ITEM 1. BUSINESS
GENERAL JSCE, Inc., together with its consolidates subsidiaries, hereinafter referred to as the "Company" or "JSCE," operates in two business segments, Paperboard/Packaging Products and Newsprint. The Company believes it is one of the nation's largest producers of paperboard and packaging products and is the largest producer of recycled paperboard and recycled packaging products and the largest processor of wastepaper. In addition, the Company believes it is one of the nation's largest producers of recycled newsprint.
The Company's Paperboard/Packaging Products segment includes a system of paperboard mills that, in 1996, produced 1,973,000 tons of virgin and recycled containerboard, 774,000 tons of recycled boxboard and solid bleached sulfate ("SBS") and 166,000 tons of uncoated recycled boxboard, which were sold to the Company's own converting operations and to third parties. The Company's converting operations consist of 50 corrugated container plants, 18 folding carton plants and 20 industrial packaging plants located across the country, with three plants located outside the U.S. In 1996, the Company's container plants converted 1,991,000 tons of containerboard, an amount equal to approximately 101% of the amount it produced, its folding carton plants converted 521,000 tons of SBS, recycled boxboard and coated natural kraft, an amount equal to approximately 67% of the amount it produced, and its industrial packaging plants converted 153,000 tons of uncoated recycled boxboard, an amount equal to approximately 92% of the amount it produced. The Paperboard/Packaging Products segment also includes the Company's reclamation division, which processed or brokered approximately 4.5 million tons of wastepaper in 1996, its timber division, which manages approximately one million acres of owned or leased timberland located close to its virgin fiber mills, and 14 consumer packaging plants. The Company's Paperboard/Packaging Products segment contributed 91% of the Company's net sales in 1996.
The Company's Newsprint segment includes two newsprint mills in Oregon, which produced 576,000 tons of recycled newsprint in 1996, and two facilities that produce Cladwood, a wood composite exterior siding, manufactured from sawmill shavings and newsprint.
For a summary of net sales, income from operations, identifiable assets, capital expenditures and depreciation, depletion and amortization for the Company's segments, see Note 12, "Business Segment Information," of the Notes to Consolidated Financial Statements contained in Part II, Item 8, "Financial Statements and Supplementary Data."
Except for the historical information contained in this Annual Report on Form 10-K, certain matters discussed herein, including (without limitation) in particular under Part I, Item 1, "Business - - Environmental Compliance," under Part I, Item 3, "Legal Proceedings" and under Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," contain forward looking statements, as that term is defined in the Private Securities Reform Act of 1995. The matters referred to in such statements could be affected by the risks and uncertainties involved in the Company's business, including (without limitation) the effect of economic and market conditions, continued pricing pressures in key product lines, the level and volatility of interest rates and currency values, wastepaper prices, costs related to environmental matters and the impact of current or pending legislation and regulations.
JSCE, Inc. is a wholly-owned subsidiary of Jefferson Smurfit Corporation ("JSC"). JSC has no operations other than its investment in JSCE. JSCE owns a 100% equity interest in Jefferson Smurfit Corporation (U.S.) ("JSC (U.S.)"). JSC (U.S.) has extensive operations throughout the United States. JSCE has no operations other than its investment in JSC (U.S.).
PRODUCTS
PAPERBOARD/PACKAGING PRODUCTS SEGMENT
CONTAINERBOARD AND CORRUGATED SHIPPING CONTAINERS The Company's containerboard operations are highly integrated. Tons of containerboard produced and converted for the last three years were:
The Company's mills produce a full line of containerboard, including unbleached kraft linerboard, mottled white linerboard and recycled medium. Unbleached kraft linerboard is produced at the Company's mills located in Fernandina Beach and Jacksonville, Florida, and mottled white linerboard is produced at its Brewton, Alabama mill. Recycled medium is produced at the Company's mills located in Alton, Illinois, Carthage, Indiana, Circleville, Ohio and Los Angeles, California. In 1996, the Company produced 1,095,000, 336,000 and 542,000 tons of unbleached kraft linerboard, mottled white linerboard and recycled medium, respectively. The Company's sales of containerboard in 1996 were $772 million (including $434 million of intracompany sales). Sales of containerboard to the Company's container plants are at market prices.
Corrugated shipping containers, manufactured from containerboard in converting plants, are used to ship such diverse products as home appliances, electric motors, small machinery, grocery products, produce, books, tobacco and furniture and for many other applications, including point of purchase displays. The Company stresses the value-added aspects of its corrugated containers, such as labeling and multi-color graphics, to differentiate its products and respond to customer requirements. The Company's 50 container plants serve local customers and large national accounts and are located nationwide, generally in or near large metropolitan areas. The Company's total sales of corrugated shipping containers in 1996 were $1,345 million (including $90 million of intracompany sales). Total corrugated shipping container sales volumes for 1996, 1995 and 1994 were 30,022, 29,382 and 30,822 million square feet, respectively.
RECYCLED BOXBOARD, SOLID BLEACHED SULFATE AND FOLDING CARTONS The Company's recycled boxboard, SBS and folding carton operations are also integrated. Tons of recycled boxboard and SBS produced and converted for the last three years were:
The Company produces coated recycled boxboard at its mills located in Middletown, Ohio, Philadelphia, Pennsylvania, Santa Clara, California and Wabash, Indiana. The Company produces uncoated recycled boxboard at its Los Angeles, California mill and SBS at its Brewton, Alabama mill. In 1996, the Company produced 585,000 and 189,000 tons of recycled boxboard and SBS, respectively. The Company's total sales of recycled boxboard and SBS in 1996 were $420 million (including $191 million of intracompany sales).
The Company's folding carton plants offer a broad range of converting capabilities, including web and sheet lithographic, rotogravure and flexographic printing and a full line of structural and design graphics services. The Company's 18 facilities convert recycled boxboard and SBS into folding cartons. Folding cartons are used primarily to protect customers' products while providing point of purchase advertising. The Company makes folding cartons for a wide variety of applications, including food and fast foods, detergents, paper products, beverages, health and beauty aids and other consumer products. Customers range from small local accounts to large national and multinational accounts. The Company's folding carton plants are located nationwide, generally in or near large metropolitan areas. The Company's sales of folding cartons in 1996 were $666 million (none of which were intracompany sales). Folding carton sales volumes for 1996, 1995 and 1994 were 467,000, 469,000 and 486,000 tons, respectively.
The Company has focused its capital expenditures in these operations and its marketing activities to support a strategy of enhancing product quality as it relates to packaging graphics, increasing flexibility while reducing customer lead time and assisting customers in innovative package designs.
The Company provides marketing consultation and research activities through its Design and Market Research (DMR) center. It provides customers with graphic and product design tailored to the specific technical requirements of lithographic, rotogravure and flexographic printing, as well as photography for packaging, sales promotion concepts and point of purchase displays.
UNCOATED RECYCLED BOXBOARD AND INDUSTRIAL PACKAGING The Company's uncoated recycled boxboard and industrial packaging operations are also integrated. Tons of uncoated recycled boxboard produced and converted for the last three years were:
Uncoated recycled boxboard, a portion of which is used by the Company's industrial packaging operations, is produced at its mills located in Cedartown, Georgia, Lafayette, Indiana, Monroe, Michigan and Tacoma, Washington. In January 1997, the Company announced its intention to discontinue operations at its Monroe, Michigan mill. The Monroe mill produced 38,000, 44,000 and 47,000 tons of uncoated recycled boxboard in 1996, 1995 and 1994, respectively. In 1996, the Company's total sales of uncoated recycled boxboard were $63 million (including $28 million of intracompany sales).
The Company's 20 industrial packaging plants convert uncoated recycled boxboard into papertubes and cores. Papertubes and cores are used primarily for paper, film and foil, yarn carriers and other textile products and furniture components. The Company also produces solid fiber partitions for the pharmaceutical, electronics, glass, cosmetics and plastics industries. In addition, the Company produces a patented self-locking partition especially suited for automated packaging and product protection. The Company also manufactures corrugated pallets that are made entirely from corrugated components and are lightweight yet extremely strong and are fully recyclable. The Company's industrial packaging sales in 1996 were $115 million (including $6 million in intracompany sales).
CONSUMER PACKAGING The Company manufactures a wide variety of products at its 14 consumer products facilities. These products include flexible packaging, paper and metallized paper labels and labels that are heat transferred to plastic containers for a wide range of industrial and consumer product applications. The contract packaging plants provide a wide variety of custom contract packaging services including cartoning, bagging, liquid- or powder- filling and high-speed overwrapping. The Company produces high- quality rotogravure cylinders and has a full-service organization experienced in the production of color separations and lithographic film for the commercial printing, advertising and packaging industries. In January 1997, the Company sold its Farmingdale, New York plant, which produced fragranced advertising products. The Company's total sales of consumer packaging products and services in 1996 were $187 million (including $13 million of intracompany sales).
FIBER RESOURCES AND TIMBER PRODUCTS The raw materials essential to the Company's business are reclaimed fiber and virgin wood fiber. The Brewton, Circleville, Jacksonville and Fernandina Beach mills use primarily wood fibers, while the other paperboard mills use reclaimed fiber exclusively. In 1996, the newsprint mills used approximately 46% wood fiber and 54% reclaimed fiber.
The use of recycled products in the Company's operations begins with its reclamation division which operates 27 facilities that collect, sort, grade and bale wastepaper, as well as collect aluminum and glass. The reclamation division also operates a nationwide brokerage system whereby it purchases and resells wastepaper (including wastepaper for use in its recycled fiber mills) on a regional and national contract basis. Such contracts provide bulk purchasing, resulting in lower prices and cleaner wastepaper. The reclamation division provides valuable fiber resources to both the paperboard and newsprint segments of the Company as well as to other producers. Many of the reclamation facilities are located close to the Company's recycled paperboard and newsprint mills, assuring availability of supply, when needed, with minimal shipping costs. During 1996, the Company's reclamation plants and brokerage operations satisfied all of the Company's mill requirements for reclaimed fiber. The Company's total sales of recycled materials in 1996 were $351 million (including $133 million of intracompany sales).
The amount of wastepaper collected and the proportions sold internally and externally by the Company's reclamation division for the last three years were:
The Company's timber division manages approximately one million acres of owned and leased timberland. In 1996, approximately 56% of the timber harvested by the Company was used in its Jacksonville, Fernandina Beach and Brewton mills. The Company harvested 1,020,000 cords of timber, which would satisfy approximately 39% of the Company's requirements for wood fibers. The Company's wood fiber requirements not satisfied internally are purchased on the open market or under long-term contracts. In 1996, the Company's total sales of timber products were $269 million (including $206 million of intracompany sales).
NEWSPRINT SEGMENT
NEWSPRINT MILLS The Company's newsprint mills are located in Newberg and Oregon City, Oregon. During 1996, 1995 and 1994, the Company produced 576,000, 620,000 and 615,000 tons of newsprint, respectively. In 1996, total sales of newsprint were $301 million (none of which were intracompany sales).
For the past three years, an average of approximately 53% of the Company's newsprint production has been sold to The Times Mirror Company ("Times Mirror") pursuant to a long-term newsprint agreement (the "Newsprint Agreement") entered into in connection with the Company's acquisition of Smurfit Newsprint Corporation ("SNC") stock in February 1986. Under the terms of the Newsprint Agreement, the Company supplies newsprint to Times Mirror generally at prevailing West Coast market prices. Sales of newsprint to Times Mirror in 1996 amounted to $165 million.
CLADWOOD Cladwood is a wood composite panel used by the housing industry, manufactured from sawmill shavings and other wood residuals and overlaid with recycled newsprint. The Company has two Cladwood plants located in Oregon. Total sales for Cladwood in 1996 were $23 million (including $1 million of intracompany sales). See also Part I, Item 3, "Legal Proceedings."
MARKETING
The marketing strategy for the Company's mills is to maximize sales of products to manufacturers located within an economical shipping area. The strategy in the converting plants focuses on both specialty products tailored to fit customers' needs and high volume sales of commodity products. The Company also seeks to broaden the customer base for each of its segments rather than to concentrate on only a few accounts for each plant. These objectives have led to decentralization of marketing efforts, such that each plant has its own sales force, and many have product design engineers, who are in close contact with customers to respond to their specific needs. National sales offices are also maintained for customers who purchase through a centralized purchasing office. National account business may be allocated to more than one plant because of production capacity and equipment requirements.
COMPETITION
The paperboard and packaging products markets as well as the newsprint markets are highly competitive and are comprised of many participants. Although no single company is dominant, the Company does face significant competitors in each of its businesses. The Company's competitors include large vertically integrated companies as well as numerous smaller companies. The industries in which the Company competes are particularly sensitive to price fluctuations as well as other competitive factors including design, quality and service, with varying emphasis on these factors depending on product line.
BACKLOG
Demand for the Company's major product lines is relatively constant throughout the year and seasonal fluctuations in marketing, production, shipments and inventories are not significant. The Company does not have a significant backlog of orders, as most orders are placed for delivery within 30 days.
RESEARCH AND DEVELOPMENT
The Company's research and development center uses state-of-the-art technology to assist all levels of the manufacturing and sales processes from raw materials supply through finished packaging performance. Research programs have provided improvements in coatings and barriers, stiffeners, inks and printing. The technical staff conducts basic, applied and diagnostic research, develops processes and products and provides a wide range of other technical services.
The Company actively pursues applications for patents on new inventions and designs and attempts to protect its patents against infringement. Nevertheless, the Company believes that its success and growth are dependent on the quality of its products and its relationships with its customers, rather than on the extent of its patent protection. The Company holds or is licensed to use certain patents, but does not consider that the successful continuation of any important phase of its business is dependent upon such patents.
EMPLOYEES
The Company had approximately 15,800 employees at December 31, 1996, of which approximately 10,700 employees (68%) were represented by collective bargaining units. The expiration dates of union contracts for the Company's major facilities are as follows: the Oregon City mill, expiring March 1997; the Fernandina Beach mill, expiring June 1998; a group of 11 properties, including 4 paper mills and 7 corrugated container plants, expiring June 1998; the Jacksonville mill, expiring June 1999; the Alton mill, expiring June 2000; the Newberg mill, expiring March 2002; and the Brewton mill, expiring October 2002. The Company believes that its employee relations are generally good and is currently in the process of bargaining with unions representing production employees at a number of its other operations.
ENVIRONMENTAL COMPLIANCE
The Company's paperboard and newsprint mills are large consumers of energy, using either natural gas or coal. Approximately 68% of the Company's total paperboard tonnage is produced by mills which have coal-fired boilers. The cost of energy is dependent, in part, on environmental regulations governing air emissions.
Because various pollution control 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 proposed a comprehensive rule governing the pulp, paper and paperboard industry (the "Cluster Rule") which will require substantial expenditures to achieve compliance. In order to comply with the Cluster Rule as currently proposed, the Company estimates that it may require approximately $125 million to $150 million in capital expenditures over the next three to five years. The ultimate financial impact of the regulations cannot be predicted with certainty and will depend on several factors including the actual requirements imposed under the final rules, new developments in control process technology and cost inflation. Since the Company's competitors are, or will be, subject to comparable pollution standards, including the proposed Cluster Rule, management is of the opinion that compliance with future pollution standards will not adversely affect the Company's competitive position.
In addition to Cluster Rule compliance, the Company also anticipates additional capital expenditures related to environmental compliance, although in the opinion of management, such expenditures will not have a material effect on the financial condition or results of operations of the Company. For the past three years, the Company has spent an average of approximately $10 million annually on capital expenditures for environmental purposes. The anticipated spending for such capital projects for fiscal 1997 is approximately $25 million. A significant amount of the increased expenditures in 1997 will be due to compliance with Clean Air Act requirements.
ITEM 2.
ITEM 2. PROPERTIES
The Company's properties at December 31, 1996 are summarized in the table below. Approximately 63% of the Company's investment in property, plant and equipment is represented by its paperboard and newsprint mills.
In addition to its manufacturing facilities, the Company owns and leases approximately 763,000 acres and 224,000 acres of timberland, respectively, and also operates wood harvesting facilities.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
LITIGATION
On January 3, 1997, SNC was served with a complaint alleging that Cladwood, produced by SNC and used in mobile homes, deteriorates when exposed to climate conditions found in South Carolina. The suit, which purports to be a class action on behalf of present and past owners of Cladwood-containing mobile homes in South Carolina, also names as defendants certain manufacturers and distributors of mobile homes in South Carolina. The complaint alleges causes of action for breach of warranty, strict liability, negligence and violation of the South Carolina Unfair Trade Practices Act and seeks an unspecified aggregate amount of actual statutory and punitive damages. The Company intends to vigorously defend the action. The litigation is currently in the discovery stage and, at this time, the Company is unable to estimate its potential liability, if any, in connection with the matter.
The Company is a defendant in a number of other lawsuits which have arisen in the normal course of business. While any litigation has an element of uncertainty, the management of the Company believes that the outcome of such suits will not have a material adverse effect on its financial condition or results of operations.
ENVIRONMENTAL MATTERS
Federal, state and local environmental requirements are a significant factor in the Company's business. The Company employs processes in the manufacture of pulp, paperboard and other products, resulting in various discharges, emissions and reporting and disclosure obligations that are subject to numerous federal, state and local environmental statutes, regulations and ordinances. The Company operates and expects to operate under permits and similar authorizations from various governmental authorities that regulate such discharges, emissions and reporting and disclosure obligations.
Occasional violations have occurred from time to time at the Company's facilities, resulting in administrative actions, legal proceedings or consent decrees and similar arrangements. Pending proceedings include the following:
Sweet Home, Oregon On May 11, 1995, the EPA executed a search warrant at the Sweet Home, Oregon Cladwood manufacturing facility of SNC. According to the search warrant, the U.S. Attorney's office for the District of Oregon and the EPA are investigating whether this facility violated the Clean Water Act or other federal laws in connection with its waste water discharges. The Company has been advised that the government has presented, or intends to present, evidence to a grand jury in connection with the investigation. SNC and certain of its employees could be charged, and SNC could be assessed significant fines and penalties if an indictment and conviction follow as a result of the grand jury proceeding.
Philomath, Oregon On May 13, 1996, SNC voluntarily self reported to the EPA and the Oregon Department of Environmental Quality ("ODEQ") possible violations of the Clean Water Act and other federal laws in connection with waste water discharges at its Cladwood facility located in Philomath, Oregon. An investigation may be undertaken by ODEQ.
Miami County, Ohio Site A criminal inquiry was commenced by the United States in 1993 relating to the Company's responses to the EPA's document and information requests in connection with a Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") site located in Miami County, Ohio. It is uncertain whether any criminal action will be forthcoming.
The Company also faces potential liability as a result of releases, or threatened releases, of hazardous substances into the environment from various sites owned and operated by third parties at which Company-generated wastes have allegedly been deposited. Generators of hazardous substances sent to off-site disposal locations at which environmental problems exist, as well as the owners of those sites and certain other classes of persons (generally referred to as "potentially responsible parties" or "PRPs"), are, in most instances, subject to joint and several liability for response costs for the investigation and remediation of such sites under CERCLA and analogous state laws, regardless of fault or the legality of the original disposal. The Company has received notice that it is or may be a PRP at a number of federal and/or state sites where remedial action may be required and, as a result, may have joint and several liability for CERCLA cleanup costs at such sites. However, liability at CERCLA sites is typically shared with the other PRPs and costs are commonly allocated according to relative amounts of waste deposited. Because the Company's relative percentage of waste deposited at a majority of these sites is quite small, management of the Company believes that its probable liability under CERCLA, taken on a case by case basis or in the aggregate, will not have a material adverse effect on its financial condition or operations. Pending CERCLA proceedings include the following:
Monterey Park, California Site The Company has paid approximately $768,000 pursuant to two partial consent decrees entered into in 1991 and 1992 with the U.S. and the State of California with respect to cleanup obligations at the Operating Industries site in Monterey Park, California. It is anticipated that there will be further remedial measures beyond those covered by these partial settlements.
Baltimore, Maryland Site The Company entered into a consent decree with the U.S. and the State of Maryland in settlement of its obligations in connection with the Kane & Lombard Superfund Site in Baltimore, Maryland. The Company paid approximately $171,500 in 1995 as part of this settlement and may be required to pay additional cleanup costs.
Kingsbury, Indiana Site The Company entered into a consent decree in 1991 with the U.S. and the State of Indiana for the remediation of the Fisher-Calo Superfund Site in Kingsbury, Indiana. To date, the Company has paid approximately $140,000 toward cleaning up the site. The Company anticipates that some additional remediation of the site will be required.
Lemont, Illinois Site The Company has entered into consent decrees in 1988 and 1993 with the EPA and the Illinois EPA for the investigation and initial remediation of the Lenz Oil Superfund Site in Lemont, Illinois. The Company has paid approximately $79,000 toward this investigation and initial remediation. It is anticipated that further remedial measures will be required beyond those covered in these consent decrees.
Wilmington, Delaware Site The Company entered into a consent decree in 1994 with the State of Delaware regarding the remedial investigation and feasibility study regarding the Wilmington, Delaware site, and anticipates entering into a consent decree to perform cleanup of the site.
Duval County, Florida In addition to participating in remediation of sites owned by third parties, the Company in 1992 entered into an administrative consent order with the Florida Department of Environmental Regulation to carry out any necessary assessment and remediation of Company-owned property in Duval County, Florida that was formerly the site of a sawmill that dipped lumber into a chemical solution. Remediation of the site has begun. Management believes that the probable costs of this site, taken alone or with potential costs at other Company- owned properties where some contamination has been found, will not have a material adverse effect on its financial condition or results of operations.
New Jersey Industrial Site Recovery Act In addition to other federal and state laws regarding hazardous substance contamination at sites owned or operated by the Company, the New Jersey Industrial Site Recovery Act ("ISRA") requires that a "Negative Declaration" or a "Cleanup Plan" be filed and approved by the New Jersey Department of Environmental Protection ("DEP") as a precondition to the "transfer" of an "industrial establishment." The ISRA regulations provide that a transferor may close a transaction prior to the DEP's approval of a negative declaration if the transferor enters into an administrative consent order with the DEP. The Company is currently a signatory to administrative consent orders with respect to two formerly leased or owned industrial establishments. Management believes that any requirements that may be imposed by the DEP with respect to these sites will not have a material adverse effect on the financial condition or results of operations of the Company.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders of the registrant during the fourth quarter of 1996.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION The Company is a wholly-owned subsidiary of JSC, and therefore, all of the outstanding common stock of the Company ("JSCE Common Stock") is owned by JSC. As a result, there is no established public market for the JSCE Common Stock.
DIVIDENDS The Company has not paid cash dividends on its common stock. The ability of the Company to pay dividends in the future is restricted by certain provisions contained in the 1994 Credit Agreement (as defined) and the indentures relating to the outstanding indebtedness of JSC (U.S.) which the Company guarantees.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL Market conditions and demand for containerboard, corrugated shipping containers and newsprint, three of the Company's most important products, are generally subject to cyclical changes in the economy and changes in industry capacity, both of which can significantly impact selling prices and the Company's profitability.
Market conditions weakened in the second half of 1995 and early 1996 due to new capacity added within the industry, resulting in excess inventories and lower selling prices for containerboard and corrugated shipping containers. Many paper companies, including the Company, took downtime at their containerboard mills in the fourth quarter of 1995 and the first half of 1996 to reduce inventories. Linerboard prices, which had reached a record high of $535 per ton in 1995, dropped rapidly during this period, declining to approximately $330 per ton by July 1996. Improving demand in the second half of 1996, however, resulted in linerboard prices stabilizing by the end of 1996.
Increasing demand in newsprint markets during 1994 and 1995 resulted in an all-time record high level for prices of approximately $760 per metric ton in October 1995. Demand for newsprint began to decline in late 1995, however, as ad lineage dropped and conservation measures taken by newspaper publishers were implemented. As a result, excess inventories developed and selling prices for newsprint fell during 1996. Many newsprint producers, including the Company, took downtime at their newsprint mills during 1996 to reduce inventories. Although increases in newsprint consumption during the second half of 1996 slowed the decline, newsprint prices dropped to approximately $500 per metric ton by the end of 1996.
Reclaimed fiber is a major product of the Company and an important raw material of the Company's recycled paper mills. Due to increases in demand, the price of recycled fiber increased dramatically during 1994 and the early part of 1995, resulting in higher costs at the Company's recycled paper mills. However, the price of this material dropped in the second half of 1995 due to lower demand resulting from the significant amount of downtime taken by recycled paper mills throughout the country. Prices have remained relatively constant during 1996, having a beneficial effect on fiber cost at the Company's recycled paper mills as compared to 1995.
RESULTS OF OPERATIONS
1996 Compared to 1995 Net sales and income from operations declined in 1996 compared to record levels in 1995 due primarily to lower sales prices. Net sales were $3.4 billion, a decrease of 17% compared to 1995, and income from operations was $391 million, a decrease of 38% compared to 1995. Increases (decreases) in results for each of the Company's segments are discussed below.
Paperboard/Packaging Products Segment Net sales of the Paperboard/Packaging Products segment decreased 17% compared to 1995 to $3.09 billion, and income from operations decreased $269 million compared to 1995 to $335 million. The decrease in net sales of this segment was primarily a result of significant reductions in sales prices for containerboard, corrugated shipping containers and reclamation products. Increases in volume partially offset the decline in net sales. Profitability for this segment declined in 1996 compared to 1995 primarily due to the sales price declines, although the lower fiber prices resulted in lower cost in the Company's paperboard mills. Income from operations as a percent of net sales for the Paperboard/Packaging Products segment decreased from 16% in 1995 to 11% in 1996. The changes in net sales price and shipments within the major product groups of the Paperboard/Packaging Products segment are discussed below.
Net sales of containerboard and corrugated shipping containers declined $363 million to $1.59 billion, a decrease of 19% compared to 1995. On average, corrugated shipping container prices decreased 16% and containerboard prices decreased 28%, compared to 1995. On the other hand, shipments of corrugated shipping containers increased 2% and shipments of containerboard increased 4%, compared to 1995. Shipments of containerboard were higher primarily as a result of reduced mill downtime in 1996, as compared to 1995.
Net sales for the reclamation and timber products operations decreased $222 million to $281 million, a decrease of 44% compared to 1995. The decrease was due primarily to lower average prices for reclaimed fiber, which declined 54% compared to 1995. Shipments of reclaimed fiber increased 4% compared to 1995.
Net sales of recycled boxboard, SBS and folding cartons were $895 million, a decrease of 2% compared to 1995. On average, recycled boxboard and SBS prices decreased 14% and 7%, respectively, and folding carton prices decreased 3% compared to 1995. Shipments of recycled boxboard and SBS increased 3% and 5%, respectively, and folding carton shipments decreased 1% compared to 1995.
Net sales of $144 million for uncoated recycled boxboard and industrial packaging products were 7% lower compared to 1995, primarily due to lower prices. Net sales of consumer packaging products declined 1% compared to 1995 to $174 million.
Newsprint Segment Net sales of the Newsprint segment decreased 17% compared to 1995 to $323 million, and income from operations increased $30 million compared to 1995 to $56 million. The decrease in net sales was a result of sales prices, which, on average, dropped 8% compared to 1995, and lower shipments due to production curtailment. Shipments of newsprint were lower in 1996 by 8% compared to 1995. The impact of reduced sales prices and lower sales volume on profitability of the segment was partially offset by lower fiber cost. This segment's 1995 profitability was also impacted by a $25 million pretax charge for anticipated cost related to the exterior siding issue discussed below. Income from operations as a percent of net sales increased from 7% in 1995 to 17% in 1996.
Costs and Expenses Cost of goods sold as a percent of net sales increased from 79% in 1995 to 81% in 1996 for the reasons explained above. Selling and administrative expenses as a percent of net sales increased from 6% in 1995 to 8% in 1996 due primarily to overall lower sales prices, higher personnel costs and inflationary increases in other costs.
In 1993, the Company recorded a pretax charge of $96 million for a restructuring program (the "Restructuring Program") to improve its long-term competitive position. The Restructuring Program provided for plant closures, asset write-downs, reductions in workforce, relocation of employees and consolidation of certain plant operations, expected to be completed over an approximate three year period. Major activities relating to the Restructuring Program in 1996 included payments of plant closure expenditures and severance of $6 million, offset by proceeds from sales of fixed assets of $3 million. Since 1993, the Company has written down the assets of closed facilities and other nonproductive assets totalling $39 million and made cash expenditures of $39 million relating to the Restructuring Program. Proceeds of $8 million from sales of fixed assets were used to offset additional expenses and anticipated expenses related to shutdowns. The remaining restructuring liability relates to closures and sales of certain facilities which were originally anticipated to be completed as of December 31, 1996 and are now expected to be completed during 1997. No significant adjustment to the reserve is anticipated at this time.
In the fourth quarter of 1995, the Company recorded a pretax charge totalling $25 million to implement a program of corrective action to address product quality matters and failure to follow proper manufacturing and internal procedures relating to production of exterior siding, a non-core product line of SNC. Based upon the experience to date, the Company believes the reserve is adequate.
Separately, in January 1997, SNC and certain manufacturers and distributors of mobile homes were named as defendants in a class action complaint filed in the state of South Carolina. The complaint alleges that exterior siding produced by SNC and used in mobile homes deteriorates when exposed to climate conditions found in South Carolina. The Company intends to vigorously defend the action. The litigation is currently in the discovery stage and, at this time, the Company is unable to estimate its potential liability, if any, in connection with the matter.
At December 31, 1995, the Company decreased its weighted average discount rate in measuring its pension obligations from 8.5% to 7.25% and its rate of increase in compensation levels from 5.0% to 4.0%. In addition, the Company changed its expected long-term rate of return on assets from 10.0% to 9.5% at December 31, 1995. The net effect of changing these assumptions increased the projected benefit obligation at December 31, 1995 and increased pension cost in 1996 by approximately $14 million.
Interest expense for 1996 declined $40 million compared to 1995 due primarily to lower average debt levels outstanding and lower effective interest rates.
The Company adopted 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," in the first quarter of 1996. The effect of such adoption was not material to the Company's financial statements. During 1996, the Company elected to early adopt the provisions of the American Institute of Certified Public Accountants Statement of Position ("SOP") 96-1, "Environmental Remediation Liabilities." The effect of adopting the provisions of SOP 96-1 was immaterial to the Company's financial statements.
The provision for income taxes in 1996 was $77 million compared to $156 million in 1995. The Company's effective tax rate of 39.7% in 1996 is comparable to the 1995 effective tax rate of 38.7%. In 1996, the Company utilized its net operating loss carryforwards for federal income tax purposes. Remaining net operating loss carryforwards for state income tax purposes of approximately $44 million expire in the years 1997 through 2009. JSC's federal income tax returns for 1989 through 1991 are currently under examination. While the ultimate results of such examination cannot be predicted with certainty, the Company's management believes that the examination will not have a material adverse effect on its financial condition or results of operations.
1995 COMPARED TO 1994 Price recovery coupled with productivity gains and cost reduction programs implemented in recent years provided record sales and earnings for the Company in 1995. Net sales were $4.1 billion, an increase of 27% over 1994, and income from operations was $630 million, more than double the 1994 amount. Increases (decreases) in sales for each of the Company's segments are discussed below.
Paperboard/Packaging Products Segment Net sales of the Paperboard/Packaging Products segment increased 25% compared to 1994 to $3.71 billion, primarily as a result of sales prices and product mix.
Net sales of containerboard and corrugated shipping containers increased 26% compared to 1994, to $1.96 billion. Corrugated shipping container prices increased 28% on average compared to 1994. In view of the reduced demand in the second half of 1995, several of the Company's containerboard mills took downtime in order to reduce inventories. As a result of this downtime, shipments of containerboard in 1995 were down 2% compared to 1994. Shipments of corrugated shipping containers were down 4% compared to 1994.
Net sales of recycled boxboard, SBS and folding cartons increased 10% compared to 1994, to $916 million. Recycled boxboard prices increased during the first half of 1995 to cover higher reclaimed fiber cost, but declined later in the year in response to lower reclaimed fiber cost. On average, prices of recycled boxboard and SBS each rose 19% compared to 1994. Folding carton prices increased 9% on average compared to 1994. Shipments of recycled boxboard and SBS decreased 2% and shipments of folding cartons decreased by 3% compared to 1994.
Net sales for the reclamation and timber products operations increased 75% compared to 1994, to $503 million, due primarily to escalating prices of reclaimed fiber. Reclaimed fiber prices were higher by 62% on average compared to 1994 and shipments increased 4% compared to 1994.
Net sales of uncoated recycled boxboard and industrial packaging increased 18% compared to 1994, to $155 million, due primarily to higher prices. Net sales of consumer packaging increased 6% compared to 1994, to $176 million.
Newsprint Segment Net sales of the Newsprint segment increased 49% compared to 1994, to $387 million, primarily as a result of sales prices and product mix.
Costs and Expenses Cost of goods sold as a percent of net sales declined from 84% in 1994 to 79% in 1995. Selling and administrative expenses as a percent of net sales declined from 7% in 1994 to 6% in 1995. The sales price increases implemented during 1995 were the primary reason for the improvements in each of cost of goods sold and selling and administrative expenses as a percent of net sales.
Interest expense for 1995 declined $35 million compared to 1994 due primarily to lower average debt levels outstanding and lower effective interest rates. The lower average interest rate in 1995 resulted primarily from the retirement in December 1994 of the Company's high-yield subordinated debt in conjunction with the Company's 1994 Recapitalization.
The provision for income taxes in 1995 was $156 million compared to $16 million in 1994. The Company's effective tax rate of 38.7% in 1995 was substantially lower than the 1994 effective tax rate of 57.1%, primarily due to the effect of permanent differences from applying purchase accounting. As of December 31, 1995, the Company had net operating loss carryforwards for federal income tax purposes of approximately $98 million (expiring in the year 2009), none of which were available for utilization against alternative minimum taxes.
LIQUIDITY AND CAPITAL RESOURCES
General
Operating activities have historically been the major source of cash to fund the Company's capital expenditures and debt payments. Net cash provided by operating activities for 1996 of $397 million and excess cash at the end of 1995 were used primarily to fund capital expenditures of $146 million and to reduce debt by $256 million.
JSC (U.S.) entered into a bank credit facility (the "1994 Credit Agreement") which consists of a $450 million revolving credit facility, of which up to $150 million may consist of letters of credit, a $900 million Tranche A Term Loan and a $300 million Tranche B Term Loan. In May 1996, the 1994 Credit Agreement was amended to allow an additional $100 million borrowing under the Tranche B Term Loan and $150 million borrowing under a newly created Tranche C Term Loan. The $250 million in new proceeds from these term loans was used to reduce scheduled installment payments of the Tranche A Term Loan. The 1994 Credit Agreement contains various business and financial covenants including, among other things, (i) limitations on dividends, redemptions and repurchases of capital stock, (ii) limitations on the incurrence of indebtedness, liens, leases and sale-leaseback transactions, (iii) limitations on capital expenditures, (iv) maintenance of minimum levels of consolidated earnings before depreciation, interest, taxes and amortization and (v) maintenance of minimum interest coverage ratios. Such restrictions, together with the highly leveraged position of the Company, could restrict corporate activities, including the Company's ability to respond to market conditions, to provide for unanticipated capital expenditures or to take advantage of business opportunities.
The 1994 Credit Agreement imposes an annual limit on future capital expenditures of $150 million. The capital spending limit is subject to increase in any year by an amount equal to a portion of the Company's excess cash flow and an amount up to $75 million if the prior year's spending was less than the maximum amount allowed. The Company has a carryover of approximately $75 million for 1997. Because the Company has invested heavily in its core businesses in prior years, management believes the annual limitation for capital expenditures does not impair its plans for maintenance, expansion and continued modernization of its facilities.
The Company expects internally generated cash flows and existing financing resources will be sufficient for the next several years to meet its needs to pay interest, pay income taxes, amortize term loans and fund capital expenditures. Scheduled debt payments due in 1997 and 1998 are $10 million and $14 million, respectively, with increasing amounts thereafter. Capital expenditures for 1997 are estimated to be comparable to 1996. The Company expects to use any excess cash provided by operations to make further debt reductions. At December 31, 1996, the Company had $322 million of unused borrowing capacity under its 1994 Credit Agreement and $133 million of unused borrowing capacity under its $315 million accounts receivable securitization program, subject to JSC (U.S.)'s level of eligible accounts receivable.
The Company's earnings are significantly affected by the amount of interest on its indebtedness. The Company enters into interest rate swap and cap agreements to manage interest rate exposure on its indebtedness. Management's objective is to protect the Company from interest rate volatility and reduce or cap interest expense within acceptable levels of risk. In 1996, interest rate swap agreements with a notional value of $250 million and a cap agreement with a notional amount of $100 million expired. The table below shows interest rate swap agreements outstanding at December 31, 1996, the related maturities for the years thereafter and the contracted pay and receive rates for such agreements.
Environmental Matters
In 1993, the Company recorded a provision of $54 million, of which $39 million relates to environmental matters, representing asbestos and PCB removal, solid waste cleanup at existing and former operating sites and expenses for response costs at various sites where the Company has received notice that it is a PRP. The Company made payments of approximately $3 million, $9 million and $4 million related to PRP sites and other environmental cleanups in 1996, 1995 and 1994, respectively. The Company, as well as other companies in the industry, faces potential environmental liability related to various sites at which hazardous wastes have allegedly been deposited. The Company has received notice that it is or may be a PRP at a number of federal and state sites (the "Sites") where remedial action may be required. Because the laws that govern the cleanup of waste disposal sites have been construed to authorize joint and several liability, government agencies or other parties could seek to recover all response costs for any Site from any one of the PRPs for such Site, including the Company, despite the involvement of other PRPs. Although the Company is unable to estimate the aggregate response costs in connection with the remediation of all Sites, if the Company were held jointly and severally liable for all response costs at some or all of the Sites, it would have a material adverse effect on the financial condition and results of operations of the Company. However, joint and several liability generally has not in the past been imposed on PRPs, and based on such past practice, the Company's past experience and the financial conditions of other PRPs with respect to the Sites, the Company does not expect to be held jointly and severally liable for all response costs at any Site. Liability at waste disposal sites is typically shared with other PRPs, and costs generally are allocated according to relative volumes of waste deposited at a given Site. At most Sites, the waste attributed to the Company is a very small portion of the total waste deposited at the Site (generally significantly less than 1%). There are approximately seven Sites where final settlement has not been reached and where the Company's potential liability is expected to exceed de minimis levels. See Part I, Item 3, "Legal Proceedings - Environmental Matters" for discussion of the environmental exposure at the five Sites subject to pending CERCLA proceedings. Accordingly, the Company believes that its estimated total probable liability for response costs at the Sites was adequately reserved at December 31, 1996. Further, the estimate takes into consideration the number of other PRPs at each site, the identity, and financial position of such parties, in light of the joint and several nature of the liability, but does not take into account possible insurance coverage or other similar reimbursement.
Compliance with federal, state and local environmental requirements is a significant, on-going factor in the Company's business. It is difficult to predict with certainty the amount of capital expenditures that will be required to comply with future standards. The Company has averaged $10 million annually in capital expenditures related to environmental compliance over the last three years and estimates spending approximately $25 million in capital expenditures related to environmental compliance in 1997. A significant amount of the increased expenditures in 1997 will be due to compliance with Clean Air Act requirements. In addition, the EPA's Cluster Rule, although not yet finalized, will require substantial expenditures to achieve compliance. In order to comply with the Cluster Rule as currently proposed, the Company estimates that it may require approximately $125 million to $150 million in capital expenditures over the next three to five years. The ultimate financial impact of the regulations cannot be predicted with certainty and will depend on several factors including the actual requirements imposed under the final rules, new developments in control process technology and cost inflation. Since the Company's competitors are, or will be, subject to comparable pollution standards, including the proposed Cluster Rule, management is of the opinion that compliance with future pollution standards will not adversely affect the Company's competitive position.
Effects of Inflation
In late 1994 and early 1995, the cost of many of the Company's base raw materials increased significantly due to strong demand and tight supply factors. During this period, the Company was able to increase selling prices, effectively offsetting the effects of the increased cost. During the latter part of 1995 and early 1996, the costs of such base raw materials declined and have remained relatively stable through the end of 1996. The Company uses the last-in, first-out method of accounting for approximately 80% of its inventories. Under this method, the cost of products sold reported in the financial statements approximates current costs and thus provides a closer matching of revenue and expenses in periods of increasing costs. Inflationary increases in other operating costs were moderate and did not have a material impact on the Company's financial position or operating results.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Page No.
Index to Financial Statements:
Management's Responsibility for Financial Statements. . . . . . . . 23 Report of Independent Auditors. . . . . . . . . . . . . . . . . . . 24 Consolidated balance sheets - December 31, 1996 and 1995. . . . . . 25 For the years ended December 31, 1996, 1995 and 1994: Consolidated statements of operations . . . . . . . . . . . . . . 26 Consolidated statements of stockholder's deficit. . . . . . . . . 27 Consolidated statements of cash flows . . . . . . . . . . . . . . 28 Notes to consolidated financial statements. . . . . . . . . . . . . 29
The following consolidated financial statement schedule of JSCE, Inc. is included in Item 14(a):
Schedule II: Valuation and Qualifying Accounts . . . . . . . . . . 57
All other schedules specified under Regulation S-X for JSCE, Inc. have been omitted because they are not applicable, because they are not required or because the information required is included in the financial statements or notes thereto.
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS
The management of the Company is responsible for the information contained in the consolidated financial statements and in other parts of this report. The consolidated financial statements have been prepared by the Company in accordance with generally accepted accounting principles appropriate in the circumstances and necessarily include certain amounts based on management's best estimate and judgment.
The Company maintains a system of internal accounting control, which it believes is sufficient to provide reasonable assurance that in all material respects transactions are properly authorized and recorded, financial reporting responsibilities are met and accountability for assets is maintained. In establishing and maintaining any system of internal control, judgment is required to assess and balance the relative costs and expected benefits. Management believes that through the careful selection of employees, the division of responsibilities and the application of formal policies and procedures, the Company has an effective and responsive system of internal accounting controls. The system is monitored by the Company's staff of internal auditors, who evaluate and report to management on the effectiveness of the system.
The Audit Committee of the Board of Directors is composed of four directors who meet with the independent auditors, internal auditors and management to discuss specific accounting, reporting and internal control matters. Both the independent auditors and internal auditors have full and free access to the Audit Committee.
/s/Richard W. Graham Richard W. Graham President and Chief Executive Officer
/s/Patrick J. Moore Patrick J. Moore Vice President and Chief Financial Officer (Principal Accounting Officer)
REPORT OF INDEPENDENT AUDITORS
Board of Directors JSCE, Inc.
We have audited the accompanying consolidated balance sheets of JSCE, Inc. as of December 31, 1996 and 1995, and the related consolidated statements of operations, stockholder's deficit and cash flows for each of the three years in the period ended December 31, 1996. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of JSCE, Inc. at December 31, 1996 and 1995, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
/s/Ernst & Young LLP Ernst & Young LLP
St. Louis, Missouri January 22, 1997
See notes to consolidated financial statements.
See notes to consolidated financial statements.
See notes to consolidated financial statements.
See notes to consolidated financial statements.
JSCE, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Tabular amounts in millions)
1. Basis of Presentation
JSCE, Inc., hereafter referred to as the "Company," is a wholly- owned subsidiary of Jefferson Smurfit Corporation ("JSC"). JSC has no operations other than its investment in JSCE, Inc. On December 31, 1994, Jefferson Smurfit Corporation (U.S.), a wholly-owned subsidiary of the Company, merged into its wholly-owned subsidiary, Container Corporation of America ("CCA"), with CCA surviving and changing its name to Jefferson Smurfit Corporation (U.S.) ("JSC (U.S.)"). The Company has no operations other than its investment in JSC (U.S.). In 1994, JSC contributed 100% of the common stock of JSC (U.S.) to the Company. This transaction has been accounted for in a manner similar to a pooling of interests, and accordingly, the consolidated financial statements for all periods presented include the accounts of JSC (U.S.). Prior to May 4, 1994, 50% of the voting stock of JSC was owned by Smurfit Packaging Corporation ("SPC") and Smurfit Holdings B.V. ("SHBV"), indirect wholly-owned subsidiaries of Jefferson Smurfit Group plc ("JS Group"), a public corporation organized under the laws of the Republic of Ireland. The remaining 50% was owned by The Morgan Stanley Leveraged Equity Fund II, L.P. ("MSLEF II") and certain other investors.
In 1994, JSC completed a recapitalization plan (the "Recapitalization") to repay and refinance a substantial portion of its indebtedness. In connection with the Recapitalization, (i) JSC issued and sold 19,250,000 shares of common stock pursuant to a registered public offering at an initial public offering price of $13.00 per share, (ii) JS Group, through its wholly-owned subsidiary Smurfit International B.V. ("SIBV"), purchased an additional 11,538,462 shares of common stock for $150 million and (iii) JSC (U.S.) issued and sold $300 million aggregate principal amount of unsecured 11.25% Series A Senior Notes due 2004 and $100 million aggregate principal amount of unsecured 10.75% Series B Senior Notes due 2002 (the "1994 Senior Notes") pursuant to a registered public offering.
The deficit in stockholder's equity is primarily due to JSC's 1989 purchase of JSC (U.S.)'s common equity owned by JS Group and the acquisition by JSC (U.S.) of its common equity owned by MSLEF I, which were accounted for as purchases of treasury stock.
2. Significant Accounting Policies
Nature of Operations: The Company's major operations are in paper products, newsprint production, recycling and consumer packaging. The Company's paperboard mills procure virgin and recycled fiber and produce paperboard for conversion into corrugated containers, folding cartons and industrial packaging at Company-owned facilities and third-party converting operations. Paper product operations customers represent a diverse range of industries including paperboard and paperboard packaging, wholesale trade, retailing and agri-business. The Company's newsprint operations produce newsprint from virgin and recycled fiber primarily for the newspaper industry. Recycling operations collect or broker wastepaper for sale to Company-owned and third-party paper mills. Consumer packaging produces labels and flexible packaging for use in industrial, medical and consumer product applications. Customers and operations are principally located in the United States. Credit is extended to customers based on an evaluation of their financial condition.
Principles of Consolidation: The consolidated financial statements include the accounts of the Company and its majority-owned subsidiaries. Significant intercompany accounts and transactions are eliminated in consolidation.
Cash Equivalents: The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. At December 31, 1996, cash and cash equivalents of $8 million are pledged as collateral for obligations associated with the accounts receivable securitization program (see Note 4).
Revenue Recognition: Revenue is recognized at the time products are shipped.
Inventories: Inventories are valued at the lower of cost or market, principally under the last-in, first-out ("LIFO") method except for $53 million in 1996 and $54 million in 1995 which are valued at the lower of average cost or market. First-in, first-out costs (which approximate replacement costs) exceed the LIFO value by $59 million and $84 million at December 31, 1996 and 1995, respectively.
Property, Plant and Equipment: Property, plant and equipment are carried at cost. Provisions for depreciation and amortization are made using straight-line rates over the estimated useful lives of the related assets and the terms of the applicable leases for leasehold improvements. Estimated useful lives of papermill machines average 23 years, while major converting equipment and folding carton presses have estimated useful lives of 20 years.
In the first quarter of 1996, the Company adopted 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," which requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. SFAS No. 121 also addresses the accounting for long-lived assets that are expected to be disposed of. The effect of adoption was immaterial to the Company's consolidated financial statements.
2. Significant Accounting Policies (cont)
Timberland: The portion of the costs of timberland attributed to standing timber is charged against income as timber is cut, at rates determined annually, based on the relationship of unamortized timber costs to the estimated volume of recoverable timber. The costs of seedlings and reforestation of timberland are capitalized.
Deferred Debt Issuance Costs: Deferred debt issuance costs are amortized over the terms of the respective debt obligations using the interest method.
Goodwill: The excess of cost over the fair value assigned to the net assets acquired is recorded as goodwill and is being amortized using the straight-line method over 40 years.
Income Taxes: The taxable income of the Company is included in the consolidated federal and state income tax returns filed by JSC. The Company's income tax provisions are computed on a separate return basis and are paid to JSC.
The Company accounts for income taxes under the provisions of SFAS No. 109, "Accounting for Income Taxes," which provides for an asset and liability approach for accounting for income taxes. Under this approach, 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 5).
Interest Rate Swap and Cap Agreements: The Company enters into interest rate swap and cap agreements to reduce the impact of interest rate fluctuations. Swap agreements involve the exchange of fixed and floating rate interest payments without the exchange of the underlying principal amount. Cap agreements provide that the Company will receive a certain amount when short-term interest rates exceed a threshold rate. Periodic amounts to be paid or received under interest rate swap and cap agreements are accrued and recognized as adjustments to interest expense. Premiums paid on cap agreements are included in interest payable and amortized to interest expense over the life of the agreements. Gains and losses realized upon settlement of these agreements are deferred and amortized to interest expense over a period relevant to the agreement if the underlying hedged instrument remains outstanding, or immediately if the underlying hedged instrument is settled.
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 which extend the life of the related property or mitigate or prevent future environmental contamination are capitalized. 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.
During 1996, the Company elected to early adopt the provisions of the American Institute of Certified Public Accountants Statement of Position ("SOP") 96-1, "Environmental Remediation Liabilities," which provides authoritative guidance on the recognition, measurement and disclosures of environmental remediation liabilities. The effect of adopting the provisions of SOP 96-1 was immaterial to the Company's financial statements.
2. Significant Accounting Policies (cont)
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 1996 presentation.
3. Property, Plant and Equipment
4. Long-Term Debt
Aggregate annual maturities of long-term debt at December 31, 1996 for the next five years are $10 million in 1997, $14 million in 1998, $100 million in 1999, $348 million in 2000 and $281 million in 2001.
4. Long-Term Debt (cont)
1994 Credit Agreement In connection with the Recapitalization, JSC (U.S.) entered into a bank credit facility (the "1994 Credit Agreement") which consists of a $450 million revolving credit facility (the "Revolving Credit Facility") of which up to $150 million may consist of letters of credit, a $900 million Tranche A Term Loan and a $300 million Tranche B Term Loan. During 1996, the 1994 Credit Agreement was amended to allow an additional $100 million borrowing under the Tranche B Term Loan and $150 million borrowing under a newly created Tranche C Term Loan. The $250 million in new proceeds from these term loans was used to reduce scheduled installment payments of the Tranche A Term Loan. The Tranche A Term Loan matures in various installments through 2001. The Tranche B and Tranche C Term Loans mature in various installments through 2002. The Revolving Credit Facility matures in 2001.
Outstanding loans under the Tranche A Term Loan and the Revolving Credit Facility bear interest at rates selected at the option of JSC (U.S.) equal to the alternate base rate ("ABR") plus .75% per annum or the adjusted LIBOR Rate plus 1.75% per annum (7.56% at December 31, 1996). Interest on outstanding loans under the Tranche B Term Loan is payable at a rate selected at the option of JSC (U.S.), equal to the prime rate plus 2% per annum or the adjusted LIBOR Rate plus 3% per annum (8.89% at December 31, 1996). Interest on the Tranche C Term Loan is payable at a rate selected at the option of the Company, equal to the prime rate plus 2.25% per annum or the adjusted LIBOR Rate plus 3.25% per annum (9.14% at December 31, 1996). ABR is defined as the highest of Chase Manhattan Bank's prime lending rate, 1/2 of 1% in excess of the Federal Funds Rate or 1% in excess of the base certificate of deposit rate. The Tranche A, B and C Term Loans and the Revolving Credit Facility may be prepaid at any time, in whole or in part, at the option of JSC (U.S.).
A commitment fee of .375% per annum is assessed on the unused portion of the Revolving Credit Facility. At December 31, 1996, the unused portion of this facility, after giving consideration to outstanding letters of credit, was $322 million.
The obligations under the 1994 Credit Agreement are unconditionally guaranteed by JSC, the Company and its subsidiaries and are secured by a security interest in substantially all of the assets of JSC (U.S.) and its material subsidiaries, with the exception of cash, cash equivalents and trade receivables. The 1994 Credit Agreement is also secured by a pledge of all the capital stock of each material subsidiary of JSC and by certain intercompany notes.
4. Long-Term Debt (cont)
The 1994 Credit Agreement contains various business and financial covenants including, among other things, (i) limitations on dividends, redemptions and repurchases of capital stock, (ii) limitations on the incurrence of indebtedness, liens, leases and sale-leaseback transactions, (iii) limitations on capital expenditures, (iv) maintenance of minimum levels of consolidated earnings before depreciation, interest, taxes and amortization and (v) maintenance of minimum interest coverage ratios. The 1994 Credit Agreement also requires prepayments if JSC (U.S.) has excess cash flows, as defined, or receives proceeds from certain asset sales, insurance, issuance of equity securities, or incurrence of certain indebtedness.
Accounts Receivable Securitization Program Loans JSC (U.S.) has a $315 million accounts receivable securitization program (the "Securitization Program") which provides for the sale of certain of the Company's trade receivables to a wholly-owned, bankruptcy remote, limited purpose subsidiary, Jefferson Smurfit Finance Corporation ("JS Finance"), which finances its purchases of eligible JSC (U.S.) receivables through the issuance of commercial paper or the proceeds of borrowings under a revolving liquidity facility and a term loan. In 1995, JS Finance borrowed $15 million under the term loan and may issue up to $300 million trade receivables-backed commercial paper or borrow up to $300 million under a revolving liquidity facility.
Under the Securitization Program, JS Finance has granted a security interest in all its assets, principally cash and cash equivalents of $8 million and trade accounts receivable of $210 million, at December 31, 1996. Interest rates on borrowings under the Securitization Program are at a variable rate (5.72% at December 31, 1996). At December 31, 1996, $133 million was available for additional borrowing, subject to JSC (U.S.)'s level of eligible accounts receivable. Borrowings under the Securitization Program, which expires December 1999, have been classified as long-term debt because of the Company's intent to refinance this debt on a long- term basis and the availability of such financing under the terms of the program.
1994 Senior Notes In connection with the Recapitalization, JSC (U.S.) issued and sold $300 million aggregate principal amount of unsecured 11.25% Series A Senior Notes due 2004 and $100 million aggregate principal amount of unsecured 10.75% Series B Senior Notes due 2002. The Series A Senior Notes are redeemable in whole or in part at the option of JSC (U.S.), at any time on or after May 1, 1999 with premiums of 5.625% and 2.813% of the principal amount if redeemed during the 12-month periods commencing May 1, 1999 and 2000, respectively. In addition, up to $100 million aggregate principal amount of Series A Senior Notes is redeemable at 110% of the principal amount prior to May 1, 1997 in connection with certain stock issuances. The Series B Senior Notes are not redeemable prior to maturity.
The 1994 Senior Notes, which are unconditionally guaranteed on a senior basis by JSCE, Inc., rank pari passu with the 1994 Credit Agreement and the 1993 Senior Notes. The 1994 Senior Notes agreement contains business and financial covenants which are less restrictive than those contained in the 1994 Credit Agreement.
4. Long-Term Debt (cont)
Holders of the 1994 Senior Notes have the right, subject to certain limitations, to require JSC (U.S.) to repurchase their securities at 101% of the principal amount plus accrued and unpaid interest, upon the occurrence of a change of control or in certain events from proceeds of major asset sales, as defined.
1993 Senior Notes In 1993, JSC (U.S.) issued $500 million of unsecured 9.75% Senior Notes (the "1993 Senior Notes") due 2003 which are not redeemable prior to maturity. The 1993 Senior Notes, which are unconditionally guaranteed on a senior basis by JSCE, Inc., rank pari passu with the 1994 Credit Agreement and the 1994 Senior Notes. The 1993 Senior Notes agreement contains business and financial covenants which are substantially less restrictive than those contained in the 1994 Credit Agreement and substantially similar to those contained in the 1994 Senior Notes agreement.
Holders of the 1993 Senior Notes have the right, subject to certain limitations, to require JSC (U.S.) to repurchase their securities at 101% of the principal amount plus accrued and unpaid interest, upon the occurrence of a change in control or in certain events, from proceeds of major asset sales, as defined.
Other Debt Other long-term debt at December 31, 1996 is payable in varying installments through the year 2029. Interest rates on these obligations averaged approximately 8.39% at December 31, 1996.
Interest Rate Swap Agreements The Company utilizes interest rate swap agreements to manage its interest rate exposure on long-term debt. At December 31, 1996, the Company has interest rate swap agreements with a notional amount of $233 million which effectively fix (for remaining periods up to one year) the interest rate on variable rate borrowings. The Company is currently paying a weighted average fixed interest rate of 7.16% and receiving a weighted average variable interest rate of 5.66%, calculated on the notional amount.
The Company is exposed to credit loss in the event of non- performance by the other parties to the interest rate swap agreements. However, the Company does not anticipate non- performance by the counterparties.
Other Interest costs capitalized on construction projects in 1996, 1995 and 1994 totalled $3 million, $4 million and $4 million, respectively. Interest payments on all debt instruments for 1996, 1995 and 1994 were $186 million, $228 million and $247 million, respectively.
5. Income Taxes
Significant components of the Company's deferred tax assets and liabilities at December 31 are as follows:
Provision for income taxes before extraordinary item was as follows:
At December 31, 1996, the Company has net operating loss carryforwards for state income tax purposes of approximately $44 million which expire in the years 1997 through 2009.
JSC's federal income tax returns for 1989 through 1991 are currently under examination. While the ultimate results of such examination cannot be predicted with certainty, the Company's management believes that the examination will not have a material adverse effect on its consolidated financial condition or results of operations.
5. Income Taxes (cont)
A reconciliation of the difference between the statutory federal income tax rate and the effective income tax rate as a percentage of income before income taxes and extraordinary item is as follows:
The Company made income tax payments of $39 million, $41 million and $3 million in 1996, 1995 and 1994, respectively.
6. Employee Benefit Plans
Pension Plans The Company sponsors noncontributory defined benefit pension plans covering substantially all employees not covered by multi-employer plans. Plans that cover salaried and management employees provide pension benefits that are based on the employee's five highest consecutive calendar years' compensation during the last ten years of service. Plans covering non-salaried employees generally provide benefits of stated amounts for each year of service. These plans provide reduced benefits for early retirement. The Company's funding policy is to make minimum annual contributions required by applicable regulations. The Company also participates in several multi-employer pension plans, which provide defined benefits to certain union employees.
Assumptions used in the accounting for the defined benefit plans were:
6. Employee Benefit Plans (cont)
The components of net pension expense (income) for the defined benefit plans and the total contributions charged to pension expense for the multi-employer plans follow:
The following table sets forth the funded status and amounts recognized in the consolidated balance sheets at December 31 for the Company's defined benefit pension plans:
Approximately 33% of plan assets at December 31, 1996 are invested in cash equivalents or debt securities and 67% are invested in equity securities. Equity securities at December 31, 1996 include 736,807 shares of JSC common stock with a market value of approximately $12 million and 25,904,227 shares of JS Group common stock having a market value of approximately $78 million. Dividends paid on JS Group common stock during 1996 were approximately $2 million.
Savings Plans The Company sponsors voluntary savings plans covering substantially all salaried and certain hourly employees. The Company match, which is paid in JSC common stock, was 60% in 1996 and 50% in 1995 and 1994 of each participant's contributions up to an annual maximum. The Company's expense for the savings plans totalled $8 million, $6 million and $5 million in 1996, 1995 and 1994, respectively.
6. Employee Benefit Plans (cont)
Postretirement Health Care and Life Insurance Benefits The Company provides certain health care and life insurance benefits for all salaried and certain hourly employees. The Company has various plans under which the cost may be borne either by the Company, the employee or partially by each party. The Company does not currently fund these plans. These benefits are discretionary and are not a commitment to long-term benefit payments. The plans allow employees who retire on or after January 1, 1994 to become eligible for these benefits only if they retire after age 60 while working for the Company.
The following table sets forth the accumulated postretirement benefit obligation ("APBO") with respect to these benefits as of December 31:
Net periodic postretirement benefit cost included the following components:
A weighted-average discount rate of 7.75% and 7.25% was used in determining the APBO at December 31, 1996 and 1995, respectively. The weighted-average annual assumed rate of increase in the per capita cost of covered benefits ("health care cost trend rate") was 8.5%, with an annual decline of 1% until the rate reaches 4.25% in the year 2001. The effect of a 1% increase in the assumed health care cost trend rate would increase the APBO as of December 31, 1996 by $2 million and have no effect on the annual net periodic postretirement benefit cost for 1996.
7. Related Party Transactions
Transactions with JS Group Transactions with JS Group, its subsidiaries and affiliated companies were as follows:
Product sales to and purchases from JS Group, its subsidiaries and affiliates are consummated on terms generally similar to those prevailing with unrelated parties.
The Company provides certain subsidiaries and affiliates of JS Group with general management and elective management services under separate Management Services Agreements. In consideration for general management services, the Company is paid a fee up to 2% of the subsidiaries' or affiliates' gross sales. In consideration for elective services, the Company is reimbursed for its direct cost of providing such services.
An affiliate of JS Group owns the No. 2 paperboard machine that is located in the Company's Fernandina Beach, Florida, paperboard mill (the "Fernandina Mill"). Pursuant to an operating agreement between the Company and the affiliate, the Company operates and manages the No. 2 paperboard machine and is compensated for its direct production and manufacturing costs and indirect manufacturing, selling and administrative costs incurred by the Company for the entire Fernandina Mill. The compensation is determined by applying various formulas and agreed-upon amounts to the subject costs. The amounts reimbursed to the Company are reflected as reductions of cost of goods sold and selling and administrative expenses in the accompanying consolidated statements of operations.
Transactions with Times Mirror In July 1995, under the terms of a shareholder agreement, JSC (U.S.) acquired the remaining 20% minority interest of Smurfit Newsprint Corporation ("SNC") from The Times Mirror Company ("Times Mirror"). SNC supplies newsprint to Times Mirror at amounts which approximate prevailing market prices under the terms of a long-term agreement. The obligations of the Company and Times Mirror to supply and purchase newsprint are wholly or partially terminable upon the occurrence of certain defined events. Sales to Times Mirror for 1996, 1995 and 1994 were $165 million, $189 million and $113 million, respectively.
7. Related Party Transactions (cont)
Transactions with Morgan Stanley & Co. Incorporated In connection with the Recapitalization, Morgan Stanley & Co. Incorporated in its capacity as underwriter of public equity and debt securities, received fees from the Company of $16 million in 1994.
8. Leases
The Company leases certain facilities and equipment for production, selling and administrative purposes under operating leases. Future minimum lease payments at December 31, 1996 required under operating leases that have initial or remaining noncancelable lease terms in excess of one year are $33 million in 1997, $25 million in 1998, $19 million in 1999, $14 million in 2000, $14 million in 2001 and $22 million thereafter.
Net rental expense was $50 million, $48 million and $46 million for 1996, 1995 and 1994, respectively.
9. Fair Value of Financial Instruments
The estimated fair values of the Company's financial instruments are as follows:
The carrying amount of cash equivalents approximates fair value because of the short maturity of those instruments. The fair value of the Company's long-term debt is estimated based on the quoted market prices for the same or similar issues or on the current rates offered to the Company for debt of the same remaining maturities. The fair value of the interest rate swap agreements is the estimated amount the Company would pay or receive, net of accrued interest expense, to terminate the agreements at December 31, 1996 and 1995, taking into account current interest rates and the current creditworthiness of the swap counterparties.
10. Restructuring Program
During 1993, the Company initiated a restructuring program designed to improve its long-term competitive position. Since 1993, the Company has written down the assets of closed facilities and other nonproductive assets totalling $39 million and made cash expenditures of $39 million relating to direct expenses associated with plant closures, reductions in workforce, realignment and consolidation of various manufacturing operations. The remaining restructuring liability relates to closures and sales of certain facilities which were originally anticipated to be completed as of December 31, 1996 and are now expected to be completed during 1997. No significant adjustment to the reserve is anticipated at this time.
11. Contingencies
The Company's past and present operations include activities which are subject to federal, state and local environmental requirements, particularly relating to air and water quality. The Company faces potential environmental liability as a result of violations of permit terms and similar authorizations that have occurred from time to time at its facilities.
The Company faces potential liability for response costs at various sites with respect to which the Company has received notice that it may be a potentially responsible party ("PRP") as well as contamination of certain Company-owned properties, under the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") concerning hazardous substance contamination. In estimating its reserves for environmental remediation and future costs, the Company's estimated liability reflects only the Company's expected share. In determining the liability, the estimate takes into consideration the number of other PRP's at each site, the identity and financial condition of such parties and experience regarding similar matters.
The Company is a defendant in a number of lawsuits and claims arising out of the conduct of its business, including those related to environmental matters. While the ultimate results of such suits or other proceedings against the Company cannot be predicted with certainty, the management of the Company believes that the resolution of these matters will not have a material adverse effect on its consolidated financial condition or results of operations.
In the fourth quarter of 1995, the Company recorded a pretax charge totalling $25 million to implement a program of corrective action to address product quality matters and failure to follow proper manufacturing and internal procedures relating to production of exterior siding, a non-core product line of SNC. Based upon the experience to date, the Company believes the reserve is adequate.
Separately, in January 1997, SNC and certain manufacturers and distributors of mobile homes were named as defendants in a class action complaint filed in the state of South Carolina. The complaint alleges that exterior siding produced by SNC and used in mobile homes deteriorates when exposed to climate conditions found in South Carolina. The Company intends to vigorously defend the action. The litigation is currently in the discovery stage and, at this time, the Company is unable to estimate its potential liability, if any, in connection with the matter.
12. Business Segment Information
The Company's principal lines of business are paperboard/packaging products and newsprint. The paperboard/packaging products segment includes the manufacture and distribution of containerboard, boxboard and solid bleached sulfate, corrugated containers, folding cartons, fiber partitions, papertubes and cores, labels and flexible packaging. The newsprint segment includes the manufacture and distribution of newsprint. A summary by business segment of net sales, income from operations, identifiable assets, capital expenditures and depreciation, depletion and amortization follows:
Sales and transfers between segments are not material. Export sales are less than 10% of total sales. Corporate assets consist principally of cash and cash equivalents, deferred income taxes, deferred debt issuance costs and other assets which are not specific to a segment.
13. Summarized Financial Information JSC (U.S.)
The following summarized financial information is presented for JSC (U.S.), a wholly-owned subsidiary of JSCE, Inc. No separate financial statements are presented for JSC (U.S.) because the financial statements of JSC (U.S.) are identical to those of JSCE, Inc. JSC (U.S.) is the borrower under the 1994 Credit Agreement and the issuer of the 1994 Senior Notes and the 1993 Senior Notes. These securities are guaranteed by JSCE, Inc.
Condensed Consolidated Balance Sheets
Condensed Consolidated Statements of Operations
14. Quarterly Results (Unaudited)
The following is a summary of the unaudited quarterly results of operations:
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ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors
The following table sets forth the names and ages of the directors of the Company.
Name Age Leigh J. Abramson 28 Donald P. Brennan 56 Alan E. Goldberg 42 Richard W. Graham 62 James S. Hoch 36 G. Thompson Hutton 41 Howard E. Kilroy 61 Michael W.J. Smurfit 60 James E. Terrill 63 James R. Thompson 60
The Board of Directors currently consists of ten directors. The directors are classified into three groups: four directors having terms expiring in 1997, including Messrs. Brennan, Hoch, Smurfit and Terrill; three directors having terms expiring in 1998, including Messrs. Abramson, Graham and Hutton; and three directors having terms expiring in 1999, including Messrs. Goldberg, Kilroy and Thompson.
Executive Officers
The following table sets forth the names, ages and positions of the executive officers of the Company.
Name Age Position Robert P. Breimeier 53 Vice President - Transportation and Logistics Janet R. Carl 36 Vice President - Environmental Affairs James P. Davis 41 Vice President and General Manager - Consumer Packaging Division James D. Duncan 55 Vice President and General Manager - Industrial Packaging Division John R. Funke 55 Vice President Richard J. Golden 54 Vice President - Purchasing Richard W. Graham 62 President and Chief Executive Officer Michael F. Harrington 56 Vice President - Human Resources Charles A. Hinrichs 43 Vice President and Treasurer Jay D. Lamb 49 Vice President and General Manager - SNC F. Scott Macfarlane 51 Vice President and General Manager - Folding Carton and Boxboard Mill Division Lyle L. Meyer 60 Vice President - Pension and Group Benefits Patrick J. Moore 42 Vice President and Chief Financial Officer Thomas A. Pagano 50 Vice President - Planning Eric Priestley 54 Executive Vice President and Chief Operating Officer Michael W.J. Smurfit 60 Chairman of the Board and Director David C. Stevens 62 Vice President and General Manager - Smurfit Recycling Company John E. Straw 54 Vice President - Corporate Sales and Marketing Michael E. Tierney 48 Vice President, General Counsel and Secretary William N. Wandmacher 54 Vice President and General Manager - Containerboard Mill Division Gary L. West 54 Vice President and General Manager - Container Division
Biographies
Leigh J. Abramson was named to the Board of Directors of the Company in January 1997. Mr. Abramson joined Morgan Stanley & Co. Incorporated ("MS&Co.") in 1990 and is a Senior Associate in MS&Co.'s Merchant Banking Division. He is a Vice President of Morgan Stanley Capital Partners III, Inc. ("MSCP III, Inc.") and Morgan Stanley Leveraged Equity Fund II, Inc. ("MSLEF II, Inc."), which is the general partner of The Morgan Stanley Leveraged Equity Fund, L.P. ("MSLEF II"). Mr. Abramson also serves as a director of PageMart Wireless, Inc., PageMart, Inc. and Silgan Holdings Inc.
Robert P. Breimeier was appointed Vice President - Transportation and Logistics in December 1996. He was Director of Operations - Transportation and Logistics from September 1995 to December 1996 and Director of Corporate Planning from December 1994 to September 1995. Prior to that, he held various managerial positions since joining the Company in 1966, including Vice President and General Manager of Coated Recycled Boxboard Mills from April 1989 until reassignment to Corporate Planning.
Donald P. Brennan has been a Director of the Company since 1989. Mr. Brennan is an Advisory Director of MS&Co. He was a Managing Director of MS&Co. from 1984 to February 1996, responsible for MS&Co.'s Merchant Banking Division. Mr. Brennan also serves as Director of Fort Howard Corporation, ICT Group, Inc. and SITA Telecommunications Holdings N.V.
Janet R. Carl was named Vice President - Environmental Affairs in August 1996. She joined the Company in August 1995 as environmental counsel. Previously, she was employed as an attorney with Mayor, Day, Caldwell and Keeton in Houston, Texas.
James P. Davis has been Vice President and General Manager - Consumer Packaging Division since November 1995. He served as Division Director of Operations from August 1995 to November 1995. Prior to that, he held various management positions in the Container Division since joining the Company in 1977.
James D. Duncan was appointed Vice President and General Manager - Industrial Packaging Division in October 1996. He was Vice President and General Manager, Converting Operations - Industrial Packaging Division from April 1994 to October 1996 and served as General Manager, Converting Operations - Industrial Packaging Division from February 1993 to April 1994. Prior to that, he was President and Chief Executive Officer of Sequoia Pacific Systems, an affiliate of the Company, that he joined in August 1989.
John R. Funke has been a Vice President since April 1989. He was Chief Financial Officer from April 1989 to October 1996. Mr. Funke will retire from the Company at the end of April 1997.
Alan E. Goldberg has been a Director of the Company since 1989. He has been a Managing Director of MS&Co. since January 1988, is co- head of MS&Co.'s Merchant Banking Division and is a Vice Chairman of MSLEF II, Inc., which is the general partner of MSLEF II, and of MSCP III, Inc. Mr. Goldberg also serves as Director of CIMIC Holdings Limited, Cat Limited, Hamilton Services Limited, Amerin Corporation and Amerin Guaranty Corporation, Direct Response Corporation and several private companies.
Richard J. Golden has been Vice President - Purchasing since January 1985 and was Director of Corporate Purchasing from October 1981 to January 1985. In January 1994, he was assigned responsibility for world-wide purchasing for JS Group.
Richard W. Graham was named President and Chief Executive Officer of the Company in January 1997. He was President of the Company from July 1996 to December 1996. He served as Senior Vice President from February 1994 to July 1996. Prior to that, he held various positions in the Folding Carton and Boxboard Mill Division, including Vice President and General Manager from February 1991 to January 1994.
Michael F. Harrington has been Vice President - Human Resources since January 1992. Prior to joining the Company, he was Corporate Director of Labor Relations/Safety and Health with Boise Cascade Corporation for more than 5 years.
Charles A. Hinrichs has been Vice President and Treasurer since April 1995. Prior to joining the Company, he was employed by The Boatmen's National Bank of St. Louis for 13 years, where most recently he was Senior Vice President and Chief Credit Officer.
James S. Hoch was named to the Board of Directors of the Company in February 1997. Mr. Hoch joined MS&Co. in 1986 and is a Principal in MS&Co.'s Merchant Banking Division. He is a Vice President of MSCP III, Inc. and MSLEF II, Inc., which is the general partner of MSLEF II. He also serves as a director of Kabelmedia Holding GmbH, Nordic Aluminum, Inc., SITA Telecommunications Holdings, N.V. and Shuttleway.
G. Thompson Hutton was elected to the Board of Directors in December 1994. Mr. Hutton has been President and Chief Executive Officer of Risk Management Solutions, Inc., an information services company based in Menlo Park, California, since 1991. Prior to that, he was a management consultant with McKinsey & Company, Inc. from 1986 to 1991. He also serves as a Trustee of Colorado Outward Bound School.
Howard E. Kilroy has been a Director of the Company since 1989. Mr. Kilroy was Chief Operations Director of JS Group from 1978 until March 1995 and President of JS Group from October 1986 until March 1995. He was a member of the Supervisory Board of Smurfit International B.V. ("SIBV") from January 1978 to January 1992. He was Senior Vice President of the Company for over 5 years. He retired from his executive positions with JS Group and the Company at the end of March 1995, but remains a Director of JS Group and the Company. In addition, he is Governor (Chairman) of Bank of Ireland and a Director of CRH plc.
Jay D. Lamb was appointed Vice President and General Manager of SNC in May 1996. He was Director of Operations of SNC from May 1995 to May 1996. Prior to that, he held various accounting and managerial positions with SNC since joining the Company in 1970.
F. Scott Macfarlane has been Vice President and General Manager - Folding Carton and Boxboard Mill Division since November 1995. He served as Vice President and General Manager of the Folding Carton Division from December 1993 to November 1995. Prior to that, he held various managerial positions within the Folding Carton Division since joining the Company in 1971.
Lyle L. Meyer has been Vice President - Pension and Group Benefits since April 1989. He served as President of Smurfit Pension and Insurance Services Company ("SPISCO") from 1982 until 1992, when SPISCO was merged into the Company.
Patrick J. Moore was named Vice President and Chief Financial Officer of the Company in October 1996. He was Vice President and General Manager - Industrial Packaging Division from December 1994 to October 1996. He served as Vice President and Treasurer from February 1993 to December 1994 and was Treasurer from October 1990 to February 1993. He joined the Company in 1987 as Assistant Treasurer.
Thomas A. Pagano was named Vice President - Planning in May 1996. He was Director of Corporate Planning from September 1995 to May 1996. Prior to that, Mr. Pagano held various managerial positions within the Company's Container Division, including Area Regional General Manager from January 1994 to September 1995.
Eric Priestley joined the Company in August 1996 as Executive Vice President and Chief Operating Officer. Prior to that, he was President and Chief Executive Officer of Rexam, Inc., a U.S. producer of packaging, print and coated products and a subsidiary of Rexam plc.
Michael W.J. Smurfit has been Chairman and Chief Executive Officer of JS Group since 1977 and has been Chairman of the Board of the Company since 1989. He was Chief Executive Officer of the Company prior to July 1990.
David C. Stevens has been Vice President and General Manager - Smurfit Recycling Company since January 1993. Prior to that, he was General Sales Manager for Smurfit Recycling Company since joining the Company in 1987.
John E. Straw has been Vice President - Corporate Sales and Marketing since May 1996. Mr. Straw has held various managerial positions in the Folding Carton and Boxboard Mill Division since joining the Company in 1969, including General Manager, National Account Sales from May 1995 to May 1996.
James E. Terrill has been Vice Chairman of the Board since February 1997 and a Director of the Company since 1994. He was Chief Executive Officer from July 1996 to December 1996 and President and Chief Executive Officer from February 1994 to July 1996. He served as Executive Vice President - Operations from August 1990 to February 1994. He also served as President of SNC from February 1986 to February 1993.
James R. Thompson was elected to the Board of Directors in July 1994. He is Chairman of the Executive Committee and a Partner of Winston & Strawn, a law firm that regularly represents the Company on numerous matters. He served as Governor of the State of Illinois from 1977 to 1991. Mr. Thompson also serves as a Director of FMC Corporation, the Chicago Board of Trade, International Advisory Council of the Bank of Montreal, Prime Retail, Inc., American National Can Corporation, National Council on Compensation Insurance, Hollinger International, Inc., Union Pacific Resources, Inc. and The Japan Society (N.Y.).
Michael E. Tierney has been Vice President, General Counsel and Secretary since January 1993. Prior to that he served as Senior Counsel and Assistant Secretary since joining the Company in 1987.
William N. Wandmacher has been Vice President and General Manager - Containerboard Mill Division since January 1993. He served as Division Vice President - Medium Mills from October 1986 to January 1993. Prior to that, he held various positions in production, plant management and planning since joining the Company in 1966.
Gary L. West was named Vice President and General Manager - Container Division in October 1996. He was Vice President of Operations for Container Division from May 1996 to October 1996. Mr. West was Vice President - Sales and Marketing from December 1994 to May 1996. Prior to that, he held various management positions in the Container, Consumer Packaging and Industrial Packaging Divisions since joining the Company in 1980, including Vice President and General Manager - Industrial Packaging Division from October 1992 to December 1994.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The information required in response to this item is set forth under the captions "Executive Compensation," "Report of the Compensation Committee on Executive Compensation" and "Appointment Committee Interlocks and Insider Participation" in JSC's proxy statement in connection with the Annual Meeting of Stockholders to be held on May 1, 1997, which will be filed with the Securities and Exchange Commission on or before March 31, 1997 (the "JSC Proxy Statement"), and is incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
All of the outstanding JSC (U.S.) Common Stock is owned by JSCE, and all of the outstanding JSCE Common Stock is owned by JSC.
Additional information required in response to this item is set forth under the caption "Principal Stockholders" in the JSC Proxy Statement and is incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required in response to this item is set forth under the caption "Certain Transactions" in the JSC Proxy Statement and is incorporated herein by reference.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) and (2) The list of Financial Statements and Financial Statement Schedules required by this item are included in Item 8. (3) Exhibits. 3.1 Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.1 to JSCE's Annual Report on Form 10-K for the fiscal year ended December 31, 1994). 3.2 By-laws of the Company (incorporated by reference to Exhibit 3.2 to JSCE's Annual Report on Form 10-K for the fiscal year ended December 31, 1994). 4.1 Indenture for the Series A 1994 Senior Notes (incorporated by reference to Exhibit 4.1 to JSC's quarterly report on Form 10-Q for the quarter ended March 31, 1994). 4.2 Indenture for the Series B 1994 Senior Notes (incorporated by reference to Exhibit 4.2 to JSC's quarterly report on Form 10-Q for the quarter ended March 31, 1994). 4.3 Indenture for the 1993 Senior Notes (incorporated by reference to Exhibit 4.4 to JSC's Registration Statement on Form S-1 (File No. 33-75520)). 4.4 First Supplemental Indenture to the 1993 Senior Note Indenture (incorporated by reference to Exhibit 4.5 to JSC's Registration Statement on Form S-1 (File No. 33- 75520)). 10.1 Second Amended and Restated Organization Agreement, as of August 26, 1992, among SIBV, MSLEF II, SIBV/MS Holdings, Inc., JSC, Container Corporation of America ("CCA") and MSLEF II, Inc. (incorporated by reference to Exhibit 10.1(d) to JSC (U.S.)'s quarterly report on Form 10-Q for the quarter ended September 30, 1992). 10.2(a) Stockholders Agreement among JSC, SIBV, MSLEF II and certain related entities (incorporated by reference to Exhibit 10.2 to JSC's quarterly report on Form 10-Q for the quarter ended March 31, 1994). 10.2(b) First Amendment to Stockholders Agreement, dated as of January 13, 1997, among SIBV, MSLEF II, JSC and certain related entities (incorporated by reference to Exhibit 10.2(b) to JSC's Annual Report on Form 10-K for the fiscal year ended December 31, 1996). 10.3 Registration Rights Agreement among JSC, MSLEF II and SIBV (incorporated by reference to Exhibit 10.3 to JSC's quarterly report on Form 10-Q for the quarter ended March 31, 1994). 10.4 Subscription Agreement among JSC, JSC (U.S.), CCA and SIBV (incorporated by reference to Exhibit 10.4 to JSC's quarterly report on Form 10-Q for the quarter ended March 31, 1994). 10.5(a) Restated Newsprint Agreement, dated January 1, 1990, by and between SNC and The Times Mirror Company (incorporated by reference to Exhibit 10.39 to JSC (U.S.)'s Annual Report on Form 10-K for the fiscal year ended December 31, 1990). Portions of this exhibit have been excluded pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended. 10.5(b) Amendment No. 1 to the Restated Newsprint Agreement (incorporated by reference to Exhibit 10.6(b) to JSC's Registration Statement on Form S-1 (File No. 33-75520)). 10.6 Operating Agreement, dated as of April 30, 1992, by and between CCA and Smurfit Paperboard, Inc. (incorporated by reference to Exhibit 10.42 to JSC (U.S.)'s quarterly report on Form 10-Q for the quarter ended March 31, 1992).
10.7 JSC (U.S.) Deferred Compensation Plan as amended (incorporated by reference to Exhibit 10.7 to JSC's Annual Report on Form 10-K for the fiscal year ended December 31, 1996). 10.8 JSC (U.S.) Management Incentive Plan (incorporated by reference to Exhibit 10.10 to JSC's Annual Report on Form 10-K for the fiscal year ended December 31, 1995). 10.9 Jefferson Smurfit Corporation (U.S.) 1994 Long-Term Incentive Plan (incorporated by reference to Exhibit 10.13 to JSC's Registration Statement on Form S-1 (File No. 33-75520)). 10.10 Rights Agreement, dated as of April 30, 1992, among CCA, Smurfit Paperboard, Inc. and Bankers Trust Company, as collateral trustee (incorporated by reference to Exhibit 10.43 to JSC (U.S.)'s quarterly report on Form 10-Q for the quarter ended March 31, 1992). 10.11(a) 1992 SIBV/MS Holdings, Inc. Stock Option Plan (incorporated by reference to Exhibit 10.48 to JSC (U.S.)'s quarterly report on Form 10-Q for the quarter ended September 30, 1992). 10.11(b) Amendment No. 1 to 1992 SIBV/MS Holdings, Inc. Stock Option Plan (incorporated by reference to Exhibit 10.16(b) to the Company's Registration Statement on Form S-1 (File No. 33-75520)). 10.12(a) Credit Agreement, amended and restated as of May 17, 1996, among JSC, JSCE, JSC (U.S.) and the banks parties thereto (incorporated by reference to Exhibit 10.1 to JSC's quarterly report on Form 10-Q for the quarter ended June 30, 1996). 10.12(b) Amendment Agreement dated as of May 17, 1996 among JSC, JSCE, JSC (U.S.), SNC and the banks parties thereto (incorporated by reference to Exhibit 10.2 to JSC's quarterly report on Form 10-Q for the quarter ended June 30, 1996). 10.13(a) Term Loan Agreement dated as of February 23, 1995 among JSC Finance and Bank Brussels Lambert, New York Branch (incorporated by reference to Exhibit 10.1 to JSC's quarterly report on Form 10-Q for the quarter ended March 31, 1995). 10.13(b) Depositary and Issuing and Paying Agent Agreement (Series A Commercial Paper) as of February 23, 1995 (incorporated by reference to Exhibit 10.2 to JSC's quarterly report on Form 10-Q for the quarter ended March 31, 1995). 10.13(c) Depositary and Issuing and Paying Agent Agreement (Series B Commercial Paper) as of February 23, 1995 (incorporated by reference to Exhibit 10.3 to JSC's quarterly report on Form 10-Q for the quarter ended March 31, 1995). 10.13(d) Receivables Purchase and Sale Agreement dated as of February 23, 1995 among JSC (U.S.), as the Initial Servicer and JS Finance, as the Purchaser (incorporated by reference to Exhibit 10.4 to JSC's quarterly report on Form 10-Q for the quarter ended March 31, 1995). 10.13(e) Termination and Reassignment Agreement dated as of March 3, 1995 among JS Finance, JSC (U.S.), Emerald Funding Corporation and Bankers Trust Company (incorporated by reference to Exhibit 10.5 to JSC's quarterly report on Form 10-Q for the quarter ended March 31, 1995). 10.13(f) Liquidity Agreement dated as of February 23, 1995 among JS Finance, the Financial Institutions parties hereto as Banks, Bankers Trust Company, as Facility Agent and Bankers Trust Company as Collateral Agent (incorporated by reference to Exhibit 10.6 to JSC's quarterly report on Form 10-Q for the quarter ended March 31, 1995). 10.13(g) Commercial Paper Dealer Agreement dated as of February 23, 1995 among BT Securities Corporation, Morgan Stanley & Co. Incorporated, JSC (U.S.) and JS Finance (incorporated by reference to Exhibit 10.7 to JSC's quarterly report on Form 10-Q for the quarter ended March 31, 1995).
10.13(h) Addendum dated March 6, 1995 to Commercial Paper Dealer Agreement (incorporated by reference to Exhibit 10.8 to JSC's quarterly report on Form 10-Q for the quarter ended March 31, 1995). 10.14(a) First Omnibus Amendment dated as of March 31, 1996 among JSC (U.S.), JSFC and the banks parties thereto (incorporated by reference to Exhibit 10.3 to JSC's quarterly report on Form 10-Q for the quarter ended June 30, 1996). 10.14(b) Affiliate Receivables Sale Agreement dated as of March 31, 1996 between SNC and JSC (incorporated by reference to Exhibit 10.4 to JSC's quarterly report on Form 10-Q for the quarter ended June 30, 1996). 10.15 Consulting Agreement dated as of October 24, 1996 by and between James E. Terrill and JSC (U.S.) (incorporated by reference to Exhibit 10.15 to JSC's Annual Report on Form 10-K for the fiscal year ended December 31, 1996). 10.16 Engagement letter dated August 1, 1996 between Mr. Eric Priestley and JSC (incorporated by reference to Exhibit 10.16 to JSC's Annual Report on Form 10-K for the fiscal year ended December 31, 1996). 18.1 Letter regarding change in accounting for pension plans (incorporated by reference to Exhibit 18.1 to JSC (U.S.)'s quarterly report on Form 10-Q for the quarter ended September 30, 1993). 21.1 Subsidiaries of the Company. 24.1 Powers of Attorney (incorporated by reference to Exhibit 24.1 to JSC's Annual Report on Form 10-K for the fiscal year ended December 31, 1996). 25.1 Statement on Form T-1 of the eligibility of NationsBank of Georgia, National Association, as Trustee under the 1993 Senior Note Indenture (incorporated by reference to Exhibit 25.1 to JSC (U.S.)/CCA's Registration Statement on Form S-2 (File No. 33-58348)). 27.1 Financial Data Schedule.
(b) Report on Form 8-K. The Company did not file any reports on Form 8-K during the three months ended December 31, 1996.
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 February 26, 1997 JSCE, Inc. (Registrant)
BY /s/ Patrick J.Moore Patrick J. Moore Vice President and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the date indicated.
SIGNATURE TITLE DATE
* Chairman of the Board Michael W. J. Smurfit and Director
* President, Chief Executive Officer Richard W. Graham and Director (Principal Executive Officer)
/s/ Patrick J.Moore Vice President and February 26, 1997 Patrick J.Moore Chief Financial Officer (Principal Accounting Officer)
* Director Leigh J. Abramson
* Director Donald P. Brennan
* Director Alan E. Goldberg
* Director James S. Hoch
* Director G. Thompson Hutton
* Director Howard E. Kilroy
* Director James E. Terrill
* Director James R. Thompson
* By /s/ Patrick J. Moore , pursuant to Powers of Attorney filed Patrick J. Moore as a part of the Form 10-K. As Attorney in Fact
JSCE, Inc. SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS (In millions)