UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934.
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934.
For Quarter Ended September 30, 1998
Commission File Number 0-11951
JSCE, Inc.
(Exact name of registrant as specified in its charter)
Delaware 37-1337160
(State or other jurisdiction of (IRS Employer
Identification No.) incorporation or organization)
8182 Maryland Avenue, St. Louis, Missouri 63105
(Address of principal executive offices) (Zip Code)
(314) 746-1100
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes X No
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of September 30, 1998, the registrant had outstanding 1,000
shares of common stock, $.01 par value per share.
Item 1. Financial Statements
JSCE, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Net sales $ 841 $ 832 $ 2,529 $ 2,395
Costs and expenses
Cost of goods sold 707 703 2,113 2,054
Selling and administrative expenses 71 64 214 193
Income from operations 63 65 202 148
Interest expense, net (46) (48) (142) (142)
Other, net (1) (2)
Income before income taxes and
extraordinary item 16 17 58 6
Provision for income taxes 8 9 28 9
Income (loss) before extraordinary item 8 8 30 (3)
Extraordinary item
Loss from early extinguishment of debt,
net of income tax benefits (13)
Net income (loss) $ 8 $ 8 $ 17 $ (3)
</TABLE>
See notes to consolidated financial statements.
JSCE, Inc.
CONSOLIDATED BALANCE SHEETS
(In millions, except share data)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
(unaudited)
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents $ 15 $ 12
Receivables, less allowances of
$10 in 1998 and 1997 312 302
Inventories
Work-in-process and finished goods 106 89
Materials and supplies 156 151
262 240
Deferred income taxes 23 32
Prepaid expenses and other current assets 18 16
Total current assets 630 602
Net property, plant and equipment 1,508 1,523
Timberland, less timber depletion 263 265
Goodwill, less accumulated amortization of
$64 in 1998 and $58 in 1997 231 237
Other assets 134 144
$ 2,766 $ 2,771
Liabilities and Stockholder's Deficit
Current liabilities
Current maturities of long-term debt $ 38 $ 15
Accounts payable 286 334
Accrued compensation and payroll taxes 85 88
Interest payable 48 25
Other accrued liabilities 72 69
Total current liabilities 529 531
Long-term debt, less current maturities 2,004 2,025
Other long-term liabilities 224 227
Deferred income taxes 366 362
Stockholder's deficit
Common stock, par value $.01 per share;
1,000 shares authorized and outstanding
Additional paid-in capital 1,102 1,102
Retained earnings (deficit) (1,459) (1,476)
Total stockholder's deficit (357) (374)
$ 2,766 $ 2,771
</TABLE>
See notes to consolidated financial statements.
JSCE, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
Nine months ended
September 30,
1998 1997
Cash flows from operating activities
Net income (loss) $ 17 $ (3)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities
Extraordinary loss from early extinguishment of debt 22
Depreciation, depletion and amortization 100 95
Amortization of deferred debt issuance costs 5 8
Deferred income taxes 13 7
Non-cash employee benefit expense 4 5
Change in current assets and liabilities,
net of effects from acquisitions
Receivables (10) (38)
Inventories (21) (16)
Prepaid expenses and other current assets (9) 2
Accounts payable and accrued liabilities (50) (4)
Interest payable 23 18
Income taxes 5 (2)
Other, net (10) (2)
Net cash provided by operating activities 89 70
Cash flows from investing activities
Property additions (69) (118)
Proceeds from property disposals 3 5
Construction funds held in escrow 8
Acquisition of businesses, net of cash acquired (9)
Net cash used for investing activities (66) (114)
Cash flows from financing activities
Borrowings under bank credit facilities 891
Net borrowings under accounts
receivable securitization program 10 26
Net borrowings (repayments) of long-term debt (908) 18
Deferred debt issuance costs (13)
Net cash provided by (used for) financing activities (20) 44
Increase in cash and cash equivalents 3 0
Cash and cash equivalents
Beginning of period 12 12
End of period $ 15 $ 12
See notes to consolidated financial statements.
JSCE, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in millions)
(Unaudited)
1. Basis of Presentation
The accompanying consolidated financial statements of JSCE, Inc.
have been prepared in accordance with the instructions to Form 10-Q
and reflect all adjustments which management believes necessary
(which include only normal recurring accruals) to present fairly
the financial position and results of operations. These
statements, however, do not include all information and footnotes
necessary for a complete presentation of financial position,
results of operations and cash flows in conformity with generally
accepted accounting principles. Interim results may not
necessarily be indicative of results which may be expected for any
other interim period or for the year as a whole. For further
information refer to the consolidated financial statements and
footnotes included in the JSCE, Inc. Annual Report on Form 10-K for
the year ended December 31, 1997, filed on March 2, 1998 with the
Securities and Exchange Commission (the "JSCE 1997 10-K").
JSCE, Inc. is a wholly-owned subsidiary of Jefferson Smurfit
Corporation ("JSC"). JSCE, Inc. and where appropriate, its
consolidated subsidiaries, are hereinafter collectively referred to
as "JSCE" or the "Company". JSC has no operations other than its
investment in the Company. The Company owns a 100% equity interest
in Jefferson Smurfit Corporation (U.S.) ("JSC (U.S.)"). JSC (U.S.)
has extensive operations throughout the United States.
2. Long-Term Debt
In March 1998, JSC (U.S.) entered into a new credit facility (the
"1998 Credit Agreement") consisting of a $550 million revolving
credit facility, a $400 million seven-year Tranche A Term Loan, and
a $350 million eight-year Tranche B Term Loan. The proceeds from
the 1998 Credit Agreement were used to fully prepay $878 million of
outstanding principal and accrued interest under the previous
credit facility (the "1994 Credit Agreement"). The 1998 Credit
Agreement reduced the interest expense, extended debt maturities,
and improved the financial flexibility of the Company. JSC (U.S.)
recorded an extraordinary loss of $13 million (net of income tax
benefits of $9 million) related to the early extinguishment of the
Company's bank debt.
Outstanding loans under the Tranche A Term Loan and the Revolving
Credit Facility bear interest at rates selected at the option of
JSC (U.S.) equal to the alternate base rate ("ABR") plus .50% per
annum or the adjusted LIBOR Rate plus 1.50% per annum (7.0625% at
September 30, 1998). Interest on outstanding loans under the
Tranche B Term Loan is payable at a rate per annum selected at the
option of JSC (U.S.), equal to the ABR plus 1% per annum or the
adjusted LIBOR Rate plus 2% per annum (7.5625% at September 30,
1998). ABR is defined as the highest of Chase Manhattan Bank's
prime rate, 1% in excess of the base certificate of deposit rate or
1/2 of 1% in excess of the Federal Funds Rate. The Tranche A and
B Term Loans and the Revolving Credit Facility may be prepaid at
any time, in whole or in part, at the option of JSC (U.S.).
3. Pending Merger
On May 10, 1998, the Company announced it had signed a merger
agreement with Stone Container Corporation ("Stone Container").
The merged company, to be named Smurfit-Stone Container
Corporation, will be a focused, integrated producer of corrugated
containers, folding cartons, industrial bags, containerboard and
recycled paperboard, with annual sales exceeding $8 billion, based
on 1997 results. Under terms of the Merger Agreement, common
shareholders of Stone Container would receive .99 shares of
Jefferson Smurfit Corporation for each common share of Stone
Container. Shareholders of JSC will continue to hold their
existing JSC shares. The Merger transaction (the "Merger") is
expected to be tax-free to the shareholders of both companies and
will be treated as a purchase for accounting purposes. All
material domestic and foreign regulatory approvals required to
permit consummation of the Merger by JSC and Stone Container have
been obtained. The Company has set a meeting date of November 17
for its shareholders to vote on the proposed merger with Stone
Container and has mailed the Joint Proxy Statement/Prospectus dated
October 8, 1998 (the "Joint Proxy Statement/Prospectus") concerning
the proposed Merger to its shareholders. Subject to the approval
of the shareholders of both companies, JSC anticipates that the
Merger will be completed shortly after the shareholder meeting.
As described in the Joint Proxy Statement/Prospectus, in connection
with the Merger and pursuant to an executed commitment letter, JSC
intends to amend its existing credit agreement to borrow $550
million (the "Amended JSC Credit Agreement"), $300 million of which
will be provided to Stone Container. There can be no assurance
that the Amended JSC Credit Agreement, which is subject to the
execution of definitive documentation and the satisfaction of other
conditions including the absence of any material adverse change at
JSC or Stone Container and their respective subsidiaries and the
absence of any material adverse change or condition in the loan or
other financial markets that would have a material adverse effect
on the syndication of the Amended JSC Credit Agreement, will become
effective, that the terms thereof will be satisfactory to JSC or
that all of the conditions to borrowing thereunder will be met. If
the Amended JSC Credit Agreement does not become effective, there
can be no assurance as to the extent to which any alternative
financings would be available, and the terms of any such
alternatives. A further description of this financing and of
certain risks associated therewith and with the financial position
of JSC is set forth in the "Risk Factors - Substantial Leverage,"
"Risk Factors - Ability to Service Debt; Liquidity" and "Risk
Factors - Restrictive Covenants; Limited Ability to Incur
Indebtedness" sections in the Joint Proxy Statement/Prospectus.
There has been no material change in the risks associated with the
financing or with the financial position of JSC since the date of
the Joint Proxy Statement/Prospectus.
In a separate transaction, a subsidiary of Jefferson Smurfit Group
plc has agreed to sell its containerboard machine located at the
Company's mill in Fernandina Beach, Florida to a subsidiary of the
Company for $175 million. The transaction is expected to close
shortly after the Merger. In the event the Merger is not
consummated, the Company will have an option to cancel or rescind
the transaction.
In May 1998, four putative class action complaints were filed
against Stone Container, the individual directors of Stone
Container and JSC in the Court of Chancery of the State of Delaware
in and for New Castle County. On June 15, 1998, the Court of
Chancery signed an order which consolidated the four actions. Now
captioned as In re Stone Container Shareholders Litigation, C.A.
16375 (the "Action"), the complaint in the Action (the "Complaint")
alleges, among other things, that the Stone Container directors
violated the fiduciary duties of due care and loyalty that they
owed to the public stockholders of Stone Container because, the
Complaint contends, the Stone Container directors failed to
undertake an appropriate evaluation of Stone Container's net worth
as a merger/acquisition candidate, actively evaluate the proposed
transaction and engage in a meaningful auction with third parties
in an attempt to obtain the best value for Stone Container's
stockholders. The Complaint further alleges that as a result of
the alleged failure by the Stone Container directors to make an
informed decision, the Stone Container stockholders will not
receive fair value for their shares of Stone Container Common Stock
in the Merger, will be largely divested of their right to share in
Stone Container's future growth and development and will be
prevented from obtaining fair and adequate consideration for their
shares of Stone Container Common Stock. The Complaint requests
that the Court of Chancery, among other things, declare that the
Complaint is a proper class action and enjoin the Merger and
require that the directors place Stone Container up for auction
and/or conduct a market-check to ascertain Stone Container's value.
JSC and Stone Container each believe the Complaint is without
merit.
On August 11, 1998, the parties of the Action entered into a
memorandum of understanding setting forth the terms of a proposed
settlement of the Action, subject to certain conditions. While
Stone Container, the members of the Stone Container board of
directors and JSC continue to deny the allegations of the Complaint
or that they have breached any duty or engaged in any wrongdoing in
connection with the Merger, the defendants have agreed to enter
into the proposed settlement to eliminate the burden, expense and
uncertainty of litigation. In connection with the proposed
settlement, (a) Stone Container and JSC agreed to provide
plaintiffs' counsel with an opportunity to review and comment upon
the disclosure to be provided to Stone Container stockholders in
the joint proxy statement seeking stockholder approval of the
Merger, (b) Stone Container agreed to obtain an updated opinion as
to the fairness of the Merger to Stone Container stockholders from
a financial point of view, and (c) Stone Container and JSC agreed,
subject to approval by their respective board of directors, to
amend the Merger Agreement to reduce the termination fee payable to
Stone Container or JSC, respectively, upon termination of the
Merger Agreement in certain circumstances, from $60 million to $50
million. The defendants in the Action agreed not to oppose an
application to the Court by plaintiffs' counsel for fees and
expenses not to exceed $650,000, which would be paid by Stone
Container. The proposed settlement set forth in the memorandum of
understanding is subject to a number of conditions, including
discovery by plaintiffs' counsel, approval of the proposed
settlement by the Court of Chancery and consummation of the Merger.
If the proposed settlement is approved by the Court of Chancery and
the other conditions are satisfied, the Court will certify a non-
opt out class of Stone Container shareholders for the period from
May 10, 1998 through the effective time of the Merger, the Action
will be dismissed with prejudice and Stone Container, the Stone
Container board of directors, JSC and their respective officers,
directors, employees and agents will receive a release for all
claims that were or could have been asserted in the Action.
On October 20, 1998, certain holders of Series E Preferred Stock of
Stone Container ("Series E Preferred") filed a complaint
against Stone Container in the Delaware Chancery Court.
The complaint alleges, among other things, that an affirmative
vote by holders of at least two-thirds of the outstanding
Series E Preferred Stock is required to approve the Merger.
The complaint further requests the chancery court to
issue an injunction against the consummation of the Merger.
On October 29, 1998, a separate complaint by a Series E Preferred
stockholder was filed against Stone Container in the Delaware
Chancery Court. The complaint is similar to the October 20, 1998
complaint. This complaint, in addition, purports to represent a class
action on behalf of all Series E Preferred stockholders and also names
each of the directors of Stone Container as additional defendants.
4. Contingencies
JSC and Smurfit Newsprint Corporation ("SNC"), a wholly-owned
subsidiary of the Company, have been served with complaints
alleging that Cladwood exterior siding, produced by SNC and used in
prefabricated or manufactured homes, deteriorates under normal
conditions and exposure. The suits purport to be class actions on
behalf of persons who own or have purchased or used Cladwood, a
non-core product line of SNC. The complaints allege either
negligence, unfair trade practices or breach of warranty, and seek
unspecified amounts of damages and in one case declaratory and
injunctive relief. Management is unable to predict at this time
the final outcome of these suits or whether the resolution of the
matters could materially affect the Company's results of
operations, cash flows or financial position. The Company and SNC
intend to defend the actions vigorously. See Part II, Item 1,
"Legal Proceedings".
5. Summarized Financial Information of JSC (U.S.)
The following summarized financial information is presented for JSC
(U.S.), a wholly-owned subsidiary of JSCE. No separate financial
statements are presented for JSC (U.S.) because the financial
statements of JSC (U.S.) are identical to those of JSCE. JSC
(U.S.) is the issuer of the 1994 Senior Notes and the 1993 Senior
Notes and is the borrower under the 1994 Credit Agreement, each as
defined in the JSCE 1997 10-K. JSCE is the guarantor of the 1994
Senior Notes and the 1993 Senior Notes and is the guarantor under
the 1994 Credit Agreement.
Condensed consolidated balance sheets:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
<S> <C> <C>
Current assets $ 630 $ 602
Property, plant and equipment and timberlands, net 1,771 1,788
Goodwill 231 237
Other assets 134 144
Total assets $ 2,766 $ 2,771
Current liabilities $ 529 $ 531
Long-term debt 2,004 2,025
Other liabilities 590 589
Stockholder's deficit
Common stock
Additional paid-in capital 1,102 1,102
Retained earnings (deficit) (1,459) (1,476)
Total stockholder's deficit (357) (374)
Total liabilities and stockholder's deficit $ 2,766 $ 2,771
</TABLE>
Condensed consolidated statements of operations:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Net sales $ 841 $ 832 $ 2,529 $ 2,395
Costs and expenses 778 767 2,327 2,247
Interest expense, net 46 48 142 142
Other expense, net 1 2
Income before income taxes and
extraordinary item 16 17 58 6
Provision for income taxes 8 9 28 9
Extraordinary item
Loss from early extinguishment of
debt, net of income tax benefits (13)
Net income (loss) $ 8 $ 8 $ 17 $ (3)
</TABLE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
(In millions) Three months ended Nine months ended
September 30, September 30,
1998 1997 1998 1997
Net sales
Paperboard/Packaging Products $ 758 $ 753 $2,286 $2,173
Newsprint 83 79 243 222
Total net sales $ 841 $ 832 $2,529 $2,395
Income from operations
Paperboard/Packaging Products $ 57 $ 56 $ 174 $ 132
Newsprint 6 9 28 16
Total income from operations $ 63 $ 65 $ 202 $ 148
For the three months ended September 30, 1998, the Company had an
increase in net sales of $9 million (1%) and a decrease in income
from operations of $2 million (3%) compared to the same period in
1997. Prices for many of the Company's products were higher than
last year, but lower sales volume and higher energy and other costs
offset the improvements in pricing.
For the nine months ended September 30, 1998, the Company had an
increase in net sales of $134 million (6%) and an increase in
income from operations of $54 million (36%) compared to the same
period in 1997. The increase in net sales and income from
operations was primarily due to higher sales prices.
(In millions) Change in net sales analysis
Three months Nine months
1998 compared to 1997 1998 compared to 1997
Sales price and product mix
Paperboard/Packaging Products $ 27 $132
Newsprint 4 26
31 158
Sales volume
Paperboard/Packaging Products (20) (12)
Newsprint 0 (5)
(20) (17)
Closed or sold facilities
Paperboard/Packaging Products (2) (7)
Total net sales increase $ 9 $134
Paperboard/Packaging Products Segment
For the three months ended September 30, 1998, net sales of the
Paperboard/ Packaging Products segment increased 1% compared to the
same period in 1997 and income from operations increased 2%
compared to the same period in 1997. The increase in net sales and
income from operations of this segment were primarily a result of
the price increases for containerboard and corrugated shipping
containers. The major changes in net sales price and shipments
within the product groups of the Paperboard/Packaging Products
segment are discussed below.
Net sales of containerboard and corrugated shipping containers for
the three months ended September 30, 1998 were $377 million, an
increase of $25 million, or 7%, compared to last year. On average,
the price of containerboard and corrugated shipping containers were
higher than last year by 17% and 15%, respectively. During the
third quarter, the Company took approximately 40,000 tons of
economic downtime at its Jacksonville, Florida containerboard mill
in order to reduce inventories. Shipments of corrugated shipping
containers during the third quarter of 1998 decreased approximately
7% compared to last year, due to the Company's strategy to
sacrifice volume for improved prices.
Net sales of reclaimed and virgin wood fiber for the three months
ended September 30, 1998 were $77 million, a decrease of $22
million, or 22%, compared to last year. The decrease was due to
lower reclaim fiber sales prices resulting from reduced demand for
this material, which stems from the extensive number of paper mill
shutdowns within the paper industry. The Company's average sales
price during the third quarter was 28% lower compared to last year.
Net sales of the other products in this segment for the three
months ended September 30, 1998 were comparable to last year.
For the nine months ended September 30, 1998, net sales of the
Paperboard/ Packaging Products segment increased 5% compared to the
same period in 1997 and income from operations increased 32%
compared to the same period in 1997. Containerboard and corrugated
shipping container price increases were the primary reason for the
increases in net sales and income from operations for the nine
months ended September 30, 1998.
Net sales of containerboard and corrugated shipping containers for
the nine months ended September 30, 1998 were $1,135 million, an
increase of $93 million, or 9%, compared to last year. For the
year to date period, average prices for containerboard and
corrugated shipping containers were higher than last year by 21%
and 13%, respectively. In order to reduce excess inventories, the
Company has taken approximately 78,000 tons of economic downtime at
two of its containerboard mills in the first 9 months of 1998 and
plans to take an additional 60,000 tons of downtime in the fourth
quarter of 1998. Shipments of corrugated shipping containers for
the nine months ended September 30, 1998 decreased approximately 6%
compared to last year.
Net sales of recycled boxboard, SBS and folding cartons for the
nine months ended September 30, 1998 were $687 million, an increase
of $29 million, or 4%, compared to last year. On average, recycled
boxboard prices were higher by 4% compared to last year and SBS
prices were 1% lower than last year. Folding carton prices were
lower than last year by 3%. Shipments of folding cartons for the
nine months ended September 30, 1998 were higher than last year by
12%.
Net sales of consumer packaging products for the nine months ended
September 30, 1998 were $108 million, a decrease of $12 million, or
10%, compared to last year. Net sales of other products in this
segment for the year-to-date period were comparable to last year.
Newsprint Segment
For the three months ended September 30, 1998, net sales for the
Newsprint segment increased by $4 million (5%) and income from
operations decreased by $3 million (33%). The improvement in net
sales was due to sales prices, which were higher than last year by
5%, but higher energy and fiber costs offset the improvement in
pricing, causing income from operations to be lower.
<PAGE>
For the nine months ended September 30, 1998, net sales and income
from operations for the Newsprint segment increased 9% and 75%,
respectively, due to higher prices. The average sales price of
newsprint for the year-to-date period was higher than last year by
11%. Newsprint sales volume was 2% lower than last year for the
year-to-date period.
Costs and Expenses
The Company's cost of goods sold as a percent of net sales for the
three months and nine months ended September 30, 1998 decreased
compared to last year, due primarily to overall higher sales prices
in 1998. For the three months ended September 30, the percentage
decreased from 85% in 1997 to 83% in 1998 in the
Paperboard/Packaging Products segment. In the Newsprint segment,
the improvement in sales price for the three months ended September
30, 1998 was not great enough to offset higher energy and virgin
fiber cost and the percentage increased from 84% to 90%. For the
nine months ended September 30, the percentage decreased from 86%
in 1997 to 83% in 1998 for the Paperboard/Packaging Products
segment and decreased from 89% to 85% in the Newsprint segment.
Selling and administrative expenses as a percent of net sales for
the three months and nine months ended September 30, 1998 increased
as compared to 1997 due in part to higher personnel cost.
Interest expense for the three months ended September 30, 1998 was
lower than the same period in 1997. Interest expense for the nine
months ended September 30, 1998 was comparable to last year. The
average effective interest rate for the Company's outstanding debt
was lower for the third quarter and year-to-date period of 1998,
offsetting the impact of higher average debt levels outstanding.
The Company's effective income tax rates for the three months and
nine months ended September 30, 1998 differed from the Federal
statutory tax rate due to several factors, the most significant of
which were state income taxes and the effect of permanent
differences from applying purchase accounting.
New Accounting Pronouncements
The AICPA issued Statement of Position ("SOP") 98-5, "Reporting the
Costs of Start-up Activities" in April 1998. SOP 98-5 is effective
beginning on January 1, 1999. However, early adoption is allowed.
SOP 98-5 requires that start-up costs capitalized prior to January
1, 1999 be written-off and any future start-up costs to be expensed
as incurred. When adopted, the unamortized balance of start-up
costs (approximately $5 million as of September 30, 1998) will be
written off as a cumulative effect of an accounting change. The
Company does not expect the adoption of SOP 98-5 to have a material
impact on its income from continuing operations.
In addition, the AICPA issued SOP 98-1, "Accounting for Computer
Software Developed For or Obtained For Internal-Use" in March 1998.
SOP 98-1 is effective beginning on January 1, 1999 and requires
that certain costs incurred after the date of adoption in
connection with developing or obtaining software for internal-use
be capitalized. Cost for such work performed internally by Company
employees is currently expensed as incurred. The Company does not
expect the adoption of SOP 98-1 to have a material impact on its
future earnings or financial position.
Statistical Data Three months ended Nine months ended
(In thousands of tons, September 30, September 30,
except as noted) 1998 1997 1998 1997
Mill production:
Containerboard 469 512 1,441 1,464
Recycled boxboard and
solid bleached sulfate 207 207 614 615
Newsprint (metric) 145 144 431 429
Sales volume:
Corrugated shipping containers
(billion square feet) 7.5 8.2 22.3 24.0
Folding cartons 138 127 401 357
Fiber reclaimed and brokered 1,291 1,208 3,833 3,562
Liquidity and Capital Resources
Operating activities have historically been the major source of
cash to fund the Company's capital expenditures and debt payments.
Net cash provided by operating activities for the nine months ended
September 30, 1998 of $89 million were used primarily to fund
capital investments totaling $69 million and net debt payments of
$20 million.
In March 1998, JSC (U.S.) entered into a new credit facility (the
"1998 Credit Agreement") consisting of a $550 million revolving
credit facility, a $400 million seven-year Tranche A Term Loan, and
a $350 million eight-year Tranche B Term Loan. The proceeds from
the 1998 Credit Agreement were used to fully repay $878 million of
outstanding principal and accrued interest under the previous
credit facility (the "1994 Credit Agreement"). The 1998 Credit
Agreement reduced interest expense, extended debt maturities, and
improved the financial flexibility of the Company. JSC (U.S.)
recorded an extraordinary loss of $13 million (net of income tax
benefits of $9 million) related to the early extinguishment of the
Company's bank debt.
The 1998 Credit Agreement contains various business and financial
covenants including, among other things, maintenance of minimum
levels of consolidated earnings before depreciation, interest,
taxes and amortization and maintenance of minimum interest coverage
ratios. The 1998 Credit Agreement also requires prepayments if JSC
(U.S.) has excess cash flows, as defined, or receives proceeds from
certain asset sales, insurance or the issuance of certain
indebtedness. Such restrictions, together with the highly
leveraged position of the Company, could restrict corporate
activities, including the Company's ability to respond to market
conditions, to provide for unanticipated capital expenditures or to
take advantage of business opportunities.
At September 30, 1998, the Company had $413 million of unused
borrowing capacity under its Credit Agreement and $96 million of
unused borrowing capacity under its $315 million accounts
receivable securitization program, subject to JSC (U.S.)'s level of
eligible accounts receivable. The Company believes that cash
provided by operating activities, available financing sources and
the divestiture of selected assets will be sufficient for the next
several years to pay interest on the Company's currently
outstanding obligations, amortize its currently outstanding term
loans and fund capital expenditures.
On May 10, 1998, the Company announced it had signed a merger
agreement with Stone Container Corporation ("Stone Container").
The merged company, to be named Smurfit-Stone Container
Corporation, will be a focused, integrated producer of corrugated
containers, folding cartons, industrial bags, containerboard and
recycled paperboard, with annual sales exceeding $8 billion based
on 1997 results. Under the terms of the agreement, common
shareholders of Stone Container would receive .99 shares of
Jefferson Smurfit Corporation for each common share of Stone
Container. Shareholders of JSC will continue to hold their
existing JSC shares. The Merger transaction ("the "Merger") is
expected to be tax-free to the shareholders of both companies and
will be treated as a purchase for accounting purposes. All
material domestic and foreign regulatory approvals required to
permit the consummation of the merger by JSC and Stone Container
have been obtained. The Company has set a meeting date of November
17 for its shareholders to vote on the proposed merger with Stone
Container and has mailed the Joint Proxy Statement/Prospectus dated
October 8, 1998 (the "Joint Proxy Statement/Prospectus") concerning
the proposed Merger to its shareholders. Subject to the approval
of the shareholders of both companies, JSC anticipates that the
Merger will be completed shortly after the shareholder meeting.
As described in the Joint Proxy Statement/Prospectus, in connection
with the Merger and pursuant to an executed commitment letter, JSC
intends to amend its existing credit agreement to borrow $550
million (the "Amended JSC Credit Agreement"), $300 million of which
will be provided to Stone Container. There can be no assurance
that the Amended JSC Credit Agreement, which is subject to the
execution of definitive documentation and the satisfaction of other
conditions including the absence of any material adverse change at
JSC or Stone Container and their respective subsidiaries and the
absence of any material adverse change or condition in the loan or
other financial markets that would have a material adverse effect
on the syndication of the Amended JSC Credit Agreement, will become
effective, that the terms thereof will be satisfactory to JSC or
that all of the conditions to borrowing thereunder will be met. If
the Amended JSC Credit Agreement does not become effective, there
can be no assurance as to the extent to which any alternative
financings would be available, and the terms of any such
alternatives. A further description of this financing and of
certain risks associated therewith and with the financial position
of JSC is set forth in the "Risk Factors - Substantial Leverage,"
"Risk Factors - Ability to Service Debt; Liquidity" and "Risk
Factors - Restrictive Covenants; Limited Ability to Incur
Indebtedness" sections in the Joint Proxy Statement/Prospectus.
There has been no material change in the risks associated with the
financing or with the financial position of JSC since the date of
the Joint Proxy Statement/Prospectus.
In a separate transaction, a subsidiary of Jefferson Smurfit Group
plc has agreed to sell its containerboard machine located at the
Company's mill in Fernandina Beach, Florida to a subsidiary of the
Company for $175 million. The transaction is expected to close by
January 1999. In the event the Merger is not consummated, the
Company will have an option to cancel or rescind the transaction.
Year 2000
The Company has conducted a review of its existing computer
software and hardware, as well as the embedded systems in its
buildings, equipment and other infrastructure in order to assess
the extent of the Year 2000 problem. The Company is currently
making the necessary modifications and replacements to bring all of
its systems into compliance by year 2000. In addition, the Company
is communicating with its critical suppliers to ascertain that they
are addressing potential Year 2000 issues as well. The Company is
using internal personnel, contract programmers and vendors to
identify Year 2000 problems, modify code and test the
modifications. The Company expects to do extensive testing of
these new systems during 1998 and 1999.
Total expenditures on Year 2000 projects are currently estimated to
be approximately $42 million. Many of the projects that have been
identified include enhancements that will enable the Company to
reduce or avoid costs and operate many of its production facilities
more efficiently. Some of these projects have been accelerated in
order to replace existing systems that cannot be brought into
compliance by the year 2000. Approximately $17 million has been
expended to date through September 30, 1998 and virtually all of
the remaining $25 million will be spent by the end of 1999.
The Company expects its operating, financial and administrative
systems to be compliant before the end of 1999 and does not
anticipate any disruption to its operations. In the event the
Company does not complete its plan to bring systems into compliance
before the year 2000, there could be severe disruption in the
operation of its process control and other manufacturing systems,
financial systems and administrative systems. Production problems
and delayed product deliveries could result in a loss of customers.
Delays in invoicing customer shipments could cause a slowdown in
cash receipts, which could affect the Company's ability to meet its
financial obligations. However, if project completion delays
become evident, the Company believes it would have sufficient time
to take the necessary steps to have employees or temporary workers
manually perform operations previously performed by the computers.
The estimates and conclusions herein contain forward-looking
statements and are based on management's best estimates of future
events. Risks to completing the Company's plan to bring all of its
systems into compliance before the year 2000 include the
availability of resources and the ability of suppliers to bring
their systems into Year 2000 compliance.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
JSC and Smurfit Newsprint Corporation ("SNC") have been served with
complaints alleging that Cladwood exterior siding, produced by SNC
and used in prefabricated or manufactured homes, deteriorates under
normal conditions and exposure, as disclosed in the Company's 1997
10-K and the Company's subsequent Quarterly Reports on Form 10-Q.
The suits purport to be class actions on behalf of persons who own
or have purchased or used Cladwood, a non-core product line of SNC.
The complaints allege either negligence, unfair trade practices or
breach of warranty, and seek unspecified amounts of damages and in
one case declaratory and injunctive relief. A similar action was
filed on October 12, 1998, styled Allen, et. al. V. SNC, et. al.,
No. 98-1-8159-05 (Georgia Superior Court) purporting to be a class
action on behalf of persons in the State of Florida whose
manufactured or mobile homes have Cladwood siding. SNC intends to
defend all of these actions vigorously. Management is unable to
predict at this time the final outcome of these suits relating to
Cladwood siding or whether the resolution of these matters could
materially affect the Company's results of operations, cash flows
or financial position.
As previously disclosed, Federal and State of Oregon authorities
have investigated potential violations of the Clean Water Act by
SNC at its Sweet Home and Philomath, Oregon Cladwood manufacturing
facilities. In order to conclude this matter, on November 10,
1998, SNC pled guilty to a one-count felony violation of the Clean
Water Act. Under the terms of the plea agreement, SNC has paid a
$50,000 fine and has paid $7,500 in restitution to each of the
Oregon Department of Environmental Quality and the Western States
Project, and the United States has agreed not to bring further
criminal charges against SNC for activities that have been the
subject of the investigation.
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
a) The following exhibits are included in this Form 10-Q.
10.1 Excerpts from Joint Proxy Statement/Prospectus dated October 8,
1998 including "Risk Factors - Substantial Leverage," "Risk
Factors - Ability to Service Debt; Liquity" and "Risk
Factors - Restrictive Covenants; Limited Ability to Incur
Indebtedness" (incorporated by reference to Exhibit 10.1 to
JSC's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1998).
27.1 Financial Data Schedule.
b) Reports on Form 8-K
None
Signatures
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
JSCE, Inc.
(Registrant)
Date November 16, 1998 /s/ Paul K. Kaufmann
Paul K. Kaufmann
Corporate Controller
(Principal Acounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000727742
<NAME> JSCE, INC.
<MULTIPLIER> 1000000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 15
<SECURITIES> 0
<RECEIVABLES> 322
<ALLOWANCES> 10
<INVENTORY> 262
<CURRENT-ASSETS> 630
<PP&E> 2525
<DEPRECIATION> 1017
<TOTAL-ASSETS> 2766
<CURRENT-LIABILITIES> 529
<BONDS> 2004
0
0
<COMMON> 0
<OTHER-SE> (357)
<TOTAL-LIABILITY-AND-EQUITY> 2766
<SALES> 2529
<TOTAL-REVENUES> 2529
<CGS> 2113
<TOTAL-COSTS> 2113
<OTHER-EXPENSES> 214
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 142
<INCOME-PRETAX> 58
<INCOME-TAX> 28
<INCOME-CONTINUING> 30
<DISCONTINUED> 0
<EXTRAORDINARY> (13)
<CHANGES> 0
<NET-INCOME> 17
<EPS-PRIMARY> .00
<EPS-DILUTED> .00
</TABLE>
