1. Annual Report Smurt-StoneCorporation Container1999Smurt-Stone Container Corporation 1999 Annual Report

2. 1999: We promised. We delivered.Smurt-Stone at a Glance 2 Financial Highlights 4 Letter to Shareholders 5 1999: We Promised. We Delivered. 82000: Setting a New Agenda. We Will Deliver Again. 16 Board of Directors and Corporate Officers 26 Annual Report Form 10-k 27 3. Building a Strong FoundationS murfit-Stone Container Corporation began life with an optimistic, yet realistic, business plan. Our confidence in our ability to meet the challenges ahead and to achieve our ambitious goals has been more than justified by 1999s results. We promised to rationalize and integrate our container/containerboard mill system; to divest ourselves of non-core businesses and unprofitable joint ventures; to reduce debt, deliver on synergies, and continue to develop our people. At the end of the first year of a two-year plan, we not only delivered on those promises, we did it ahead of our own projected schedule.GOAL STATUS Rationalize Capacity Reduce containerboard capacity toAchievedmeet internal needs and real, open Completed within rstmarket demandmonth following mergerDivest Non-core Assets $2 billion within 24 monthsAhead of schedule $1.8 billion within 13 months 90% of goalReduce DebtReduce debt by $2.0 billion from Ahead of schedule$6.8 billion within 24 months$1.8 billion debt reduction to $4.8 billion at year-endRealize Synergies$220 million steady-state run rate Ahead of schedulein 1999; $350 million by mid-yearAchieved $284 million2000 in 1999Integrate Operations Achieve full rationalization ofOn schedulethe container/containerboard millsystem by the end of 24 monthsUnify Organization Establish strong core values,Ongoingleadership, staff, and culture1 4. Smurfit-Stone at a Glance Smurfit-Stone at a GlanceDescriptionCapabilitiesContainerboard and Containerboard and corrugated containers represent Full range of high-quality corrugated containers s Smurt-Stones largest business segment, with 65 percent Innovative packaging solutions and high-quality graphics sCorrugated Containersof the companys sales. The division s Complete line of retail-ready, point-of-purchase displayssupplies hundreds of national ands Full line of specialty products and custom, die-cut boxesinternational manufacturers, to display packaged merchandiseas well as thousands s Graphic capabilities include exo, preprint, post-print,of local and regional labels, and substratescustomers. s Cordeck corrugated palletsSmurt-Stone isthe leading supplier ofs Full range of domestic and export-specic liners, including containerboard to domestic mottled white and high-performance grades. Full rangeand export markets.of semi-chemical and recycled medium, including high-performance gradesFo l d i n g C a r t o n Smurt-Stone offers a wide range of styles appropriate Full line of folding cartons and clay-coated and uncoated s and Boxboard to nearly all carton end uses. These cartons are used by recycled boxboard in newsback, kraftback, andconsumer-goods producers to package foods, beverages,whiteback gradesfast food, soap, paper, pharmaceuticals, and cosmetics.s Extensive converting capabilities and support Printing capabilities include sheet and web, lithographic, services in structural and graphic design,rotogravure, and exographic.mechanical packaging, engineering services, electronic data interchange, research and development s High-quality, preprinted E-ute and F-utecorrugated packaging in a full range of grades in calipers, from .014 to .040 S p e c i a l t y Pa c k a g i n g The specialty-packaging business comprises Paper tubes and cores s industrial and consumer packaging. s Labels for decorative packaging applicationsB a g Pa c k a g i n g Industrial produces tubes and cores,s Solid ber and paperboard partitionspartitions, and a number of specializeds Flexible-packaging operations with specializedproducts. Consumer meets the Recycled Fiberlaminationproduct needs of a wide varietys Specialized products, includingof marketing, manufacturing,furniture forms, construction forms,and consumer companies.industrial dissipative storage tubes,and electrostatic board (PROTECH)Multiwall, consumer, specialty, and exible bags are used to Multiwall, industrial, consumer, specialty, and exible bags s ship, store, protect, and promote a wide range of products.Full line of exible, intermediate bulk containers s Smurt-Stone offers a coordinateds Custom-designed bag packagingapproach to analyzing customer needs s Packaging equipment and systems that ll,and providing both the bag-packaging seal, convey, and palletize bag productsand packaging equipment system s Technical, graphics, and marketingthat best suits the product, production, expertiseand protection requirements of itscustomers.Smurt-Stone is unique in the paper and packaging industryRecycling business handles recovered paper generated s in that it has a strong position in recycled ber. The companyby industrial, commercial, and residential sources.has built the largest reclamation business in the industry and s Collected material includes old corrugated containers, now collects and processes approximately 7 million tons of newspapers, magazines, aluminum cans, glass,recycled paper every year. and plastics. s Waste Reduction Services provides waste-managementsolutions to businesses. 2 5. I n d u s t r y P o s i t i o n / Fa c i l i t i e s 1999 Status2000 AgendaLargest supplier of corrugated containersEliminated 1.5 million tons of inefficient capacityComplete optimization of mill system sssIndustrys most complete line of graphic Implemented two price increasesContinue plant-by-plant, full-potential program ssscapabilities s Improved segment prot by $361 millions Major domestic export supplier ofs Initiated a full-potential programcontainerboard s Approximately 150 container facilitiesworldwide s 18 paper and paperboard millss Marketing and Technical Center (MTC) inWestmont, IL A leading supplier of folding cartons andContinued to grow the business Emphasize margin improvement and cost take out sssclay-coated recycled boxboardOutperformed the industry by vefold Evaluate acquisition opportunitiessss Provider of broadest range of supports Folding carton side posted record earningsservices in the industry s Asitrade machine in Cleveland sold out s 19 folding carton facilitiess 4 clay-coated, recycled boxboard millss 1 paper can plant in Conyers, GA A leading producer of paper tubes and coresTubes, cores and, partition business close to plan Mill system improvement sss and ahead of 1998 One of the nations largest contract packagersTake advantage of strong outlook for consumer s sand suppliers of labels for decorative packagings Major consumer business ahead packaging applicationsof 1998 status and close to s Adding a new product (stand-up pouch)1999 plan s Industry leader in litho and heat-transferto exible packaging business labels, exible lms, and contract packaging s Increased prices on converting s 3 uncoated, recycled boxboard mills business s 17 tube and core plantss 3 partition plantss 9 consumer-packaging plants Industrys largest manufacturer of multiwall Retained a leading position in marketplace Improve prot margins by managing inventory, sssindustrial and consumer bagslowering waste rates, focusing on quality, andSolidied market share gains in a changingsmaximizing efficiency of existing system s A leading industry manufacturer of exible,industry intermediate bulk containerss Improve safety record through awareness and training s 13 bag plants in the U.S. programs s Technical and Graphics Center inCantonment, FL s Bag Packaging Equipment Groupin Salt Lake City, UT Largest reclamation business in the industry Grew at three times the industry average Continue implementation of productivity- sssimprovement process 26 U.S. collection centers Best safety year on record sss Evaluate acquisition candidates to support s 11 U.S. brokerage officess Closed three marginal plantsmill system s 1 brokerage office in Shanghai, Chinas Reduced salaried headcount by 9%3 6. Financial Highlights Dollars in millions, except per share data1999 1998 1997Summary of operations Net sales $ 7,151$ 3,485$2,957 Income (loss) from operations423 (93)176 Interest expense, net(563)(247)(196) Income (loss) from continuing operations before extraordinary item and cumulative effect of accounting change 163(211) (19) Net income (loss)157(200) 1 Basic earnings per share Income (loss) from continuing operations before extraordinary item and cumulative effect of accounting change$ .75$ (1.70) $ (.17) Net income (loss) .72(1.61) .01 Weighted average shares outstanding (in millions)217124111 Diluted earnings per share Income (loss) from continuing operations before extraordinary item and cumulative effect of accounting change$ .74$ (1.70) $ (.17) Net income (loss) .71(1.61) .01 Weighted average shares outstanding (in millions)220124111 Other nancial data Net cash provided by operating activities $183 $129 $ 88 Capital investments and acquisitions 156287191 Net working capital 42635 71 Property, plant, equipment and timberland, net4,4195,7721,788 Total assets9,859 11,6312,771 Long-term debt4,7936,6332,040 Stockholders equity (decit) 1,8471,634 (374) Number of employees 36,30038,00015,800 Sales per product segment Containerboard and 18% Corrugated Containers47%Folding Cartons and Boxboard 12%Other: Bag Packaging 7% Recycled Fiber4% Specialty Packaging 4%International and Other 8%4 7. Letter to ShareholdersMichael W.J. Smurt,Chairman of the Board, left,and Ray M. Curran,President and Chief Executive Officer Dear Shareholder, Our first full year as Smurfit-Stone was a year of integration, change, andconstant challenge. Ultimately, we cleared each hurdle and ended the yearwith a record of accomplishment. We have achieved our initial objectives among them, advancing our position as a leader in the industry. We have laid a foundation for future growth and are now building upon it, as we will detail later in this report.At the outset, we outlined an ambitious transitionissues created by the merger of two large companies and agenda for the 24-month period following the completiondevoted substantial management time to extricating our- of the merger of Jefferson Smurfit Corporation ( JSC)selves from unprofitable joint ventures and investments and Stone Container Corporation. Our goals were clearlythat drained resources. defined: divest non-core assets and exit unprofitable No merger process is easy, and ours was no exception. ventures, reduce debt, generate synergy savings, rational- The inevitable headcount reductions, as well as the deci- ize manufacturing capacity, and integrate our operations sion to sell or exit certain businesses, forced us to part especially the container and containerboard business company with good employees. We invested time and into one efficient system. We also pledged to follow anmoney in assisting our employees with the transition operating strategy of producing for demand, rather thanin their careers. building inventory, and a capital strategy of managingWhen Roger Stone opted to retire early in 1999, the investments to real change in demand, rather thanBoard of Directors elected Ray Curran president and CEO. anticipated demand.By blending existing talent with external recruitment,Now, halfway through the transition period, we arewe strengthened our management team. We will continue on schedule. We quickly rationalized major operations, to develop and recruit talent to achieve our ambitious sold assets and businesses that did not fit our focusedperformance objectives. packaging strategy, improved operating cash flow, and We are fully committed to completing our 24-month strengthened our balance sheet. Despite the heavy debt agenda: building on the achievements of the first year; level at the merger date, we were generating positiveimproving all our businesses; and continuing to deliver cash flow by the second quarter. We paid attention toon our promises. We will create stockholder value; provide our customers and our operations, as well as to financiala safe and satisfying work environment for our employees; discipline. Operating results improved each quarter, and provide innovation, service, value, and quality for our Smurfit-Stone reported a profit by the final quarter ofcustomers; and commit to the communities in which we the year. We also resolved many complex organizational conduct business. 5 8. Letter to Shareholders 1999 Results and 2000 Outlook The primary merger-related expenses that impactedprofit negatively during the year were severance and Smurfit-Stone posted net income in 1999 of $157 millionshutdown costs related to our ongoing rationalization or $.71 per diluted share compared to a net loss ofprogram. In addition, in the second half we recorded $200 million or $1.61 per diluted share in 1998. Thecharges in excess of $20 million, resulting from mill 1999 results included after-tax gains of $268 million, ordowntime related to Hurricane Floyd, as well as downtime $1.22 per diluted share, related to the sale of non-coreto manage containerboard mill inventories at year end. assets. Excluding the gains from asset sales, the companyRecycled fiber costs, a raw material for the companys posted a loss of $.48 per diluted share from continuingmills, were, on average, considerably higher than in operations, before extraordinary item. Sales for 1999 were1998. The impact of higher recycled fiber costs was $7.2 billion, compared to $3.5 billion the previous year.partly offset by more favorable virgin fiber costs. Smurfit-Stones results for 1998 included the results The primary drivers of earnings improvement of JSC, the predecessor of Smurfit-Stone, for the full year,through the year were our cost-reduction efforts; our and the results of Stone Container from November 18,divestiture program, which lowered debt and interest 1998, the date of the merger, through the end of the year.expense; and the overall improvement in the container- The best measure of our progress in 1999 was the sequen-board and corrugated container business. Healthy demand tial improvement in earnings, rather than comparisonsfor corrugated containers, coupled with balanced supply to 1998. We began 1999 with a first-quarter loss fromof containerboard, stabilized prices in the beginning of continuing operations of $.43 per diluted share andthe year and eventually supported price restoration. narrowed that loss each quarter until we reported a profit Shipment volumes decreased primarily as a result of from continuing operations, excluding asset sale gains,our operating plan to focus on margin improvement and of $.20 per diluted share for the fourth quarter. Our casha better business mix, following the sizable shutdown in flow improved rapidly.capacity in late 1998. Healthy demand supported price Proceeds from asset sales and refinancing activitiesincreases in boxboard and kraft paper. enabled us to keep our debt reduction program on target. We With little new capacity anticipated in the container- reduced debt from $6.6 billion at year-end 1998 to $4.8 bil-board sector and growing demand for packaging, we hope lion at year-end 1999. Interest expense was $563 million infor continued improvement in the supply/demand balance 1999. EBITDA (earnings before interest, taxes, deprecia-in 2000. Favorable conditions will enable us to further our tion, and amortization) excluding gain on asset sales ofstrategic agenda of capitalizing on new opportunities and $446 million for the full year was $872 million. In the fourthcontinuing to improve our operations in 2000. quarter it was $311 million. Capital spending for 1999 was Asset sales and anticipated cash flow from operations $156 million, substantially below depreciation of $352 million.will enable us to achieve substantial debt reduction in2000. This ongoing debt reduction will continue to reduceour interest expense to more manageable levels. At thestart of 2000 we began the process of extending the Stonerevolving credit agreements. This extends the side-by-side capital structure of the company, which preservesthe companys two operating entities, Stone and JeffersonSmurfit Corporation (U.S.). This postponement of com-prehensive refinancing of the company saves substantialfinancing costs.In addition to Michael W.J. Smurt and Raymond M. Curran,Delivering on Our Promises the companys Executive Committee includes (from left to right): Peter F. Dages, Vice President and General Manager, CorrugatedOur top financial priority has been to reduce debt, thereby Container Division; William N. Wandmacher, Vice President andreducing risk in a historically cyclical business. At the General Manager, North American Containerboard Mill Division;merger date, Smurfit-Stone had $6.8 billion of debt. We and Patrick J. Moore, Vice President and Chief Financial Officer. 6 9. $625 million in cash and 25 million shares of Smurfit- identified an estimated $2 billion in non-core assets to Stone common stock. This is a company with high-quality be divested within the first 24 months, with the proceeds assets, and it is a strong fit with two Smurfit-Stone strate- to be applied to debt reduction. By November 1999, we gies: to grow the company through acquisitions and to had achieved approximately $1.8 billion in asset sales, expand our core packaging business, especially in the 90 percent of our original target. The largest asset sale was higher margin areas. A more detailed account of this our timberland holdings, which sold for $710 million in transaction is presented on page 24 in this report. the fourth quarter. Newsprint assets, such as our stake in Abitibi Consolidated and our Newberg, OR, mill, were sold, along with other domestic and foreign assets. Taking a Non-traditional ApproachWe achieved $284 million in synergies in 1999, Our goal is not only to position the company as an industry surpassing our goal of $220 million. The synergies were leader but eventually to measure Smurfit-Stone against primarily driven by containerboard mill and container the best industrial companies in terms of customer satis- plant rationalization, grade mix optimization, reduction faction, growth, opportunity for employees, and returns to in general and administrative costs, and purchasing sav- shareholders. That will require a non-traditional approach ings. The cash cost to achieve these synergies was $95 mil- to the packaging business, bringing a heavy emphasis on lion, primarily severance, restructuring, and shutdown marketing an array of packaging products and providing costs. The cost to achieve these synergies had an impact innovative ways to solve fulfillment and supply problems on the income statement of $41 million, for a net profit for manufacturers, distributors, and retailers. improvement from the synergy program of $243 millionWe foresee far greater returns from investing in peo- for 1999. In addition, the synergy program enabled the ple than from buying new machinery. We are committed company to avoid cash payments of $44 million during to training employees under a combined quality manage- 1999. We expect to meet our synergy target of $350 million ment program. We are striving to achieve an accident-free on schedule in 2000. work environment and to retain and recruit the best and brightest employees to help us create and further develop Setting a New Agendaa new business model.We are encouraged and excited about and fulfilling From an operating standpoint, our focus has been onour business plan. While our top priority for 1999 was to retaining customers, as we integrated two large container- reduce debt and integrate the company, the ultimate goal board mill and corrugated container systems. The reduc- for 2000 is to realize the full potential from our operations. tion in containerboard capacity forced us to cut back sales With the company now solidly profitable, we are commit- to the open market. We sacrificed some volume during the ted to building on our accomplishments of the last year. year as we consolidated corrugated container operations and focused on customers who value high levels of service.Having reached our initial goals, we enter the second phase of our transition. Our agenda for 2000 will focus heavily on operations, including: fully realizing synergies; continuing the optimization of the containerboard, con- Michael W. J. Smurfit tainer, and logistics system; developing the full potential Chairman of the Board of all of the companys packaging businesses; and exceed- ing customer expectations by understanding and antici- pating their needs and effectively marketing a diversified product line.Ray M. Curran St. Laurent Acquisition President and Chief Executive Officer In February 2000, we announced the acquisition of St. Laurent Paperboard Inc., for approximately April 1, 2000 7 10. 1 9 9 9 : We Pr o m i s e d . We D e l i v e r e d . Building a Strong Foundation In May 1998, when we announced the merger of JSC andStone Container, we sketched out two ambitious goals: tore-energize the business and to create new value for share- holders in a flagging industry. In 1999, we implemented our stated business plan rationalization, divestiture, integration of container/containerboard operations, synergies, and debt reduction for achieving the initial goals of the merger. We delivered what we promised, and we remain on schedule with our agenda.Rationalized Container and Containerboard Mill System In late 1998, according to plan, we closed four of our 22 containerboard mills. Mill closings were based on a comparative financial analysis of structures and future operating costs. Their tonnage was moved to the remaining 18 mills in order to optimize produc- tion. In the process, we were able to walk away from a substantial amount of unprofitable business, much of which was overseas; run the remaining mill system at a lower cost; and direct more of our output to our own container plants. Our effort at integrating our business enabled us to learn the best practices of each facility and provided good data for improving the operational excellence process. For example, at our Missoula, MT, mill, we realized substantial savings on total cash costs. This was achieved through improved machine speeds and uptime; reduced waste, energy, and maintenance costs; and an improved grade mix of linerboard produced at the mill. One of the key ingredients in the rationalization, from a human resources perspec- tive, was ensuring that we helped employees with the transition in their careers. To that end, we enhanced our severance programs, provided opportunities for outplacement, and encouraged employees to bid on available jobs. While not as extensive as the mill rationalization, roughly half of the box plants targeted for closing over a 24-month period have been shut down. We had two goals: to close duplicate, overlapping, or poor-performing plants; and to retain the business of the closed plants. We have closed 15 plants since the merger.8 11. > Rationalizing CapacityGOAL Reduce containerboard capacity to meet internal needs and real, open market demand STATUS AchievedCompleted within rst month following merger Jose Luis Rivera of Smurt-Stones North Chicago, IL, corrugated plant checks the status of corrugated containers that are ready to be shipped. North Chicago is one of the companys most productive and efficient facilities, thanks to its creative, hard- working employees. 12. > Integrating OperationsAchieve full GOALrationalization ofmill system in24 months On scheduleSTATUS Making good progress Smurt-Stones Florence, SC, con- tainerboard mill is one of the industrys best-run mills in terms of productivity and use of energy. Lead Operator Wade Conner monitors the ame system from the control desk at the mills cogeneration plant. The cogenera- tion plant burns bark and coal to produce electricity. 13. 1 9 9 9 : We Pr o m i s e d . We D e l i v e r e d . By virtue of the rigorous process we developed for the mill closings, we were able to retain a major portion of the combined companys revenues. We are on track in terms of time and performance. We have a full slate planned for 2000, with indications that we will achieve all of our rationalization goals by the end of the 24-month period. In deciding which packaging plants to close, we considered profitability, volume, size of markets, number of employees, and customer mix. Equipment from closed plants was transferred within the company, allowing us to reduce capital spending. Delivered on Asset Sales We closed on $1.8 billion in asset sales by November, 1999, 90 percent of our $2 billion target, in about half of our original 24-month time frame. The first asset to be sold was Stones Snowflake, AZ, newsprint facility for $267 million in net proceeds; next, our stake in Abitibi Consolidated in two separate transactions totaling $494 million. The sale of other miscellaneous packaging assets, such as Stone Australia, netted an additional $75 million. The largest asset divested was our timberlands, which were sold for $710 million. Finally, we completed the sale of our Newberg, OR, newsprint mill for $211 million in November. We will continue to pursue the sale of the pulp mill in Port Wentworth, GA, as opportunities arise. Achieved Debt-reduction Targets Virtually all of the $1.8 billion in asset sales have been applied to debt reduction, which was the companys highest financial priority in 1999. Our total debt at year end was $4.8 billion. We will reduce debt in the year 2000, as we continue to sell assets and generate free cash. Given a growing economy and improving prices, we could see further, substantial debt reduction over the next 24 months. Delivered on Synergies Our plan was to achieve a full $350 million in synergies by the end of the first 24 months, and we are well on our way. We achieved $284 million in synergies in 1999, against a tar- get of $220 million. The cash cost to achieve these synergies was $95 million, primarily severance, restructuring, and shutdown costs. The cost to achieve these synergies had an impact on the income statement of $41 million, for a net profit improvement from the synergy program of $243 million for 1999.11 14. 1 9 9 9 : We Pr o m i s e d . We D e l i v e r e d .The synergies were primarily driven by containerboard mill and container plantrationalization, as well as administrative and purchasing savings. Manufacturing systemrationalization yielded $178 million, while procurement synergies produced $55 million.Synergies achieved in administrative expenses were $51 million.In addition, the synergy program enabled the company to avoid cash payments of$44 million during 1999. These savings improved cash flow but did not affect the incomestatement. We expect to achieve the original synergy target of $350 million in 2000. To date,we have reduced headcount by about 2,300. This includes about 1,900 manufacturingpositions and 400 staff positions. Integrating Remaining OperationsPhilosophically, JSC and Stone Container approached the packaging business fromdifferent perspectives. In order to blend those approaches and run the business as asingle, unified organization, we have actively reviewed the compensation systems,manufacturing theory, investment strategy, and sales philosophy of both companiesin an effort to adopt best practices throughout the organization.We are making good progress. We adopted a newcompensation plan for the container business androlled it out in 1999. Our major initiative for 2000is margin improvement effectively improvingprofitability.Procurement is a cross-company/cross-divisionalendeavor. Much effort has gone into leveraging oursize to maximize buying power; improve the procure-ment process; analyze, streamline, and take out costs;and eliminate duplication across all divisions of thecompany. Graphics Coordinator Dan Walsh, left, and Digital Imaging Manager Chris Martin use Exited Joint Ventures digital les to ne tune a match between a customers proof and press output at Smurt-Stones Irvine, CA, folding carton A major management focus of the past year was extri- facility. cating the company from unprofitable and unpromising joint venture operations both domestic and interna-tional all of which required the allocation of management time and resources. Havingthose resolved will free us up to pursue more promising opportunities.12 15. > Unify the Organization Richard Faltynowski, an operator at Smurt- Stones bag packaging plant in Kansas City, MO, makes a visual quality check during the manufacturing of Ralston Purinas O.N.E. metallised bag. Retain leading positionGOAL and solidify market share STATUS On scheduleImprove prot margin and safety record 16. > Realizing Synergies$350 millionGOALsteady-state run rateby mid-2000 Ahead of schedule STATUS Achieved $284 millionin 1999, againstrst-year goal of$220 million John Kuhn, rst press operator, is examining print quality of a Kimberly-Clark Expressions sheet. This job is running on the companys 64 KBA offset press and utilizes the new Hexachrome (6-color process) ink system. Automatic plate changers, scanning densitometers, remote inking capabilities, and onboard system diagnostics allow Irvine to meet the fast turnaround, high-quality needs of its customers. 17. 1 9 9 9 : We Pr o m i s e d . We D e l i v e r e d .The most time-consuming effort involved the Florida Coast mill, a joint venture between Stone Container and Four M Corporation. Each had 50 percent ownership. This mill was closed prior to the merger and filed for bankruptcy protection. Under the terms of the negotiated settlement, Smurfit-Stone took control of this facility and was released from all obligations under the original agreements, in exchange for a payment to Florida Coast stakeholders.Domestically, we also negotiated an exit from S&G Packaging, a joint venture that produced retail bags. By exiting a business that had been modestly unprofitable, we are optimizing our mill system to substitute containerboard or multiwall bag grades for the retail kraft paper formerly produced.Internationally, we ended our involvement in a timbering operation in Costa Rica, shut down a similarRalph Blackford, left, a converting business in Venezuela, and sold our share of a folding specialist and instructor at Smurt-StonesCrestwood, IL, Container Division Training carton venture in Europe. We are also reviewing theCenter, demonstrates to John Meisner how prospects of Stones remaining obligations in Asia and printing plate and mounting specicationsinuence the nished product. Meisner South America. is a maintenance supervisor at SSCCsPortland, OR, facility.Reorganized European Management Late in the year, we agreed to integrate the operating management of Smurfit-Stones European packaging business with the management of the European business of our affiliate and largest shareholder, Jefferson Smurfit Group plc. Although no ownership change will take place, the plan permits both companies to present a unified face to European customers, expand our services and market presence, and benefit from syner- gies. In unifying the sales and marketing teams for Europe, we eliminate the potential for customer confusion. Smurfit-Stone will retain economic responsibility for the prof- itability of its European operations, as well as capital spending and personnel. Developed People Our primary human resources goals are to align the whole organization, identify talent at every level, and develop tomorrows leaders. Internally, we are providing training, ranging from on-the-job skill development to managerial training. We also have recruited executives from other industries.15 18. 2000: Setting a new agenda. We will deliver again.16 19. Attaining Operational Excellence I n the first half of our 24-month agenda, our focus was on the financial aspects of our business; during the second half, we will turn our atten- tion to operations. With the company favorably positioned for 2000, we began the year with many of the challenges behind us and ambitious plans for the next stage re-energizing the business. While we will continue the programs begun in 1999, we are now free to redirect our energies toward the fulfillment of two other significant goals: to become a customer-led, market-driven company; and to create a culture that fosters empowerment and provides a safe and healthy working environ- ment for our employees. GOALAGENDA Full Realization of Synergies $350 million in synergies by end of Continue program with the the rst 24 monthspotential to exceed goalAchieve Full PotentialDevelop full earnings potential Process gains, marketing of all packaging businesses initiatives, SG&A efficienciesContainer/Containerboard System Optimize production, costs, Best practices in Integration and inventories for combinedmanufacturing and mills and corrugated system supply-chain managementCustomer Satisfaction Exceed customer expectationsCross-divisional selling, Anticipate marketplace evolutione-commerce, new products, and enhanced sales and marketingUnify the OrganizationAlign the entire organization Succession planning Identify talent at all levels Employee development Develop leaders of tomorrow Diversity training17 20. > Achieve Full PotentialDevelop full GOALearnings potentialof all businesses In progressAGENDA Process gains,marketing initiatives,new products,administrativeefficiencies Journeyman Cutter Galaxy Mong Somsavath loads strips of labels into a PMC machine at Smurt-Stones St. Charles, IL, litho label plant. Part of the companys unique Accu-Sort system, the labels are cut into individual stacks of 1,000. The PMC is capable of cutting up to three strips of labels at once. 21. 2 0 0 0 : S e t t i n g a N e w A g e n d a . We W i l l D e l i v e r A g a i n . Attaining Operational Excellence W e have favorably positioned the company for 2000 and are now free to focus on our original goal of re-energizing the business. We will continue to optimize the container and containerboard system, achieve full potential of all businesses and functions, and accelerate generation of cash flow. With the rationalization of our mill system in place, we can devote our energies to becoming a customer-focused, market- driven company. With the first-year agenda behind us, we will continue to build the kind of culture that encourages initiative and continues to provide a safe environment for our employees.While we set and achieved aggressive goals in 1999, we still have considerable work to do to fulfill the promises we made in connection with the merger. What follows are our strategies for completing our two-year business plan.Optimization of the Container and Containerboard System The container and containerboard system is the engine that drives much of our growth. In 2000, our primary goal is to be customer-focused. Our second goal is to run our mills at optimum efficiency and cost. The logistical system is the link between marketing and the mills. It provides the raw materials and the service necessary to meet both sets of needs. We will continue to implement best practices of the combined JSC and Stone mill systems across all our facilities and to identify means to achieve the most efficient configuration of grades. If we can successfully move our mills blended manufacturing costs from the second-quartile to the first-quartile cost position, we can realize significant savings. We are halfway through the rationalization of our container system. Completing that process will take the remainder of our 24-month transition period. Our goal will be to retain the best business at the plants that are best-equipped to meet our customers needs. 19 22. 2 0 0 0 : S e t t i n g a N e w A g e n d a . We W i l l D e l i v e r A g a i n . Achieving Full Potential of Packaging Businesses Our goals for 2000 include turning our full attention to attaining peak performance from every aspect of our businesses. We expect to achieve significant profit improvement by implementing best practices across all of our packaging operations, as we have begun to do in our corrugated container and containerboard mill operations. This process will comprise three initiatives:1.) MARKETING INITIATIVES are those that will position Smurfit-Stone as a customer-focused company that knows its customers and provides them with predictability and stability of supply in a cyclical business.2.) PROCESS INITIATIVES include setting benchmark targets, implementing a philosophyof continuous improvement, and developing natural work teams that are empow- ered to make those improvements to achieve the full potential targets.3.) CORPORATE INITIATIVES involve utilizing our corporate staff to better supportoperations and create overall value through process improvement. We will benchmark our staff functions and seek ways to improve them, in order to provide better service and support, at lower cost, to our internal customers.Major targets are to optimize all of our manufacturing systems and to run efficiently with less inventory. Strategically, we produce for existing demand, never for inventory. Our goal is to operate with a tighter supply, reducing inventory and working capital. We see potential in the following actions:1.) aggressively driving improvement of overall service and delivery performance 2.) reducing operating costs across the supply chain 3.) providing supply-chain value to our customersKey initiatives are to develop best-in-class process capabilities in the areas of demand planning and forecasting, master production scheduling for our plants and mills, inventory management, transportation network optimization, and technology tools and solutions. The supply-chain origination will play a key role in facilitating the implementation of a well-integrated and seamless company. Achieving our Target Synergies In 2000 we will complete our synergy program, which encompasses rationalization, procurement, operations optimization, and administrative efficiencies. We achieved 20 23. > Full Potential of Synergies GOAL $350 million in synergiesby end of 2000AGENDA In progress Continue program withpotential to exceed goalSmurt-Stones blue-lined Smooth ConcreteColumn Form isunique to the construc-tion industry. QualityAssurance Rep DebbieChoonhaurai uses amicrometer to measurethe thickness of thenished form atthe companysVacaville, CA, plant. 24. > Customer SatisfactionExceed customer GOALexpectations In progress AGENDA Enhanced cross-divisional sales/marketing Andrew De Guzman, an employee at the Wal-Mart store in Oakland, CA, oversees bundling of old corru- gated containers to be shipped to Smurt- Stones recycling plant nearby. New machinery at the plant efficiently separates corrugated from plastic and other recyclable material, creating a much more efficient waste management process for Wal-Mart and other customers. 25. 2 0 0 0 : S e t t i n g a N e w A g e n d a . We W i l l D e l i v e r A g a i n . 80 percent of our two-year target of $350 million in 1999 and have approximately $70 million remaining. In order to achieve the final 20 percent, we will continue our synergy program, shifting our emphasis where necessary. Here are our priorities: 1.) Last years efforts were primarily driven by mill rationalization.RATIONALIZATION: Incremental gains in 2000 will be driven by converting plant rationalization thatbegan in the latter half of 1999 and is continuing in the current year. 2.)In 1999, our primary activity was to use our leverage on existingPROCUREMENT: contracts to lower the unit cost of major chemicals and other commodities neededfor production. In 2000, we will expand our corporate procurement resourcesand review opportunities to reduce purchasing costs in goods and services thattraditionally had been bought on a site-specific basis. 3.) In 1999, our emphasis was on optimization of grade mixOPERATIONS OPTIMIZATION: within the mill structure and customer mix within containerboard marketing.We will continue this process in 2000. Becoming a Customer-focused Company As a diversified, customer-focused paper packaging company, we are able to offer a broad portfolio of products to meet our customers packaging needs. We are also inves- tigating ways in which to take full advantage of todays advanced technology to serve our customers through effective utilization of the Internet and e-commerce. In the last couple of years, there has been a changing mentality in our customer base. Customers are seeking continuous innovation. They want packaging that catches the customers eye and works effectively with their products. We must now work together to sell a customers product. By finding business connec- tions in which we can perform a function more efficiently and cost effectively for the customer, we essentially become an extension of that customers marketing resources. We will continue to emphasize high-service business. One example of this philosophy in action is our Packaging Solution Center (PSC), designed to solve customers packaging problems on the spot. In the PSC, structural designers, mechanical packaging people, and graphic designers apply a full range of packaging options and creative services to meet each customers unique requirements. 23 26. 2 0 0 0 : S e t t i n g a N e w A g e n d a . We W i l l D e l i v e r A g a i n . Caring for our Employees Caring for our employees means creating a safe environment. Endeavoring to become one of the safest companies in the U.S. sends a powerful message to our employees that they are valuable to us and that we care about their welfare. We have an active safety and safety-awards program. Incentive and recognition systems are tied to safety performance, and we are among the leaders in our industry in safety performance.Acquisition of St. Laurent Paperboard Inc. Ultimately, our goaland point-of-pur-TRANSACTION HIGHLIGHTS: is to grow our core chase displays. TheACQUISITION: St.Laurent Paperboard Inc. packaging businessescombination of these Leading specialty through strategic,packaging businesses packaging company opportunistic acquisi-with Smurfit-Stone tions. The first such into one North s 4 millsASSETS: acquisition since the American unit will s 16 packaging plantsmerger, announced generate an estimated s 920,000 acres of forest landearly in 2000 and $50 million annually expected to close inin cost savings. It will the second quarter, was that of St. Laurentalso enhance cash flow, enabling us to service Paperboard Inc., for approximately $625 millionthe increased debt, and create significant new in cash and 25 million shares of Smurfit-Stone opportunities to optimize our containerboard common stock.manufacturing system.St. Laurent is a leading North American pro- Under the terms of the agreement, holders ducer, supplier, and converter of high-quality,of St. Laurent stock will receive $12.50 in cash, value-added specialty containerboard and high- plus one-half share of Smurfit-Stone common impact graphics packaging. In addition to itsstock for each share of St. Laurent. To finance four mills and 16 packaging plants, the companythe transaction, Smurfit-Stone will raise owns 920,000 acres of forest land in Quebec. approximately $625 million in new debt andThis acquisition will significantly expandissue approximately 25 million new shares, our production capabilities in specialty gradesincreasing the number of fully diluted shares of containerboard, such as white-top linerboard, outstanding to approximately 250 million. coated and bleached linerboard, and light- We will also refinance about $400 million of weight medium. It will afford Smurfit-StoneSt. Laurent debt. The transaction is subject to an unmatched ability to serve customers forapproval of St. Laurent shareholders and microflute, high-impact graphics packaging,various regulatory bodies. 24 27. > Container/Containerboard System Integration Structural designersAndre Smith, left,and Rick Jaraczewskireview a structure for adisplay designed andproduced at the CameoContainer plant inCameo, IL. Smurt-Stone has greatly bene-ted from the creativityand innovation of designpresentations producedby this affiliate facility. GOAL Optimize production,costs, inventoriesAGENDA In progress Implement best practices 28. Smurt-Stone Container Corporation Board of Directors and Corporate and Division Officers David C. StevensVictor E. Kendall BOARD OF DIRECTORS DIVISION OFFICERS Vice President and General Manager, Vice President and Manager, Ray M. Curran Reclamation DivisionCorporate SalesCorrugated Container Division President and CEO,William N. WandmacherLeRoy R. Crocker Jerry Roeske Smurfit-Stone Container Corporation Vice President and General Manager,Vice President and Regional ManagerVice President and Manager, Richard A. Giesen Containerboard Mill DivisionCorporate SalesJohn J. Curry, Jr. Chairman and CEO, Lorne ParnellVice President and Regional ManagerJim Laurence Continere Corporation Vice President, Vice President, SalesStephen P. Folan Alan E. GoldbergPacific Operations Vice President and Regional ManagerFred Klatt Managing Director,Jose A Santos Vice President, ManufacturingJames A. Henderson Morgan Stanley & Co., Inc.Vice President,Vice President and Regional Manager Howard E. KilroyLatin American Operations Folding Carton andLane W. Hunter Retired,Boxboard Mill Division Cynthia S. BowersVice President and Regional Manager Jefferson Smurfit Group plc Vice President, J. Gregor DomanJohn B. Malloy James J. OConnor Compensation and Administration Vice President, SalesVice President and Regional Manager Retired,Daniel J. GarandLarry D. Fielder Unicom/Commonwealth Edison James A. McNeill Vice President, Vice President, Paper CanVice President and Regional Manager Jerry K. Pearlman Supply Chain Operations John E. Straw Retired, Rodney A. Myers Edwin Goffard Vice President and Regional Manager, Zenith Electronics Corporation Vice President and Regional Manager Vice PresidentEastern Region Thomas A. Reynolds, IIIJames S. Nolan Michael F. Harrington Curtiss M. Komen Partner, Vice President and Regional Manager Vice President, Vice President and Regional Manager, Winston & StrawnEmployee Relations Donald A. PetriWestern Region Dermot F. SmurfitVice President and Regional Manager James A. HayssenDavid J. Pietrowicz Deputy Chairman,Vice President,Donald A. TinkoffVice President and Regional Manager, Jefferson Smurfit Group plc Information Technology Vice President and Regional ManagerCentral Region Dr. Michael W.J. SmurfitCharles A. HinrichsJames S. WillisNathan S. Holmes Chairman and CEO, Vice President and Treasurer Vice President and Regional ManagerVice President and General Manager, Jefferson Smurfit Group plc Boxboard Mills Craig A. HuntRoger W. Clingerman Vice President,Vice President and General Manager - CORPORATE OFFICERSSpecialty Packaging Division Secretary and General CounselCorporate Accounts George Q. Langstaff Paul K. Kaufmann Stephen E. Jevyak Dr. Michael W. J. Smurfit Vice President, Converting and Vice President and ControllerVice President and Transition Chairman of the Board MarketingTeam Leader Allen M. Koleff Ray M. Curran Vice President,Michael S. Rose President and CEO Reclamation Division Environmental AffairsVice President, Patrick J. MooreMichael R. OswaldInternational Sales Development Leslie T. Lederer Vice President and CFOVice President, Operations Vice President,Jerry D. Suiter Peter F. DagesMark Brantley Strategic Investment DispositionsVice President and Director, Vice President and General Manager, North Central Operations ManagerManufacturing Timothy J.P. McKenna Corrugated Container Division Steve Miller Vice President,Robert A. Guillou James P. DavisWest Region Operations Manager Investor Relations and Vice President, National Accounts Vice President, CommunicationsTom Squires Corrugated Container Division South Region Operations ManagerContainerboard Sales and Mark R. OBryan James D. DuncanMarketing Division Vice President, Jim Pope Vice President and General Manager, Purchasing Larry L. BurtonInternational/West Sales Manager Specialty Packaging Division Vice President, Sales and Marketing Thomas A. PaganoEd Tucciarone William G. EusticeVice President,Peter Butier, Jr.National/East Sales Manager Vice President, Planning Vice President, Containerboard Corrugated Container Divisionand Kraft Paper SalesSmurt Newsprint Corporation Thomas G. Pavlini Jay D. Lamb Vice President, Michael A. Siebers President and General Manager, Containerboard Mill Division DistributionVice President and General Manager, Smurfit Newsprint CorporationJohn E. DavisOregon City Mill Gayle M. Sparapani F. Scott MacfarlaneVice President, Forest Resources Vice President, Jon E. Melkerson Vice President and General Manager, Benefits Alain DubucVice President, Folding Carton and Vice President, Mill Operations, Sales and Marketing John F. Allgood Boxboard Mill Division Northern Region Assistant Secretary Fran J. Ostlund John M. Riconosciuto W. G. Stuart Controller and Assistant Secretary Richard P. Marra Vice President and General Manager,Vice President, Mill Operations, Assistant Treasurer Bag Packaging Division Central Region Research and Development Division Ronald J. Megna Joseph V. LeBlanc Assistant SecretaryBag Packaging Division Vice PresidentJohn MoranVice President, Marketing andSpecialty Bag Packaging26 29. Stockholders InformationSTOCKHOLDERS ANNUAL MEETINGMay 18, 2000 at 1:00 pm The Sheraton Chicago Hotel & Towers City Front Center 301 E. North Water Street Chicago, IL 60611REGISTRAR AND TRANSFER AGENTChaseMellon Shareholder Services, L.L.C. Overpeck Centre 85 Challenger Road Ridgefield Park, NJ 07660 www.chasemellon.com Telephone: 888-213-0965COMMON STOCKSmurfit-Stone Container Corporation common stock is traded on The Nasdaq Stock Market under the symbol: SSCC FOR INVESTOR INFORMATION CONTACTInvestor Relations and Communications Smurfit-Stone Container Corporation 8182 Maryland Avenue St. Louis, MO 63105 Telephone: 314-746-1223 Fax: 314-746-1347Timothy McKenna Vice President, Investor Relations and Communications St. Louis: 314-746-1254 Chicago: 312-580-4637 CORPORATE OFFICESmurfit-Stone Container Corporation 150 North Michigan Avenue Chicago, IL 60601-7568 Telephone: 312-346-6600 Design: ProWolfe Partners; St. Louis, MO Photography: Mark Green; Houston, TX 30. Smurfit-Stone Container Corporation (Nasdaq: SSCC) is the industrys premier paper-based packaging company. Headquartered in Chicago, with additional corporate functions in St. Louis, Missouri, and Alton, Illinois, the company was formed November 18, 1998, as a result of the merger between Jefferson Smurfit Corporation and Stone Container Corporation. Core products include corrugated containers, folding cartons, specialty packaging, and bag packaging, which are supported by an integrated mill system and significant fiber resources. The company operates approximately 300 facilities worldwide. 150 North Michigan Avenue Chicago, IL 60601-7568 (312) 346-6600 www.smurfit-stone.com