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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, 1999
Commission File Number 0-11951
JSCE, Inc.
----------------------------------------------------
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Delaware 37-1337160
- --------------------------------- -----------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
</TABLE>
150 North Michigan Avenue, Chicago, Illinois 60601
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(Address of principal executive offices) (Zip Code)
(312) 346-6600
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Registrant's telephone number, including area code
Not Applicable
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(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, 1999, the registrant had outstanding 1,000 shares of common
stock, $.01 par value per share.
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PART I-FINANCIAL INFORMATION
Item 1. Financial Statements
JSCE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31, (In millions) 1999 1998
---- ----
<S> <C> <C>
Net sales ............................................................. $ 729 $ 764
Costs and expenses
Cost of goods sold .................................................. 634 637
Selling and administrative expenses ................................. 69 68
Restructuring charge ................................................ 5
----- ----
Income from operations ............................................ 21 59
Other income (expense)
Interest expense, net ............................................... (47) (51)
Other, net .......................................................... (1)
----- ----
Income (loss) from continuing operations before
income taxes, extraordinary item and
cumulative effect of accounting change .......................... (26) 7
Benefit from (provision for) income taxes ............................. 9 (4)
----- ----
Income (loss) from continuing operations before
extraordinary item and cumulative effect of
accounting change ............................................... (17) 3
Discontinued operations
Income from discontinued operations, ..............................
net of income taxes of $1 in 1999 and $6 in 1998 ............... 4 8
----- ----
Income (loss) before extraordinary item and
cumulative effect of accounting change......................... (13) 11
Extraordinary item
Loss from early extinguishment of debt, net of income
tax benefit of $9 ............................................... (13)
Cumulative effect of accounting change
Start-up costs, net of income tax benefit of $2 ................... (3)
----- ----
Net loss .............................................................. $ (13) $ (5)
===== ====
</TABLE>
See notes to consolidated financial statements
1
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JSCE, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
(In millions, except share data) 1999 1998
---- ----
<S> <C> <C>
Assets (Unaudited)
Current assets
Cash and cash equivalents ...................................... $ 20 $ 18
Receivables, less allowances of $9 in 1999 and 1998 ............ 315 294
Inventories
Work-in-process and finished goods............................ 107 104
Materials and supplies ....................................... 124 124
-------- --------
231 228
Refundable income taxes .......................................... 34 22
Deferred income taxes ............................................ 104 122
Prepaid expenses and other current assets ........................ 20 10
-------- --------
Total current assets ......................................... 724 694
Net property, plant and equipment ................................ 1,487 1,499
Timberland, less timber depletion ................................ 260 261
Goodwill, less accumulated amortization
of $67 in 1999 and $65 in 1998 .................................. 224 226
Notes receivable from SSCC ....................................... 353 342
Other assets ..................................................... 144 152
-------- --------
$ 3,192 $ 3,174
======== ========
Liabilities and Stockholder's Equity (Deficit)
Current liabilities
Current maturities of long-term debt ........................... $ 57 $ 44
Accounts payable ............................................... 319 276
Accrued compensation and payroll taxes ......................... 77 75
Interest payable ............................................... 48 28
Other current liabilities ...................................... 114 126
-------- --------
Total current liabilities .................................... 615 549
Long-term debt, less current maturities .......................... 2,510 2,526
Other long-term liabilities ...................................... 275 278
Deferred income taxes ............................................ 343 359
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) .................................... (1,649) (1,636)
Accumulated other comprehensive income (loss) .................. (4) (4)
-------- --------
Total stockholder's equity (deficit) ........................ (551) (538)
-------- --------
$ 3,192 $ 3,174
======== ========
</TABLE>
See notes to consolidated financial statements.
2
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JSCE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31, (In millions) 1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities
Net loss .................................................................. $ (13) (5)
Adjustments to reconcile net loss to net cash provided by
operating activities
Extraordinary loss from early extinguishment of debt .................... 22
Cumulative effect of accounting change for start-up costs ............... 5
Depreciation, depletion and amortization ................................ 33 33
Amortization of deferred debt issuance costs ............................ 3 3
Deferred income taxes ................................................... 2 (1)
Non-cash employee benefit expense ....................................... 1 2
Non-cash restructuring charge ........................................... 3
Change in current assets and liabilities, net of effects from
acquisitions
Receivables ........................................................... (21) (4)
Inventories ........................................................... (3) (19)
Prepaid expenses and other current assets ............................. (10) (12)
Accounts payable and accrued liabilities .............................. 28 (41)
Interest payable ...................................................... 9 24
Income taxes .......................................................... (12) (3)
Other, net .............................................................. 4 (3)
---- ----
Net cash provided by operating activities ............................... 24 1
---- ----
Cash flow from investing activities
Property additions ...................................................... (17) (21)
Proceeds from property disposals and sale of businesses ................. 1 2
---- ----
Net cash used for investing activities .................................. (16) (19)
---- ----
Cash flow from financing activities
Borrowings under bank credit facilities ................................. 891
Payments of long-term debt .............................................. (6) (861)
Deferred debt issuance costs ............................................ (13)
---- ----
Net cash provided by (used for) financing activities ...................... (6) 17
---- ----
Increase (decrease) in cash and cash equivalents .......................... 2 (1)
Cash and cash equivalents
Beginning of period ..................................................... 18 12
----- -----
End of period ........................................................... $ 20 $ 11
===== =====
</TABLE>
See notes to consolidated financial statements
3
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JSCE, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in millions)
1. Significant Accounting Policies
The accompanying consolidated financial statements and notes thereto, 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, results of
operations and cash flows. 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. These financial statements should be read in conjunction
with the audited consolidated financial statements and footnotes included in the
JSCE, Inc. Annual Report on Form 10-K for the year ended December 31, 1998,
filed March 31, 1999 with the Securities and Exchange Commission.
JSCE, Inc., hereafter referred to as the "Company," is a wholly-owned subsidiary
of Smurfit-Stone Container Corporation ("SSCC"), formerly known as Jefferson
Smurfit Corporation ("JSC"). On November 18, 1998 a subsidiary of JSC was merged
with Stone Container Corporation ("Stone"), an action hereafter referred to as
the "Merger," and Stone became a subsidiary of SSCC. The Company owns 100% of
the equity interest in Jefferson Smurfit Corporation (U.S.) ("JSC (U.S.)") and
is a guarantor of the senior unsecured indebtedness of JSC (U.S.). The Company
has no operations other than its investment in JSC (U.S.). JSC (U.S.) has
extensive operations throughout the United States.
2. Reclassifications
Certain prior year amounts have been reclassified to conform to the current year
presentation.
3. Merger and Restructuring
As part of the Company's continuing evaluation of all areas of its business in
connection with its merger integration, the Company recorded a $5 million
restructuring charge during the first quarter of 1999 related to the permanent
shutdown of three corrugated container facilities. Additional restructuring
charges are expected in 1999 as management finalizes its plans.
4. Discontinued Operations
During February 1999 the Company adopted a formal plan to sell the operating
assets of its subsidiary, Smurfit Newsprint Corporation ("SNC"). Accordingly,
SNC is accounted for as a discontinued operation in the accompanying
consolidated financial statements. The Company has restated its prior financial
statements to present the operating results of SNC as a discontinued operation.
SNC revenues were $74 million and $80 million for the first quarter of 1999 and
1998, respectively.
4
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5. Business Segment Information
The Company has three reportable segments: (1) Containerboard and Corrugated
Containers, (2) Boxboard and Folding Cartons and (3) Reclamation. The
Containerboard and Corrugated Containers segment is highly integrated. It
includes a system of mills and plants that produces a full line of
containerboard that is converted into corrugated containers. Corrugated
containers are used to transport such diverse products as home appliances,
electric motors, small machinery, grocery products, produce, books, tobacco and
furniture. The Boxboard and Folding Cartons segment is also highly integrated.
It includes a system of mills and plants that produces a broad range of coated
recycled boxboard that is converted into folding cartons. Folding cartons are
used primarily to protect products such as food, fast food, detergents, paper
products, beverages, health and beauty aids and other consumer products, while
providing point of purchase advertising. The Reclamation segment collects
recovered paper generated by industrial, commercial and residential sources
which is used as raw material for the Company's containerboard and boxboard
mills as well as sales to external third party mills.
Other includes specialty packaging business unit and corporate related items.
Corporate related items include income and expense not allocated to reportable
segments, goodwill amortization, interest expense, the adjustment to record
inventory at LIFO, and the elimination of intercompany profit.
A summary of business segment activity follows:
<TABLE>
<CAPTION>
Container-
board & Boxboard
Corrugated & Folding Recla-
Containers Cartons mation Other Total
----------- --------- ------ ----- -----
<S> <C> <C> <C> <C> <C>
March 31, 1999
Revenues from external
customers........................... $ 391 $ 197 $ 75 $ 66 $ 729
Intersegment revenues................. 9 28 9 46
Segment profit (loss)................. 19 13 1 (59) (26)
March 31, 1998
Revenues from external
customers........................... $ 419 $ 195 $ 82 $ 68 $ 764
Intersegment revenues................. 11 33 4 48
Segment profit (loss)................. 35 14 1 (59) 7
</TABLE>
5
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6. Summarized Financial Information JSC (U.S.)
The following summarized financial information is presented for JSC (U.S.), a
wholly owned subsidiary of the Company. No separate financial statements are
presented for JSC (U.S.) because the financial statements of JSC (U.S.) are
identical to those of the Company.
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
---- ----
<S> <C> <C>
Current assets.................................................... $ 724 $ 694
Property, plant and equipment and timberlands, net................ 1,747 1,760
Goodwill.......................................................... 224 226
Other assets...................................................... 497 494
-------- --------
Total assets.................................................... $ 3,192 $ 3,174
======== ========
Current liabilities............................................... $ 615 $ 549
Long-term debt.................................................... 2,510 2,526
Other liabilities................................................. 618 637
Stockholder's deficit
Common stock....................................................
Additional paid-in capital...................................... 1,102 1,102
Retained deficit................................................ (1,649) (1,636)
Accumulated other comprehensive income.......................... (4) (4)
-------- --------
Total stockholder's deficit..................................... (551) (538)
-------- --------
Total liabilities and stockholder's deficit..................... $ 3,192 $ 3,174
======== ========
Condensed Consolidated Statements of Operations
Three Months Ended March 31
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Net sales......................................................... $ 729 $ 764
Cost and expenses................................................. 708 705
Interest expense, net............................................. 47 51
Other expense, net................................................ 1
-------- --------
Income (loss) from continuing operations before
income taxes, extraordinary item, and
cumulative effect of accounting change.......................... (26) 7
Benefit from (provision for) income taxes......................... 9 (4)
Discontinued operations........................................... 4 8
Extraordinary item
Loss from early extinguishment of debt, net of
income tax benefits........................................... (13)
Cumulative effect of accounting change............................ (3)
-------- --------
Net loss.......................................................... $ (13) (5)
======== ========
</TABLE>
The above Condensed Consolidated Statements of Operations have been restated to
reflect the newsprint division as a discontinued operation.
6
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7. Contingencies
The Company's past and present operations include activities which are subject
to federal, state and local environmental requirements, particularly relating to
air and water quality. The Company faces potential environmental liability as a
result of violations of permit terms and similar authorizations that have
occurred from time to time at its facilities.
The Company faces potential liability for response costs at various sites with
respect to which the Company has received notice that it may be a potentially
responsible party ("PRP"), as well as contamination of certain Company-owned
properties, concerning hazardous substance contamination. In estimating its
reserves for environmental remediation and future costs, the Company's estimated
liability reflects only the Company's expected share. In determining the
liability, the estimate takes into consideration the number of other PRPs at
each site, the identity and financial condition of such parties and experience
regarding similar matters.
Subsequent to an understanding reached in December 1998, the Company and SNC
entered into a Settlement Agreement in January 1999 to implement a nationwide
class action settlement of claims involving Cladwood'r', a composite wood siding
product manufactured by SNC that has been used primarily in the construction of
manufactured or mobile homes. The Company recorded a $30 million pre-tax charge
to reflect amounts SNC has agreed to pay into a settlement fund, administrative
costs, plaintiffs' attorneys' fees, class representative payments and other
costs. The Company believes its reserve is adequate to pay eligible claims.
However, the number of claims, and the number of potential claimants who choose
not to participate in the settlement, could cause the Company to re-evaluate
whether the liabilities in connection with the Cladwood'r' cases could exceed
established reserves.
In March 1999, management of SNC's Oregon City, Oregon newsprint mill became
aware of possible violations of the mill's National Pollutant Discharge
Elimination System permit. SNC has provided both the EPA and Oregon Department
of Environmental Quality with a detailed report of its internal investigation
and it is probable that the agencies will conduct an additional investigation
based on this report. The Company is unable to predict its potential liability
in this matter at this time.
The Company is a defendant in a number of lawsuits and claims arising out of the
conduct of its business, including those related to environmental matters. While
the ultimate results of such suits or other proceedings against the Company
cannot be predicted with certainty, the management of the Company believes that
the resolution of these matters will not have a material adverse effect on its
consolidated financial condition or results of operations.
7
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<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
As discussed in the Company's Annual Report filed on Form 10-K for the year
ended December 31, 1998 (the "JSCE 1998 10-K"), a subsidiary of SSCC merged with
Stone as of November 18, 1998 and Stone became a wholly-owned subsidiary of
SSCC.
<TABLE>
<CAPTION>
(In millions) Three months ended March 31,
-------------------------------------------
1999 1998
--------------------- --------------------
Net Profit/ Net Profit/
sales (loss) sales (loss)
---------- -------- ------ --------
<S> <C> <C> <C> <C>
Containerboard & corrugated
containers $ 391 $ 19 $ 419 $ 35
Boxboard & folding cartons 197 13 195 14
Reclamation 75 1 82 1
Other operations 66 7 68 8
------ ---- ---- -----
Total operations $ 729 40 $ 764 58
====== =====
Other, net (1) ( 66) ( 51)
---- -----
Income (loss) from continuing
operations before income taxes,
extraordinary item and cumulative
effect of accounting change $ (26) $ 7
==== ====
</TABLE>
(1) Other, net includes corporate revenues and expenses, net interest expense
and, in 1999, a restructuring charge in connection with the Merger.
Net sales for the Company for the three months ended March 31, 1999 were $729
million a decrease of 5% compared to the same period last year. Operating
profits for the Company for the three months ended March 31, 1999 were $40
million, a decrease of $18 million compared to the same period last year. As
shown in the chart below, the decrease in net sales was due primarily to lower
average sales prices for the Company's products and the closure or sale of
operating facilities. The effect of the lower sales prices on profits were
partially offset by lower wastepaper cost. Other, net cost was higher in the
1999 period due to higher LIFO expense and a $5 million restructuring charge.
<TABLE>
<CAPTION>
(In millions) 1999 compared to 1998
----------------------------------------------------------------
Container-
board & Boxboard
Increase (decrease) corrugated & folding Other
in net sales due to: containers cartons Reclamation operations Total
- --------------------- ------------ ---------- ----------- ---------- -----
<S> <C> <C> <C> <C> <C>
Sales price and
product mix $(25) $ (4) $(48) $ (1) $(78)
Sales volume 10 6 44 (1) 59
Acquisitions 5 5
Closed or sold facilities (18) (3) (21)
----- ----- ----- ----- ----
Total increase
(decrease) $(28) $ 2 $ (7) $ (2) $ (35)
===== ===== ===== ===== ====
</TABLE>
8
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Containerboard and Corrugated Containers Segment
Net sales of $391 million for the three months ended March 31, 1999, decreased
by 7% compared to last year and profits decreased by $16 million to $19 million.
The decline in net sales was due primarily to the lower sales prices for
corrugated containers and containerboard and the permanent closure of three JSC
(U.S.) containerboard mills in December 1998. Operations for 1999 include a
containerboard machine (the "Fernandina No. 2 Machine") acquired from Jefferson
Smurfit Group plc in November 1998. Cost of goods sold as a percent of net sales
increased to 86% for the three months ended March 31, 1999 compared to 83% for
the same period last year due primarily to the lower average selling prices in
1999. Fiber costs in 1999 declined compared to last year.
Linerboard prices in the first quarter of 1999 were lower than last year by
6% and the average price of corrugated containers was lower by 2%. Market
conditions began to improve late in 1998 and, during the first quarter of 1999,
the Company implemented price increases of $50 and $60 per ton for linerboard
and medium, respectively. The Company also began to implement price increases
for corrugated containers. The price increases are expected to be fully
implemented by the end of the second quarter of 1999. Containerboard shipments,
including the Fernandina No. 2 Machine, increased 18%. Shipments of corrugated
containers during the first quarter of 1999 increased 2% compared to last year.
The average price of SBS in the first quarter of 1999 declined 8% and shipments
were lower by 3% compared to last year.
Boxboard and Folding Cartons Segment
For the three months ended March 31, 1999, net sales increased by 1% compared to
last year to $197 million and profits decreased by $1 million to $13 million.
The decline in profits was due primarily to the lower sales prices for folding
cartons and boxboard. On average, boxboard prices were lower than last year by
11% and the average price of folding cartons was lower by 1%. Boxboard shipments
decreased 15% while shipments of folding cartons increased 11% compared to last
year. Cost of goods sold as a percent of net sales for the three months ended
March 31, 1999 were comparable to the same period last year.
Reclamation Segment
Net sales of reclaimed fiber for the three months ended March 31, 1999 were $75
million, down 9% compared to last year and profits were unchanged. Sales prices
were significantly lower than last year as a result of lower demand and the drop
in the price of old corrugated containers ("OCC") experienced in 1998. The price
of OCC, the primary grade used by paper mills, was lower in the 1999 period by
approximately $50 per ton compared to last year. The price of old newsprint was
higher by approximately $10 per ton. External shipments of reclaimed fiber
increased 52% compared to last year, as a result of the closure of three of
the Company's paper mills, which made significant intracompany purchases of
waste fiber in prior periods.
Discontinued Operations
During February 1999, the Company adopted a formal plan to sell the operating
assets of its subsidiary, Smurfit Newsprint Corporation ("SNC"). Accordingly,
SNC is accounted for as a discontinued operation for all periods shown. Income
from discontinued operations, net of tax, for the three months ended March 31,
1999 was $4 million compared to $8 million for the same period last year.
9
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Newsprint inventories within the industry continue to be excessive, with
deteriorating prices. Many newsprint producers, including the Company, have
announced the curtailment of production in the first quarter of 1999. SNC
revenues were $74 million and $80 million for the first quarter of 1999 and
1998, respectively. Average sales prices and shipments during the quarter were
each lower than last year by 5%.
Costs and Expenses
The decrease in cost of goods sold compared to last year in the Company's
Consolidated Statements of Operations resulted primarily from the permanent
closure of certain containerboard mill capacity and lower fiber costs. The
increase in the Company's overall cost of goods sold as a percent of net sales
for the three months ended March 31 from 83% in 1998 to 87% in 1999, was
due primarily to the lower average selling prices in 1999. Selling and
administrative expenses as a percent of net sales for the three months ended
March 31, 1999 was comparable to 1998.
Interest expense for the three months ended March 31, 1999 was $4 million lower
than last year due primarily to lower average effective interest rates.
The Company recorded an income tax benefit of $9 million on a pretax loss of $26
million for the three months ended March 31, 1999. The effective tax rate for
the stated period includes the effect of permanent differences from applying
purchase accounting.
Restructuring
As explained in the JSCE 1998 10-K, the Company recorded a pre-tax charge of
$257 million in the fourth quarter of 1998 for restructuring costs related to
the permanent closure of certain of its operations in 1998 in connection with
the Merger. The restructuring charge included provisions for costs associated
with (1) adjustment of property, plant and equipment of closed facilities to
fair value less costs to sell of $179 million, (2) facility closure costs of
$42 million, (3) severance related costs of $27 million, and (4) other Merger
related costs of $9 million. The restructuring charge consisted of approximately
$179 million for the write-down of assets at closed facilities and approximately
$78 million of anticipated cash expenditures. To date, through March 31, 1999,
approximately $27 million (35%) of the cash expenditures were incurred, the
majority of which related to severance and facility closure cost. THe remaining
cash expenditures will continue to be funded through operations, a majority of
which will be paid in 1999, as originally planned.
As part of the Company's continuing evaluation of all areas of its business in
connection with its Merger integration, the Company recorded a $5 million
restructuring charge during the first quarter of 1999 related to the permanent
shutdown of three corrugated JSC (U.S.) container facilities. Additional
restructuring charges are expected in 1999 as management finalizes its plans.
Statistical Data
<TABLE>
<CAPTION>
(In thousands of tons, Three months ended
except as noted) March 31,
-------------------
1999 1998
---- ----
<S> <C> <C>
Mill production:
Containerboard 367 518
Solid bleached sulfate 44 49
Coated boxboard 150 145
Corrugated shipments (billion square feet) 7.4 7.2
Folding cartons shipments 140 133
Fiber reclaimed and brokered 1,591 1,279
</TABLE>
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, 1999 of $24 million were used
primarily to fund capital investments of $17 million and net debt payments of $6
million. Working capital, exclusive of cash and current maturities of debt,
increased approximately $9 million during the three months
10
<PAGE>
<PAGE>
ended March 31, 1999, due primarily to the price increases implemented in the
first quarter.
The JSC (U.S.) bank credit facility (the "JSC (U.S.) Credit Agreement") contains
various business and financial covenants including, among other things, (i)
limitations on dividends, redemptions and repurchases of capital stock, (ii)
limitations on the incurrence of indebtedness, (iii) limitations on capital
expenditures and (iv) maintenance of certain financial covenants. The JSC (U.S.)
Credit Agreement also requires prepayments if JSC (U.S.) has excess cash flows,
as defined, or receives proceeds from certain asset sales, insurance, issuance
of equity securities or incurrence of certain indebtedness. The obligations
under the JSC (U.S.) Credit Agreement are unconditionally guaranteed by the
Company and certain of its subsidiaries. The obligations under the JSC (U.S.)
Credit Agreement are secured by a security interest in substantially all of the
assets of JSC (U.S.). 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.
The Company intends to sell or liquidate certain of its assets, including its
newsprint and woodlands operations. Proceeds from asset sales are required to be
used to pay down the borrowings under the JSC (U.S.) Credit Agreement.
At March 31, 1999, the Company had $406 million of unused borrowing capacity
under its Credit Agreement and $109 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
internally generated cash flows, proceeds from asset divestitures and existing
financing resources will be sufficient for the next several years to meet its
obligations, including debt service, restructuring payments, settlement of
certain litigation relating to Cladwood'r' siding and capital expenditures. The
Company expects to use any excess cash provided by operations to make further
debt reductions.
Year 2000
The Year 2000 problem concerns the inability of computer systems and devices to
properly recognize and process date-sensitive information when the year changes
to 2000. The Company depends upon its information technology ("IT") and non-IT
systems (used to run manufacturing equipment that contain embedded hardware or
software that must handle dates) to conduct and manage the Company's business.
The Company believes that, by replacing, repairing or upgrading the systems, the
Year 2000 issue can be resolved without material operational difficulties. While
it is difficult, at present, to fully quantify the overall cost of this work,
the Company expects to spend approximately $43 million through 1999 to correct
the Year 2000 problem, of which approximately $20 million has been incurred
through March 31, 1999. A large portion of these costs relate to 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. The Company is utilizing both internal and external
resources to evaluate the potential impact of the Year 2000 problem. The Company
plans to fund its Year 2000 effort with cash from operations and borrowings
under the Credit Agreements.
11
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<PAGE>
The Company's Year 2000 Program Management Office is responsible for guiding and
coordinating operating units in developing and executing their Year 2000 plans,
enabling the Company to share knowledge and work across operating units,
developing standard planning and formats for internal and external reporting,
consistent customer and vendor communications and where appropriate, the
development of contingency plans. The Company's Year 2000 program consists of
the following seven phases:
Phase 1: Planning/Awareness: The planning and awareness phase includes the
identification of critical business processes and components.
Phase 2: Inventory: During the inventory phase, Company personnel identified
systems that could potentially have a Year 2000 problem and categorized the
system as compliant, non-compliant, obsolete or unknown.
Phase 3: Triage: In the triage phase, every system is assigned a business risk
as high, medium, or low.
Phase 4: Detailed Assessment: The detailed assessment provides for a planned
schedule of remediation and estimated cost.
Phase 5: Remediation: Remediation involves what corrective action to take if
there is a Year 2000 problem, such as replacing, repairing or upgrading the
system, and concludes with the execution of system test.
Phase 6: Fallout: In the Fallout phase, the inventory will be kept up to date
and no new Year 2000 problems will be introduced.
Phase 7: Contingency Planning: The Company is developing contingency plans for
the most reasonable worst case scenarios.
The Company has completed the planning, inventory, triage, and detailed
assessment of its IT systems and is taking corrective action and testing the
new, upgraded or repaired systems. The Company identified seven high-risk IT
systems, of which two have been remediated and the remaining five are scheduled
to be substantially completed in the second and third quarters of 1999.
The Company's operating facilities rely on control systems, which control and
monitor production, power, emissions and safety. The inventory, triage and
detailed assessment phases for all operating facilities were substantially
complete as of the end of the first quarter of 1999. The Company had retained a
third party to assist with the verification and validation of these three
phases. The Company expects to have substantially completed all phases of its
Year 2000 program, for non-IT systems, by the end of the third quarter of 1999.
The Year 2000 Program Management Office has compiled a list of mission critical
vendors. A mission critical vendor is a provider of goods or services without
which a facility could not function. Each of the mission critical vendors was
surveyed to insure that they are Year 2000 compliant or have a plan in place. As
of March 31, 1999, 66% of the mission critical vendors surveyed have responded.
The results of the mission critical vendors surveyed indicate 22% are currently
compliant, 34% have provided a target date for compliance, and 10% have replied
but did not provide a target date for
12
<PAGE>
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compliance. A second follow-up survey has been sent to the 34% who did not
respond. Where appropriate, Company representatives will conduct an in-depth
investigation of a mission critical vendor's ability to be Year 2000 compliant.
The Company currently believes that it will be able to replace, repair or
upgrade all of its IT and non-IT systems affected by the Year 2000 problem on a
timely basis. 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. The production impact of
a Year 2000 related failure varies significantly among the facilities and any
such failure could cause manufacturing delays, possible environmental
contamination or safety hazards. The most reasonably likely worst case scenario
is the occurrence of a Year 2000 related failure at one or more of the Company's
paper mills which, could include multiple paper machines. The Company has the
capability to produce and ship products from multiple geographic locations
should disruptions occur. Delays in invoicing customer shipments could cause a
slowdown in cash receipts, which could affect the Company's ability to meet its
financial obligations. To the extent customers experience Year 2000 problems
that are not remediated on a timely basis, the Company may experience material
fluctuations in the demand for its products. The amount of any potential
liability and/or lost revenue cannot be reasonably estimated at this time;
however, such amounts could be material.
While the Company currently expects no material adverse consequences on its
financial condition or results of operations due to Year 2000 issues, the
Company's beliefs and expectations are based on certain assumptions that
ultimately may prove to be inaccurate. Each of the Company's operating
facilities is developing a specific contingency plan for their most reasonably
likely worst case scenarios. The Company will also seek to take appropriate
actions to mitigate the effects of the Company's or significant vendors' failure
to remediate the Year 2000 problem in a timely manner, including increasing the
inventory of critical raw materials and supplies, increasing finished goods
inventories, switching to alternative energy sources, and making arrangements
for alternate vendors.
There is a risk that the Company's plans for achieving Year 2000 compliance may
not be completed on time. However, failure to meet critical milestones being
identified in the Company's plans would provide advance notice, and steps would
be taken to prevent injuries to employees and others, and to prevent
environmental contamination. Customers and suppliers would also receive advance
notice allowing them to implement alternate plans.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
For a discussion of certain market risks related to the Company, See Part II,
Item 7A, "Quantitative and Qualitative Disclosures About Market Risk", in the
JSCE 1998 10-K.
Interest Rate Risk
The Company's earnings and cash flows are significantly affected by the amount
of interest on its indebtedness. No significant change has occurred in the
Company's exposure to such risk in the first quarter of 1999.
13
<PAGE>
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None
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.
27.1 Financial Data Schedule
b) Reports on Form 8-K
Form 8-K dated February 12, 1999 was filed under Item 5 - Other Events and
Item 7 - Exhibits
14
<PAGE>
<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 May 17, 1999 /s/ Paul K. Kaufmann
-------------- -----------------------------
Paul K. Kaufmann
Vice President and
Corporate Controller
(Principal Accounting Officer)
15
STATEMENT OF DIFFERENCES
------------------------
The registered trademark symbol shall be expressed as.................. 'r'
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