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 June 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 June 30, 1998, the registrant had outstanding 1,000
shares of common stock, $.01 par value per share.
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
JSCE, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions)
(Unaudited)
Three months ended Six months ended
June 30, June 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Net sales $ 844 $ 785 $ 1,688 $ 1,563
Costs and expenses
Cost of goods sold 704 676 1,406 1,351
Selling and administrative expenses 72 65 143 129
Income from operations 68 44 139 83
Interest expense, net (46) (47) (96) (94)
Other, net (1) (1)
Income (loss) before income taxes and
extraordinary item 21 (3) 42 (11)
Provision for income taxes 10 1 20
Income (loss) before extraordinary item 11 (4) 22 (11)
Extraordinary item
Loss from early extinguishment of debt,
net of income tax benefits (13)
Net income (loss) $ 11 $ (4) $ 9 $ (11)
</TABLE>
See notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
JSCE, Inc.
CONSOLIDATED BALANCE SHEETS
(In millions, except share data)
June 30, December 31,
1998 1997
<S> <C> <C>
Assets (unaudited)
Current assets
Cash and cash equivalents $ 15 $ 12
Receivables, less allowances of
$10 in 1998 and 1997 305 302
Refundable income taxes
Inventories
Work-in-process and finished goods 106 89
Materials and supplies 160 151
266 240
Deferred income taxes 30 32
Prepaid expenses and other current assets 19 16
Total current assets 635 602
Net property, plant and equipment 1,512 1,523
Timberland, less timber depletion 264 265
Goodwill, less accumulated amortization of
$62 in 1998 and $58 in 1997 233 237
Other assets 129 144
$ 2,773 $ 2,771
Liabilities and Stockholder's Deficit
Current liabilities
Current maturities of long-term debt $ 22 $ 15
Accounts payable 294 334
Accrued compensation and payroll taxes 86 88
Interest payable 25 25
Other accrued liabilities 77 69
Total current liabilities 504 531
Long-term debt, less current maturities 2,051 2,025
Other long-term liabilities 222 227
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) (1,467) (1,476)
Total stockholder's deficit (365) (374)
$ 2,773 $ 2,771
</TABLE>
See notes to consolidated financial statements.
<PAGE>
JSCE, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
Six months ended
June 30,
1998 1997
Cash flows from operating activities
Net income (loss) $ 9 $ (11)
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 66 63
Amortization of deferred debt issuance costs 4 6
Deferred income taxes 1 3
Non-cash employee benefit expense 4 4
Change in current assets and liabilities,
net of effects from acquisitions
Receivables (3) (3)
Inventories (26) 1
Prepaid expenses and other current assets (8) 4
Accounts payable and accrued liabilities (48) (19)
Interest payable (6)
Income taxes 14 (9)
Other, net (4) (3)
Net cash provided by operating activities 31 30
Cash flows from investing activities
Property additions (47) (72)
Proceeds from property disposals 3 3
Construction funds held in escrow 6
Acquisition of businesses, net of cash acquired (9)
Net cash used for investing activities (44) (72)
Cash flows from financing activities
Borrowings under bank credit facilities 891
Net borrowings (repayments) under accounts
receivable securitization program (6) 4
Borrowings (repayments) of long-term debt (856) 36
Deferred debt issuance costs (13)
Net cash provided by financing activities 16 40
Increase (decrease) in cash and cash equivalents 3 (2)
Cash and cash equivalents
Beginning of period 12 12
End of period $ 15 $ 10
See notes to consolidated financial statements.
<PAGE>
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 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 (7.1875% at
June 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 (7.6875% at June 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.).
<PAGE>
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. The Merger
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. All material domestic and foreign regulatory
approvals required to permit consummation of the Merger by JSC and
Stone Container have been obtained.
The combined company is expected to have approximately $7 billion
of debt outstanding after the Merger (without giving effect to any
divestitures prior to or upon the Merger or thereafter). In
connection with the Merger, the Company is considering various
refinancing alternatives which would be intended to reduce interest
expense and address the expected liquidity requirements of the
combined company following the Merger. Effectuation of the Merger
is not conditioned on consummation of any such refinancing. There
are material uncertainties relating to the consummation of any of
the refinancing alternatives under consideration and, as a result,
the particular capital structure that would result from any such
alternative is subject to significant variables. In addition, no
assurance can be given that any of the refinancing alternatives and
planned divestitures will generate sufficient funds to meet all of
the combined company's needs or that refinancing or divestitures
can be implemented on terms acceptable to the combined company.
Even if a refinancing and all of the planned divestitures are
implemented, the combined company will continue to have a highly
leveraged capital structure.
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.
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 that the Complaint is without
merit.
<PAGE>
On August 11, 1998, the parties to 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 boards 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.
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".
<PAGE>
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.
<TABLE>
<CAPTION>
Condensed consolidated balance sheets:
June 30, December 31,
1998 1997
<S> <C> <C>
Current assets $ 635 $ 602
Property, plant and equipment and timberlands, net 1,776 1,788
Goodwill 233 237
Other assets 129 144
Total assets $ 2,773 $ 2,771
Current liabilities $ 504 $ 531
Long-term debt 2,051 2,025
Other liabilities 583 589
Stockholder's deficit
Common stock
Additional paid-in capital 1,102 1,102
Retained earnings (deficit) (1,467) (1,476)
Total stockholder's deficit (365) (374)
Total liabilities and stockholder's deficit $ 2,773 $ 2,771
</TABLE>
<TABLE>
<CAPTION>
Condensed consolidated statements of operations:
Three months ended Six months ended
June 30, June 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Net sales $ 844 $ 785 $ 1,688 $ 1,563
Costs and expenses 776 741 1,549 1,480
Interest expense, net 46 47 96 94
Other expense, net 1 1
Income (loss) before income taxes and
extraordinary item 21 (3) 42 (11)
Provision for income taxes 10 1 20
Extraordinary item
Loss from early extinguishment of
debt, net of income tax benefits (13)
Net income (loss) $ 11 $ (4) $ 9 $ (11)
</TABLE>
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
<TABLE>
<CAPTION>
Results of Operations
(In millions) Three months ended Six months ended
June 30, June 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Net sales
Paperboard/Packaging Products $ 764 $ 709 $1,528 $1,420
Newsprint 80 76 160 143
Total net sales $ 844 $ 785 $1,688 $1,563
Income from operations
Paperboard/Packaging Products $ 57 $ 37 $ 117 $ 76
Newsprint 11 7 22 7
Total income from operations $ 68 $ 44 $ 139 $ 83
</TABLE>
The Company's net sales and income from operations for the three
months and six months ended June 30, 1998 increased compared to
last year due primarily to product pricing. For the three months
ended June 30, 1998, net sales of $844 million were 8% higher than
last year and income from operations of $68 million was 55% higher
than last year. For the six months ended June 30, 1998, net sales
of $1,688 million were 8% higher than last year and income from
operations of $139 million was 67% higher than last year.
(In millions) Change in net sales analysis
Three months Six months
1998 compared to 1997 1998 compared to 1997
Sales price and product mix
Paperboard/Packaging Products $ 71 $105
Newsprint 8 22
79 127
Sales volume
Paperboard/Packaging Products (13) 8
Newsprint (4) (5)
(17) 3
Closed or sold facilities
Paperboard/Packaging Products (3) (5)
Total net sales increase $ 59 $125
Paperboard/Packaging Products Segment
For the three months ended June 30, 1998, net sales of the
Paperboard/Packaging Products segment increased 8% compared to the
same period in 1997 and income from operations increased 54%
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.
<PAGE>
Net sales of containerboard and corrugated shipping containers for
the three months ended June 30, 1998 were $384 million, an increase
of $41 million, or 12%, compared to last year. On average, the
price of containerboard and corrugated shipping containers were
higher than last year by 31% and 16%, respectively. Inventories
have increased in recent months and the Company is taking economic
downtime at its Jacksonville, Florida containerboard mill in order
to reduce inventories. Shipments of corrugated shipping containers
during the second quarter of 1998 decreased approximately 6%
compared to last year, due to the Company's strategy to sacrifice
volume for improved prices.
Net sales of recycled boxboard, solid bleached sulfate ("SBS") and
folding cartons for the three months ended June 30, 1998 were $227
million, an increase of $13 million, or 6%, compared to last year.
Industry demand for folding cartons was flat, but the Company
benefited from new business awarded late in 1997. Shipments of
folding cartons during the second quarter of 1998 were higher than
last year by 12%. On average, recycled boxboard prices were higher
by 5% compared to last year and SBS prices were comparable to last
year. Folding carton prices were lower than last year by 3% due
primarily to product mix.
For the six months ended June 30, 1998, net sales of the
Paperboard/Packaging Products segment increased 8% compared to the
same period in 1997 and income from operations increased 54%
compared to the same period in 1997. Containerboard and corrugated
shipping container price increases were also the primary reason for
the increases in net sales and income from operations for the six
months ended June 30, 1998.
Net sales of containerboard and corrugated shipping containers for
the six months ended June 30, 1998 were $758 million, an increase
of $68 million, or 10%, compared to last year. For the year to
date period, average prices for containerboard and corrugated
shipping containers were higher than last year by 24% and 12%,
respectively. In order to reduce excess inventories, the Company
has taken 26,000 tons of downtime at two of its containerboard
mills in the first half of 1998 and plans to take an additional
40,000 tons of downtime in the third quarter of 1998. Shipments of
corrugated shipping containers for the six months ended June 30,
1998 decreased approximately 6% compared to last year.
Net sales of recycled boxboard, SBS and folding cartons for the
last six months ended June 30, 1998 were $454 million, an increase
of $27 million, or 6%, compared to last year. On average, recycled
boxboard prices were higher by 5% compared to last year and SBS
prices were comparable to last year. Folding carton prices were
lower than last year by 4%. Shipments of folding cartons for the
six months ended June 30, 1998 were higher than last year by 14%.
Net sales of reclaimed fiber and virgin wood fiber for the first
half of 1998 were $179 million, an increase of $21 million, or 13%,
compared to last year. Reclaimed fiber shipments increased 8%
compared to last year and sales prices were 4% higher, on average,
compared to last year.
Net sales of the other products in this segment for the year-to-
date period were lower than last year by 6% overall, due primarily
to lower sales volume and plant closures.
Newsprint Segment
Net sales and income from operations for the Newsprint segment for
the three months and six months ended June 30, 1998 were higher
than last year due to price increases. Net sales for the three
months ended June 30, 1998 increased by 5% compared to last year
and income from operations increased by $4 million. For the six
months ended June 30, 1998, net sales increased by $17 million, or
12% compared to last year and income from operations increased by
$15 million. The average sales price was higher than last year by
9% for the second quarter and by 14% year to date. Sales volume
was lower than last year for both the quarter and year to date by
7% and 4%, respectively.
<PAGE>
Costs and Expenses
The Company's cost of goods sold as a percent of net sales for the
three months and six months ended June 30, 1998 decreased compared
to last year, due primarily to overall higher sales prices in 1998.
For the three months ended June 30, the percentage decreased from
86% in 1997 to 84% in 1998 in the Paperboard/Packaging Products
segment and decreased from 87% to 82% in the Newsprint segment.
For the six months ended June 30, the percentage decreased from 86%
in 1997 to 83% in 1998 for the Paperboard/Packaging Products
segment and decreased from 92% to 82% in the Newsprint segment.
Selling and administrative expenses as a percent of net sales for
the three months and six months ended June 30, 1998 increased
slightly as compared to 1997. The increases in cost were due in
part to a higher level of employee benefits cost.
Interest expense for the three months and six months ended June 30,
1998 was comparable to last year. The average effective interest
rate for the Company's outstanding debt was lower in the second
quarter of 1998, which partially offset the impact of higher
average debt levels outstanding in 1998.
The Company's effective income tax rates for the three months and
six months ended June 30, 1998 were 48%. The effective tax rate
for each of the stated periods 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.
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 and 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. The Company does not
expect that the adoption of SOP 98-5 will be material.
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. The Company does not expect that the adoption of
SOP 98-1 will be material.
Statistical Data Three months ended Six months ended
(In thousands of tons, June 30, June 30,
except as noted) 1998 1997 1998 1997
Mill production:
Containerboard 477 473 972 952
Recycled boxboard and
solid bleached sulfate 201 205 407 408
Newsprint (metric) 144 144 286 285
Sales volume:
Corrugated shipping containers
(billion square feet) 7.6 8.1 14.8 15.8
Folding cartons 130 116 263 227
Fiber reclaimed and brokered 1,263 1,171 2,542 2,354
<PAGE>
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 six months ended
June 30, 1998 of $31 million and net borrowings of $16 million were
used primarily to fund capital investments totaling $47 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 June 30, 1998, the Company had $363 million of unused borrowing
capacity under its Credit Agreement and $111 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 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 produce 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 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. All material domestic and foreign regulatory
approvals required to permit the consummation of the merger by JSC
and Stone Container have been obtained.
<PAGE>
The combined company is expected to have approximately $7 billion
of debt outstanding after the Merger (without giving effect to any
divestitures prior to or upon the Merger or thereafter). In
connection with the Merger, the Company is considering various
refinancing alternatives which would be intended to reduce interest
expense and address the expected liquidity requirements of the
combined company following the Merger. Effectuation of the Merger
is not conditioned on consummation of any such refinancing. There
are material uncertainties relating to the consummation of any of
the refinancing alternatives under consideration and, as a result,
the particular capital structure that would result from any such
alternative is subject to significant variables. In addition, no
assurance can be given that any of the refinancing alternatives and
planned divestitures will generate sufficient funds to meet all of
the combined company's needs or that refinancing or divestitures
can be implemented on terms acceptable to the combined company.
Even if a refinancing and all of the planned divestitures are
implemented, the combined company will continue to have a highly
leveraged capital structure.
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.
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
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. These suits have been disclosed in the
Company's Annual Report on Form 10-K for fiscal year ended December
31, 1997 and the Company's Quarterly Report on Form 10-Q for the
period ended March 31, 1998. 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
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.
On July 8, 1998, SNC was served in an action styled Winona Davis,
et ano. v. Smurfit Newsprint Corporation et al., No. 981-5276-05
(Georgia Superior Court). The complaint alleges that Cladwood
siding deteriorates under normal conditions and exposure. The suit
purports to be a class action on behalf of persons in the State of
North Carolina whose manufactured homes or mobile homes have
Cladwood siding. The Complaint alleges causes of action for breach
of warranty and negligence and seeks an unspecified amount of
actual, consequential and punitive damages, which in the aggregate
may exceed $100,000. SNC intends to defend the action 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.
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
The Registrant's Annual Meeting of Stockholders was held on May 7,
1998. At the meeting, stockholders voted on (i) the election of
three directors for terms of office expiring at the annual meeting
of stockholders in 2001 and (ii) the ratification of the
appointment of Ernst & Young LLP as independent auditors of the
Company for 1998. Voting on each matter was as follows:
Votes Votes Withheld/
For Against Abstentions
1. Election of Directors
Leigh J. Abramson 103,011,450 246,553
Richard W. Graham 103,022,465 235,538
G. Thompson Hutton 103,045,453 212,550
2. Ratification of Auditors 103,192,891 37,335 27,777
The name of each other director whose term of office as a director
continued after the meeting are: Alan E. Goldberg, Michael C.
Hoffman, Michael M. Janson, Howard E. Kilroy, Thomas A. Reynolds,
III, Michael W.J. Smurfit and James E. Terrill.
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.
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.
<PAGE>
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 August 14, 1998 /s/ Paul K. Kaufmann
Paul K. Kaufmann
Corporate Controller
(Principal Accounting Officer)
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