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Securities and Exchange Commission
Washington, D.C. 20549
Form 10-K
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
for the fiscal year ended Commission File
December 31, 1993 Number 0-11951
Jefferson Smurfit Corporation
(Exact name of registrant as specified in its charter)
Delaware 36-2931273
(State of incorporation or organization) (I.R.S. Employer
Identification)
Jefferson Smurfit Centre
8182 Maryland Avenue
St. Louis, Missouri 63105
(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number: (314) 746-1100
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
15 1/2% Junior Subordinated
Accrual Debentures of Container The Pacific Stock Exchange
Corporation of America Due 2004
Guarantee of 15 1/2% Junior Subordinated
Accrual Debentures of Container The Pacific Stock Exchange
Corporation of America Due 2004
Securities to be registered pursuant to Section 12(g) of the Act:
NONE
Indicate by check mark whether registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes x No
As of March 15, 1994, none of registrant's voting stock was held by
non-affiliates.
As of March 15, 1994, registrant had 1,000 shares of common stock,
$.01 par value per share outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: NONE
JEFFERSON SMURFIT CORPORATION
Annual Report on Form 10-K
December 31, 1993
TABLE OF CONTENTS
PART I
Page
Item 1. Business. . . . . . . . . . . . . . . . . . . . . . . . .1
Item 2. Properties. . . . . . . . . . . . . . . . . . . . . . . 10
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . 10
Item 4. Submission of Matters to a Vote of
Security Holders. . . . . . . . . . . . . . . . . . . . 13
PART II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters . . . . . . . . . . . . . 13
Item 6. Selected Financial Data . . . . . . . . . . . . . . . . 15
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . 17
Item 8. Financial Statements and Supplementary Data . . . . . . 27
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure. . . . . . . . . 53
PART III
Item 10. Directors and Executive Officers
of the Registrant . . . . . . . . . . . . . . . . . . . 53
Item 11. Executive Compensation. . . . . . . . . . . . . . . . . 60
Item 12. Security Ownership of Certain Beneficial Owners
and Management. . . . . . . . . . . . . . . . . . . . . 66
Item 13. Certain Relationships and Related Transactions. . . . . 67
PART IV
Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K . . . . . . . . . . . . . . . . 75
PART I
ITEM 1. BUSINESS
SUMMARY OF SIGNIFICANT TRANSACTIONS
Jefferson Smurfit Corporation ("JSC") was incorporated in 1976
under the laws of the State of Delaware. JSC is a wholly-owned
subsidiary of SIBV/MS Holdings, Inc. ("Holdings"), a corporation
formed in connection with the 1989 Transaction (as defined below),
50% of the voting stock of which is owned by Smurfit Packaging
Corporation ("Smurfit Packaging") and Smurfit Holdings B.V.
("Smurfit Holdings"). The remaining 50% is owned by The Morgan
Stanley Leveraged Equity Fund II, L.P. ("MSLEF II"). Holdings has
no operations other than its investment in JSC. MSLEF II is an
investment fund formed by Morgan Stanley & Co. Incorporated
("MS&CO."). Smurfit Packaging and Smurfit Holdings are wholly-
owned subsidiaries of Smurfit International B.V. ("SIBV"), which is
an indirect wholly-owned subsidiary of Jefferson Smurfit Group plc,
a corporation organized under the laws of the Republic of Ireland
("JS Group").
Container Corporation of America ("CCA") was incorporated in 1968
under the laws of the State of Delaware. On September 30, 1986,
JSC acquired a 50% equity interest in CCA. Prior to September 30,
1986, CCA was a wholly-owned subsidiary of Mobil Corporation.
In December 1989, (i) Holdings acquired the entire equity interest
in JSC, (ii) JSC acquired the entire equity interest in CCA, (iii)
The Morgan Stanley Leveraged Equity Fund, L.P., a Delaware limited
partnership ("MSLEF I"), and certain other private investors,
including MS&Co. and certain limited partners of MSLEF I investing
in their individual capacities (collectively, the "MSLEF I Group")
received $500 million in respect of their shares of CCA common
stock and (iv) SIBV received $41.75 per share, or an aggregate of
approximately $1.25 billion, in respect of its shares of JSC stock,
and the public stockholders received $43 per share of JSC stock.
Certain assets of JSC and CCA were also transferred to SIBV or one
of its affiliates. Holdings' acquisition of all of the outstanding
JSC common stock and CCA's acquisition of the 50% of its common
equity owned by the MSLEF I Group are referred to hereafter as the
"1989 Transaction". Financing for the 1989 Transaction was
provided through borrowings under bank credit facilities, the sale
of various debt securities, including $850.0 million of
subordinated notes (the "Subordinated Debt") and debentures (the
"Secured Notes") sold by CCA which are unconditionally guaranteed
by JSC, equity contributions by Holdings and available cash of JSC
and CCA.
In August 1992, proceeds from a $231.8 million capital contribution
by Holdings and a new $400 million senior secured term loan (the
"1992 Credit Agreement") were used to prepay $400 million of the
1989 term loan facility (the "1989 Credit Agreement"), retire
$193.5 million accreted value of the Junior Accrual Debentures and
prepay $19.1 million aggregate principal amount of the subordinated
note due in 1993. The proceeds from the capital contribution and
the 1992 Credit Agreement and the prepayments of the 1989 Credit
Agreement and the subordinated debt are referred to hereafter as
the "1992 Transaction". The 1989 Credit Agreement and the 1992
Credit Agreement are collectively referred to herein as the "Old
Bank Facilities".
Holdings is implementing a recapitalization plan (the
"Recapitalization Plan") to repay or refinance a substantial
portion of its indebtedness in order to improve operating and
financial flexibility by (i) reducing the level and overall cost of
debt, (ii) extending maturities of indebtedness, (iii) increasing
stockholders' equity and (iv) increasing its access to capital
markets. In the first quarter of 1994, Holdings filed a
registration statement with the Securities and Exchange Commission
(the "SEC") for an offering of 17,250,000 shares of common stock
(the "Equity Offerings"). In addition, CCA filed a registration
statement with the SEC for an offering of $300 million aggregate
principal amount of Series A Senior Notes due 2004 (the "Series A
Senior Notes") and $100 million aggregate principal amount of
Series B Senior Notes due 2002 (the "Series B Senior Notes"). The
Series A Senior Notes and the Series B Senior Notes are referred to
herein as the "Senior Notes" or the "Debt Offerings". The Equity
Offerings and the Debt Offerings are collectively referred to
herein as the "Offerings". The Recapitalization Plan includes,
among other things, (i) the Offerings, (ii) the sale of $100
million of Common Stock to SIBV (or a corporate affiliate) (the
"SIBV Investment") and (iii) a new credit agreement by JSC and CCA
(the "New Credit Agreement") consisting of a $450 million revolving
credit facility (the "New Revolving Credit Facility"), a $300
million term loan (the "Initial Term Loan") and a $900 million
delayed term loan (the "Delayed Term Loan" and, together with the
Initial Term Loan, the "New Term Loans"). Proceeds of the
Recapitalization Plan, exclusive of the Delayed Term Loan, will be
used to refinance all of the Company's indebtedness under the 1989
and 1992 Credit Agreements and the Secured Notes. The applications
of borrowings under the Delayed Term Loan shall be used to redeem
or repurchase the Subordinated Debt on approximately December 1,
1994 (the "Subordinated Debt Refinancing").
Prior to the date on which the Registration Statements are declared
effective by the SEC, Holdings intends to change its name to
"Jefferson Smurfit Corporation" and JSC intends to change its name
to "Jefferson Smurfit Corporation (U.S.)". All references in this
10-K to the "Company" or to "JSC" refer to the corporation
currently named Jefferson Smurfit Corporation and, when the context
requires, its consolidated subsidiaries. All references in this
10-K to "Holdings" refer to the corporation currently named SIBV/MS
Holdings, Inc.
GENERAL
The predecessor to the Company was founded in 1974 when JS Group,
a worldwide leader in the packaging products industry, commenced
operations in the United States by acquiring 40% of a small
paperboard and packaging products company. The remaining 60% of
that company was acquired by JS Group in 1977, and in 1978 net
sales were $42.9 million. The Company implemented a strategy to
build a fully integrated, broadly based, national packaging
business, primarily through acquisitions, including Alton Box Board
Company in 1979, the paperboard and packaging divisions of Diamond
International Corporation in 1982, 80% of Smurfit Newsprint
Corporation ("SNC") in 1986 and 50% of CCA in 1986. The Company
financed its acquisitions by using leverage and, in several cases,
utilized joint venture financing whereby the Company eventually
obtained control of the acquired company. While no major
acquisition has been made since 1986, the Company has made 18
smaller acquisitions and started up five new facilities which had
combined sales in 1993 of $280.3 million. JSC was formed in 1983
to consolidate the operations of the Company, and today the Company
ranks among the industry leaders in its two business segments,
Paperboard/Packaging Products and Newsprint. In 1993, the Company
had net sales of $2.9 billion, achieving a compound annual sales
growth rate of 32.6% for the period since 1978.
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. In 1993, the
Company's system of 16 paperboard mills produced 1,840,000 tons of
virgin and recycled containerboard, 829,000 tons of coated and
uncoated recycled boxboard and solid bleached sulfate ("SBS") and
206,000 tons of recycled cylinderboard, which were sold to the
Company's own converting operations or to third parties. The
Company's converting operations consist of 52 corrugated container
plants, 18 folding carton plants, and 16 industrial packaging
plants located across the country, with three plants located
outside the U.S. In 1993, the Company's container plants converted
1,942,000 tons of containerboard, an amount equal to approximately
105.5% of the amount it produced, its folding carton plants
converted 542,000 tons of SBS, recycled boxboard and coated natural
kraft, an amount equal to approximately 65.4% of the amount it
produced, and its industrial packaging plants converted 123,000
tons of recycled cylinderboard, an amount equal to approximately
59.7% of the amount it produced. The Company's
Paperboard/Packaging Products segment contributed 91.6% of the
Company's net sales in 1993.
The Company's paperboard operations are supported by its
reclamation division, which processed or brokered 3.9 million tons
of wastepaper in 1993, and by its timber division which manages
approximately one million acres of owned or leased timberland
located in close proximity to its virgin fibre mills. The
paperboard/packaging products operations also include 14 consumer
packaging plants.
In addition, the Company believes it is one of the nation's largest
producers of recycled newsprint. The Company's Newsprint segment
includes two newsprint mills in Oregon, which produced 615,000 tons
of recycled newsprint in 1993, and two facilities that produce
Cladwood, a construction material produced from newsprint and wood
by-products. The Company's newsprint mills are also supported by
the Company's reclamation division.
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:
1991 1992 1993
(Ton in thousands)
Containerboard
Production 1,830 1,918 1,840
Consumption 1,813 1,898 1,942
The Company's mills produce a full line of containerboard,
including unbleached kraft linerboard, mottled white linerboard and
recycled medium.
The Company believes it is the nation's largest producer of mottled
white linerboard, the largest producer of recycled medium and the
fifth largest producer of containerboard. Unbleached kraft
linerboard is produced at the Company's mills located in Fernandina
Beach and Jacksonville, Florida and mottled
white linerboard is produced at its Brewton, Alabama mill.
Recycled medium is produced at the Company's mills located in
Alton, Illinois, Carthage, Indiana, Circleville, Ohio and Los
Angeles, California. In 1993, the Company produced 1,018,000,
315,000 and 507,000 tons of unbleached kraft linerboard, mottled
white linerboard and recycled medium, respectively.
Large capital investment is required to sustain the Company's
containerboard mills, which employ state of the art computer
controlled machinery in their manufacturing processes. During the
last five years, the Company has invested approximately $246
million to enhance product quality, reduce costs, expand capacity
and increase production efficiency, as well as make required
improvements to stay in compliance with environmental regulations.
Major capital projects completed in the last five years include (i)
a rebuild of Jacksonville's linerboard machine to produce high
performance, lighter weight grades now experiencing higher demand,
(ii) modifications to Brewton's mottled white machine to increase
run speed by 100 tons per day and (iii) a project to reduce sulfur
emissions from the Fernandina Beach linerboard mill. A key
strategy for the next few years will be to reduce wood cost at its
virgin fibre mills by modifying methods of woodchip production and
handling, utilizing random length roundwood forms and continuing to
pursue forest management practices designed to enhance timberland
productivity.
The Company's sales of containerboard in 1993 were $670.6 million
(including $384.1 million of intracompany sales). Sales of
containerboard to its 52 container plants are reflected at prices
based upon those published by Official Board Markets which are
generally higher than those paid by third parties except in
exchange contracts.
The Company believes it is the third largest producer of corrugated
shipping containers in the U.S. 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 container plants serve local customers
and large national accounts and are located nationwide, generally
in or near large metropolitan areas. The Company's total sales of
corrugated shipping containers in 1993 were $1,175.7 million
(including $81.1 million of intracompany sales). Corrugated
shipping container sales volumes for 1991, 1992 and 1993 were
25,178, 26,593 and 27,268 million square feet, respectively.
RECYCLED BOXBOARD, SBS 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:
1991 1992 1993
(Tons in thousands)
Recycled Boxboard and SBS
Production 826 832 829
Consumption 561 551 542
The Company's mills produce recycled coated and uncoated boxboard
and SBS. The Company believes it is the nation's largest producer
of coated recycled boxboard, made from 100 percent recycled fibre,
which offers comparable quality to virgin boxboard for most
applications. The Company also believes that its premium-priced
SBS offers a high quality product for packaging applications.
Coated recycled boxboard is produced at the Company's 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. The Company believes its coated
recycled boxboard, known as MASTERCOAT, is recognized in the
industry for its high quality and extensive range of grades and
calipers. The Brewton machine produces four basic grades of SBS
including MASTERPRINT, which is ideally suited for converting into
folding cartons and related end uses, MASTERSEAL and MASTERVAC,
which are used for visual carded packaging that facilitates
merchandising at the point of sale, and MASTERWITE, which is
designed for intricately printed and die-cut greeting cards and
other specialty uses. In 1993, the Company produced 653,000 and
176,000 tons of recycled boxboard and SBS, respectively. The
Company's total sales of recycled boxboard and SBS in 1993 were
$409.7 million (including $197.2 million of intracompany sales).
The Company believes it is the nation's largest producer of folding
cartons, offering a broad range of converting capabilities,
including web and sheet litho, rotogravure and flexo printing and
a full line of structural and design graphics services. The
Company's 18 folding carton plants convert recycled boxboard and
SBS, including approximately 49% of the boxboard and SBS produced
by the Company, into folding cartons. Folding cartons are used
primarily to protect customers' products while providing point of
purchase advertising. The Company makes folding cartons for a wide
variety of applications, including food and fast foods, detergents,
paper products, beverages, health and beauty aids and other
consumer products. Customers range from small local accounts to
large national and multinational accounts. The Company's folding
carton plants are located nationwide, generally in or near large
metropolitan areas. The Company's sales of folding cartons in 1993
were $648.2 million (including $2.2 million of intracompany sales).
Folding carton sales volumes for 1991, 1992 and 1993 were 482,000,
487,000 and 475,000 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 response time and
assisting customers in innovating package designs.
The Company provides marketing consultation and research activities
through its Design and Market Research (DMR) Laboratory. 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.
RECYCLED CYLINDERBOARD AND INDUSTRIAL PACKAGING
The Company's recycled cylinderboard and industrial packaging
operations are also integrated. Tons of recycled cylinderboard
produced and converted for the last three years were:
1991 1992 1993
(Tons in thousands)
Recycled Cylinderboard
Production 196 213 206
Consumption 102 120 123
The Company's recycled cylinderboard mills are located in: Tacoma,
Washington, Monroe, Michigan (2 mills), Lafayette, Indiana, and
Cedartown, Georgia. In 1993, total sales of recycled cylinderboard
were $61.8 million (including $17.9 million of intracompany sales).
The Company's 16 industrial packaging plants convert recycled
cylinderboard, including a portion of the recycled cylinderboard
produced by the Company, 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 fibre partitions for the pharmaceutical,
electronics, cosmetics and plastics industries. In addition, the
Company produces a patented self-locking partition especially
suited for automated packaging and product protection. The Company
believes it is the nation's third largest producer of tubes and
cores. The Company's industrial packaging sales in 1993 were $88.1
million (including $1.6 million in intracompany sales).
CONSUMER PACKAGING
The Company manufactures a wide variety of consumer packaging
products. These products include flexible packaging, printed paper
labels, foil labels, and labels that are heat transferred to
plastic containers for a wide range of industrial and consumer
product applications. The contract packaging plants provide
cartoning, bagging, liquid- or powder-filling, high-speed
overwrapping and fragranced advertising products. 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. The Company also designs, manufactures and
sells custom machinery including specialized machines that apply
labels to customers' packaging. The Company currently has 14
facilities including the engineering service center referred to
below and has improved their competitiveness by installing state-
of-the-art production equipment.
In addition, the Company has an engineering services center,
specializing in automated production systems and highly specialized
machinery, providing expert consultation, design and equipment
fabrication for consumer and industrial products manufacturers,
primarily from the food, beverage and medical products industries.
Total sales of consumer packaging products and services were $179.8
million (including $15.1 million of intracompany sales).
RECLAMATION OPERATIONS; FIBRE RESOURCES AND TIMBER PRODUCTS
The raw materials essential to the Company's business are reclaimed
fibre from wastepaper and wood, in the form of logs or chips. The
Brewton, Circleville, Jacksonville and Fernandina mills use
primarily wood fibres, while the other paperboard mills use
reclaimed fibre exclusively. The newsprint mills use approximately
45% wood fibre and 55% reclaimed fibre.
The Company believes it is the nation's largest processor of
wastepaper. The use of recycled products in the Company's
operations begins with its reclamation division which operates 26
facilities that collect, sort, grade and bale wastepaper, as well
as collect aluminum and glass. The reclamation division provides
valuable fibre resources to both the paperboard and newsprint
segments of the Company as well as to other producers. Many of the
reclamation facilities are located in close proximity to the
Company's recycled paperboard and newsprint mills, assuring
availability of supply, when needed, with minimal shipping costs.
In 1993, the Company processed 3.9 million tons of wastepaper,
which the Company believes is approximately twice the amount of
wastepaper processed by its closest competitor. The amount of
wastepaper collected and the proportions sold internally and
externally by the Company's reclamation division for the last three
years were:
1991 1992 1993
(Tons in thousands)
Wastepaper collected by Reclamation Division 3,666 3,846 3,907
Percent sold internally 49.7% 49.7% 48.8%
Percent sold to third parties 50.3% 50.3% 51.2%
The reclamation division also operates a nationwide brokerage
system whereby it purchases and resells wastepaper (including
wastepaper for use in its recycled fibre mills) on a regional and
national contract basis. Such contracts provide bulk purchasing,
resulting in lower prices and cleaner wastepaper. Total sales of
recycled materials for 1993 were $242.9 million (including $120.8
million of intracompany sales).
During 1993, the wastepaper which was reclaimed by the Company's
reclamation plants and brokerage operations satisfied all of the
Company's mill requirements for reclaimed fibre.
The Company's timber division manages approximately one million
acres of owned and leased timberland. In 1993, approximately 53%
of the timber harvested by the Company was used in its
Jacksonville, Fernandina and Brewton Mills. The Company harvested
808,000 cords of timber which would satisfy approximately 32% of
the Company's requirements for woodfibres. The Company's woodfibre
requirements not satisfied internally are purchased on the open
market or under long-term contracts. In the past, the Company has
not experienced difficulty obtaining an adequate supply of wood
through its own operations or open market purchases. The Company
is not aware of any circumstances that would adversely affect its
ability to satisfy its wood requirements in the foreseeable future.
In recent years, a shortage of wood fibre in the spotted owl
regions in the Northwest has resulted in increases in the cost of
virgin wood fibre. However, the Company's use of reclaimed fibre
in its newsprint mills has mitigated the effect of this in
significant part.
In 1993, the Company's total sales of timber products were $227.8
million (including $185.1 million of intracompany sales).
NEWSPRINT SEGMENT
NEWSPRINT MILLS
The Company believes it is one of the largest producer of recycled
newsprint and the fourth largest producer overall of newsprint in
the United States. The Company's newsprint mills are located in
Newberg and Oregon City, Oregon. During 1991, 1992 and 1993, the
Company produced 614,000, 615,000 and 615,000 tons of newsprint,
respectively. In 1993, total sales of newsprint were $219.5
million (none of which were intracompany sales).
For the past three years, an average of approximately 56% of the
Company's newsprint production has been sold to The Times Mirror
Company ("Times Mirror") pursuant to a long-term newsprint
agreement (the "Newsprint Agreement") entered into in connection
with the Company's acquisition of SNC stock in February 1986.
Under the terms of the Newsprint Agreement, the Company supplies
newsprint to Times Mirror generally at prevailing West Coast market
prices. Sales of newsprint to Times Mirror in 1993 amounted to
$115.2 million.
CLADWOOD
Cladwood is a wood composite panel used by the housing industry,
manufactured from sawmill shavings and other wood residuals and
overlayed with recycled newsprint. The Company has two Cladwood
plants located in Oregon. Total sales for Cladwood in 1993 were
$29.1 million ($.5 million of which were intracompany sales).
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 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. The
market for the Newsprint segment is also highly competitive.
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 works with its
manufacturing and sales operations, providing state-of-the-art
technology, 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
Subsequent to closure in early 1994 of three container plants, two
folding carton plants and one recycled boxboard mill, the Company
had approximately 16,600 employees at March 1, 1994, of which
approximately 11,300 employees (68%), are represented by collective
bargaining units. The expiration date of union contracts for the
Company's major facilities are as follows: the Alton mill, expiring
June 1994; the Newberg mill, expiring March 1995; the Oregon City
mill, expiring March 1997; the Brewton mill, expiring October 1997;
the Fernandina mill, expiring June 1998; a group of 12 properties,
including 4 paper mills and 8 corrugated container plants, expiring
June 1998; and the Jacksonville mill, expiring June 1999. 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.
ITEM 2. PROPERTIES
The Company's properties at December 31, 1993 are summarized in the
table below. The table reflects the previously mentioned closure
in early 1994 of three container plants, two folding carton plants
and one recycled boxboard mill, but does not reflect the additional
closures contemplated by the Restructuring Program. Approximately
62% of the Company's investment in property, plant and equipment is
represented by its paperboard and newsprint mills.
Number
of State
Facilities Locations
Paperboard mills:
Containerboard mills 7 6
Boxboard mills 4 4
Cylinderboard mills 5 4
Newsprint mills 2 1
Reclamation plants 26 12
Converting facilities:
Corrugated container plants 52 22
Folding carton plants 18 10
Industrial packaging plants 16 11
Consumer packaging plants 14 9
Cladwood plants 2 1
Wood product plants 1 1
Total 147 28
In addition to its manufacturing facilities, the Company owns and
leases approximately 758,000 acres and 226,000 acres of timberland,
respectively, and also operates wood harvesting facilities.
ITEM 3. LEGAL PROCEEDINGS
Litigation
In May 1993, CCA received a notice of default on behalf of Otis B.
Ingram, as executor of the estate of Naomi M. Ingram, and Ingram-
LeGrand Lumber Company with respect to certain timber purchase
agreements and timber management agreements between CCA and such
parties dated November 22, 1967 pertaining to approximately 30,000
acres of property in Georgia (the "Agreements"). In June 1993, CCA
filed suit against such parties in the United States District
Court, Middle District of Georgia, seeking declaratory and
injunctive relief and damages in excess of $3 million arising out
of the defendants' alleged breach and anticipatory repudiation of
the Agreements. The defendants have filed an answer and
counterclaim seeking damages in excess of $14 million based on
allegations that CCA breached the Agreements and failed to pay for
timber allegedly stolen or otherwise removed from the property by
CCA or third parties. The alleged thefts of timber are being
investigated by the Georgia Bureau of Investigation, which has
advised CCA that it is not presently a target of this
investigation. CCA has filed a third-party complaint against
Keadle Lumber Enterprises, Inc. seeking indemnification with
respect to such alleged thefts and has filed a reply to the
defendants' counterclaims denying the allegations and any liability
to the defendants. Management does not believe that the outcome of
this litigation will have a material adverse effect on the
Company's financial condition or operations.
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 operations.
Environmental Matters
Federal, state and local environmental requirements, particularly
relating to air and water quality, 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 and emissions 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 and
emissions.
Occasional violations of permit terms 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:
In March 1992, JSC entered into an administrative consent order
with the Florida Department of Environmental Regulation to carry
out any necessary assessment and remediation of JSC-owned
property in Duval County, Florida that was formerly the site of
a sawmill that dipped lumber into a chemical solution.
Assessment is on-going, but initial data indicates soil and
groundwater contamination that may require nonroutine
remediation. Management believes that the probable costs of this
site, taken alone or with potential costs at other Company-owned
properties where some contamination has been found, will not have
a material adverse effect on its financial condition or
operations.
In February 1994, JSC entered into a consent decree with the
State of Ohio in full satisfaction of all liability for alleged
violations of applicable standards for particulate and opacity
emissions with respect to two coal-fired boilers at its Lockland,
Ohio recycled boxboard mill (which has been permanently closed as
part of the Company's restructuring program), and is required to
pay $122,000 in penalties and enforcement costs pursuant to such
consent decree. The United States Environmental Protection
Agency has also issued a notice of violation with respect to such
emissions, but has informally advised JSC's counsel that no
Federal enforcement is likely to commenced in light of the
settlement with the State of Ohio.
The Company also faces potential liability as a result of releases,
or threatened releases, of hazardous substances into the
environment from various sites owned and operated by third parties
at which Company-generated wastes have allegedly been deposited.
Generators of hazardous substances sent to off-site disposal
locations at which environmental problems exist, as well as the
owners of those sites and certain other classes of persons
(generally referred to as "potentially responsible parties" or
"PRPs"), are, in most instances, subject to joint and several
liability for response costs for the investigation and remediation
of such sites under the Comprehensive Environmental Response,
Compensation and Liability Act ("CERCLA") and analogous state laws,
regardless of fault or the legality of the original disposal. The
Company has received notice that it is or may be a PRP at a number
of federal and/or state sites where remedial action may be
required, and as a result may have joint and several liability for
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 the
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:
In January 1990, CCA filed a motion for leave to intervene and
for modification of the consent decree in United States v.
General Refuse Services, a case pending in the United States
District Court for the Southern District of Ohio. CCA contends
that it should be allowed to participate in the proposed consent
decree, which provides for remediation of alleged releases or
threatened releases of hazardous substances at a site in Miami
County, near Troy, Ohio, according to a plan approved by the
United States Environmental Protection Agency, Region V (the
"Agency"). The Court granted CCA's motion to intervene in this
litigation, but denied CCA's motion for an order denying entry of
the consent decree. Consequently, the consent decree has been
entered without CCA's being included as a party to the decree,
meaning that CCA may have some exposure to potential claims for
contribution to remediation costs incurred by other participants
and for non-reimbursed response costs incurred by the Agency,
which costs are reported by the Agency as $3.4 million as of
February 1994. CCA's appeal of the Court's decision to the Sixth
Circuit Court of Appeals is pending.
In December 1991, the United States filed a civil action against
CCA in United States District Court, Southern District of Ohio,
to recover its unreimbursed costs at the Miami County site, and
CCA subsequently filed a third-party complaint against certain
entities that had joined the original consent decree. In October
1993, the United States filed an additional suit against CCA in
the same court seeking injunctive relief and damages up to
$25,000 per day from March 27, 1989 to the present, based on
CCA's alleged failure to properly respond to the Agency's
document and information requests in connection with this site.
In July 1993, counsel for CCA was advised by the Office of the
United Stated Attorney, Northern District of Illinois that a
criminal inquiry is also underway relating to CCA's responses to
the Agency's document and information requests. CCA is
investigating the circumstances regarding its responses, and is
pursuing settlement with respect to all matters relating to the
Miami County Site.
CCA has paid approximately $768,000 pursuant to two partial
consent decrees entered into in 1990 and 1991 with respect to
clean-up 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.
In addition to other Federal and State laws regarding hazardous
substance contamination at sites owned or operated by the Company,
the New Jersey Industrial Site Recovery Act ("ISRA") requires that
a "Negative Declaration" or a "Cleanup Plan" be filed and approved
by the New Jersey Department of Environmental Protection and Energy
("DEPE") as a precondition to the "transfer" of an "industrial
establishment". The ISRA regulations provide that a transferor may
close a transaction prior to the DEPE's approval of a negative
declaration if the transferor enters into an administrative consent
order with the DEPE. The Company is currently a signatory to
administrative consent orders with respect to two formerly leased
or owned industrial establishments and has recently closed a
facility and received a negative declaration with respect thereto.
Management believes that any requirements that may be imposed by
the DEPE with respect to these sites will not have a materially
adverse effect on the financial condition or operations of the
Company.
The Company's paperboard and newsprint mills are large consumers of
energy, using either natural gas or coal. Approximately 67% 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 concerning sulfur dioxide and particulate
emissions.
Because various pollution control standards are subject to change,
it is not possible at this time to predict the amount of capital
expenditures that will ultimately be required to comply with future
standards. In particular, the United States Environmental
Protection Agency has proposed a comprehensive rule governing the
pulp, paper and paperboard industry, which could require
substantial compliance expenditures on the part of the Company.
For the past three years, the Company has spent an average of
approximately $10 million annually on capital expenditures for
environmental purposes. Further sums may be required in the
future, although, in the opinion of management, such expenditures
will not have a material effect on its financial condition or
results of operations. The amount budgeted for such expenditures
for fiscal 1994 is approximately $10 million. Since the Company's
competitors are, or will be, subject to comparable pollution
control standards, including the proposed rule discussed above, if
implemented, management is of the opinion that compliance with
future pollution standards will not adversely affect the Company's
competitive position.
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 1993.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER
MATTERS
MARKET INFORMATION
CCA is an indirect wholly-owned subsidiary of JSC. All of the
outstanding common stock of JSC ("JSC Common Stock") is owned by
Holdings. As a result, there is no established public market for
either the JSC Common Stock or the common stock of CCA ("CCA Common
Stock").
DIVIDENDS
In connection with the 1989 Transaction, the number of outstanding
shares of JSC Common Stock was reduced from 38,557,721 to 1,000.
There have been no dividends on the JSC Common Stock or the CCA
Common Stock since the date of the 1989 Transaction.
Following the consummation of the Offerings, the Senior Notes and
the 9.75% Senior Unsecured Notes due 2003 (the "1993 Notes") will
allow each of JSC and CCA to pay dividends such that the Company
would be able, and permitted thereunder, to pay dividends.
However, the New Credit Agreement and, unless and until the
Subordinated Debt Refinancing is consummated, the indentures
governing the Subordinated Debt, will prohibit the payment of any
dividends by JSC or CCA for the foreseeable future. Delaware law
generally requires that dividends are payable only out of a
company's surplus or current net profits in accordance with the
General Corporation Law of Delaware. Such Delaware law limitations
apply to the payment of dividends by JSC and CCA. Any
determination to pay cash dividends in the future will be at the
discretion of the Board of Directors and will be dependent upon the
Company's results of operations, financial condition, contractual
restrictions and other factors deemed relevant at the time by the
Board of Directors.
ITEM 6. SELECTED FINANCIAL DATA
(In millions, except statistical data)
1993 1992 1991 1990 1989
Summary of Operations
Net sales $2,947.6 $2,998.4 $2,940.1 $2,910.9 $2,936.3
Cost of goods sold 2,573.1 2,499.3 2,409.4 2,296.1 2,275.9
Selling and administrative expenses 239.2 231.4 225.2 218.8 254.9
Restructuring charge 96.0
Environmental and other charges 54.0
Income (loss) from operations (14.7) 267.7 305.5 396.0 405.5
Recapitalization expenses (139.2)
Interest expense (254.2) (300.1) (335.2) (337.8) (119.1)
Other, net 8.1 5.2 5.4 6.5 8.4
Income (loss) before income taxes,
equity in earnings (loss) of
affiliates, minority interests,
extraordinary item and
cumulative effect of
accounting changes (260.8) (27.2) (24.3) 64.7 155.6
Provision for (benefit from)
income taxes (83.0) 10.0 10.0 35.4 74.0
Equity in earnings (loss)
of affiliates .5 (39.9) (2.2) 11.9
Minority interest in
SNC (3.2) (2.7) 2.9 5.3 3.6
CCA, prior to acquisition 24.4
Income (loss) before
extraordinary item and
cumulative effect of
accounting changes (174.6) (34.0) (77.1) 21.8 65.5
Extraordinary item:
Loss from early extinguishment
of debt, net of income tax benefit (37.8) (49.8) (29.7)
Cumulative effect of accounting
changes:
Postretirement benefits (37.0)
Income taxes 20.5
Net income (loss) $ (228.9) $ (83.8) $ (77.1) $ 21.8 $ 35.8
Other Financial Data
Working capital $ 40.0 $ 105.7 $ 76.9 $ 60.8 $ 156.9
Property, plant and equipment and
timberland, net 1,636.0 1,496.5 1,525.9 1,527.3 1,422.3
Total assets 2,597.1 2,436.4 2,460.1 2,447.9 2,436.7
Long-term debt (excluding
current maturities) 2,619.1 2,503.0 2,650.4 2,636.7 2,684.4
Deferred income taxes
(excluding current portion) 232.2 159.8 158.3 168.6 145.5
Stockholder's deficit (1,057.8) (828.9) (976.9) (899.4) (921.6)
Property and timberland additions 117.4 97.9 118.9 192.0 201.3
Depreciation, depletion and
amortization 130.8 134.9 130.0 122.6 94.9
ITEM 6. SELECTED FINANCIAL DATA (cont'd)
(In millions, except statistical data)
1993 1992 1991 1990 1989
Other Information (tons in thousands)
Containerboard production (tons) 1,840 1,918 1,830 1,797 1,792
Boxboard production (tons) 829 832 826 809 816
Newsprint production (tons) 615 615 614 623 582
Corrugated shipping containers
sold (tons) 1,936 1,871 1,768 1,655 1,581
Folding cartons sold (tons) 475 487 482 455 444
Fibre reclaimed and brokered (tons) 3,907 3,846 3,666 3,547 3,549
Timberland owned or leased
(thousand acres) 984 978 978 968 992
[FN]
Data for the year ended December 31, 1989, includes CCA's results of
operations as if CCA were consolidated with JSC as of January 1, 1989.
Equity in earnings (loss) of affiliates in 1991 includes after-tax
charges of $29.3 million and $6.7 million for the write-off
of the Company's equity investments in Temboard and Company
Company Limited Partnership, Inc., and PCL Industries Limited,
respectively.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General
Industry Conditions
Sales of containerboard and corrugated shipping containers, two of
the Company's most important products, are generally subject to
changes in industry capacity and cyclical changes in the economy,
both of which can significantly impact selling prices and the
Company's profitability. Operating rates in the industry during
1992 and 1991 were at high levels relative to demand, which was
lower due to the sluggish U.S. economy and a decline in export
markets. This imbalance resulted in excess inventories in the
industry and lower prices for the Company's containerboard and
corrugated shipping container products, which began early in 1991
and continued throughout 1992 and most of 1993. From the first
quarter of 1991 through the third quarter of 1993 industry
linerboard prices fell from $347 per ton to $295 per ton. During
1993, industry operating rates were lower as many containerboard
producers, including the Company, took downtime at containerboard
mills to reduce the excess inventories. By the end of the third
quarter of 1993, inventory levels had decreased significantly. The
lower level of inventories and the stronger U.S. economy provided
what the Company believes were improved market conditions late in
1993, enabling the Company and other producers to implement a $25
per ton price increase for linerboard. A further linerboard
increase of $30 per ton was implemented by all major integrated
containerboard producers, including the Company, effective March 1,
1994.
Newsprint prices have fallen substantially since 1990 due to supply
and demand imbalances. During 1991 and 1992, new capacity of
approximately 2.0 million tons annually came on line, representing
an approximate 12% increase in supply. At the same time, U.S.
consumption of newsprint fell, due to declines in readership and ad
linage. As prices fell, certain high cost, virgin paper machines,
primarily in Canada, representing approximately 1.2 million tons of
annual production capacity, were shut down and remained idle during
1993. While supply was diminished, a price increase announced for
1993 was unsuccessful. Although market demand has improved in the
fourth quarter of 1993, the Company does not expect significant
improvement in prices before the second quarter of 1994.
In addition, prices for many of the Company's other products,
including solid bleached sulfate, recycled boxboard, folding
cartons and reclaimed fibre weakened in 1993 and 1992. While the
effect of the reclaimed fibre price decreases is unfavorable to the
reclamation products division, it is favorable to the Company
overall because of the reduction in fibre cost to the Company's
paper mills that use reclaimed fibre. The Company has taken
various steps to extend its business into less cyclical product
lines, such as industrial packaging and consumer packaging.
As a result of these industry conditions, the Company's gross
margin declined from 18.1% in 1991 to 16.6% in 1992 and 12.7% in
1993.
The Company's sales and profitability have historically been more
sensitive to price changes than changes in volume. There can be no
assurance that announced price increases for the Company's products
can be implemented, or that prices for the Company's products will
not decline from current levels.
Cost Reduction Initiatives
The recent cyclical downturn in the Paperboard/Packaging Products
segment has led management to undertake several major cost
reduction initiatives. In 1991, the Company implemented an
austerity program to freeze staff levels, defer certain
discretionary spending programs and more aggressively manage
capital expenditures and working capital in order to conserve cash
and reduce interest expense. While these measures successfully
reduced expenses and increased cash flow, the length and extent of
the industry downturn led the Company, in 1993, to initiate a new
six year plan to reduce costs, increase volume and improve product
mix (the "Plan").
The Plan is a systematic Company-wide effort designed to improve
the cost competitiveness of all the Company's operating facilities
and staff functions. In addition to increases in volume and
improvements in product mix resulting from a focus on less
commodity oriented business at its converting operations, the
program will focus on opportunities to reduce costs and other
measures, including (i) productivity improvements, (ii) capital
projects which provide high returns and quick paybacks, (iii)
reductions in fibre cost, (iv) reductions in the purchase cost of
materials, (v) reductions in personnel costs and (vi) reductions in
waste cost.
Restructuring Program
To further counteract the downturn in the industries in which the
Company operates, management examined its cost and operating
structure and developed a restructuring program (the "Restructuring
Program") to improve its long-term position. As a result of
management's review, in September 1993, the Company recorded a pre-
tax charge of $96 million including a provision for direct expenses
associated with (i) plant closures (consisting primarily of
employee severance and termination benefits, lease termination
costs and environmental costs); (ii) asset write-downs (consisting
primarily of write-off of machinery no longer used in production
and nonperforming machine upgrades); (iii) employee severance and
termination benefits for the elimination of salaried and hourly
personnel in operating and management realignment; and (iv)
relocation of employees and consolidation of plant operations.
Management anticipates that it will take approximately two to three
years to complete the Restructuring Program due to ongoing customer
demands. The Restructuring Program is expected to reduce
production costs, employee expenses and depreciation charges. As
part of the Restructuring Program, the Company closed certain high
cost operating facilities, including a coated recycled boxboard
mill and five converting plants, in January 1994. While future
benefits of the Restructuring Program are uncertain, the operating
losses in 1993 for the plants shut down in January 1994 and those
contemplated in the future were $31 million. While the Company
believes that it would have realized financial benefits in 1993 had
these plants been shut down at the beginning of the year, and that
it will realize such benefits in future periods, no assurances can
be given in this regard and, in particular, no assurances can be
given as to what portion of such loss would not have been realized
in 1993 had such plants been shut down for the entire year.
The $96 million charge consists of approximately $43 million for
the write-down of assets at closed facilities and certain other
nonproductive assets and $53 million of future cash expenditures.
Significant anticipated cash expenditures reflected in the above
amount include $33 million of plant closure costs, $5 million of
employee severance and termination benefits and $7 million of
consolidation and relocation of plant employees and equipment, a
substantial portion of which will be paid in 1994, 1995 and 1996.
Environmental Matters
The Company recorded a provision of $54 million of which $39
million relates to environmental matters, representing asbestos and
PCB removal, solid waste cleanup at existing and former operating
sites, and expenses for response costs at various sites where the
Company has received notice that it is a potentially responsible
party ("PRP"). The Company, as well as other companies in the
industry, faces potential environmental liability related to
various sites at which wastes have allegedly been deposited. The
Company has received notice that it is or may be a PRP at a number
of federal and state sites (the "Sites") where remedial action may
be required. Because the laws that govern the clean up 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 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 ten Sites where final settlement
has not been reached and where the Company's potential liability is
expected to exceed de minimis levels. Accordingly, the Company
believes that its estimated total probable liability for response
costs at the Sites was adequately reserved at December 31, 1993.
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.
Results of Operations
The following tables present net sales on a segment basis for the
years ended December 31, 1993, 1992 and 1991 and an analysis of
period-to-period increases (decreases) in net sales (in millions):
NET SALES BY SEGMENT
Year Ended December 31,
1993 1992 1991
Paperboard/Packaging Products $2,699.5 $2,751.0 $2,653.9
Newsprint 248.1 247.4 286.2
Total net sales $2,947.6 $2,998.4 $2,940.1
NET SALES ANALYSIS
1993 1992
Compared to Compared to
1992 1991
Increase (decrease) due to:
Sales price and product mix
Paperboard/Packaging Products $(91.2) $ .8
Newsprint (3.0) (39.4)
(94.2) (38.6)
Sales volume
Paperboard/Packaging Products 15.8 88.7
Newsprint 3.7 .6
19.5 89.3
Acquisitions and new facilities
Paperboard/Packaging Products 34.9 9.8
Plant closings and asset distributions
Paperboard/Packaging Products (11.0) (2.2)
Total net sales increase (decrease) $(50.8) $ 58.3
1993 Compared to 1992
The Company's net sales for 1993 decreased 1.7% to $2.95 billion
compared to $3.0 billion in 1992. Net sales decreased 1.9% in the
Paperboard/Packaging Products segment and increased 0.3% in the
Newsprint segment.
The decrease in Paperboard/Packaging Products segment sales for
1993 was due primarily to lower prices and changes in product mix
for containerboard, corrugated shipping containers and folding
cartons. This decrease was partially offset by an increase in
sales volume primarily of corrugated shipping containers, which set
a record in 1993. A newly constructed corrugated container
facility and several minor acquisitions in 1992 caused net sales to
increase $34.9 million for 1993.
The net sales increase in the Newsprint segment was a result of an
increase in sales volume in 1993 compared to 1992, partially offset
by a decline in sales prices.
Cost of goods sold as a percent of net sales for 1993 and 1992 were
85.9% and 81.9%, respectively, for the Paperboard/Packaging
Products segment and 102.8% and 99.0%, respectively, for the
Newsprint segment. The increase in cost of goods sold as a percent
of net sales for the Paperboard/Packaging Products segment was due
primarily to the aforementioned changes in pricing and product mix.
The increase in the cost of goods sold as a percent of net sales
for the Newsprint segment was due primarily to the higher cost of
energy and fibre and decreases in sales price. In 1993, the
Company changed the estimated depreciable lives of its paper
machines and major converting equipment. These changes were made
to better reflect the estimated periods during which the assets
will remain in service and were based upon the Company's historical
experience and comparable industry practice. These changes were
made effective January 1, 1993 and had the effect of reducing
depreciation expense by $17.8 million and decreasing the 1993 net
loss by $11.0 million.
Selling and administrative expenses increased to $239.2 million
(3.4%) for 1993 compared to $231.4 million for 1992. The increase
was due primarily to higher provisions for retirement costs,
acquisitions, new facilities and other costs.
In order to minimize significant year-to-year fluctuations in
pension cost caused by financial market volatility, the Company
changed, effective January 1, 1993, the method of accounting for
the recognition of fluctuations in the market value of pension
assets. The effect of this change on 1993 results of operations,
including the cumulative effect of prior years, was not material.
See Note 8 to the Company's consolidated financial statements.
The Company reduced its weighted average discount rate in measuring
its pension obligations from 8.75% to 7.6% and its rate of increase
in compensation levels from 5.5% to 4.0% at December 31, 1993. The
net effect of changing these assumptions was the primary reason for
the increase in the projected benefit obligations and the changes
are expected to increase pension cost by approximately $3.4 million
in 1994.
As a result of the $96 million restructuring charge, $54 million
environmental and other charges, and the lower margins, primarily
for newsprint and containerboard products, the Company had a loss
from operations of $14.7 million for 1993, compared to $267.7
million income from operations for 1992.
Interest expense for 1993 declined $45.9 million due to lower
effective interest rates and the lower level of subordinated debt
outstanding resulting primarily from the 1992 Transaction.
The benefit from income taxes for 1993 was $83.0 million compared
to a tax provision of $10.0 million in 1992. The significant
difference in the income tax provision from 1993 to 1992 results
from the use of the liability method of accounting which restored
deferred income taxes and increased the related asset values for
tax effects previously recorded as a reduction of the carrying
amount of the related assets under prior business combinations.
The Company's effective tax rate for 1993 was lower than the
Federal statutory tax rate due to the nondeductibility of goodwill
amortization and a $5.7 million provision to adjust deferred tax
assets and liabilities in 1993 due to the enacted Federal income
tax rate change from 34% to 35%.
Effective January 1, 1993, the Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for
Income Taxes" and SFAS No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions". The cumulative
effect of adopting SFAS No. 109 was to increase net income for 1993
by approximately $20.5 million. The cumulative effect of adopting
SFAS No. 106 was to decrease net income for 1993 by approximately
$37 million. The Company will adopt SFAS No. 112 "Employers'
Accounting for Postemployment Benefits" in 1994, the effect of
which is not expected to be material.
The loss before extraordinary item and cumulative effect of
accounting changes for 1993 was $174.6 million, compared to $34.0
million for the comparable period in 1992. The Company recorded an
extraordinary loss of $37.8 million (net of income tax benefits of
$21.7 million) for the early extinguishment of debt associated with
the issuance of the 1993 Notes.
1992 Compared to 1991
Net sales for 1992 increased to $3.0 billion (2.0%) compared to
$2.94 billion in 1991. Net sales increased 3.7% in the
Paperboard/Packaging Products segment and decreased 13.6% in the
Newsprint segment.
The increase in Paperboard/Packaging Products segment sales was due
primarily to a 5.6% increase in sales volume for corrugated
shipping containers. Segment sales were also positively affected
by increases in sales volumes for papertubes and partitions and to
a lesser extent for folding cartons and reclamation products.
Prices of containerboard products improved over 1991 but did not
increase sufficiently to cover cost increases, causing margins to
be somewhat lower in 1992. Prices for most of the Company's other
packaging products have declined compared to 1991. A minor
acquisition in 1992 and the operation of new facilities in the
Paperboard/Packaging Products segment resulted in an increase in
net sales of $9.8 million, while plant closings caused net sales to
decrease by $2.2 million.
The net sales decrease in the Newsprint segment was a result of the
lower sales prices as discussed above. Newsprint sales volume for
1992 was virtually the same as 1991.
The Company continued to benefit from certain austerity measures
first implemented during 1991 to help offset the impact of the
recession. These measures had a positive effect on cost of goods
sold and selling and administrative expenses. Cost of goods sold
as a percent of net sales for 1992 and 1991 were 81.9% and 81.8%,
respectively, for the Paperboard/Packaging Products segment and
99.0% and 83.1% respectively, for the Newsprint segment. The
increase in the Newsprint segment was due primarily to the
aforementioned decrease in sales price.
Selling and administrative expense as a percent of net sales for
1992 was 7.7%, unchanged from 1991. The Company continued to
benefit from certain cost containment measures implemented in 1991
to reduce expenses to help offset the impact of the recession and
inflation.
Income from operations for 1992 decreased 12.4% to $267.7 million
as a result of the low average selling prices for newsprint and
packaging products discussed above.
Interest expense for 1992 was lower by $35.1 million, due to lower
effective interest rates and the lower level of debt outstanding as
a result of the 1992 Transaction. During 1992, the Company
replaced $425.0 million of mature swaps with $400.0 million of the
new two-year fixed interest rate swaps at an annual savings of
approximately 3.8% on such amount (equivalent to an annual savings
of approximately $15.1 million).
The Company recorded a $10.0 million income tax provision to both
1992 and 1991 on income before income taxes, equity in earnings
(loss) of affiliates and extraordinary item of $27.2 million and
$24.3 million, respectively. The tax provisions for 1992 and 1991
were higher than the Federal statutory tax rate due to several
factors, the most significant of which was the impact of permanent
differences from applying purchase accounting.
Equity in loss of affiliates for 1991 included a write-down of
$36.0 million with respect to the Company's equity investments in
Temboard and Company Limited Partnership and PCL Industries
Limited. See Note 3 to the Company's consolidated financial
statements. For 1992 the Company had an extraordinary loss of
$49.8 million (net of income tax benefits of $25.8 million) for the
early extinguishment of debt associated with the 1992 Transaction.
Impact of Inflation and Changing Prices
The Company uses the LIFO method of accounting for approximately
81% of its inventories. Under this method, the cost of products
sold reported in the financial statements approximates current cost
and thus reduces the distortion in reported income due to
increasing costs. In recent years, inflation has not had a
material effect on the financial position or results of operations
of the Company.
Liquidity and Capital Resources
The Company's primary uses of cash for the next several years will
be principal and interest payments on its indebtedness and capital
expenditures.
In April 1993, the Company issued $500 million aggregate principal
amount of the 1993 Notes. Proceeds of the 1993 Notes were used to
refinance a substantial portion of indebtedness in order to improve
operating and financial flexibility by extending maturities of
indebtedness and improving liquidity. As a result of the issuance
of the 1993 Notes, there are no significant scheduled payments due
on bank term loans until June 1996 (assuming the refinancing of the
Company's indebtedness under 1989 and 1992 Credit Agreements and
the Secured Notes is not consummated). In connection with the
issuance of the 1993 Notes, SIBV committed to purchase up to $200
million aggregate principal amount of 11 1/2% Junior Subordinated
Notes maturing 2005, the proceeds of which must be used to
repurchase or otherwise retire Subordinated Debt. The above
commitment will be terminated upon the consummation of the
Offerings.
Holdings and the Company are implementing the Recapitalization Plan
to repay or refinance a substantial portion of their indebtedness
in order to improve operating and financial flexibility by (i)
reducing the level and overall cost of their debt, (ii) extending
maturities of indebtedness, (iii) increasing stockholders' equity
and (iv) increasing their access to capital markets. The
Recapitalization Plan includes (i) the Debt Offerings, (ii) the
Equity Offerings, (iii) the SIBV Investment, and (iv) the New
Credit Agreement consisting of the New Revolving Credit Facility
and the New Term Loans. Proceeds of the Recapitalization Plan,
exclusive of funds used to effect the Subordinated Debt Refinancing
(including the remaining borrowings under the Delayed Term Loan and
available proceeds of the Debt Offerings), will be used to
refinance all of the Company's indebtedness under the 1989 and 1992
Credit Agreements and the Secured Notes. Available proceeds of the
Debt Offerings, remaining borrowings under the Delayed Term Loan
and, to the extent required, borrowings under the New Revolving
Credit Facility or available cash shall be used to redeem or
repurchase the Subordinated Debt on approximately December 1, 1994.
It is anticipated that immediately following the Offerings,
borrowings of $65 million and letters of credit of approximately
$90 million will be outstanding under the New Revolving Credit
Facility. After giving effect to the Recapitalization Plan on a
pro forma basis, at December 31, 1993 the Company would have had
approximately $2,371.1 million of total long-term debt outstanding,
all of which would have been senior debt, as compared to $2,619.1
million of long-term debt actually outstanding. After completion
of the Recapitalization Plan there will be no significant scheduled
payments due on bank debt (other than required payments out of
"excess cash", if any) until 18 months following consummation of
the Offerings, at which time approximately $46.0 million will be
payable. Assuming consummation of the Recapitalization Plan
(whether including or excluding the Subordinated Debt Refinancing),
the Company does not currently anticipate that it will experience
any liquidity problems which would cause it to fail to make any
scheduled payment on its bank debt. As discussed below, the
Company expects that liquidity will be provided by its operations
and through the utilization of unused borrowing capacity under the
New Credit Agreement and the Securitization (defined below).
The Company's earnings are significantly affected by the amount of
interest on its indebtedness. At December 31, 1993, the Company
had $215 million of variable rate debt which had been swapped to a
weighted average fixed rate of approximately 9.1%. The Company
also had interest rate swap agreements related to the Accounts
Receivable Securitization Program (the "Securitization") that
effectively converted $95 million of fixed rate borrowings to a
variable rate of 5.6% (at December 31, 1993) and converted $80
million of variable rate borrowings to a fixed rate of 7.2% through
January 1996. In addition, the Company is party to interest rate
swap agreements related to the 1993 Notes which convert $500
million of fixed rate borrowings to a variable rate of 8.6% (at
December 31, 1993).
Capital expenditures consist of property and timberland additions
and acquisitions of businesses. Capital expenditures for 1993,
1992 and 1991 were $117.4 million, $97.9 million and $118.9
million, respectively. Financing arrangements entered into in
connection with the 1989 Transaction impose an annual limit on
future capital expenditures, as defined in the financing
arrangements, of approximately $125.0 million. The capital
spending limit is subject to increase in any year if the prior
year's spending was less than the maximum amount allowed. For
1993, such carryover from 1992 was $75 million. Because the
Company has invested heavily in its core businesses over the last
several years, management believes the annual limitation on capital
expenditures should not impair its plans for maintenance, expansion
and continued modernization of its facilities. It is expected that
the New Credit Agreement will contain limitations on capital
expenditures substantially similar to those
contained in the financing arrangements entered into in connection
with the 1989 Transaction. The Company anticipates making capital
expenditures of approximately $140 million in 1994.
Under the terms of the Old Bank Facilities, the Company is required
to comply with certain financial covenants, including maintenance
of quarterly and annual interest coverage ratios and earnings, as
defined. In anticipation of violating these financial covenants at
September 30, 1993, the Company requested and received waivers from
its lender group, and in December, 1993 amended the Old Bank
Facilities to modify financial covenants. The Company was in
compliance with the amended covenants at December 31, 1993. The
Company expects to have similar covenants in the New Credit
Agreement.
Operating activities have historically been the major source of
cash for the Company's working capital needs, capital expenditures
and debt payments. For 1993 and 1992, net cash provided by
operating activities was $78.2 million and $145.7 million,
respectively.
At December 31, 1993, the Company had $112.1 million in unused
borrowing capacity under the Revolving Credit Facility. Following
the Offerings, the Company anticipates having $295.0 million of
unused borrowing capacity under the New Revolving Credit Facility
under the New Credit Agreement. The Company has borrowing capacity
of $230.0 million under the Securitization subject to the Company's
level of eligible accounts receivable. At December 31, 1993, the
Company had borrowed $182.3 million under the Securitization and
the level of eligible receivables did not permit any additional
borrowings under the Securitization at the date. The
Securitization matures in April 1996, at which time the Company
expects to refinance it. Although the Company believes that it
will be able to do so, no assurance can be given in this regard.
The Company's existing indebtedness imposes restrictions on its
ability to incur additional 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.
However, the Company believes that cash provided by operations and
available financing sources will be sufficient to meet the
Company's cash requirements for the next several years.
This page is intentionally left blank.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Page No.
The following consolidated financial statements of Jefferson
Smurfit
Corporation are included in this report:
Consolidated balance sheets - December 31, 1993 and 1992 . . . . . 30
For the years ended December 31, 1993, 1992 and 1991:
Consolidated statements of operations . . . . . . . . . . . . 32
Consolidated statements of stockholder's deficit. . . . . . . . . 33
Consolidated statements of cash flows . . . . . . . . . . . . . . 34
Notes to consolidated financial statements. . . . . . . . . . . . . 35
The following consolidated financial statement schedules of
Jefferson
Smurfit Corporation are included in Item 14(a):
II: Amounts Receivable From Related Parties and Underwriters,
Promoters and Employees Other than Related Parties. . . . . . 79
V: Property, Plant and Equipment . . . . . . . . . . . . . . . . 80
VI: Accumulated Depreciation, Depletion and Amortization of
Property, Plant and Equipment . . . . . . . . . . . . . . . . 82
VIII: Valuation and Qualifying Accounts . . . . . . . . . . . . . . 84
X: Supplementary Income Statement Information. . . . . . . . . . 85
All other schedules specified under Regulation S-X for Jefferson
Smurfit Corporation have been omitted because they are either not
applicable, not required or because the information required is
included in the financial statements or notes thereto.
MANAGEMENT'S STATEMENT OF RESPONSIBILITY
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 two
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.
James E. Terrill
President, Chief Executive Officer
John R. Funke
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, 1993 and 1992, and
the related consolidated statements of operations, stockholder's
deficit and cash flows for each of the three years in the period
ended December 31, 1993. Our audits also included the financial
statement schedules listed in the Index at Item 14(a). These
financial statements and schedules are the responsibility of the
Company's management. Our responsibility is to express an opinion
on these financial statements and schedules 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, 1993 and
1992, and the consolidated results of its operations and its cash
flows for each of the three years in the period ended December 31,
1993, in conformity with generally accepted accounting principles.
Also, in our opinion, the related financial statement schedules,
when considered in relation to the basic financial statements taken
as a whole, present fairly in all material respects the information
set forth therein.
As described in Note 6 and Note 7 to the financial statements, in
1993, the Company changed its method of accounting for income taxes
and postretirement benefits.
Ernst & Young
St. Louis, Missouri
January 28, 1994 except
as to Note 15, as to which
the date is February 23, 1994
JEFFERSON SMURFIT CORPORATION
CONSOLIDATED BALANCE SHEETS
(In millions, except share data)
December 31, 1993 1992
ASSETS
Current assets
Cash and cash equivalents $ 44.2 $ 45.0
Receivables, less allowances of
$9.2 in 1993 and $7.8 in 1992 243.2 243.7
Refundable income taxes .7 17.0
Inventories
Work-in-process and finished goods 96.1 91.4
Materials and supplies 137.2 132.6
233.3 224.0
Deferred income taxes 41.9 41.1
Prepaid expenses and other current assets 5.2 10.1
Total current assets 568.5 580.9
Property, plant and equipment
Land 60.2 47.6
Buildings and leasehold improvements 241.3 216.4
Machinery, fixtures and equipment 1,601.1 1,477.8
1,902.6 1,741.8
Less accumulated depreciation and amortization 563.2 525.0
1,339.4 1,216.8
Construction in progress 35.1 53.3
Net property, plant and equipment 1,374.5 1,270.1
Timberland, less timber depletion 261.5 226.4
Deferred debt issuance costs, net 52.3 67.0
Goodwill, less accumulated amortization of
$27.6 in 1993 and $20.3 in 1992 261.4 226.0
Other assets 78.9 66.0
$2,597.1 $2,436.4
See notes to consolidated financial statements.
1993 1992
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current liabilities
Current maturities of long-term debt $ 10.3 $ 32.4
Accounts payable 270.6 267.8
Accrued compensation and payroll taxes 110.1 85.7
Interest payable 52.6 45.4
Other accrued liabilities 84.9 43.9
Total current liabilities 528.5 475.2
Long-term debt, less current maturities
Nonsubordinated 1,839.4 1,741.3
Subordinated 779.7 761.7
Total long-term debt 2,619.1 2,503.0
Other long-term liabilities 257.1 108.1
Deferred income taxes 232.2 159.8
Minority interest 18.0 19.2
Stockholder's deficit
Common stock, par value $.01 per share;
1,000 shares authorized and outstanding
Additional paid-in capital 731.8 731.8
Retained earnings (deficit)
At date of 1989 Recapitalization (1,425.9) (1,425.9)
Subsequent to date of 1989
Recapitalization (363.7) (134.8)
(1,789.6) (1,560.7)
Total stockholder's deficit (1,057.8) (828.9)
$2,597.1 $2,436.4
JEFFERSON SMURFIT CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions)
Year Ended December 31, 1993 1992 1991
Net sales $2,947.6 $2,998.4 $2,940.1
Costs and expenses
Cost of goods sold 2,573.1 2,499.3 2,409.4
Selling and administrative expenses 239.2 231.4 225.2
Restructuring charge 96.0
Environmental and other charges 54.0
Income (loss) from operations (14.7) 267.7 305.5
Other income (expense)
Interest expense (254.2) (300.1) (335.2)
Other, net 8.1 5.2 5.4
Loss before income taxes, equity
in earnings (loss) of affiliates, minority
interests, extraordinary item and
cumulative effect of accounting changes (260.8) (27.2) (24.3)
Provision for (benefit from) income taxes (83.0) 10.0 10.0
(177.8) (37.2) (34.3)
Equity in earnings (loss) of affiliates .5 (39.9)
Minority interest share of (income) loss 3.2 2.7 (2.9)
Loss before extraordinary item and
cumulative effect of accounting changes (174.6) (34.0) (77.1)
Extraordinary item
Loss from early extinguishments of debt,
net of income tax benefits of $21.7 in
1993 and $25.8 in 1992 (37.8) (49.8)
Cumulative effect of accounting changes
Postretirement benefits, net of income tax
benefit of $21.9 (37.0)
Income taxes 20.5
Net loss $ (228.9) $ (83.8) $ (77.1)
See notes to consolidated financial statements.
JEFFERSON SMURFIT CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S DEFICIT
(In millions, except share data)
Common Stock
Amount Number Additional Retained
($.01 Par of Paid-In Earnings
Value) Shares Capital (Deficit)
Balance at January 1, 1991 1,000 $500.0 $(1,399.8)
Net loss (77.1)
Balance at December 31, 1991 1,000 500.0 (1,476.9)
Net loss (83.8)
Capital contribution,
net of related expenses 231.8
Balance at December 31, 1992 1,000 731.8 (1,560.7)
Net loss (228.9)
Balance at December 31, 1993 1,000 $731.8 $(1,789.6)
See notes to consolidated financial statements.
JEFFERSON SMURFIT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
Year Ended December 31, 1993 1992 1991
Cash flows from operating activities
Net loss $(228.9) $(83.8) $(77.1)
Adjustments to reconcile net loss to
net cash provided by operating activities
Extraordinary loss from early
extinguishment of debt 59.5 75.6
Cumulative effect of accounting changes
Postretirement benefits 58.9
Income taxes (20.5)
Restructuring charge 96.0
Environmental and other charges 54.0
Depreciation, depletion and amortization 130.8 134.9 130.0
Amortization of deferred debt issuance costs 7.9 14.6 17.6
Deferred income taxes (156.9) .1 (6.3)
Equity in (earnings) loss of affiliates (.5) 39.9
Non-cash interest 18.0 33.6 37.8
Non-cash employee benefit expense (12.5) (18.8) (9.4)
Change in current assets and liabilities,
net of effects from acquisitions
Receivables .7 12.9 (6.8)
Inventories 14.2 (10.4) (20.8)
Prepaid expenses and other current assets 5.0 (2.9) 2.3
Accounts payable and accrued liabilities 26.2 14.9 (30.8)
Interest payable 4.7 (4.9) 5.5
Income taxes 16.2 (17.3) 13.4
Other, net 4.9 (2.3) 37.7
Net cash provided by operating activities 78.2 145.7 133.0
Cash flows from investing activities
Property additions (97.2) (77.5) (102.0)
Timberland additions (20.2) (20.4) (16.9)
Investments in affiliates and acquisitions (.1) (5.8) (9.9)
Proceeds from property and timberland
disposals and sale of businesses 24.5 1.8 6.1
Net cash used for investing activities (93.0) (101.9) (122.7)
Cash flows from financing activities
Borrowings under senior unsecured notes 500.0
Net borrowings (repayments) under accounts
receivable securitization program 6.4 (8.8) 184.7
Borrowings under bank credit facility 400.0
Other increases in long-term debt 12.0 56.8 55.8
Payments of long-term debt and, in
1992, related premiums (479.2) (698.6) (203.3)
Deferred debt issuance costs (25.2) (40.4) (3.7)
Capital contribution, net of related expenses 231.8
Net cash provided by (used for) financing
activities 14.0 (59.2) 33.5
Increase (decrease) in cash and cash equivalents (.8) (15.4) 43.8
Cash and cash equivalents
Beginning of year 45.0 60.4 16.6
End of year $ 44.2 $ 45.0 $ 60.4
See notes to consolidated financial statements.
JEFFERSON SMURFIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1993
(Tabular amounts in millions)
1. -- Basis of Presentation
Jefferson Smurfit Corporation ("JSC" or the "Company") is a wholly-owned
subsidiary of SIBV/MS Holdings, Inc. ("Holdings"). Fifty percent of
the voting stock of Holdings is owned by Smurfit Packaging Corporation
("SPC") and Smurfit Holdings B.V. ("SHBV"), indirect wholly-owned
subsidiaries of Jefferson Smurfit Group plc ("JS Group"), a public
corporation organized under the laws of the Republic of Ireland. The
remaining 50% is owned by The Morgan Stanley Leveraged Equity Fund II,
L.P. ("MSLEF II"). Holdings has no operations other than its investment
in JSC. In December 1989, pursuant to a series of transactions referred
to hereafter as the "1989 Recapitalization", Holdings acquired the
entire equity interest in JSC. Concurrently with Holdings' acquisition
of JSC, Container Corporation of America ("CCA") acquired its common
equity interest not owned by JSC. Prior to the 1989 Recapitalization,
Smurfit International B.V. ("SIBV"), an indirect wholly-owned subsidiary
of JS Group, owned 78% of JSC's outstanding common equity, the public
owned the remaining common equity of JSC and JSC indirectly owned 50% of
the common stock and 100% of the preferred stock of CCA. The remaining
50% of the common stock of CCA was owned by The Morgan Stanley Leveraged
Equity Fund, L.P. and other investors ("MSLEF I Group"). Both MSLEF II
and MSLEF I Group are affiliates of Morgan Stanley & Co. Incorporated
("MS & Co.").
For financial accounting purposes, the 1989 acquisition by CCA of its
common equity owned by MSLEF I Group and the purchase of the JSC common
equity owned by SIBV were accounted for as purchases of treasury stock,
resulting in a deficit balance in stockholder's equity in the
accompanying consolidated financial statements. The acquisition of
JSC's minority interest, representing approximately 22% of JSC's common
equity, was accounted for as a purchase.
2. -- Significant Accounting Policies
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 a maturity of three months or less when purchased to be cash
equivalents. At December 31, 1993 cash and cash equivalents of $42.9
million are maintained as collateral for obligations under the accounts
receivable securitization program (see Note 5).
Revenue Recognition: Revenue is recognized at the time products are
shipped.
Inventories: Inventories are valued at the lower of cost or market,
principally under the last-in, first-out ("LIFO") method except for
$50.6 million in 1993 and $51.9 million in 1992 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 $44.7 million
and $46.3 million at December 31, 1993 and 1992, respectively.
2. -- Significant Accounting Policies (cont)
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.
Effective January 1, 1993, the Company changed its estimate of the
useful lives of certain machinery and equipment. Based upon historical
experience and comparable industry practice, the depreciable lives of
the papermill machines that previously ranged from 16 to 20 years were
increased to an average of 23 years, while major converting equipment
and folding carton presses that previously averaged 12 years were
increased to an average of 20 years. These changes were made to better
reflect the estimated periods during which such assets will remain in
service. These changes had the effect of reducing depreciation expense
by $17.8 million and decreasing net loss by $11.0 million in 1993.
Timberland: The portion of the costs of timberland attributed to
standing timber is charged against income as timber is cut, at rates
determined annually, based on the relationship of unamortized timber
costs to the estimated volume of recoverable timber. The costs of
seedlings and reforestation of timberland are capitalized.
Deferred Debt Issuance Costs: Deferred debt issuance costs are
amortized over the terms of the respective debt obligations using the
interest method.
Goodwill: The excess of cost over the fair value assigned to the net
assets acquired is recorded as goodwill and is being amortized using the
straight-line method over 40 years.
Income Taxes: The taxable income of the Company is included in the
consolidated federal income tax return filed by Holdings. The Company's
income tax provisions are computed on a separate return basis. JSC's
state income tax returns are filed on a separate return basis.
Effective January 1, 1993, the Company changed its method of accounting
for income taxes from the deferred method to the liability method
required by Statement of Financial Accounting Standards ("SFAS") No.
109, "Accounting for Income Taxes" (see Note 6).
Interest Rate Swap Agreements: The Company enters into interest rate
swap agreements which involve the exchange of fixed and floating rate
interest payments without the exchange of the underlying principal
amount. The differential to be paid or received is accrued as interest
rates change and is recognized over the life of the agreements as an
adjustment to interest expense.
Reclassifications: Certain reclassifications of prior year
presentations have been made to conform to the 1993 presentation.
3. -- Investments
Equity in loss of affiliates of $39.9 million in 1991, which is net of
deferred income tax benefits of $18.5 million, includes the Company's
(i) write-off of its equity investment in Temboard, Inc., formerly
Temboard and Company Limited Partnership ("Temboard"), totaling $29.3
million, (ii) write-off of its remaining equity investment in PCL
Industries Limited ("PCL") totaling $6.7 million, and (iii)
proportionate share of the net loss of equity affiliates, including PCL
prior to the write-off of that investment, totaling $3.9 million.
4. -- Related Party Transactions
Transactions with JS Group
Transactions with JS Group, its subsidiaries and affiliates were as
follows:
Year Ended December 31,
1993 1992 1991
Product sales $18.4 $22.8 $21.0
Product and raw material purchases 49.3 60.1 11.8
Management services income 5.8 5.6 5.4
Charges from JS Group for services provided .4 .3 .7
Charges from JS Group for letter of credit
and commitment fees (See Note 5) 2.9
Charges to JS Group for costs pertaining to
the No. 2 paperboard machine 62.2 54.7 10.9
Receivables at December 31 1.7 3.3 2.4
Payables at December 31 11.6 10.2 3.4
Product sales to and purchases from JS Group, its subsidiaries, and
affiliates are consummated on terms generally similar to those
prevailing with unrelated parties.
The Company provides certain subsidiaries and affiliates of JS Group
with general management and elective management services under separate
Management Services Agreements. In consideration for general management
services, the Company is paid a fee up to 2% of the subsidiaries' or
affiliate's gross sales. In consideration for elective services, the
Company is reimbursed for its direct cost of providing such services.
In October 1991 an affiliate of JS Group completed a rebuild of the No.
2 paperboard machine owned by the affiliate that is located in CCA's
Fernandina Beach, Florida paperboard mill (the "Fernandina Mill").
Pursuant to an operating agreement between CCA and the affiliate, the
affiliate engaged CCA to operate and manage the No. 2 paperboard
machine. As compensation to CCA for its services the affiliate
reimburses CCA for production and manufacturing costs directly
attributable to the No. 2 paperboard machine and pays CCA a portion of
the indirect manufacturing, selling and administrative costs incurred by
CCA 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 CCA are reflected as reductions of cost of
goods sold and selling and administrative expenses in the accompanying
consolidated statements of operations.
4. -- Related Party Transactions (cont)
Transactions with Times Mirror
Under the terms of a long-term agreement, Smurfit Newsprint Corporation
("SNC"), a majority-owned subsidiary of the Company, supplies newsprint
to Times Mirror, a minority shareholder of SNC, at amounts which
approximate prevailing market prices. The obligations of the Company
and Times Mirror to supply and purchase newsprint, respectively, are
wholly or partially terminable upon the occurrence of certain defined
events. Sales to Times Mirror for 1993, 1992 and 1991 were $115.2
million, $114.0 million and $150.6 million, respectively.
5. -- Long-Term Debt
Long-term debt at December 31 consists of:
1993 1992
Current Current
maturities Long-term maturities Long-term
1992 term loan $ $ 201.3 $ $ 392.3
1989 term loan 412.3 608.8
Revolving loans