Item 1.	Business
GENERAL
Jefferson Smurfit Corporation, together with its direct and indirect subsidiaries, hereinafter referred to as the "Company" or "JSC", 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 recovered paper. 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 1997, produced 1,933,000 tons of virgin and recycled containerboard, 823,000 tons of recycled boxboard and solid bleached sulfate ("SBS") and 125,000 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 51 corrugated container plants, 19 folding carton plants and 22 industrial packaging plants located across the country, with three plants located outside the U.S. In 1997, the Company's container plants converted 2,047,000 tons of containerboard, an amount equal to approximately 106% of the amount the Company produced, its folding carton plants converted 547,000 tons of SBS, recycled boxboard and coated natural kraft, an amount equal to approximately 66% of the amount it produced, and its industrial packaging plants converted 149,000 tons of uncoated recycled boxboard, an amount equal to approximately 119% of the amount it produced. The Paperboard/Packaging Products segment also includes the Company's reclamation facilities, which processed or brokered approximately 4.8 million tons of recovered paper in 1997, its timber operations, which manage approximately one million acres of owned or leased timberland located close to its virgin fiber mills and 10 consumer packaging plants. The Company's Paperboard/Packaging Products segment contributed 91% of the Company's net sales in 1997.
The Company's Newsprint segment includes two newsprint mills in Oregon, which produced 574,000 metric tons of recycled newsprint in 1997, 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 13, "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) under Part I, Item 1, "Business - Environmental Compliance", under Part 1, Item 3, "Legal Proceedings" and under Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," contain forward looking statements, 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, recovered paper prices, costs related to environmental matters and the impact of current or pending legislation and regulation.
Jefferson Smurfit Corporation owns 100% of the equity interest in JSCE, Inc., hereinafter referred to as "JSCE". Jefferson Smurfit Corporation 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:
		1997 	1996 	1995 		 (Tons in thousands) Containerboard Production 	1,933	 1,973	 1,905 	Consumption 	2,047 	1,991 	1,925
The Company's mills produce a full line of containerboard, including unbleached kraft linerboard, mottled white linerboard and recycled and semi-chemical 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, and Los Angeles, California and semi-chemical medium is produced in Circleville, Ohio. In 1997, the Company produced 1,127,000, 265,000, 423,000 and 118,000 tons of unbleached kraft linerboard, mottled white linerboard, recycled medium and semi-chemical medium, respectively. The Company's sales of containerboard in 1997 were $648 million (including $382 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 51 container plants serve local customers and large national accounts and are located nationwide, generally in or near large metropolitan areas. The Company's sales of corrugated shipping containers in 1997 were $1,236 million (including $97 million of intracompany sales). Total corrugated shipping container sales volumes for 1997, 1996 and 1995 were 31,702, 30,022 and 29,382 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: 			1997 	1996 	1995 			 (Tons in thousands) Recycled Boxboard and SBS 	Production 	 823 	774 	 773 	Consumption 	 547 	521	 529
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 1997, the Company produced 633,000 and 190,000 tons of recycled boxboard and SBS, respectively. The Company's sales of recycled boxboard and SBS in 1997 were $418 million (including $173 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, laminating and a full line of structural and design graphics services. The Company's 19 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 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 1997 were $659 million (including $3 million of intracompany sales). Folding carton sales volumes for 1997, 1996 and 1995 were 488,000, 474,000 and 476,000 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:
			1997 	1996 	1995 			 (Tons in thousands) Uncoated Recycled Boxboard 	Production	 125	 128	 120 	Consumption 	 149 	153 	 148
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 and Tacoma, Washington. In 1997, the Company's sales of uncoated recycled boxboard were $49 million (including $29 million of intracompany sales).
The Company's 22 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 1997 were $115 million (including $6 million of intracompany sales).
CONSUMER PACKAGING The Company manufactures a wide variety of products at its 10 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 plant provides 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 1997, sales of consumer packaging products and services were $152 million (including $7 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 1997, the newsprint mills used approximately 44% wood fiber and 56% reclaimed fiber.
The Company operates 29 facilities that collect, sort, grade and bale recovered paper, as well as collect aluminum and glass. The Company also operates a nationwide brokerage system whereby it purchases and resells recovered paper (including recovered paper 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 recovered paper. The reclamation operations provide 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 1997, the Company's reclamation plants and brokerage operations satisfied all of the Company's mill requirements for reclaimed fiber. The Company's sales of recycled materials in 1997 were $446 million (including $155 million of intracompany sales).
The amount of recovered paper collected and the proportions sold internally and externally by the Company for the last three years were: 			1997 	1996 	1995 			 (Tons in thousands)
Recovered paper collected 	4,832 	4,464 	4,293 	 Percent sold internally	 38.0% 	 39.8% 	 43.1% 	Percent sold to third parties	 62.0%	 60.2%	 56.9%
The Company manages approximately one million acres of owned and leased timberland in the southeastern United States. In 1997, the Company harvested 1,015,000 cords of timber, which would satisfy approximately 43% of the wood fiber requirements for its Jacksonville, Fernandina Beach and Brewton mills. The Company's wood fiber requirements not satisfied internally are purchased on the open market or under long-term contracts. In 1997, the Company's sales of timber products were $269 million (including $204 million of intracompany sales).
NEWSPRINT SEGMENT
NEWSPRINT MILLS The Company's Newsprint segment is operated by Smurfit Newsprint Corporation, a wholly-owned subsidiary of the Company ("SNC"). SNC newsprint mills are located in Newberg and Oregon City, Oregon. SNC produced 574,000, 522,000 and 563,000 metric tons of newsprint during 1997, 1996 and 1995, respectively. In 1997, sales of newsprint were $283 million (including $2 million of intracompany sales).
For the past three years, an average of approximately 50% of SNC'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 SNC from Times Mirror in February 1986. Under the terms of the Newsprint Agreement, SNC supplies newsprint to Times Mirror generally at prevailing market prices. Sales of newsprint to Times Mirror in 1997 amounted to $140 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. SNC has two Cladwood plants located in Oregon. Sales for Cladwood in 1997 were $22 million (including $1 million of intracompany sales). See also Part 1, 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, 1997, of which approximately 10,600 employees (67%) were represented by collective bargaining units. The expiration dates of union contracts for the Company's major facilities are as follows: the Jacksonville mill, expiring June 1999; the Alton mill, expiring June 2000; SNC's Newberg mill, expiring March 2002; the Brewton mill, expiring October 2002; the Fernandina mill, expiring June 2003; a group of 11 properties, including 4 paper mills and 7 corrugated container plants, expiring June 2003; and SNC's Oregon City mill, expiring March 2004. 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. A majority 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 finalized significant parts of its comprehensive rule governing the pulp, paper and paperboard industry (the "Cluster Rule") which will require substantial expenditures to achieve compliance. In order to comply with these parts of the Cluster Rule, the Company estimates that, based on preliminary engineering studies done to date, it may require approximately $175 million in capital expenditures over the next three to five years. The ultimate cost of complying with the regulations cannot be predicted with certainty until further engineering studies are completed and additional regulations are finalized.
In addition to Cluster Rule compliance, the Company also anticipates additional capital expenditures related to environmental compliance, although in the opinion of management, such compliance will not adversely affect the Company's competitive position. For the past three years, the Company has spent an average of approximately $15 million annually on capital expenditures for environmental purposes. The anticipated spending for such capital projects for fiscal 1998 is approximately $34 million. A significant amount of the increased expenditures in 1998 will be due to compliance with the Cluster Rule and is included in the $175 million estimate referenced above. Since the Company's competitors are, or will be, subject to comparable pollution standards, including the Cluster Rule, management is of the opinion that compliance with the pollution standards will not adversely affect the Company's competitive position.
ITEM 2.
ITEM 2.	PROPERTIES
The Company's properties at December 31, 1997 are summarized in the table below. Approximately 62% 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 aproximately 820,000 acres and leases approximately 163,000 acres of timberland in the southeastern United States and also operates wood harvesting facilities. 				 		 Number of Facilities State 			 Total	Owned	Leased Locations Paperboard mills: 	Containerboard mills	 7	 7	 	 0	 	 6 	Boxboard mills 	 4	 4	 0 	 	 4 	Uncoated recycled boxboard mills 	 3 	 3 	 0 	 3 Newsprint mills 	 2 	 2	 	 0 		 1 Reclamation plants	 29 21 	 8 		13 Converting facilities: 	Corrugated container plants 	 51 	 39	 	 12	 	21 	Folding carton plants 	 19 	 16 3 	 	10 	Industrial packaging plants 	 22 	 7 		 15 		15 Consumer packaging plants 	 10 	 5	 	 5 	 6 Cladwood plants 	 2 	 2 	 0 	 		 1 Wood product plants 	 1	 1 		 0 		 1 	Total 		150 	 107 	 43 	28
ITEM 3.
ITEM 3.	LEGAL PROCEEDINGS
LITIGATION
On January 3, 1997, SNC was served in an action styled John and Peggy Woolum, et ano. v. Fleetwood Homes of Georgia, Inc. et al., No. 96-CP-08-2029 (South Carolina Court of Common Pleas). The suit, which purports to be a class action on behalf of 5,000 or more present and past owners or Cladwood-containing mobile homes in South Carolina, alleges that Cladwood siding deteriorates when exposed to climate conditions found there. The complaint seeks an unspecified amount of actual, statutory and punitive damages, which, in the aggregate, may exceed $100,000. The Court has dismissed the Company from the action for lack of personal jurisdiction, which the other litigants may seek to appeal.
On July 1, 1997, SNC was served in an action entitled John Sechler and Hazel Sechler, et ano. v. Smurfit Newsprint Corporation, No. 1 97-CV-1870 (United States District Court, Northern District of Georgia). The complaint alleges that Cladwood siding deteriorates under normal conditions and exposure. The suit purports to be a nationwide class action on behalf of owners of Cladwood-containing manufactured homes or mobile homes. The complaint alleges causes of action for breach of warranty and negligence and seeks an unspecified amount of actual, consequential and punitive damages, which, in the aggregate, may exceed $100,000. On September 24, 1997, Plaintiffs voluntarily dismissed the action. On October 15, 1997, Plaintiffs refiled their action in state court, naming Fleetwood Homes of Georgia, Inc. and Fleetwood Enterprises, Inc. (mobile home manufacturers) as additional defendants. On October 24, 1997, the Company removed the state court action to federal court. The second federal court action is styled John Sechler and Hazel Sechler, et ano. v. Smurfit Newsprint Corporation, et al., No. 1:97-CV-3201 (United States District Court, Northern District of Georgia). On November 4, 1997, the Company filed a motion to dismiss the negligence and punitive damages claims. Plaintiffs have moved to add additional parties, amend the complaint, and remand the action back to state court. The motions are currently before the court for its consideration. SNC intends to defend the action vigorously.
On August 8, 1997, JSC and SNC were served in an action entitled Carolyn Cave-Woods, et ano. v. Jefferson Smurfit Corporation, et al., No. 97-2-19958-1SEA (Washington Superior Court). The suit, which purports to be a class action on behalf of all persons who own or have purchased or used Cladwood siding, alleges that Cladwood siding used in prefabricated or manufactured homes, deteriorates when exposed to moisture. The complaint alleges unfair trade practices and breach of express warranty, and seeks an unspecified amount of actual and punitive damages, which, in the aggregate, may exceed $100,000. The complaint also seeks declaratory and injunctive relief. On January 2, 1998, Plaintiffs filed a motion seeking certification of a nationwide class. The Company intends to oppose the class certification motion and defend the action vigorously.
On February 6, 1998, SNC was served in an action styled Jeffrey A. and Deborah Pross, et ano. v. Smurfit Newsprint Corporation et al., No. 9810069-24 (Georgia Superior Court). The complaint alleges that Cladwood siding deteriorates under normal conditions and exposure. The suit purports to be a class action on behalf of persons in the State of South Carolina whose manufactured homes or mobile homes have Cladwood siding. The complaint alleges causes of action for breach of warranty and negligence and seeks an unspecified amount of actual, consequential and punitive damages, which in the aggregate may exceed $100,000. SNC intends to defend the action vigorously.
Management is unable to predict at this time the final outcome of these suits relating to Cladwood siding or whether the resolution of the matters could materially affect the Company's results of operations, cash flows or financial position.
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 control statutes, regulations and ordinances. The Company operates and expects to operate under permits and similar authorizations from various governmental authorities that regulate such discharges, 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 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 follows 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. It is uncertain whether an investigation will 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 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 original disposal. The Company has received notice that it is or may be a PRP at a number of federal and/or state sites where remedial action may be required, and as a result may have joint and several liability for cleanup costs at such sites. However, liability of CERCLA sites is typically shared with the other PRPs and costs are commonly allocated according to relative amounts of waste deposited. Because the Company's relative percentage of waste deposited at 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:
Operating Industries Site, Monterey Park, California 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. 	
Kane & Lombard Site, Baltimore, Maryland 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.
Fisher-Calo Site, Kingsbury, Indiana 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.
Lenz Oil Site, Lemont, Illinois 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 $80,000 toward this investigation and initial remediation. It is anticipated that further remedial measures will be required beyond those covered in these consent decrees.
Augustine Mill Site, Wilmington, Delaware In 1994, the Company entered into a consent decree with the State of Delaware regarding remedial investigation of the Augustine Mill site. In 1997, the Company constructed a landfill cap to close the site in cooperation with the State. To date, the Company has spent approximately $2 million on the remediation, which is nearly completed. The Delaware Parks Department will eventually assume responsibility for maintenance of the site as part of its Delaware Greenways program.	
Jones Industrial Services Site, South Brunswick, New Jersey The Company entered into an administrative consent order in 1997 with the State of New Jersey for the remediation of the Jones Industrial Services Site in South Brunswick, New Jersey. To date, the Company has paid approximately $21,000 toward the remedial investigation of this site. The Company anticipates that it will pay additional investigation costs and cleanup costs at this site.
In addition to participating in remediation of sites owned by third parties, the Company has entered consent orders for remediation of two Company-owned properties.
Duval, County, Florida In 1992, the Company entered into an administrative consent order with the Florida Department of Environmental Regulation ("FDER") to carry out any necessary assessment and remediation of Company-owned property in Duval County, Florida. The property was formerly the site of a sawmill that dipped lumber into a chemical solution. To date, the Company has spent approximately $744,000 on remediating the site. It is currently in a monitoring-only stage.
Jacksonville, Florida In 1987, the Company entered into an administrative consent order with the FDER to conduct an assessment of the Jacksonville, Florida property site for potential impacts caused by previous industrial activity. To date, the Company has paid approximately $2 million for remediation and investigation, and may incur some additional expense before closure of the site.
New Jersey Industrial Site Recovery Act The New Jersey Industrial Site Recovery Act ("ISRA") requires owners or operators of "industrial establishments" to notify the New Jersey Department of Environmental Protection ("NJDEP") upon the closing of operations, or upon the transfer of ownership or operations of an industrial establishment. As a precondition to the transfer of ownership or operations, an owner or operator of an industrial establishment is required to obtain a no further action letter from NJDEP, or NJDEP approval of a remedial action workplan or remediation agreement. The Company currently is a signatory to a consent order with NJDEP with respect to an industrial establishment. Management believes that any requirements that may be imposed by NJDEP with respect to the site will not have a material adverse effect on the financial condition or results of operations to the Company.
Management believes that the probable costs of the potential environmental enforcement matters discussed above, CERCLA response costs, remediation of owned property, and its New Jersey ISRA obligation will not have a material adverse effect on the Company's financial condition or results of operations.
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 1997.
PART II
ITEM 5.
ITEM 5.	MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION At December 31, 1997 the Company's common stock was held by approximately 13,000 stockholders. The Company's common stock trades on The Nasdaq Stock Market under the symbol "JJSC". The high and low trading prices of the stock were: 1997 1996 				 High 	 Low 	 High 	 Low 		First Quarter 	$16.38	$11.88 	$12.38	$ 9.38 		Second Quarter 	$18.63	$11.88	 $14.13	$10.25 		Third Quarter 	$21.63	$15.50 	$12.25	$10.50 		Fourth Quarter 	$20.50	$13.25 	$16.13	$11.88
DIVIDENDS The Company has not paid cash dividends on its common stock and does not intend to pay dividends on its common stock in the foreseeable future. The ability of the Company to pay dividends in the future is restricted by certain provisions contained in the 1994 Credit Agreement and the indentures relating to JSC (U.S.)'s outstanding indebtedness.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA (In millions, except per share and statistical data) 	 	1997 	1996 	 1995 1994 199	 Summary of Operations Net sales 	$3,238 	$3,410 	$4,093 	$3,233 	$2,947	 Cost of goods sold	 2,776 	 2,754 	 3,222 	 2,719 	 2,567 Gross profit 462 	 656 	 871 	 514 	 380 Selling and administrative expenses 258 	 265 	 241 	 223 	 239 Restructuring charge		 			 96 Environmental and other charges 	 54 Income (loss) from operations 	 204	 391 	 630 	 291 	 (9) Interest expense, net 	 (190)	 (194)	 (234)	 (266)	 (253) Other, net 	 (2)	 (3)	 7 	 3 	 4 Income (loss) before income taxes, 	extraordinary item and cumulative 	effect of accounting changes 	 12	 194 	 403 	 28 	 (258) Provision for (benefit from) 	income taxes	 11	 77 	 156 	 16 	 (83) Income (loss) before 	 	extraordinary item and cumulative 	effect of accounting changes 	 1	 117 	 247 	 12 	 (175) Extraordinary item 	Loss from early extinguishment 	 of debt, net of income tax benefit	 	 (5)	 (4)	 (55)	 (38) Cumulative effect of accounting changes 	 (16) Net income (loss) 	$ 1 	$ 112 	$ 243 	$ (43)	$ (229) 												
Basic earnings per share of common stock (a) 	Income (loss) before extraordinary 	 item and cumulative effect of 	 accounting changes 	$ .01 	$ 1.05 	$ 2.23 	$ .12 	$(2.75) 	Net income (loss) 	 .01 	 1.01 	 2.19 	 (.43)	 (3.60)
Weighted average shares outstanding	 111 	 111 	 111 	 101 	 64
Diluted earnings per share of common stock (a) 	Income (loss) before extraordinary 	 item and cumulative effect of 	 accounting changes 	$ .01 	$ 1.04 	$ 2.21	 $ .12	 $(2.75) 	Net income (loss)	 .01	 1.00	 2.17	 (.43)	 (3.60)
Weighted average shares outstanding	 113 	 112 	 112	 101 64
ITEM 6. SELECTED FINANCIAL DATA (cont'd) (In millions, except per share and statistical data) 	 	1997 	1996 	1995 	1994 	1993 Other Financial Data Net cash provided by operating 	activities	 $ 88 	$ 380 	$ 393 	$ 134 	$ 63 Depreciation, depletion and 	amortization 	 127	 125 	 122 	 116 	 117 Capital investments and acquisitions 191 	 129 	 170 	 152 	 102 Working capital	 71	 34 	 51 	 15 	 44 Property, plant, equipment and 	timberland, net	 1,788	 1,720 	 1,709 	 1,681	 1,631 Total assets	 2,771 	 2,688 	 2,783 	 2,759 	 2,597 Long-term debt, less current maturities 	 2,025 	 1,934 	 2,111 	 2,392 	 2,619 Deferred income tax liability	 362	 363 	 328 	 208 	 232 Stockholders' deficit	 (374)	 (375)	 (487)	 (730) 	(1,058)
Statistical Data (tons in thousands) Containerboard production (tons)	 1,933	 1,973 	1,905 	 1,932 	 1,840 Boxboard and SBS production (tons) 823 	 774	 773	 767	 744 Newsprint production (metric tons)	 574 	 522 	 563	 558	 558 Corrugated shipments (billion sq. ft.)	 31.7	 30.0	 29.4	 30.8 	 29.4 Folding carton shipments (tons)	 488	 474 	 476 	 493 	 483 Fiber reclaimed and brokered (tons) 	 4,832 	 4,464 	4,293	 4,134 	 3,907 Timberland owned or leased 	(thousand acres)	 983	 987 	 984	 985 	 984 Number of employees 	15,800 	15,800	 16,200 	16,600	 17,300
(a)	Gives effect to the ten-for-one stock conversion pursuant to a reclassification in 1994, whereby the Company's five classes of common stock were converted into one class on a basis of ten shares of common stock for each outstanding share of each of the old classes.
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.
Containerboard market conditions were weak from the second half of 1995 to early 1997 due to new capacity added within the industry. The added capacity resulted in excess inventories and lower selling prices for containerboard and corrugated shipping containers. While demand for containerboard improved during this time, many paper companies, including the Company, took economic downtime at their containerboard mills to reduce inventories. Linerboard prices, which had reached a record high of $535 per ton in April 1995, dropped rapidly thereafter, declining to below $300 per ton in April 1997. Improvements in market conditions during 1997, however, resulted in increases in containerboard prices in the second half of 1997. In December 1997, the price of linerboard had risen to approximately $390 per ton.
Demand for newsprint was strong throughout 1995, but was weaker in 1996 due to reductions in ad lineage and conservation measures taken by newspaper publishers. Strong demand for newsprint during 1995 resulted in an all-time record price of approximately $760 per metric ton in October 1995. As market conditions weakened in 1996, excess inventories developed and selling prices for newsprint fell to below $500 per metric ton in the first quarter of 1997. Many newsprint producers, including the Company, took economic downtime at their newsprint mills during 1996 to reduce inventories. Improvement in newsprint demand in 1997, coupled with an extended strike at a competitor's mills, resulted in a reduction in the excess inventory levels and provided an opportunity to raise prices. Two attempts to raise prices during 1997 were successful and by December 1997, newsprint prices had risen to approximately $605 per metric ton.
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 the early part of 1995, resulting in higher costs at the Company's recycled paper mills. However, the price of this material was lower in the second half of 1995 and remained relatively stable in 1996 due to lower demand as a result of significant downtime taken by recycled paper mills throughout the country. The lower prices in 1996 had a beneficial effect on fiber cost at the Company's recycled paper mills as compared to 1995. Reclaimed fiber prices were higher in 1997, but were still well below the record highs set in 1995.
Results of Operations
Segment data (In millions) 1997 1996 1995 Income Income Income Net from Net from Net from 		 sales operations sales operations sales operations Paperboard/ 	Packaging 	Products 	$2,936	 $177 	$3,087 	$335 	$3,706 	$604 Newsprint	 302	 27	 323 	 56 	 387 	 26 	Total	 $3,238 	$204 	$3,410	 $391	 $4,093 	$630
1997 COMPARED TO 1996 Net sales and income from operations declined in 1997 compared to 1996, due primarily to lower sales prices. Net sales were $3,238 million, a decrease of 5% compared to 1996 and income from operations was $204 million, a decrease of 48% compared to 1996.
(In millions) 1997 Compared to 1996 Paperboard/ Packaging Products Newsprint Total Increase (decrease) due to: 	Sales prices and product mix 	$(234) 	$ (59) 	$ (293) 	Sales volume	 	 85 	 38	 123 	Acquisitions and new facilities	 28 		 28 	Sold or closed facilities 	 (30) 	 (30) Total net sales decrease 		$(151) 	$ (21) 	$(172)
Paperboard/Packaging Products Segment Net sales of the Paperboard/Packaging Products segment decreased 5% compared to 1996 to $2,936 million, and income from operations decreased $158 million compared to 1996 to $177 million. The decrease in net sales of this segment was primarily a result of significant reductions in sales prices for containerboard and corrugated shipping containers. Increases in sales volume partially offset the decline due to price. Profitability for this segment declined in 1997 compared to 1996 also due primarily to the sales price declines. Income from operations as a percent of net sales for the Paperboard/Packaging Products segment decreased from 11% in 1996 to 6% in 1997. 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 $192 million to $1,405 million, a decrease of 12% compared to 1996. The decrease was due primarily to lower prices. On average, corrugated shipping container prices decreased 13% and containerboard prices decreased 13% compared to 1996. Demand for corrugated shipping containers was strong throughout 1997 and shipments of corrugated shipping containers increased 6% compared to 1996. As market conditions improved, the Company successfully implemented two price increases for linerboard, the first in August for $40 per ton and the second in October for $50 per ton. Containerboard sales volume in 1997 decreased 2% compared to 1996 due to economic downtime taken to reduce inventories in 1997 and a shutdown at the Company's Brewton, Alabama mill associated with a rebuild and upgrade of its mottled white paper machine.
Net sales for the reclamation and timber products operations increased $75 million to $356 million, an increase of 27% compared to 1996. On average, prices for reclaimed fiber were 17% higher in 1997 compared to 1996 and shipments of reclaimed fiber increased 8% compared to 1996.
Net sales of recycled boxboard, SBS and folding cartons of $901 million were equal to 1996. On average, recycled boxboard and SBS prices decreased 5% and 2%, respectively, and folding carton prices decreased 5% compared to 1996. Strengthening demand during 1997 enabled the Company to implement a $40 per ton price increase in the fourth quarter of 1997. Shipments of recycled boxboard and SBS increased 6% and 2%, respectively, and folding carton shipments increased 3% compared to 1996.
Net sales of $129 million for uncoated recycled boxboard and industrial packaging products were 10% lower compared to 1996, primarily due to lower prices and plant closures. Net sales of $145 million for consumer packaging products declined 12% compared to 1996 due to lower prices, reduced sales volume and the sale of a facility.
Newsprint Segment Net sales of the Newsprint segment decreased 7% compared to 1996 to $302 million, and income from operations decreased $29 million compared to 1996 to $27 million. Strengthening demand for newsprint enabled SNC to successfully implement two price increases totaling $115 per metric ton in 1997. Despite the increases, the average sales price for 1997 was 15% lower when compared to 1996. Sales volume increased 12% compared to 1996 primarily as a result of reduced mill downtime. Income from operations as a percent of net sales decreased from 17% in 1996 to 9% in 1997 due primarily to the decline in the average sales price of newsprint.
Costs and Expenses Cost of goods sold as a percent of net sales increased from 81% in 1996 to 86% in 1997 due primarily to the lower sales prices explained above, and, to a lesser extent, higher recycled fiber cost and downtime taken at containerboard mills. Selling and administrative expenses as a percent of net sales was comparable to 1996 due to a decline in expenses, which resulted primarily from lower employee benefit costs.
During 1997, the Company completed its 1993 restructuring program. All major activity related to plant closures, workforce reductions, severance payments and asset sales were completed without significant adjustment to the reserve. Cash payments for restructuring activity in 1997 were not significant to cash flows.
In the fourth quarter of 1995, SNC recorded a pre-tax charge totalling $25 million related to a corrective action program 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. The program was substantially completed in 1997. The Company believes the remaining reserve is adequate to address expenditures contemplated under the corrective action program.
Interest expense for 1997 declined $4 million compared to 1996 due primarily to lower average debt levels outstanding and lower effective interest rates.
The provision for income taxes in 1997 was $11 million. The effective tax rate for 1997 exceeded the federal statutory tax rate due to several factors, the most significant of which was the effect of permanent differences from applying purchase accounting. The tax values of remaining net operating loss carryforwards for state income tax purposes of approximately $45 million expire in years 1998 through 2012. Federal income tax returns for 1989 through 1994 are currently under examination. While the ultimate results of such examinations cannot be predicted with certainty, the Company's management believes that the examinations will not have a material adverse effect on its financial condition or 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 $3,410 million, a decrease of 17% compared to 1995 and income from operations was $391 million, a decrease of 38% compared to 1995.
(In millions) 1996 Compared to 1995 Paperboard/ Packaging Products Newsprint Total Increase (decrease) due to: 	Sales prices and product mix	 $(699) 	$ (30) 	$ (729) 	Sales volume		 117 	 (34)	 83 	Acquisitions and new facilities	 4 	 	 4 	Sold or closed facilities 	 (41) 	 (41) Total net sales decrease 		$(619) 	$ (64)	 $(683)
Paperboard/Packaging Products Segment Net sales of the Paperboard/Packaging Products segment decreased 17% compared to 1995 to $3,087 million, 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 $1,597 million, 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 $901 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 $164 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 above. 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 1996, major activities relating to the 1993 restructuring program included payments of plant closure expenditures and severance of $6 million, offset by proceeds from sales of fixed assets of $3 million. Proceeds from sales of fixed assets were used to offset additional expenses and other unanticipated expenses related to shutdowns.
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 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 was 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. As of December 31, 1996, the Company had net operating loss carryforwards for state income tax purposes of approximately $44 million which expire in years 1997 through 2009.
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. The Company also adopted the disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based Compensation" in 1996. 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.
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 1997 of $88 million and net borrowings of $87 million were used primarily to fund capital investments and acquisitions totaling $191 million. Acquisitions in 1997 included a corrugated shipping container plant and three recycling plants. In addition, the Company purchased a 50,000 acre woodlands tract that complements its southern holdings.
As of December 31, 1997, JSC (U.S.)'s bank credit facility (the "1994 Credit Agreement") consisted of a Tranche A Term Loan of $312 million, a Tranche B Term Loan of $283 million, a Tranche C Term Loan of $141 million and a $450 million revolving credit facility. The revolving credit facility may include letters of credit of up to $150 million. 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. In view of the economic downturn within the Company's business in the early part of 1997, the Company sought an amendment to the 1994 Credit Agreement to ease certain of its financial covenants. The amendment to the 1994 Credit Agreement was granted in June 1997. 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. 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.
As referenced above, 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 $41 million for 1998. The Company does not believe the annual limitation for capital expenditures impairs 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, pay debt maturities and fund capital expenditures. Scheduled debt payments in 1998 and 1999 are $15 million and $101 million, respectively, with increasing amounts thereafter. Capital expenditures for 1998 are estimated to be lower, comparable to the levels in 1996 and 1995. The Company expects to use any excess cash provided by operations to make further debt reductions. At December 31, 1997, the Company had $270 million of unused borrowing capacity under its 1994 Credit Agreement and $103 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 has received a commitment letter dated February 16, 1998 from certain of its senior lenders and their affiliates to provide, structure, arrange and syndicate $1.3 billion of new senior secured facilities to refinance all of the outstanding indebtedness under the 1994 Credit Agreement. The refinancing is expected to reduce interest expense, extend debt maturities and improve financial flexibility of the Company. The refinancing is expected to close in the first half of 1998 and will result in a non-cash extraordinary write-off consisting primarily of deferred debt issuance costs related to the 1994 Credit Agreement.
The Company's earnings are significantly affected by the amount of interest on its indebtedness. The Company periodically 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. As of December 31, 1997, the Company had no interest rate swaps or cap agreements outstanding.
JSC and SNC have been served with complaints alleging that Cladwood exterior siding, produced by SNC and used in prefabricated or manufactured homes, deteriorates under normal conditions and exposure. The suits purport to be class actions on behalf of persons who own or have purchased or used Cladwood, a non-core product line of SNC. The complaints allege either negligence, unfair trade practices or breach of warranty, and seek unspecified amounts of damages and in one case declaratory and injunctive relief. Management is unable to predict at this time the final outcome of these suits or whether the resolution of the matters could materially affect the Company's results of operations, cash flows or financial position. The Company and SNC intend to defend the actions vigorously.
The Company has conducted a review of its computer systems to identify areas that could be affected by the "Year 2000" issue. Based on this review, the Company has established a plan and has begun to modify or replace certain portions of its existing software so that the systems will function properly with respect to dates in the year 2000 and thereafter. The modifications to existing software are expected to be completed by the end of 1998. The Company believes that the cost of such modifications will be immaterial to its results of operations and cash flows. The Company, in the ordinary course of business, continually seeks to upgrade its computer systems and software when economically practical and benefits can be achieved. Appropriate cost associated with such systems are normally capitalized when purchased and depreciated over five years. The Company has reviewed the systems that it is currently in the process of installing and believes these new systems will be Year 2000 compliant. The Company expects to do extensive testing of these new systems during 1998 and 1999.
The Company believes that, in general, it does not have a material exposure to the Year 2000 issue, either operationally or financially, and that its plan to modify or replace its software will address the Year 2000 issue on a timely basis.
Environmental Matters
In 1993, the Company recorded a provision of $54 million, of which $39 million related 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 $5 million, $3 million and $9 million related to PRP sites, environmental cleanup and other environmental compliance related measures in 1997, 1996 and 1995, 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 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 six 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 a discussion of the environmental exposure at the six 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, 1997. 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.
In 1997, the EPA finalized significant parts of the Cluster Rule, which will require substantial expenditures to achieve compliance. In order to comply with these parts of the Cluster Rule, the Company estimates that, based on preliminary engineering studies done to date, it may require approximately $175 million in capital expenditures over the next three to five years. The ultimate cost of complying with the regulations cannot be predicted with certainty until further engineering studies are completed, and additional regulations are finalized.
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 $15 million annually in capital expenditures related to environmental compliance over the last three years and estimates spending approximately $34 million in capital expenditures related to environmental compliance in 1998. A significant amount of the increased expenditures in 1998 will be due to compliance with the Cluster Rule and is included in the $175 million estimate referenced above. 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
The Company uses the last-in, first-out method of accounting for approximately 83% 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. In 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 cost of such base raw materials declined and has remained relatively stable through 1996 and 1997. 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	 25 	Report of Independent Auditors	 26 	Consolidated balance sheets - December 31, 1997 and 1996	 27	 	For the years ended December 31, 1997, 1996 and 1995: 		Consolidated statements of operations	 28 		Consolidated statements of stockholders' deficit	 29 		Consolidated statements of cash flows	 30 	Notes to consolidated financial statements	 31
The following consolidated financial statement schedule of Jefferson Smurfit Corporation is included in Item 14(a):
	II: Valuation and Qualifying Accounts 	 59
All other schedules specified under Regulation S-X for Jefferson Smurfit Corporation have been omitted because they are not applicable, because they are not required or because the information required is included in the financial statements or notes thereto.
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.
Richard W. Graham President and Chief Executive Officer
Patrick J. Moore Vice President and Chief Financial Officer (Principal Accounting Officer)
REPORT OF INDEPENDENT AUDITORS
Board of Directors Jefferson Smurfit Corporation
We have audited the accompanying consolidated balance sheets of Jefferson Smurfit Corporation as of December 31, 1997 and 1996, and the related consolidated statements of operations, stockholders' deficit and cash flows for each of the three years in the period ended December 31, 1997. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Jefferson Smurfit Corporation at December 31, 1997 and 1996, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1997 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.
Ernst & Young LLP
St. Louis, Missouri January 22, 1998
JEFFERSON SMURFIT CORPORATION CONSOLIDATED BALANCE SHEETS (In millions, except share data)
December 31,	1997	1996
		 ASSETS Current assets 	Cash and cash equivalents 	$ 12 	$ 12 	Receivables, less allowances 		of $10 in 1997 and $9 in 1996 	302 	279 	Inventories 		Work-in-process and finished goods 	89 	81 		Materials and supplies	 151 	 126 			240 	207 	Deferred income taxes 	32	 46 	Prepaid expenses and other current assets	 16	 15 		 Total current assets 	602 	559
Net property, plant and equipment	 1,523 	1,466
Timberland, less timber depletion	 265	 254
Goodwill, less accumulated amortization of 	$58 in 1997 and $50 in 1996 	237 	246 Other assets	 144	 163 			 $ 2,771 	$ 2,688 LIABILITIES AND STOCKHOLDERS' DEFICIT Current liabilities 	Current maturities of long-term debt 	$ 15 	$ 10 	Accounts payable	 334 	290 	Accrued compensation and payroll taxes 	88 	92 	Interest payable 25 	30 	Other accrued liabilities	 69	 103 		 Total current liabilities	 531	 525
Long-term debt, less current maturities 	2,025 	1,934
Other long-term liabilities 	227 	241
Deferred income taxes 	362 	363
Stockholders' deficit 	Preferred stock, par value $.01 per share; 50,000,000 		shares authorized; none issued and outstanding 	Common stock, par value $.01 per share; 250,000,000 		shares authorized; 110,996,794 and 110,989,156 issued 		and outstanding in 1997 and 1996, respectively 	 1 	1 	Additional paid-in capital	 1,168 	1,168 	Retained earnings (deficit) 	(1,543) 	(1,544) 	 Total stockholders' deficit	 (374) 	 (375) 	 		$ 2,771 	$ 2,688
See notes to consolidated financial statements.
JEFFERSON SMURFIT CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (In millions, except per share data)
Year Ended December 31, 	1997 	1996 	1995
Net sales 	$ 3,238	$ 3,410 $ 4,093 Costs and expenses	 	Cost of goods sold 	2,776 	2,754 	3,222 	Selling and administrative expenses 	 258	 265 	 241
		Income from operations 	204 391 	630
Other income (expense)	 	Interest expense, net 	(190) 	(194) 	(234) 	Other, net	 (2)	 (3)	 7
		Income before income taxes and 	 		 extraordinary item 	12	 194 	403
Provision for income taxes	 11	 77	 156 			 		Income before extraordinary item 	1 	117 	247
Extraordinary item	 	Loss from early extinguishment of debt,	 		net of income tax benefit of $3 in 		1996 and $2 in 1995 	 	 (5)	 (4)
		Net income 	$ 1	$ 112 	$ 243
Basic earnings per common share	 	Income before extraordinary item 	$ .01	$ 1.05 	$ 2.23 	Extraordinary item 	 (.04) (.04)
		Net income 	$ .01	$ 1.01 	$ 2.19
Weighted average shares outstanding 	 111	 111 	 111
Diluted earnings per common share	 	Income before extraordinary item 	$ .01	$ 1.04 $ 2.21 	Extraordinary item (.04) (.04)
		Net income 	$ .01	$ 1.00 	$ 2.17
Weighted average shares outstanding 	 113	 112 	 112
See notes to consolidated financial statements.
JEFFERSON SMURFIT CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT (In millions, except share data)
	 	 Common Stock 	 Par 	Number 	Additional	 Retained 		Value, 	 of 	Paid-In 	Earnings 		 $.01 	 Shares 	 Capital 	(Deficit)
Balance at January 1, 1995	 $ 1 	110,988,462	 $1,168 	$(1,899)
Net income	 			243 Issuance of common stock under 	stock option plan	 	694 Balance at December 31, 1995	 1 	110,989,156 	1,168 	 (1,656)
Net income			 	112 Balance at December 31, 1996	 1 	110,989,156 	 1,168	 (1,544)
Net income			 	1 Issuance of common stock under 	stock option plan 		7,638 Balance at December 31, 1997 	$ 1	 110,996,794 	$1,168	 $(1,543)
See notes to consolidated financial statements.
JEFFERSON SMURFIT CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (In millions)
Year Ended December 31, 	1997 	1996 	1995
Cash flows from operating activities 	Net income 	$ 1 	$ 112 	$ 243 	Adjustments to reconcile net income to net 	 	cash provided by operating activities	 		Extraordinary loss from early 	 			extinguishment of debt	 	8 	7 		Depreciation, depletion and amortization 	127 	125 	122 		Amortization of deferred debt issuance costs	11 	13 	14 		Deferred income taxes	 13 	34 	113 	Non-cash employee benefit expense (income)	 4 	17 	(7) 		Change in current assets and liabilities, 	 			net of effects from acquisitions 	 			 Receivables 	(24)	 60 	(22) 			 Inventories	 (32) 	17 	(4) 			 Prepaid expenses and other current assets 	3	 	(1) 			 	Accounts payable and accrued liabilities 	(4) 		(61) 			 Interest payable 	(5) 	(4) 	(7) 			 Income taxes	 (6) 	 2 	(1) 		Other, net	 	 (4)	 (3) 	Net cash provided by operating activities	 88 	 380 	 393
Cash flows from investing activities	 	Property additions 	(166) 	(120) 	(130) 	Timberland additions 	(16) 	(9) 	(6) 	Investments in affiliates and acquisitions	 (9) 		(34) 	Construction funds held in escrow 	9 (10) 	Proceeds from property and timberland		 		disposals and sale of businesses	 7	 6	 10 	Net cash used for investing activities	 (175) 	(133) 	(160)
Cash flows from financing activities	 	Borrowings under bank credit facilities	 	250	 	Net borrowings (repayments) under accounts 	 		receivable securitization program	 30 	(38)	 	Payments of long-term debt 	(7) 	(481) 	(284) 	Other increases in long-term debt	 64 	13 	20 	Deferred debt issuance costs	 	 (6)	 (4) 	Net cash provided by (used for) financing activities	 87 	(262) 	(268)
Decrease in cash and cash equivalents	 	(15) 	(35) Cash and cash equivalents	 	Beginning of year	 12	 27 	 62 	End of year 	$ 12 	$ 12 	$ 27
See notes to consolidated financial statements.
JEFFERSON SMURFIT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Tabular amounts in millions, except share data)
1. Basis of Presentation
Jefferson Smurfit Corporation, hereafter referred to as the "Company," owns 100% of the equity interest in JSCE, Inc. The Company has no operations other than its investment in JSCE, Inc. JSCE, Inc. owns 100% of the equity interest in JSC (U.S.) and is the guarantor of the senior unsecured indebtedness of JSC (U.S.). JSCE, Inc. has no operations other than its investment in JSC (U.S.). JSC (U.S.) has extensive operations throughout the United States.
The deficit in stockholders' equity is primarily due to the Company's 1989 purchase of JSC (U.S.)'s common equity owned by Jefferson Smurfit Group plc ("JS Group") and the acquisition by JSC (U.S.) of its common equity owned by The Morgan Stanley Leveraged Equity Fund I, L.P., 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, recycled and renewable fiber resources, newsprint production, and consumer and specialty 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 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. Cash and cash equivalents of $9 million and $8 million are pledged at December 31, 1997 and 1996 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.
Significant Accounting Policies (cont)
Inventories: Inventories are valued at the lower of cost or market, principally under the last-in, first-out ("LIFO") method except for $51 million in 1997 and $53 million in 1996 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 $62 million and $59 million at December 31, 1997 and 1996, 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 paper 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.
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 included in other assets 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 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).
2. Significant Accounting Policies (cont)
Interest Rate Swap and Cap Agreements: The Company periodically 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.
At December 31, 1997, the Company had no interest rate swaps or cap agreements outstanding.
Earnings per Common Share: Effective December 31, 1997, the Company adopted SFAS No. 128 "Earnings per Share." SFAS No. 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Basic earnings per share excludes any dilutive effects of options. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. All earnings per share amounts for all periods have been presented, and where appropriate, restated to conform to the SFAS No. 128 requirements (see Note 8).
Employee Stock Options: SFAS No. 123, "Accounting for Stock- Based Compensation," encourages but does not require companies to record compensation cost for stock-based employee compensation plans at fair value. The Company has chosen to continue to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. Under APB 25, no compensation expense is recognized because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant. The Company has, however, adopted the disclosure-only provisions of SFAS No. 123 (see Note 7).
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.
Prospective Accounting Pronouncements: In 1997, the Financial Accounting Standards Board issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 131 specifies the computation, presentation, and disclosure requirements for business segment information. This statement is required to be adopted in 1998. The Company is currently evaluating SFAS 131 and has not yet determined its impact on the Company's consolidated financial statements.
Reclassifications: Prior to 1997, timberdeeds were included with timberland on the Consolidated Balance Sheets, and as depletion and timberland additions on the Consolidated Statements of Cash Flows. Effective December 31, 1997, the Company has reclassified timberdeed activity as cash flows from operating activities. The effect of the reclassification on the Consolidated Statements of Cash Flows was to reduce depletion by $17 million, $14 million and $17 million in 1997, 1996 and 1995, respectively, with offsetting effects to timberland additions and other current assets. There was no effect on the Consolidated Statements of Operations.
Certain other reclassifications of prior year presentations have been made to conform to the 1997 presentation.
3. Property, Plant and Equipment
Property, plant and equipment at December 31 consists of:
				 1997 		 1996 Land	 		$ 63 	$ 61 Buildings and leasehold improvements 	304		 280 Machinery, fixtures and equipment 	2,024	 	1,908 		 		2,391 		2,249 Less accumulated depreciation and amortization	 934	 	 849 		 		1,457 		1,400 Construction in progress	 66	 	 66
	 Net property, plant and equipment 	$1,523		$1,466
4. Long-Term Debt
Long-term debt at December 31 consists of: 				 1997 		 1996 Tranche A term loan	 $ 312		$ 312 Tranche B term loan	 283 		283 Tranche C term loan 	141 		141 Revolving loans 	120	 	55 Accounts receivable securitization program loans	210	 	179 1994 series A senior notes	 300	 	300 1994 series B senior notes	 100	 	100 1993 senior notes	 500		 500 Other 	 74 	 74 			 	2,040 		1,944 Less current portion	 15	 10 		 		$2,025		$1,934
Aggregate annual maturities of long-term debt at December 31, 1997 for the next five years are $15 million in 1998, $101 million in 1999, $170 million in 2000, $347 million in 2001 and $568 million in 2002.
	1994 Credit Agreement In 1994, JSC (U.S.) entered into a bank credit facility (the "1994 Credit Agreement") consisting of a $450 million revolving credit facility (the "Revolving Credit Facility") of which up to $150 million may consist of letters of credit, a Tranche A Term Loan and a 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 1.50% per annum or the adjusted LIBOR Rate plus 2.50% per annum (8.66% at December 31, 1997). Interest on outstanding loans under the Tranche B Term Loan is payable at a rate per annum 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 (9.0% at December 31, 1997). Interest on the Tranche C Term Loan is payable at a rate per annum selected at the option of JSC (U.S.), equal to the prime rate plus 2.25% per annum or the adjusted LIBOR Rate plus 3.25% per annum (9.25% at December 31, 1997). 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 .50% per annum is assessed on the unused portion of the Revolving Credit Facility. At December 31, 1997, the unused portion of this facility, after giving consideration to outstanding letters of credit, was $270 million.
4. Long-Term Debt (cont)
The obligations under the 1994 Credit Agreement are unconditionally guaranteed by the Company, JSCE, Inc. and its subsidiaries and are secured by a security interest in substantially all of the assets of JSC (U.S.) and its material subsidiaries, with the exception of cash, cash equivalents and trade receivables. The 1994 Credit Agreement is also secured by a pledge of all the capital stock of each material subsidiary of the Company and by certain intercompany notes.
The 1994 Credit Agreement contains various business and financial covenants including, among other things, (i) limitations on dividends, redemptions and repurchases of capital stock, (ii) limitations on the incurrence of indebtedness, liens, leases 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"). JS Finance 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 $9 million and trade accounts receivable of $231 million at December 31, 1997. Interest rates on borrowings under the Securitization Program are at a variable rate (5.96% at December 31, 1997). At December 31, 1997, $103 million was available for additional borrowing, subject to JSC (U.S.)'s level of eligible accounts receivable. Borrowings under the Securitization Program, which expires February 2002, have been classified as long-term debt because of the Company's intent to refinance this debt on a long-term basis and the availability of such financing under the terms of the program.
	1994 Senior Notes In 1994, 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. The Series B Senior Notes are not redeemable prior to maturity.
4. Long-Term Debt (cont)
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.
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, 1997 is payable in varying installments through the year 2029. Interest rates on these obligations averaged approximately 8.31% at December 31, 1997.
	Other Interest costs capitalized on construction projects in 1997, 1996 and 1995 totaled $5 million, $3 million and $4 million, respectively. Interest payments on all debt instruments for 1997, 1996 and 1995 were $188 million, $186 million and $228 million, respectively.
5. Income Taxes
Significant components of the Company's deferred tax assets and liabilities at December 31 are as follows:
						1997 	1996	 Deferred tax liabilities 	Property, plant and equipment and timberland	 	$414	 $396 	Inventory	 		13 	13 	Prepaid pension costs 		31 	31 	Other			 	114 	104 		Total deferred tax liabilities		 572 	544
Deferred tax assets 	Employee benefit plans	 	96	 102 	Net operating loss, alternative minimum tax and 		tax credit carryforwards		 99 	90 	Other				 58	 53 		Total deferred tax assets	 	253 	245 	Valuation allowance for deferred tax assets	 	(11)	 (18) 		Net deferred tax assets	 	242 	227 		Net deferred tax liabilities	 	$330 	$317
Provision for income taxes before extraordinary item was as follows: 					 Year Ended December 31, 					 1997	 1996 	 1995 Current 	Federal 		$ (3) 	$ 41	 $ 38 State and local		 	 2 	 4 					 (3) 	43 	42 Deferred 	Federal 	 	10 	(1) 	(12) 	State and local	 	 4 	(5) 	2 	Net operating loss carryforwards		 	 40	 124 					 14	 34	 114 		 		$ 11 $ 77 	$ 156
At December 31, 1997, the Company has net operating loss carryforwards for state income tax purposes with a tax value of approximately $45 million which expire in years 1998 through 2012.
The federal income tax returns for 1989 through 1994 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: 			 			 					 Year Ended December 31, 			 	 1997 	 1996 	 1995
U.S. federal statutory rate 	35.0%	 35.0%	 35.0% State and local taxes, net 	 	of federal tax benefit 	(2.8)	 (1.5) 	3.9 Permanent differences from applying 	purchase accounting	 116.1 	4.1 	3.2 Effect of valuation allowances on 	deferred tax assets, net of 	federal benefit 	(58.0) 	2.1 	(3.4) Other, net	 1.4 		 		91.7% 	39.7%	 38.7%
The Company made income tax payments of $8 million, $39 million and $41 million in 1997, 1996 and 1995, 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:
				1997 	1996 	1995 Weighted average discount rate 	7.25%	 7.75% 	7.25% Rate of increase in compensation levels	 4.0%	 4.5% 	4.0% Expected long-term rate of return on assets	 9.5% 	9.5% 	9.5%
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:
				Year Ended December 31, 					 1997	 1996 	1995 Defined benefit plans 	Service cost-benefits earned during the period	$ 16	 $ 16 	$ 13 	Interest cost on projected benefit obligations	 63 	60 	59 	Actual return on plan assets	 (140) 	(131) 	(155) 	Net amortization and deferral 	61 	62 	75 Multi-employer plans	 2 	 2 	 2 Net pension expense (income) 	$ 2	 $ 9 	$ (6)
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:
				1997 	1996 Actuarial present value of benefit obligations	 	Vested benefit obligations 	$ 821	 $759
	Accumulated benefit obligations	 $ 873 	$802
Projected benefit obligations 	$ 919 	$838 Plan assets at fair value 	1,013	 926 Plan assets in excess of 	projected benefit obligations 	94 	88 Unrecognized net (gain) loss	 (2) 	8 Unrecognized net asset at December 31, 	being recognized over 14 to 15 years	 (13) 	(17) Net pension asset 	$ 79 	$ 79
Approximately 31% of plan assets at December 31, 1997 are invested in cash equivalents or debt securities and 69% are invested in equity securities. Equity securities at December 31, 1997 include 754,500 shares of common stock of the Company with a market value of approximately $11 million and 26,526,260 shares of JS Group common stock having a market value of approximately $75 million. Dividends paid on JS Group common stock during 1997 were approximately $1.7 million.
	Savings Plans The Company sponsors voluntary savings plans covering substantially all salaried and certain hourly employees. The Company match, which is paid in Company common stock, was 60% in 1997 and 1996 and 50% in 1995 of each participant's contributions up to an annual maximum. The Company's expense for the savings plans totaled $9 million, $8 million and $6 million in 1997, 1996 and 1995, 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:
				1997 	1996 Retirees 	$ 60 	$ 63 Active employees	 43	 35 Total accumulated postretirement benefit obligation	 103 	98 Unrecognized net (gain) loss 	 (1) 	 3 Accrued postretirement benefit cost	 $102	 $101
Net periodic postretirement benefit cost included the following components:
				1997	 1996	 1995	 		 Service cost-benefits earned during the period	 $ 2 	$ 1 	$ 1 Interest cost on accumulated postretirement 	benefit obligation 	7 	7 	7 Net amortization 	(1) 	(1) 	(1) Net periodic postretirement benefit cost 	$ 8	 $ 7 	$ 7
A weighted-average discount rate of 7.25% and 7.75% was used in determining the APBO at December 31, 1997 and 1996, respectively. The weighted-average annual assumed rate of increase in the per capita cost of covered benefits ("health care cost trend rate") was 7.5%, 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, 1997 by $2 million and have no effect on the annual net periodic postretirement benefit cost for 1997.
	Supplemental Income Plan The Company maintains an unfunded, non-qualified supplemental income pension plan (the "SIP") for certain key executives. Benefits are determined by final average earnings and years of credited service and are offset by a certain portion of social security benefits.
At December 31, 1997 and 1996, the projected benefit obligation was $31 million and $26 million, respectively, and the net unrecognized SIP cost was $11 million and $9 million. The amounts included in other long-term liabilities in the Consolidated Balance Sheets were $20 million and $17 million as of December 31, 1997 and 1996, respectively. During 1997, 1996 and 1995 the Company incurred SIP expenses of $2 million, $9 million, and $3 million, respectively.
7. 1992 Stock Option Plan
Under the 1992 Stock Option Plan (the "Plan"), selected employees of the Company and its affiliates and subsidiaries are granted non-qualified stock options to acquire shares of common stock of the Company. The stock options are exercisable at a price equal to the fair market value, as defined, of the Company's common stock on the date of grant. The options vest pursuant to the schedule set forth for each option and expire upon the earlier of 12 years from the date of grant or termination of employment, death or disability. At December 31, 1997, 13,041,668 shares of common stock were reserved for issuance under the Plan, including 4,873,895 shares available for the granting of options. The stock options become exercisable upon the earlier of the occurrence of certain trigger dates, as defined, or 11 years from the date of grant.
Pro forma information regarding net income and earnings per share is required by SFAS No. 123 and has been determined as if the Company had accounted for its employee stock options issued subsequent to December 31, 1994 under the fair value method of that statement. The pro forma net income information required by SFAS No. 123 is not likely to be representative of the effects on reported net income for future years. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following assumptions:
				1997 	1996 	1995 	Expected option life (years) 	5 	6 	7 	Risk-free weighted average 	 interest rate	 6.49% 	6.22% 	7.36% 	Stock price volatility 	44.20% 	42.10% 	42.10% 	Dividend yield	 0.0%	 0.0% 	0.0%
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.
7. 1992 Stock Option Plan (cont)
For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma information follows (in millions, except per share data):
As Reported 	1997 	1996 	1995 	Net income 	$ 1 	$ 112 	$ 243 	Basic earnings per share 	.01 	1.01 	2.19 	Diluted earnings per share 	.01 	1.00 	2.17
Pro Forma 	Net income 	$ (1) 	$ 111	 $ 243 	Basic earnings per share 	(.01) 	1.00 	2.19 	Diluted earnings per share 	(.01) 	1.00 	2.19
The weighted average fair values of options granted during 1997, 1996 and 1995 were $6.63, $6.38 and $9.60 per share, respectively.
Additional information relating to the Plan is as follows: 						Weighted 					 	Average 			 	Shares Under 	Option Exercise 				 Option 	 Price Range 	 Price Outstanding at January 1, 1995 	5,531,255	 $10.00 - 12.50 	Granted 	141,750	 14.31 - 17.63 	Exercised 	925	 10.00 	Cancelled	 40,612	 10.00 - 17.63 Outstanding at December 31, 1995 	5,631,468 	$10.00 - 17.63 	$10.44 Granted	 1,497,500 	11.13 - 13.38 	12.67 Cancelled	 11,495	 10.00 - 17.63 	11.13 Outstanding at December 31, 1996	 7,117,473 	$10.00 - 17.63 	$10.91 	Granted 	1,238,500 	13.13 - 15.81 	13.43 	Exercised 	23,825 	10.00 	10.00 	Cancelled	 164,375 	10.00 - 15.81 	12.98 Outstanding at December 31, 1997 	8,167,773 	$10.00 - 17.63 	$11.25
The following table summarizes information about stock options outstanding at December 31, 1997:
	 Options Outstanding 	Options Exercisable 			 Weighted 		Weighted	 Average Weighted 		Average Remaining	 		Average Range of 		Exercise 	Contractual		 	Exercise Exercise Prices 	12/31/97	 Price 	Life (Years) 	12/31/97	 Price $10.00 - 12.50 	5,736,023	 $10.33	 6.98	 	 483,100	 $10.00 13.00 - 14.31 	2,207,750	 13.11	 11.02 15.81 - 17.63	 224,000	 16.51	 10.03 	8,167,773				 483,100
The number of options exercisable at December 31, 1996 and 1995 were 506,925 and 508,770, respectively.
8. Earnings per Share
The following table sets forth the computation of basic and diluted earnings per share:
				1997 	1996 	1995 Numerator 	Income before extraordinary item	 $ 1 	$ 117	 $ 247
Denominator 	Denominator for basic earnings per 		share - weighted average shares 	111 	111 	111
	Effect of dilutive securities: 		Employee stock options	 2	 1 1
	Denominator for diluted earnings per 		share - adjusted weighted average 		shares and assumed conversions 	 113 	 112	 112
Basic earnings per share before 	extraordinary item 	$ .01 	$1.05	 $2.23
Diluted earnings per share before 	extraordinary item 	$ .01 	$1.04	 $2.21
An immaterial number of options to purchase shares of common stock were outstanding but not included in the computation of diluted earnings per share because the option exercise price was greater than the average market price of the common shares.
9. Related Party Transactions
	Transactions with JS Group Transactions with JS Group, its subsidiaries and affiliated companies were as follows:
Year Ended December 31, 				1997 	1996 	1995 Product sales	 $ 34 	$ 34 	 $ 44 Product and raw material purchases	 51 	64 	108 Management services income 	4 	5 	4 Charges from JS Group for services provided	 1	 	1 Charges to JS Group for costs pertaining to 	the Fernandina No. 2 paperboard machine 	53 	54 	57 Receivables at December 31 	3 	3 	3 Payables at December 31 	11 	10 	13
Product sales to and purchases from JS Group, its subsidiaries and affiliates are consummated on terms generally similar to those prevailing with unrelated parties.
9. Related Party Transactions (cont)
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 1997, 1996 and 1995 were $140 million, $165 million and $189 million, respectively.
10. Leases
The Company leases certain facilities and equipment for production, selling and administrative purposes under operating leases. Future minimum lease payments at December 31, 1997 required under operating leases that have initial or remaining noncancelable lease terms in excess of one year are $36 million in 1998, $29 million in 1999, $23 million in 2000, $19 million in 2001, $17 million in 2002 and $73 million thereafter.
Net rental expense was $50 million, $50 million and $48 million for 1997, 1996 and 1995, respectively.
11. Fair Value of Financial Instruments
The estimated fair values of the Company's financial instruments are as follows: 	 		 December 31, 					 1997 1996 				Carrying	 Fair 	Carrying 	Fair 				 Amount 	 Value 	 Amount 	 Value Assets 	Cash and cash equivalents 	$ 12 	$ 12	 $ 12 	$ 12
Liabilities 	Long-term debt, including 	 current maturities	 2,040 	2,105 	1,944 	2,005
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.
12. 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 PRPs 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, SNC recorded a pretax charge totaling $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. As of December 31, 1997 this program was substantially complete and the Company believes the remaining reserve is adequate to address expenditures contemplated under the corrective action program.
12. Contingencies (cont)
JSC and SNC have been served with complaints alleging that Cladwood exterior siding, produced by SNC and used in prefabricated or manufactured homes, deteriorates under normal conditions and exposure. The suits purport to be class actions on behalf of persons who own or have purchased or used Cladwood, a non-core product line of SNC. The complaints allege either negligence, unfair trade practices or breach of warranty, and seek unspecified amounts of damages and in one case declaratory and injunctive relief. Management is unable to predict at this time the final outcome of these suits or whether the resolution of the matters could materially affect the Company's results of operations, cash flows or financial position. The Company and SNC intend to defend the actions vigorously.
13. 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:
				 Year Ended December 31, 				 1997 	 1996 	 1995 Net sales 	Paperboard/packaging products	 $2,936 	$3,087 	$3,706 	Newsprint	 302	 323 	 387 			 	$3,238 	$3,410 	$4,093
Income from operations 	Paperboard/packaging products 	$ 177 	$ 335	 $ 604 	Newsprint	 27 	 56	 26 	Total income from operations	 204 	391 	630 Interest expense, net	 (190) 	(194) 	(234) Other, net	 (2)	 (3)	 7 Income before income taxes and extraordinary item 	$ 12 	$ 194 	$ 403
Identifiable assets 	Paperboard/packaging products 	$2,287	 $2,189 	$2,246 	Newsprint	 290 	284 	296 	Corporate assets 	 194 	 215	 241 			 	$2,771 	$2,688 	$2,783
Capital expenditures 	Paperboard/packaging products 	$ 166 	$ 112 	$ 119 	Newsprint 	 16 	 17 	 17 				 $ 182 	$ 129 	$ 136
Depreciation, depletion and amortization 	Paperboard/packaging products 	$ 113 	$ 112 	$ 105 	Newsprint	 14 	 13 	 17 		 		$ 127 	$ 125 	$ 122
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.
14. Quarterly Results (Unaudited)
The following is a summary of the unaudited quarterly results of operations:
			 	First 	Second 	 Third 	Fourth 				Quarter 	Quarter 	Quarter	 Quarter 		 	Net sales 	$778 	 $785 	 $832 	$843 	Gross profit	 103 	109 	129 	121 	Income from operations	 39 	 44 	 65 	56 	Net income (loss) 	(7) 	(4) 	 8 	 4
	Basic earnings (loss) per share: 	Net income (loss) per share 	(.06) 	(.04) 	.07 	 .04
	Diluted earnings (loss) per share: 	Net income (loss) per share 	(.06) 	(.04) 	.07 	 .04
	Net sales 	$916 	$844 	$834 	$816 	Gross profit	 205 	155 	151 	145 	Income from operations 	138 	92 	86 	 75 	Income before extraordinary item 	53 	 27 	22 	15 	Loss from early extinguishment of debt		 (4)	 	(1) 	Net income 	53 	23 	22 	14
	Basic earnings per share: 	Income per share before 	 extraordinary item	 .48 	.24 	.20 	.13 	Net income per share 	.48 	.20 	.20 	.13
	Diluted earnings per share: 	Income per share before 	 extraordinary item 	.48 	.24 	.20 	.13 	Net income per share 	.48 	.20 	.20 	.13
The 1996 and first three quarters of 1997 earnings per share amounts have been restated to comply with SFAS No. 128, "Earnings per Share."
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	 29 				Alan E. Goldberg	 43 				Richard W. Graham	 63 				Michael C. Hoffman 	 35 				G. Thompson Hutton	 42 				Michael M. Janson	 50 				Howard E. Kilroy	 62 				Thomas A. Reynolds, III 45 				Michael W.J. Smurfit	 61 				James E. Terrill	 64
The Board of Directors currently consists of ten directors. The directors are classified into three groups: three directors having terms expiring in 1998, including Messrs. Abramson, Graham and Hutton; three directors having terms expiring in 1999, including Messrs. Goldberg, Kilroy and Reynolds; and four directors having terms expiring in 2000, including Messrs. Hoffman, Janson, Smurfit and Terrill.
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		 54	 Vice President - Transportation and 						Logistics Janet R. Carl		 	37 	Vice President - Environmental 	 						Affairs James P. Davis 			42	 Vice President and General Manager 					Consumer Packaging Division James D. Duncan			 56 	Vice President and General Manager - Industrial Packaging Division Richard J. Golden		 55	 Vice President - Purchasing Richard W. Graham 		63 	President and Chief Executive 		 					 	Officer and Director Michael F. Harrington	 57 	Vice President - Human Resources Charles A. Hinrichs	 	44 	Vice President and Treasurer Jay D. Lamb 			50 	Vice President and General Manager 	 						- SNC F. Scott Macfarlane	 	52 	Vice President and General Manager 	 						- Folding 	Carton and Boxboard Mill 	 						Division Timothy McKenna			 49 Vice President - Investor Relations 		 and Communications Patrick J. Moore 		43 Vice President and Chief Financial 	 					 Officer Thomas A. Pagano	 	51 Vice President - Planning Michael W.J. Smurfit 		61 Chairman of the Board and Director David C. Stevens	 	63 Vice President and General Manager 	 					 - Smurfit Recycling Company John E. Straw		 	55 Vice President - Corporate Sales 	 					 and Marketing Michael E. Tierney		 49 Vice President, General Counsel and 					 Secretary William N. Wandmacher	 55 Vice President and General Manager 	 					 - Containerboard Mill Division Gary L. West			 55 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 Vice President 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 Director of PageMart Wireless, 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.
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 environmental 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.
Alan E. Goldberg has been a Director of the Company since 1989. He is head of MS&Co.'s Private Equity Group and has been a Managing Director of MS&Co. since 1988. Mr. Goldberg is a Managing Director of MSLEF II, Inc. and MSCP III, Inc. Mr. Goldberg also serves as Director of CIMIC Holdings Limited, CAT Limited, Catalytica, Inc., 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 1985. In January 1994, he was assigned responsibility for world- wide purchasing for JS Group.
Richard W. Graham has been a Director of the Company since January 1997. He has been President and Chief Executive Officer of the Company since January 1997 and 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. Mr. Graham also serves as Director of Mercantile Bank of St. Louis N.A.
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.
Michael C. Hoffman was named to the Board of Directors of the Company in February 1998. Mr. Hoffman joined MS&Co. in 1986 and is a Principal of MS&Co., MSLEF II, Inc. and MSCP III, Inc. Mr. Hoffman has been a member of the MS Private Equity Group since 1989 and is a member of MS&Co.'s bank steering committee.
G. Thompson Hutton has been a Director of the Company since 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.
Michael M. Janson was named to the Board of Directors of the Company in October 1997. Mr. Janson joined MS&Co. in 1987 and is a Managing Director of MS&Co. and MSCP III. Before joining MS&Co.'s Merchant Banking Division in 1997, he was a Managing Director of MS&Co.'s High Yield Capital Markets Department. Mr. Janson also serves as Director of American Color Graphics, Inc.
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.
Timothy McKenna was named Vice President - Investor Relations and Communications in July 1997. He joined the Company in October 1995 as Director of Investor Relations and Communications. Prior to joining the Company, he was employed by Union Camp Corporation for 14 years where most recently he was Director of Investor Relations.
Patrick J. Moore 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.
Thomas A. Reynolds, III was named to the Board of Directors of the Company in August 1997. He has been a Partner since 1984 with Winston & Strawn, a law firm that regularly represents the Company on numerous matters. Mr. Reynolds is an adjunct faculty member in trial advocacy at Northwestern University School of Law. He also serves as Director of Georgetown University.
Michael W.J. Smurfit has been Chairman and Chief Executive Officer of JS Group since 1977. Dr. Smurfit has been Chairman of the Board of the Company since 1989. He was Chief Executive Officer of the Company prior to July 1990.
David C. Stevens has been Vice President and General Manager - Smurfit Recycling Company since January 1993. Prior to that, he was General Sales Manager for the Reclamation Division, 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 of the Company 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. Mr. Terrill also served as President of SNC from February 1986 to February 1993.
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 7, 1998, which will be filed with the Securities and Exchange Commission on or before March 31, 1998 (the "JSC Proxy Statement"), and is incorporated herein by reference.
ITEM 12.
ITEM 12.	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The 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 is included in Item 8. (3) Exhibits. 	 3.1	 Restated Certificate of Incorporation of the Company (incorporated by reference to Exhibit 4.1 to JSC's Registration Statement on Form S-8 (File No. 33-57085)). 3.2 	 By-laws of the Company (incorporated by reference to Exhibit 4.2 to JSC's Registration Statement on Form S-8 (File No. 33-57085)). 4.1 	Certificate for JSC's Common Stock (incorporated by reference to Exhibit 4.3 to JSC's Registration Statement on Form S-8 (File No. 33-57085)). 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, by and 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 Times Mirror (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 	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). 10.10	 Jefferson Smurfit Corporation Amended and Restated 1992 Stock Option Plan dated as of May 1, 1997. 10.11(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). 10.11(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). 10.11(c) 	Amendment No. 2, dated as of June 15, 1997, to the Amended and Restated Credit Agreement among JSC, JSC (U.S.), JSCE, Inc. and the financial institutions party thereto (incorporated by reference to Exhibit 10.1 to JSC's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997). 10.12(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). 10.12(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). 10.12(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). 10.12(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). 10.12(e) 	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). 10.12(f)	 Commercial Paper Dealer Agreement dated as of February 23, 1995 among BT Securities Corporation, MS&Co., JSC (U.S.) and JS Finance (incorporated by reference to Exhibit 10.7 to JSC's Quarterly Report on Form 10-Q for the quarter ended March 31, 1995). 10.12(g)	 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). 10.12(h) 	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). 10.12(i)	 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). 10.12(j) 	Amendment No. 2 dated as of August 19, 1997 to the Term Loan Agreement among JS Finance and Bank Brussels Lambert, New York Branch and JSC (U.S.) as Servicer. 10.12(k)	 Amendment No. 2 dated as of August 19, 1997 to the Receivables Purchase and Sale Agreement among JSC (U.S.) as the Seller and Servicer and JS Finance as the Purchaser, Bankers Trust Company as Facility Agent and Bank Brussels Lambert, New York Branch as the Term Bank. 10.12(l) 	Amendment No. 2 dated as of August 19, 1997 to the Liquidity Agreement among JS Finance, Bankers Trust Company as Facility Agent, JSC (U.S.) as Servicer, Bank Brussels Lambert, New York Branch as Term Bank and the Financial Institutions parties thereto as Banks. 10.13	 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). 18.1	 Letter regarding change to 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. 23.1	 Consent of Independent Auditors. 24.1	 Powers of Attorney. 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, 1997.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
DATE March 2, 1998 JEFFERSON SMURFIT CORPORATION 		 (Registrant)
							BY /s/ Patrick J. Moore 	 Patrick J. Moore 							 Vice-President and Chief Financial 		 						 Officer 		 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the date indicated. 		 SIGNATURE		 	TITLE	 DATE
* 	Chairman of the Board Michael W. J. Smurfit			 and Director
* 	President and Chief Executive Officer Richard W. Graham		 	and Director (Principal Executive 	 						 	Officer)
/s/Patrick J. Moore 	 Vice-President and Chief March 2,1998 Patrick J. Moore 		 Financial Officer (Principal 	 Accounting Officer)
* 		Director Leigh J. Abramson
* 		Director Alan E. Goldberg
* 		Director Michael C. Hoffman
* 		Director G. Thompson Hutton	
* 		Director Michael M. Janson
* 	 	Director Howard E. Kilroy
* 	Director Thomas A. Reynolds, III
* 		Director James E. Terrill
* By /s/ Patrick J. Moore , 	pursuant to Powers of 	 Patrick J. Moore		 	Attorney filed as a part of 	As Attorney in Fact	 		the Form 10-K.
	JEFFERSON SMURFIT CORPORATION 	SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS 	(In Millions)