1. Annual Report > Smurfit-Stone Container Corporation 2000 Look again.

2. Table of ContentsFinancial Highlights 6 Letter to Shareholders 7 Smurfit-Stone at a Glance 10 Bringing New Perspective to an Established Industry 13 Board of Directors and Officers 22 Smurfit-Stone Form 10-K 23 We are. Smurfit-Stones leadership role in the paper and packaging industry is no illusion. To improve that position, we are taking another look at how we manage our business, satisfy our customers, and deliver value to all stakeholders. In todays economic environment, we hope our business fundamentals and track record of financial discipline will encourage you to take another look at Smurfit-Stone. 3. 1Look again. >1 leadershipperspective Weve adopted the following principles to run our business: empowered employees,ongoing learning s s teamwork, and consensus continuous process improvement s shared leadership s data-based decisions s open, two-way communication s People 4. 2 Look again.>2 customer perspective Smurt-Stone is the best positioned paper-based packaging company to anticipate and respond to rapidly changing conditions in the packaging market. As a customer-led company, we listen to our customers in order to deliver the types of products and services they and their customers will need in the short- and long-term. In other words, we make the products they want, rather than merely selling the products we make. Products 5. Productsoperationalperspective In 2000, we continued to rene the benchmarking process we began at the time of the merger of Jefferson Smurt Corporation and Stone Container. We identied the best operations within our manufacturing system and throughout the industry and challenged our operations to close the gap between where they are and where3 they ought to be. The results produced higher operating efficiencies and lower costs.>Look again. 3 6. 4Look again.>4 nancial perspective Our number one nancial goal for 2001 is to reduce debt and continue to increase our nancial exibility. We are focused on cost containment, cost reduction, and cash generation to pay down debt. Smurt-Stones plan is to conduct business with a unied packaging focus, have better assets in play, and complete our strategy of exiting businesses that do not meet our strategic objectives.Performance 7. Performanceaccountability perspective Our challenge at the start of the 21st century is to examine the practices of our predecessor companies and adopt only the very best. As a company that employs approximately 40,000 people, operates more than 300 manufacturing facilities throughout North America, and holds a leadership position in our industry, we take seriously our obligations 5 to all stakeholders.>Look again.5 8. FINANCIAL HIGHLIGHTS2000 1999 1998 Dollars in millions, except per share data Summary of operations Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$ 7,423 $ 3,612 $ 8,796 Income (loss) from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .423 (93) 933 Interest expense, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (563) (247)(527) Income (loss) from continuing operations before extraordinary item and cumulative effect of accounting change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .163 (211)219 Net income (loss) available to common shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .157 (200)224 Basic earnings per share Income (loss) from continuing operations before extraordinary item and cumulative effect of accounting change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $.75$ (1.70) $.94 Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .72(1.61) .96 Weighted average shares outstanding (in millions) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 217 124233 Diluted earnings per share Income (loss) from continuing operations before extraordinary itemand cumulative effect of accounting change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$.74$ (1.70) $.93 Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .71(1.61) .96 Weighted average shares outstanding (in millions) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .220124234 Other financial data Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$183$129 $ 807 6 Capital investments and acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .156 287994 Net working capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .73 635470 Property, plant, equipment and timberland, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4,419 5,7725,670 Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9,85911,631 11,280 Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4,793 6,6335,342 Stockholders equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1,847 1,6342,528 Number of employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .36,30038,000 39,700Sales per Product Segment Containerboard and 68%12%Consumer Packaging Corrugated Containers 8% Specialty Packaging 5% Recycled Fiber7% Internationaland Other 9. Smurfit-Stone Container CorporationLETTER TO SHAREHOLDERS Dear Shareholder, Significant Improvement inF or Smurt-Stone,Operating Performance 2000 was a year ofA key measure of our progress nancial and operatingis improvement in operating accomplishments tempered by performance. market challenges. It broughtFor the full year 2000, the the acquisition of St. Laurentcompany reported net income Paperboard Inc. which available to common share- accelerated our strategic holders of $224 million, or $0.96 development as a full-service,per diluted share, compared paper-based packaging with net income of $157 million company as well asin 1999, or $0.71 per diluted economic conditions that forced share. The 1999 results included us to schedule mill downtimeafter-tax gains on the sale of7 equal to about 10 percent of ournon-core assets of $268 million, > Michael W. J. Smurt, Chairman of the Board (left), and Ray M. Curran, President containerboard capacity.or $1.22 per diluted share. In and Chief Executive Officer.We began 2000 with our 2000, higher product prices and role as industry leader rmly the addition of St. Laurents established. The merger of Jefferson Smurthigher-value product mix contributed to an 18 percent Corporation (JSC) and Stone Container Corporationincrease in sales to $8.8 billion compared with 1999.in 1998 made us the largest paper-based packaging The operations of St. Laurent, included in the com- company in North America and providedpanys results for the last seven months of the year, unparalleled opportunities to improve serviceadded $96 million in operating prots. to customers, rationalize operating systems,These favorable results were achieved despite and enhance operating efficiencies.higher energy costs of about $88 million and the needWe immediately acted on these opportunities.to take 758,000 tons of economic downtime to manage Even so, the path from packaging manufacturer to inventory levels and conserve working capital in the packaging solutions provider demands new skills, containerboard mill system.sometimes difficult production decisions, and aWe continued to make progress in strengtheningwillingness to accept new kinds of challenges. As weour nancial position. The St. Laurent acquisition addedbuild these skills, we are becoming a stronger company$1 billion in debt without weakening the credit prole ofwith a more efficient integrated system and greater the company. Operating prots and synergies from theexibility to meet these challenges.acquisition supplemented our operating cash ow andenabled us to reduce debt by approximately $370 millionduring the second half of 2000. Total debt was $5.3 billionat the end of the year. Interest expense in 2000 was$527 million, a $36 million decrease from the prior year. 10. In January 2001, we simplied our balance sheetAverage prices for most paperboard and packaging with a $1.05 billion bond offering by Stone Container. products showed signicant improvement in 2000. The bond offering replaced several higher-coupon Containerboard prices posted the greatest improvement, issues with lower-interest debt and extended our increasing about 20 percent on average and partially maturities, improving our credit prole andrestoring prot margins lost in the second half of the nancial exibility. 1990s. The company successfully implemented priceCapital expenditures for the year were $363 mil-increases on corrugated containers, boxboard, and lion, a substantial increase from the $156 million spent folding cartons, as well as multiwall bags. in 1999. This was primarilyOur packaging driven by heavy environ-businesses continued to mental compliance spendingenhance their positions in our mill system. Wewith customers seeking expect capital spending toadditional graphics and stay well below depreciationspecialized service. In a and amortization levels for difficult year for the industry, the foreseeable future. our folding carton businessSmurt-Stone has increased market share and beneted from more than protability as a result of our $350 million in annualizeddemonstrated commitment synergy savings from theto consistent customer integration of the JSC andservice and production Stone manufacturing and quality. This helps to corporate systems. Theseprovide a stable prot base. 8 savings, a major priority in > In addition to Ray Curran, the companys Executive Committee members are (sitting, left to right) 1999, were fully implemented Patrick J. Moore, vice president and chief nancial by the second quarter Positive Trends and officer; Peter F. Dages, vice president and general of 2000.Continued Progress manager, corrugated container division; and (standing, left to right) John M. Riconosciuto,A strong economy The achievements recorded vice president and general manager, specialty from most vantage pointsand challenges faced in 2000 packaging division; William N. Wandmacher, vice nevertheless brought specialsignal changes afoot in our president and general manager, North American containerboard mill and forest resources division; challenges for the packagingindustry. We believe the and F. Scott Macfarlane, vice president and general industry. Because of theindustry trends bode well manager, consumer packaging division. strength of the dollar, for Smurt-Stone. Here are U.S. consumers bought some reasons for optimism. an increased level of goods manufactured and packaged Customers continue to embrace high-end abroad. Additionally, the dollars strength impaired packaging, including boxes that combine corrugated U.S. manufacturers ability to export their goods in U.S.- packagings structural features with the customer made boxes, and U.S. linerboard producers found theirappeal of high-impact graphics. Evolving customer prices uncompetitive in export markets. Despite thepreferences will give us opportunities to grow, although impressive performance overall from the U.S. economy,change also carries the potential to reduce demand in domestic shipments of corrugated containers declined other parts of our business. We believe the net benet of roughly one percent in 2000. these changes can increase revenues and prot margins.In this environment, Smurt-Stone worked hardThe acquisition of St. Laurent expands our to manage our production to meet demand. As a result,capabilities and positions us well to meet customers we beneted from stable to improving prices and better changing needs. St. Laurents outstanding capabilities margins compared with the prior year.in developing and producing high-end containerboardcomplement Smurt-Stones existing product lines. 11. With St. Laurent, we also acquired additional marketingWe are reviewing our methods for reducing resources, which support our aim of being a market- production as necessary to manage inventory. driven company rather than an operations-driven one.Unscheduled downtime is costly in increased We now have approximately 7.8 million tons of manufacturing costs as well as disruptions to employees containerboard capacity in the combined Smurt-Stoneand customer schedules and is prompting a thorough and St. Laurent system. We consume more than veassessment of the best approach. Our options include million tons in our corrugated container operations.extending scheduled maintenance downtime, slowing We have been improving the market mix of this businessthe rate at which machines run, and temporarily for the past two years, taking advantage of opportunities shutting down high-cost machines in certain cases. to substitute higher-margin, high-impact packagingOur goal is to make our system more cost efficient and for products with lower margins. Adding St. Laurents better positioned to respond to customer demand. packaging and marketing skills has aided that process. In the near term we expect economic challenges About 20 percent of our containerboard mill to continue. There are signs that the U.S. dollar may production is higher-value containerboard. This weaken. This may stimulate packaging demand later includes one million tons of white top linerboard in 2001 and thereafter. We plan to hold capital spending as well as lightweight medium and coated whitebelow 2000 levels now that the bulk of the environ- linerboard. These constitute the most consistentlymental compliance spending is behind us. We also protable grades in a changing packaging environment. plan to use cash ow to further reduce debt, which is Integrating the JSC, Stone, and St. Laurent our number one nancial priority. We have achieved production facilities into a single system gave us more $20 million in annualized synergy savings from the manufacturing exibility. Soon after the acquisition of St. Laurent acquisition, and we expect to realize the St. Laurent, we shut down one of the smaller Smurt-total $50 million targeted by the end of 2001. Stone mills, eliminating 130,000 tons of mediumSmurt-Stone aims to be recognized as a company9 capacity. With this closing, we have permanentlythat delivers value to customers and shareholders. To do shuttered 1.8 million tons of containerboard capacity that on a consistent basis requires a customer-focused since 1998. organization with motivated and committed employees and effective operations. Our company culture must mirror our position as the industry leader. We are on course to become the preeminent packaging solutions Providing Packaging Solutions Our strategic aim is to be the supplier of choice for provider, which is Smurt-Stones strategic goal and one two signicant groups of customers: those who seekthat recognizes the interests of customers, employees, a broad-based source for efficient packaging solutions, and shareholders. and independent packaging producers who buy ourWe are encouraged by our accomplishments and containerboard products.we look forward to continued progress in 2001.For packaging customers, we now have a rich pool of resources to provide the service and high-impact packaging increasingly in demand. We have initiated a comprehensive review aimed at better serving our customers and focusing on where we can expand and enhance these resources to meet market needs.Michael W. J. SmurtThe independent packaging producer is seeking Chairman of the Boarda reliable supply of high-quality containerboard. We are working to address this need by dedicating a large portion of our tonnage to this sector and are exploring other ideas related to the independent market.Ray M. CurranPresident and Chief Executive Officer 12. S M U R F I T- S T O N E AT A G L A N C EDESCRIPTIONC A PA B I L I T I E SContainerboard and Corrugated Containers Containerboard and corrugated Full range of high-qualityGraphic capabilities includecontainers represent Smurt-Stones corrugated containers preprint and post-print exography,largest business segment, withand label applications.Innovative packaging solutions and68 percent of the companys sales. Thishigh-quality graphics Full range of domestic and export-segment supplies hundreds of nationalspecic liners, including solidComplete line of retail-ready,and international manufacturers, as wellbleached sulfate, white top andpoint-of-purchase displaysas thousands of local and regionalhigh-performance gradescustomers.Full line of specialty products andFull range of semi-chemical andcustom, die-cut boxes to displayrecycled medium, including high-packaged merchandiseperformance gradesConsumer Packaging Smurt-Stones consumer packaging Clay-coated and uncoated recycledproducts and services businessboxboard in newsback, kraftback,includes boxboard, folding cartons, and whiteback gradesprinted paper, foil and heat-transfer Folding carton convertinglabels, rotogravure cylinders, colorcapabilities include sheet andseparations, engineering services,web lithographic printing,and full-service design.laminating, gluing, tray forming,and windowing. 10 Labels for decorative packagingapplicationsSpecialty Packaging Smurt-Stones specialty packagingmanufacturing, exible packaging, and Multiwall industrial and consumer,business includes bag packaging contract packaging services. Multiwall, specialty, and exible bagsoperations, industrial tube and coreconsumer, specialty, and exible bags Paper tubes and coresare used to ship, store, protect andSolid ber and paperboardpromote a wide range of products.partitionsTubes and cores are used by the textile,paper, lm and carpet industries. Full line of exible, intermediateFlexible packaging supplies products forbulk containersdetergent, fabric softeners, and liquid Packaging equipment and systemschemicals, among others.that ll, seal, convey, and palletizebag productsContract packaging servicesRecycled Fiber Smurt-Stone is unique in the paper and now collects and processesRecycling business handlesWaste Reduction Servicesand packaging industry in that it has approximately 7 million tons of recovered paper generated byprovides waste-managementa strong position in recycled ber. recycled paper every year.industrial, commercial, and solutions to businesses.The company has built the largest residential sources.reclamation business in the industryCollected material includes oldcorrugated containers, newspapers,office waste, magazines, aluminumcans, glass, and plastics. 13. I N D U STRY POS ITI O N FA C I L I T I E S ACCOM PLISH M E NTSLargest producer of containerboardApproximately 150 containerImproved segment prot facilities worldwide by $441 million Largest producer of high-value white top linerboard21 paper and paperboard millsOptimized mill operations Largest supplier of 5 strategically located Packaging corrugated containers Solution Centers Industrys most complete line of graphic capabilitiesRecord safety performance No. 1 producer of clay-coated recycled boxboard 18 folding carton plantsIncreased folding carton market share A leading supplier of folding cartons 4 clay-coated recycled boxboard millsImproved segment prot by 8 percent 4 label plantsSuccessfully combined existing folding carton 3 lamination facilitiesand boxboard mill businesses with other 2 prepress operationsconsumer packaging operations 1 PaperCan plant 3 uncoated, recycled board mills11 Largest manufacturer of multiwall industrial and18 tube and core plantsSignicant improvement in operational areas, consumer bagsespecially safety 11 bag plants A leading supplier of exible intermediate bulkImproved cash ow from working capital 4 exible packaging facilities containers Integrated tube and core, 3 partition plants A leading producer of paper tubes and corespartition, contract packaging, 1 technical and graphics centerand exible packaging operations 1 bag packaging equipmentresulting in shared services and facility multi-product sales opportunities Worlds largest paper recycler25 U.S. collection centers Record volume year 10 brokerage offices Record export sales 1 brokerage office in Shanghai, ChinaDivision reorganization reduced SG&Acosts 7.5 percent 1 waste reduction services office 14. > Smurt-Stones acquisition ofSt. Laurent Paperboard Inc. in May2000 made the company the lead-ing manufacturer of high-qualitywhite top linerboard. Here,Isabelle Dussault inspects asample sheet at the La Tuque,Quebec, containerboard mill. La Tuque, Quebec 15. Smurfit-Stone Container Corporation BRINGINGnew perspective T O A N E S TA B L I S H E D I N D U S T RY The paper-based packaging industry, like most manufacturing-based industries, has been operations driven for most of itshistory. Big paperboard mills, at their best when the machinery was fully engaged, delivered product into inventory until buyers wanted it. In sluggish economic times, warehouses bulged and prices fell. Those circumstances gave rise to an inefficient and disruptive cycle.Conditions began to change in 1998 with the combination of Jefferson Smurt Corporation (JSC) and Stone Container Corporation. As Smurt- 13Stone, we set out to be a customer-driven company in which decisions start with the marketplace and work back through production. The evolving market also played a signicant role in our decision to acquire St. Laurent Paperboard Inc. and its high-end containerboard capabilities. 1Leadership People The combination of JSC and Stone Container gave Smurt-Stone the No. 1 Leadership perspectiveranking by size in the paper-based packaging industry. The larger com- pany became a platform on which to build a new business model.Greater size brought increased exibility in operating our mill system. Our challenge was to align the mill system more closely with market priorities and make it more efficient. Within the rst 15 months after the merger, we shuttered ve mills, eliminating 1.6 million tons of inefficient containerboard production capacity.To add capabilities that better reected the evolving packaging market, we acted on the opportunity to acquire St. Laurent Paperboard. Its white top linerboard provides the substrate for packaging customers who require colorful, marketing-oriented, high-impact graphic design. Expanding these capabilities within Smurt-Stone accelerated our development as a provider of packaging solutions. 16. The acquisition further expanded our mill system, offering additional opportunities tooptimize production, achieve cost savings, and better match production to customer orders. Smurt-Stones new business model contains two key aspects. One is structural a moreefficient mill system. The other addresses the marketplace a product line more attuned tocustomer priorities. For Smurt-Stone, this business model laid a foundation for better inventorymanagement. A more predictable market environment mitigates price swings and allows man-agers to concentrate on other aspects of the business, such as a corporate culture that reects ourleadership position. The vehicle through which we intend to implement the business model is CustomerONE.More than a corporate quality program, it is a comprehensive operating philosophy and workprocess that is designed to provide focus and, where necessary, change our attitude about whatit takes to succeed in the marketplace. We are transforming how we dene customer. In the CustomerONE environment,a customer is any stakeholder someone who buys our products, works at our company,invests in us, or partners with us. Our stakeholders include the communities in which we dobusiness. Dening all of these relationships in the customer sense leads to a different attitudeabout how we conduct our business. It focuses us on solutions. Over the years, JSC and Stone Container had developed theirown quality programs and operating philosophies. CustomerONEHouston, Texasintegrates their best features. More important, it provides a sense ofidentity that is unique to Smurt-Stone, at a time when our vision is > Len Murphy (left) andGreg Traylor carry outto be a top-tier company, not just in packaging but among all leadinga quality check at theNorth American companies. Houston, Texas, corru- 14 gated container plant. 17. The changing economy gives< Smurt-Stones research, develop- more urgency to adopting this approach. ment, and productTodays business environment presents testing capabilitiesemployees with unprecedented choices. are part of providing total solutions to our Companies in established industries like customers packagingpaper and packaging compete against needs. Sue Annemployers perceived to offer more Daniels performs a structural strengthappealing career prospects. test at the corrugated As we apply the concept of customer container divisionsto the workplace, we expand employees Westmont, Illinois, marketing and tech-skill sets, foster management training, nical center.and generally enrich the work process.CustomerONE promotes open, two-waycommunications, solicits employees ideas Westmont, Illinoisand creativity, and facilitates teamworkand consensus building. Smurt-Stoneempowers employees to engage in natural work teams, pool knowledge and talent to createnew ideas, and deal with operational challenges. The work teams have been an important factor in improving plant safety, a top priorityat Smurt-Stone. The safety initiative also demonstrates the value of training, and we are usingit as a model for other career and quality training programs. We have a comprehensive safety process Smurt-Stone Accident Free Environment, orSAFE which has helped position us as an industry leader in safety practices and measurement. 15The name of the process speaks to its goal to create an accident-free work environment. Sinceits inception in 1994, safety performance has improved 68 percent as measured by the numberof incidents involving injuries requiring medical attention, logged according to rules of theOccupational Safety and Health Administration. We continued to make progress in safety in2000, solidifying our ranking in the top quartile of our industry. 2Understanding Our Customers Perspective ProductsIn the marketplace, CustomerONE encourages us to focus on packaging Customer perspective solutions, not just manufacturing efficiency. We recognize that a highly competitive retail environment forces merchants to look to packaging to display, promote, and safely transport products. We have responded by working closely with our customers to develop appropriate packaging solutions and expand our high-end, higher-margin capabilities. In addition, we respect the intense competitive cost pressures faced by our customers. To respond, we have invested heavily to improve our supply chain operations. Our goals are clear. We aim to: Anticipate customers packaging needs. Exceed customers expectations with value-added services. Be the supplier of choice for a wide range of products. Be cost competitive without compromising innovation or quality. We start production decisions at the point of package content and end-user expectations,rather than at the mill. Working with our customers, our sales force may recognize the need fora nontraditional packaging solution: lighter substrates than the mills have typically produced, 18. Missoula, Montanalarger semi-bulk packages, protective packaging, or adifferent type of packaging altogether. Smurt-Stones > Smurt-Stone achieved signicant cost reductions at our Missoula,integrated system makes it possible to deliver the best Montana, mill by concentrating its pro-solutions, whether they are boxes, folding cartons,duction on brown board and movingmultiwall bags, or industrial packaging. its white top production to Brewton, Alabama. Missoula employees such as We constantly are analyzing efforts to improve Mark Snead, right, helped implementdelivery of our products and services and to build the change. In addition, the Missoulanew business without sacricing prot margins. mill continues its role as an environ- mental steward. The wastewaterA company-wide assessment is underway to examine holding ponds that dominate 800 acresservices, capabilities, and technical resources, as well alongside the mill provide refuge foras initiatives such as e-commerce and cross selling. 196 species of birds, migrants, and resident breeders. Volunteers such as During 2000, we reorganized three non-corrugated Larry Weeks (inset) have helped put upcontainer packaging businesses into two businesses fences to keep cows away and plantedconcentrating on consumer packaging and specialty pack-cottonwoods to improve the stream- side vegetation.aging. This action streamlined management, enhancedour ability to identify opportunities for cross selling tolarge customers, and generated synergy savings. E-commerce initiatives quickly are becomingnecessities, not merely opportunities. The largestpackaging users the customers Smurt-Stone isuniquely positioned to serve by virtue of our size andproduct scope have determined that competitivenessincreasingly rests on driving down cost and speeding 16up transactions by carrying out more processes overthe Internet. Smurt-Stone is building electronicprocurement capabilities to compete in this environment. We have implemented forecasting, inventorymanagement, and replenishment applications. Improve-ments in these transactional tasks allow us to redeployemployee efforts to focus on more value-added activitieson behalf of customers. Driving many of these initiatives is an enterprisetransformation process with the basic premise thatimproving how we do business delivers a better valueproposition to our customers. We are analyzing how wedo business within and across our operating divisions,as well as general and administrative functions, to bestdetermine how to better serve customers. The better wecomprehend both aspects of the customer relationship their expectations of us and how we are organized todeliver on those expectations the better our decisionsregarding investments in technology, organizationalinitiatives, and product development. Smurt-Stone serves a broad range of customers,from those who buy our packaging to those who buy ourproducts as their raw materials. As we have closed mills 19. and consolidated production, some independent corrugated customers have expressed concern about dependability of their supply. Smurt-Stone is dedicating a part of our mill system to meet the needs of these key customers and has committed a minimum of one million tons of containerboard products annually to the independent marketplace.3 Optimizing Production CapabilitiesProducts Our primary operational focus since the merger of Smurt-Stone hasOperational perspectivebeen higher manufacturing efficiencies and lower costs. Six mills in a pilot program focused on improving existing processes increased efficiencies up to ve percent and reduced costs by as much as 10 percent by the end of 2000. The program will be extended to our other mills. Our objectives are to lower the cost per ton and balance production with current demand. To accomplish that, Smurt-Stone is evaluating more efficient ways to reduce operating rates through a combination of running the mills more slowly and taking periodic shutdowns. In the second half of 2000, we launched an incremental-cost measurement process that focuses on the cost of the last ton made rather than average price per ton. This analysis aims to capture total production costs, including incremental energy and transportation expenses that are often incurred by the single-minded focus on meeting production goals. Average-cost-per-ton calculations tend to ignore these expenses. Our larger mill system provides opportunities to schedule production at facilities best equipped to deliver the products most in demand. We achieved signicant cost reductions at our Missoula, Montana, mill by concentrating its production on brown linerboard and moving its 18 white top production to Brewton, Alabama. Brewton, along with the West Point, Virginia, and La Tuque, Quebec, mills added in the St. Laurent merger, now produce the same high-quality white top linerboard. The exibility to shift production among the mills means customers orders are lled expeditiously and the mills operate more cost-effectively. The result: increased customer focus and improved protability at the mill level. We are in the process of introducing uniform computer-based purchasing and maintenance management systems. Over time that approach will become standard procedure. The supply chain operations group is focused on signi- cantly improving service to integrated andJacksonville, Arkansas independent customers, reducing order cycle time, and improving inventory levels. Supply> Smurt-Stone isthe industrys leading chain improvements by themselves reducedbag packaging manu- corrugated containerboard inventories morefacturer. Employees than 15 percent in 2000.such as WendyHadlock at our Being a demand-driven producer enablesJacksonville, Smurt-Stone to maintain the all-importantArkansas, bag pack- customer focus while keeping inventories inaging facility paygreat attention to balance. The company and our workforceproduction detail benet from steadier production that mitigatesand customer service. downtime taken to reduce excess inventories. 20. 4 Strong Financial Management> Smurt-Stone spent Performanceabout $204 million Enhances Performancein 1999-2000 on Financial perspectiveSmurt-Stone has a well-established reputationenvironmentalfor strong nancial management based on setting aggressive perform- improvements atnine mills, includingance objectives and then achieving if not exceeding those goals.the Panama City, In the merger that created Smurt-Stone, our goal was to achieve Florida, mill, where$350 million in annual savings within a two-year period. We reached the Jeremy Odom ispart of the team$350 million goal in mid-year 2000, six months ahead of the target date.that helped the millBy the end of the year, we realized synergy savings from the St. Laurentcomply with theacquisition of $20 million on an annual basis. We expect to reach our EPAs Cluster Rule.$50 million goal in total synergy savings in 2001. Panama City, Florida Our history of growth through acquisitions produced a high levelof debt. Our top nancial objective is to reduce that debt to help lowerinterest expense and improve earnings. As important as that is, we also remain committed tomaintaining nancial exibility so that we are well positioned to take advantage of strategicand operating opportunities. In 1999, we reduced total debt by $1.8 billion, principally from the proceeds of sales ofnon-core assets. Debt reduction remained our top nancial priority for 2000, but we also tookadvantage of our nancial exibility and reputation for strong nancial management toacquire St. Laurent when that opportunity presented itself. The transaction represented an 21. important strategic transaction for Smurt-Stone even though it meant $1 billion in additional debt. In the second half of 2000, following the acquisition, we reduced debt by approximately $370 million. Early in 2001, we announced plans to issue $500 million of new bonds at Stone Container, with the proceeds to be used to redeem bonds maturing in 2002. Strong market interest, signaling an acceptance of our strategies, allowed Stone Container to increase the issue to $1.05 billion of new bonds and redeem existing bonds with higher interest rates. This renancing helped us increase nancial exibility by lengthening the maturities of our bonds and lowering our interest expense.5Accepting the Accountability of Leadership Performance Accountability improves performance. The management processes in Accountability perspectiveplace recognize the contributions of employees throughout the organi- zation by giving them responsibility in their spheres of inuence, within corporate guidelines designed to promote best practices and reach common goals. Measurement is routine in the corporate culture at Smurt-Stone. Line managers are accountable for customer satisfaction and for managing the business to increase both sales and prot margins. Executive management is measured on corporate performance including cash ow, debt reduction, and overall protability. Smurt-Stone also is accountable to the communities in which we operate and to the environment in and around our plants. Realizing that employees not only work but also live in the areas in which we do business, we strive to be a good corporate citizen and encourage 20 employees to become involved in their communities. One way we demonstrate commitment to environmental protection is a rigorous, companywide audit program. Internal teams made up of corporate and operating staff and legal counsel routinely inspect company facilities for environmental compliance. As the worlds largest paper recycler, we not only provide our mills with a secure recycled ber source, but our efforts help divert materials from landlls. In 1999 and 2000, we spent approximately $204 million on environmental improvements at nine mills to comply with the Cluster Rule, a collection of federal air and water regulations that affect U.S. paper mills. The company is dedicated to improving water and air quality byactively pursuing treatmentsystems that remove undesirablePanama City, Floridaparticles from our manufacturingdischarges.> Smurt-Stone takesa leadership role We recognize that leadershipin environmentalrequires accountability tostewardship andcustomers, employees and com-conducts rigoroustesting and auditingmunities, as well as to share-programs. Bunkyholders. From our perspectiveJones, a chemistas North Americas leading paper-at the Panama Citycontainerboard mill,based packaging solutionsgathers a waterprovider, constantly taking anothersample for testing.look at the way we do businessensures our accountability to all. 22. > Paul Napier checks for color accuracy at Smurt-Stones Solon, Ohio, folding carton manufacturing facility, which converts boxboard from several of Smurt-Stones mills and has a tradition of strong customer relationships.Solon, Ohio 23. Smurfit-Stone Container CorporationBOARD OF DIRECTORS AND C O R P O R AT E A N D D I V I S I O N O F F I C E R SBoard MembersCorporate Officers Michael W.J. SmurfitJerry K. PearlmanMichael W.J. SmurfitJames P. DavisPaul K. KaufmannLorne ParnellChairman and CEO, Retired, Chairman of the Board Vice President andVice President, Vice President,Jefferson Smurfit Group plc Zenith Electronics Area Manager, ControllerPacific Operations Ray M. CurranCorporationCorrugated Container Division President andRay M. CurranLeslie T. Lederer John M. RiconosciutoPresident and CEO, Chief Executive Officer Vice President, Vice President andThomas A. Reynolds, IIIJames D. DuncanSmurfit-Stone Container Partner, Vice President, Strategic InvestmentGeneral Manager, Patrick J. MooreCorporation Winston & Strawn Corporate Sales and Marketing DispositionsSpecialty Packaging Division Vice President and Chief Financial OfficerRichard A. Giesen Anthony P. J. SmurfitWilliam G. EusticeF. Scott Macfarlane Jose A. SantosChairman and CEO, Chief Executive Officer, Vice President andVice President andVice President, John F. AllgoodContinere Corporation Smurfit Europe Area Manager, General Manager,Latin American Operations Assistant Secretary Corrugated Container Division Consumer Packaging DivisionAlan E. GoldbergDermot F. SmurfitDavid C. Stevens Curtis A. BartonFormer Managing Director, Deputy Chairman, Vice President and Daniel J. GarandRichard P. Marra Vice President,Morgan Stanley & Co., Inc.Jefferson Smurfit Group plcVice President, Assistant Treasurer General Manager, Environmental Affairs Supply Chain Operations Recycling DivisionHoward E. Kilroy Timothy J. P. McKenna Mathew J. BlanchardRetired, Vice President, Michael F. Harrington Gayle M. Sparapani Vice President andJefferson Smurfit Group plcVice President, Investor Relations andVice President, General Manager, Employee RelationsCommunicationsBenefits Containerboard Sales andJames J. OConnorRetired, Marketing James A. HayssenRonald J. Megna William N. WandmacherUnicom/CommonwealthVice President, Assistant Secretary Vice President and Cynthia S. BowersEdison Information TechnologyGeneral Manager, Vice President, Mark R. OBryan North American Compensation andVice President, Charles A. Hinrichs Containerboard Mill and AdministrationVice President, Procurement Forest Resources Division Treasurer Peter F. DagesThomas A. Pagano Vice President andVice President, Craig A. Hunt General Manager,Vice President, Planning Corrugated Container Division Secretary and General Counsel 22 Division Officers Corrugated ContainerRodney A. MyersDonald C. Wyatt Consumer PackagingSpecialty Packaging Michael R. OswaldVice President and Vice President, Vice President,Division DivisionDivisionRegional Manager North AmericanOperationsLeRoy R. Crocker J. Gregor Doman L. David Fielder Containerboard & KraftVice President and Vice President, Vice President,Robert D. Nelson James W. Pope Sales, Board SalesRegional ManagerVice President and Sales PaperCanVice President,Regional Manager International / Western SalesJohn J. Curry, Jr. Nathan S. HolmesFred W. KlattVice President and Vice President andVice President ofJames S. Nolan North AmericanTom E. SquiresRegional ManagerVice President,General Manager Manufacturing Vice President, Containerboard MillCorporate Accounts Southeast Region and Forest ResourcesStephen P. Folan Gary R. HustonGeorge Q. Langstaff DivisionVice President and Vice President, Vice President andDonald A. PetriEdward V. TucciaroneRegional ManagerVice President and Boxboard SalesGeneral Manager,Vice President, Alain BoivinRegional Manager Vice President, Industrial GroupEastern SalesRoland F. Hauser Steven L. Kelchen Mill Operations,Vice President and Vice President andJerry D. SuiterJames B. Laurence Central RegionRegional ManagerVice President and Regional ManagerVice President of Sales Research andDirector of ManufacturingJohn E. DavisJames A. Henderson Curtiss M. KomenGary D. McDanielDevelopment Division Vice President,Vice President and Vice President andVice President andDonald A. TinkoffJoseph V. LeBlanc Forest ResourcesRegional ManagerVice President and Regional ManagerGeneral Manager,Vice PresidentRegional Manager Flexible Group Alain DubucLane W. Hunter David J. Pietrowicz Vice President,Vice President and Vice President andJohn J. Moran Supply Chain/ Mill Operations,Regional Manager Regional ManagerVice President,Containerboard Sales Transportation Northern Region Marketing, andStephen E. Jevyak and Marketing Division William Wanner General Manager, W. G. StuartVice President and Vice President,Larry L. BurtonVice President, Specialty GroupRegional ManagerVice President,Supply / Demand Operations Mill Operations,Sales & MarketingJohn L. KnudsenSouthern Region Terence J. BrownVice President and Recycling DivisionVice President,Michael L. ButlerRegional ManagerVice President,Transportation Mark C. BrantleyGraphic and Specialty Sales, Vice President,John B. MalloyVice President andBoard SalesNorth Central RegionRegional ManagerAndrew J. WoodroffeSteve A. MillerVice President,Vice President,Technical Services & Product West RegionManagement, Board Sales 24. SHAREHOLDERS INFORMATION Stockholders Annual Meeting For Investor Information Contact May 17, 2001 at 1:00 pmInvestor Relations and Communications The Sheraton Chicago Hotel & TowersSmurfit-Stone Container Corporation City Front Center8182 Maryland Avenue 301 E. North Water StreetSt. Louis, MO 63105 Chicago, IL 60611Telephone: 314-746-1223Fax:314-746-1347www.smurfit-stone.com Registrar and Transfer Agent Mellon Investor Services LLC Overpeck CentreTimothy McKenna 85 Challenger Road Vice President, Ridgefield Park, NJ 07660Investor Relations and Communications www.mellon-investor.comSt. Louis: 314-746-1254 Telephone: 888-213-0965Chicago: 312-580-4637Common Stock Corporate Office Smurfit-Stone Container CorporationSmurfit-Stone Container Corporation common stock is traded on The Nasdaq 150 North Michigan Avenue Stock Market under the symbol: SSCCChicago, IL 60601-7568Telephone: 312-346-6600 Preferred Stock Smurfit-Stones 7% Series A Cumulative Exchangeable Redeemable Convertible Preferred Stock is traded on The Nasdaq under the symbol SSCCP Design: ProWolfe Partners; St. Louis, MO Photography: Studio Bruton/Stroube; St. Louis, MO Location Mark Green; Houston, TX 25. 150 North Michigan Avenue Chicago, IL 60601-7568 (312) 346-6600 www.smurfit-stone.com Company ProfileSmurfit-Stone Container Corporation (Nasdaq: SSCC) is the industrys leading integrated manufacturer of paper and paper-based packaging, including containerboard, corrugated containers, multiwall bags, and clay-coated recycled boxboard, and is the worlds largest paper recy- cler. In addition, we are a leading producer of solid bleached sulfate, folding car- tons, paper tubes and cores, and labels.