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 March 31, 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 EmployerIdentification No.)
ncorporation or organization)
8182 Maryland, 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 March 31, 1998, the registrant had outstanding 1,000
shares of common stock, $.01 par value per share.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
JSCE, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions)
(Unaudited)
Three months ended
March 31,
1998 1997
Net sales $ 844 $ 778
Costs and expenses
Cost of goods sold 702 675
Selling and administrative expenses 71 64
Income from operations 71 39
Interest expense, net (50) (47)
Income (loss) before income taxes and
extraordinary item 21 (8)
Provision for (benefit from) income taxes 10 (1)
Net income (loss) before extraordinary item 11 (7)
Extraordinary item:
Loss from early extinguishment of debt,
net of income tax benefits (13)
Net loss $ (2) $ (7)
See notes to consolidated financial statements.
<TABLE>
<CAPTION>
JSCE, Inc.
CONSOLIDATED BALANCE SHEETS
(In millions, except share data)
March 31, December 31,
1998 1997
(unaudited)
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents $ 11 $ 12
Receivables, less allowances of
$10 in 1998 and 1997 306 302
Refundable income taxes
Inventories
Work-in-process and finished goods 104 89
Materials and supplies 155 151
259 240
Deferred income taxes 31 32
Prepaid expenses and other current assets 30 16
Total current assets 637 602
Net property, plant and equipment 1,515 1,523
Timberland, less timber depletion 263 265
Goodwill, less accumulated amortization of
$60 in 1998 and $58 in 1997 235 237
Other assets 132 144
$ 2,782 $ 2,771
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current liabilities
Current maturities of long-term debt $ 7 $ 15
Accounts payable 292 334
Accrued compensation and payroll taxes 81 88
Interest payable 49 25
Other accrued liabilities 78 69
Total current liabilities 507 531
Long-term debt, less current maturities 2,064 2,025
Other long-term liabilities 226 227
Deferred income taxes 361 362
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) (1,478) (1,476)
Total stockholder's deficit (376) (374)
$ 2,782 $ 2,771
</TABLE>
See notes to consolidated financial statements.
JSCE, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
Three months ended
March 31,
1998 1997
Cash flows from operating activities
Net loss $ (2) $ (7)
Adjustments to reconcile net loss to
net cash provided by operating activities
Extraordinary loss from early extinguishment of debt 22
Depreciation, depletion and amortization 33 31
Amortization of deferred debt issuance costs 3 3
Deferred income taxes (1) 4
Non-cash employee benefit expense 2 2
Change in current assets and liabilities,
net of effects from acquisitions
Receivables (4) 6
Inventories (19) (7)
Prepaid expenses and other current assets (12) (2)
Accounts payable and accrued liabilities (41) (8)
Interest payable 24 23
Income taxes payable (1) (9)
Other, net (3)
Net cash provided by operating activities 1 36
Cash flows from investing activities
Property additions (21) (32)
Proceeds from property disposals 2
Construction funds held in escrow 2
Acquisition of businesses, net of cash acquired (9)
Net cash used for investing activities (19) (39)
Cash flows from financing activities
Borrowings under bank credit facilities 891
Net repayments under Accounts Receivable
Securitization Program (5) (3)
Borrowings (repayments) of long-term debt (856) 9
Deferred debt issuance costs (13)
Net cash provided by financing activities 17 6
Increase (decrease) in cash and cash equivalents (1) 3
Cash and cash equivalents
Beginning of period 12 12
End of period $ 11 $ 15
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 1996 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 will reduce the interest expense, extend debt maturities,
and improve 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 (7.1875% at
March 31, 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 alternate base rate plus 1% per annum
or the adjusted LIBOR Rate plus 2% per annum (7.6875% at March 31,
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. Subsequent Events
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 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
transaction is expected to be tax-free to the shareholders of both
companies and will be treated as a purchase for accounting
purposes. The transaction is subject to certain conditions,
including the approval of JSC's and Stone Container's shareholders,
domestic and foreign regulatory clearances and other matters as
described in the Company's Form 8-K dated May 12, 1998.
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.
On or about May 12, 1998, two putative class action complaints were
filed against Stone Container and its individual directors and the
Company in Delaware Chancery Court alleging, among other things,
that the directors of Stone Container violated the fiduciary duties
owed to Stone Container's public stockholders. These complaints do
not include any specific allegations regarding the Company. The
Company believes that these actions are without merit.
4. Contingencies
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. 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. On April 17, 1998, the court in one of these
cases denied the plantiff's motion seeking to certify a nationwide
class, but did certify a class of persons who own or have owned
buildings in Washington and Oregon with Cladwood siding. 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.
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.
5. Summarized Financial Information of JSC (U.S.)
Condensed consolidated balance sheets:
March 31, December 31,
1998 1997
Current assets $ 637 $ 602
Property, plant and equipment and timberlands, net 1,778 1,788
Goodwill 235 237
Other assets 132 144
Total assets $ 2,782 $ 2,771
Current liabilities $ 507 $ 531
Long-term debt 2,064 2,025
Other liabilities 587 589
Stockholder's deficit
Common stock
Additional paid-in capital 1,102 1,102
Retained earnings (deficit) (1,478) (1,476)
Total stockholder's deficit (376) (374)
Total liabilities and stockholder's deficit $ 2,782 $ 2,771
Condensed consolidated statements of operations:
Three months ended
March 31,
1998 1997
Net sales $ 844 $ 778
Costs and expenses 773 739
Interest expense, net 50 47
Income (loss) before income taxes and extraordinary item 21 (8)
Provision for (benefit from) income taxes 10 (1)
Net income (loss) before extraordinary item 11 (7)
Extraordinary item: Loss from early extinguishment
of debt, net of income tax benefits (13)
Net loss $ (2) $ (7)
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
Three months ended March 31,
(In millions) 1998 1997
Income Income
Net from Net from
sales operations sales operations
Paperboard/Packaging Products $ 764 $ 60 $ 711 $ 39
Newsprint 80 11 67
Total $ 844 $ 71 $ 778 $ 39
Net sales for the Company for the three months ended March 31, 1998
were $844 million, an increase of 8% compared to the same period
last year. Income from operations for the Company for the three
months ended March 31, 1998 was $71 million, an increase of 82%
compared to the same period last year. The increases in net sales
and income from operations compared to last year were due primarily
to sales price and product mix and sales volume. The impact of the
changes in sales price and product mix, shipment volumes and closed
or sold operations on net sales for each of the Company's segments
is shown in the chart below.
(In millions)
Paperboard/
Packaging
Increase (decrease) in sales due to: Products Newsprint Total
Sales price and product mix $ 34 $ 14 $ 48
Sales volume 21 (1) 20
Closed or sold facilities (2) (2)
Total net sales increase $ 53 $ 13 $ 66
Paperboard/Packaging Products Segment
For the three months ended March 31, 1998 net sales of the
Paperboard/Packaging Products segment were $764 million, an
increase of $53 million, or 7%, compared to last year and income
from operations was $60 million, an increase of $21 million, or
54%, compared to last year. The net sales increase was due
primarily to higher product prices, particularly for containerboard
and corrugated shipping containers. Net sales also increased due
to higher sales volume for folding cartons and reclaimed fiber.
The improvement in income from operations for this segment was due
primarily to the higher sales prices. The major changes in net
sales price and shipments within the product groups of the
Paperboard/Packaging Products segment are discussed below.
The sales of containerboard and corrugated shipping containers for
the three months ended March 31, 1998 were $374 million, an
increase of $27 million compared to the same period last year.
Market conditions were favorable during the first quarter of 1998
and corrugated shipping container prices continued to firm up.
Linerboard prices, which increased during the fourth quarter of
1997, held steady through the first quarter of 1998. On average,
prices of containerboard and corrugated shipping containers were
higher in the first quarter of 1998 by 17% and 8%, respectively,
compared to last year. Shipments of corrugated shipping containers
during the first quarter of 1998 decreased approximately 6%
compared to last year, due in part to lower sales to agricultural
customers as a result of poor weather conditions.
Net sales of recycled boxboard, solid bleached sulfate ("SBS") and
folding cartons for the three months ended March 31, 1998 were $227
million, an increase of $14 million compared to last year.
Industry demand for folding cartons was somewhat soft, but the
Company benefited from new business awarded in 1997. On average,
recycled boxboard prices were higher by 4% compared to last year
and SBS prices were comparable to last year. Folding carton prices
were lower than last year by 5% due primarily to product mix.
Shipments of folding cartons during the first quarter of 1998 were
higher than last year by approximately 20%.
Net sales of reclaimed fiber and virgin wood fiber for the first
quarter were $95 million, an increase of $16 million, or 20%,
compared to last year. Reclaimed fiber shipments increased
approximately 8% compared to last year and the sales price during
the quarter was 8% higher, on average, compared to last year.
Virgin fiber prices were substantially higher than last year due to
tight supplies brought about by heavy rains, which restricted
access to woodlands in the southeast United States.
Net sales of the other products in this segment for the first
quarter were lower than last year by 6% overall, due primarily to
lower sales volume and plant closures.
Newsprint Segment
Net sales for the Newsprint segment for the three months ended
March 31, 1998 were $80 million, an increase of $13 million, or
19%, compared to last year and income from operations was $11
million, an increase of $11 million compared to last year.
Domestic consumption was strong during the quarter. The average
sales price during the quarter was higher than last year by
approximately $90 per metric ton, or 19%. The improvement in
income from operations for the quarter was due primarily to higher
prices. Sales volume was comparable to last year.
Costs and Expenses
The Company's cost of goods sold as a percent of net sales for the
three months ended March 31, 1998 decreased compared to last year,
due primarily to overall higher sales prices in 1998. In the
Paperboard/Packaging Products segment the percentage decreased from
86% in 1997 to 83% in 1998 for the quarter. For the Newsprint
segment, the first quarter percentage decreased from 97% in 1997 to
82% in 1998.
Selling and administrative expenses as a percent of net sales for
the three months ended March 31, 1998 increased slightly as
compared to 1997. The increase in cost was due in part to a higher
level of employee benefits cost.
Interest expense for the three months ended March 31, 1998 was $3
million higher than last year due primarily to higher average debt
levels outstanding. The average effective interest rate for the
Company's outstanding debt was slightly higher in 1998 compared to
1997.
The provision for income taxes for the three months ended March 31,
1998 was $10 million. The effective tax rate for the stated period
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.
Statistical Data
(In thousands of tons, Three months ended
except as noted) March 31,
1998 1997
Mill production:
Containerboard 495 479
Recycled boxboard and
solid bleached sulfate 206 203
Newsprint (metric) 142 141
Corrugated shipping containers
sold (billion square feet) 7.2 7.7
Folding cartons sold 133 111
Fiber reclaimed and brokered 1,279 1,183
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 three months
ended March 31, 1998 of $1 million and net borrowings of $17
million were used primarily to fund capital investments of $21
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 will reduce the interest expense, extend debt maturities,
and improve 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 March 31, 1998, the Company had $358 million of unused borrowing
capacity under its Credit Agreement and $110 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 and available financing sources will be
sufficient for the next several years to pay interest on the
Company's obligations, amortize its 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 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
transaction is expected to be tax-free to the shareholders of both
companies and will be treated as a purchase for accounting
purposes. The transaction is subject to certain conditions,
including the approval of JSC's and Stone Container's shareholders,
domestic and foreign regulatory clearances and other matters as
described in the Company's Form 8-K dated May 12, 1998.
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.
As discussed in the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1997 (the "1997 10-K"), the Company
established a plan to modify or replace certain portions of its
existing software and to review the systems that it is currently in
the process of installing in order to assure that these systems
will function properly with respect to dates in the year 2000 and
thereafter. The Company is proceeding with its plan and, as stated
in the 1997 10-K, expects that its plan to modify or replace
software will address the Year 2000 issue on a timely basis.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
As previously reported, Jefferson Smurfit
Corporation ("JSC") and Smurfit Newsprint
Corporation, its wholly owned subsidiary ("SNC"),
have been served in a purported class action
entitled Carolyn Cave-Woods, et. ano. v. Jefferson
Smurfit Corporation, et al, No. 97-2-19958-ISEA
(Washington Superior Court) alleging unfair trade
practices and breach of express warranty regarding
SNC's Cladwood siding product. On April 17, 1998,
the Court in this case denied the plaintiff's
motion seeking to certify a nationwide class, but
did certify a class of all persons who own or have
owned buildings in Washington and Oregon with
Cladwood siding. JSC and SNC intend to seek
discretionary review of the Court's class
certification ruling and to defend the action
vigorously.
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
As reported in JSC's Current Report on Form 8-K dated May
12, 1998, JSC announced on May 10, 1998, that it had signed
a merger agreement with Stone Container Corporation.
Item 6. Exhibits and Reports on Form 8-K
a) The following exhibits are included in this Form 10-Q.
10.1 Amendment dated February 1, 1998 to Allocation Policies
and Procedures for Fernandina Beach, Florida Mill under
the Operating Agreement by and among Container Corporation
of America ("CCA") n/k/a JSC(U.S.) and Smurfit Paperboard
Inc. ("SPI") (incorporated by reference to Exhibit 10.1
to JSC's quarterly report on Form 10-Q for the quarter
ended March 31, 1998).
10.2 Agreement dated as of May 11, 1994 to amend each of the
Operating Agreement and the Rights Agreement by and
between CCA, SPI, Smurfit International B.V. ("SIBV") and
Bankers Trust Company, as collateral trustee, and Chemical
Bank, as collateral agent (incorporated by reference to
Exhibit 10.2 to JSC's quarterly report on Form 10-Q for
the quarter ended March 31, 1998).
10.3 Agreement dated as of March 24, 1998 to amend each of the
Operating Agreement and the Rights Agreement by and
between JSC(U.S.), CCA, SPI, SIBV and the Chase Manhattan
Bank, as collateral agent (incorporated by reference to
Exhibit 10.3 to JSC's quarterly report on Form 10-Q for
the quarter ended March 31, 1998).
10.4 Credit Agreement dated as of March 24, 1998, among JSC,
JSC(U.S.), JSCE, Inc., the Lenders and Fronting Banks
named herein, the Managing Agents named herein, Bankers
Trust Company, as Senior Managing Agent and the Chase
Manhattan Bank, as Administrative Agent and Senior
Managing Agent (incorporated by reference to Exhibit 10.4
to JSC's quarterly report on Form 10-Q for the quarter
ended March 31, 1998).
27.1 Financial Data Schedule
b) Reports on Form 8-K
Form 8-K regarding a merger agreement between JSC and Stone
Container Corporation was filed with the Securities and
Exchange Commission on May 12, 1998.
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 May 15, 1998 /s/ Paul K. Kaufmann
Paul K. Kaufmann
Corporate Controller
(Principal Accounting Officer)
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