**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 
| **ý** | ** ** | **Quarterly Report Pursuant to  Section 13 or 15(d) of the Securities Exchange Act of 1934.**  |
|------------|------------|----------------------------------------------------------------------------------------------------------|
|       |       |                                                                                                     |
| **o**      | ** ** | **Transition Report Pursuant to  Section 13 or 15(d) of the Securities Exchange Act of 1934.** |

 

**For Quarter Ended June 30, 2005**

 

**Commission File Number 1-3439**

 

**SMURFIT-STONE CONTAINER ENTERPRISES,INC.**

(Exact name of registrant as specified in its charter)

 
| **Delaware**                                                          | ** ** | **36-2041256**                    |
|-----------------------------------------------------------------------|------------|-----------------------------------|
| (State or other jurisdiction of                                       |       | (IRS Employer Identification No.) |
| incorporation or organization)                                        |       |                              |
|                                                                  |       |                              |
| **150  North Michigan Avenue, Chicago, Illinois 60601**     |
| (Address of principal executive  offices)   (Zip Code) |
|                                                                  |       |                              |
| **(312) 346-6600**                                                    |
| (Registrant’s telephone number, including area code)             |
|                                                                  |       |                              |
|                                                                  |       |                              |
| (Former name, former address and former fiscal year,  if              |
| changed since last report)                                            |

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 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 suchreports), and (2) has been subject to such filing requirements for thepast 90 days.   Yes   ý    No   o

 

Indicateby check mark if the registrant is an accelerated filer (as defined in Rule 12b-2of the Act).   Yes   o    No   ý

 

APPLICABLE ONLY TOCORPORATE ISSUERS:

 

As of August 4, 2005,the registrant had outstanding 770 shares of common stock, $.01 par value pershare, all of which are owned by Smurfit-Stone Container Corporation.

 

The registrant meets theconditions set forth in General Instruction (H) (1) (a) and (b) ofForm 10-Q and is therefore filing this form with the reduced disclosureformat permitted thereby.

 

 

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**PART - FINANCIAL INFORMATION**

 

**Item 1. FinancialStatements**

 

**SMURFIT-STONECONTAINER ENTERPRISES, INC.**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

**(Unaudited)**

 
| ** **                                 | ** ** | **Three Months Ended** |       | **Six Months Ended** | ** ** |
|--------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                 | ** ** | **June 30,**      |       | **June 30,**    | ** ** |
| **(In millions)**                          | ** ** | **2005**               | ** ** | **2004**             |       | **2005** | ** ** | **2004** | ** ** |
| Net sales                                  | ** ** | **$**                  | **2,153**  | ** **           | $          | 2,038 |   | **$** | **4,246** | ** ** | $ | 3,980 |   |
| Costs and  expenses                        |       |                   | ** ** |                 |       |   | ** ** |   |   |
| Cost of goods  sold                        | ** ** | **1,864**              | ** ** | 1,782                |       | **3,699** | ** ** | 3,532 |   |
| Selling and  administrative expenses       | ** ** | **193**                | ** ** | 191                  |       | **389** | ** ** | 391 |   |
| Restructuring  charges                     | ** ** | **3**                  | ** ** | 2                    |       | **4** | ** ** | 17 |   |
| Income from  operations                    | ** ** | **93**                 | ** ** | 63                   |       | **154** | ** ** | 40 |   |
| Other income  (expense)                    |       |                   | ** ** |                 |       |   | ** ** |   |   |
| Interest  expense, net                     | ** ** | **(87**                | **)**      | (85                  | )          | **(173** | **)** | (171 | ) |
| Interest income  from SSCC                 |       |                   | ** ** | 21                   | ** ** |   | ** ** | 41 |   |
| Other, net                                 | ** ** | **1**                  | ** ** | 7                    |       | **(2** | **)** | 12 |   |
| Income (loss)  before income taxes         | ** ** | **7**                  | ** ** | 6                    |       | **(21** | **)** | (78 | ) |
| Benefit from  (provision for) income taxes | ** ** | **(3**                 | **)**      | ** **           |       | **9** |   | 33 |   |
| Net income  (loss)                         | ** ** | **$**                  | **4**      | ** **           | $          | 6 |   | **$** | **(12** | **)** | $ | (45 | ) |

 

See notes toconsolidated financial statements.

 

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**SMURFIT-STONECONTAINER ENTERPRISES, INC.**

**CONSOLIDATEDBALANCE SHEETS**

 
| ** **                                                                                                                    | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| **(In millions, except share  data)**                                                                                         | ** ** | **2005**          | ** ** | **2004**              | ** ** |
| ** **                                                                                                                    | ** ** | **(Unaudited)**   | ** ** | ** **            | ** ** |
| **Assets**                                                                                                                    |       |              | ** ** |                  |       |
|                                                                                                                          |       |              | ** ** |                  |       |
| Current assets                                                                                                                |       |              | ** ** |                  |       |
| Cash and cash  equivalents                                                                                                    | ** ** | **$**             | **7**      | ** **            | $          | 6 |   |
| Receivables,  less allowances of $10 in 2005 and $12 in 2004                                                                  | ** ** | **313**           | ** ** | 254                   |       |
| Retained  interest in receivables sold                                                                                        | ** ** | **140**           | ** ** | 158                   |       |
| Inventories,  including amounts valued under LIFO method                                                                      |       |              | ** ** |                  |       |
| Work-in-process  and finished goods                                                                                           | ** ** | **270**           | ** ** | 265                   |       |
| Materials and  supplies                                                                                                       | ** ** | **513**           | ** ** | 521                   |       |
| ** **                                                                                                                    |       | **783**           |       | 786                   | ** ** |
| Deferred income  taxes                                                                                                        | ** ** | **148**           | ** ** | 142                   |       |
| Prepaid expenses  and other current assets                                                                                    | ** ** | **68**            | ** ** | 60                    |       |
| Total current  assets                                                                                                         | ** ** | **1,459**         | ** ** | 1,406                 |       |
| Net property,  plant and equipment                                                                                            | ** ** | **4,567**         | ** ** | 4,638                 |       |
| Timberland, less  timber depletion                                                                                            | ** ** | **44**            | ** ** | 44                    |       |
| Goodwill                                                                                                                      | ** ** | **3,309**         | ** ** | 3,301                 |       |
| Other assets                                                                                                                  | ** ** | **322**           | ** ** | 336                   |       |
| ** **                                                                                                                    |       | **$**             | **9,701**  |                  | $          | 9,725 | ** ** |
| **Liabilities  and Stockholder’s Equity**                                                                                |       |              | ** ** |                  |       |
|                                                                                                                          |       |              | ** ** |                  |       |
| Current  liabilities                                                                                                          |       |              | ** ** |                  |       |
| Current  maturities of long-term debt                                                                                         | ** ** | **$**             | **25**     | ** **            | $          | 19 |   |
| Accounts payable                                                                                                              | ** ** | **606**           | ** ** | 604                   |       |
| Accrued  compensation and payroll taxes                                                                                       | ** ** | **188**           | ** ** | 191                   |       |
| Interest payable                                                                                                              | ** ** | **95**            | ** ** | 95                    |       |
| Other current  liabilities                                                                                                    | ** ** | **164**           | ** ** | 207                   |       |
| Total current  liabilities                                                                                                    | ** ** | **1,078**         | ** ** | 1,116                 |       |
| Long-term debt,  less current maturities                                                                                      | ** ** | **4,554**         | ** ** | 4,479                 |       |
| Other long-term  liabilities.                                                                                                 | ** ** | **1,015**         | ** ** | 1,048                 |       |
| Deferred income  taxes                                                                                                        | ** ** | **942**           | ** ** | 966                   |       |
| Stockholder’s  equity                                                                                                    |       |              | ** ** |                  |       |
| Common stock,  par value $.01 per share; 1,000 shares authorized, 770 issued and outstanding  in 2005 and 2004, respectively. |       |              | ** ** |                  |       |
| Additional  paid-in capital                                                                                                   | ** ** | **3,596**         | ** ** | 3,587                 |       |
| Retained  earnings (deficit)                                                                                                  | ** ** | **(1,173**        | **)**      | (1,157                | )          |
| Accumulated  other comprehensive income (loss)                                                                                | ** ** | **(311**          | **)**      | (314                  | )          |
| Total stockholder’s  equity                                                                                              | ** ** | **2,112**         | ** ** | 2,116                 |       |
| ** **                                                                                                                    |       | **$**             | **9,701**  |                  | $          | 9,725 | ** ** |

 

See notes toconsolidated financial statements.

 

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**SMURFIT-STONECONTAINER ENTERPRISES, INC.**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(Unaudited)**

 
| **Six Months Ended June 30,  (In millions)**                                             | ** ** | **2005** | ** ** | **2004**   | ** ** |
|-----------------------------------------------------------------------------------------------|------------|----------|------------|------------|------------|
| **Cash  flows from operating activities**                                                     |       |     | ** ** |       |       |
| Net loss                                                                                      | ** ** | **$**    | **(12**    | **)**      | $          | (45 | ) |
| Adjustments to  reconcile net loss to net cash provided by (used for) operating activities    |       |     | ** ** |       |       |
| Depreciation,  depletion and amortization                                                     | ** ** | **207**  | ** ** | 209        |       |
| Amortization of  deferred debt issuance costs                                                 | ** ** | **4**    | ** ** | 6          |       |
| Deferred income  taxes                                                                        | ** ** | **(27**  | **)**      | (40        | )          |
| Pension and  postretirement benefits                                                          | ** ** | **(20**  | **)**      | (18        | )          |
| Non-cash  restructuring charges                                                               | ** ** | **2**    | ** ** | 7          |       |
| Non-cash foreign  currency gains                                                              | ** ** | **(4**   | **)**      | (10        | )          |
| Non-cash interest  income from SSCC                                                           |       |     |       | (41        | )          |
| Change in  current assets and liabilities, net of effects from acquisitions and  dispositions |       |     | ** ** |       |       |
| Receivables and  retained interest in receivables sold                                        | ** ** | **(44**  | **)**      | (99        | )          |
| Inventories                                                                                   | ** ** | **(1**   | **)**      | (16        | )          |
| Prepaid expenses  and other current assets                                                    | ** ** | **1**    | ** ** | (14        | )          |
| Accounts payable  and accrued liabilities                                                     | ** ** | **(45**  | **)**      | 23         |       |
| Interest payable                                                                              | ** ** | **1**    | ** ** | 1          |       |
| Other, net                                                                                    | ** ** | **3**    | ** ** | 6          |       |
| Net cash  provided by (used for) operating activities                                         | ** ** | **65**   | ** ** | (31        | )          |
| **Cash  flows from investing activities**                                                     |       |     | ** ** |       |       |
| Expenditures for  property, plant and equipment                                               | ** ** | **(139** | **)**      | (81        | )          |
| Proceeds from  property and timberland disposals and sale of businesses                       | ** ** | **6**    | ** ** | 12         |       |
| Payments on  acquisitions                                                                     | ** ** | **(5**   | **)**      |       |       |
| Notes receivable  from SSCC                                                                   |       |     | ** ** | 6          |       |
| Net cash used  for investing activities                                                       | ** ** | **(138** | **)**      | (63        | )          |
| **Cash flows  from financing activities**                                                     |       |     | ** ** |       |       |
| Proceeds from  long-term debt                                                                 | ** ** | **72**   | ** ** |       |       |
| Net borrowings  of debt                                                                       | ** ** | **7**    | ** ** | 11         |       |
| Net borrowings  under accounts receivable securitization programs                             |       |     | ** ** | 46         |       |
| Dividends paid                                                                                | ** ** | **(4**   | **)**      | (4         | )          |
| Capital  contribution from SSCC                                                               | ** ** | **1**    | ** ** | 45         |       |
| Deferred debt  issuance costs                                                                 | ** ** | **(2**   | **)**      | (2         | )          |
| Net cash  provided by financing activities                                                    | ** ** | **74**   | ** ** | 96         |       |
| **Increase  in cash and cash equivalents**                                                    | ** ** | **1**    | ** ** | 2          |       |
| Cash and cash  equivalents                                                                    |       |     | ** ** |       |       |
| Beginning of  period                                                                          | ** ** | **6**    | ** ** | 12         |       |
| End of period                                                                                 | ** ** | **$**    | **7**      | ** ** | $          | 14 |   |

 

See notes toconsolidated financial statements.

 

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**SMURFIT-STONECONTAINER ENTERPRISES, INC.**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

(Tabular amounts in millions)

 

**1.  SignificantAccounting Policies**

 

Theaccompanying consolidated financial statements and notes thereto ofSmurfit-Stone Container Enterprises, Inc. (“SSCE” or the “Company”) havebeen prepared in accordance with the instructions to Form 10-Q and reflectall adjustments which management believes necessary (which include only normalrecurring accruals) to present fairly the Company’s financial position, resultsof operations and cash flows.  Thesestatements, however, do not include all information and footnotes necessary fora complete presentation of financial position, results of operations and cashflows in conformity with U.S. generally accepted accounting principles.  Interim results may not necessarily beindicative of results that may be expected for any other interim period or forthe year as a whole.  These financialstatements should be read in conjunction with the audited consolidatedfinancial statements and footnotes included in the SSCE Annual Report on Form 10-Kfor the year ended December 31, 2004 (“10-K”) filed March 8, 2005with the Securities and Exchange Commission (“SEC”).

 

SSCE is a wholly-owned subsidiary ofSmurfit-Stone Container Corporation (“SSCC”). SSCE has domestic and international operations.

 

Prior to November 1,2004, SSCC owned 100% of the equity interest in JSCE, Inc. (“JSCE”) andStone Container Corporation (“Stone”). JSCE owned 100% of the equity interest in Jefferson Smurfit Corporation(U.S.) (“JSC(U.S.)”) and was the guarantor of the senior unsecured indebtednessof JSC(U.S.).  JSCE had no operationsother than its investment in JSC(U.S.). On November 1, 2004, JSCE merged with and into JSC(U.S.), withJSC(U.S.) as the surviving company, and then JSC(U.S.) merged with and intoStone, with Stone as the surviving company (the “Merger”), principally toconsolidate debt financing activities of the Company and its subsidiaries.  Stone was simultaneously renamed SSCE.

 

Stone and JSC(U.S.) werewholly-owned subsidiaries of SSCC and, therefore, the historical cost basis ofthe acquired entity, JSC(U.S.) carried over into SSCE.  As a result of the Merger, the financialstatements of the Company for periods presented prior to the merger have beenrestated to include the combined results of Stone and JSC(U.S.).  In addition, notes receivable due from SSCCwere settled in November, 2004.  TheMerger did not impact the operating activities of the merged companies, whichcontinue to do business as SSCC.

 

Reconciliations of netsales and net income (loss) previously reported by Stone and JSCE to amountsreported in the SSCE consolidated statements of operations are as follows:

 
| ** **   | ** ** | **Three months ended** | ** ** | **Six months ended**   | ** ** |
|--------------|------------|------------------------|------------|------------------------|------------|
| ** **   | ** ** | **June 30, 2004** | ** ** | **June 30, 2004** | ** ** |
| ** **   | ** ** | **Net Sales**          | ** ** | **Net Income  (Loss)** | ** ** | **Net Sales** | ** ** | **Net Income  (Loss)** | ** ** |
|         |       |                   |       |                   |       |   |   |   |   |
| Stone        |       | $                      | 1,351      |                   | $          | (7 | ) | $ | 2,626 |   | $ | (52 | ) |
| JSCE         |       | 958                    |       | 13                     |       | 1,865 |   | 7 |   |
| Eliminations |       | (271                   | )          |                   |       | (511 | ) |   |   |
| SSCE         |       | $                      | 2,038      |                   | $          | 6 |   | $ | 3,980 |   | $ | (45 | ) |

 

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**2.  Reclassifications**

 

Certainprior year amounts have been reclassified to conform to the current yearpresentation.

 

**3.  Stock-BasedCompensation**

 

The Company adopted thefair value recognition provisions of Statement of Financial AccountingStandards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation,”effective as of January 1, 2003. The Company selected the prospective transition method as allowed inSFAS No. 148, “Accounting for Stock-Based Compensation-Transition andDisclosure,” which requires expensing new option grants prospectively,beginning in the year of adoption. Because the prospective transition method was used and awards vest overthree to eight years, the 2004 and 2005 expense is less than what would havebeen recognized if the fair value-based method had been applied to all awardssince the original effective date of SFAS No. 123.

 

The following tableillustrates the effect on net income (loss) if the fair value-based method hadbeen applied to all outstanding and unvested awards in each period.

 
| ** **                                                                                                                                    | ** ** | **Three months ended  June 30,** | ** ** | ** ** | ** ** | **Six months ended  June 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|------------|------------|-------------------------------------|------------|
| ** **                                                                                                                                    | ** ** | **2005**                              | ** ** | **2004**   | ** ** | ** **                          | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net income  (loss), as reported                                                                                                               |       | $                                     | 4          |       | $          | 6                                   |       |   |   | $ | (12 | ) | $ | (45 | ) |
| Add: Stock-based  employee compensation expense included in reported net income (loss, net of) related  tax effects                           |       | 1                                     |       | 1          |       |                                |       | 3 |   | 3 |   |
| Deduct: Total  stock-based employee compensation expense determined under fair value-based  method for all awards, net of related tax effects |       | (3                                    | )          | (3         | )          |                                |       | (6 | ) | (7 | ) |
|                                                                                                                                          |       |                                  |       |       |       |                                |       |   |   |   |   |
| Pro forma net  income (loss)                                                                                                                  |       | $                                     | 2          |       | $          | 4                                   |       |   |   | $ | (15 | ) | $ | (49 | ) |

 

In April 2005, the SEC announced that itwould defer the required implementation of SFAS No. 123(R), “Share-BasedPayment,” to January 1, 2006 for companies with fiscal years ending on December 31.  The Company plans to adopt SFAS No. 123(R)on January 1, 2006.  Had the Companyadopted SFAS No. 123(R) in prior periods, the impact of that standard wouldhave approximated the impact of SFAS No. 123 as described in the pro-formanet income (loss) disclosed above.

 

**4.  Restructuringand Exit Liabilities**

 

The Company has recordedvarious restructuring charges related to the rationalization of its containerboardmill and converting operations, including the termination of employees andliabilities for lease commitments at the closed facilities.  The Company recorded $3 million and $4million of restructuring charges during the three and six months ended June 30,2005, respectively, including a $2 million non-cash write down to adjust assetsto estimated net realizable value and severance and benefits for terminatedemployees.  All charges related to theclosure of a converting facility, which was announced in the fourth quarter of2004.

 

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The Company recordedrestructuring charges of $2 million and $17 million for the three and sixmonths ended June 30, 2004, respectively, related to the closure of sevenconverting facilities and exit from its Indonesian operations.

 

At December 31,2004, the Company had $33 million of exit liabilities related to therestructuring of operations.  For thethree and six months ended June 30, 2005, the Company had $4 million and $9million, respectively, of cash disbursements related to these exit liabilities.

 

**5.  Other,Net**

 

For the three and sixmonths ended June 30, 2005, the Company recorded non-cash foreign currencyexchange gains of $5 million and $4 million, respectively, related to itsoperations in Canada.  For the three andsix months ended June 30, 2004, the Company recorded non-cash foreigncurrency exchange gains of $7 million and $10 million, respectively, related toits operations in Canada.

 

**6.  Accounts Receivable Securitization Programs**

 

At June 30, 2005 andDecember 31, 2004, $613 million and $624 million, respectively, ofreceivables had been sold under two accounts receivable securitizationprograms, of which the Company retained a subordinated interest.  The off-balance sheet Stone ReceivablesCorporation debt and funding received from the Canadian accounts receivableprogram totaled $464 million and $451 million, respectively, as of those dates.

 

**7.  Long-Term Debt**

 

In the second quarter of2005, the Company issued environmental improvement revenue refunding bonds inthe amount of $72 million.  New bonds inthe principal amount of $30 million were issued at an interest rate of 5.125%and are due in 2013.  New bonds in theprincipal amount of $42 million were issued at an interest rate of 5.25% andare due in 2015.  The proceeds of thesebonds were used to repay revenue refunding bonds at interest rates of 7.875%and 8.25%, respectively.

 

As of June 30, 2005, the Company was incompliance with all of the financial covenants contained in its creditagreement entered into in November 2004. However, if business conditions do not improve, the Company may need toseek an amendment or waiver to avoid violating certain financial covenantscontained in its credit agreement.  TheCompany believes that it could obtain such an amendment or waiver, ifnecessary.  However, if there is aviolation of any of the financial covenants and if the Company is notsuccessful in obtaining an amendment or waiver, a default would occur under thecredit agreement, which could result in a material adverse impact on theCompany’s financial condition.

 

**8.  Guarantees**

 

The Company has certainwood chip processing contracts, entered into prior to January 1, 2003,extending from 2010 through 2018 with minimum purchase commitments.  As part of the agreements, the Companyguarantees the third party contractor’s debt outstanding and has a securityinterest in the chipping equipment.  At June 30,2005, the maximum potential amount of future payments related to theseguarantees was approximately $41 million and decreases ratably over the life ofthe contracts.  In the event theguarantees on these contracts were called, proceeds from the liquidation of thechipping

 

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equipment would be basedon current market conditions and the Company may not recover in full theguarantee payments made.

 

**9.  EmployeeBenefit Plans**

 

The Company sponsorsnoncontributory defined benefit pension plans covering substantially all U.S.employees.  The Company also sponsorsnoncontributory and contributory defined benefit pension plans for its Canadianoperations.

 

The Company’spostretirement plans provide certain health care and life insurance benefitsfor all salaried as well as certain hourly employees.

 

The components of netperiodic benefit costs for the defined benefit plans and the components of thepostretirement benefit costs are as follows:

 
| ** **                                    | ** ** | **Three months ended June 30,** | ** ** | ** **         | ** ** | **Six months ended June 30,** | ** ** |
|-----------------------------------------------|------------|--------------------------------------|------------|--------------------|------------|------------------------------------|------------|
| ** **                                    | ** ** | **Defined**                          | ** ** | **Postretirement** | ** ** | ** **                         | ** ** | **Defined Benefit** | ** ** | **Postretirement** | ** ** |
| ** **                                    | ** ** | **Benefit Plans**                    | ** ** | **Plans**          | ** ** | ** **                         | ** ** | **Plans** | ** ** | **Plans** | ** ** |
| ** **                                    | ** ** | **2005**                             | ** ** | **2004**           | ** ** | **2005**                           | ** ** | **2004** | ** ** | ** ** | ** ** | **2005** | ** ** | **2004** | ** ** | **2005** | ** ** | **2004** | ** ** |
| Service cost                                  |       | $                                    | 21         |               | $          | 17                                 |       | $ | 2 |   | $ | 1 |   |   |   | $ | 41 |   | $ | 36 |   | $ | 4 |   | $ | 3 |   |
| Interest cost                                 |       | 47                                   |       | 45                 |       | 3                                  |       | 3 |   |   |   | 95 |   | 91 |   | 7 |   | 8 |   |
| Expected return on  plan assets               |       | (54                                  | )          | (47                | )          |                               |       |   |   |   |   | (105 | ) | (96 | ) |   |   |   |   |
| Amortization of  prior service cost (benefit) |       | 3                                    |       | 2                  |       |                               |       | (1 | ) |   |   | 5 |   | 4 |   | (1 | ) | (1 | ) |
| Amortization of  net loss                     |       | 15                                   |       | 12                 |       | 2                                  |       | 1 |   |   |   | 31 |   | 25 |   | 3 |   | 2 |   |
| Curtailments                                  |       |                                 |       | 1                  |       |                               |       |   |   |   |   |   |   | 2 |   |   |   |   |   |
| Multi-employer  plans                         |       | 1                                    |       | 2                  |       |                               |       |   |   |   |   | 3 |   | 4 |   |   |   |   |   |
| Net periodic benefit  cost                    |       | $                                    | 33         |               | $          | 32                                 |       | $ | 7 |   | $ | 4 |   |   |   | $ | 70 |   | $ | 66 |   | $ | 13 |   | $ | 12 |   |

 

The Company’s 2005expected contributions to its qualified defined benefit plans and benefitpayments to its non-qualified defined benefit plans and postretirement plansare not expected to be materially different from the amounts disclosed at December 31,2004.

 

**10.  DerivativeInstruments and Hedging Activities**

 

TheCompany’s derivative instruments used for its hedging activities are designatedas cash flow hedges and relate to minimizing exposures to fluctuations in theprice of commodities used in its operations, the movement in foreign currencyexchange rates and the fluctuations in the interest rate on debt.

 

**Commodity Derivative Instruments**

The Company usesderivative instruments, including fixed price swaps and options, to managefluctuations in cash flows resulting from commodity price risk in theprocurement of natural gas.  Theobjective is to fix the price of a portion of the Company’s purchases ofnatural gas used in the manufacturing process. The changes in the market value of such derivative instruments havehistorically been, and are expected to continue to be, highly effective atoffsetting changes in price of the hedged item. As of June 30, 2005, the maximum length of time over which theCompany was hedging its exposure to the variability in future cash flowsassociated with natural gas forecasted transactions was 18 months.  For the three and six months ended June 30,2005, the Company reclassified an immaterial amount and a $1 million loss (netof tax), respectively, from other comprehensive income (“OCI”) to cost of goodssold when the hedged items were

 

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recognized.  For the three and six months ended June 30,2004, the Company reclassified an immaterial amount from OCI to cost of goodssold when the hedged items were recognized. The fair value of the Company’s commodity derivative instruments at June 30,2005 was $17 million and was included in other current assets.

 

For the three and sixmonths ended June 30, 2005, the Company recorded a $3 million loss (net oftax) and a $3 million gain (net of tax), respectively, in cost of goods sold oncommodity derivative instruments related to the ineffective portion of thechange in fair value of certain derivative instruments not qualifying for hedgeaccounting.  For the three and six monthsended June 30, 2004, the Company recorded a $1 million loss (net of tax)and an immaterial amount, respectively, in cost of goods sold on commodityderivative instruments related to the ineffective portion of the change in fairvalue of certain derivative instruments not qualifying for hedge accounting.

 

For the three and sixmonths ended June 30, 2005, the Company recorded an immaterial amount anda $1 million loss (net of tax), respectively, in cost of goods sold on settledcommodity derivative instruments related to the ineffective portion of hedgesand derivative instruments not qualifying for hedge accounting.  For the three and six months ended June 30,2004, the Company recorded an immaterial amount in cost of goods sold onsettled commodity derivative instruments related to the ineffective portion ofhedges and derivative instruments not qualifying for hedge accounting.

 

**Foreign Currency Derivative Instruments**

The Company’s principalforeign exchange exposure is the Canadian dollar.  The Company uses foreign currency derivativeinstruments, including forward contracts and options, primarily to protectagainst Canadian currency exchange risk associated with expected future cashflows.  As of June 30, 2005, themaximum length of time over which the Company was hedging its exposure to thevariability in future cash flows associated with foreign currency was 18months.  For the three and six monthsended June 30, 2005, the Company reclassified an immaterial amount and a$2 million gain (net of tax), respectively, from OCI to cost of goods soldrelated to the recognition of the foreign currency derivative instruments.  For the three and six months ended June 30,2004, the Company reclassified an immaterial amount from OCI to cost of goodssold related to the recognition of the foreign currency derivativeinstruments.  The fair value of theCompany’s foreign currency derivative instruments at June 30, 2005 was $4million and was included in other current assets.  The change in fair value of these derivativeinstruments is recorded in OCI until the underlying transaction is recorded.

 

**Interest Rate Swap Contracts**

The Company uses interestrate swap contracts to manage interest rate exposure on $300 million of thecurrent Tranche B and Tranche C floating rate bank term debt, effectivelyfixing the interest rate at 4.3%.  These contractsextend until 2011, consistent with the maturity of the Company’s Tranche B andTranche C term loans.  Additionally, theCompany entered into forward starting interest rate swaps of $225 millionduring the second quarter of 2005 at a fixed rate of 4.75% to eliminate thevariability of future interest payments for a ten year period from February 2006through February 2016.  Changes inthe fair value of the interest rate swap contracts are expected to be highlyeffective in offsetting the fluctuations in the floating interest rate and arerecorded in OCI until the underlying transaction is recorded.  The accounting for the cash flow impact ofthe swap contracts is recorded as an adjustment to interest expense eachperiod.  For the three and six monthsended June 30, 2005, the Company reclassified a $1 million loss (net oftax) and a $2 million loss (net of tax), respectively, from OCI to interestexpense when the hedged items were recognized. The fair value of the Company’s interest rate swap contracts at June 30,2005 was $8 million and was included in other current liabilities.

 

The cumulative deferredhedge loss on all derivative instruments was $4 million (net of tax) at June 30,2005, including a $2 million gain (net of tax) on commodity instruments,  $1 million loss (net of tax) on foreigncurrency derivative instruments and $5 million loss (net of tax) on interestrate swap contracts.   The Companyexpects to reclassify a $1 million loss (net of tax) into cost of goods soldwithin the next 12 months, related to the commodity and foreign currencyderivative instruments.

 

8

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**11.  ComprehensiveIncome (Loss)**

 

Comprehensive income (loss) is asfollows:

 
| ** **                                        | ** ** | **Three months ended  June 30,** | ** ** | **Six months ended  June 30,** | ** ** |
|---------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                                        | ** ** | **2005**                              | ** ** | **2004**                            | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net income  (loss)                                |       | $                                     | 4          |                                | $          | 6 |   | $ | (12 | ) | $ | (45 | ) |
| Other  comprehensive income (loss), net of tax:   |       |                                  |       |                                |       |   |   |   |   |
| Net changes in  fair value of hedging instruments |       | (11                                   | )          |                                |       | 1 |   |   |   |
| Net hedging loss  reclassified into earnings      |       | 1                                     |       |                                |       | 1 |   |   |   |
| Foreign currency  translation adjustment          |       |                                  |       | (1                                  | )          | 1 |   | (1 | ) |
| Comprehensive  income (loss)                      |       | $                                     | (6         | )                                   | $          | 5 |   | $ | (9 | ) | $ | (46 | ) |

 

**12.  Goodwill and Other Intangible Assets**

 

InDecember 2004, the Company acquired 15% of Innovative Packaging Corp. (“IPC”),a corrugated container facility in Milwaukee, Wisconsin for $13 million.  Previously, the Company owned 85% of IPC and,as a result of the acquisition, now owns 100%. The cost to acquire the remaining 15% of IPC eliminated the Company’sminority interest liability of $1 million with the remaining balance of $12million preliminarily allocated to intangible assets.  In June 2005, the Company completed it’sallocation of the purchase price resulting in the reclassification of $8million from intangible assets to goodwill. The remaining $4 million of intangible assets primarily representcustomer relationships with lives of 12 years. The $8 million of goodwill is reflected in the Containerboard andCorrugated Containers segment.

 

**13.  Business Segment Information**

 

The Company has two reportable segments:  (1) Containerboard and CorrugatedContainers and (2) Consumer Packaging. The Containerboard and Corrugated Containers segment is highlyintegrated.  It includes a system ofmills and plants that produces a full line of containerboard that is convertedinto corrugated containers.  Corrugatedcontainers are used to transport such diverse products as home appliances,electric motors, small machinery, grocery products, produce, books, tobacco andfurniture.  The Consumer Packagingsegment is also highly integrated.  Itincludes a system of mills and plants that produces a broad range of coatedrecycled boxboard that is converted into folding cartons.  Folding cartons are used primarily to protectand market products such as food, fast food, detergents, paper products,beverages, health and beauty aids and other consumer products, while providingpoint of purchase advertising.  Inaddition, the Consumer Packaging segment converts kraft and specialty paperinto multiwall bags and consumer bags that are designed to ship and protect awide range of industrial and consumer products including fertilizers,chemicals, concrete and pet and food products. The Consumer Packaging segment also produces flexible packaging, paperand metalized paper labels and heat transfer labels used in a wide range ofconsumer applications.

 

The Company evaluates performance and allocatesresources based on profit or loss from operations before income taxes, interestexpense and other non-operating gains and losses.  The accounting policies of the reportablesegments are the same as those described in the summary of significantaccounting policies in the Company’s 10-K. Intersegment sales and transfers are recorded at market prices.

 

9

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The Company’s reportable segments are strategicbusiness units that offer different products. The reportable segments are each managed separately because theymanufacture distinct products.  Otherincludes corporate related items and two non-reportable segments, includingReclamation and Innovation to Implementation (i2iSM).  Corporate related items include expenses notallocated to reportable segments, including corporate expenses, restructuringcharges, non-cash foreign currency gains or losses and interest expense.

 

A summary by business segment follows:

 
| ** **                        | ** ** | **Containerboard &  Corrugated  Containers** | ** ** | **Consumer  Packaging** | ** ** | **Other** | ** ** | **Total** | ** ** |
|-----------------------------------|------------|--------------------------------------------------|------------|-------------------------|------------|-----------|------------|-----------|------------|
| Three months  ended June 30, |       |                                             |       |                    |       |      |       |      |       |
| 2005                              |       |                                             |       |                    |       |      |       |      |       |
| Revenues from  external customers |       | $                                                | 1,626      |                    | $          | 414       |       | $         | 113        |   | $ | 2,153 |   |
| Intersegment  revenues            |       | 39                                               |       |                    |       | 74        |       | 113       |       |
| Segment profit  (loss)            |       | 92                                               |       | 23                      |       | (108      | )          | 7         |       |
|                              |       |                                             |       |                    |       |      |       |      |       |
| 2004                              |       |                                             |       |                    |       |      |       |      |       |
| Revenues from  external customers |       | $                                                | 1,528      |                    | $          | 410       |       | $         | 100        |   | $ | 2,038 |   |
| Intersegment revenues             |       | 35                                               |       |                    |       | 79        |       | 114       |       |
| Segment profit  (loss)            |       | 62                                               |       | 23                      |       | (100      | )          | (15       | )          |
|                              |       |                                             |       |                    |       |      |       |      |       |
| Six months ended  June 30,   |       |                                             |       |                    |       |      |       |      |       |
| 2005                              |       |                                             |       |                    |       |      |       |      |       |
| Revenues from  external customers |       | $                                                | 3,208      |                    | $          | 818       |       | $         | 220        |   | $ | 4,246 |   |
| Intersegment  revenues            |       | 76                                               |       |                    |       | 146       |       | 222       |       |
| Segment profit  (loss)            |       | 159                                              |       | 38                      |       | (218      | )          | (21       | )          |
|                              |       |                                             |       |                    |       |      |       |      |       |
| 2004                              |       |                                             |       |                    |       |      |       |      |       |
| Revenues from  external customers |       | $                                                | 2,969      |                    | $          | 821       |       | $         | 190        |   | $ | 3,980 |   |
| Intersegment  revenues            |       | 69                                               |       |                    |       | 147       |       | 216       |       |
| Segment profit  (loss)            |       | 54                                               |       | 44                      |       | (217      | )          | (119      | )          |

 

**14.  Contingencies**

 

In 2003, the Companysettled the antitrust class action cases pending against the Company, whichwere based on allegations of a conspiracy among containerboard manufacturersfrom 1993 to 1995.  The Company, alongwith other large linerboard manufacturers, is a defendant in ten lawsuitsbrought on behalf of numerous companies that opted out of these class actionsto seek their own recovery, nine of which have been consolidated for pretrialproceedings in the United States District Court for the Eastern District ofPennsylvania, and one of which has been remanded to Kansas District Court (the “DirectAction Cases”).  The Company settled theDirect Action Cases of two of our largest customers during the second quarterof 2005, and made aggregate settlement payments of approximately $11 million,which were charged against existing reserves. The Company is vigorously defending the remaining Direct ActionCases.  While the ultimate results of theDirect Action Cases cannot be predicted with certainty, the Company believesthe resolution of these cases will not have a material adverse effect on theCompany’s consolidated financial condition, results of operations or cashflows.

 

The Company’s past andpresent operations include activities which are subject to federal, state andlocal environmental requirements, particularly relating to air and waterquality.  The Company faces potential

 

10

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environmental liabilityas a result of violations of permit terms and similar authorizations that haveoccurred from time to time at its facilities. In addition, the Company faces potential liability for response costs atvarious sites for which it has received notice as being a potentiallyresponsible party (“PRP”) concerning hazardous substance contamination.  In estimating its reserves for environmentalremediation and future costs, the Company’s estimated liability reflects onlythe Company’s expected share after consideration for the number of other PRPsat each site, the identity and financial condition of such parties andexperience regarding similar matters.  Asof June 30, 2005, the Company had approximately $18 million reserved forenvironmental liabilities included primarily in other long-term liabilities in theconsolidated balance sheet.  The Companybelieves the liability recorded for these matters was adequately reserved at June 30,2005.

 

Ifall or most of the other PRPs are unable to satisfy their portion of thecleanup costs at one or more of the significant sites in which the Company isinvolved or the Company’s expected share increases, the resulting liabilitycould have a material adverse effect on the Company’s consolidated financialcondition, results of operations or cash flows.

 

The Company is a defendantin 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 orother proceedings against the Company cannot be predicted with certainty,management of the Company believes that the resolution of these matters willnot have a material adverse effect on its consolidated financial condition,results of operations or cash flows.

 

**15.  Subsequent Event**

 

On August 4, 2005,the Company announced plans to permanently close production capacity at threeNorth American containerboard mills as part of the Company's ongoing assessmentand restructuring efforts.  The Companywill permanently close the No. 2 paper machine at its Fernandina Beach,Florida, linerboard mill, its New Richmond, Quebec, linerboard mill and itsBathurst, New Brunswick, medium mill. The rationalization will result in a work force reduction ofapproximately 565 employees.  As a resultof these closures, the Company expects to take a pretax charge of approximately$302 million during the third quarter of 2005, approximately $260 million ofwhich are non-cash charges primarily to write down the assets of these mills toestimated net realizable value.  Thecharges are estimates that will be finalized during the third quarter.

 

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**ITEM 2.****                             MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

**FORWARD-LOOKINGSTATEMENTS**

 

Some information includedin this report may contain forward-looking statements within the meaning of Section 21Eof the Securities Exchange Act of 1934, as amended.  Although we believe that, in making any suchstatements, our expectations are based on reasonable assumptions, any suchstatement may be influenced by factors that could cause actual outcomes andresults to be materially different from those projected.  When used in this document, the words “anticipates,”“believes,” “expects,” “intends” and similar expressions as they relate to Smurfit-StoneContainer Enterprises, Inc. or its management, are intended to identifysuch forward-looking statements.  Theseforward-looking statements are subject to numerous risks anduncertainties.  There are importantfactors that could cause actual results to differ materially from those inforward-looking statements, certain of which are beyond our control.  These factors, risks and uncertaintiesinclude the following:

 

•                  the impact of general economicconditions in North America and in other locations in which we do business;

•                  general industry conditions,including competition and product and raw material prices;

•                  fluctuations in interest rates,exchange rates and currency values;

•                  unanticipated capital expenditurerequirements;

•                  legislative or regulatoryrequirements, particularly concerning environmental matters;

•                  access to capital markets;

•                  assumptions relating to pension andpostretirement costs;

•                  fluctuations in energy costs;

•                  fluctuations in wood fiber andreclaimed fiber costs;

•                  fluctuations in other costs,including freight, chemicals and employee benefits;

•                  our substantial leverage;

•                  obtaining required consents orwaivers of creditors in the event we are unable to satisfy covenants in ourdebt instruments; and

•                  the outcome of negotiations forcollective bargaining contracts.

 

Ouractual results, performance or achievements could differ materially from thoseexpressed in, or implied by, these forward-looking statements and, accordingly,we can give no assurances that any of the events anticipated by theforward-looking statements will transpire or occur, or if any of them do, whatimpact they will have on our results of operations or financial condition.  We expressly decline any obligation to publiclyrevise any forward-looking statements that have been made to reflect theoccurrence of events after the date hereof.

 

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# **GENERAL**

 

We meet the conditions set forth in General Instruction (H) (1) (a) and(b) of Form 10-Q and are therefore filing this form with the reduceddisclosure format permitted thereby.  Theomitted information is substantially similar to the disclosures contained inSmurfit-Stone Container Corporation’s Quarterly Report on Form 10-Q forthe quarter ended June 30, 2005 filed with the Securities and ExchangeCommission on the date hereof.  Inaccordance with General Instruction (H) (2) (a), the discussion ofour results of operations below includes only a narrative analysis of the mostrecent fiscal year-to-date period presented and the corresponding year-to-dateperiod in the preceding fiscal year.

#  

We are a wholly-ownedsubsidiary of Smurfit-Stone Container Corporation (Smurfit-Stone), a holdingcompany with no business operations of its own. Smurfit-Stone conducts its businessoperations through us.  We are thesurviving company resulting from the merger (the Merger) of Smurfit-Stone’sprimary operating subsidiaries on November 1, 2004.  JSCE, Inc. merged with and intoJefferson Smurfit Corporation (U.S.) (JSC(U.S.)), with JSC(U.S.) as thesurviving company, and then JSC(U.S.) merged with and into us, with us as thesurviving entity.  The Merger waseffected principally to consolidate debt financing activities of Smurfit-Stoneand its subsidiaries.  We weresimultaneously renamed Smurfit-Stone Container Enterprises, Inc.

 

We and JSC(U.S.) werewholly-owned subsidiaries of Smurfit-Stone and, therefore, the historical costbasis of the acquired entity, JSC(U.S.), carried over into us.  As a result of the Merger, our financialstatements for all periods presented have been restated to include the combinedresults of us and JSC(U.S.).  The Mergerdid not impact the operating activities of the merged companies, which continueto do business as Smurfit-Stone.

 

# **RESULTS OF OPERATIONS**

 

**OngoingAssessment and Restructuring Efforts**

On August 4, 2004, weannounced plans to permanently close production capacity at three NorthAmerican containerboard mills as part of our ongoing assessment andrestructuring efforts.  We willpermanently close:

 

•                  the No. 2 paper machine at ourFernandina Beach, Florida linerboard mill;

•                  our New Richmond, Quebec linerboardmill; and

•                  our Bathurst, New Brunswick mediummill.

 

The No. 2 papermachine at Fernandina Beach, Florida has been idle since April 2001.  Our containerboard manufacturing capacitywill be reduced by approximately 700,000 tons, or 8.5% as a result of theseclosures.  The rationalization processwill result in a workforce reduction of approximately 565 employees.

 

We expect to take a pretaxcharge of approximately $302 million during the third quarter of 2005, nearly$260 million of which is non-cash related to the write-down of fixed assets andother costs, as a result of the closure. The cash charges relate primarily to severance and benefits andenvironmental matters.  These charges areestimates and will be finalized in the third quarter of 2005.

 

# **Overview**

For the six months ended June 30,2005, we had a net loss of $12 million compared to a net loss of $45 millionfor the same period in 2004.  Net salesfor the year-to-date period increased 6.7% compared to last year.  For the six months ended June 30, 2005,the Containerboard and Corrugated Containers segment profits improved $105million on stronger pricing for most products compared to the same period lastyear.  Lower sales volume forcontainerboard and corrugated containers and higher costs for wood fiber,energy, freight, chemicals and employee benefits unfavorably impacted segmentprofits for the first six months of 2005 compared to the same period last year.

 

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In the third quarter of2005, we expect seasonally strong demand for containerboard and corrugatedcontainers.  However, the published priceindex for linerboard declined $15 per ton in May 2005 and an additional$30 per ton in July 2005 and as a result, our selling prices forcontainerboard and corrugated containers will likely weaken.

 

**SixMonths 2005 Compared to Six Months 2004**

 
| ** **                                | ** ** | **Six months ended June 30,** | ** ** |
|-------------------------------------------|------------|------------------------------------|------------|
| ** **                                | ** ** | **2005**                           | ** ** | **2004** | ** ** |
| **(In millions)**                         | ** ** | **Net  Sales**                     | ** ** | **Profit/  (Loss)** | ** ** | **Net  Sales** | ** ** | **Profit/  (Loss)** | ** ** |
|                                      |       |                               |       |   |   |   |   |   |   |
| Containerboard  and corrugated containers |       | $                                  | 3,208      |   | $ | 159 |   | $ | 2,969 |   | $ | 54 |   |
| Consumer  packaging                       |       | 818                                |       | 38 |   | 821 |   | 44 |   |
| Other operations                          |       | 220                                |       | 10 |   | 190 |   | 14 |   |
| Total segment  operations                 |       | $                                  | 4,246      |   | 207 |   | $ | 3,980 |   | 112 |   |
|                                      |       |                               |       |   |   |   |   |   |   |
| Restructuring  charges                    |       |                               |       | (4 | ) |   |   | (17 | ) |
| Interest  expense, net                    |       |                               |       | (173 | ) |   |   | (171 | ) |
| Interest income  from Smurfit-Stone       |       |                               |       |   |   |   |   | 41 |   |
| Non-cash foreign  currency exchange gains |       |                               |       | 4 |   |   |   | 10 |   |
| Corporate  expenses and other (1)         |       |                               |       | (55 | ) |   |   | (53 | ) |
| Loss before  income taxes                 |       |                               |       | $ | (21 | ) |   |   | $ | (78 | ) |

 

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(1)          Amountsinclude corporate expenses, corporate charges to segments for working capitalinterest and other expenses not allocated to segments.

 

The increase in net saleswas due primarily to the improvements in pricing for the Containerboard andCorrugated Containers segment.  Averagesales prices for folding cartons, multiwall bags, coated recycled boxboard andreclamation products also improved.  Thechange in net sales for each of our segments is summarized in the chart below:

 
| **(In millions)**            | ** ** | **Containerboard &  Corrugated  Containers** | ** ** | **Consumer  Packaging** | ** ** | **Other  Operations** | ** ** | **Total** | ** ** |
|------------------------------|------------|-------------------------------------------------------|------------|-------------------------|------------|-----------------------|------------|-----------|------------|
|                         |       |                                                  |       |                    |       |                  |       |      |       |
| Sales price and  product mix |       | $                                                     | 276        |                    | $          | 24                    |       | $         | 7          |   | $ | 307 |   |
| Sales volume                 |       | (37                                                   | )          | (27                     | )          | 23                    |       | (41       | )          |
| Total                        |       | $                                                     | 239        |                    | $          | (3                    | )          | $         | 30         |   | $ | 266 |   |

 

Cost of goods soldincreased from $3,532 million in 2004 to $3,699 million in 2005 due primarilyto higher costs for energy ($22 million), fiber ($30 million), freight ($28million), chemicals ($14 million) and employee benefits ($9 million).  Cost of goods sold as a percent of net salesdecreased from 88.7% in 2004 to 87.1% in 2005 due primarily to the higheraverage sales prices.

 

Selling andadministrative expense decreased $2 million compared to last year.  Selling and administrative expense as apercent of net sales decreased from 9.8% in 2004 to 9.2% in 2005.

 

We recorded restructuringcharges of $4 million for the six months ended June 30, 2005, including a$2 million non-cash write down to adjust assets to estimated net realizablevalue and severance and benefits for terminated employees at a convertingfacility, the closure of which was announced in the fourth quarter of 2004.

 

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Interest expense, net was$173 million in 2005, an increase of $2 million compared to 2004.  The unfavorable impact of higher averageinterest rates ($11 million) was partially offset by lower average borrowings($9 million).  Our overall average effectiveinterest rate in 2005 was approximately 55 basis points higher than in 2004.

 

Interest income fromSmurfit-Stone in 2005 decreased $41 million compared to 2004 due to thesettlement of the notes receivable in November 2004.  The notes receivable from Smurfit-Stone of$645 million, including accrued interest, were exchanged for 230 shares of ourcommon stock owned by Smurfit-Stone.  Theexchange, which was accounted for at historical cost, resulted in a reduction of$645 million to our additional paid-in capital. The fair value of the shares of our stock received, as estimated by athird party valuation, approximated the net book value of the shares at thetime of the exchange.

 

Other, net for 2005included non-cash foreign currency exchange gains of $4 million compared togains of $10 million in 2004.

 

Benefit from income taxesdiffered from the amount computed by applying the statutory U.S. federal incometax rate to loss before income taxes due primarily to state income taxes andthe effect of other permanent differences.

 

**Containerboardand Corrugated Containers Segment**

Net sales increased 8.0%in 2005 compared to last year primarily as a result of higher average salesprices.  For the year-to-date period,average domestic linerboard prices increased 19.2% compared to the same periodlast year.  Our average North Americanselling price for corrugated containers was up 8.3% compared to 2004.  Shipments of corrugated containers on a perday basis decreased 1.3%, and third party containerboard shipments decreased12.5% compared to the same period last year. Average sales prices for market pulp, SBS and kraft paper increased5.3%, 4.7%, and 22.8%, respectively, compared to the same period last year.

 

Our containerboard millsoperated at 90.0% of capacity in the first half of 2005, and productiondecreased 1.2% compared to last year. Production of market pulp and SBS both increased 2.2% compared to lastyear.  Production of kraft paper declined30.1% due primarily to the shift of production from kraft paper tocontainerboard on one of our paper machines.

 

Profits increased $105million due primarily to the higher average sales prices.  Profits were unfavorably impacted by ourlower mill operating rates, the lower sales volumes and higher costs of wood($19 million), reclaimed fiber ($12 million), energy ($20 million), freight($28 million), chemicals ($13 million) and employee benefits.

 

**ConsumerPackaging Segment**

Net sales for 2005 werecomparable to last year.  Net sales werefavorably impacted by higher sales volume for folding cartons and higheraverage sales prices for folding cartons, coated recycled boxboard andmultiwall bags, which improved 3.4%, 9.9% and 2.8%, respectively.  Sales volume for folding cartons increased1.2% despite the closure of a converting facility, while sales volume formultiwall bags decreased 4.0% due primarily to the closure of a convertingfacility.  Third party shipments ofcoated recycled boxboard were 8.7% lower and laminated product shipmentsdeclined due primarily to the sale of a plant. Flexible packaging shipments increased 3.8%.  The coated recycled boxboard mills operatedat 97.9% of capacity in the first six months of 2005 compared to nearly 100% ofcapacity in 2004.

 

Profits decreased $6million compared to last year primarily as a result of the higher costs ofenergy ($2 million), chemicals ($1 million) and employee benefits.  In addition, profits of our multiwall bagoperation were unfavorably impacted by higher kraft paper cost.  Profits were favorably impacted by the higheraverage sales prices.

 

15

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**OtherOperations**

Net sales increased dueprimarily to the impact of our newly formed Innovation to Implementation (i2iSM) business which began operating in the second half of 2004, higheraverage sales prices for most of our reclamation products and higher externalsales volume for reclaimed fiber.  Totaltons of fiber reclaimed and brokered increased 2.2% as a result of the higher externalsales volume.  Profits decreased $4million dollars compared to last year.

 

**Statistical Data**

 
| **(In thousands of tons, except  as noted)**                     | ** ** | **Six months ended  June 30,** | ** ** |
|------------------------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                                       | ** ** | **2005**                            | ** ** | **2004** | ** ** |
| Mill production                                                  |       |                                |       |   |   |
| Containerboard  (1)                                              |       | 3,603                               |       | 3,648 |   |
| Kraft paper                                                      |       | 102                                 |       | 146 |   |
| Market pulp                                                      |       | 280                                 |       | 274 |   |
| SBS                                                              |       | 137                                 |       | 134 |   |
| Coated recycled  boxboard                                        |       | 274                                 |       | 281 |   |
| North American  corrugated containers Sold (billion sq. ft.) (2) |       | 42.8                                |       | 43.3 |   |
| Folding cartons  sold                                            |       | 255                                 |       | 252 |   |
| Multiwall bags  sold (million bags)                              |       | 550                                 |       | 573 |   |
| Fiber reclaimed  and brokered                                    |       | 3,297                               |       | 3,225 |   |

 

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(1)          Forthe six months ended June 30, 2005 and 2004, our container plants consumed2,701,000 and 2,788,000 tons of containerboard, respectively.

(2)          Forthe six months ended June 30, 2005 and 2004, North American corrugatedcontainers sold include intercompany shipments of 2.9 and 2.8 billion squarefeet, respectively.

 

**ITEM 3.**          **QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUTMARKET RISK**

 

Intentionallyomitted in accordance with General Instruction (H) (2) (c) of Form 10-Q.

 

**ITEM 4.****          CONTROLSAND PROCEDURES**

 

**Evaluationof Disclosure Controls and Procedures**

Our management, with theparticipation of our principal executive officer and our principal financialofficer, evaluated the effectiveness of our disclosure controls and procedures(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of theend of the period covered by this report and concluded that, as of such date,our disclosure controls and procedures were adequate and effective.

 

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**Changesin Internal Control**

There have not been anychanges in our internal control over financial reporting during the most recentquarter that have materially affected, or are reasonably likely to materiallyaffect, our internal control over financial reporting.

 

**PART II - OTHER INFORMATION**

 

**ITEM 1.****                             LEGALPROCEEDINGS**

 

In 2003, we settled theantitrust class action cases pending against us, which were based onallegations of a conspiracy among linerboard manufacturers from 1993 to1995.  We, along with other largelinerboard manufacturers, are a defendant in ten lawsuits brought on behalf ofnumerous companies that opted out of these class actions to seek their ownrecovery, nine of which have been consolidated for pretrial proceedings in theUnited States District Court for the Eastern District of Pennsylvania, and oneof which has been remanded to Kansas District Court (the Direct ActionCases).  We settled the Direct ActionCases of two of our largest customers during the second quarter of 2005, and madeaggregate settlement payments of approximately $11 million, which were chargedagainst existing reserves.  We arevigorously defending the remaining Direct Action Cases.  While the ultimate results of the DirectAction Cases cannot be predicted with certainty, we believe the resolution ofthese cases will not have a material adverse effect on our consolidatedfinancial condition, results of operations or cash flows.

 

In April 2005, theUnited States Environmental Protection Agency (EPA) issued a Notice ofViolation (NOV) and Finding of Violation (FOV) that alleged that we violatedthe Prevention of Significant Deterioration regulations and New SourcePerformance Standards of the Clean Air Act in connection with the replacementof burners in a boiler at our medium mill in Ontonagon, Michigan in 1995.  Specifically, the EPA has alleged that theburner replacement project resulted in an increase of the coal burning capacityof the boiler that in turn led to increased emissions of nitrogen oxides andsulfur dioxide.  We believe that theburner replacement project was routine maintenance and did not increase thecoal burning capacity of the boiler, and that differences in emissions resultedfrom permissible switching of fuels from natural gas to coal.  We have met with the EPA to discuss thismatter, and have advised the EPA that we disagree with the allegations and intend to contest theNOV and FOV.

 

**ITEM 2.****          UNREGISTEREDSALES OF EQUITY SECURITIES AND USE OF PROCEEDS**

 

Intentionallyomitted in accordance with General Instruction (H) (2) (b) of Form 10-Q.

 

**ITEM 3.****          DEFAULTSUPON SENIOR SECURITIES**

 

Intentionallyomitted in accordance with General Instruction (H) (2) (b) of Form 10-Q.

 

**ITEM 4.****          SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS**

 

Intentionallyomitted in accordance with General Instruction (H) (2) (b) of Form 10-Q.

 

**ITEM 5.****          OTHERINFORMATION**

 

None

 

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**ITEM 6.****          EXHIBITS**

 

The following exhibits are included in this Form 10-Q:

 
| 31.1   |   | Certification  Pursuant to Rules 13a–14 and 15d–14 under the Securities Exchange Act of  1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of  2002. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                      |
| 31.2   |   | Certification  Pursuant to Rules 13a–14 and 15d–14 under the Securities Exchange Act of  1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of  2002. |
|   |   |                                                                                                                                                                                      |
| 32.1   |   | Certification  Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002.                                                       |
|   |   |                                                                                                                                                                                      |
| 32.2   |   | Certification  Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002.                                                       |

 

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Signature

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the Registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 
|                       | SMURFIT-STONE  CONTAINER ENTERPRISES, INC.      |   |
|----------------------------|-------------------------------------------------|--------|
|                       | (Registrant)                                    |   |
|                       |                                            |
|                       |                                            |
| Date: August 8,  2005 | /s/  Paul K. Kaufmann                           |   |
|                       | Paul K. Kaufmann                                |   |
|                       | Senior Vice  President and Corporate Controller |   |
|                       | (Principal Accounting  Officer)                 |   |
|                            |                                                 |        |  |

 

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