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1998 Annual Report

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                                     PART I
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                                ITEM 1. BUSINESS
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     On May 10, 1998, Jefferson Smurfit Corporation, a Delaware Corporation
("JSC"), now known as Smurfit-Stone Container Corporation (the "Company" or
"SSCC") entered into an Agreement and Plan of Merger (the "Merger Agreement")
with JSC Acquisition Corporation, a wholly-owned subsidiary of the Company ("JSC
Acquisition"), and Stone Container Corporation ("Stone"). Pursuant to the terms
of the Merger Agreement, JSC Acquisition was merged with and into Stone (the
"Merger") on November 18, 1998.
     As a result of the Merger, each issued and outstanding share of common
stock of Stone was converted into the right to receive .99 shares of SSCC common
stock, and Stone became a wholly-owned subsidiary of SSCC. SSCC continues to own
100% of the equity interest of JSCE, Inc. ("JSCE"). SSCC has no operations other
than its investment in JSCE and Stone. JSCE owns 100% of the equity interest in
Jefferson Smurfit Corporation (U.S.) ("JSC (U.S.)"). JSCE has no operations
other than its investment in JSC (U.S.). JSC (U.S.) and Stone collectively have
extensive operations throughout the United States, Canada, Europe, Central and
South America, Australia and Asia.
     SSCC, together with its direct and indirect subsidiaries, is a large,
integrated producer of containerboard, corrugated containers and other packaging
products. The Company believes its high level of integration enhances its
ability to respond quickly and efficiently to customers and to fill orders on
short lead times. SSCC operates in two major business segments: (1)
Containerboard and Corrugated Containers; and (2) Boxboard and Folding Cartons.
For a summary of revenues, profits, identifiable assets, capital expenditures
and depreciation, depletion and amortization for each of the Company's segments,
see Note 16, "Business Segment Information" of the Notes to Consolidated
Financial Statements contained in Part II, Item 8, "Financial Statements and
Supplementary Data".
     Amounts included in the discussion below include Stone's operations after
November 18, 1998 (the "Merger Date") to December 31, 1998. Subsequent to the
Merger Date, on December 1, 1998, JSC(U.S.) closed three containerboard mills
located in Alton, IL, Circleville, OH and Jacksonville, FL. Amounts in the
discussion below include these paper mill facilities through November 30, 1998.
In addition, the Company recently announced its intention to divest the
newsprint mills owned by Smurfit Newsprint Corporation, a wholly-owned
subsidiary of JSC (U.S.) ("SNC"), and accordingly its former newsprint segment
is now accounted for as a discontinued operation.
     The primary products of the Company's Containerboard and Corrugated
Containers segment include corrugated containers, containerboard, kraft paper,
solid bleached sulfate ("SBS"), pulp and timber products. This segment includes
15 paper mills and 137 container plants located in the United States and three
paper mills located in Canada. Sales for the Company's Containerboard and
Corrugated Containers segment in 1998 were $2,071 million (including $57 million
of intersegment sales).
     Production of the Company's containerboard mills and sales of the Company's
corrugated container facilities for the last three years, excluding Stone's
operations prior to the Merger Date, were:
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                                1998    1997    1996
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Tons produced 
  (in thousands)
  Containerboard               2,479   2,024   2,061
  Kraft paper                     63       0       0
  Solid bleached sulfate         185     190     189
  Market pulp                     71       0       0
Corrugated containers 
  sold (in billion sq. ft.)     36.5    31.7    30.0
     The Company's containerboard mills produce a full line of containerboard,
which for 1998 included 1,378,000 tons of unbleached kraft linerboard, 316,000
tons of mottled white linerboard, 677,000 tons of recycled medium and 108,000
tons of semi-chemical medium. The Company's containerboard mills and corrugated
container operations are highly integrated, with the majority of containerboard
produced by the Company used internally by its corrugated container operations.
In 1998, the Company's corrugated container plants consumed 2,377,000 tons of
containerboard, representing an integration level of approximately 96%.
     Corrugated containers are sold to a broad range of manufacturers of
consumable goods. Corrugated containers are used to ship such diverse products
as home appliances, electric motors, small machinery, grocery products, produce,
books, tobacco and furniture and for many other applications, including point of
purchase displays. The Company provides innovative packaging solutions,
stressing the value-added aspects of its corrugated containers, including
labeling and multi-color graphics to differentiate its products and respond to
customer requirements. The Company's corrugated container plants are located
nationwide, serving local customers and large national accounts. The Company's
sales of corrugated containers in 1998 were $1,422 million.
     The Company also produces solid bleached sulfate and kraft paper, portions
of which are consumed internally by the Company's folding carton and bag
packaging plants, respectively. In addition, the Company produces bleached
hardwood and softwood pulp, which is sold to manufacturers of fine papers,
photographic papers, tissue and newsprint.
     The Company manages approximately one million acres of owned and leased
timberland in the southeastern United States and 137,000 acres of owned
timberland in Canada. The Company also owns or leases timberland and conducts
forestry operations in Costa Rica and Venezuela. In 1998, the Company harvested
954,000 cords of timber, which was approximately 34% of the wood fiber
requirements for the Company's paper mills, including Stone's operations after
the Merger.
     The primary products of the Company's Boxboard and Folding Cartons segment
include coated recycled boxboard and folding cartons. Sales for the Company's
Folding Carton and Boxboard segment in 1998 were $785 million.
     Production of coated recycled boxboard in 1998, 1997 and 1996 by the
Company's boxboard mills was 582,000, 585,000 and 538,000 tons, respectively.
The Company's boxboard and folding carton operations are also integrated, with
the majority of tons produced by the Company's boxboard mills used internally by
its folding carton operations. In 1998, the Company's folding carton plants
consumed 611,000 tons of recycled boxboard, SBS and coated natural kraft,
representing an integration level of approximately 75%.
     Folding cartons are sold to manufacturers of consumable goods, especially
food, beverage, detergents, paper products and other consumer products. The
Company's folding carton plants offer extensive converting capabilities,
including web and sheet lithographic, rotogravure and flexographic printing,
laminating and a full line of structural and graphic design services. Folding
cartons are used primarily to protect customers' products while providing point
of purchase advertising. The Company makes folding cartons for a wide variety of
applications, including food and fast foods, detergents, paper products,
beverages, health and beauty aids and other consumer products. Customers range
from small local accounts to large national accounts. The Company's folding
carton plants are located nationwide. Folding carton sales volumes for 1998,
1997 and 1996 were 536,000, 488,000 and 474,000 tons, respectively. The
Company's sales of folding cartons in 1998 were $699 million.
     The Company has focused its capital expenditures and its marketing
activities in this segment to support a strategy of enhancing product quality as
it relates to packaging graphics, increasing flexibility while reducing customer
lead time and assisting customers in innovative package designs.
     The Company provides marketing consultation and research activities through
its Design and Market Research (DMR) center. It provides customers with graphic
and product design tailored to the specific technical requirements of
lithographic, rotogravure and flexographic printing, as well as photography for
packaging, sales promotion concepts, and point of purchase displays.
     SNC manufactures newsprint at two mills located in Oregon. SNC produced
575,000, 574,000 and 522,000 metric tons of newsprint during 1998, 1997 and
1996, respectively. In 1998, sales of newsprint were $303 million. For the past
three years, an average of approximately 44% of SNC's newsprint production has
been sold to The Times Mirror company ("Times Mirror") pursuant to a long-term
newsprint agreement (the "Newsprint Agreement") entered into in connection with
the Company's acquisition of SNC from Times Mirror in February 1986. Under the
terms of the Newsprint Agreement, SNC supplies newsprint to Times Mirror
generally at prevailing market prices. Sales of newsprint to Times Mirror in
1998 amounted to $126 million.
     As of March 15, 1999, Stone owned approximately 41 million shares of common
stock of Abitibi-Consolidated Inc., a Canadian-based manufacturer and marketer
of newsprint ("Abitibi"), representing approximately 22% of the total issued and
outstanding common stock.
     Cladwood'r' is a wood composite panel used by the housing industry,
manufactured from sawmill shavings and other wood residuals and overlaid with
recycled newsprint. SNC has two Cladwood'r' plants located in Oregon. Sales for
Cladwood'r' in 1998 were $21 million.
Industrial Bags
     The Company produces multi-wall bags, consumer bags and intermediate bulk
containers that are designed to safely and effectively ship a wide range of
industrial and consumer products, including fertilizers, chemicals, concrete,
flour, sugar, feed, seed, pet foods, popcorn, charcoal, salt and more. In
addition, the Company's non-consolidated affiliate S&G Packaging LLC, produces
grocery bags which are sold primarily to supermarket chains. The Company's paper
bag and industrial bag plants are located nationwide. The Company believes that
it is the largest producer of grocery bags (through its affiliate) and
industrial bags in the United States. In 1998, the Company's paper bag and
industrial bag plants consumed approximately 28% of the kraft paper produced by
its kraft paper mills. The Company's sales of industrial bags in 1998, excluding
Stone's operations prior to the Merger Date, were $59 million.
Specialty Packaging
     The Company produces a wide variety of specialty packaging products
including uncoated recycled boxboard, paper tubes and cores, solid fiber
partitions and consumer packaging. Paper tubes and cores are used primarily for
paper, film and foil, yarn carriers and other textile products and furniture
components. Flexible packaging, paper and metallized paper labels and heat
transfer labels are used in a wide range of consumer product applications. In
addition, a contract packaging plant provides custom contract packaging services
including cartoning, bagging, liquid-filling or powder-filling and high-speed
overwrapping. The Company produces high-quality rotogravure cylinders and has a
full-service organization experienced in the production of color separations and
lithographic film for the commercial printing, advertising and packaging
industries. In 1998, the Company's sales of specialty packaging products were
$294 million (including $17 million of intersegment sales).
Reclamation Operations
     The Company's reclamation operations procure fiber resources for the
Company's paper mills as well as other producers. The Company operates 27
reclamation facilities that collect, sort, grade and bale recovered paper. The
Company also collects aluminum and glass. In addition, the Company operates a
nationwide brokerage system whereby it purchases and resells recovered paper to
the Company's recycled paper mills and other producers on a regional and
national contract basis. Brokerage contracts provide bulk purchasing, resulting
in lower prices and cleaner recovered paper. Many of the reclamation facilities
are located close to the Company's recycled paper mills, assuring availability
of supply, when needed, with minimal shipping costs. Tons of recovered paper
collected for 1998, 1997 and 1996 were 5,155,000, 4,832,000 and 4,464,000,
respectively. In 1998, 33% of the recovered paper collected was sold internally
to the Company's paper mills. The Company's sales of recycled materials in 1998
were $397 million (including $132 million of intersegment sales).
Foreign Operations
     The Company's European operations include three paper mills, which produce
containerboard and boxboard, and 21 corrugated container plants. In addition,
the Company operates three plants in Mexico, two plants in Australia, one plant
in Asia and several small affiliate operations which also produce corrugated
containers. The Company's sales for its foreign operations in 1998, excluding
Stone's operations prior to the Merger Date, were $69 million. Projected sales
of the foreign operations for 1999 represent approximately 9% of the Company's
overall projected sales.
     Wood fiber and recycled fiber are the principal raw materials used in the
manufacture of the Company's paper products. The Company satisfies a significant
portion of its needs for wood fiber through its forestry operations and
essentially all of its need for recycled fiber through the operation of its
reclamation facilities and nationwide brokerage system. The Company's wood fiber
requirements not satisfied internally are purchased on the open market or under
long-term contracts.
     Wood fiber and recycled fiber are purchased in highly competitive, price
sensitive markets, which have historically exhibited price and demand
cyclicality. A decrease in the supply of wood fiber due to conservation
regulation has caused, and will likely continue to cause, higher wood fiber
costs in some of the regions in which the Company procures wood fiber.
Fluctuations in supply and demand for recycled fiber has from time to time
caused tight supplies of recycled fiber and at those times the Company has
experienced an increase in the cost of such fiber. While the Company has not
experienced any significant difficulty in obtaining wood fiber and recycled
fiber in proximity to its mills, there can be no assurances that this will
continue to be the case for any or all of its mills.
     The marketing strategy for the Company's mills is to maximize sales of
products to manufacturers located within an economical shipping area. Converting
plants focus 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.
     The Company's business is not dependent upon a single customer or upon a
small number of major customers. The Company does not believe that the loss of
any one customer would have a material adverse effect on the Company.
     The markets in which the Company sells its principal products are highly
competitive and 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 brought about
by shifts in industry capacity and other cyclical industry conditions. Other
competitive factors include design, quality and service, with varying emphasis
depending on product line.
     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. Backlogs are not a significant
factor in the industry. The Company does not have a significant backlog of
orders, as most orders are placed for delivery within 30 days.
     The Company's research and development center located in Carol Stream, IL
uses state-of-the-art technology to assist all levels of the manufacturing and
sales processes from raw materials supply through finished packaging performance. 
Research programs have provided improvements in coatings and barriers, stiffeners, 
inks and printing. The technical staff conducts basic, applied and diagnostic 
research, develops processes and products and provides a wide range of other 
technical services. The Company actively pursues applications for patents on new 
inventions and designs and attempts to protect its patents against infringement. 
Nevertheless, the Company believes that its success and growth are dependent on 
the quality of its products and its relationships with its customers, rather than 
on the extent of its patent protection. The Company holds or is licensed to use 
certain patents, licenses, trademarks and trade names on products, but does not 
consider that the successful continuation of any important phase of its business 
is dependent upon such intellectual property. The cost of the Company's research
and development center for 1998, 1997 and 1996 was approximately $3 million each
     The Company had approximately 38,000 employees at December 31, 1998, of
whom approximately 32,600 were employees of U.S. operations and the remainder
were employees of foreign operations. Of the domestic employees, approximately
21,700 (67%) are represented by collective bargaining units. The expiration
dates of union contracts for the Company's major paper mill facilities are as
follows: the Hodge, LA mill, expiring in June 2000; the Missoula, MT mill,
expiring in May 2001; the Jacksonville, FL (Seminole) mill, expiring in June
2001; the Hopewell, VA mill, expiring in July 2002; the Brewton, AL mill,
expiring in October 2002; the Panama City, FL mill, expiring in March 2003; the
Fernandina Beach, FL mill, expiring in June 2003; and the Florence, SC mill,
expiring in August 2003. 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 operations. While the terms
of these agreements may vary, the Company believes that the material terms of
its collective bargaining agreements are customary for the industry and the type
of facility, the classification of the employees and the geographic location
covered thereby.
     The Company's operations are subject to extensive environmental regulation
by federal, state, and local authorities. The Company has in the past, made
significant capital expenditures to comply with water, air, solid and hazardous
waste, and other environmental laws and regulations, and expects to make
significant expenditures in the future for environmental compliance. Because
various environmental standards are subject to change, it is difficult to
predict with certainty the amount of capital expenditures that will ultimately
be required to comply with future standards. In particular, the United States
Environmental Protection Agency ("EPA") has finalized significant parts of its
comprehensive rule governing the pulp, paper and paperboard industry (the
"Cluster Rule"), which will require substantial expenditures to achieve
compliance. The Company estimates, based on engineering studies done to date,
that compliance with these portions of the Cluster Rule should require up to
$310 million in capital expenditures over the next two to four years. The
ultimate cost of complying with the regulations cannot be predicted with
certainty until further engineering studies are completed and additional
regulations are finalized.
     In addition to Cluster Rule compliance, the Company also anticipates
additional capital expenditures related to environmental compliance, although in
the opinion of management, such compliance will not adversely affect the
Company's competitive position. For the past three years, the Company has spent
an average of approximately $41 million annually on capital expenditures for
environmental purposes. The anticipated spending for such capital projects for
fiscal 1999 is approximately $132 million. A significant amount of the increased
expenditures in 1999 will be due to compliance with the Cluster Rule and is
included in the estimate of up to $310 million set forth above. Since the
Company's principal competitors are, or will be, subject to comparable
environmental standards, including the Cluster Rule, management is of the
opinion, based on current information, that compliance with environmental
standards will not adversely affect the Company's competitive position.
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