<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 September 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 September 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 Nine months ended
September 30, September 30,
--------------------------------------
(In millions) 2000 1999 2000 1999
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales.................................................. $939 $855 $2,837 $2,370
Costs and expenses
Cost of goods sold....................................... 787 715 2,379 1,994
Selling and administrative expenses...................... 69 73 216 238
Restructuring charge..................................... 1 10
--------------------------------------
Income from operations................................. 83 66 242 128
Other income (expense)
Interest expense, net.................................... (27) (48) (82) (141)
Other, net............................................... 1 1 6 1
--------------------------------------
Income (loss) from continuing operations before
income taxes......................................... 57 19 166 (12)
Benefit from (provision for) income taxes.................. (24) (10) (68) 2
--------------------------------------
Income (loss) from continuing operations............... 33 9 98 (10)
Discontinued operations
Loss from discontinued operations,
net of income tax benefit of $4 for the three months
ended September 30, 1999 and $4 for the nine months
ended September 30, 1999.............................. (4) (1)
Gain on disposition of discontinued operations,
net of income taxes of $4............................. 6
--------------------------------------
Net income (loss)..................................... $ 33 $ 5 $ 104 $ (11)
-------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
1
<PAGE>
JSCE, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
(In millions, except share data) 2000 1999
============================================================================================================
Assets (Unaudited)
<S> <C> <C>
Current assets
Cash and cash equivalents................................................ $ 18 $ 11
Receivables, less allowances of $10 in 2000 and $9 in 1999............... 358 396
Inventories
Work-in-process and finished goods..................................... 101 95
Materials and supplies................................................. 128 139
-------------------------------
229 234
Refundable income taxes.................................................. 35 7
Deferred income taxes.................................................... 29 42
Prepaid expenses and other current assets................................ 22 22
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Total current assets................................................. 691 712
Net property, plant and equipment......................................... 1,254 1,307
Timberland, less timber depletion......................................... 2 2
Goodwill, less accumulated amortization of $78 in 2000 and $72 in 1999.... 200 205
Notes receivable from SSCC................................................ 396 364
Other assets.............................................................. 156 146
-------------------------------
$ 2,699 $ 2,736
============================================================================================================
Liabilities and Stockholder's Equity (Deficit)
Current liabilities
Current maturities of long-term debt..................................... $ 10 $ 12
Accounts payable......................................................... 287 389
Accrued compensation and payroll taxes................................... 87 88
Interest payable......................................................... 55 30
Other current liabilities................................................ 92 152
-------------------------------
Total current liabilities............................................ 531 671
Long-term debt, less current maturities................................... 1,567 1,624
Other long-term liabilities............................................... 252 253
Deferred income taxes..................................................... 480 423
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)............................................... (1,260) (1,364)
-------------------------------
Total stockholder's equity (deficit)................................. (131) (235)
-------------------------------
$ 2,699 $ 2,736
============================================================================================================
See notes to consolidated financial statements.
</TABLE>
2
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JSCE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended September 30, (In millions) 2000 1999
====================================================================================================
<S> <C> <C>
Cash flows from operating activities
Net income (loss).................................................... $ 104 $ (11)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities
Gain on disposition of discontinued operations................... (10)
Depreciation, depletion and amortization......................... 90 100
Amortization of deferred debt issuance costs..................... 5 8
Deferred income taxes............................................ 73 (29)
Gain on sale of assets........................................... (3)
Non-cash employee benefit expense (income)....................... (13) 27
Non-cash restructuring charge.................................... 6
Change in current assets and liabilities,
net of effects from acquisitions
Receivables.................................................. 38 (88)
Inventories.................................................. 5 (21)
Prepaid expenses and other current assets.................... (1) (23)
Accounts payable and accrued liabilities..................... (109) 85
Interest payable............................................. (16) (16)
Income taxes................................................. (30) 15
Other, net....................................................... (1)
---------------------------
Net cash provided by operating activities............................ 133 52
---------------------------
Cash flows from investing activities
Property additions................................................... (80) (49)
Proceeds from property disposals and sale of businesses.............. 8 2
Notes receivable from SSCC........................................... 7 20
---------------------------
Net cash used for investing activities............................... (65) (27)
---------------------------
Cash flows from financing activities
Net borrowings (repayments) of debt.................................. (64) (40)
Net borrowings under the accounts
receivable securitization program.................................. 3 17
---------------------------
Net cash used for financing activities............................... (61) (23)
---------------------------
Increase in cash and cash equivalents.................................. 7 2
Cash and cash equivalents
Beginning of period.................................................. 11 18
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End of period........................................................ $ 18 $ 20
====================================================================================================
See notes to consolidated financial statements.
</TABLE>
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, 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 $1 million restructuring charge during the third quarter
of 1999, and $10 million for the nine months ended September 30, 1999 related to
the permanent shutdown of various facilities.
4. 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.
5. 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
4
<PAGE>
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.
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
-----------------------------------------------------------------
Three months ended Sept. 30,
----------------------------
2000
----
<S> <C> <C> <C> <C> <C>
Revenues from external
customers..................... $ 481 $239 $139 $ 80 $ 939
Intersegment revenues............ 13 22 6 41
Segment profit (loss)............ 45 24 4 (16) 57
1999
----
Revenues from external
customers..................... $ 444 $212 $130 $ 69 $ 855
Intersegment revenues............ 10 35 4 49
Segment profit (loss)............ 59 15 6 (61) 19
Nine months ended Sept. 30,
---------------------------
2000
----
Revenues from external
customers..................... $1,453 $678 $477 $ 229 $2,837
Intersegment revenues............ 35 99 17 151
Segment profit (loss)............ 163 61 22 (80) 166
1999
----
Revenues from external
customers..................... $1,256 $617 $296 $ 201 $2,370
Intersegment revenues............ 29 91 17 137
Segment profit (loss)............ 130 49 10 (201) (12)
</TABLE>
The Company announced its plan to reorganize part of its packaging operations to
reduce costs and enhance its marketing efforts. The Company will begin
reporting its new segments in its internal reporting during the fourth quarter.
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. 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.
5
<PAGE>
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- ------------
<S> <C> <C>
Current assets.............................................................. $ 702 $ 716
Property, plant and equipment and timberlands, net.......................... 1,254 1,309
Goodwill.................................................................... 200 205
Other assets................................................................ 470 430
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Total assets.............................................................. $ 2,626 $ 2,660
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Current liabilities......................................................... $ 530 $ 671
Long-term debt.............................................................. 1,567 1,624
Other liabilities........................................................... 665 605
Stockholder's deficit
Common stock..............................................................
Additional paid-in capital................................................ 1,124 1,124
Retained deficit.......................................................... (1,260) (1,364)
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Total stockholder's deficit............................................... (136) (240)
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Total liabilities and stockholder's deficit............................... $ 2,626 $ 2,660
------- -------
</TABLE>
Condensed Consolidated Statements of Operations
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------ -------------------
2000 1999 2000 1999
----- ---- ------ ------
<S> <C> <C> <C> <C>
Net sales................................................. $ 939 $855 $2,837 $2,370
Cost and expenses......................................... 853 789 2,588 2,242
Interest expense, net..................................... 30 50 90 143
Other income, net......................................... 1 1 6 1
----- ---- ------ ------
Income (loss) from continuing operations
before income taxes..................................... 57 17 165 (14)
Benefit from (provision for) income taxes................. (24) (9) (67) 3
Discontinued operations................................... (4) 6 (1)
----- ---- ------ ------
Net income (loss)......................................... $ 33 $ 4 $ 104 $ (12)
----- ---- ------ ------
</TABLE>
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. 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.
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.
6
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
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of Operations
-------------
Results of Operations
<TABLE>
<CAPTION>
Three months ended Nine months ended
(In millions) September 30, September 30,
------------------ ------------------
2000 1999 2000 1999
----- ----- ------ ------
<S> <C> <C> <C> <C>
Net sales
Containerboard and corrugated containers............. $ 481 $ 444 $1,453 $1,256
Folding cartons and boxboard......................... 239 212 678 617
Reclamation.......................................... 139 130 477 296
Other operations..................................... 80 69 229 201
----- ----- ------ ------
Total operations..................................... $ 939 $ 855 $2,837 $2,370
===== ===== ====== ======
Profit (loss)
Containerboard and corrugated containers............. $ 45 $ 59 $ 163 $ 130
Folding cartons and boxboard......................... 24 15 61 49
Reclamation.......................................... 4 6 22 10
Other operations..................................... 8 7 22 24
----- ----- ------ ------
Total operations..................................... 81 87 268 213
Restructuring charge................................. (1) (10)
Interest expense, net................................ (27) (48) (82) (141)
Other, net........................................... 3 (19) (20) (74)
----- ----- ------ ------
Income (loss) from continuing operations
before income taxes.................................. $ 57 $ 19 $ 166 $ (12)
===== ===== ====== ======
</TABLE>
Net sales for the three months and nine months ended September 30, 2000
increased by 10% and 20%, respectively, compared to last year due primarily to
higher average sales prices for containerboard and corrugated containers. While
average sales prices were favorable to last year, operating profits for the
three months ended September 30, 2000 declined by 7% due primarily to high
levels of mill downtime taken for internal inventory management and maintenance
and higher energy cost. Income from continuing operations before income taxes
for the three months ended September 30, 2000 increased by $38 million compared
to last year due primarily to lower interest cost and the effects of lower
intercompany profit elimination and LIFO expense. For the nine months ended
September 30, 2000, income from continuing operations before income taxes
increased compared to last year by $178 million due primarily to higher
operating profit, the effects of lower intercompany profit elimination and LIFO
expense, lower interest cost and an expense in 1999 of $26 million related to
the cashless exercise of SSCC stock options under the Jefferson Smurfit
Corporation stock option plan. The increases (decreases) in net sales for each
of the Company's segments are shown in the chart below.
7
<PAGE>
<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 September 30,
2000 compared to 1999
---------------------
Sales price and product mix............ $ 53 $18 $ (5) $ 3 $ 69
Sales volume........................... (2) 9 16 9 32
Closed or sold facilities.............. (14) (2) (1) (17)
---- ---- ---- --- ----
Net increase......................... $ 37 $27 $ 9 $11 $ 84
==== === ==== === ====
Nine months ended September 30,
2000 compared to 1999
---------------------
Sales price and product mix............ $227 $42 $153 $14 $436
Sales volume........................... 22 19 33 18 92
Closed or sold facilities.............. (52) (5) (4) (61)
---- ---- ---- --- ----
Net increase......................... $197 $61 $181 $28 $467
==== === ==== === ====
</TABLE>
Containerboard and Corrugated Containers Segment
------------------------------------------------
Net sales of $481 million for the three months ended September 30, 2000
increased by 8% compared to last year and profits declined by $14 million to $45
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 plant closures and the sale in October 1999 of
Company timberlands. While the higher average sales prices were favorable to
last year, profits decreased primarily as a result of the negative impact of the
mill downtime taken for internal inventory management and maintenance and higher
energy cost. Cost of goods sold as a percent of net sales increased to 83% for
the three months ended September 30, 2000 compared to 81% for the same period
last year due primarily to the effects of the high level of mill downtime.
On average, linerboard prices for the third quarter of 2000 were higher than
last year by 12% and the average price of corrugated containers was higher by
13%. Containerboard production for the third quarter of 2000 declined 22%
compared to last year due to the higher levels of downtime. Shipments of
corrugated containers increased 1% compared to last year. Solid bleached sulfate
("SBS") prices increased 4% compared to last year and sales volume declined by
4%.
For the nine months ended September 30, 2000, net sales of $1,453 million
increased by 16% compared to last year and profits improved by $33 million to
$163 million. On average, linerboard prices were higher than last year by 18%
and the average price of corrugated containers was higher by 20%.
Containerboard production for the nine months ended September 30, 2000 decreased
10% due to the downtime. Shipments of corrugated containers were comparable to
last year. The average sales price of SBS increased 6% compared to last year
while sales volume was lower by 2%. Profits increased due to the higher average
sales prices, although the mill downtime and higher energy cost partially offset
the sales price improvements. Cost of goods sold as a percent of net sales
decreased to 82% for the nine months ended September 30, 2000 compared to 85%
for the same period last year due primarily to the higher average sales prices.
Folding Cartons and Boxboard Segment
------------------------------------
Net sales of $239 million for the three months ended September 30, 2000
increased by 13% compared to last year and profits increased by $9 million to
$24 million. The sales and profit increases were due primarily to higher
average sales prices for folding cartons and boxboard and higher shipments of
folding cartons. On average, boxboard sales prices were 14% higher and folding
carton sales prices were 7% higher than last year. Folding carton shipments
increased 5% compared to last year. Reclaimed fiber cost
8
<PAGE>
was comparable to last year. Cost of goods sold as a percent of net sales
decreased to 83% for the three months ended September 30, 2000 compared to 85%
for the same period last year due primarily to the higher sales prices.
For the nine months ended September 30, 2000 net sales of $678 million increased
by 10% compared to last year and profit improved $12 million to $61 million. On
average, boxboard sales prices were 11% higher and folding carton sales prices
were 6% higher than last year. Folding carton shipments increased 2% and
boxboard shipments increased 9% compared to last year. Increases in the cost of
materials and higher converting costs partially offset the improvements in sales
price and product mix. Cost of goods sold as a percent of net sales for the
nine months ended September 30, 2000 was 84%, comparable to the same period last
year.
Reclamation Segment
-------------------
Net sales of $139 million for the three months ended September 30, 2000
increased by 7% compared to last year due to higher sales volume. On average,
reclaimed fiber prices were lower than last year due primarily to reduced demand
for old corrugated containers ("OCC") resulting from the high level of mill
downtime taken by the containerboard industry. Old newsprint ("ONP") prices, on
the other hand, were higher than last year. Export shipments improved in the
third quarter. Total tons of fiber reclaimed and brokered increased 3% compared
to last year. Cost of goods sold as a percent of net sales increased to 92% for
the three months ended September 30, 2000 compared to 89% for the same period
last year due primarily to the lower average sales prices. As a result, profits
for the three months ended September 30, 2000 decreased $2 million.
For the nine months ended September 30, 2000 net sales of $477 million increased
61% compared to last year. Reclaimed fiber prices for the nine months ended
September 30, 2000 were higher than last year. Compared to last year, the
average prices for OCC and ONP were higher by $20 per ton and $30 per ton,
respectively. Total tons of fiber reclaimed and brokered increased 3% compared
to last year. For the nine month period, profits improved from $10 million in
1999 to $22 million in 2000. Cost of goods sold as a percent of net sales
increased to 91% for the nine months ended September 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 $80 million for the three months ended September 30,
2000 increased by 16% 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. Profits increased by
$1 million.
For the nine months ended September 30, 2000 net sales of $229 million increased
by 14% compared to last year due to the higher average sales prices and product
mix and sales volume. Profits declined $2 million due primarily to the higher
cost of reclaimed fiber.
Costs and Expenses
------------------
The Company's overall cost of goods sold as a percent of net sales for the three
and nine month periods ended September 30, 2000 were each comparable to last
year. The higher cost of reclaimed fiber and the effects of the high level of
mill downtime in 2000 offset the effects of higher sales prices.
Selling and administrative expenses as a percent of net sales for the three
months ended September 30 declined from 9% in 1999 to 7% in 2000, and for the
nine months ended September 30 declined from 10% in 1999 to 8% in 2000. In each
case, the decline was due primarily to the higher sales prices in 2000. For the
nine months ended September 30, 1999, the expense included $26 million related
to the cashless exercise of SSCC stock options under the Jefferson Smurfit
Corporation stock option plan.
Interest expense, net for the three and nine month periods ended September 30,
2000 declined compared to last year due primarily to lower average outstanding
debt levels in 2000. The Company's overall average
9
<PAGE>
effective interest rates for the three and nine month periods ended September
30, 2000 were higher than last year by 0.5%. Interest expense, net for the three
and nine month periods ended September 30, 2000 included $13 million and $39
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.
Benefit from (provision for) income taxes for the three month and nine month
periods ended September 30, 2000 differed from the federal statutory tax rate
due to several factors, the most significant of which was state income taxes.
Statistical Data
<TABLE>
<CAPTION>
(In thousands of tons, except as noted) Three months ended Nine months ended
September 30, September 30,
------------------------- ------------------------
2000 1999 2000 1999
------ ------ ------ ------
<S> <C> <C> <C> <C>
Mill production:
Containerboard............................... 312 401 1,064 1,184
Solid bleached sulfate....................... 51 50 146 141
Recycled boxboard............................ 188 186 571 561
Corrugated shipments (billion sq. ft.).......... 7.0 7.2 21.6 21.8
Folding carton shipments........................ 154 147 445 434
Fiber reclaimed and brokered.................... 1,705 1,648 5,036 4,869
</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 September 30, 2000, approximately $46 million
(65%) 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 September 30, 2000 of approximately $25 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 nine months ended September 30, 2000, cash provided by operating
activities of $133 million, proceeds of $7 million received from SSCC in partial
repayment of its intercompany loan and proceeds of $8 million from property
disposals were used primarily to fund property additions of $80 million and net
repayment of debt of $61 million. Property additions include approximately $39
million of expenditures as planned under the Cluster Rule (as discussed in the
JSCE 1999 10-K).
10
<PAGE>
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.
On October 26, 2000 the stockholders of Stone Container Corporation ("Stone")
approved an Agreement and Plan of Merger among SSCC, SCC Merger Co. and Stone
pursuant to which each share of issued and outstanding $1.75 Series E Cumulative
Convertible Exchangeable Preferred Stock of Stone (the "Stone Preferred Stock")
will be converted into the right to receive one share of $1.75 Series A
Cumulative Convertible Exchangeable Preferred Stock of SSCC (the "SSCC Preferred
Stock") plus a cash payment from SSCC equal to the accrued and unpaid dividends
on each outstanding share of Stone Preferred Stock, less $0.12 to cover certain
transaction related expenses. It is anticipated that the merger transaction
will be completed on November 15, 2000, and that the cash payment per share of
Stone Preferred Stock will be $6.4425, resulting in total cash payments by SSCC
of approximately $30 million. Following the completion of the merger
transaction, the holders of the SSCC Preferred Stock will be entitled to
dividends of $0.4375 per quarter, payable in cash except in certain
circumstances, with the first dividend to be paid on February 15, 2001. SSCC
will fund the approximately $30 million cash portion of the merger consideration
and future dividend payments on the SSCC Preferred Stock through an intercompany
loan from the Company, which will be funded by cash from operations and
borrowings under the JSC(US) Credit Agreement.
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 and other capital expenditures.
The Company expects to use any excess cash provided by operations to make
further debt reductions. As of September 30, 2000, JSC(U.S.) had $517 million
of unused borrowing capacity under the JSC(U.S.) Credit Agreement and $88
million of unused borrowing capacity under its $315 million accounts receivable
securitization program, subject to JSC(U.S.)'s level of eligible accounts
receivable.
Prospective Accounting Standards
In 1998, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 133 ("SFAS No. 133"), "Accounting for Derivative
Instruments and Hedging Activities". SFAS No. 133 requires that all derivative
instruments be recorded on the balance sheet at fair value. SFAS No. 133 is
required to be adopted effective January 1, 2001 for companies with fiscal years
ending December 31, 2000. The Company is currently assessing what the impact of
SFAS No. 133 will be on its earnings and financial position.
In 1999, the Securities and Exchange Commission staff issued Staff Accounting
Bulletin No. 101, ("SAB 101") "Revenue Recognition in Financial Statements".
SAB 101 clarifies the basic principles of revenue recognition in existing
generally accepted accounting principles. SAB 101 is required to be implemented
no later than the fourth quarter of fiscal years beginning after December 15,
1999. The Company anticipates no effect on income from operations or financial
position from the adoption of SAB 101.
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In September 2000, the Emerging Issues Task Force reached a consensus on Issue
No. 00-10 ("EITF 00-10"), "Accounting for Shipping and Handling Fees and Costs".
EITF 00-10 implementation is consistent with the requirements of SAB 101. The
Company intends to adopt EITF 00-10 in the fourth quarter and reclassify
shipping and handling costs from net sales. The reclassification will have no
effect on income from operations or financial position.
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 nine months ended September 30, 2000.
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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.
10.1 Third Amendment of Amended and Restated Credit Agreement dated as of
March 22, 2000, among SSCC, JSCE, Inc., JSC(U.S.) and the banks party
thereto (incorporated by reference to Exhibit 10.1 to SSCC's Quarterly
Report on Form 10-Q for the quarter ended September 30, 2000).
10.2 Fourth Amendment of Amended and Restated Credit Agreement dated as of
July 31, 2000, among SSCC, JSCE, Inc., JSC(U.S.) and the banks party
thereto (incorporated by reference to Exhibit 10.2 to SSCC's Quarterly
Report on Form 10-Q for the quarter ended September 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: November 9, 2000 /s/ Paul K. Kaufmann
----------------- --------------------------------
Paul K. Kaufmann
Vice President and
Corporate Controller
(Principal Accounting Officer)
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