in Part 1, Item 3. Legal Proceedings -
Environmental Matters, will not have a material adverse effect on our financial
condition or results of operation. As of December 31, 2001, we had
approximately $30 million reserved for environmental liabilities. We believe
our liability for these matters was adequately reserved at December 31, 2001.
PROSPECTIVE ACCOUNTING STANDARDS
- --------------------------------
In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No.
142, "Goodwill and Other Intangible Assets," effective for fiscal years
beginning after December 15, 2001. Under the new rules, goodwill and intangible
assets deemed to have indefinite lives will no longer be amortized, but will be
subject to an annual impairment test. Other intangible assets will continue to
be amortized over their useful lives.
We will apply the new rules on accounting for goodwill and other intangible
assets beginning in the first quarter of 2002. Application of the
non-amortization provision of the Statement is expected to result in an
increase in net income of $84 million per year. During 2002, we will perform
the first of the required
22
impairment tests of goodwill as of January 1, 2002. We have not yet determined
what the effect of these tests will be on our earnings and financial position.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." SFAS No. 143 establishes accounting standards for the recognition
and measurement of an asset retirement obligation and its associated asset
retirement cost. It also provides accounting guidance for legal obligations
associated with the retirement of tangible long-lived assets. This statement is
effective for fiscal years beginning after June 15, 2002. We are currently
assessing the impact of this new standard.
In July 2001, the FASB issued SFAS No. 144, "Impairment or Disposal of
Long-Lived Assets," which is effective for fiscal years beginning after
December 15, 2001. The provisions of this statement provide a single accounting
model for impairment of long-lived assets, including discontinued operations.
We are currently assessing the impact of these new standards. The impact of
this new standard is not expected to be material.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------
We are exposed to various market risks, including commodity price risk, foreign
currency risk and interest rate risk. To manage the volatility related to these
risks, we enter into various derivative contracts. We do not use derivatives
for speculative or trading purposes.
Commodity Risk
We periodically enter into exchange traded futures contracts to manage
fluctuations in cash flows resulting from commodity price risk in the
procurement of natural gas. As of December 31, 2001, we have futures contracts
to hedge approximately 65% to 80% of our expected natural gas requirements for
the months of January 2002 through March 2002. We have futures contracts to
hedge approximately 35% to 45% of our expected natural gas requirements for the
months of April 2002 through October 2002. Our objective is to fix the price of
a portion of our forecasted purchases of natural gas used in the manufacturing
process. The increase in energy cost discussed in Item 7, Management's
Discussion and Analysis of Financial Condition and Results of Operations,
included the impact of the natural gas futures contracts. See Note 8 of the
Notes to Consolidated Financial Statements.
Foreign Currency Risk
Our principal foreign exchange exposures are the Canadian dollar and the euro.
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
the local currency to the U.S. dollar beginning on 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.
We periodically enter into foreign exchange forward contracts with financial
institutions to purchase Canadian dollars in order to protect against currency
exchange risk associated with expected future cash flows. Contracts typically
have maturities of approximately one year. As of December 31, 2001, we have
Canadian dollar forward purchase contracts to hedge approximately 20% to 60% of
our Canadian dollar requirements for the months of January 2002 through
February 2003.
The potential change in fair value resulting from a hypothetical 10% change in
the euro exchange rate would be approximately $23 million and in the Canadian
dollar exchange rate would be $13 million at December 31, 2001. Any loss in
fair value, associated with the euro, in the Consolidated Balance Sheets would
be reflected as a currency 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.
23
In 2001, 2000 and 1999, the average exchange rates for the Canadian dollar and
the euro (weakened) against the U.S. dollar as follows:
Year Ended December 31,
----------------------
2001 2000 1999
---- ---- ----
Canadian dollar (4.3)% % (0.2)%
euro (3.1) (15.4) (9.4)
Interest Rate Risk
Our earnings and cash flow 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. Our objective
is to protect Stone Container 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, 2001.
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.
Short and Long-Term Debt
Outstanding as of December 31, 2001
There- Fair
(U.S.$, in millions) 2002 2003 2004 2005 2006 after Total Value
- -------------------------------------------------------------------------------------------------------------------
U.S. bank term loans and revolver --
5.6% average interest rate (variable).................. $44 $449 $ 6 $ 588 $749 $ $1,836 $1,827
U.S. senior notes -- 10.2% average interest
rate (fixed)........................................... 2 3 3 3 203 1,245 1,459 1,557
U.S. industrial revenue bonds --
9.0% average interest rate(fixed)...................... 3 14 14 14 15 151 211 211
German mark bank term loans --
4.9% average interest rate (variable)................. 5 1 1 7 7
Other-U.S.............................................. 2 1 1 2 6 6
Other-foreign......................................... 6 3 2 2 1 6 20 20
-----------------------------------------------------------
Total debt............................................ $62 $471 $27 $607 $968 $1,404 $3,539 $3,628
===========================================================
24
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
Page No.
-------
Index to Financial Statements
Management's Responsibility for Financial Statements................................... 26
Report of Independent Auditors......................................................... 27
Consolidated Balance Sheets - December 31, 2001 and 2000............................... 28
For the years ended December 31, 2001, 2000 and 1999
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.................................. 55
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 Stone Container is responsible for the information contained
in the consolidated financial statements. 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, Stone Container 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. In
addition, our business ethics policy requires employees to maintain a high
level of ethical standards in the conduct of the company's business.
/s/ Patrick J. Moore
- ---------------------------------------
Patrick J. Moore
President and Chief Executive Officer
/s/ Paul K. Kaufmann
- ---------------------------------------
Paul K. Kaufmann
Vice President and Corporate Controller
(Principal Accounting Officer)
26
Report of Independent Auditors
Board of Directors
Stone Container Corporation
We have audited the accompanying consolidated balance sheets of Stone Container
Corporation as of December 31, 2001 and 2000, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 2001. 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 Stone Container
Corporation at December 31, 2001 and 2000 and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2001 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 8 to the financial statements, in 2001 the Company changed
its method of accounting for derivative instruments and hedging activities.
/s/ Ernst & Young LLP
---------------------
Ernst & Young LLP
St. Louis, Missouri
January 29, 2002
27
STONE CONTAINER CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, (In millions, except share data) 2001 2000
- ------------------------------------------------------------------------------------------------------------
Assets
Current assets
Cash and cash equivalents .................................................. $ 15 $ 24
Receivables, less allowances of $43 in 2001 and $44 in 2000................. 279 369
Inventories
Work-in-process and finished goods ......................................... 154 154
Materials and supplies ..................................................... 355 385
--------------------------
509 539
Deferred income taxes ...................................................... 138 159
Prepaid expenses and other current assets................................... 45 42
--------------------------
Total current assets ................................................... 986 1,133
Net property, plant and equipment ........................................... 4,159 4,348
Timberland, less timber depletion .......................................... 44 58
Goodwill, less accumulated amortization of $245 in 2001 and $161 in 2000.... 3,106 3,170
Investment in equity of non-consolidated affiliates........................ 127 132
Other assets ............................................................... 216 210
--------------------------
$ 8,638 $ 9,051
- ------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Current liabilities
Current maturities of long-term debt ...................................... $ 62 $ 34
Accounts payable........................................................... 353 405
Accrued compensation and payroll taxes..................................... 121 118
Interest payable........................................................... 67 71
Other current liabilities.................................................. 127 136
--------------------------
Total current liabilities............................................. 730 764
Long-term debt, less current maturities.................................... 3,477 3,779
Other long-term liabilities ............................................... 757 708
Deferred income taxes ..................................................... 717 797
Stockholders' equity
Common stock, par value $.01 per share; 1,000
shares authorized, issued and outstanding
Additional paid-in capital ................................................ 3,016 3,016
Retained earnings ......................................................... 12 2
Accumulated other comprehensive income (loss).............................. (71) (15)
--------------------------
Total stockholders' equity .............................................. 2,957 3,003
--------------------------
$ 8,638 $ 9,051
- ------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
28
STONE CONTAINER CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31, (In millions) 2001 2000 1999
- -----------------------------------------------------------------------------------
Net sales........................................ $ 5,757 $ 5,738 $ 4,500
Costs and expenses
Cost of goods sold............................ 4,866 4,629 3,914
Selling and administrative expenses........... 514 465 389
Restructuring charges......................... 6 53
Gain on sale of assets........................ (9) (2) (39)
--------------------------------
Income from operations..................... 380 593 236
Other income (expense)
Interest expense, net......................... (330) (371) (340)
Equity income of affiliates................... 14 13 12
Other, net.................................... 5 6 17
--------------------------------
Income (loss) before income extraordinary
item....................................... 69 241 (75)
Provision for income taxes....................... (55) (126)
--------------------------------
Income (loss) before extraordinary item....... 14 115 (75)
Extraordinary item
Loss from early extinguishment of debt, net
of income tax benefit of $2 in 2001 and
$1 in 1999................................... (4) (2)
--------------------------------
Net income (loss).......................... 10 115 (77)
Preferred stock dividends........................ (7) (8)
--------------------------------
Net income (loss) applicable to
common share.............................. $ 10 $ 108 $ (85)
- -----------------------------------------------------------------------------------
See notes to consolidated financial statements.
29
STONE CONTAINER CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In millions)
- -----------------------------------------------------------------------------------------------------------------------------------
Stockholders' Equity
-------------------------------------------------------------------------
Number of Shares Accumulated
-------------------- Additional Retained Other
Preferred Common Preferred Common Paid-In Earnings Comprehensive
Stock Stock Stock Stock Capital (Deficit) Income (Loss) Total
-------------------------------------------------------------------------------------------
Balance at January 1, 1999............. 5 110 $ 78 $ 1 $ 2,544 $ (36) $ 3 $ 2,590
Comprehensive income (loss)
Net loss............................ (77) (77)
Other comprehensive income (loss)
Unrealized holding gain on
marketable Securities, net of
tax of $2..................... 3 3
Foreign currency translation
adjustment, net of tax of
$(6).......................... (10) (10)
---------
Comprehensive income (loss)... (84)
-------------------------------------------------------------------------------------------
Balance at December 31, 1999........... 5 110 78 1 2,544 (113) (4) 2,506
Effect of St. Laurent Acquisition
Issuance of common stock............ 25 393 393
Agreement and Plan of Merger
Preferred stock transaction......... (5) (78) 78
Dissolution of common stock......... (135) (1) 1
Issuance of common stock............
Comprehensive income
Net income.......................... 115 115
Other comprehensive income (loss)
Minimum pension liability, net
of tax of $(1).................. (3) (3)
Foreign currency translation
adjustment,
net of tax of $(5)............ (8) (8)
---------
Comprehensive income.......... 104
-------------------------------------------------------------------------------------------
Balance at December 31, 2000........... 3,016 2 (15) 3,003
Comprehensive income (loss)
Net loss............................ 10 10
Other comprehensive income (loss)
Cumulative effect of accounting
change net of tax of $2....... 3 3
Deferred hedge loss, net of tax of
$(7).......................... (10) (10)
Minimum pension liability, net of
tax of $(26)....................... (44) (44)
Unrealized holding loss on
marketable securities, net of
tax of $(1)...................... (2) (2)
Foreign currency translation
adjustment, net of tax of $(2)... (3) (3)
--------
Comprehensive income (loss)...... (46)
-------------------------------------------------------------------------------------------
Balance at December 31, 2001........... $ $ $ 3, 016 $ 12 $ (71) $ 2,957
- -----------------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
30
STONE CONTAINER CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31, (In millions) 2001 2000 1999
- --------------------------------------------------------------------------------------------------------
Cash flows from operating activities
Net income (loss)............................................ $ 10 $ 115 $ (77)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Extraordinary loss from early extinguishment of debt...... 6 3
Depreciation and amortization............................. 354 313 296
Amortization of deferred debt issuance costs.............. 6 3 4
Deferred income taxes..................................... 19 108 (17)
Non cash restructuring charge............................. 4 32
Foreign currency transaction gains........................ (8) (7)
Equity income of affiliates............................... (14) (13) (12)
Gain on sale of assets.................................... (9) (2) (39)
Change in current assets and liabilities, net of
effects from acquisitions and dispositions
Receivables.......................................... 98 96 (166)
Inventories.......................................... 31 48 23
Prepaid expenses and other current assets............ (3) 29 51
Accounts payable and other current liabilities....... (62) (26) 104
Interest payable..................................... (4) (11) (17)
Income taxes......................................... 6 (3)
Other, net................................................ (20) (134) (71)
---------------------------------------
Net cash provided by operating activities................... 414 558 72
---------------------------------------
Cash flows from investing activities
Expenditures for property, plant and equipment.............. (103) (247) (87)
Proceeds from sales of assets............................... 29 70 544
Net proceeds from sale of receivables....................... 226
Payments on acquisitions, net of cash received.............. (43) (631)
---------------------------------------
Net cash provided by (used for) investing activities........ (117) (808) 683
---------------------------------------
Cash flows from financing activities
Net payments of debt........................................ (1,319) (1,246) (657)
Proceeds from long-term debt................................ 1,050 1,525
Debt repurchase premiums.................................... (14)
Net repayments under accounts receivable
securitization program.................................... (226)
Deferred debt issuance costs................................ (23) (17)
---------------------------------------
Net cash provided by (used for) financing activities........ (306) 262 (883)
---------------------------------------
Effect of exchange rate changes on cash..................... (1) 4
---------------------------------------
Increase (decrease) in cash and cash equivalents.............. (9) 11 (124)
Cash and cash equivalents
Beginning of period......................................... 24 13 137
---------------------------------------
End of period............................................... $ 15 $ 24 $ 13
- --------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
31
STONE CONTAINER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in millions)
1. Significant Accounting Policies
Basis of Presentation: Stone Container Corporation ("Stone"), hereafter
referred to as the "Company," is a wholly-owned subsidiary of Smurfit-Stone
Container Corporation ("SSCC"). On November 18, 1998, Stone was merged with a
wholly-owned subsidiary of SSCC (the "Merger"). On May 31, 2000, the Company
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 and specialty packaging products. The Company's
paperboard mills procure virgin and reclaimed fiber and produce paperboard for
conversion into corrugated containers and bags 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. Customers and operations are located
principally in North America and Europe. 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 the Company does not have a
majority voting interest and non-majority owned affiliates are primarily
accounted for under 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.
Revenue Recognition: The Company recognizes revenue at the time persuasive
evidence of an agreement exists, price is fixed and determinable, products are
shipped to external customers and collectibility is reasonably assured.
Shipping and handling costs are included in cost of goods sold.
Inventories: Inventories are valued at the lower of cost or market under the
last-in, first-out ("LIFO") method, except for $248 million in 2001 and $255
million in 2000, 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 $2 million and $16 million at December 31, 2001 and 2000,
respectively.
Net Property, Plant and Equipment: Property, plant and equipment related to
the Merger and the St. Laurent Acquisition was recorded at fair value. 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. Paper machines have been assigned a useful
life of 18 years, while major converting equipment has been assigned a useful
life of 12 years.
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.
32
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 (See Prospective Accounting Pronouncements).
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.
Marketable Securities: The Company includes its available for sale marketable
securities in other assets. The securities consist of equity securities, which
are stated at fair value, with net unrealized gains or losses on the securities
recorded as accumulated other comprehensive income (loss) in stockholders'
equity.
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 10).
Foreign Currency Translation: The functional currency for the majority of the
Company's foreign operations is the applicable local currency, except for the
operations in Canada. The functional currency for the Canadian operations was
changed from the local currency to the U.S. dollar beginning on June 1, 2000
in conjunction with the St. Laurent Acquisition.
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 14). Foreign currency transaction gains or losses are credited or
charged to income.
Derivative Instruments and Hedging Activities: In June 1998, the Financial
Accounting Standards Board ("FASB") issued SFAS No. 133, as amended by SFAS No.
138, "Accounting for Derivative Instruments and Hedging Activities," which was
adopted by the Company January 1, 2001. The Company recognizes all derivatives
on the balance sheet at fair value. Derivatives that are not hedges are
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 are either
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 is immediately recognized in earnings (See
Note 8).
Transfers of Financial Assets: The Company accounts for transfers of financial
assets in accordance with SFAS No. 140 "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 not
available for retained interests, so the Company estimates fair value based on
the present value of expected cash flows estimated by using management's best
estimates of key assumptions (See Note 4).
33
Stock-Based Compensation: The Company's employees participate in
SSCC's stock-based plans. The Company accounts for stock-based plans in
accordance with Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees," and related interpretations. Under APB No. 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 for stock options. The Company has adopted the
disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation."
Amounts earned under the Company's annual management incentive plan, which are
deferred and paid in the form of SSCC Restricted Stock Units ("RSUs"),
immediately vest and are expensed by the Company in the year earned. RSUs
related to the Company matching program are expensed over the vesting period.
Environmental Matters: The Company expenses environmental expenditures related
to existing conditions resulting from past or current operations and 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 Statement of Position 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 2001 presentation. Gain on sale of assets, relating
to assets used in operations, has been reclassified from other, net to a
separate component of operating income in the consolidated statements of
operations.
Prospective Accounting Pronouncements: In June 2001, the FASB issued SFAS No.
142, "Goodwill and Other Intangible Assets," effective for fiscal years
beginning after December 15, 2001. Goodwill and intangible assets deemed to
have indefinite lives will no longer be amortized, but will be subject to an
annual impairment test. Other intangible assets will continue to be amortized
over their useful lives.
The Company will apply the new rules on accounting for goodwill and other
intangible assets beginning in the first quarter of 2002. Application of the
non-amortization provision of the statement is expected to result in an
increase in net income of approximately $84 million per year. During 2002, the
Company will perform the first of the required impairment tests of goodwill as
of January 1, 2002. The Company has not yet determined what the effect of these
tests will be on its earnings and financial position.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." SFAS No. 143 establishes accounting standards for the recognition
and measurement of an asset retirement obligation and its associated asset
retirement cost. It also provides accounting guidance for legal obligations
associated with the retirement of tangible long-lived assets. This statement is
effective for fiscal years beginning after June 15, 2002. The Company is
currently assessing the impact of this new standard.
In July 2001, the FASB issued SFAS No. 144 "Impairment or Disposal of
Long-Lived Assets," which is effective for fiscal years beginning after
December 15, 2001. The provisions of this statement provide a single accounting
model for impairment of long-lived assets, including discontinued operations.
The impact of this new standard is not expected to be material.
34
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 purchase price allocation was completed during the second quarter of 2001.
The final allocation has resulted in acquired goodwill of approximately $222
million, which is being amortized on a straight-line basis over 40 years. The
preliminary allocation was adjusted primarily for the final fixed asset
valuations.
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:
2000
------
Net sales............................................ $6,223
Income before extraordinary item..................... 106
Net income........................................... 106
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.
The following is a summary of the exit liabilities recorded in the allocation
of the purchase price:
Lease Other
Severance Commitments Commitments Total
--------------------------------------------------
Opening balance.................. $ 4 $ 2 $ 4 $10
Payments...................... (1) (2) (3)
--------------------------------------------------
Balance at December 31, 2000..... 3 2 2 7
Payments...................... (3) (1) (2) (6)
Adjustments................... 1 1 2
--------------------------------------------------
Balance at December 31, 2001..... $ 1 $ 1 $ 1 $ 3
--------------------------------------------------
Future cash outlays under the exit liabilities are anticipated to be $2 million
in 2002 and $1 million thereafter.
3. Merger and Restructuring
Merger
In connection with the Merger, the allocation of the cost to acquire the
Company included liabilities associated with the permanent shutdown of certain
containerboard mill and pulp mill facilities, the termination of certain
Company employees and long-term commitments.
During 1999, the Company permanently closed five converting facilities.
Included in the purchase price allocation for these facilities are the
adjustments 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.
35
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, the Company paid approximately $123 million
to satisfy the claims of creditors of FCPC. The Company received title to the
FCPC mill, and all claims under an output purchase agreement, as well as any
obligations of the Company involving FCPC or its affiliates, were released and
discharged.
In May 2000, the Company sold the market pulp mill at its closed Port
Wentworth, Florida 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. The $15 million reduction to the exit
liabilities in 2000 is due primarily to the assumption of certain lease
commitments by the buyer of the Port Wentworth facility.
The following table is a summary of the exit liabilities recorded as part of
the Merger. The remaining long-term lease commitments include the five
converting facilities and the corporate office.
Settlement Mill
Lease of FCPC Other Closure
Severance Commitments Litigation Commitments Costs Total
---------------------------------------------------------------------------------------
Balance at
January 1, 1999............................ $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
Payments................................... (3) (3) (6)
-------------------------------------------------------------------------------------
Balance at December
31, 2001................................... $ $ 15 $ $ 10 $ 25
-------------------------------------------------------------------------------------
Future cash outlays under the exit liabilities are anticipated to be $4 million
in 2002, $4 million in 2003, $7 million in 2004 and $10 million thereafter.
Restructuring
During 2000, the Company recorded a restructuring charge 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 closed facilities
were adjusted to their estimated fair value less costs to sell resulting in a
$32 million non-cash write down. 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. The net sales and operating loss of these shutdown
facilities in 2000 prior to closure were $56 million and $17 million,
respectively. The net sales and operating loss of these shutdown facilities in
1999 were $88 million and $1 million, respectively.
During 2001, the Company recorded a restructuring charge of $6 million related
to the permanent shutdown of two converting facilities and two sawmills. The
assets of these facilities were adjusted to their estimated fair value less
costs to sell resulting in a $4 million non-cash write down. The terminated
employees included approximately 100 at the sawmills and approximately 135
employees at the converting facilities. The net sales and operating loss of
the shutdown facilities in 2001 prior to closure
36
were $46 million and $10 million, respectively. The net sales and operating
loss of the shutdown facilities in 2000 were $42 million and $4 million,
respectively.
The following is a summary of the restructuring liabilities recorded:
Write-down of
Property and Facility
Equipment to Lease Closure Other
Fair Value Severance Commitments Costs Commitments Total
--------------------------------------------------------------------------------------
Opening balance............................ $ 32 $12 $ 4 $ 4 $ 1 $ 53
Payments................................ (8) (1) (1) (10)
Adjustments............................. (32) (32)
--------------------------------------------------------------------------------------
Balance at
December 31, 2000.......................... 4 3 3 1 11
Charge.................................. 4 1 1 6
Payments................................ (3) (1) (4)
Adjustments............................. (4) (4)
--------------------------------------------------------------------------------------
Balance at
December 31, 2001.......................... $ $ 2 $ 4 $ 2 $ 1 $ 9
--------------------------------------------------------------------------------------
Future cash outlays under the restructuring liabilities are anticipated to be
$6 million in 2002, $1 million in 2003, $1 million in 2004, and $1 million
thereafter.
4. Transfers of Financial Assets
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. 140,
"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, 2001 and 2000, $271 million and $295 million of accounts
receivable had been sold under the program, of which $33 million and $66
million were retained by the Company as a subordinated interest and recorded in
accounts receivable in the accompanying consolidated balance sheets. The
Company recognized a loss on sales of receivables to SRC of $11 million and $16
million in 2001 and 2000 respectively, which is included in other, net in the
consolidated statements of operations.
37
Key economic assumptions used in measuring the retained interest are as follows:
Year Ended Year Ended
December 31, December 31, December 31, December 31,
2001 2001 2000 2000
------------------------------------------------------------------------
Residual cash flows discounted at ... 8.00% 8.00% 8.00% 8.00%
Expected loss and dilution rate ..... 2.70%-4.66% 6.22% 3.42%-3.82% 5.45%
Variable return to investors ........ LIBOR plus 50 to 2.68% LIBOR plus 50 to 7.20%
180 basis points 180 basis points
At December 31, 2001, 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 SRC:
2001 2000
---------------------------------
Cash proceeds from sales of receivables.......................... $2,884 $2,748
Servicing fees received.......................................... 3 3
Other cash flows received on retained interest .................. 1 30
Interest income.................................................. 1 1
5. Net Property, Plant and Equipment
Net property, plant and equipment at December 31 consists of:
2001 2000
--------------------------
Land............................................................. $ 83 $ 82
Buildings and leasehold improvements............................. 359 320
Machinery, fixtures and equipment................................ 4,341 4,244
Construction in progress......................................... 51 134
--------------------------
4,834 4,780
Less accumulated depreciation and amortization................... (675) (432)
--------------------------
Net property, plant and equipment.............................. $4,159 $4,348
--------------------------
The total value assigned to the St. Laurent property, plant and equipment was
$1,284 million in the final purchase price allocation (See Note 2).
Depreciation expense was $270 million in 2001, $231 million in 2000 and $225
million in 1999. Property, plant and equipment include capitalized leases of
$12 million and $11 million and related accumulated amortization of $3 million
and $3 million at December 31, 2001 and 2000, respectively.
38
6. Non-Consolidated Affiliates
The Company has several non-consolidated affiliates that are engaged in paper
and packaging operations in North America and Europe. The Company's
significant non-consolidated affiliate at December 31, 2001 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 stockholder of SSCC. Smurfit-MBI had net
sales of $441 million and $460 million in 2001 and 2000, respectively. The
Company has not guaranteed and is not otherwise contingently liable for any
debts or obligations of Smurfit-MBI.
During 1999, the Company sold its interest in Abitibi-Consolidated, Inc.
("Abitibi"), a Canadian based manufacturer and marketer of publication paper,
and recorded a $39 million gain.
Combined summarized financial information for all of the Company's
non-consolidated affiliates that are accounted for under the equity method of
accounting is as follows:
2001 2000
------------------------------
Results of operations
Net sales................................................. $640 $697
Cost of sales............................................. 552 604
Income before income taxes, minority interest and
extraordinary charges................................... 38 36
Net income................................................ 38 35
December 31, December 31,
2001 2000
-----------------------------
Financial position:
Current assets............................................ $139 $153
Non-current assets........................................ 127 147
Current liabilities....................................... 76 91
Non-current liabilities................................... 117 111
Stockholders' equity...................................... 73 98
39
7. LONG-TERM DEBT
Long-term debt as of December 31 is as follows:
2001 2000
----------------------
Bank Credit Facilities
Tranche C Term Loan (5.7% weighted average variable rate), payable in
various installments through October 1, 2003......................................... $ 146 $ 181
Tranche D Term Loan (5.7% weighted average variable rate), payable in
various installments through October 1, 2003......................................... 138 173
Tranche E Term Loan (5.7% weighted average variable rate), payable in
various installments through October 1, 2003........................................ 197 233
Tranche F Term Loan (5.3% weighted average variable rate), payable in
various installments through December 31, 2005...................................... 563 569
Tranche G Term Loan (5.7% weighted average variable rate), due
December 31, 2006................................................................... 402 402
Tranche H Term Loan (5.7% weighted average variable rate), due
December 31, 2006................................................................... 347 348
Revolving credit facility (6.8% weighted average variable rate), due
December 31, 2005................................................................... 43 177
Revolving credit facility (Canada) (7.3% 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........................................................ 7 12
----------------------
1,843 2,098
Senior Notes
10.75% first mortgage notes, due October 1, 2002 (plus unamortized
premium of $9 in 2000).............................................................. 509
8.45% mortgage notes, payable in monthly installments through August 1,
2007 and $69 on September 1, 2007................................................... 78 80
11.5% unsecured senior notes, due October 1, 2004 (plus unamortized
premium of $8 in 2000).............................................................. 208
11.5% unsecured senior notes, due August 15, 2006 (plus unamortized
premium of $4 and $4)............................................................... 204 204
12.58% rating adjustable unsecured senior notes, due August 1, 2016 (plus
unamortized premium of $2 and $2)................................................... 127 127
9.25% unsecured senior notes, due February 1, 2008....................................... 300
9.75% unsecured senior notes, due February 1, 2011....................................... 750
----------------------
1,459 1,128
Other Debt
Fixed rate utility systems and pollution control revenue bonds (fixed rates
ranging from 6.0% to 9.0%), payable in varying annual sinking fund
payments through 2027............................................................... 211 223
Other (including obligations under capitalized leases of $6 and $7)...................... 26 26
----------------------
237 249
40
2001 2000
-------------------------
Subordinated Debt
10.75% senior subordinated debentures and 1.5% supplemental interest
certificates, due on April 1, 2002 (less unamortized discount of
$1 in 2000)................................................................ 99
10.75% senior subordinated debentures, due April 1, 2002...................... 200
6.75% convertible subordinated debentures (convertible at $34.28 per
share), due February 15, 2007 (less unamortized discount of $6 in 2000).... 39
-------------------------
338
-------------------------
Total debt.................................................................... 3,539 3,813
Less current maturities....................................................... (62) (34)
-------------------------
Total long-term debt.......................................................... $3,477 $3,779
-------------------------
The amounts of total debt outstanding at December 31, 2001 maturing during the
next five years are as follows:
2002................................................ $ 62
2003................................................ 471
2004................................................ 27
2006................................................ 607
2006................................................ 968
Thereafter.......................................... 1,404
Bond Offering
On January 25, 2001, the Company closed on a bond offering (the "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 Revolving Credit Facility of $32 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 $37 million in fees, call
premiums and other expenses related to these transactions. An extraordinary
loss of $4 million (net of tax of $2 million) was recorded due to the early
extinguishment of debt.
Bank Credit Facilities
The Company 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 $1,044 million at December 31, 2001 with maturities ranging from
October 1, 2003 to December 31, 2005, and a $560 million senior secured
revolving credit facility ("Revolving Credit Facility"), of which up to $100
million may consist of letters of credit, maturing December 31, 2005
(collectively the "Credit Agreement"). The Company pays a 0.5% commitment fee
on the unused portions of its Revolving Credit Facility. At December 31, 2001,
the unused portion of this facility, after giving consideration to outstanding
letters of credit, was $488 million. The Credit Agreement is secured by a
security interest in substantially all of the assets of the Company 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. During the fourth quarter of
2001, the Company prepaid $33 million on the Tranche C term loan, $33 million
on the Tranche D term loan and $34 million on the Tranche E term loan.
41
On May 31, 2000, the Company and certain of its wholly owned subsidiaries
closed on new credit facilities (the "Additional Stone 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 Canadian revolving credit facility maturing on December 31, 2005.
The proceeds of the Additional Stone 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 Canadian revolving credit facility will be used for
general corporate purposes. At December 31, 2001, the unused portion of this
facility, after giving consideration to outstanding letters of credit, was $85
million. The Additional Stone Credit Agreement is secured by a security
interest in substantially all of the assets acquired in the St. Laurent
Acquisition.
The Credit Agreement and the Additional Stone 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
financial covenants. Both credit agreements also require prepayments of the
term loans if the Company has excess cash flows, as defined or receives
proceeds from certain asset sales or incurrence of certain indebtedness. As a
result of excess cash flow in 2001, the Company is required to make a $38
million prepayment on the term loans covered by the Credit Agreement prior to
March 31, 2002. The Company intends to fund the $38 prepayment with available
borrowings under the Revolving Credit Facility.
On January 23, 2002, the Company and its bank group amended the Credit
Agreement and the Additional Stone Credit Agreement to permit the Company to
call for redemption prior to September 30, 2002 all of its 12.58% rating
adjustable unsecured senior notes due 2016 in an aggregate outstanding
principal amount of $125 million plus accrued interest and stated premium with
borrowings of the Revolving Credit Facility.
Senior Notes
The Company's senior notes aggregating $1,081 million at December 31, 2001, are
redeemable in whole or in part at the option of the Company at various dates,
at par plus a weighted average premium of 4.08%. The 9.25% unsecured senior
notes aggregating $300 million are not redeemable prior to maturity.
The indentures governing the Company'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, 2001, generally provide that in the event of a
"change of control" (as defined in the indentures), the Company must offer to
repurchase the senior notes. The Merger constituted such a change of control.
As a result, the Company 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 the Company's bank debt, prior to
making an offer to repurchase these senior notes, the indentures require that
the Company either pay the bank debt or obtain the consent of its bank lenders
to such repurchase. A repurchase of senior notes, other than the 12.58% rating
adjustable senior notes, is currently prohibited by the terms of the Company's
bank debt. Although the terms of the senior notes refer to an obligation to
repay the Company's 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. The Company 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 8.45% mortgage notes are secured by the assets at 37 of the Company's
corrugated container plants.
42
Other
Interest costs capitalized on construction projects were $2 million, $5 million
and $1 million for 2001, 2000 and 1999, respectively. Interest payments on all
debt instruments were $341 million, $393 million and $369 million for 2001,
2000 and 1999, respectively.
8. Derivative Instruments and Hedging Activities
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities",
as amended by SFAS No. 137 and SFAS No. 138 requires that all derivatives be
recorded on the consolidated balance sheets at fair value. Changes in the fair
value of derivatives not qualifying as hedges are recorded each period in
earnings. Changes in the fair value of derivatives qualifying as hedges are
either offset against the change in fair value of the hedged item through
earnings or recognized in Other Comprehensive Income ("OCI") until the hedged
item is recognized in earnings, depending on the nature of the hedge. The
ineffective portion of the change in fair value of all derivatives is
recognized in earnings. Hedges related to anticipated transactions are
designated and documented at hedge inception as cash flow hedges and evaluated
for hedge effectiveness quarterly.
Upon adoption of SFAS No. 133 in 2001, the Company recorded a cumulative effect
of an accounting change gain of approximately $3 million (net of tax of $2
million) in OCI.
The Company's derivative instruments and hedging activities relate to
minimizing exposures to fluctuations in the price of commodities used in its
operations and the movement in foreign currency exchange rates and are
designated as cash flow hedges.
Commodity Futures Contracts
The Company uses exchange traded futures contracts to manage fluctuations in
cash flows resulting from commodity price risk in the procurement of natural
gas. The objective is to fix the price of a portion of the Company's forecasted
purchases of natural gas used in the manufacturing process. The changes in the
market value of such contracts have historically been, and are expected to
continue to be, highly effective at offsetting changes in price of the hedged
item. As of December 31, 2001, the maximum length of time over which the
Company is hedging its exposure to the variability in future cash flows
associated with natural gas forecasted transactions is approximately one year.
For the year ended December 31, 2001, the Company reclassified a $4 million
loss from OCI to cost of goods sold when the hedged items were recognized. The
fair value of the Company's futures contracts at December 31, 2001 is a $9
million loss included in other current liabilities. At December 31, 2001, the
Company recorded a $1 million loss in cost of goods sold on commodity futures
contracts, related to the ineffective portion of the change in fair value of
certain contracts and contracts not qualifying as hedges.
For the year ended December 31, 2001, the Company recorded a $5 million loss in
cost of goods sold on settled commodity futures contracts, related to the
ineffective portion of hedges and contracts not qualifying as hedges.
Foreign Currency Forward Contracts
The Company enters into foreign currency forward contracts with financial
institutions to purchase Canadian dollars, primarily to protect against
currency exchange risk associated with expected future cash flows. Contracts
typically have maturities of approximately one year. The fair value of the
Company's foreign currency forward contracts at December 31, 2001 is a $4
million loss included in other current liabilities. The change in fair value of
these contacts is recorded in OCI until the underlying transaction is recorded.
The cumulative deferred hedge loss on all commodity and foreign currency
contracts is $7 million (net of tax of $5 million) at December 31, 2001. The
Company expects to reclassify $7 million into cost of goods sold during 2002.
43
9. 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:
2002................................. $ 80
2003................................. 65
2004................................. 49
2005................................. 41
2006................................. 31
Thereafter........................... 43
------
Total minimum lease payments.. $ 309
------
Net rental expense for operating leases, including leases having a duration of
less than one year, was approximately $108 million for 2001, $105 million in
2000 and $106 million in 1999.
10. Income Taxes
Significant components of the Company's deferred tax assets and liabilities at
December 31 are as follows:
2001 2000
-------------------
Deferred tax liabilities
Property, plant and equipment and timberland.................................... $ (1,155) $ (1,193)
Inventory....................................................................... (18) (20)
Investment in affiliate......................................................... (13) (45)
Other........................................................................... (29) (19)
--------------------
Total deferred tax liabilities (1,215) (1,277)
--------------------
Deferred tax assets
Employee benefit plans......................................................... 176 117
Net operating loss, alternative minimum tax and tax credit carryforwards....... 525 459
Deferred gain.................................................................. 16 27
Purchase accounting liabilities................................................ 51 94
Deferred debt issuance costs................................................... 11 48
Other.......................................................................... 55 92
--------------------
Total deferred tax assets...................................................... 834 837
Valuation allowance for deferred tax asset..................................... (198) (198)
--------------------
Net deferred tax assets........................................................ 636 639
--------------------
Net deferred tax liabilities................................................... $ (579) $ (638)
--------------------
44
At December 31, 2001, the Company had approximately $1,068 million of net
operating loss carryforwards for U.S. federal income tax purposes that expire
from 2011 through 2019, with a tax value of $374 million and $38 million of
capital loss carryforwards for U.S. federal income tax purposes that expire
from 2004 to 2005, with a tax value of $13 million. A valuation allowance of
$152 million has been established for a portion of these deferred tax assets.
The Company had net operating loss carryforwards for state purposes with a tax
value of $77 million, which expire from 2002 through 2020. A valuation
allowance of $46 million has been established for a portion of these deferred
tax assets. Further, the Company had approximately $86 million of net operating
loss carryforwards for Canadian tax purposes that expire from 2004 to 2007,
with a tax value of $29 million. The Company had approximately $32 million of
alternative minimum tax credit carryforwards for U.S. federal tax purposes,
which are available indefinitely.
Provision for income taxes on income (loss) before income taxes and
extraordinary item is as follows:
2001 2000 1999
-------------------------------
Current
Federal ........................................... $ (1) $ (1) $
State and local ................................... (4)
Foreign ........................................... (10) (6) (19)
-------------------------------
Total current expense ............................. (15) (7) (19)
Deferred
Federal ........................................... (19) (87) 24
State and local ................................... (2) (20) 2
Foreign ........................................... (19) (12) (7)
-------------------------------
Total deferred benefit (expense) .................. (40) (119) 19
-------------------------------
Total provision for income taxes .................. $(55) $(126) $
-------------------------------
The Company's provision for income taxes differed from the amount computed by
applying the statutory U.S. federal income tax rate to income (loss) before
income taxes and extraordinary item is as follows:
2001 2000 1999
-------------------------------
U.S. federal income tax benefit (provision) at federal
statutory rate....................................... $(24) $ (84) $ 26
Permanent differences from applying purchase
accounting........................................... (29) (29) (26)
Other permanent differences 2 (1)
State income taxes, net of federal income tax effect.... (4) (13) 2
Other, net.............................................. (1)
-------------------------------
Total provision for income taxes........................ $(55) $(126) $
-------------------------------
The components of the income (loss) before income taxes and extraordinary item
are as follows:
2001 2000 1999
-------------------------------
United States........................................... $(17) $ 199 $(128)
Foreign................................................. 86 42 53
-------------------------------
Income (loss) before income taxes and extraordinary
item................................................. $ 69 $ 241 $ (75)
-------------------------------
The Internal Revenue Service is currently examining the year 1998 and a loss
carryback claim from 1997. All years through 1996 are closed. While the
ultimate results of such examinations cannot be predicted with certainty, the
Company's management believes that the examinations will not have a material
adverse effect on its consolidated financial condition or results of
operations.
45
The Company made income tax payments of $29 million in 2001, $4 million in
2000, and $14 million in 1999.
11. Employee Benefit Plans
Defined Benefit Plans
The Company participates in the SSCC sponsored noncontributory defined benefit
pension plans covering substantially all employees. On December 31, 2000, the
domestic defined benefit plans of St. Laurent were merged with the defined
benefit plans of the Company and Jefferson Smurfit Corporation (U.S.)
("JSC(U.S.)"). The assets of these plans are available to meet the funding
requirements of the combined plans. The Company intends to fund its
proportionate share of the future contributions based on the funded status of
the Company's plan determined on an actuarial basis. Therefore, the plan asset
information provided below is based on an actuarial estimate of assets and
liabilities, excluding the effect of the plan merger, in order to be consistent
with the presentation of the consolidated statements of operations and balance
sheets.
The benefit obligation, fair value of plan assets and the under funded status
of the JSC(U.S.) defined benefit plans at December 31, 2001 were $1,116
million, $984 million and $132 million, respectively.
Approximately 42% of the merged pension plan assets at December 31, 2001 are
invested in cash equivalents or debt securities, and 58% are invested in equity
securities. Equity securities at December 31, 2001 include 0.7 million shares
of SSCC common stock with a market value of approximately $12 million and 26
million shares of JS Group common stock having a market value of approximately
$57 million. Dividends paid on JS Group common stock during 2001 and 2000 were
approximately $2 million.
The Company sponsors noncontributory and contributory defined benefit pension
plans for its foreign operations. Approximately 45% of the foreign pension plan
assets at December 31, 2001 are invested in cash equivalents or debt securities
and 55% 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 12.00% for the U.S. plans and 9.40% for the foreign plans at
December 31, 2001, decreasing to the ultimate rate of 5.00% for the U.S. plans
and 4.80% for the foreign plans. The effect of a 1% change in the assumed health
care cost trend rate would increase/(decrease) the APBO as of December 31, 2001
by $11 million and would change the annual net periodic postretirement benefit
cost by $1 million for 2001.
46
As a result of the Merger and the St. Laurent Acquisition, the Company recorded
previously unrecognized actuarial gains and losses and prior service cost in
its purchase price allocation. The following provides a reconciliation of
benefit obligations, plan assets, and funded status of the plans:
Defined Benefit Plans Postretirement Plans
-------------------------------------------------
2001 2000 2001 2000
-------------------------------------------------
Change in benefit obligation:
Benefit obligation at January 1............... $1,130 $754 $ 91 $ 74
Service cost.................................. 27 23 3 1
Interest cost................................. 79 68 8 6
Acquisition................................... 7 278 4 22
Amendments.................................... 10 11 (9)
Actuarial (gain) loss ........................ 64 60 45 (3)
Plan participants' contributions.............. 3 2 3 2
Benefits paid................................. (60) (48) (12) (10)
Foreign currency rate changes ................ (28) (16) (1) (1)
Curtailment................................... (2)
-------------------------------------------------
Benefit obligation at December 31............. $1,232 $1,130 $ 132 $ 91
-------------------------------------------------
Change in plan assets:
Fair value of plan assets at January 1........ $ 768 $ 542 $ $
Acquisition................................... 7 242
Actual return on plan assets.................. (11) 19
Employer contributions........................ 42 19 9 8
Plan participants' contributions.............. 3 2 3 2
Benefits paid................................. (60) (48) (12) (10)
Foreign currency rate changes................. (19) (8)
-------------------------------------------------
Fair value of plan assets at December 31...... $ 730 $ 768 $ $
-------------------------------------------------
Over (under) funded status: $ (502) $ (362) $ (132) $ (91)
Unrecognized actuarial (gain) loss............ 158 7 40 (4)
Unrecognized prior service cost............... 27 19 (9)
-------------------------------------------------
Net amount recognized......................... $ (317) $ (336) $ (101) $ (95)
-------------------------------------------------
Amounts recognized in the balance sheets:
Accrued pension liability.................... $ (418) $ (352) $ (101) $ (95)
Intangible asset............................. 27 12
Accumulated other comprehensive (income) loss
74 4
-------------------------------------------------
Net amount recognized....................... $ (317) $ (336) $ (101) $ (95)
-------------------------------------------------
The weighted average assumptions used in the accounting for the defined benefit
plans and postretirement plans were:
Defined Benefit Plans Postretirement Plans
-------------------------------------------------------
2001 2000 2001 2000
-------------------------------------------------------
Weighted average discount rate:
U.S. plans...................... 7.25% 7.50% 7.25% 7.50%
Foreign plans................... 6.50% 7.00% 6.50% 7.00%
Rate of compensation increase...... 3.25-4.00% 3.50-4.00% N/A N/A
Expected return on plan assets..... 9.50-9.75% 7.80-9.50% N/A N/A
Health care cost trend on covered
charges......................... N/A N/A 9.40-12.00% 5.25-6.00%
47
The components of net pension expense for the defined benefit plans and the
components of the postretirement benefits costs follow:
Defined Benefit Plans Postretirement Plans
------------------------- -----------------------
2001 2000 1999 2001 2000 1999
------------------------- -----------------------
Service cost $ 27 $ 23 $ 22 $ 3 $ 2 $ 1
Interest cost 79 68 52 8 6 5
Expected return on plan assets (73) (61) (47)
Net amortization and deferral 3 (3) (1) (1)
Multi-employer plans 6 4 4 1 1
------------------------- -----------------------
Net periodic benefit cost $ 42 $ 31 $ 30 $ 11 $ 8 $ 7
------------------------- -----------------------
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 $1,232 million, $1,139 million and $730 million,
respectively, as of December 31, 2001 and $1,130 million, $960 million and $768
million as of December 31, 2000.
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 $12 million in 2001, $10 million in 2000, and $8 million in 1999.
12. Preferred and Common Stock
On November 15, 2000, pursuant to an Agreement and Plan of Merger among SSCC,
SCC Merger Co. and the Company, approximately 4.6 million shares of $1.75
Series E Preferred Stock of the Company (the "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 by SSCC to the holders of the Preferred Stock. The cash
payment was equal to the accrued and unpaid dividends on each share of
Preferred Stock, less $0.12 per share to cover certain transaction related
expenses. SSCC made a $78 million capital contribution to the Company to effect
the preferred stock exchange. The Company had accumulated dividend arrearages
on the Preferred Stock of $22 million at December 31, 1999.
In conjunction with this transaction, all of the Company's common stock shares
issued and outstanding were cancelled and replaced with 1,000 new shares of
common stock authorized, issued and outstanding at a par value of $.01 per
share.
13. Stock Option and Incentive Plans
Prior to the Merger, the Company maintained incentive plans for selected
employees. Effective with the Merger, options outstanding under the Company's
plans were converted into options to acquire SSCC common stock, and all
outstanding options under both the Company and SSCC plans became exercisable
and fully vested.
In November 1998, the Company's parent, SSCC, adopted the 1998 Long-Term
Incentive Plan ("1998 Plan") and reserved 8.5 million shares of SSCC common
stock for non-qualified stock options and performance awards. In 2001, an
additional 8 million shares of SSCC common stock were reserved. Certain
employees of the Company are covered under the 1998 Plan. The options are
exercisable at a price equal to the fair market value of SSCC's common stock at
the date of grant. The vesting schedule and other terms and conditions of
options granted under the 1998 Plan are established separately for each
48
grant. 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. The
options expire ten years after the date of grant.
Certain grants under the 1998 Plan contain change in control provisions which
provide for immediate vesting and exercisability in the event that specific
SSCC ownership conditions are met. These grants also allow for immediate
vesting and exercisability in the event of retirement. These options remain
exercisable until the earlier of five years from retirement or ten years from
the initial grant date. The stock options granted prior to 2001 vest and
become exercisable eight years after the date of grant subject to acceleration
based upon the attainment of pre-established stock price targets. In 2001, the
majority of options granted vest and become exercisable at the rate of 25% each
year for four years.
During 2001, the Company revised its annual management incentive plan so that a
portion of annual employee bonuses is paid in the form of RSUs under the 1998
Plan. The RSUs are non-transferable and do not have voting rights. These RSUs
vest immediately, but the restrictions do not lapse until the third anniversary
of the award date. The Company pays a premium in the form of RSUs ("Premium
RSUs") to certain employees. Premium RSUs vest at the earlier of a change in
control, retirement or three years after the award date. At December 31, 2001,
the Company recorded a liability of $2 million for RSUs to be issued in 2002
for services provided in 2001. The cost of Premium RSUs ($.5 million) will be
amortized over the three year vesting period, beginning in 2002.
The Company and its parent have elected to continue to follow APB Opinion No.
25 to account for stock awards granted to employees. If the Company adopted
SFAS No. 123 to account for stock awards granted to employees, the Company's
net income, based on a Black-Scholes option pricing model would have been
reduced by $7 million, $6 million and $1 million for 2001, 2000 and 1999,
respectively. The effects of applying SFAS No. 123 as described above may not
be representative of the effects on reported net income for future years.
14. Accumulated Other Comprehensive Income (Loss)
Accumulated other comprehensive income (loss), net of tax is as follows:
Unrealized
Foreign Gain (Loss) Accumulated
Currency Minimum on Deferred Other
Translation Pension Marketable Hedge Comprehensive
Adjustment Liability Securities Loss Income (Loss)
------------------------------------------------------------------
Balance at January 1, 1999............... $ 3 $ $ $ $ 3
Current period change................. (10) 3 (7)
------------------------------------------------------------------
Balance at December 31, 1999 ............ (7) 3 (4)
Current period change................. (8) (3) (11)
------------------------------------------------------------------
Balance at December 31, 2000............. (15) (3) 3 (15)
Cumulative effect of accounting
change............................. 3 3
Net changes in fair value of
hedging transactions............... (14) (14)
Net loss reclassified into earnings .. 4 4
Current period change................. (3) (44) (2) (49)
------------------------------------------------------------------
Balance at December 31, 2001............. $(18) $ (47) $ 1 $ (7) $ (71)
------------------------------------------------------------------
49
15. Related Party Transactions
Transactions with JSC(U.S.)
The Company sold and purchased containerboard at market prices from JSC(U.S.),
a subsidiary of SSCC, as follows:
2001 2000 1999
---------------------------
Product sales...................................... $535 $422 $237
Product and raw material purchases................. 311 387 248
Net payables at December 31........................ 29 24 28
Corporate shared expenses are allocated between the Company and JSC(U.S.) based
on an established formula using a weighted average rate based on the net book
value of fixed assets, number of employees and sales. Net payables are settled
in cash.
Transactions With JS Group
Transactions with JS Group, its subsidiaries and affiliated companies were as
follows:
2001 2000 1999
---------------------------
Product sales...................................... $ 17 $ 21 $ 12
Product and raw material purchases................. 7 11 5
Receivables at December 31......................... 3 1
Payables at December 31............................ 1 1
Note receivable at December 31..................... 1
Sale of business................................... 1 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.
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 on
terms generally similar to those prevailing with unrelated parties. The
following table summarizes the Company's related party transactions with its
non-consolidated affiliates for each year presented:
2001 2000 1999
---------------------------
Product sales...................................... $ 221 $ 210 $297
Product and raw material purchases................. 15 23 29
Receivables at December 31......................... 33 31 42
Payables at December 31............................ 1 1 2
50
16. Fair Value of Financial Instruments
The carrying amounts and fair values of the Company's financial instruments at
December 31 are as follows:
2001 2000
------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------------------------------------
Cash and cash equivalents...................... $ 15 $ 15 $ 24 $ 24
Notes receivable and marketable securities..... 26 26 28 28
Derivative liabilities......................... 13 13
Long-term debt including current maturities.... 3,539 3,628 3,813 3,824
The carrying value 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 values of the Company's derivatives
are based on quoted market rates at December 31, 2001. 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.
17. Other, Net
The significant components of other, net are as follows:
2001 2000 1999
------------------------
Foreign currency transaction gains....................$ 8 $ $ 7
Gain on redemption of convertible preferred stock of
Four M Corporation.................................. 13
Loss on sales of receivables to SRC...................(11) (16)
Other................................................. 8 9 10
------------------------
Total other, net......................................$ 5 $ 6 $17
------------------------
18. Contingencies
The Company's past and present operations include activities which are subject
to federal, state and local environmental requirements, particularly relating
to air and water quality. The Company faces potential environmental liability
as a result of violations of permit terms and similar authorizations that have
occurred from time to time at its facilities. In addition, the Company faces
potential liability for response 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. As of December 31, 2001, the Company had
approximately $30 million reserved for environmental liabilities.
If all or most of the other PRPs are unable to satisfy their portion of the
clean-up costs at one or more of the significant sites in which the Company is
involved or the Company's expected share increases, the resulting liability
could have a material adverse effect on our consolidated financial condition or
results of operations.
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
51
believes that the resolution of these matters will not have a material adverse
effect on its consolidated financial condition or results of operations.
19. Business Segment Information
The Company has two reportable segments: (1) Containerboard and Corrugated
Containers and (2) International. 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 International segment is primarily
comprised of the Company's containerboard mills and corrugating facilities
located in Europe.
The Company evaluates performance and allocates resources based on profit or
loss from operations before income taxes, interest expense, and other
nonoperating 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 level.
The Company's North American reportable segments are strategic business units
that offer different products, and each is managed separately because they
manufacture distinct products. The International segment is managed separately
because it has different customers, and its operations are based in markets
outside of the North American market. Other includes corporate related items
and two non-reportable segments, including Specialty Packaging and Consumer
Packaging. Corporate related items include goodwill, income and expense not
allocated to reportable segments (corporate expenses, restructuring charges,
goodwill amortization, interest expense, and the adjustment to record inventory
at LIFO), the elimination of intercompany assets and intercompany profit and a
$39 million gain on the sale of Abitibi in 1999 (See Note 6).
Purchase price allocation adjustments related to property, plant and equipment
have been pushed down to the applicable operating segment assets.
52
A summary by business segment follows:
Container-
board &
Corrugated Inter
Containers national Other Total
---------------------------------------
Year ended December 31, 2001
Revenues from external customers.............. $4,577 $575 $ 605 $5,757
Intersegment revenues......................... 122 122
Depreciation and amortization................. 237 22 95 354
Segment profit (loss)......................... 458 36 (425) 69
Income in non-consolidated affiliates......... 13 1 14
Segment assets................................ 4,322 522 3,794 8,638
Expenditures for long-lived assets............ 75 19 9 103
Year ended December 31, 2000
Revenues from external customers.............. $4,590 $587 $ 561 $5,738
Intersegment revenues......................... 130 130
Depreciation and amortization................. 205 20 88 313
Segment profit (loss)......................... 738 37 (534) 241
Income in non-consolidated affiliates......... 12 1 13
Segment assets................................ 4,628 482 3,941 9,051
Expenditures for long-lived assets............ 217 13 17 247
Year ended December 31, 1999
Revenues from external customers.............. $3,407 $567 $ 526 $4,500
Intersegment revenues......................... 153 153
Depreciation and amortization................. 120 27 149 296
Segment profit (loss)......................... 322 30 (427) (75)
Income in non-consolidated affiliates......... 15 (3) 12
Segment assets................................ 3,256 443 3,866 7,565
Expenditures for long-lived assets............ 54 26 7 87
53
The following table presents net sales to external customers by country of
origin:
2001 2000 1999
---------------------------
United States ............................... $4,988 $5,005 $3,877
Canada ...................................... 112 83 11
Europe and other ............................ 657 650 612
---------------------------
Total ....................................... $5,757 $5,738 $4,500
---------------------------
The following table presents long-lived assets by country at December 31:
2001 2000 1999
---------------------------
United States ............................... $3,054 $3,217 $2,406
Canada ...................................... 848 876 347
Europe and other ............................ 301 313 357
---------------------------
............................................ 4,203 4,406 3,110
Goodwill .................................... 3,106 3,170 3,123
---------------------------
Total ....................................... $7,309 $7,576 $6,233
---------------------------
The Company's export sales from the United States were approximately $187
million for 2001, $246 million for 2000 and $208 million for 1999.
20. Summary of Quarterly Data (Unaudited)
The following table summarizes quarterly financial data for 2001 and 2000.
First Second Third Fourth
2001 Quarter Quarter Quarter Quarter
-------------------------------------
Net sales............................ $1,513 $1,438 $1,440 $1,366
Gross profit......................... 244 221 224 202
Income (loss) before extraordinary
charges .......................... 12 (1) 7 (4)
Net income (loss).................... 8 (1) 7 (4)
2000
Net sales............................ $1,286 $1,379 $1,576 $1,497
Gross profit......................... 247 248 327 287
Income (loss) before extraordinary
charges .......................... 28 (2) 56 33
Net income........................... 28 55 32
54
STONE CONTAINER CORPORATION AND SUBSIDIARIES
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, 2001....... $ 44 $ 8 $ (8)(a) $ 1(b) $ 43
------------------------------------------------------------------
Year ended December 31, 2000....... $ 41 $ 9 $ (4)(a)(c) $ 2(b) $ 44
------------------------------------------------------------------
Year ended December 31, 1999....... $ 61 $ 6 $ (11)(a) $ 15(b) $ 41
------------------------------------------------------------------
Exit liabilities:
Year ended December 31, 2001....... $ 38 $ $ 2 (d) $ 12(e) $ 28
------------------------------------------------------------------
Year ended December 31, 2000....... $183 $ $ (5)(d) $140(e) $ 38
------------------------------------------------------------------
Year ended December 31, 1999....... $106 $ $ 106 (f) $ 29(e) $183
------------------------------------------------------------------
Restructuring:
Year ended December 31, 2001....... $ 11 $ 6 $ $ 8(e) $ 9
------------------------------------------------------------------
Year ended December 31, 2000....... $ $53 $ $ 42(e) $ 11
------------------------------------------------------------------
(a) Includes the effect of the accounts receivable securitization application
of SFAS No. 140.
(b) Uncollectible amounts written off, net of recoveries.
(c) Includes $3 million acquired with the St. Laurent Acquisition.
(d) Charges associated with the exit activities included in the purchase
price allocation of St. Laurent and reduction to Stone exit liabilities.
(e) Charges against the exit liability reserves.
(f) Charges associated with exit activities and litigation settlements
included in the purchase price allocation of Stone.
55
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
---------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
None
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 Container") (incorporated
by reference to SSCC's Registration Statement on Form S-4
(File No. 333-43656)).
3.1 Certificate of Merger merging SCC Merger Co. with and into Stone
Container (including the Certificate of Incorporation of Stone
Container) (incorporated by reference to Exhibit 3.1 to Stone
Container's Annual Report on Form 10-K for the fiscal year ended
December 31, 2000).
3.2 By-laws of Stone Container (incorporated by reference to Exhibit 3.2
to Stone Container's Annual Report on Form 10-K for the fiscal year
ended December 31, 2000).
Indentures with respect to long-term debt, none of which exceeds 10 percent of
the total assets of Stone Container and its subsidiaries on a consolidated
basis, are not filed herewith. The Registrant agrees to furnish a copy of such
documents to the Commission upon request.
4.1(a) Amended and Restated Credit Agreement, dated as of March 31, 2000,
among Stone Container, 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
Container's Quarterly Report on Form 10-Q for the quarter ended
March 31, 2000).
4.1(b) Amendment No. 1, dated as of May 1, 2001, to the Amended and Restated
Credit Agreement dated as of March 31, 2000 among Stone, the
financial institutions signatory thereto, The Chase Manhattan Bank,
as Agent and Bankers Trust Company, as Administrative Agent,
Collateral Agent, Facing Agent and as Swingline Lender.
4.1(c) Amendment No. 2, Consent and Waiver, dated as of January 23, 2002,
among Stone, the financial institutions party to the Amended and
Restated Credit Agreement dated as of March 31, 2000, JPMorgan
Chase Bank and Bankers Trust Company, as Agents, and Bankers Trust
Company, as Administrative Agent and Collateral Agent.
4.2(a) Credit Agreement, dated as of May 31, 2000, among Stone
Container, St. Laurent Paperboard Inc. ("St. Laurent"), the
financial institutions signatory thereto, The Chase Manhattan Bank,
as Agent, Bankers Trust Company, as Administrative Agent and
Collateral Agent and Deutsche Bank Canada, as Canadian
Administrative Agent (incorporated by reference to Exhibit 10.1 to
Stone Container's Quarterly Report on Form 10-Q for the quarter
ended June 30, 2000).
56
4.2(b) Amendment No. 1, dated as of May 1, 2001 to the Credit Agreement
dated as of May 31, 2000, among Stone, St. Laurent and the financial
institutions signatory to the Credit Agreement, The Chase Manhattan
Bank, as Agent, Bankers Trust Company, as Administrative Agent,
Collateral Agent and Facing Agent, and Deutsche Bank Canada, as
Canadian Administrative Agent.
4.2(c) Amendment No. 2, Consent and Waiver, dated as of January 23, 2002,
among Stone Container Corporation, Smurfit-Stone Container Canada
Inc., a corporation amalgamated under the Canada Business
Corporations Act, formerly known as St. Laurent, the financial
institutions party to the Credit Agreement dated as of May 31,
2000, JPMorgan Chase Bank, as Agent, Bankers Trust Company, as
Administrative Agent and Collateral Agent, and Deutsche Bank
Canada, as Canadian Administrative Agent.
4.3 Indenture dated as of January 25, 2001, between Stone Container and
The Bank of New York, as Trustee, relating to Stone Container's 9
1/4% Senior Notes due 2008 and 9 3/4% Senior Notes due 2011
(incorporated by reference to Exhibit 4.2 to Stone Container's
Registration Statement on Form S-4, Registration Number 333-58030).
4.4(a) Guaranty, dated October 7, 1983, between Stone Container and The
Continental Group, Inc. (incorporated by reference to Exhibit 4(h)
to Stone Container's Registration Statement on Form S-3,
Registration Number 33-36218).
4.4(b) Amendment No. 1 to Guaranty, dated as of June 1, 1996, among
Continental Holdings, Inc., Continental Group, Inc. and Stone
Container (incorporated by reference to Exhibit 4(r) to Stone
Container's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1996).
10.1(a)* Stone Container Corporation 1993 Stock Option Plan (incorporated by
reference to Appendix A to Stone Container's Proxy Statement dated
as of April 10, 1992).
10.1(b)* Amendment of the Stone Container Corporation 1993 Stock Option Plan
(incorporated by reference to Exhibit 10.2 to Stone Container's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1999).
10.2(a)* Stone Container Corporation 1995 Long-Term Incentive Plan
(incorporated by reference to Exhibit A to Stone Container's Proxy
Statement dated as of April 7, 1995).
10.2(b)* Amendment of the Stone Container Corporation 1995 Long-Term Incentive
Plan (incorporated by reference to Exhibit 10.2 to Stone
Container's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1999).
10.3* Jefferson Smurfit Corporation (U.S.) Management Incentive Plan
(incorporated by reference to Exhibit 10.10 to SSCC's Annual Report
on Form 10-K for the fiscal year ended December 31, 1995).
10.4(a)* Smurfit-Stone Container Corporation 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).
10.4(b)* First Amendment of the Smurfit-Stone Container Corporation 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).
57
10.5(a) Pooling and Servicing Agreement, dated October 1, 1999, by and among
Stone Receivables Corporation, as Transferor, Stone Container, as
Securer, and The Chase Manhattan Bank, as Trustee (incorporated by
reference to Exhibit 10.1(a) to Stone Container's Quarterly Report
on Form 10-Q for the quarter ended September 30, 1999).
10.5(b) Series 1999-1 Supplement, dated as of October 15, 1999, among Stone
Receivables Corporation, as Transferor, Stone Container 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 Container's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1999).
10.5(c) Series 1999-2 Supplement, dated as of October 15, 1999, among Stone
Receivables Corporation, as Transferor, Stone Container 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 Container's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1999).
10.5(d) Receivables Purchase Agreement, dated October 15, 1999, between
Stone Container, as Seller, and Stone Receivables Corporation, as
Purchaser (incorporated by reference to Exhibit 10.1(d) to Stone
Container's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1999).
10.6* Employment Agreement of Ray M. Curran (incorporated by reference to
Exhibit 10.27 to SSCC's Annual Report on Form 10-K for the fiscal
year ended December 31, 1999).
10.7* Consulting Agreement dated as of January 4, 2002 by and between Ray M
Curran and SSCC (incorporated by reference to Exhibit 10.25 to
SSCC's Annual Report on Form 10-K for the fiscal year ended
December 31, 2001).
10.8* Letter Agreement dated January 4, 2002 by and between Ray M. Curran
and SSCC (incorporated by reference to Exhibit 10.26 to SSCC's Annual
Report on Form 10-K for the fiscal year ended December 31, 2001).
10.9* Employment Agreement of 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).
10.10* Employment Agreement of William N. Wandmacher (incorporated by
reference to Exhibit 10.31 to SSCC's Annual Report on Form 10-K for
the fiscal year ended December 31, 2000).
10.11* Employment Agreement of F. Scott Macfarlane (incorporated by
reference to Exhibit 10.32 to SSCC's Annual Report on Form 10-K for
the fiscal year ended December 31, 2000).
10.12* 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 ended June 30, 2000).
10.13 Pre-Merger Agreement, dated as of February 23, 2000, among SSCC,
Stone Container, 3038727 Nova Scotia Company and St. Laurent
(incorporated by reference to Exhibit 99.2 to Stone Container's
Current Report on Form 8-K dated February 23, 2000).
* 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, 2001.
58
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, 2002 Stone Container Corporation
--------------------------------------------
(Registrant)
BY /s/ Charles A. Hinrichs
--------------------------------------------
Charles A. Hinrichs
Vice President and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant in the capacities and on the date indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Patrick J. Moore President and Chief Executive Officer March 13, 2002
- --------------------- and Director (Principal Executive Officer)
Patrick J. Moore
/s/ Charles A. Hinrichs Vice President and Chief Financial March 13, 2002
- ----------------------- Officer and Director (Principal Financial Officer)
Charles A. Hinrichs
/s/ Paul K. Kaufmann Vice President and Corporate Controller March 13, 2002
- ---------------------- (Principal Accounting Officer)
Paul K. Kaufmann
59