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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, 1994 Number 0-11951
JSCE, Inc.
(Successor corporation to Jefferson Smurfit Corporation (U.S.))
(Exact name of registrant as specified in its charter)
Delaware 37-1337160
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: NONE
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes x No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of the Registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K. [X]
As of February 10, 1995, none of the Registrant's voting stock was held
by non-affiliates.
The number of shares outstanding of the Registrant's common stock as of
February 10, 1995: 1,000
DOCUMENTS INCORPORATED BY REFERENCE: NONE
JEFFERSON SMURFIT CORPORATION
Annual Report on Form 10-K
December 31, 1994
TABLE OF CONTENTS
PART I
Page
Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . 1
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . 8
Item 3. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . 8
Item 4. Submission of Matters to a Vote of Security Holders. . . .12
PART II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters. . . . . . . . . . . . . . . . .12
Item 6. Selected Financial Data. . . . . . . . . . . . . . . . . . .13
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . .15
Item 8. Financial Statements and Supplementary Data. . . . . . . . .24
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure . . . . . . . . . . .48
PART III
Item 10. Directors and Executive Officers of the Registrant . . . . .48
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . .52
Item 12. Security Ownership of Certain Beneficial Owners and
Management . . . . . . . . . . . . . . . . . . . . . . . . .63
Item 13. Certain Relationships and Related Transactions . . . . . . .64
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K. . . . . . . . . . . . . . . . . . . . . . . . .67
PART I
ITEM 1. BUSINESS
SUMMARY OF SIGNIFICANT TRANSACTIONS
Jefferson Smurfit Corporation (formerly SIBV/MS Holdings, Inc.),
hereinafter referred to as "JSC", owns 100% of the equity interest
in JSCE, Inc. ("JSCE"). JSC has no operations other than its
investment in JSCE. On December 31, 1994, Jefferson Smurfit
Corporation (U.S.), a wholly-owned subsidiary of JSC, merged into
its wholly-owned subsidiary, Container Corporation of America
("CCA"), with CCA surviving and changing its name to Jefferson
Smurfit Corporation (U.S.) ("JSC (U.S.)"). JSCE owns a 100% equity
interest in JSC (U.S.) and is the guarantor of JSC (U.S.)'s senior
indebtedness. Prior to May 4, 1994, 50% of the voting stock of JSC
was owned by Smurfit Packaging Corporation and Smurfit Holdings
B.V., indirect wholly-owned subsidiaries of Jefferson Smurfit Group
plc ("JS Group"), a public corporation organized under the laws of
the Republic of Ireland. The remaining 50% was owned by The Morgan
Stanley Leveraged Equity Fund II, L.P. ("MSLEF II") and certain
other investors.
In May 1994, JSC completed a recapitalization plan (the
"Recapitalization") to repay or refinance a substantial portion of
its indebtedness in order to improve operating and financial
flexibility. In connection with the Recapitalization, (i) JSC
issued and sold 19,250,000 shares of common stock pursuant to a
registered public offering at an initial public offering price of
$13.00 per share, (ii) JS Group, through its wholly-owned
subsidiary Smurfit International B.V. ("SIBV"), purchased an
additional 11,538,462 shares of common stock for $150 million,
(iii) JSC (U.S.) issued and sold $300 million aggregate principal
amount of 11.25% Series A Senior Notes due 2004 and $100 million
aggregate principal amount of 10.75% Series B Senior Notes due 2002
pursuant to a registered public offering (the "1994 Senior Notes")
and (iv) JSC (U.S.) entered into a new bank credit facility (the
"1994 Credit Agreement") which consists of a $450 million revolving
credit facility (the "New Revolving Credit Facility") of which up
to $150 million may consist of letters of credit, a $900 million
Tranche A term loan and a $300 million Tranche B term loan. The
proceeds from the equity and debt offerings, the sale to SIBV and
borrowings under a new bank facility were used, among other things,
to repay outstanding bank debt. The new bank facility enabled JSC
(U.S.) to consummate the Subordinated Debt Refinancing which
consisted of the redemption of the 13.5% Senior Subordinated Notes
due 1999, 14.0% Subordinated Debentures due 2001 and 15.5% Junior
Subordinated Accrual Debentures due 2004 (collectively, the
"Subordinated Debt") and the payment of related premiums on
December 1, 1994.
All references hereinafter to the "Company" shall, as the contract
may require, refer collectively to CCA and Jefferson Smurfit
Corporation (U.S.) prior to the Merger or JSC, JSCE and JSC (U.S.).
GENERAL
The Company operates in two business segments, Paperboard/Packaging
Products and Newsprint. The Company believes it is one of the
nation's largest producers of paperboard and packaging products and
is the largest producer of recycled paperboard and recycled
packaging products. In addition, the Company believes it is one of
the nation's largest producers of recycled newsprint.
The Company's Paperboard/Packaging Products segment includes a
system of 16 paperboard mills that, in 1994, produced 1,932,000
tons of virgin and recycled containerboard, 767,000 tons of coated
and uncoated recycled boxboard and solid bleached sulfate ("SBS")
and 209,000 tons of recycled cylinderboard, which were sold to the
Company's own converting operations and to third parties. The
Company's converting operations consist of 52 corrugated container
plants, 18 folding carton plants, and 20 industrial packaging
plants located across the country, with three plants located
outside the U.S. In 1994, the Company's container plants converted
2,018,000 tons of containerboard, an amount equal to approximately
104.5% of the amount it produced, its folding carton plants
converted 543,000 tons of SBS, recycled boxboard and coated natural
kraft, an amount equal to approximately 70.8% of the amount of
boxboard it produced, and its industrial packaging plants converted
128,000 tons of recycled cylinderboard, an amount equal to
approximately 61.1% of the amount it produced. The Company's
Paperboard/Packaging Products segment contributed 92.0% of the
Company's net sales in 1994.
The Company's paperboard operations are supported by its
reclamation division, which processed or brokered 4.1 million tons
of wastepaper in 1994, 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 15 consumer
packaging plants.
The Company's Newsprint segment includes two newsprint mills in
Oregon, which produced 615,000 tons of recycled newsprint in 1994,
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:
1992 1993 1 994
(Ton in thousands)
Containerboard
Production 1,918 1,840 1,932
Consumption 1,898 1,942 2,018
The Company's mills produce a full line of containerboard,
including unbleached kraft linerboard, mottled white linerboard and
recycled medium. Unbleached kraft linerboard is produced at the
Company's mills located in Fernandina Beach and Jacksonville,
Florida and mottled white linerboard is produced at its Brewton,
Alabama mill. Recycled medium is produced at the Company's mills
located in Alton, Illinois, Carthage, Indiana, Circleville, Ohio
and Los Angeles, California. In 1994, the Company produced
1,085,000, 317,000 and 530,000 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 $181
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 chip thickness screening
project for the Fernandina Beach linerboard mill.
The Company's sales of containerboard in 1994 were $786.4 million
(including $424.9 million of intracompany sales). During the first
part of 1994, sales of containerboard to its container plants were
reflected at prices based upon those published by Official Board
Markets which were generally higher than those paid by third
parties except in exchange contracts. Beginning in September 1994,
the sales price of containerboard to the container plants was the
same as market price.
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 52 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 1994
were $1,282.7 million (including $91.4 million of intracompany
sales). Total corrugated shipping container sales volumes for
1992, 1993 and 1994 were 28,095, 29,394 and 30,822 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:
1992 1993 1994
(Tons in thousands)
Recycled Boxboard and SBS
Production 745 744 767
Consumption 551 542 543
The Company's mills produce recycled coated and uncoated boxboard
and SBS. 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 table above excludes
production of approximately 87,000 and 85,000 tons in 1992 and
1993, respectively, from the Lockland, Ohio boxboard mill that was
closed in January 1994 as part of the Company's Restructuring
Program (as discussed in Item 7. - Management's Discussion and
Analysis of Financial Condition and Results of Operations). In
1994, the Company produced 586,000 and 181,000 tons of recycled
boxboard and SBS, respectively. The Company's total sales of
recycled boxboard and SBS in 1994 were $390.9 million (including
$197.5 million of intracompany sales).
The Company's folding carton plants offer 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 52% 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 1994 were $644.7 million (including $1.8
million of intracompany sales). Folding carton sales volumes for
1992, 1993 and 1994 were 487,000, 475,000 and 486,000 tons,
respectively.
The Company has focused its capital expenditures in these
operations and its marketing activities to support a strategy of
enhancing product quality as it relates to packaging graphics,
increasing flexibility while reducing customer 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:
1992 1993 1994
(Tons in thousands)
Recycled Cylinderboard
Production 213 206 209
Consumption 120 123 128
The Company's recycled cylinderboard mills are located in Tacoma,
Washington, Monroe, Michigan (2 mills), Lafayette, Indiana, and
Cedartown, Georgia. In 1994, total sales of recycled cylinderboard
were $67.8 million (including $28.9 million of intracompany sales).
The Company's 20 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, glass, cosmetics and plastics industries. In
addition, the Company produces a patented self-locking partition
especially suited for automated packaging and product protection.
Also, the Company manufactures corrugated pallets that are made
entirely from corrugated components and are lightweight yet
extremely strong and are fully recyclable. The Company's
industrial packaging sales in 1994 were $94.0 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, paper and
metallized paper labels, and labels that are heat transferred to
plastic containers for a wide range of industrial and consumer
product applications. The contract packaging plants provide
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 15
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 pharmaceutical, agricultural and specialty
products industries.
Total sales of consumer packaging products and services in 1994
were $179.7 million (including $14.2 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 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 1994, the Company
processed 4.1 million tons of wastepaper. The amount of wastepaper
collected and the proportions sold internally and externally by the
Company's reclamation division for the last three years were:
1992 1993 1994
(Tons in thousands)
Wastepaper collected by Reclamation Division 3,846 3,907 4,134
Percent sold internally 49.7% 48.8% 45.5%
Percent sold to third parties 50.3% 51.2% 54.5%
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 1994 were $428.2 million (including $190.2
million of intracompany sales).
During 1994, 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 1994, approximately 61%
of the timber harvested by the Company was used in its
Jacksonville, Fernandina and Brewton Mills. The Company harvested
953,000 cords of timber which would satisfy approximately 37% of
the Company's requirements for wood fibres. The Company's wood
fibre 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. In 1994, the Company's total sales of timber
products were $235.2 million (including $185.4 million of
intracompany sales).
NEWSPRINT SEGMENT
NEWSPRINT MILLS
The Company's newsprint mills are located in Newberg and Oregon
City, Oregon. During 1992, 1993 and 1994, the Company produced
615,000, 615,000 and 615,000 tons of newsprint, respectively. In
1994, total sales of newsprint were $231.4 million (none of which
were intracompany sales).
For the past three years, an average of approximately 54% of the
Company's newsprint production has been sold to The Times Mirror
Company ("Times Mirror") pursuant to a long-term newsprint
agreement (the "Newsprint Agreement") entered into in connection
with the Company's acquisition of Smurfit Newsprint Corporation
("SNC") stock in February 1986. Under the terms of the Newsprint
Agreement, the Company supplies newsprint to Times Mirror generally
at prevailing West Coast market prices. Sales of newsprint to
Times Mirror in 1994 amounted to $113.0 million.
CLADWOOD
Cladwood is a wood composite panel used by the housing industry,
manufactured from sawmill shavings and other wood residuals and
overlaid with recycled newsprint. The Company has two Cladwood
plants located in Oregon. Total sales for Cladwood in 1994 were
$28.7 million ($.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
The Company had approximately 16,600 employees at December 31,
1994, of which approximately 11,200 employees (68%), are
represented by collective bargaining units. The expiration date of
union contracts for the Company's major facilities are as follows:
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. Although
the contract for the Alton mill expired in June 1994, production at
the mill has not been interrupted and the Company is currently in
the process of bargaining with the union representing the mill
employees. 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, 1994 are summarized in the
table below. Approximately 59% 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 20 13
Consumer packaging plants 15 9
Cladwood plants 2 1
Wood product plants 1 1
Total 152 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, the Company 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 the
Company and such parties dated November 22, 1967 pertaining to
approximately 30,000 acres of property in Georgia (the
"Agreements"). In June 1993, the Company 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 the Company breached the
Agreements and failed to pay for timber allegedly stolen or
otherwise removed from the property by the Company or third
parties. The case is set for trial in June 1995. The alleged
thefts of timber are being investigated by the Georgia Bureau of
Investigation, which has advised the Company that it is not
presently a target of this investigation. 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, the Company entered into an administrative consent
order with the Florida Department of Environmental Regulation to
carry out any necessary assessment and remediation of Company-
owned property in Duval County, Florida that was formerly the
site of a sawmill that dipped lumber into a chemical solution.
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, the Company 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 was permanently
closed as part of the Company's Restructuring Program). The
Company paid $122,000 in penalties and enforcement costs pursuant
to such consent decree. The United States Environmental
Protection Agency also issued a notice of violation with respect
to such emissions, but has informally advised the Company's
counsel that no Federal enforcement is likely to be commenced in
light of the settlement with the State of Ohio.
In the fourth quarter of 1994, the Company learned of possible
noncompliance with certain provisions of its
construction/operation permit at its D-Graphics labels plant
located in Jacksonville, Florida. In October, 1994, the Company
voluntarily reported such possible noncompliance to state and
local environmental authorities and suspended operations at this
facility for several days until temporary operating authority was
obtained. Subsequently, a settlement agreement was signed
between the Company, the Florida Department of Environmental
Protection and the City of Jacksonville Regulatory and
Environmental Services Division to resolve all civil and
administrative issues regarding this matter, pursuant to which
the Company has paid an aggregate of $1.5 million in fines and
penalties. An operating permit allowing the plant to be operated
on a continuing basis has also been obtained. The United States
Department of Justice is currently conducting a criminal
investigation of the matters reported by the Company and it is
uncertain whether any criminal action will be forthcoming.
The Company also faces potential liability as a result of releases,
or threatened releases, of hazardous substances into the
environment from various sites owned and operated by third parties
at which Company-generated wastes have allegedly been deposited.
Generators of hazardous substances sent to off-site disposal
locations at which environmental problems exist, as well as the
owners of those sites and certain other classes of persons
(generally referred to as "potentially responsible parties" or
"PRPs"), are, in most instances, subject to joint and several
liability for response costs for the investigation and remediation
of such sites under 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:
Miami County, Ohio Site
In January 1990, the Company 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. The
Company contended that it should have been allowed to participate
in the proposed consent decree, which provided 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 the Company's motion
to intervene in this litigation, but denied the Company's motion
for an order denying entry of the consent decree. Consequently,
the consent decree was entered without the Company's being
included as a party to the decree, meaning that the Company had
some exposure to potential claims for contribution to remediation
costs incurred by other participants and for non-reimbursed
response costs incurred by the Agency.
In December 1991, the United States filed a civil action against
the Company in United States District Court, Southern District of
Ohio, to recover its unreimbursed costs at the Miami County site,
and the Company subsequently filed a third-party complaint
against certain entities that had joined the original consent
decree. The Company and the United States have executed a
consent decree which was lodged with the Court in January 1995,
pursuant to which the Company will pay $3.1 million in
satisfaction of its alleged and/or potential liability for past
and future response costs in connection with this site.
In October 1993, the United States filed an additional suit
against the Company in the same court seeking injunctive relief
and damages up to $25,000 per day from March 27, 1989 to the
present, based on the Company's alleged failure to properly
respond to the Agency's document and information requests in
connection with this site. The Company and the United States
have reached an agreement in principle pursuant to which the
Company will pay $1.2 million in settlement of the pending
litigation concerning the Company's allegedly improper responses
to the document requests of the Environmental Protection Agency
in connection with this site.
In July 1993, counsel for the Company was advised by the Office
of the United Stated Attorney, Northern District of Illinois that
a criminal inquiry is also underway relating to the Company's
responses to the Agency's document and information requests. The
Company is investigating the circumstances regarding its
responses. It is uncertain whether any criminal action will be
forthcoming.
Monterey Park, California Site
The Company 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.
Griffin, Indiana Site
The Company entered into a settlement with the United States, the
State of Indiana and certain other parties pursuant to which
their obligations in connection with a superfund site in Griffin,
Indiana were satisfied in exchange for aggregate payments of
approximately $588,000.
Kankakee County, Illinois Site
The Company has paid $258,000 and agreed to pay an additional
amount of approximately $50,000 in full settlement of its
obligations in connection with a superfund site in Kankakee
County, Illinois.
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 68% of the
Company's total paperboard tonnage is produced by mills which have
coal-fired boilers. The cost of energy is dependent, in part, on
environmental regulations 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 expenditures to achieve compliance on the part of the
Company. For the past three years, the Company has spent an
average of approximately $10.0 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
capital expenditures for fiscal 1995 is approximately $20.0
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 1994.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
MARKET INFORMATION
The Company is a wholly-owned subsidiary of JSC, and therefore, all
of the outstanding common stock of the Company ("JSCE Common
Stock") is owned by JSC. As a result, there is no established
public market for the JSCE Common Stock.
DIVIDENDS
The Company has not paid cash dividends on its common stock. The
ability of the Company to pay dividends in the future is restricted
by certain provisions contained in the 1994 Credit Agreement and
the indentures relating to the outstanding indebtedness of JSC
(U.S.) which the Company guarantees. 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 the Company. 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)
1994 1993 1992 1991 1990
Summary of Operations
Net sales $3,233.3 $2,947.6 $2,998.4 $2,940.1 $2,910.9
Cost of goods sold 2,718.7 2,567.2 2,495.4 2,407.3 2,294.2
Gross profit 514.6 380.4 503.0 532.8 616.7
Selling and administrative expenses 223.7 239.2 231.4 225.2 218.8
Restructuring charge 96.0
Environmental and other charges 54.0
Income (loss) from operations 290.9 (8.8) 271.6 307.6 397.9
Interest expense (268.5) (254.2) (300.1) (335.2) (337.8)
Other, net 6.3 5.4 4.5 (39.5) (2.9)
Income (loss) before income taxes,
extraordinary item and cumulative
effect of accounting changes 28.7 (257.6) (24.0) (67.1) 57.2
Provision for (benefit from)
income taxes 16.4 (83.0) 10.0 10.0 35.4
Income (loss) before
extraordinary item and cumulative
effect of accounting changes 12.3 (174.6) (34.0) (77.1) 21.8
Extraordinary item
Loss from early extinguishment
of debt, net of income tax benefit (55.4) (37.8) (49.8)
Cumulative effect of accounting
changes (16.5)
Net income (loss) $ (43.1) $ (228.9) $ (83.8) $ (77.1) $ 21.8
Other Financial Data
Net cash provided by operating
activities $ 149.3 $ 78.2 $ 145.7 $ 133.0 $ 299.1
Depreciation, depletion and
amortization 131.6 130.8 134.9 130.0 122.6
Property and timberland additions 163.2 117.4 97.9 118.9 192.0
Working capital 10.5 40.0 105.7 76.9 60.7
Property, plant and equipment and
timberland, net 1,686.1 1,636.0 1,496.5 1,525.9 1,527.3
Total assets 2,759.0 2,597.1 2,436.4 2,460.1 2,447.9
Long-term debt 2,391.7 2,619.1 2,503.0 2,650.4 2,636.7
Deferred income tax liability 207.7 232.2 159.8 158.3 168.6
Stockholder's deficit (730.3) (1,057.8) (828.9) (976.9) (899.4)
ITEM 6. SELECTED FINANCIAL DATA (cont'd)
(In millions, except statistical data)
1994 1993 1992 1991 1990
Statistical Data (tons in thousands)
Containerboard production (tons) 1,932 1,840 1,918 1,830 1,797
Boxboard production (tons) 767 744 745 726 718
Newsprint production (tons) 615 615 615 614 623
Corrugated shipments (billion sq. ft.) 30.8 29.4 28.1 26.4 24.7
Folding carton shipments (tons) 486 475 487 482 455
Fibre reclaimed and brokered (tons) 4,134 3,907 3,846 3,666 3,547
Timberland owned or leased
(thousand acres) 985 984 978 978 968
Number of employees 16,600 17,300 17,800 18,100 17,600
Other, net 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 Limited Partnership, Inc. and PCL Industries Limited,
respectively.
Amounts shown for 1993, 1992, 1991 and 1990 exclude production from the
Lockland, Ohio boxboard mill that was closed in January 1994 as part of
the Company's Restructuring Program (as discussed in Item 7. -
Management's Discussion and Analysis of Financial Condition and Results
of Operations).
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General
Markets for containerboard, corrugated shipping containers and
newsprint, three of the Company's most important products, are
generally subject to cyclical changes in the economy and changes in
industry capacity, both of which can significantly impact selling
prices and the Company's profitability. The sluggish U.S. economy
in 1991, 1992 and 1993, coupled with a decline in export markets,
caused an imbalance of supply and demand, which resulted in excess
inventories and lower prices for these products. From the first
quarter of 1991 through the third quarter of 1993, reported
linerboard prices fell from approximately $350 per ton to
approximately $280 per ton. Similarly, newsprint prices were
depressed over the same period. As a result, profits of companies
in these industries, including profits of the Company, fell sharply
in 1993.
Containerboard markets began to recover in late 1993 and, based on
increasing demand, a price increase was successfully implemented in
the fourth quarter of 1993. As the economy gained strength and
export shipments increased during 1994, demand for containerboard
products improved. Excess inventories were sold and additional
price increases were rapidly implemented. By the end of 1994, the
reported price of linerboard had risen to $430 per ton and
increased an additional $50 per ton on January 1, 1995. An
additional price increase for containerboard has been announced by
the Company for April 1, 1995. Demand for newsprint improved in
the second half of 1994 and price increases were implemented by the
Company in August and December of 1994, for a total price increase
of $87 per ton. Additional newsprint increases have been announced
by the Company effective March 1 and May 1, 1995.
Prices for the Company's other products showed mixed performance
for 1994. Recycled boxboard prices were comparable to 1993, but
SBS prices, although rising in the second half of 1994, were 5%
lower on average compared to last year. Recycled cylinderboard
prices were higher by approximately 8% compared to last year.
As the economic recovery progressed, unprecedented demand for
recycled fibre caused shortages of this material and prices
escalated at a dramatic rate beginning in the second quarter of the
year. While the effect of the reclaimed fibre price increases is
favorable to the Company's reclamation products division, it is
unfavorable to the Company overall because of the increase in fibre
cost to the paper mills that use reclaimed fibre. The Company
believes that its cost of fibre, a key raw material, will remain
substantially higher than in prior years, although it does not
anticipate a problem satisfying its need for this material in the
foreseeable future.
With the exception of recycled fibre, the moderate level of
inflation during the past few years, has not had a material impact
on the Company's financial position or operating results. The
Company uses the LIFO method of accounting for approximately 80% 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.
Cost Reduction Initiatives
The cyclical downturn of the early 1990's 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 "Cost Reduction Initiatives").
The Cost Reduction Initiatives include systematic Company-wide
efforts 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
less commodity oriented business at its converting operations, the
program focuses 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 the purchase cost of materials, (iv) reductions in
personnel costs and (v) 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 competitive 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-offs 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.
The restructuring charge consisted of approximately $43 million for
the write-down of assets at closed facilities and other
nonproductive assets and $53 million of anticipated cash
expenditures. Approximately $23.9 million (45%) of the cash
expenditures were incurred through 1994, the majority of which
related to plant closure costs. The remaining cash expenditures
will continue to be funded through operations, a majority of which
will be paid in 1995 and 1996, as originally planned. Based on
expenditures to date and those anticipated by the original plan, no
significant adjustment to the reserve balance is expected at this
time.
Environmental Matters
In 1993, the Company recorded a provision of $54 million of which
$39 million relates to environmental matters, representing asbestos
and PCB removal, solid waste cleanup at existing and former
operating sites, and expenses for response costs at various sites
where the Company has received notice that it is a potentially
responsible party ("PRP"). During 1994, the Company incurred $6.1
million in cash expenditures related to these environmental
matters. 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, 1994.
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
(In millions) 1994 1993 1992
Operating Operating Operating
Net profit Net profit Net profit
sales (loss) sales (loss) sales (loss)
Paperboard/
Packaging Products $2,973.7 $310.9 $2,699.5 $16.5 $2,751.0 $284.6
Newsprint 259.6 (16.5) 248.1 (21.4) 247.4 (10.3)
Total $3,233.3 $294.4 $2,947.6 $(4.9) $2,998.4 $274.3
1994 Compared to 1993
Results for 1994 reflect the accelerating demand for the Company's
products. Net sales of $3.23 billion for 1994 set a record, up
9.7% compared to 1993. Increases/(decreases) in sales for each of
the Company's segments are shown in the chart below.
(In millions) 1994 Compared to 1993
Paperboard/
Packaging
Products Newsprint Total
Increase (decrease) due to:
Sales price and product mix $183.8 $11.6 $195.4
Sales volume 199.5 (.1) 199.4
Acquisitions and new facilities 5.3 5.3
Plant closings and asset distributions (114.4) (114.4)
Total net sales increase $274.2 $11.5 $285.7
Net sales in the Paperboard/Packaging Products segment for 1994
increased $274.2 million, up 10.2% compared to 1993, due to higher
sales prices and increased sales volume. Record sales volume was
achieved for several major products, including: containerboard up
3.8%; corrugated shipping containers up 4.7%; and reclamation
products up 5.8%. Sales growth for this segment was mitigated by
the shutdown of several operating facilities in late 1993 and early
1994, including a coated recycled boxboard mill, five converting
plants and two reclamation products facilities, in connection with
the Company's Restructuring Program.
Net sales in the Newsprint segment for 1994 increased $11.5
million, up 4.6% compared to 1993, due primarily to higher sales
prices in the second half of the year.
Costs and expenses in both segments in 1994 were favorably impacted
by the Cost Reduction Initiatives begun in 1993 and by the
Restructuring Program (together, the "Plans"). Cost of goods sold
as a percent of net sales in the Paperboard/Packaging Products
segment declined from 85.6% in 1993 to 82.5% in 1994, primarily as
a result of higher sales prices, improved capacity utilization and
other benefits associated with the Plans. Cost of goods sold as a
percent of net sales in the Newsprint segment improved modestly
from 102.8% in 1993 to 102.2% in 1994, primarily as a result of
higher sales prices. Selling and administrative expenses in both
segments in 1994 were also favorably impacted by the Plans.
The Company increased its weighted average discount rate in
measuring its pension obligations from 7.6% to 8.5% and its rate of
increase in compensation levels from 4.0% to 5.0% at December 31,
1994. The net effect of changing these assumptions was the primary
reason for the decrease in projected benefit obligations and the
changes are expected to decrease pension cost in 1995 by
approximately $3.9 million.
Average debt levels outstanding decreased in 1994 as a result of
the Recapitalization discussed below; however, interest expense of
$268.5 million for 1994 increased 5.6% compared to 1993 due to the
impact of higher effective interest rates in 1994.
The tax provision for 1994 was $16.4 million compared to a tax
benefit for 1993 of $83.0 million. The Company's effective tax
rate for 1994 was higher than the Federal statutory tax rate due to
several factors, the most significant of which was the effect of
permanent differences between book and tax accounting.
The Company recorded an extraordinary loss from the early
extinguishment of debt (net of income tax benefits) amounting to
$55.4 million in 1994 and $37.8 million in 1993. The Company
adopted Statement of Financial Accounting Standards ("SFAS") No.
112 "Employers' Accounting for Postemployment Benefits" in 1994,
the effect of which was not material.
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. Increases/(decreases) in each of
the Company's segment sales are shown in the chart below.
(In millions) 1993 Compared to 1992
Paperboard/
Packaging
Products Newsprint Total
Increase (decrease) due to:
Sales price and product mix $(91.2) $(3.0) $(94.2)
Sales volume 15.8 3.7 19.5
Acquisitions and new facilities 34.9 34.9
Plant closings and asset distribution (11.0) (11.0)
Total net sales increase (decrease) $(51.5) $ .7 $(50.8)
Net sales decreased 1.9% in the Paperboard/Packaging Products
segment in 1993. The decrease 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.
Net sales increased 0.3% in the Newsprint segment as 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 the
Paperboard/Packaging Products segment rose from 81.8% in 1992 to
85.6% in 1993 due primarily to the aforementioned changes in
pricing and product mix. Cost of good sold as a percent of net
sales in the Newsprint segment rose from 99.0% in 1992 to 102.8% in
1993 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 6 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.
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 a $231.8 million capital
contribution received in August 1992.
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 to 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 effect of permanent
differences between book and tax accounting 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 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 $37.0 million.
Liquidity and Capital Resources
The Company completed a recapitalization plan in May 1994 (the
"Recapitalization") in order to improve its operating and financial
flexibility by reducing the level and overall cost of its debt,
extending maturities of indebtedness, increasing stockholder's
equity and increasing its access to capital markets. In connection
with the Recapitalization, (i) JSC issued and sold 19,250,000
shares of common stock pursuant to a registered public offering at
an initial public offering price of $13.00 per share, (ii) JS
Group, through its wholly-owned subsidiary Smurfit International
B.V. ("SIBV"), purchased an additional 11,538,462 shares of common
stock for $150 million, (iii) JSC (U.S.) issued and sold $300
million aggregate principal amount of 11.25% Series A Senior Notes
due 2004 and $100 million aggregate principal amount of 10.75%
Series B Senior Notes due 2002 pursuant to a registered public
offering (the "1994 Senior Notes") and (iv) the Company entered
into a new bank credit facility (the "1994 Credit Agreement")
consisting of a $450 million revolving credit facility (the "New
Revolving Credit Facility") of which up to $150 million may consist
of letters of credit, a $300 million Tranche A Term Loan and a $900
million Tranche B Term Loan. Proceeds of the Recapitalization,
including $370.6 million from the shares issued to the public and
SIBV, $400.0 million from the sale of the 1994 Senior Notes and
borrowings under the 1994 Credit Agreement were used to extinguish
the Company's 1989 and 1992 term loans, the 1989 revolving credit
facility, the Company's senior secured notes and redeem the
Company's subordinated debentures, including related premiums and
accrued interest, and pay related fees and expenses. Had the
Recapitalization occurred on January 1, 1994, the Company's income
before extraordinary item would have been $42.0 million and the net
loss would have been $15.1 million for 1994.
Outstanding loans under the Tranche A Term Loan and the New
Revolving Credit Facility bear interest at rates selected at the
option of the Company equal to the alternate base rate ("ABR") plus
1.5% per annum or the adjusted LIBOR Rate plus 2.5% per annum
(8.77% at December 31, 1994). Interest on outstanding loans under
the Tranche B Term Loan is payable at a rate per annum selected at
the option of the Company, equal to the prime rate plus 2% per
annum or the adjusted LIBOR rate plus 3% per annum (8.56% at
December 31, 1994). The ABR rate is defined as the highest of
Chemical Bank's prime lending rate, 1/2 of 1% in excess of the
Federal Funds Rate or 1% in excess of the base certificate of
deposit rate. The New Revolving Credit Facility matures in 2001.
The Tranche A Term Loan matures in various installments from 1995
to 2001. The Tranche B Term Loan matures in various installments
from 1995 to 2002.
The 1994 Credit Agreement contains various business and financial
covenants including, among other things, (i) limitations on
dividends, redemptions and repurchases of capital stock, (ii)
limitations on the incurrence of indebtedness, liens, leases, sale-
leaseback transactions, (iii) limitations on capital expenditures,
(iv) maintenance of minimum levels of consolidated earnings before
depreciation, interest, taxes and amortization and (v) maintenance
of minimum interest coverage ratios. Such restrictions, together
with the highly leveraged position of the Company, could restrict
corporate activities, including the Company's ability to respond to
market conditions, to provide for unanticipated capital
expenditures or to take advantage of business opportunities.
The 1994 Credit Agreement imposes an annual limit on future capital
expenditures of $150.0 million. The capital spending limit is
subject to increase by an amount up to $75.0 million in any year if
the prior year's spending was less than the maximum amount allowed.
The Company has a carryover of $62.4 million for 1995. Capital
expenditures in 1994, including property and timberland additions
and acquisitions, were $166.9 million. Because the Company has
invested heavily in its core businesses in prior years, management
believes the annual limitation for capital expenditures does not
impair its plans for maintenance, expansion and continued
modernization of its facilities.
The Company's earnings are significantly affected by the amount of
interest on its indebtedness. The Company enters into interest
rate swap, cap and option agreements to manage its interest rate
exposure on its indebtedness. Management's objective is to protect
the Company from interest rate volatility and reduce or cap
interest expense within acceptable levels of risk. Periodic
amounts to be paid or received under these agreements are accrued
and recognized as adjustments to interest expense. The Company
amends existing agreements or enters into agreements with
offsetting effects when necessary to change its net position.
During 1994, as interest rates increased, the Company amended
several of its agreements and entered new agreements, including
options, to respond to those rate changes. Significant option
positions entered into to offset increasing rates in 1994
expired unexercised, and there are no
significant options outstanding at December 31, 1994.
The table below shows certain interest rate swap agreements
outstanding at December 31, 1994, the related maturities for the
years thereafter and the contracted pay and receive rates for such
agreements. Included are swaps with a notional amount of $345.0
million not associated with existing debt at December 31, 1994, due
to previous debt extinguishments, which are carried at fair market
value with changes to the fair value reflected in interest expense.
Interest rate
swaps at Interest rate
December 31, swap maturities
(In millions) 1994 1995 1996 1997
Pay fixed interest rate swaps $532.5 $(150.0) $(150.0) $(232.5)
Pay rate 7.180% 7.180% 6.990% 7.474%
Receive rate 5.732%
Receive fixed interest rate swaps $595.0 $(595.0)
Pay rate 7.161%
Receive rate 5.041% 5.041%
In addition, the Company has swap agreements not associated with
existing debt at December 31, 1994 with a notional amount of $180
million (of which $100 million matures in 1995 and $80 million
matures in 1996) whereby the Company is receiving a weighted
average variable rate of 5.2% and pays a weighted average variable
rate of 6.1%.
The Company has a cap agreement with a notional amount of $100.0
million, which matures in 1996, on variable rate debt which caps
the Company's variable interest rates at 7.5% on the notional
amount. In addition, the Company has a cap agreement with a
notional amount of $100.0 million, which matures in 1996, on
variable rate debt which limits the Company's interest payments to
a range of 5.5-7.0% on the notional amount.
Operating activities have historically been the major source of
cash for the Company's working capital needs, capital expenditures
and debt payments. Net cash provided by operating activities for
1994 improved $71.1 million (90.9%) over 1993. Scheduled payments
due in 1995 and 1996 under the 1994 Credit Agreement are $46.0
million and $117.0 million, respectively, with increasing amounts
thereafter. The Company believes that cash provided by operating
activities and available financing sources will be sufficient for
the next several years to pay interest on the Company's
obligations, amortize its term loans and fund capital expenditures.
At December 31, 1994, the Company had $303.2 million of unused
borrowing capacity under its 1994 Credit Agreement and borrowing
capacity of $12.0 million under its $230.0 million accounts
receivable securitization program (the "1991 Securitization
Program") subject to the Company's level of eligible accounts
receivable. In the first quarter of 1995, the Company entered into
a new $315.0 million accounts receivable securitization program
(the "1995 Securitization"), consisting of a $300.0 million trade
receivables-backed commercial paper program and a $15.0 million term
loan. Proceeds of the 1995 Securitization were used to extinguish
the Company's 1991 Securitization Program.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Page No.
The following consolidated financial statements of JSCE, Inc. are
included in this report:
Consolidated balance sheets - December 31, 1994 and 1993 . . . . . .27
For the years ended December 31, 1994, 1993 and 1992:
Consolidated statements of operations . . . . .. . . . . . . . .28
Consolidated statements of stockholder's deficit. . . . . . . .29
Consolidated statements of cash flows . . . . . . . . . . . . .30
Notes to consolidated financial statements. . . . . . . . . . . . . .31
The following consolidated financial statement schedules of JSCE,
Inc. are included in Item 14(a):
VIII: Valuation and Qualifying Accounts . . . . . . . . . . . .71
All other schedules specified under Regulation S-X for JSCE, Inc.
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 three
directors who meet with the independent auditors, internal auditors
and management to discuss specific accounting, reporting and
internal control matters. Both the independent auditors and
internal auditors have full and free access to the Audit Committee.
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
JSCE, Inc.
We have audited the accompanying consolidated balance sheets of
JSCE, Inc. as of December 31, 1994 and 1993, 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, 1994. Our audits also included the financial statement
schedule listed in the Index at Item 14(a). These financial
statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial
position of JSCE, Inc. at December 31, 1994 and 1993, and the
consolidated results of its operations and its cash flows for each
of the three years in the period ended December 31, 1994 in
conformity with generally accepted accounting principles. Also, in
our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information
set forth therein.
As discussed in Note 5 and Note 6 to the financial statements, in
1993, the Company changed its method of accounting for income taxes
and postretirement benefits.
Ernst & Young LLP
St. Louis, Missouri
January 30, 1995 except
as to Note 14, as to which
the date is February 23, 1995
JSCE, Inc.
CONSOLIDATED BALANCE SHEET
(In millions)
December 31, 1994 1993
ASSETS
Current assets
Cash and cash equivalents $ 61.8 $ 44.2
Receivables, less allowances of
$8.6 in 1994 and $9.2 in 1993 316.3 243.2
Inventories
Work-in-process and finished goods 86.9 96.1
Materials and supplies 136.8 137.2
223.7 233.3
Deferred income taxes 38.1 41.9
Prepaid expenses and other current assets 6.6 5.9
Total current assets 646.5 568.5
Net property, plant and equipment 1,427.1 1,374.5
Timberland, less timber depletion 259.0 261.5
Goodwill, less accumulated amortization of
$35.0 in 1994 and $27.6 in 1993 257.1 261.4
Other assets 169.3 131.2
$2,759.0 $2,597.1
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current liabilities
Current maturities of long-term debt $ 50.2 $ 10.3
Accounts payable 348.8 270.6
Accrued compensation and payroll taxes 114.3 110.1
Interest payable 48.3 52.6
Other accrued liabilities 74.4 84.9
Total current liabilities 636.0 528.5
Long-term debt, less current maturities 2,391.7 2,619.1
Other long-term liabilities 237.5 257.1
Deferred income taxes 207.7 232.2
Minority interest 16.4 18.0
Stockholder's deficit
Common stock, par value $.01 per share;
1,000 shares authorized and outstanding
Additional paid-in capital 1,102.4 731.8
Retained earnings (deficit) (1,832.7) (1,789.6)
Total stockholder's deficit (730.3) (1,057.8)
$ 2,759.0 $ 2,597.1
See notes to consolidated financial statements.
JSCE, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions)
Year Ended December 31, 1994 1993 1992
Net sales $3,233.3 $2,947.6 $2,998.4
Costs and expenses
Cost of goods sold 2,718.7 2,567.2 2,495.4
Selling and administrative expenses 223.7 239.2 231.4
Restructuring charge 96.0
Environmental and other charges 54.0
Income (loss) from operations 290.9 (8.8) 271.6
Other income (expense)
Interest expense (268.5) (254.2) (300.1)
Other, net 6.3 5.4 4.5
Income (loss) before income taxes,
extraordinary item and cumulative
effect of accounting changes 28.7 (257.6) (24.0)
Provision for (benefit from) income taxes 16.4 (83.0) 10.0
Income (loss) before extraordinary item and
cumulative effect of accounting changes 12.3 (174.6) (34.0)
Extraordinary item
Loss from early extinguishment of debt,
net of income tax benefit of $33.7 in
1994, $21.7 in 1993 and $25.8 in 1992 (55.4) (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 $ (43.1) $ (228.9) $ (83.8)
See notes to consolidated financial statements.
JSCE, Inc.
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S DEFICIT
(In millions except share data)
Common Stock
Par Number Additional Retained
Value of Paid-In Earnings
$.01 Shares Capital (Deficit)
Balance at January 1, 1992 $ 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)
Net loss (43.1)
Capital contribution,
net of related expenses 370.6
Balance at December 31, 1994 $ 1,000 $1,102.4 $(1,832.7)
See notes to consolidated financial statements.
JSCE, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
Year Ended December 31, 1994 1993 1992
Cash flows from operating activities
Net loss $ (43.1) $(228.9) $ (83.8)
Adjustments to reconcile net loss to net
cash provided by operating activities
Extraordinary loss from early
extinguishment of debt 89.1 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 131.6 130.8 134.9
Amortization of deferred debt issuance costs 10.1 7.9 14.6
Deferred income taxes (20.8) (156.9) .1
Non-cash interest 18.9 18.0 33.6
Non-cash employee benefit expense (9.4) (12.5) (18.8)
Change in current assets and liabilities,
net of effects from acquisitions
Receivables (73.0) .7 12.9
Inventories 9.8 14.2 (10.4)
Prepaid expenses and other current assets (.9) 5.0 (2.9)
Accounts payable and accrued liabilities 42.1 26.2 14.9
Interest payable (7.2) 4.7 (4.9)
Income taxes .8 16.2 (17.3)
Other, net 1.3 4.9 (2.8)
Net cash provided by operating activities 149.3 78.2 145.7
Cash flows from investing activities
Property additions (143.7) (97.2) (77.5)
Timberland additions (19.5) (20.2) (20.4)
Investments in affiliates and acquisitions (3.7) (.1) (5.8)
Proceeds from property and timberland
disposals and sale of businesses 4.4 24.5 1.8
Net cash used for investing activities (162.5) (93.0) (101.9)
Cash flows from financing activities
Capital contribution, net of related expenses 370.6 231.8
Borrowings under bank credit facilities 1,371.8 400.0
Borrowings under senior notes 400.0 500.0
Net borrowings (repayments) under accounts
receivable securitization program 34.8 6.4 (8.8)
Other increases in long-term debt 3.4 12.0 56.8
Payments of long-term debt and related premiums (2,072.9) (479.2) (698.6)
Deferred debt issuance costs (76.9) (25.2) (40.4)
Net cash provided by (used for) financing activities 30.8 14.0 (59.2)
Increase (decrease) in cash and cash equivalents 17.6 (.8) (15.4)
Cash and cash equivalents
Beginning of year 44.2 45.0 60.4
End of year $ 61.8 $ 44.2 $ 45.0
See notes to consolidated financial statements.
JSCE, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in millions)
1. -- Basis of Presentation
JSCE, Inc. hereafter referred to as the "Company" is a wholly-owned
subsidiary of Jefferson Smurfit Corporation ("JSC"). JSC has no
operations other than its investment in JSCE, Inc. On December 31, 1994
Jefferson Smurfit Corporation (U.S.), a wholly-owned subsidiary of the
Company, merged into its wholly-owned subsidiary, Container Corporation
of America ("CCA"), with CCA surviving and changing its name to
Jefferson Smurfit Corporation (U.S.) ("JSC (U.S.)"). The Company has no
operations other than its investment in JSC (U.S.). In 1994, JSC
contributed 100% of the common stock of JSC (U.S.) to the Company. This
transaction has been accounted for in a manner similar to a pooling of
interests and accordingly, the consolidated financial statements for all
periods presented include the accounts of JSC (U.S.). Prior to May 4,
1994, JSC had been named "SIBV/MS Holdings" and JSC (U.S.) had been
named "Jefferson Smurfit Corporation". Prior to May 4, 1994, 50% of the
voting stock of JSC was owned by Smurfit Packaging Corporation ("SPC")
and Smurfit Holdings B.V. ("SHBV"), indirect wholly-owned subsidiaries
of Jefferson Smurfit Group plc ("JS Group"), a public corporation
organized under the laws of the Republic of Ireland. The remaining 50%
was owned by The Morgan Stanley Leveraged Equity Fund II, L.P. ("MSLEF
II") and certain other investors.
In May 1994, JSC completed a recapitalization plan (the
"Recapitalization") to repay and refinance a substantial portion of its
indebtedness. In connection with the Recapitalization, (i) JSC issued
and sold 19,250,000 shares of common stock pursuant to a registered
public offering at an initial public offering price of $13.00 per share,
(ii) JS Group, through its wholly-owned subsidiary Smurfit International
B.V. ("SIBV"), purchased an additional 11,538,462 shares of common stock
for $150 million, and (iii) JSC (U.S.) issued and sold $300 million
aggregate principal amount of unsecured 11.25% Series A Senior Notes due
2004 and $100 million aggregate principal amount of unsecured 10.75%
Series B Senior Notes due 2002 (the "1994 Senior Notes") pursuant to a
registered public offering. The proceeds from the equity and debt
offerings, the sale of shares to SIBV and $1,200 million of borrowings
under a new bank credit facility (see Note 4) were used to refinance JSC
(U.S.)'s 1989 and 1992 term loans, the 1989 revolving credit facility,
and JSC (U.S.)'s senior secured notes and pay related fees and expenses.
Proceeds were also used to redeem JSC (U.S.)'s subordinated debentures
and pay related premiums and accrued interest. Premiums paid in
connection with the debt payments, the write-off of related deferred
debt issuance costs, and losses on interest rate swap agreements
totalling $51.6 million (net of income tax benefits of $31.6 million)
are reflected in the accompanying 1994 consolidated statement of
operations as an extraordinary item. Net proceeds from the shares
issued totalled $370.6 million.
For financial accounting purposes, JSC's 1989 purchases of JSC (U.S.)'s
common equity owned by JS Group and the acquisition by JSC (U.S.) of its
common equity owned by MSLEF I Group were accounted for as purchases of
treasury stock and resulted in a deficit balance of $1,425.9 million in
stockholder's equity in the accompanying consolidated financial
statements.
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 an original maturity of three months or less to be cash
equivalents. At December 31, 1994 cash and cash equivalents of $62.4
million are maintained as collateral for obligations under the accounts
receivable securitization program (see Note 4).
Revenue Recognition: Revenue is recognized at the time products are
shipped.
Inventories: Inventories are valued at the lower of cost or market,
principally under the last-in, first-out ("LIFO") method except for
$55.2 million in 1994 and $50.6 million in 1993 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 $58.5 million
and $44.7 million at December 31, 1994 and 1993, respectively.
Property, Plant and Equipment: Property, plant and equipment are
carried at cost. Provisions for depreciation and amortization are made
using straight-line rates over the estimated useful lives of the related
assets and the terms of the applicable leases for leasehold
improvements.
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. The change 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.
2. -- Significant Accounting Policies (cont)
Interest Rate Swap and Cap Agreements: The Company enters into interest
rate swap and cap agreements to reduce the impact of interest rate
fluctuations. Swap agreements involve the exchange of fixed and floating
rate interest payments without the exchange of the underlying principal
amount. Cap agreements provide that the Company will receive a certain
amount when short term interest rates exceed a threshold rate. Periodic
amounts to be paid or received under interest rate swap and cap
agreements are accrued and recognized as adjustments to interest
expense. Premiums paid on cap agreements are included in interest
payable and amortized to interest expense over the life of the
agreements.
Reclassifications: Certain reclassifications of prior year
presentations have been made to conform to the 1994 presentation.
3. -- Property, Plant and Equipment
Property, plant and equipment at December 31 consists of:
1994 1993
Land $ 59.7 $ 60.2
Buildings and leasehold improvements 253.7 241.3
Machinery, fixtures and equipment 1,696.3 1,601.1
2,009.7 1,902.6
Less accumulated depreciation and amortization 657.2 563.2
1,352.5 1,339.4
Construction in progress 74.6 35.1
Net property, plant and equipment $1,427.1 $1,374.5
4. -- Long-Term Debt
Long-term debt at December 31 consists of:
1994 1993
Current Current
maturities Long-term maturities Long-term
Tranche A term loan $45.0 $ 855.0 $ $
Tranche B term loan 1.0 299.0
1992 term loan 201.3
1989 term loan 412.3
Revolving loans 43.0 196.5
Senior secured notes 270.5
Accounts receivable securitization
program loans 217.2 182.3
1994 series A senior notes 300.0
1994 series B senior notes 100.0
1993 senior notes 500.0 500.0
Other 4.2 77.5 10.3 76.5
Total non-subordinated 50.2 2,391.7 10.3 1,839.4
13.5% Senior subordinated notes,
due 1999 350.0
14.0% Subordinated debentures,
due 2001 300.0
15.5% Junior subordinated accrual
debentures, due 2004 129.7
Total subordinated 779.7
$50.2 $2,391.7 $10.3 $2,619.1
Aggregate annual maturities of long-term debt at December 31, 1994, for
the next five years are $50.2 million in 1995, $349.8 million in 1996,
$158.8 million in 1997, $164.6 million in 1998 and $174.7 million in
1999.
1994 Credit Agreement
In connection with the Recapitalization, JSC (U.S.) entered into a new
bank credit facility (the "1994 Credit Agreement") which consists of a
$450 million revolving credit facility (the "New Revolving Credit
Facility") of which up to $150 million may consist of letters of credit,
a $900 million Tranche A Term Loan and a $300 million Tranche B Term
Loan. The New Revolving Credit Facility matures in 2001. The Tranche
A Term Loan matures in various installments from 1995 to 2001. The
Tranche B Term Loan matures in various installments from 1995 to 2002.
Outstanding loans under the Tranche A Term Loan and the New Revolving
Credit Facility bear interest at rates selected at the option of JSC
(U.S.) equal to the alternate base rate ("ABR") plus 1.5% per annum or
the adjusted LIBOR Rate plus 2.5% per annum (8.77% at December 31,
1994). Interest on outstanding loans under the Tranche B Term Loan is
payable at a rate per annum selected at the option of JSC (U.S.), equal
to the prime rate plus 2% per annum or the adjusted LIBOR rate plus 3%
per annum (8.56% at December 31, 1994). The ABR rate is defined as the
highest of Chemical Bank's prime lending rate, 1/2 of 1% in excess of
the Federal Funds Rate or 1% in excess of the base certificate of
deposit rate.
4. -- Long-Term Debt (cont)
A commitment fee of 1/2 of 1% per annum is assessed on the unused
portion of the New Revolving Credit Facility. At December 31, 1994, the
unused portion of this facility, after giving consideration to
outstanding letters of credit, was $303.2 million.
The Tranche A and Tranche B Term Loans and the New Revolving Credit
Facility may be prepaid at any time, in whole or in part, at the option
of JSC (U.S.). The 1994 Credit Agreement requires prepayments if JSC
(U.S.) has excess cash flows, as defined, or receives proceeds from:
certain asset sales, insurance, issuance of equity securities, or
incurrence of certain indebtedness.
The obligations under the 1994 Credit Agreement are unconditionally
guaranteed by JSC, the Company and its subsidiaries and are secured by
a security interest in substantially all of the assets of JSC (U.S.) and
its material subsidiaries, with the exception of cash, cash equivalents
and trade receivables. The 1994 Credit Agreement is also secured by a
pledge of all the capital stock of each material subsidiary of JSC and
by certain intercompany notes.
The 1994 Credit Agreement contains various business and financial
covenants including, among other things, (i) limitations on dividends,
redemptions and repurchases of capital stock, (ii) limitations on the
incurrence of indebtedness, liens, leases, sale-leaseback transactions,
(iii) limitations on capital expenditures, (iv) maintenance of minimum
levels of consolidated earnings before depreciation, interest, taxes and
amortization and (v) maintenance of minimum interest coverage ratios.
1994 Senior Notes
In connection with the Recapitalization, JSC (U.S.) issued and sold $300
million aggregate principal amount of unsecured 11.25% Series A Senior
Notes due 2004 and $100 million aggregate principal amount of unsecured
10.75% Series B Senior Notes due 2002. The Series A Senior Notes are
redeemable in whole or in part at the option of JSC (U.S.), at any time
on or after May 1, 1999 with premiums of 5.625% and 2.813% of the
principal amount if redeemed during the 12-month periods commencing May
1, 1999 and 2000, respectively. In addition, up to $100 million
aggregate principal amount of Series A Senior Notes are redeemable at
110% of the principal amount prior to May 1, 1997 in connection with
certain stock issuances. The Series B Senior Notes are not redeemable
prior to maturity.
The 1994 Senior Notes, which are unconditionally guaranteed on a senior
basis by JSCE, Inc., rank pari passu with the 1994 Credit Agreement and
the 1993 Senior Notes. The 1994 Senior Notes agreements contain
business and financial covenants which are less restrictive than those
contained in the 1994 Credit Agreement.
Holders of the 1994 Senior Notes have the right, subject to certain
limitations, to require JSC (U.S.) to repurchase their securities at
101% of the principal amount plus accrued and unpaid interest, upon the
occurrence of a change of control or in certain events from proceeds of
major asset sales, as defined.
4. -- Long-Term Debt (cont)
Accounts Receivable Securitization Program Loans
The $230.0 million accounts receivable securitization program
("Securitization Program") provides for the sale of certain of the
Company's trade receivables to a wholly-owned, bankruptcy remote,
limited purpose subsidiary, Jefferson Smurfit Finance Corporation ("JS
Finance"), which finances its purchases of the receivables, through
borrowings from a limited purpose finance company (the "Issuer")
unaffiliated with the Company. The Issuer, which is restricted to
making loans to JS Finance, issued $95 million in fixed rate term notes,
issued $13.8 million under a subordinated loan, and may issue up to
$121.2 million in trade receivables-backed commercial paper or obtain up
to $121.2 million under a revolving liquidity facility to fund loans to
JS Finance. At December 31, 1994, $12.0 million was available for
additional borrowing. Borrowings under the Securitization Program,
which expires April 1996, have been classified as long-term debt because
of the Company's intent to refinance this debt on a long-term basis and
the availability of such financing under the terms of the program.
At December 31, 1994, all assets of JS Finance, principally cash and
cash equivalents of $62.4 million and trade receivables of $213.8
million, are pledged as collateral for obligations of JS Finance to the
Issuer. Interest rates on borrowings under this program are at a fixed
rate of 9.56% for $95.0 million of the borrowings and at a variable rate
on the remainder (6.37% at December 31, 1994).
1993 Senior Notes
In April 1993, JSC (U.S.) issued $500.0 million of unsecured 9.75%
Senior Notes (the "1993 Senior Notes") due 2003 which are not redeemable
prior to maturity. The 1993 Senior Notes, which are unconditionally
guaranteed on a senior basis by JSCE, Inc., rank pari passu with the
1994 Credit Agreement and the 1994 Senior Notes. The 1993 Senior Notes
agreement contains business and financial covenants which are
substantially less restrictive than those contained in the 1994 Credit
Agreement and substantially similar to those contained in the 1994
Senior Notes agreements.
Holders of the 1993 Senior Notes have the right, subject to certain
limitations, to require JSC (U.S.) to repurchase their securities at
101% of the principal amount plus accrued and unpaid interest, upon the
occurrence of a change in control or in certain events, from proceeds of
major asset sales, as defined.
Net proceeds from the offering were used to partially repay amounts
outstanding under the 1989 and 1992 term loans and the 1989 revolving
credit facility. The write-off of related deferred debt issuance costs
and losses on interest rate swap agreements, totalling $37.8 million
(net of income tax benefits of $21.7 million), are reflected in the
accompanying 1993 consolidated statement of operations as an
extraordinary item.
Other Non-subordinated Debt
Other non-subordinated long-term debt at December 31, 1994, is payable
in varying installments through the year 2028. Interest rates on these
obligations averaged approximately 9.93% at December 31, 1994.
4. -- Long-Term Debt (cont)
Interest Rate Swap and Cap Agreements
The Company utilizes interest rate swap and cap agreements to manage its
interest rate exposure on long-term debt. At December 31, 1994, the
Company has interest rate swap agreements with a notional amount of
$282.5 million which effectively fix (for remaining periods up to 3
years) the interest rate on variable rate borrowings. The Company is
currently paying a weighted average fixed interest rate of 6.4% and
receiving a weighted average variable interest rate of 6.0%, calculated
on the notional amount. The Company has a cap agreement with a notional
amount of $100.0 million on variable rate debt (through 1996) which caps
the Company's variable interest rates at 7.5% on the notional amount.
In addition, the Company has a cap agreement with a notional amount of
$100.0 million (through 1996) on variable rate debt which limits the
Company's interest payments to a range of 5.5-7.0% on the notional
amount. The Company is party to interest rate swap agreements on fixed
rate borrowings with a notional amount of $500.0 million which
effectively convert the fixed rate borrowings to variable rate
borrowings maturing at various dates through May 1995. The Company is
currently receiving a weighted average fixed interest rate of 4.6% and
paying a weighted average variable interest rate of 7.1%, calculated on
the notional amount.
The Company has interest rate swaps with a notional amount of $525
million not associated with existing debt at December 31, 1994, due to
previous debt extinguishments, which are carried at fair market value
with changes to the fair value reflected in interest expense. The
Company is currently paying a weighted average fixed rate of 8.1% and
receiving a weighted average variable rate of 5.4% on swaps with a
notional amount of $250.0 million (for remaining periods up to 1997).
The Company is currently receiving a weighted average fixed rate of 7.3%
and paying a weighted average variable rate of 7.4% on swaps with a
notional amount of $95 million (through 1995). In addition, the Company
has swap agreements with a notional amount of $180 million (through
1996) whereby the Company is receiving a weighted average variable rate
of 5.2% and pays a weighted average variable rate of 6.1%.
The Company is exposed to credit loss in the event of non-performance by
the other parties to the interest rate swap agreements. However, the
Company does not anticipate non-performance by the counter parties.
Other
Interest costs capitalized on construction projects in 1994, 1993 and
1992 totalled $3.9 million, $3.4 million and $4.2 million, respectively.
Interest payments on all debt instruments for 1994, 1993 and 1992 were
$247.0 million, $226.2 million and $257.6 million, respectively.
5. -- Income Taxes
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." Prior years' financial statements
have not been restated.
5. -- Income Taxes (cont)
The cumulative effect of adopting SFAS No. 109 as of January 1, 1993 was
to increase net income by $20.5 million. For 1993, application of SFAS
No. 109 increased the pretax loss by $14.5 million because of increased
depreciation expense as a result of the requirement to report assets
acquired in prior business combinations at pretax amounts.
In adopting this new accounting principle, the Company (i) adjusted
assets acquired and liabilities assumed in prior business combinations
from their net-of-tax amounts to their pretax amounts and recognized the
related deferred tax assets and liabilities for those temporary
differences, (ii) adjusted deferred income tax assets and liabilities to
statutory income tax rates and for previously unrecognized tax benefits
related to certain state net operating loss carryforwards and, (iii)
adjusted asset and liability accounts arising from previous acquisitions
and recapitalizations to recognize potential tax liabilities related to
those transactions. The net effect of these adjustments on assets and
liabilities was to increase inventory $23.0 million, increase property,
plant and equipment and timberlands $196.5 million, increase goodwill
$42.0 million, increase liabilities by $12.6 million, and increase
deferred income taxes by $228.4 million.
At December 31, 1994, the Company has net operating loss carryforwards
for federal income tax purposes of approximately $460.5 million
(exp