<PAGE>
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, 2000
Commission File Number 0-11951
JSCE, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 37-1337160
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
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 ___ No X
-
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of June 30, 2000, the registrant had outstanding 1,000 shares of common
stock, $.01 par value per share.
<PAGE>
PART I -- FINANCIAL INFORMATION
-------------------------------
Item 1. Financial Statements
--------------------
JSCE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
-----------------------------------------------
(In millions) 2000 1999 2000 1999
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales............................................................. $ 988 $ 786 $1,898 $1,515
Costs and expenses
Cost of goods sold................................................ 818 645 1,592 1,279
Selling and administrative expenses............................... 73 96 147 165
Restructuring charge.............................................. 4 9
-----------------------------------------------
Income from operations........................................ 97 41 159 62
Other income (expense)
Interest expense, net............................................. (28) (46) (55) (93)
Other, net........................................................ 3 5
-----------------------------------------------
Income (loss) from continuing operations before income taxes.. 72 (5) 109 (31)
Benefit from (provision for) income taxes............................. (29) 3 (44) 12
-----------------------------------------------
Income (loss) from continuing operations.......................... 43 (2) 65 (19)
Discontinued operations
Income (loss) from discontinued operations, net of income tax
benefit of $1 for the three months ended June 30, 1999 and $0
for the six months ended June 30, 1999.......................... (1) 3
Gain on disposition of discontinued operations, net of income
taxes of $4..................................................... 6 6
-----------------------------------------------
Net income (loss)................................................. $ 49 $ (3) $ 71 $ (16)
-------------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
1
<PAGE>
JSCE, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
(In millions, except share data) 2000 1999
-----------------------------------------------------------------------------------------------------------------
Assets (Unaudited)
<S> <C> <C>
Current assets
Cash and cash equivalents............................................... $ 8 $ 11
Receivables, less allowances of $10 in 2000 and $9 in 1999.............. 427 396
Inventories
Work-in-process and finished goods................................... 103 95
Materials and supplies............................................... 135 139
-----------------------------
238 234
Refundable income taxes................................................. 36 7
Deferred income taxes................................................... 37 42
Prepaid expenses and other current assets............................... 32 22
-----------------------------
Total current assets............................................... 778 712
Net property, plant and equipment......................................... 1,251 1,307
Timberland, less timber depletion......................................... 2 2
Goodwill, less accumulated amortization of $75 in 2000 and $72 in 1999.... 202 205
Notes receivable from SSCC................................................ 383 364
Other assets.............................................................. 152 146
-----------------------------
$ 2,768 $ 2,736
=================================================================================================================
Liabilities and Stockholder's Equity (Deficit)
Current liabilities
Current maturities of long-term debt.................................... $ 10 $ 12
Accounts payable........................................................ 338 389
Accrued compensation and payroll taxes.................................. 76 88
Interest payable........................................................ 29 30
Other current liabilities............................................... 84 152
-----------------------------
Total current liabilities.......................................... 537 671
Long-term debt, less current maturities................................... 1,676 1,624
Other long-term liabilities............................................... 249 253
Deferred income taxes..................................................... 471 423
Stockholder's deficit
Common stock, par value $.01 per share; 1,000
shares authorized and outstanding......................................
Additional paid-in capital.............................................. 1,129 1,129
Retained earnings (deficit)............................................. (1,294) (1,364)
-----------------------------
Total stockholder's equity (deficit)............................... (165) (235)
-----------------------------
$ 2,768 $ 2,736
=================================================================================================================
</TABLE>
See notes to consolidated financial statements.
2
<PAGE>
JSCE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six months ended June 30, (In millions) 2000 1999
-----------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities
Net income (loss)................................................ $ 71 $ (16)
Adjustments to reconcile net income (loss) to
net cash provided by (used for) operating activities
Gain on disposition of discontinued operations............... (10)
Depreciation, depletion and amortization..................... 60 67
Amortization of deferred debt issuance costs................. 3 5
Deferred income taxes........................................ 54 (31)
Gain on sale of assets....................................... (2)
Non-cash employee benefit expense............................ (8) 27
Non-cash restructuring charge................................ 5
Change in current assets and liabilities,
net of effects from acquisitions
Receivables.............................................. (31) (42)
Inventories.............................................. (4) (13)
Prepaid expenses and other current assets................ (11)
Accounts payable and accrued liabilities................. (77) 29
Interest payable......................................... (28) (27)
Income taxes............................................. (30) 15
Other, net................................................... (2) (1)
----------------------
Net cash provided by (used for) operating activities............ (15) 18
----------------------
Cash flows from investing activities
Property additions.............................................. (49) (33)
Proceeds from property disposals and sale of businesses......... 6 1
Notes receivable from SSCC...................................... 7 19
----------------------
Net cash used for investing activities.......................... (36) (13)
----------------------
Cash flows from financing activities
Net borrowings (repayments) of debt............................. 38 (5)
Net borrowings under the accounts
receivable securitization program............................. 10 10
----------------------
Net cash provided by financing activities....................... 48 5
----------------------
Increase in cash and cash equivalents.............................. (3) 10
Cash and cash equivalents
Beginning of period............................................. 11 18
----------------------
End of period................................................... $ 8 $ 28
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</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
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, 1999, (the
"JSCE 1999 10-K"), filed March 14, 2000 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"). On November 18, 1998 a
subsidiary of SSCC was merged with Stone Container Corporation, an action
hereafter referred to as the "Stone Merger". The Company owns 100% of the equity
interest in Jefferson Smurfit Corporation (U.S.) ("JSC(U.S.)") and is a
guarantor of the senior indebtedness of JSC(U.S.). The Company has no other
material 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
The Company recorded a $4 million restructuring charge during the second quarter
of 1999, and $9 million for the six months ended June 30, 1999 related to the
permanent shutdown of various facilities.
4. Selling and Administrative Expenses
During the second quarter of 1999, the Company recorded a $26 million charge in
selling and administrative expenses related to the cashless exercise of stock
options under the Jefferson Smurfit Corporation stock option plan.
5. Discontinued Operations
During February 1999 the Company adopted a formal plan to sell the newsprint
mills of its subsidiary, Smurfit Newsprint Corporation ("SNC"). Accordingly, the
newsprint operations of SNC are accounted for as discontinued operations in the
accompanying consolidated financial statements. The Company transferred
ownership of the Oregon City, Oregon newsprint mill to a third party in May
2000, thereby completing its exit from the newsprint business. No proceeds from
the transfer were received. During the second quarter of 2000, the Company
recorded a $6 million after tax gain to reflect adjustments to the previous
estimates on disposition of discontinued operations.
4
<PAGE>
6. Business Segment Information
The Company has three reportable segments: (1) Containerboard and Corrugated
Containers, (2) Folding Cartons and Boxboard 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 Folding Cartons and Boxboard 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, Cladwood(R), and corporate related items.
Corporate related items include income and expense not allocated to reportable
segments, goodwill amortization, net interest expense, the adjustment to record
inventory at LIFO, and the elimination of intercompany profit.
5
<PAGE>
The information for 1999 has been restated from the prior year's presentation in
order to conform to the 2000 presentation.
<TABLE>
<CAPTION>
Container-
board & Folding
Corrugated Cartons &
Containers Boxboard Reclamation Other Total
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Three months ended June 30,
---------------------------
2000
----
Revenues from external
customers..................... $507 $227 $179 $ 75 $ 988
Intersegment revenues............ 10 40 5 55
Income (loss) from
continuing operations
before income taxes........... 61 22 8 (19) 72
1999
----
Revenues from external
customers..................... $421 $208 $ 91 $ 66 $ 786
Intersegment revenues............ 10 28 4 42
Income (loss) from
continuing operations
before income taxes........... 48 18 2 (73) (5)
Six months ended June 30,
-------------------------
2000
----
Revenues from external
customers..................... $972 $439 $338 $ 149 $1,898
Intersegment revenues............ 22 77 11 110
Income (loss) from
continuing operations
before income taxes........... 118 37 18 (64) 109
1999
----
Revenues from external
customers..................... $812 $405 $166 $ 132 $1,515
Intersegment revenues............ 19 56 13 88
Income (loss) from
continuing operations
before income taxes........... 71 34 4 (140) (31)
</TABLE>
6
<PAGE>
7. Summarized Financial Information JSC(U.S.)
The following summarized financial information is presented for JSC(U.S.), a
wholly-owned subsidiary of the Company. Other wholly-owned subsidiaries of the
Company, established in the third quarter of 1999, are not presented separately
due to their insignificance to the Company as a whole.
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
------- ----------
<S> <C> <C>
Current assets................................................................. $ 786 $ 716
Property, plant and equipment and timberlands, net............................. 1,253 1,309
Goodwill....................................................................... 202 205
Other assets................................................................... 452 430
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Total assets................................................................. $ 2,693 $ 2,660
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Current liabilities............................................................ $ 536 $ 671
Long-term debt................................................................. 1,676 1,624
Other liabilities.............................................................. 651 605
Stockholder's deficit
Common stock.................................................................
Additional paid-in capital................................................... 1,124 1,124
Retained deficit............................................................. (1,294) (1,364)
------- ----------
Total stockholder's deficit.................................................. (170) (240)
------- ----------
Total liabilities and stockholder's deficit.................................. $ 2,693 $ 2,660
-------- ----------
</TABLE>
Condensed Consolidated Statements of Operations
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
----------------------- ------------------
2000 1999 2000 1999
----- ----- ------ ------
<S> <C> <C> <C> <C>
Net sales................................................. $ 988 $786 $1,898 $1,515
Cost and expenses......................................... 890 745 1,735 1,453
Interest expense, net..................................... 30 46 60 93
Other income, net......................................... 3 5
----- ----- ------ ------
Income (loss) from continuing operations
before income taxes..................................... 71 (5) 108 (31)
Benefit from (provision for) income taxes................. (28) 3 (43) 12
Discontinued operations................................... 6 (1) 6 3
----- ----- ------ ------
Net income (loss)......................................... $ 49 $ (3) $ 71 $ (16)
----- ----- ------ ------
</TABLE>
8. 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. In addition, the Company faces
potential liability for response costs at various sites for which it has
received notice as being a potentially responsible party ("PRP") 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 after consideration for the number of other PRPs at
each site, the identity and financial condition of such parties and experience
regarding similar matters.
7
<PAGE>
In March 1999, management of SNC's former Oregon City, Oregon newsprint mill
became aware of possible alterations by one of its employees of data utilized in
determining compliance with the mill's National Pollutant Elimination System
permit. SNC conducted a thorough internal investigation of this matter. Based on
this investigation, it concluded that such alterations did occur and, as a
result, the mill may have violated its permit limits on suspended solids on
several occasions. SNC provided both the Environmental Protection Agency ("EPA")
and the Oregon Department of Environmental Quality ("ODEQ") with a detailed
report of its investigation, and the agencies conducted additional
investigations based on this report. SNC fully cooperated with these
investigations. In July 2000, SNC paid a civil penalty of less than $100,000 to
the ODEQ to settle the Notice of Assessment of Civil Penalty issued by the ODEQ
in connection with this matter. In addition, the U.S. Attorney's Office has
advised SNC that it does not intend to commence a criminal prosecution against
SNC. Accordingly, SNC now considers this matter fully resolved.
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.
8
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations
-------------
Results of Operations
<TABLE>
<CAPTION>
Three months ended Six months ended
(In millions) June 30, June 30,
-------------------------------- ----------------------------
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales
Containerboard and corrugated containers............. $ 507 $ 421 $ 972 $ 812
Folding cartons and boxboard......................... 227 208 439 405
Reclamation.......................................... 179 91 338 166
Other operations..................................... 75 66 149 132
--------- --------- --------- ---------
Total operations..................................... $ 988 $ 786 $ 1,898 $ 1,515
========= ========= ========= ==========
Profit (loss)
Containerboard and corrugated containers............. $ 61 $ 48 $ 118 $ 71
Folding cartons and boxboard......................... 22 18 37 34
Reclamation.......................................... 8 2 18 4
Other operations..................................... 7 9 14 17
--------- --------- --------- ---------
Total operations..................................... 98 77 187 126
Restructuring charge................................. (4) (9)
Interest expense, net................................ (28) (46) (55) (93)
Other, net........................................... 2 (32) (23) (55)
--------- --------- --------- ---------
Income (loss) from continuing operations
before income taxes.................................. $ 72 $ (5) $ 109 $ (31)
========= ========= ========= ==========
</TABLE>
Improvements in containerboard and other markets in 2000 resulted in strong
increases in net sales and profits for the Company. Net sales for the Company
for the three and six month periods ended June 30, 2000 increased 26% and 25%,
respectively, compared to the same periods last year. The increases in net sales
were due primarily to improvements in sales prices and product mix. Operating
profits for the Company for the three and six month periods ended June 30, 2000
increased 27% and 48%, respectively, compared to last year due primarily to the
sales price increases. Operating profits in the second quarter of 2000 were
reduced by the economic downtime taken at the Company's containerboard mills in
order to reduce inventories. Other, net in the 1999 periods include expense of
$26 million related to the cashless exercise of SSCC stock options under the
Jefferson Smurfit Corporation stock option plan. The increases (decreases) for
each of the Company's segments are shown in the chart below.
<TABLE>
<CAPTION>
(In millions) Container-
board & Folding
Increase (decrease) Corrugated Cartons & Other
in net sales due to: Containers Boxboard Reclamation Operations Total
------------------- --------------- ------------- --------------- --------------- -------------
<S> <C> <C> <C> <C> <C>
Three months ended June 30,
2000 compared to 1999
---------------------
Sales price and product mix............ $ 95 $ 17 $ 81 $ 7 $ 200
Sales volume........................... 8 2 8 4 22
Closed or sold facilities.............. (17) (1) (2) (20)
----------- ----------- ----------- ----------- -----------
Net increase.......................... $ 86 $ 19 $ 88 $ 9 $ 202
=========== ========== =========== =========== ===========
Six months ended June 30,
2000 compared to 1999
---------------------
Sales price and product mix............ $ 176 $ 24 $ 159 $ 12 $ 371
Sales volume........................... 22 10 17 8 57
Closed or sold facilities.............. (38) (4) (3) (45)
----------- ----------- ----------- ----------- -----------
Net increase.......................... $ 160 $ 34 $ 172 $ 17 $ 383
=========== ========== =========== =========== ===========
</TABLE>
9
<PAGE>
Containerboard and Corrugated Containers Segment
------------------------------------------------
Market conditions in the containerboard industry continued to improve in the
first half of 2000, and the Company implemented price increases of $50 per ton
and $60 per ton on February 1, 2000 for linerboard and medium, respectively. On
average, linerboard prices for the second quarter of 2000 were higher than last
year by 22% and the average price of corrugated containers was higher by 24%.
Solid bleached sulfate ("SBS") prices increased 10% compared to last year.
Containerboard production for the second quarter of 2000 declined 11% compared
to last year due to higher levels of maintenance downtime, as well as economic
downtime taken in order to reduce inventories. Shipments of corrugated
containers were comparable to last year. SBS sales volume declined by 4%.
Net sales of $507 million for the three months ended June 30, 2000 increased by
20% compared to last year and profits improved by $13 million to $61 million.
The increase in net sales was due primarily to the impact of higher average
sales prices for containerboard and corrugated containers. Net sales were
negatively impacted by the 1999 closure of four container plants and the sale of
Company timberlands in October 1999. Profits increased as a result of higher
average sales prices, but the impact of the additional mill downtime and higher
reclaimed fiber cost partially offset the improvement. Cost of goods sold as a
percent of net sales decreased to 80% for the three months ended June 30, 2000
compared to 82% for the same period last year due primarily to the higher
average sales prices.
For the six months ended June 30, 2000, net sales of $972 million increased by
20% compared to last year and profits improved by $47 million to $118 million.
On average, linerboard prices were higher than last year by 22% and the average
price of corrugated containers was higher by 23%. Containerboard production for
the six months ended June 30, 2000 decreased 4% due to the downtime. Shipments
of corrugated containers were comparable to last year. The average sales price
of SBS increased 7% compared to last year while sales volume was lower by 1%.
Profits increased due to the higher average sales prices, although the
additional mill downtime and the higher reclaimed fiber cost partially offset
the sales price improvements. Cost of goods sold as a percent of net sales
decreased to 81% for the six months ended June 30, 2000 compared to 84% for the
same period last year due primarily to the higher average sales prices.
Folding Cartons and Boxboard Segment
------------------------------------
Net sales of $227 million for the three months ended June 30, 2000 increased by
9% compared to last year and profits increased by $4 million to $22 million. The
sales increase was due primarily to higher average sales prices and product mix.
On average, boxboard sales prices were 13% higher and folding carton sales
prices were 7% higher than last year. Folding carton shipments were comparable
to last year. Higher reclaimed fiber cost and increases in the cost of other
materials and converting costs partially offset the improvements in sales price
and product mix. Cost of goods sold as a percent of net sales decreased to 83%
for the three months ended June 30, 2000 compared to 84% for the same period
last year due primarily to the higher sales prices.
For the six months ended June 30, 2000 net sales of $439 million increased by 8%
compared to last year. On average, boxboard sales prices were 9% higher and
folding carton sales prices were 5% higher than last year. Folding carton
shipments increased 1% and boxboard shipments increased 14% compared to last
year. The higher cost of materials and higher converting costs partially offset
the improvements in sales price and product mix, resulting in a profit
improvement of $3 million compared to last year. Cost of goods sold as a percent
of net sales of 84% for the six months ended June 30, 2000 was comparable to the
same period last year.
Reclamation Segment
-------------------
Net sales of $179 million for the three months ended June 30, 2000 increased by
97% compared to last year due to higher average sales prices and sales volume.
Demand for reclaimed fiber has been strong in 2000 causing the cost and sales
price of reclaimed fiber to escalate rapidly. Compared to last year, the average
prices of old corrugated containers ("OCC") and old newsprint ("ONP") were each
higher by approximately $50 per ton. The amount of mill downtime taken by the
paper industry and a decline in export
10
<PAGE>
shipments in the second quarter of 2000 however, have reduced demand, thereby
bringing cost and sales prices down in June and July. Total tons of fiber
reclaimed and brokered were comparable to last year. Cost of goods sold as a
percent of net sales increased to 91% for the three months ended June 30, 2000
compared to 88% for the same period last year due primarily to higher wastepaper
cost. Profits for the three months ended June 30, 2000 quadrupled compared to
last year to $8 million due primarily to the sales price increases.
For the six months ended June 30, 2000 net sales of $338 million increased by
104% compared to last year due to the higher average sales prices and higher
sales volume. Compared to last year, the average prices for OCC and ONP were
higher by $50 per ton and $40 per ton, respectively. Total tons of fiber
reclaimed and brokered increased 3% compared to last year. For the first half,
profits improved from $4 million in 1999 to $18 million in 2000. Cost of goods
sold as a percent of net sales increased to 91% for the six months ended June
30, 2000 compared to 89% for the same period last year due primarily to higher
wastepaper cost.
Other Operations
----------------
Other operations include the Company's specialty packaging and Cladwood(R)
operations. Net sales of $75 million for the three months ended June 30, 2000
increased by 14% compared to last year due to improvements in sales price and
product mix and sales volume. The closure in 1999 of a gravure cylinder plant
partially offset the improvements in sales prices. A $30 per ton price increase
was implemented on tube grades on April 1, 2000, but it was insufficient to
cover the increases in reclaimed fiber cost. The sales volume increase is
attributable to Cladwood(R), which was classified as a discontinued operation in
1999. The higher reclaimed fiber cost was the primary factor causing profits to
decline by $2 million.
For the six months ended June 30, 2000 net sales of $149 million increased by
13% compared to last year due to the higher average sales prices and product mix
and sales volume. Profits declined due primarily to the higher cost of reclaimed
fiber.
Costs and Expenses
------------------
The Company's overall cost of goods sold for the three and six month periods
ended June 30, 2000 increased compared to last year due primarily to higher
reclaimed fiber cost. Cost of goods sold as a percent of net sales for the three
months ended June 30, 2000 increased from 82% in 1999 to 83% in 2000 due
primarily to the higher cost of reclaimed fiber and the higher level of mill
downtime taken in the second quarter of 2000. Cost of goods sold as a percent of
net sales of 84% for the six months ended June 30 was comparable to the same
period in 1999.
Selling and administrative expenses decreased compared to last year due to
expense in 1999 of $26 million related to the cashless exercise of SSCC stock
options under the Jefferson Smurfit Corporation stock option plan. Exclusive of
the effect of the 1999 charge for stock option exercises, selling and
administrative expenses as a percent of net sales for the three months ended
June 30 declined from 9% in 1999 to 7% in 2000, and for the six months ended
June 30 declined from 9% in 1999 to 8% in 2000. In each case, the decline was
the result of higher sales prices in 2000.
Interest expense, net declined compared to last year for the three and six month
periods ended June 30, 2000 due primarily to lower average outstanding debt
levels in 2000. The Company's overall average effective interest rates in the
2000 periods were higher than last year by 0.6% for the three months ended June
30, 2000 and by 0.5% for the six months ended June 30, 2000. Interest expense,
net for the three and six month periods ended June 30, 2000 included $13 million
and $26 million, respectively, of interest income earned on the Company's
intercompany loan to SSCC. Interest income was higher in 2000 compared to 1999
due to the higher intercompany loan balance, which accrues and compounds on a
semiannual basis.
Provision for income taxes for the three month and six month periods ended June
30, 2000 differed from the federal statutory tax rate due to several factors,
the most significant of which was state income taxes.
11
<PAGE>
Statistical Data
<TABLE>
<CAPTION>
(In thousands of tons, except as noted) Three months ended Six months ended
June 30, June 30,
------------------------- -----------------------------
2000 1999 2000 1999
-------- ------- --------- ----------
<S> <C> <C> <C> <C>
Mill production:
Containerboard.................................. 372 416 752 783
Solid bleached sulfate.......................... 47 47 95 91
Recycled boxboard............................... 191 184 383 375
Corrugated shipments (billion sq. ft.)............. 7.2 7.2 14.6 14.6
Folding carton shipments........................... 148 147 291 287
Fiber reclaimed and brokered....................... 1,630 1,630 3,331 3,221
</TABLE>
Restructuring
As explained in the JSCE 1999 10-K, the Company restructured its operations in
connection with the Stone Merger. The Company recorded a pretax charge of $257
million in the fourth quarter of 1998 for restructuring costs related to the
permanent closure of certain JSC(U.S.) mill operations and related facilities on
December 1, 1998. As part of the Company's continuing evaluation of all areas of
its business in connection with the Stone Merger integration, the Company
recorded a $9 million restructuring charge in the year ended December 31, 1999
related to the permanent shutdown of eight additional JSC(U.S.) facilities.
Since the Stone Merger, through June 30, 2000, approximately $45 million (63%)
of the cash expenditures were incurred, the majority of which related to
severance and facility closure costs. The remaining exit liabilities for the
Company as of June 30, 2000 of approximately $26 million will be funded through
operations as originally planned.
Discontinued Operations
As explained in the JSCE 1999 10-K, in February 1999, the Company adopted a
formal plan to sell the newsprint mills of its subsidiary, SNC. Accordingly, the
newsprint operations of SNC are accounted for as discontinued operations. The
Company transferred ownership of the Oregon City, Oregon newsprint mill to a
third party on May 9, 2000, thereby completing its exit from the newsprint
business. No proceeds from the transfer were received. During the second quarter
of 2000, the Company recorded a $6 million after tax gain to reflect adjustments
to the previous estimates on disposition of discontinued operations.
Liquidity and Capital Resources
For the six months ended June 30, 2000, borrowings of $48 million, proceeds of
$7 million received from SSCC in partial repayment of its intercompany loan,
proceeds of $6 million from property disposals and available cash of $3 million
were used primarily to fund property additions of $49 million and net cash used
for operating activities of $15 million.
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.
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The Company expects that internally generated cash flows and existing financing
resources will be sufficient for the next several years to meet its obligations,
including debt service, restructuring payments, environmental expenditures
relating to compliance with the Cluster Rule (as discussed in the JSCE 1999 10-
K) and other capital expenditures. The Company expects to use any excess cash
provided by operations to make further debt reductions. As of June 30, 2000,
JSC(U.S.) had $432 million of unused borrowing capacity under the JSC(U.S.)
Credit Agreement and $80 million of unused borrowing capacity under its $315
million accounts receivable securitization program, subject to JSC(U.S.)'s level
of eligible accounts receivable.
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 1999 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 for the six months ended June 30, 2000.
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PART II - OTHER INFORMATION
---------------------------
Item 1. Legal Proceedings
-----------------
In March 1999, management of SNC's former Oregon City, Oregon newsprint mill
became aware of possible alterations by one of its employees of data utilized in
determining compliance with the mill's National Pollutant Elimination System
permit. SNC conducted a thorough internal investigation of this matter. Based on
this investigation, it concluded that such alterations did occur and, as a
result, the mill may have violated its permit limits on suspended solids on
several occasions. SNC provided both the EPA and the ODEQ with a detailed report
of its investigation, and the agencies conducted additional investigations based
on this report. SNC fully cooperated with these investigations. In July 2000,
SNC paid a civil penalty of less than $100,000 to the ODEQ to settle the Notice
of Assessment of Civil Penalty issued by the ODEQ in connection with this
matter. In addition, the U.S. Attorney's Office has advised SNC that it does not
intend to commence a criminal prosecution against SNC. Accordingly, SNC now
considers this matter fully resolved.
Item 2. Changes in Securities
---------------------
None
Item 3. Defaults Upon Senior Securities
-------------------------------
None
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
None
Item 5. Other Information
-----------------
None
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
a) The following exhibits are included in this Form 10-Q.
10.1 Employment agreement for Joseph J. Gurandiano (incorporated by
reference to Exhibit 10.1 to SSCC's Quarterly Report of Form 10-Q for
the quarter ended June 30, 2000).
10.2 Severance benefits agreement for Joseph J. Gurandiano (incorporated by
reference to Exhibit 10.2 to SSCC's Quarterly Report of Form 10-Q for
the quarter ended June 30, 2000).
27.1 Financial Data Schedule.
b) Reports on Form 8-K.
None
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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, 2000 /s/ Paul K. Kaufmann
--------------- ---------------------------
Paul K. Kaufmann
Vice President and
Corporate Controller
(Principal Accounting Officer)
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