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1998 Annual Report

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              ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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Index to Financial Statements:                                         Page No.
Management's Responsibility for Financial Statements ...................     24
Report of Independent Auditors .........................................     25
Consolidated balance sheets — December 31, 1998 and 1997 ..............     26
For the years ended December 31, 1998, 1997 and 1996:
  Consolidated statements of operations ................................     27
  Consolidated statements of stockholders' equity (deficit) ............     28
  Consolidated statements of cash flows ................................     29
Notes to consolidated financial statements .............................     30
The following consolidated financial statement schedule of Smurfit-Stone
Container Corporation is included in Item 14(a):
  II: Valuation and Qualifying Accounts and Reserves ...................     51
All other schedules specified under Regulation S-X for Smurfit-Stone Container
Corporation have been omitted because they are not applicable, because they are
not required or because the information required is included in the financial
statements or notes thereto.

MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS
     The management of the Company is responsible for the information contained
in the consolidated financial statements and in other parts of this report. The
consolidated financial statements have been prepared by the Company in
accordance with generally accepted accounting principles appropriate in the
circumstances, and necessarily include certain amounts based on management's
best estimate and judgment.
     The Company maintains a system of internal accounting control, which it
believes is sufficient to provide reasonable assurance that in all material
respects transactions are properly authorized and recorded, financial reporting
responsibilities are met and accountability for assets is maintained. In
establishing and maintaining any system of internal control, judgment is
required to assess and balance the relative costs and expected benefits.
Management believes that through the careful selection of employees, the
division of responsibilities and the application of formal policies and
procedures, the Company has an effective and responsive system of internal
accounting controls. The system is monitored by the Company's staff of internal
auditors, who evaluate and report to management on the effectiveness of the
system.
     The Audit Committee of the Board of Directors is composed of four directors
who meet with the independent auditors, internal auditors and management to
discuss specific accounting, reporting and internal control matters. Both the
independent auditors and internal auditors have full and free access to the
Audit Committee.
Roger W. Stone                                Paul K. Kaufmann
Roger W. Stone                                Paul K. Kaufmann
President and Chief Executive Officer         Vice President and Corporate Controller
                                              (Principal Accounting Officer)
 

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  REPORT OF INDEPENDENT AUDITORS Board of Directors Smurfit-Stone Container Corporation We have audited the accompanying consolidated balance sheets of Smurfit-Stone Container Corporation as of December 31, 1998 and 1997, and the related consolidated statements of operations, stockholders' equity (deficit) and cash flows for each of the three years in the period ended December 31, 1998. 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 Smurfit-Stone Container Corporation at December 31, 1998 and 1997, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1998 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 1 to the financial statements, in 1998 the Company changed its method of accounting for start-up costs. ERNST & YOUNG LLP ERNST & YOUNG LLP St. Louis, MO February 11, 1999 except for Notes 5 and 15, as to which the date is March 23, 1999  
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  SMURFIT-STONE CONTAINER CORPORATION CONSOLIDATED BALANCE SHEETS ———————————————————————————————————————————————- December 31, (In millions, except share data) 1998 1997 ———————————————————————————————————————————————- Assets Current assets Cash and cash equivalents .......................................... $ 155 $ 12 Receivables, less allowances of $85 in 1998 and $10 in 1997 ........ 743 302 Inventories Work-in-process and finished goods ............................... 238 89 Materials and supplies ........................................... 546 151 —————————— 784 240 Refundable income taxes ............................................ 24 6 Deferred income taxes .............................................. 160 32 Prepaid expenses and other current assets .......................... 118 10 —————————— Total current assets ........................................... 1,984 602 Net property, plant and equipment .................................... 5,496 1,523 Timberland, less timber depletion .................................... 276 265 Goodwill, less accumulated amortization of $73 in 1998 and $58 in 1997 2,869 237 Investment in equity of non-consolidated affiliates .................. 638 10 Other assets ......................................................... 368 134 —————————— $11,631 $ 2,771 ============================================================================================== Liabilities and Stockholders' Equity (Deficit) Current liabilities Current maturities of long-term debt ............................... $ 205 $ 15 Accounts payable ................................................... 533 334 Accrued compensation and payroll taxes ............................. 174 88 Interest payable ................................................... 126 25 Other current liabilities .......................................... 311 69 —————————— Total current liabilities ...................................... 1,349 531 Long-term debt, less current maturities .............................. 6,428 2,025 Other long-term liabilities .......................................... 1,026 225 Deferred income taxes ................................................ 1,113 362 Minority interest .................................................... 81 2 Stockholders' equity (deficit) Preferred stock, par value $.01 per share; 25,000,000 shares authorized; none issued and outstanding Common stock, par value $.01 per share; 400,000,000 shares authorized, 214,959,041 and 110,996,794 issued and outstanding in 1998 and 1997, respectively ............ 2 1 Additional paid-in capital ......................................... 3,376 1,168 Retained earnings (deficit) ........................................ (1,743) (1,543) Accumulated other comprehensive income (loss) ...................... (1) —————————— Total stockholders' equity (deficit) ........................... 1,634 (374) —————————— $11,631 $2,771 ============================================================================================== See notes to consolidated financial statements.  
Smurfit-Stone Home Annual Report Contents 10-K Contents
  SMURFIT-STONE CONTAINER CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS ——————————————————————————————————————————————————- Year Ended December 31, (In millions, except share data) 1998 1997 1996 ——————————————————————————————————————————————————- Net sales ..................................................... $ 3,469 $ 2,936 $ 3,087 Costs and expenses Cost of goods sold .......................................... 2,934 2,514 2,500 Selling and administrative expenses ......................... 342 247 255 Restructuring charge ........................................ 257 ————————————————- Income (loss) from operations ............................. (64) 175 332 Other income (expense) Interest expense, net ....................................... (247) (196) (198) Other, net .................................................. 4 (2) (3) ————————————————- Income (loss) from continuing operations before income taxes, minority interest, extraordinary item and cumulative effect of accounting change ......... (307) (23) 131 Benefit from (provision for) income taxes ..................... 114 3 (52) Minority interest expense ..................................... (1) ————————————————- Income (loss) from continuing operations before extraordinary item and cumulative effect of accounting change ........................................ (194) (20) 79 Discontinued operations Income from discontinued operations, net of income taxes of $6 in 1998, $14 in 1997 and $25 in 1996 ............... 10 21 38 ————————————————- Income (loss) before extraordinary item and cumulative effect of accounting change ............................... (184) 1 117 Extraordinary item Loss from early extinguishment of debt, net of income tax benefit of $9 in 1998 and $3 in 1996 ...................... (13) (5) Cumulative effect of accounting change Start-up costs, net of income tax benefit of $2 ............. (3) ————————————————- Net income (loss) ........................................... $ (200) $ 1 $ 112 ================================= Basic earnings per common share Income (loss) from continuing operations before extraordinary item and accounting change ................................ $ (1.56) $ (.18) $ .71 Discontinued operations ..................................... .08 .19 .34 Extraordinary item .......................................... (.11) (.04) Cumulative effect of accounting change ...................... (.02) ————————————————- Net income (loss) ......................................... $ (1.61) $ .01 $ 1.01 ================================= Weighted average shares outstanding ........................... 124 111 111 ================================= Diluted earnings per common share Income (loss) from continuing operations before extraordinary item and accounting change ................................ $ (1.56) $ (.18) $ .70 Discontinued operations ..................................... .08 .19 .34 Extraordinary item .......................................... (.11) (.04) Cumulative effect of accounting change ...................... (.02) ————————————————- Net income (loss) ......................................... $ (1.61) $ .01 $ 1.00 ================================= Weighted average shares outstanding ........................... 124 111 112 ==================================================================================================== See notes to consolidated financial statements.  
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  SMURFIT-STONE CONTAINER CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) ————————————————————————————————————————————————————————————— (In millions, except share data) ————————————————————————————————————————————————————————————— Common Stock —————————- Accumulated Number Par Additional Retained Other of Value, Paid-In Earnings Comprehensive Shares $.01 Capital (Deficit) Income (Loss) Total ————————————————————————————————————————————————————————————— Balance at January 1, 1996 ................... 110,989,156 $1 $1,168 $(1,656) $ $(487) Comprehensive income Net income ................................. 112 112 Other comprehensive income, net of tax ....................... ————————————————————————————————————— Comprehensive income ..................... 112 112 ————————————————————————————————————— Balance at December 31, 1996 ................. 110,989,156 1 1,168 (1,544) (375) Comprehensive income Net income ................................. 1 1 Other comprehensive income, net of tax ....................... ————————————————————————————————————— Comprehensive income ..................... 1 1 Issuance of common stock under stock option plan .................... 7,638 ————————————————————————————————————— Balance at December 31, 1997 ................. 110,996,794 1 1,168 (1,543) (374) Comprehensive income (loss) Net loss ................................... (200) (200) Other comprehensive income (loss), net of tax Foreign currency translation adjustment ............................. 3 3 Minimum pension liability adjustment ................... (4) (4) ————————————————————————————————————— Comprehensive income (loss) ............ (200) (1) (201) Issuance of common stock for acquisition of Stone Container Corporation, net of registration costs ..... 103,954,782 1 2,168 2,169 Fair value of Smurfit-Stone Container Corporation stock options issued to convert Stone Container Corporation stock options .................. 40 40 Issuance of common stock under stock option plan .......................... 7,465 ————————————————————————————————————— Balance at December 31, 1998 ................. 214,959,041 $2 $3,376 $(1,743) $(1) $1,634 ========================================================================================================================= See notes to consolidated financial statements.  
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  SMURFIT-STONE CONTAINER CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS ——————————————————————————————————————————————————————————— Year Ended December 31, (In millions) 1998 1997 1996 ——————————————————————————————————————————————————————————— Cash flows from operating activities Net income (loss) ............................................................ $ (200) $ 1 $ 112 Adjustments to reconcile net income (loss) to net cash provided by operating activities Extraordinary loss from early extinguishment of debt ..................... 22 8 Cumulative effect of accounting change for start-up costs ................ 5 Depreciation, depletion and amortization ................................. 168 127 125 Amortization of deferred debt issuance costs ............................. 8 11 13 Deferred income taxes .................................................... (113) 13 34 Non-cash employee benefit expense ........................................ 9 4 17 Foreign currency transaction gains ....................................... (4) Non-cash restructuring charge ............................................ 179 Change in current assets and liabilities, net of effects from acquisitions Receivables ............................................................ 98 (24) 60 Inventories ............................................................ 3 (32) 17 Prepaid expenses and other current assets .............................. (13) 3 Accounts payable and accrued liabilities ............................... (77) (4) Interest payable ....................................................... 26 (5) (4) Income taxes ........................................................... (18) (6) 2 Other, net ............................................................... 36 (4) ————————————————— Net cash provided by operating activities .................................... 129 88 380 ————————————————— Cash flow from investing activities Property additions ........................................................... (285) (166) (120) Timberland additions ......................................................... (2) (16) (9) Investments in affiliates and acquisitions ................................... (9) Cash acquired with acquisition, net of acquisition costs ..................... 222 Construction funds held in escrow ............................................ 9 (10) Proceeds from property and timberland disposals and sale of businesses ....... 6 7 6 ————————————————— Net cash used for investing activities ....................................... (59) (175) (133) ————————————————— Cash flow from financing activities Borrowings under bank credit facilities ...................................... 1,502 250 Net borrowings (repayments) under accounts receivable securitization program .......................................... (1) 30 (38) Payments of long-term debt ................................................... (1,384) (7) (481) Other increases in long-term debt ............................................ 64 13 Deferred debt issuance costs ................................................. (44) (6) ————————————————— Net cash provided by (used for) financing activities ......................... 73 87 (262) ————————————————— Increase (decrease) in cash and cash equivalents ............................... 143 (15) Cash and cash equivalents Beginning of year ............................................................ 12 12 27 ————————————————— End of year .................................................................. $ 155 $ 12 $ 12 ===================================================================================================================== See notes to consolidated financial statements.  
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  SMURFIT-STONE CONTAINER CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Tabular amounts in millions, except share data) 1. SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation: Smurfit-Stone Container Corporation ("SSCC"), formerly Jefferson Smurfit Corporation, and hereafter referred to as the "Company," owns 100% of the common equity interest in JSCE, Inc. and Stone Container Corporation ("Stone"). The Company has no operations other than its investments in JSCE, Inc. and Stone. JSCE, Inc. owns 100% of the equity interest in JSC (U.S.) and is the guarantor of the senior unsecured indebtedness of JSC (U.S.). JSCE, Inc. has no operations other than its investment in JSC (U.S.). JSC (U.S.) has extensive operations throughout the United States. Stone has extensive domestic and international operations. Nature of Operations: The Company's major operations are in paper products, recycled and renewable fiber resources, and consumer and specialty packaging. In February 1999, the Company announced its intention to divest its newsprint subsidiary, and accordingly, its newsprint segment is accounted for as a discontinued operation (See Note 11). The Company's paperboard mills procure virgin and recycled fiber and produce paperboard for conversion into corrugated containers, folding cartons, industrial bags and industrial packaging at Company-owned facilities and third-party converting operations. Paper product customers represent a diverse range of industries including paperboard and paperboard packaging, wholesale trade, retailing and agri-business. Recycling operations collect or broker wastepaper for sale to Company-owned and third-party paper mills. Consumer packaging produces labels and flexible packaging for use in industrial, medical and consumer product applications. Customers and operations are principally located in the United States. Credit is extended to customers based on an evaluation of their financial condition. Principles of Consolidation: The consolidated financial statements include the accounts of the Company and majority-owned and controlled subsidiaries. Investments in majority-owned affiliates where control does not exist and non-majority owned affiliates are accounted for on the equity method. Significant intercompany accounts and transactions are eliminated in consolidation. Cash and Cash Equivalents: The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. Cash and cash equivalents of $55 million and $9 million are pledged at December 31, 1998 and 1997 as collateral for obligations associated with the accounts receivable securitization programs (See Note 5). Revenue Recognition: Revenue is recognized at the time products are shipped to external customers. Inventories: Inventories are valued at the lower of cost or market, principally under the last-in, first-out ("LIFO") method except for $303 million in 1998 and $51 million in 1997 which are valued at the lower of average cost or market. First-in, first-out ("FIFO") costs (which approximate replacement costs) exceed the LIFO value by $45 million and $62 million at December 31, 1998 and 1997, respectively. Net Property, Plant and Equipment: Property, plant and equipment are carried at cost. The costs of additions, improvements and major replacements are capitalized, while maintenance and repairs are charged to expense as incurred. Provisions for depreciation and amortization are made using straight-line rates over the estimated useful lives of the related assets and the terms of the applicable leases for leasehold improvements. Estimated useful lives of papermill machines average 23 years, while major converting equipment and folding carton presses have estimated useful lives of 20 years. Based upon preliminary appraisal results, property, plant and equipment of Stone was recorded at fair market value on the date of the Merger, and useful lives averaging 17 years were assigned to the Stone assets (See Note 2). Timberland, less Timber Depletion: Timberland is stated at cost less accumulated cost of timber harvested. 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. 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. Deferred Debt Issuance Costs: Deferred debt issuance costs included in other assets are amortized over the terms of the respective debt obligations using the interest method. Long-lived Assets: In accordance with Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-lived Assets and for Long-lived Assets to be Disposed of," long-lived assets held and used by the Company and the related goodwill are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Income Taxes: The Company accounts for income taxes in accordance with the liability method of accounting for income taxes. Under the liability method, deferred assets and liabilities are recognized based upon anticipated future tax consequences attributable to differences between financial statement carrying amounts of assets and liabilities and their respective tax bases (See Note 7). Foreign Currency Translation: The functional currency for the majority of the Company's foreign operations is the applicable local currency. Accordingly, assets and liabilities are translated at the exchange rate in effect at the balance sheet date, and income and expenses are translated at average exchange rates prevailing during the year. Translation gains or losses are included within stockholders' equity as part of Accumulated Other Comprehensive Income. Foreign currency transaction gains or losses are credited or charged to income. The functional currency for foreign operations operating in highly inflationary economies is the U.S. dollar and any gains or losses are credited or charged to income. Financial Instruments: The Company periodically enters into interest rate swap agreements that involve the exchange of fixed and floating rate interest payments without the exchange of the underlying principal amount. For interest rate instruments that effectively hedge interest rate exposures, the net cash amounts paid or received on the agreements are accrued and recognized as an adjustment to interest expense. If an arrangement is replaced by another instrument and no longer qualifies as a hedge instrument, then it is marked to market and carried on the balance sheet at fair value. Gains and losses realized upon settlement of these agreements are deferred and amortized to interest expense over a period relevant to the agreement if the underlying hedged instrument remains outstanding, or immediately if the underlying hedged instrument is settled. The Company is exposed to the effect of foreign exchange rate fluctuations due to its foreign operations. The Company's non-consolidated equity affiliate, Abitibi-Consolidated, Inc. ("Abitibi") purchases foreign currency forward contracts to minimize the effect of fluctuating foreign currencies on its reported income, generally over the ensuing 60 months. The forward contracts do not qualify as hedges for financial reporting purposes and accordingly are carried in the financial statements of the equity investee at the current forward foreign rates, with the changes in forward rates reflected directly in income. Earnings per Common Share: Effective December 31, 1997, the Company adopted SFAS No. 128 "Earnings per Share." SFAS No. 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. As required, all prior-period earnings per share data presented have been restated. Basic earnings per share is computed by dividing income available to common shareholders by the weighted average number of shares outstanding. Diluted earnings per share is computed to show, on a pro forma basis, per share earnings available to common shareholders assuming the exercise or conversion of all dilutive securities that are exercisable or convertible into common stock (See Note 12). Employee Stock Options: Accounting for stock-based plans is in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. Under APB 25, because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. The Company has adopted the disclosure-only provisions of SFAS No. 123 "Accounting for Stock-Based Compensation" (See Note 10). Environmental Matters: The Company expenses environmental expenditures related to existing conditions resulting from past or current operations from which no current or future benefit is discernible. Expenditures that extend the life of the related property or mitigate or prevent future environmental contamination are capitalized. Reserves for environmental liabilities are established in accordance with the American Institute of Certified Public Accountants ("AICPA") Statement of Position ("SOP") 96-1, "Environmental Remediation Liabilities." The Company records a liability at the time when it is probable and can be reasonably estimated. Such liabilities are not discounted or reduced for potential recoveries from insurance carriers. Use of Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Reclassifications: Certain reclassifications of prior year presentations have been made to conform to the 1998 presentation. Start-up Costs: In April 1998, the AICPA issued SOP 98-5, "Reporting the Costs of Start-Up Activities," which requires that costs related to start-up activities be expensed as incurred. Prior to 1998, the Company capitalized certain costs to open new plants or to start new production processes. The Company adopted the provisions of the SOP in its financial statements as of the beginning of 1998. The Company recorded a charge for the cumulative effect of an accounting change of $3 million, net of taxes of $2 million ($.02 per share), to expense costs that had been capitalized prior to 1998. Prospective Accounting Pronouncements: SOP 98-1, "Accounting for Computer Software Developed or Obtained for Internal Use," was issued in March 1998. SOP 98-1 is effective beginning on January 1, 1999 and requires that certain costs incurred after the date of adoption in connection with developing or obtaining software for internal-use must be capitalized. The Company does not anticipate that the adoption of SOP 98-1 will have a material effect on its 1999 financial statements. In 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Investments and Hedging Activities." SFAS No. 133 requires that all derivative instruments be recorded on the balance sheet at fair value. The Company has not assessed what the impact of SFAS No. 133 will be on the Company's future earnings or financial position.  
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  2. MERGER AND RESTRUCTURINGS MERGER WITH STONE CONTAINER CORPORATION On November 18, 1998, Stone merged with a wholly-owned subsidiary of the Company ("the Merger"). Under the terms of the Merger, each share of Stone common stock was exchanged for the right to receive .99 of one share of Company common stock. A total of 104 million shares of Company common stock were issued in the Merger, resulting in a total purchase price (including the fair value of stock options and related fees) of approximately $2,245 million. The Merger was accounted for as a purchase business combination and, accordingly, the results of operations of Stone have been included in the consolidated statements of operations of the Company after November 18, 1998. The cost to acquire Stone has been preliminarily allocated to the assets acquired and liabilities assumed according to their estimated fair values and are subject to adjustment when additional information concerning asset and liability valuations is finalized. In addition, the allocation may be impacted by changes in pre-acquisition contingencies identified during the allocation period by the Company relating to its investment in Florida Coast Paper Company L.L.C. and the resolution of litigation related to Stone's purchase of common stock of Stone Savannah River Pulp and Paper Corporation (See Note 15). The preliminary allocation has resulted in acquired goodwill of approximately $2,650 million, which is being amortized on a straight-line basis over 40 years. The following unaudited pro forma combined information presents the results of operations of the Company as if the Merger had taken place on January 1, 1998 and 1997, respectively: ————————————————————————————————————- 1998 1997 ————————————————————————————————————- Pro Forma Information Net sales $ 7,731 $ 7,922 Loss from continuing operations before extraordinary item and cumulative effect of accounting change (976) (432) Net loss (992) (445) Net loss per common share Basic (4.61) (2.08) Diluted (4.61) (2.08) These unaudited pro forma results of operations have been prepared for comparative purposes only and do not purport to be indicative of the results of operations which actually would have resulted had the Merger occurred as of January 1, 1998 and 1997, respectively. RESTRUCTURING OF STONE OPERATIONS Included in the allocation of the cost to acquire Stone is the adjustment to fair value of property and equipment associated with the permanent shutdown of certain containerboard mill and pulp mill facilities of Stone, liabilities for the termination of certain Stone employees, and liabilities for long-term commitments. The mill facilities were shut down on December 1, 1998 and in the near future the Company will abandon or sell these facilities. The assets at these facilities were recorded at their estimated fair value less cost to sell based upon appraisals. The terminated employees included approximately 550 employees at these mill facilities and 200 employees in Stone's corporate office. These employees were terminated in December 1998. The long-term commitments consist of lease commitments and funding commitments on debt guarantees that are associated with the shutdown of the containerboard mill and pulp mill facilities or other investments in which the Company will no longer participate as a result of its merger plan. The following is a summary of the exit liabilities included in the preliminary allocation of the cost of Stone: ———————————————————————————————— Balance at Opening December 31, Balance Activity 1998 ———————————————————————————————— Severance $ 14 $ (4) $ 10 Lease commitments 38 (1) 37 Other commitments 56 (6) 50 Mill closure costs 9 9 ———————————————————- $117 $(11) $106 ================================================================ RESTRUCTURING OF JSC (U.S.) OPERATIONS In connection with the Merger, the Company recorded a pretax restructuring charge of $257 million related to the permanent shutdown of certain containerboard mill operations and related facilities formerly operated by JSC (U.S.), the termination of certain JSC (U.S.) employees, and liabilities for lease commitments at the shutdown JSC (U.S.) facilities. The containerboard mill facilities were permanently shut down on December 1, 1998 and in the near future the Company will abandon or sell these facilities. The assets at these facilities were adjusted to their estimated fair value less cost to sell based upon appraisals. The sales and operating income of these mill facilities in 1998 prior to closure were $209 million and $9 million respectively. The terminated employees included approximately 700 employees at these mills and 50 employees in the Company's corporate office. These employees were terminated in December 1998. The following are the components of the write down of property, plant and equipment to fair value and exit liabilities along with related 1998 activity: ———————————————————————————————— Balance at Opening December 31, Balance Activity 1998 ———————————————————————————————— Non-cash Write-down of property and equipment to fair value $179 $(179) $ Cash Severance 27 (3) 24 Lease commitments 21 (1) 20 Pension curtailments 9 9 Facility closure costs 13 (3) 10 Other 8 8 ————————————————————- $257 $(186) $71 ================================================================ CASH REQUIREMENTS Future cash outlays under the restructuring of Stone and JSC (U.S.) operations are anticipated to be $80 million in 1999, $21 million in 2000, $19 million in 2001, and $57 million thereafter. The Company is continuing to evaluate all areas of its business in connection with its merger integration, including the identification of corrugated container facilities that might be closed. Additional restructuring charges are expected in 1999 as management finalizes its plans. OTHER MERGER RELATED CHARGES In addition, the Company recorded $23 million of Merger related charges as selling and administrative expenses during the fourth quarter of 1998. These charges pertained to professional management fees to achieve operating efficiencies from the Merger, fees for management personnel changes and other Merger costs.  
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  3. NET PROPERTY, PLANT AND EQUIPMENT Net property, plant and equipment at December 31 consists of: —————————————————————————————- 1998 1997 —————————————————————————————- Land $ 145 $ 63 Buildings and leasehold improvements 780 304 Machinery, fixtures and equipment 5,279 2,024 Construction in progress 156 66 ——————————- 6,360 2,457 ——————————- Less accumulated depreciation and amortization 864 934 ——————————- Net property, plant and equipment $5,496 $1,523 =========================================================== Depreciation and depletion expense was $153 million, $119 million and $117 million for 1998, 1997 and 1996 respectively. Property, plant and equipment include capitalized leases of $68 million and $45 million and related accumulated amortization of $23 million and $18 million at December 31, 1998 and 1997, respectively.  
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  4. NON-CONSOLIDATED AFFILIATES The Company has several non-consolidated affiliates that are engaged in paper and packaging operations in North America, South America, Europe and Asia. Significant non-consolidated affiliates at December 31, 1998 include MacMillan Bathurst Inc. ("MBI"), a Canadian corrugated container company in which the Company owns a 50% interest, that had sales of $351 million in 1998. Also, as of December 31, 1998 the Company owned approximately 25% of Abitibi, which had sales of $2,313 million in 1998. Subsequently, on January 21, 1999, the Company sold 16% of its interest in Abitibi to a third party such that the Company's ownership percentage was reduced to approximately 22%. The Company is holding its remaining interest in Abitibi with a carrying value of $452 million at December 31, 1998 for sale. As of December 31, 1998, the carrying value of non-consolidated affiliates is $115 million lower than the underlying equity interest owned by the Company which represents the adjustments to fair value which were made in the allocation of the costs to acquire Stone. Combined summarized financial information for the Company's non-consolidated affiliates that are accounted for under the equity method of accounting is presented below: —————————————————————————————- 1998 —————————————————————————————- Results of operations:(a) Net sales $ 380 Cost of sales 119 Loss before income taxes, minority interest and extraordinary charges (56) Net loss (43) Financial position: Current assets $ 960 Noncurrent assets 4,224 Current liabilities 773 Noncurrent liabilities 1,972 Stockholders' equity 2,439 (a) Includes results of operations for each Stone affiliate after November 18, 1998.  
Smurfit-Stone Home Annual Report Contents 10-K Contents
  5. LONG-TERM DEBT Long-term debt, as of December 31, is as follows: —————————————————————————————————————————————————— 1998 1997 ——————————————————————————————————————————————————- BANK CREDIT FACILITIES JSC (U.S.) 1998 Tranche A Term Loan (7.4% weighted average variable rate), payable in various installments through March 31, 2005 ................................ $ 400 $ 1998 Tranche B Term Loan (8.0% weighted average variable rate), payable in various installments through March 31, 2006 ................................ 900 1994 Term Loans (8.5% weighted average variable rate)......................... 736 Revolving Credit Facility (7.8% weighted average variable rate), due March 31, 2005 ......................................................... 85 120 Stone Tranche B Term Loan (8.8% weighted average variable rate), payable in various installments through April 1, 2000 ...................... 368 Tranche C Term Loan (9.0% weighted average variable rate), payable in various installments through October 1, 2003 .................... 194 Tranche D Term Loan (9.0% weighted average variable rate), payable in various installments through October 1, 2003 .................... 185 Tranche E Term Loan (9.0% weighted average variable rate), payable in various installments through October 1, 2003 .................... 248 Revolving Credit Facility (8.5% weighted average rate), due April 1, 2000 .... 161 Europa Carton AG (a wholly-owned German subsidiary) 7.96% term loan, denominated in German DMs, payable in March 2005 ........................... 49 4.98% to 7.96% term loans, denominated in foreign currencies, payable in varying amounts through 2004 ............................................... 30 ———————— 2,620 856 ACCOUNTS RECEIVABLE SECURITIZATION PROGRAM BORROWINGS JSC (U.S.) accounts receivable securitization program borrowings (6.3% weighted average variable rate), due in February 2002 ................ 209 210 Stone accounts receivable securitization program term loans (6.2% weighted average variable rate), due December 15, 2000 ............... 210 ———————— SENIOR NOTES 419 210 JSC (U.S.) 11.25% Series A unsecured senior notes, due May 1, 2004 ...................... 300 300 10.75% Series B unsecured senior notes, due May 1, 2002 ...................... 100 100 9.75% unsecured senior notes, due April 1, 2003 ............................. 500 500 Stone 10.75% first mortgage notes, due October 1, 2002 (plus unamortized premium of $18) .......................................... 518 8.45% mortgage notes, payable in monthly installments through August 1, 2007 and $69 on September 1, 2007 ................................ 82 9.875% unsecured senior notes, due February 1, 2001 (plus unamortized premium of $7) ........................................... 578 11.5% unsecured senior notes, due October 1, 2004 (plus unamortized premium of $12)........................................... 212 11.5% unsecured senior notes, due August 15, 2006 (plus unamortized premium of $6) ........................................... 206 12.58% rating adjustable unsecured senior notes, due August 1, 2016 (plus unamortized premium of $2) ................................................. 127 ———————— 2,623 900 OTHER DEBT Other (including obligations under capitalized leases of $44 and $32) ........ 344 74 STONE SUBORDINATED DEBT 10.75% senior subordinated debentures and 1.5% supplemental interest certificates, due on April 1, 2002 (less unamortized discount of $5) ....... 270 10.75% senior subordinated debentures, due April 1, 2002 ..................... 200 11.0% senior subordinated notes, due August 15, 1999 (plus unamortized premium of $1) ........................................... 120 6.75% convertible subordinated debentures (convertible at $34.28 per share), due February 15, 2007 (less unamortized discount of $8) .................... 37 ————————— 627 ————————— Total debt ................................................................... 6,633 2,040 Less current maturities ...................................................... (205) (15) —————————- Total long-term debt ......................................................... $ 6,428 $2,025 =================================================================================================== The amounts of total debt outstanding at December 31, 1998 maturing during the next five years are as follows: 1999 $ 205 2000 843 2001 686 2002 1,395 2003 1,198 Thereafter 2,306 BANK CREDIT FACILITIES JSC (U.S.) CREDIT AGREEMENT In March 1998, JSC (U.S.) entered into a bank credit facility (the "JSC (U.S.) Credit Agreement") consisting of a $550 million revolving credit facility, ("Revolving Credit Facility"), of which up to $150 million may consist of letters of credit, a $400 million Tranche A Term Loan and a $350 million Tranche B Term Loan. Net proceeds from the offering were used to repay the 1994 JSC (U.S.) Tranche A, Tranche B, and Tranche C Term Loans and revolving credit facility. The write-off of related deferred debt issuance costs, totaling $13 million (net of income tax benefits of $9 million), is reflected in the accompanying consolidated statement of operations as an extraordinary item. On November 18, 1998, JSC (U.S.) and its bank group amended and restated the JSC (U.S.) Credit Agreement to, among other things, (i) allow an additional $550 million borrowing on the Tranche B Term Loan, (ii) allow the purchase of a paper machine from an affiliate (See Note 13), (iii) make a $300 million intercompany loan to SSCC which was contributed to Stone as additional paid-in capital, (iv) permit the Merger, and (v) ease certain financial covenants. A commitment fee of .5% per annum is assessed on the unused portion of the JSC (U.S.) Revolving Credit Facility. At December 31, 1998, the unused portion of this facility, after giving consideration to outstanding letters of credit, was $422 million. The JSC (U.S.) Credit Agreement contains various covenants and restrictions including, among other things, (i) limitations on dividends, redemptions and repurchases of capital stock, (ii) limitations on the incurrence of indebtedness, liens, leases and sale-leaseback transactions, (iii) limitations on capital expenditures, and (iv) maintenance of certain financial covenants. The JSC (U.S.) Credit Agreement also requires prepayments if JSC (U.S.) has excess cash flows, as defined, or receives proceeds from certain asset sales, insurance, issuance of equity securities or incurrence of certain indebtedness. The obligations under the JSC (U.S.) Credit Agreement are unconditionally guaranteed by the Company and JSCE, Inc. and its subsidiaries, and are secured by a security interest in substantially all of the assets of JSC (U.S.) and its material subsidiaries, with the exception of cash, cash equivalents and trade receivables. The JSC (U.S.) Credit Agreement is also secured by a pledge of all the capital stock of JSCE, Inc. and each of its material subsidiaries and by certain intercompany notes. STONE CREDIT AGREEMENT Stone has a bank credit agreement which provides for four secured senior term loans (Tranche B, Tranche C, Tranche D, and Tranche E Term Loans), aggregating $995 million at December 31, 1998 which mature through October 1, 2003 and a $560 million senior secured revolvingcredit facility, up to which $62 million may consist of letters of credit, maturing April 1, 2000 collectively the "Stone Credit Agreement"). Stone pays a .5% commitment fee on the unused portions of its revolving credit facility. At December 31, 1998, the unused portion of this facility, after giving consideration to outstanding letters of credit, was $363 million. On November 18, 1998, Stone and its bank group amended and restated the Stone Credit Agreement to, among other things, (i) extend the maturity date on the Tranche B Term Loan $190 million payment due on October 1, 1999 to April 1, 2000, (ii) extend the maturity date of the revolving credit facility to April 1, 2000 and to provide a further extension to December 31, 2000 upon repayment of the Tranche B Term Loan on or before its maturity date of April 1, 2000, (iii) permit the use of the net proceeds from the sale of the newsprint and related assets at the Snowflake, AZ facility to repay a portion of Stone's 11.875% Senior Notes due December 1, 1998, (iv) permit the Merger, and (v) ease certain financial covenants. The Stone Credit Agreement (as amended) contains various covenants and restrictions including, among other things, (i) limitations on dividends, redemptions and repurchases of capital stock, (ii) limitations on the incurrence of indebtedness, liens, leases and sale-leaseback transactions, (iii) limitations on capital expenditures, and (iv) maintenance of certain financial covenants. The Stone Credit Agreement also requires prepayments of the term loans if Stone has excess cash flows, as defined, or receives proceeds from certain asset sales, insurance, issuance of equity securities or incurrence of certain indebtedness. Any prepayments are allocated against the term loan amortization in inverse order of maturity. During January 1999, Stone obtained a waiver from its bank group for relief from certain financial covenant requirements under the Stone Credit Agreement as of December 31, 1998. Subsequently, on March 23, 1999 Stone and its bank group amended the Stone Credit Agreement to ease certain quarterly financial covenant requirements for 1999. At December 31, 1998, borrowings and accrued interest outstanding under the Stone Credit Agreement were secured by a security interest in substantially all of the assets of Stone with the exception of cash, cash equivalents and certain trade receivables, 65% of the stock of its Canadian subsidiary and all of the shares of Abitibi owned by Stone. ACCOUNTS RECEIVABLE SECURITIZATION PROGRAM BORROWINGS JSC (U.S.) SECURITIZATION PROGRAM JSC (U.S.) has a $315 million accounts receivable securitization program (the "JSC (U.S.) Securitization Program") which provides for the sale of certain of the Company's trade receivables to a wholly owned, bankruptcy remote, limited purpose subsidiary, Jefferson Smurfit Finance Corporation ("JS Finance"). The accounts receivable purchases are financed through the issuance of commercial paper or through borrowings under a revolving liquidity facility and a $15 million term loan. Under the JSC (U.S.) Securitization Program, JS Finance has granted a security interest in all its assets, principally cash and cash equivalents and trade accounts receivable. The Company has $106 million available for additional borrowing at December 31, 1998, subject to eligible accounts receivable. Borrowings under the JSC (U.S.) Securitization Program, which expire February 2002, have been classified as long-term debt because of the Company's intent to refinance this debt on a long-term basis and the availability of such financing under the terms of the program. STONE SECURITIZATION PROGRAM Stone has a $210 million accounts receivable securitization program (the "Stone Securitization Program") whereby certain eligible trade accounts receivable are sold to Stone Receivables Corporation, a wholly owned, bankruptcy remote, limited purpose subsidiary. The accounts receivable purchases are financed through the issuance of $210 million in term loans. Under the Stone Securitization Program, Stone Receivables Corporation has granted a security interest in cash, cash equivalents and trade accounts receivable. At December 31, 1998, $228 million of Stone's trade accounts receivable are pledged as collateral under the program. SENIOR NOTES JSC (U.S.) The 11.25% Series A Senior Notes are redeemable in whole or in part at the option of JSC (U.S.), at any time on or after May 1, 1999 with premiums of 5.625% and 2.813% of the principal amount if redeemed during the 12-month periods commencing May 1, 1999 and 2000, respectively. The 10.75% Series B Senior Notes and the 9.75% Senior Notes are not redeemable prior to maturity. Holders of the JSC (U.S.) 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. The Senior Notes, which are unconditionally guaranteed on a senior basis by JSCE, Inc., rank pari passu with the JSC (U.S.) Credit Agreement and contain business and financial covenants which are less restrictive than those contained in the JSC (U.S.) Credit Agreement. STONE Stone's senior notes (the "Stone Senior Notes"), aggregating $1,723 million, are redeemable in whole or in part at the option of Stone at various dates beginning in February 1999, at par plus a weighted average premium of 2.68%. The Merger constituted a "Change of Control" under the Stone Senior Notes and Stone's $627 million outstanding senior subordinated debentures (the "Stone Senior Subordinated Debentures"). As a result, Stone is required, subject to certain limitations, to offer to repurchase the Stone Senior Notes and the Stone Senior Subordinated Debentures at a price equal to 101% of the principal amount, together with accrued interest. However, because the Credit Agreement prohibits Stone from making an offer to repurchase the Stone Senior Notes and the Stone Senior Subordinated Debentures, Stone could not make the offer. Although the terms of the Stone Senior Notes refer to an obligation to repay the bank debt or obtain the consent of the bank lenders to such repurchase, the terms do not specify a deadline, if any, following the Merger for repayment of bank debt or obtaining such consent. Stone intends to actively seek commercially acceptable sources of financing to repay the Stone Credit Agreement or alternative financing arrangements which would cause the bank lenders to consent to the repurchase. There can be no assurance that the Company will be successful in obtaining such financing or consents. In the event Stone does not maintain the minimum Subordinated Capital Base (as defined) of $1 billion for two consecutive quarters, the indentures governing the Stone Senior Notes require Stone to semiannually offer to purchase 10% of such outstanding indebtedness at par until the minimum Subordinated Capital Base is attained. In the event the Stone Credit Agreement prohibits such an offer to repurchase, the interest rate on the Stone Senior Notes is increased by 50 basis points per semiannual coupon period up to a maximum of 200 basis points until the minimum Subordinated Capital Base is attained. Stone's Subordinated Capital Base (as defined) was $3,096 million at December 31, 1998; however, it was below the $1 billion minimum at September 30, June 30, and March 31, 1998 and December 31, 1997. In April 1998, Stone offered to repurchase 10% of the outstanding Stone Senior Notes. Approximately $1 million of such indebtedness was redeemed under this offer. Effective February 1, 1999 the interest rate on the 9.875% Senior Notes due February 1, 2001 and 12.58% Senior Notes due August 1, 2016 were increased by 50 basis points. Effective February 15, 1999 the interest rate on the 11.5% Senior Notes due August 15, 2006 was also increased 50 basis points. The interest rates on all of the Stone Senior Notes will return to the original interest rate on April 1, 1999 due to Stone's Subordinated Capital Base exceeding the minimum on December 31, 1998. On December 1, 1998, Stone repaid its $240 million 11.875% Senior Unsecured Notes at maturity, with borrowings under its revolving credit facility and proceeds from the sale of the Snowflake, AZ mill and related assets (See Note 13). The 10.75% first mortgage notes are secured by the assets at four of Stone's containerboard mills. The 8.45% mortgage notes are secured by the assets at 37 of Stone's corrugated container plants. STONE SUBORDINATED DEBT The Stone Senior Subordinated Debentures, aggregating $627 million, are redeemable as of December 31, 1998, in whole or in part at the option of Stone at par plus a weighted average premium of 2.56%. In the event Stone does not maintain a minimum Net Worth, as defined, of $500 million, for two consecutive quarters, the interest rate on Stone's 10.75% senior subordinated debentures ($470 million) and 11.0% senior subordinated notes ($120 million) will be increased by 50 basis points per semiannual coupon period up to a maximum amount of 200 basis points, until the minimum Net Worth is attained. Stone's Net Worth (as defined) was $2,590 million at December 31, 1998; however, it was below the $500 million minimum at September 30, June 30, March 31, 1998 and December 31, 1997. The interest rate on the 11.0% senior subordinated notes was increased 50 basis points on August 15, 1998 and 50 basis points on February 15, 1999. The interest rate on the 10.75% senior subordinated debentures and the 10.75% senior subordinated debentures with the 1.5% supplemental interest certificates was increased 50 basis points on October 1, 1998. The interest rate on all of the Stone Senior Subordinated Debentures will return to the original interest rate on April 1, 1999, due to Stone's Net Worth exceeding the minimum at December 31, 1998. OTHER Interest costs capitalized on construction projects in 1998, 1997 and 1996 totaled $2 million, $5 million and $3 million, respectively. Interest payments on all debt instruments for 1998, 1997 and 1996 were $206 million, $188 million and $186 million, respectively.  
Smurfit-Stone Home Annual Report Contents 10-K Contents
  6. LEASES The Company leases certain facilities and equipment for production, selling and administrative purposes under operating leases. Future minimum rental commitments (exclusive of real estate taxes and other expenses) under operating leases having initial or remaining non-cancelable terms in excess of one year are reflected below: ——————————————————————— 1999 $117 2000 96 2001 80 2002 67 2003 56 Thereafter 187 —— Total minimum lease payments $603 ============================================= Net rental expense for operating leases, including leases having a duration of less than one year, was approximately $69 million, $50 million and $50 million for 1998, 1997 and 1996, respectively.  
Smurfit-Stone Home Annual Report Contents 10-K Contents
  7. INCOME TAXES Significant components of the Company's deferred tax assets and liabilities at December 31 are as follows: ——————————————————————————————————- 1998 1997 ——————————————————————————————————- Deferred tax liabilities Property, plant and equipment and timberland $(1,622) $(414) Inventory 2 (13) Prepaid pension costs (41) (31) Investments in affiliates (57) Other (153) (114) ———————————— Total deferred tax liabilities (1,871) (572) ======================== Deferred tax assets Employee benefit plans 225 96 Net operating loss, alternative minimum tax and tax credit carryforwards 559 99 Deferred gain 23 Purchase accounting liabilities 103 Deferred debt issuance cost 52 Restructuring 49 Other 115 58 ———————————— Total deferred tax assets 1,126 253 Valuation allowance for deferred tax assets (208) (11) ———————————— Net deferred tax assets 918 242 ———————————— Net deferred tax liabilities $ (953) $(330) ====================================================================== At December 31, 1998, the Company had approximately $1,055 million of net operating loss carryforwards for U.S. Federal income tax purposes that expire from the years 2009 to 2018, with a tax value of $369 million. A valuation allowance of $153 million has been established for a portion of these deferred tax assets. Further, the Company had net operating loss carryforwards for state purposes with a tax value of $106 million, which expire from 1999 to 2018. A valuation allowance of $55 million has been established for a portion of these deferred tax assets. The Company had approximately $84 million of alternative minimum tax credit carryforwards for U.S. federal income tax purposes, which are available indefinitely. Benefit from (provision for) income taxes from continuing operations before income taxes, minority interest, extraordinary item and cumulative effect of accounting change is as follows: ——————————————————————————————— 1998 1997 1996 ——————————————————————————————— Current Federal $ 11 $10 $(18) State and local 3 Foreign (5) ———————————— Total current benefit (expense) 9 10 (18) Deferred Federal 91 (5) 1 State and local 11 (2) 5 Foreign 3 Net operating loss carryforwards (40) ———————————— Total deferred benefit (expense) 105 (7) (34) ———————————— Total benefit from (provision for) income taxes $114 $ 3 $(52) ============================================================== The Company's benefit from (provision for) income taxes differed from the amount computed by applying the statutory U.S. federal income tax rate to income (loss) from continuing operations before income taxes, minority interest, extraordinary items, and cumulative effect of accounting change as follows: ——————————————————————————————— 1998 1997 1996 ——————————————————————————————— U.S. federal income tax benefit (provision) at federal statutory rate $107 $ 8 $(46) Permanent differences from applying purchase accounting (6) (3) (3) Permanently non-deductible expenses (2) (8) 3 State income taxes, net of federal income tax effect 14 2 Effect of valuation allowances on deferred tax assets, net of federal benefit 1 7 (5) Other (3) (1) ————————————- Total benefit from (provision for) income taxes $114 $ 3 $(52) ============================================================== The components of the income (loss) from continuing operations before income taxes, minority interests, extraordinary item and change in accounting method are as follows: ———————------------------------------------------------ 1998 1997 1996 - ------------------------------------------------------------- United States $(309) $23 $131 Foreign 2 ------------------------- Income (loss) from continuing operations before income taxes, minority interest, extraordinary item and change in accounting method $(307) $23 $131 =========================================================== The federal income tax returns for 1989 through 1994 are currently under examination. While the ultimate results of such examination cannot be predicted with certainty, the Company's management believes that the examination will not have a material adverse effect on its consolidated financial condition or results of operations. The Company made income tax payments of $22 million, $8 million and $39 million in 1998, 1997 and 1996, respectively.  
Smurfit-Stone Home Annual Report Contents 10-K Contents
  8. EMPLOYEE BENEFIT PLANS DEFINED BENEFIT PLANS The Company sponsors noncontributory defined benefit pension plans covering substantially all employees. Approximately 26% of pension plan assets at December 31, 1998 are invested in cash equivalents or debt securities and 74% are invested in equity securities. Equity securities at December 31, 1998 include 1 million shares of SSCC common stock with a market value of approximately $16 million and 26 million shares of JS Group common stock having a market value of approximately $48 million. Dividends paid on JS Group common stock during 1998 and 1997 were approximately $2 million in each year. The defined benefit plans of JSCE, Inc. were merged with the defined benefit plans of Stone on December 31, 1998. As a result of this plan merger, the plan assets of the Company will be available to meet the funding requirements of all plans. Plan asset information provided below reflects the plan assets of the Company prior to the effect of this plan merger. POSTRETIREMENT HEALTH CARE AND LIFE INSURANCE BENEFITS The Company provides certain health care and life insurance benefits for all salaried as well as certain hourly employees. The assumed health care cost trend rates used in measuring the accumulated postretirement benefit obligation ("APBO") range from 5% to 9% at December 31, 1998, decreasing to the ultimate rate of 5%. The effect of a 1% increase in the assumed health care cost trend rate would increase the APBO as of December 31, 1998 by $9 million and have an immaterial effect on the annual net periodic postretirement benefit cost for 1998. The following provides a reconciliation of benefit obligations, plan assets, and funded status of the plans: - -------------------------------------------------------------------------------------------------- Defined Benefit Plans Postretirement Plans --------------------- -------------------- 1998 1997 1998 1997 - -------------------------------------------------------------------------------------------------- Change in benefit obligation: Benefit obligation at January 1 ......... $ 950 $ 864 $ 103 $ 98 Service cost ............................ 18 16 1 2 Interest cost ........................... 68 65 7 7 Amendments .............................. 8 Plan participants' contributions ........ 4 4 Actuarial loss .......................... 22 58 3 4 Acquisitions ............................ 778 73 Benefits paid ........................... (55) (53) (13) (12) ----------------------------------------------------- Benefit obligation at December 31 ....... $1,789 $ 950 $ 178 $ 103 ----------------------------------------------------- Change in plan assets: Fair value of plan assets at January 1, . $1,013 $ 926 $ $ Actual return on plan assets ............ 49 139 Employer contributions .................. 1 1 9 8 Plan participants' contributions ........ 4 4 Acquisitions ............................ 504 Benefits paid ........................... (55) (53) (13) (12) ----------------------------------------------------- Fair value of plan assets at December 31 $1,512 $1,013 $ $ ----------------------------------------------------- Over (under) funded status: ............. $ (277) $ 63 $(178) $(103) Unrecognized actuarial (gain) loss ...... (9) (32) 6 4 Unrecognized prior service cost ......... 44 43 (2) (3) Net transition obligation ............... (9) (13) ----------------------------------------------------- Net amount recognized ................... $(251) $ 61 $(174) $(102) ----------------------------------------------------- Amounts recognized in the balance sheets: Prepaid benefit cost .................... $ 52 $ 80 $ $ Accrued benefit liability ............... (303) (19) (174) (102) Additional minimum liability ............ (32) Intangible asset ........................ 26 Accumulated other comprehensive income .. 4 Deferred tax ............................ 2 ----------------------------------------------------- Net amount recognized ................... $ (251) $ 61 $(174) $(102) ================================================================================================== The weighted-average assumptions used in the accounting for the defined benefit plans and postretirement plans were: - ------------------------------------------------------------------------------------- Defined Benefit Plans Postretirement Plans --------------------- --------------------- 1998 1997 1998 1997 - ------------------------------------------------------------- --------------------- Weighted discount rate...................... 7.00% 7.25% 7.00% 7.25% Rate of compensation increase .............. 3.75% 4.00% N/A N/A Expected return on assets................... 9.50% 9.50% N/A N/A Health care cost trend on covered charges... N/A N/A 6.50% 7.50% The components of net pension expense for the defined benefit plans and the components of the postretirement benefit costs follow: - ------------------------------------------------------------------------------------ Defined Benefit Plans Postretirement Plans --------------------- --------------------- 1998 1997 1996 1998 1997 1996 - ------------------------------------------------------------ --------------------- Service cost ..................... $ 26 $ 19 $ 23 $1 $1 $ Interest cost..................... 74 65 62 8 7 7 Expected return on plan assets.... (90) (80) (75) Curtailment cost.................. 2 Special retiree charge............ 6 -------------------- ------------------- Net periodic benefit cost......... $ 12 $ 4 $ 16 $9 $8 $7 =================================================================================== The projected benefit obligation, accumulated benefit obligation, and fair value of plan assets for the pension plans with accumulated benefit obligations in excess of plan assets were $795 million, $778 million and $601 million, respectively, as of December 31, 1998 and $31 million, $27 million and none as of December 31, 1997. SAVINGS PLANS The Company sponsors voluntary savings plans covering substantially all salaried and certain hourly employees. The Company match is paid in SSCC common stock, up to an annual maximum. The Company's expense for the savings plans totaled $10 million, $9 million and $8 million in 1998, 1997 and 1996, respectively.  
Smurfit-Stone Home Annual Report Contents 10-K Contents
  9. MINORITY INTEREST At December 31, 1998 Stone had approximately 4.6 million shares of $1.75 Series E Cumulative Convertible Exchangeable Preferred Stock, $.01 par value, (the "Preferred Stock") issued and outstanding. Each share of Preferred Stock is entitled to one vote on all matters submitted to a vote of Stone's common stockholders. In addition, the holders of Preferred Stock are currently entitled to elect two directors of Stone as a result of the dividend arrearages on such shares. The Preferred Stock is convertible, at the option of the holder, into shares of SSCC common stock at the conversion price of $34.28 (equivalent to a conversion rate of .729 shares of SSCC Common Stock for each share of Preferred Stock), subject to adjustment based on certain events. The Preferred Stock may alternatively be exchanged, at the option of Stone, for new 7% Convertible Subordinated Exchange Debentures of Stone due February 15, 2007 in a principal amount equal to $25.00 per share of Preferred Stock so converted. Additionally, the Preferred Stock is redeemable at the option of Stone, in whole or in part, from time to time. Preferred dividends are reflected as a minority interest in the Company's Consolidated Statements of Operations. At December 31, 1998 Stone had accumulated dividend arrearages on the Preferred Stock of $14 million. The payment of dividends is prohibited by covenants in certain of the agreements and indentures relating to indebtedness of Stone.  
Smurfit-Stone Home Annual Report Contents 10-K Contents
  10. STOCK OPTION AND INCENTIVE PLANS Prior to the Merger, the Company and Stone each maintained incentive plans for selected employees. The Company's plan included non-qualified stock options issued at prices equal to the fair market value of the Company's stock at the date of grant which expire upon the earlier of 12 years from the date of grant or termination of employment, death, or disability. The Stone plans included incentive stock options and non-qualified stock options issued at prices equal to the fair market value of Stone's common stock at the date of grant which expire upon the earlier of 10 years from the date of grant or termination of employment, death, or disability. Effective with the Merger, options outstanding under the Stone plans were converted into options to acquire SSCC common stock, with the number of shares and exercise price being adjusted in accordance with the exchange ratio of .99 established in the Merger Agreement, and all outstanding options under both the Company and the Stone plans became exercisable and fully vested. In November 1998, the stockholders approved the 1998 Long-Term Incentive Plan (the "1998 Plan") reserving 8.5 million shares of Company stock for non-qualified stock options and performance awards to officers, key employees, and employee directors of the Company. The stock options are exercisable at a price equal to the fair market value of the Company's common stock on the date of grant. The vesting schedule and other terms and conditions of options granted under the 1998 Plan are established separately for each grant. The stock options granted during 1998 vest and become exercisable eight years after the date of grant subject to acceleration based upon the attainment of pre-established stock price targets. The number of options that become vested and exercisable in any one year may not exceed one-third of the options granted for certain participants and may not exceed one-fourth of the options granted for other participants. The performance awards permit the holder to receive amounts, denominated in shares of Company common stock, based on the Company's performance during the period between the date of grant and a pre-established future date. Performance criteria, the length of the performance period, and the form and time of payment of the award is established separately for each grant. There were no performance awards outstanding under the 1998 Plan at December 31, 1998. At December 31, 1998, 8.5 million shares of common stock from the 1998 Plan and approximately 28 million shares from previous plans were reserved for issuance under all of the Company's incentive plans. At December 31, 1998, approximately 4.5 million options from the 1998 Plan and approximately 14.4 million options from previous plans have been granted to obtain shares of common stock. Pro forma information regarding net income and earnings per share is required by SFAS No. 123 and has been determined as if the Company had accounted for its employee stock options issued subsequent to December 31, 1994 under the fair value method. The pro forma net income information required by SFAS No. 123 is not likely to be representative of the effects on reported net income for future years. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following assumptions: - ----------------------------------------------------------- 1998 1997 1996 - ----------------------------------------------------------- Expected option life (years) 6 5 6 Risk-free weighted average interest rate 4.79% 6.49% 6.22% Stock price volatility 53.30% 44.20% 42.10% Dividend yield 0.0% 0.0% 0.0% The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma information is as follows: - ---------------------------------------------------------- 1998 1997 1996 - ---------------------------------------------------------- As Reported Net income (loss) $ (200) $ 1 $ 112 Basic earnings per share (1.61) .01 1.01 Diluted earnings per share (1.61) .01 1.00 Pro Forma Net income (loss) $ (209) $ (1) $ 111 Basic earnings per share (1.69) (.01) 1.00 Diluted earnings per share (1.69) (.01) 1.00 The weighted average fair values of options granted during 1998, 1997 and 1996 were $6.98, $6.63 and $6.38 per share, respectively. Additional information relating to the Plans is as follows: - ------------------------------------------------------------------------------- Weighted Shares Option Average Under Price Exercise Option Range Price - ------------------------------------------------------------------------------- Outstanding at January 1, 1996 5,631,468 $10.00 - 17.63 $10.44 Granted 1,497,500 11.13 - 13.38 12.67 Exercised Cancelled 11,495 10.00 - 17.63 11.13 ----------------------------------------- Outstanding at December 31, 1996 7,117,473 $10.00 - 17.63 $10.91 Granted 1,238,500 13.13 - 15.81 13.43 Exercised 23,825 10.00 10.00 Cancelled 164,375 10.00 - 15.81 12.98 ----------------------------------------- Outstanding at December 31, 1997 8,167,773 $10.00 - 17.63 $11.25 Granted 4,728,000 12.81 - 15.81 12.94 Exercised 36,950 10.00 10.00 Cancelled 9,918 11.13 - 22.35 13.67 Stone addition 6,050,196 11.87 - 29.59 14.35 ----------------------------------------- Outstanding at December 31, 1998 18,899,101 $10.00 - 29.59 $12.67 ----------------------------------------- The following table summarizes information about stock options outstanding at December 31, 1998: - ---------------------------------------------------------------------------------------- Weighted Average Weighted Average Remaining Average Range of Options Exercise Contractual Options Exercise Exercise Prices Outstanding Price Life (Years) Exercisable Price - ---------------------------------------------------------------------------------------- $10.00 - 12.50 7,296,259 $10.67 6.66 7,296,259 $10.67 12.81 - 13.51 8,817,169 13.05 9.23 4,304,169 13.29 14.06 - 15.81 1,685,485 14.47 8.65 1,685,485 14.47 17.63 - 29.59 1,100,188 20.10 5.81 1,100,188 20.10 ---------- ---------- 18,899,101 14,386,101 The number of options exercisable at December 31, 1997 and 1996 were 483,100 and 506,925 respectively.  
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  11. DISCONTINUED OPERATIONS During February 1999 the Company adopted a formal plan to sell the operating assets of its subsidiary, Smurfit Newsprint Corporation ("SNC"). Accordingly, SNC is accounted for as discontinued operations in the accompanying consolidated financial statements. The Company has restated its prior financial statements to present the operating results of SNC as a discontinued operation. SNC revenues were $324 million, $302 million, and $323 million for 1998, 1997 and 1996, respectively. The net assets of SNC included in the consolidated balance sheets as of December 31, 1998 and 1997 consisted of the following: - ------------------------------------------------------------- 1998 1997 - ------------------------------------------------------------- Inventories and current assets $ 31 $ 20 Net property, plant and equipment 194 205 Other assets 7 7 Accounts payable and other current liabilities (67) (41) Other liabilities (72) (71) ----------------- Net assets of discontinued operations $ 93 $120 - -------------------------------------------------------------  
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  12. EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share: - ------------------------------------------------------------- (in millions except per share) 1998 1997 1996 - ------------------------------------------------------------- Numerator: Income (loss) from continuing operations before extraordinary item and cumulative effect of accounting change $ (194) $ (20) $ 79 --------------------------- Denominator: Denominator for basic earnings per share -- weighted average shares 124 111 111 Effect of dilutive securities: Employee stock options 1 --------------------------- Denominator for diluted earnings per share-- adjusted weighted average shares and assumed conversions 124 111 112 - ------------------------------------------------------------- Basic earnings (loss) per share from continuing operations before extraordinary item and cumulative effect of accounting change $(1.56) $(.18) $ .71 - ------------------------------------------------------------- Diluted earnings (loss) per share from continuing operations before extraordinary item and cumulative effect of accounting change $(1.56) $(.18) $ .70 - ------------------------------------------------------------- Options to purchase one million shares of common stock under the treasury stock method, convertible debt to acquire one million shares of common stock with an earnings effect of $2 million, and additional minority interest shares of three million with an earnings effect of $1 million are excluded from the diluted earnings per share computation in 1998 because they are antidilutive. Options to purchase an immaterial number of shares of common stock for 1997 and 1996 were outstanding, but not included in the computation of diluted earnings per share because the option exercise price was greater than the average market price of the common shares for the year.  
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  13. RELATED PARTY TRANSACTIONS TRANSACTIONS WITH JS GROUP Transactions with Jefferson Smurfit Group plc ("JS Group"), a significant shareholder of the Company, its subsidiaries and affiliated companies were as follows: - -------------------------------------------- 1998 1997 1996 - -------------------------------------------- Product sales $39 $34 $34 Product and raw material purchases 54 51 64 Management services income 4 4 5 Charges from JS Group for services provided 1 Charges to JS Group for costs pertaining to the Fernandina No. 2 paperboard machine through November 18, 1998 50 53 54 Receivables at December 31 5 3 3 Payables at December 31 4 11 10 Product sales to and purchases from JS Group, its subsidiaries and affiliates are consummated on terms generally similar to those prevailing with unrelated parties. The Company provides certain subsidiaries and affiliates of JS Group with general management and elective management services under separate Management Services Agreements. In consideration for general management services, the Company is paid a fee up to 2% of the subsidiaries' or affiliates' gross sales. In consideration for elective services, the Company is reimbursed for its direct cost of providing such services. On November 18, 1998 the Company purchased the No. 2 paperboard machine located in the Company's Fernandina Beach, FL, paperboard mill (the "Fernandina Mill") for $175 million from an affiliate of JS Group. Until that date, the Company and the affiliate were parties to an operating agreement whereby the Company operated and managed the No. 2 paperboard machine. The Company was compensated for its direct production and manufacturing costs and indirect manufacturing, selling and administrative costs incurred for the entire Fernandina Mill. The compensation was determined by applying various formulas and agreed-upon amounts to the subject costs. The amounts reimbursed to the Company are reflected as reductions of cost of goods sold and selling and administrative expenses in the accompanying consolidated statements of operations. Stone's Canadian subsidiary, Stone Container (Canada) Inc. ("Stone Canada") owns a 50% interest in MBI. On September 4, 1998, Stone Canada purchased the remaining 50% of MBI from MacMillan Bloedel Ltd., for $185 million (Canadian). Simultaneously, Stone Canada sold the newly acquired 50% interest to JS Group for the same amount. The Company, in connection with Merger related activities, either paid or reimbursed $16 million in legal fees, financial advisory fees and executive compensation to JS Group. TRANSACTIONS WITH NON-CONSOLIDATED AFFILIATES The following table summarizes the Company's sales of paperboard and other related party transactions with Stone's non-consolidated affiliates after November 18, 1998: - ------------------------------------------------------ 1998 - ------------------------------------------------------ Product sales $24 Accounts and notes receivable at December 31 70 On October 15, 1998 Stone sold its Snowflake, AZ newsprint manufacturing operations and related assets to Abitibi for $250 million. The Company retained ownership of a corrugating medium machine located in the facility that Abitibi will operate on behalf of the Company pursuant to an operating agreement entered into as part of the sale. Payments made to Abitibi under the operating agreement after November 18, 1998 were $4 million.  
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  14. Fair Value of Financial Instruments The carrying values and fair values of the Company's financial instruments are as follows: December 31, ------------------------------------ 1998 1997 ---------------- ---------------- Carrying Fair Carrying Fair Amount Value Amount Value - ---------------------------------------------------------- Cash and cash equivalents $ 155 $ 155 $ 12 $ 12 Notes receivable and long-term investments 22 22 Long-term debt including current maturities 6,633 6,690 2,040 2,105 The carrying amount of cash equivalents approximates fair value because of the short maturity of those instruments. The fair values of notes receivable and long-term investments are based on discounted future cash flows or the applicable quoted market price. The fair value of the Company's debt is estimated based on the quoted market prices for the same or similar issues or on the current rates offered to the Company for debt of the same remaining maturities.  
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  15. CONTINGENCIES The Company's past and present operations include activities which are subject to federal, state and local environmental requirements, particularly relating to air and water quality. The Company faces potential environmental liability as a result of violations of permit terms and similar authorizations that have occurred from time to time at its facilities. The Company faces potential liability for response costs at various sites with respect to which the company has received notice that it may be a potentially responsible party ("PRP"), as well as contamination of certain Company-owned properties, concerning hazardous substance contamination. In estimating its reserves for environmental remediation and future costs, the Company's estimated liability reflects only the Company's expected share. In determining the liability, the estimate takes into consideration the number of other PRP's at each site, the identity and financial condition of such parties and experience regarding similar matters. In April 1998, a suit was filed against Stone in Los Angeles Superior Court by Chesterfield Investments L.P. ("Chesterfield"), and D.P. Investments L.P. ("DPI"), alleging that Stone owes such parties approximately $120 million relating to Stone's purchase of common stock of Stone Savannah River Pulp and Paper Corporation ("SSR"). In 1991, Stone purchased the shares of common stock of SSR held by Chesterfield and DPI for approximately $6 million plus a contingent payment payable in March 1998 based upon the post-closing performance of the operations of SSR from 1991 through 1997. Stone has concluded a settlement of the case with DPI, which had a 30% interest in the contingent payment. Chesterfield is continuing to pursue the case as to the remaining 70% of the contingent payment. Stone disputes Chesterfield's calculation of the contingent payment, and is vigorously defending the litigation. The case is currently set for trial in the second quarter of 1999. Stone believes that existing reserves are adequate and the Company does not believe that the resolution of this matter will have a significant impact on the Company's financial condition or results of operations. Stone is a party to an Output Purchase Agreement (the "OPA") with Four M Corporation ("Four M") and Florida Coast Paper Company, L.L.C. ("FCPC"), a joint venture owned 50% by each of Stone and Four M. The OPA requires that Stone and Four M each purchase one half of the linerboard produced at FCPC's mill in Port St. Joe, FL (the "FCPC Mill") at a minimum price sufficient to cover certain obligations of FCPC. The OPA also requires Stone and Four M to use their best efforts to cause the FCPC Mill to operate at a production rate not less than the reported average capacity utilization of the U.S. linerboard industry. FCPC indefinitely discontinued production at the FCPC Mill in August 1998. Certain creditors of FCPC have alleged that Stone and Four M are in default with respect to their obligations under the OPA. Stone's ultimate liability under the OPA is uncertain at this time, although Stone believes that existing reserves are adequate to cover the amount of any adverse judgment in this matter. Subsequent to an understanding reached in December 1998, the Company and SNC entered into a Settlement Agreement in January 1999 to implement a nationwide class action settlement of claims involving Cladwood'r', a composite wood siding product manufactured by SNC that has been used primarily in the construction of manufactured or mobile homes. The Company recorded a $30 million pre-tax charge to reflect amounts SNC has agreed to pay into a settlement fund, administrative costs, plaintiffs' attorneys' fees, class representative payments and other costs. The Company believes its reserve is adequate to pay eligible claims. However, the number of claims, and the number of potential claimants who choose not to participate in the settlement, could cause the Company to re-evaluate whether the liabilities in connection with the Cladwood'r' cases could exceed established reserves. In March 1999, management of SNC's Oregon City, OR newsprint mill became aware of possible violations of the mill's National Pollutant Discharge Elimination System permit. SNC has provided both the EPA and Oregon Department of Environmental Quality with a detailed report of its internal investigation and it is probable that the agencies will conduct an additional investigation based on this report. The Company is unable to predict its potential liability in this matter at this time. The Company is a defendant in a number of lawsuits and claims arising out of the conduct of its business, including those related to environmental matters. While the ultimate results of such suits or other proceedings against the Company cannot be predicted with certainty, the management of the Company believes that the resolution of these matters will not have a material adverse effect on its consolidated financial condition or results of operations.  
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  16. BUSINESS SEGMENT INFORMATION The Company adopted SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information", in 1998 which changes the way operating segment information is presented. The information for 1997 and 1996 has been restated from the prior year's presentation in order to conform to the 1998 presentation. The Company has two reportable segments: (1) Containerboard and Corrugated Containers, and (2) Boxboard and Folding Cartons. The Containerboard and Corrugated Containers segment is highly integrated. It includes a system of mills and plants that produces a full line of containerboard that is converted into corrugated containers. Corrugated containers are used to transport such diverse products as home appliances, electric motors, small machinery, grocery products, produce, books, tobacco and furniture. The Boxboard and Folding Cartons segment is also highly integrated. It includes a system of mills and plants that produces a broad range of coated recycled boxboard that is converted into folding cartons. Folding cartons are used primarily to protect products, such as food, fast food, detergents, paper products, beverages, health and beauty aids and other consumer products, while providing point of purchase advertising. The Company evaluates performance and allocates resources based on profit or loss from operations before income taxes, and other gains and losses. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies except that the Company accounts for inventory on a FIFO basis at the segment level compared to a LIFO basis at the consolidated level. Intersegment sales and transfers are recorded at market prices. Intercompany profit is eliminated at the corporate division level. The Company's reportable segments are strategic business units that offer different products. The reportable segments are each managed separately because they manufacture distinct products. Other includes four non-reportable segments, specialty packaging, industrial bags, reclamation, international and corporate related items. Corporate related items include goodwill, equity investments, income and expense not allocated to reportable segments (goodwill amortization and interest expense), the adjustment to record inventory at LIFO, and the elimination of intercompany assets and intercompany profit. In 1998, corporate related items also included a $257 million restructuring charge (See Note 2). The restructuring charge included $179 million for the write-down of property, plant and equipment of the Containerboard and Corrugated Containers Segment to fair value. A summary by business segment follows: - -------------------------------------------------------------------------------------- Containerboard Boxboard & Corrugated & Folding Containers Cartons Other Total - -------------------------------------------------------------------------------------- Year ended December 31, 1998 Revenues from external customers ....... $ 2,014 $ 785 $ 670 $ 3,469 Intersegment revenues .................. 57 149 206 Depreciation, depletion and amortization 85 22 61 168 Segment profit (loss) .................. 123 67 (497) (307) Total assets ........................... 5,751 455 5,425 11,631 Capital expenditures ................... 221 26 40 287 Year ended December 31, 1997 Revenues from external customers ....... $ 1,607 $ 752 $ 577 $ 2,936 Intersegment revenues .................. 35 167 202 Depreciation, depletion and amortization 67 21 39 127 Segment profit (loss) .................. 56 68 (147) (23) Total assets ........................... 1,462 435 874 2,771 Capital expenditures ................... 101 37 44 182 Year ended December 31, 1996 Revenues from external customers ....... $ 1,794 $ 756 $ 537 $ 3,087 Intersegment revenues .................. 41 151 192 Depreciation, depletion and amortization 67 20 38 125 Segment profit (loss) .................. 197 66 (132) 131 Total assets ........................... 1,434 393 861 2,688 Capital expenditures ................... 58 24 47 129 - ------------------------------------------------------------------------------------- The following table presents net sales to external customers by country: - ----------------------------------------------- 1998 1997 1996 - ----------------------------------------------- United States $3,200 $2,753 $2,905 Canada 52 35 35 Europe and other 217 148 147 - ----------------------------------------------- Total net sales $3,469 $2,936 $3,087 =============================================== The following table presents long-lived assets by country: - ------------------------------------------------ 1998 1997 1996 - ------------------------------------------------ United States $4,972 $1,787 $1,719 Canada 325 1 1 Europe and other 475 - ------------------------------------------------ 5,772 1,788 1,720 Goodwill 2,869 237 246 - ------------------------------------------------ Total long lived assets $8,641 $2,025 $1,966 ================================================  
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  17. QUARTERLY RESULTS (UNAUDITED) The following is a summary of the unaudited quarterly results of operations: - --------------------------------------------------------------------------------------------------- First Second Third Fourth Quarter Quarter Quarter Quarter - --------------------------------------------------------------------------------------------------- 1998 Net sales ..................................... $ 764 $ 764 $ 758 $ 1,183 Gross profit .................................. 127 125 125 158 Income (loss) from continuing operations before extraordinary item and cumulative effect of accounting change ........................... 3 2 3 (202) Discontinued operations ....................... 8 9 5 (12) Extraordinary item ............................ (13) Cumulative effect of accounting change ........ (3) Net income (loss) ............................. (5) 11 8 (214) Basic earnings (loss) per share: Income (loss) from continuing operations before extraordinary item and cumulative effect of accounting change ........................... .03 .02 .03 (1.25) Discontinued operations ....................... .07 .08 .04 (.08) Extraordinary item ............................ (.12) Cumulative effect of accounting change ........ (.03) ------------------------------------------------- Net income (loss) ............................. (.05) .10 .07 (1.33) Diluted earnings (loss) per share: Income (loss) from continuing operations before extraordinary item and cumulative effect of accounting change ........................... .03 .02 .03 (1.25) Discontinued operations ....................... .07 .08 .04 (.08) Extraordinary item ............................ (.11) Cumulative effect of accounting change ........ (.03) ------------------------------------------------- Net income (loss) ............................. (.04) .10 .07 (1.33) 1997 Net sales ..................................... $ 711 $ 709 $ 753 $ 763 Gross profit .................................. 100 99 116 107 Income (loss) from continuing operations ...... (8) (9) 1 (4) Discontinued operations ....................... 1 5 7 8 Net income (loss) ............................. (7) (4) 8 4 Basic earnings (loss) per share: Income (loss) from continuing operations ...... (.07) (.08) .01 (.03) Discontinued operations ....................... .01 .04 .06 .07 --------------------------------------------------- Net income (loss) ............................. (.06) (.04) .07 .04 Diluted earnings (loss) per share: Income (loss) from continuing operations ...... (.07) (.08) .01 (.03) Discontinued operations ....................... .01 .04 .06 .07 ------------------------------------------------- Net income (loss) ............................. (.06) (.04) .07 .04 The first three quarters of 1998 and all quarters for 1997 have been restated to reflect discontinued operations. The first quarter of 1998 has been restated for the cumulative effect of accounting change for start-up costs. - ------------------------------------------------------------------------------- SMURFIT-STONE CONTAINER CORPORATION SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS AND RESERVES - ------------------------------------------------------------------------------- (In millions) - -------------------------------------------------------------------------------------------- Column A Column B Column C Column D Column E Column F - ------------------------------------ ---------- ----------- ---------- ---------- --------- Additions Balance at Charged Balance Beginning to Costs Deductions at End of Description of Period and Expenses Other Describe Period - ------------------------------------ ---------- ----------- --------- ---------- --------- Allowance for doubtful accounts and sales returns and allowances:   Year ended December 31, 1998 $ 10 $ 3 $ 75(b) $ 3(a) $ 85 ------------------------------------------------------- Year ended December 31, 1997 $ 9 $ 2 $ $ 1(a) $ 10 ------------------------------------------------------- Year ended December 31, 1996 $ 9 $ 5 $ $ 5(a) $ 9 ------------------------------------------------------- Restructuring of Stone operations: Year ended December 31, 1998 $ $ $117(d) $ 11(c) $106 ------------------------------------------------------- Restructuring of JSC (U.S.) operations: Year ended December 31, 1998 $ $ $257 $186(c) $ 71 ------------------------------------------------------- (a) Uncollectible amounts written off, net of recoveries. (b) Amount related to the acquisition of Stone. (c) Charges against the restructuring reserves. (c) Restructuring charges associated with exit activities included in the purchase price allocation of Stone. < Prev     Next > 
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