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

 

**For Quarter Ended March 31,2006Commission 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)

 

**Not Applicable**

(Former name, former address and former fiscal year,if changed since last report)

 

 

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days.  Yes x    No o

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer or a non-accelerated filer (asdefined in Rule 12b-2 of the Exchange Act):
| Large accelerated filer   o | Accelerated filer    o | Non-accelerated filer   x |
|---------------------------------------|----------------------------------|-------------------------------------|

 

Indicate by check markif the registrant is a shell company (as defined in Rule 12b-2 ofthe Act). Yes o   No x

 

APPLICABLEONLY TO CORPORATE ISSUERS:

 

Asof May 2, 2006, the registrant had outstanding 770 shares of common stock,$.01 par value per share, all of which are owned by Smurfit-Stone ContainerCorporation.

 

**The registrant meets the conditions set forth inGeneral Instruction (H) (1) (a) and (b) of Form 10-Qand is therefore filing this form with the reduced disclosure format permittedthereby.**

 

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**PARTI — FINANCIAL INFORMATION**

**Item 1. FinancialStatements**

**SMURFIT-STONE CONTAINER ENTERPRISES,INC.CONSOLIDATED STATEMENTS OF OPERATIONS(Unaudited)**
| **Three Months Ended March 31, (In millions)** | ** ** | **2006**  | ** ** | **2005**   | ** ** |
|------------------------------------------------------------------------------|------------|-----------|------------|------------|------------|
| Net sales                                                                    | ** ** | **$**     | **2,125**  |       | $          | 2,093 |   |
| Costs and expenses                                                           |       |      |       |       |       |
| Cost of goods sold                                                           | ** ** | **1,936** |       | 1,835      |       |
| Selling and administrative expenses                                          | ** ** | **206**   |       | 196        |       |
| Restructuring charges                                                        | ** ** | **9**     |       | 1          |       |
| Gain on sale of assets                                                       | ** ** | **(23**   | **)**      | ** ** | ** ** |
| Income (loss) from operations                                                | ** ** | **(3**    | **)**      | 61         |       |
| Other income (expense)                                                       |       |      |       |       |       |
| Interest expense, net                                                        | ** ** | **(92**   | **)**      | (86        | )          |
| Other, net                                                                   | ** ** | **(3**    | **)**      | (3         | )          |
| Loss before income taxes                                                     | ** ** | **(98**   | **)**      | (28        | )          |
| Benefit from  income taxes                                                   | ** ** | **37**    |       | 12         |       |
| Net loss                                                                     |       | **$**     | **(61**    | **)**      | $          | (16 | ) |

 

See notes to consolidated financial statements.

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**SMURFIT-STONECONTAINER ENTERPRISES, INC.**

**CONSOLIDATEDBALANCE SHEETS**
| ** **                                                                                                                   | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| **(In millions, except share data)**                                                                     | ** ** | **2006**           | ** ** | **2005**              | ** ** |
| **Assets**                                                                                                                   |       | **(Unaudited)**    | ** ** | ** **            | ** ** |
|                                                                                                                         | ** ** | ** **         |       |                  |       |
| Current assets                                                                                                               | ** ** | ** **         |       |                  |       |
| Cash and cash  equivalents                                                                                                   | ** ** | **$**              | **4**      |                  | $          | 5 |   |
| Receivables,  less allowances of $11 in 2006 and $10 in 2005                                                                 | ** ** | **271**            |       | 224                   |       |
| Retained  interest in receivables sold                                                                                       | ** ** | **130**            |       | 139                   |       |
| Inventories,  including amounts valued under LIFO method                                                                     | ** ** | ** **         |       |                  |       |
| Work-in-process  and finished goods                                                                                          | ** ** | **233**            |       | 234                   |       |
| Materials and  supplies                                                                                                      | ** ** | **493**            |       | 500                   |       |
|                                                                                                                         | ** ** | **726**            |       | 734                   |       |
| Prepaid expenses  and other current assets                                                                                   | ** ** | **63**             |       | 82                    |       |
| Total current  assets                                                                                                        | ** ** | **1,194**          |       | 1,184                 |       |
| Net property, plant and  equipment                                                                                           | ** ** | **4,191**          |       | 4,245                 |       |
| Timberland, less timber  depletion                                                                                           | ** ** | **44**             |       | 44                    |       |
| Goodwill                                                                                                                     | ** ** | **3,309**          |       | 3,309                 |       |
| Other assets.                                                                                                                | ** ** | **324**            |       | 332                   |       |
|                                                                                                                         | ** ** | **$**              | **9,062**  |                  | $          | 9,114 |   |
| **Liabilities and Stockholder’s  Equity**                                                                               | ** ** | ** **         |       |                  |       |
|                                                                                                                         | ** ** | ** **         |       |                  |       |
| Current liabilities                                                                                                          | ** ** | ** **         |       |                  |       |
| Current  maturities of long-term debt                                                                                        | ** ** | **$**              | **37**     |                  | $          | 35 |   |
| Accounts payable                                                                                                             | ** ** | **642**            |       | 654                   |       |
| Accrued  compensation and payroll taxes                                                                                      | ** ** | **167**            |       | 186                   |       |
| Interest payable                                                                                                             | ** ** | **79**             |       | 97                    |       |
| Income taxes  payable                                                                                                        | ** ** | **3**              |       | 17                    |       |
| Current deferred  income taxes                                                                                               | ** ** | **16**             |       | 15                    |       |
| Other current  liabilities                                                                                                   | ** ** | **142**            |       | 183                   |       |
| Total current  liabilities                                                                                                   | ** ** | **1,086**          |       | 1,187                 |       |
| Long-term debt, less  current maturities                                                                                     | ** ** | **4,682**          |       | 4,536                 |       |
| Other long-term  liabilities                                                                                                 | ** ** | **1,142**          |       | 1,123                 |       |
| Deferred income taxes                                                                                                        | ** ** | **479**            |       | 529                   |       |
| Stockholder’s equity                                                                                                    | ** ** | ** **         |       |                  |       |
| Common stock,  par value $.01 per share; 1,000 shares authorized, 770 issued and outstanding  in 2006 and 2005, respectively | ** ** | ** **         |       |                  |       |
| Additional  paid-in capital                                                                                                  | ** ** | **3,614**          |       | 3,604                 |       |
| Retained  earnings (deficit)                                                                                                 | ** ** | **(1,556**         | **)**      | (1,492                | )          |
| Accumulated  other comprehensive income (loss)                                                                               | ** ** | **(385**           | **)**      | (373                  | )          |
| Total  stockholder’s equity                                                                                             | ** ** | **1,673**          |       | 1,739                 |       |
|                                                                                                                         | ** ** | **$**              | **9,062**  |                  | $          | 9,114 |   |

See notes to consolidatedfinancial statements.

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**SMURFIT-STONE CONTAINER ENTERPRISES, INC**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Unaudited)**

 
| **Three Months Ended March 31, (In millions)**                  | ** ** | **2006**   | ** ** | **2005** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|------------|------------|----------|------------|
| **Cash flows from operating  activities**                                                     | ** ** | ** ** |       |     |       |
| Net loss                                                                                      | ** ** | **$**      | **(61**    | **)**    | $          | (16 | ) |
| Adjustments to  reconcile net loss to net cash used for operating activities                  | ** ** | ** ** |       |     |       |
| Depreciation,  depletion and amortization                                                     | ** ** | **100**    |       | 103      |       |
| Amortization of  deferred debt issuance costs                                                 | ** ** | **2**      |       | 2        |       |
| Deferred income  taxes                                                                        | ** ** | **(55**    | **)**      | (28      | )          |
| Pension and  postretirement benefits                                                          | ** ** | **23**     |       | (9       | )          |
| Gain on sale of  assets                                                                       | ** ** | **(23**    | **)**      |     |       |
| Non-cash  restructuring charges                                                               | ** ** | **5**      |       |     |       |
| Non-cash stock  based compensation                                                            | ** ** | **5**      |       | 2        |       |
| Non-cash foreign  currency losses (gains)                                                     | ** ** | **(2**     | **)**      | 1        |       |
| Change in  current assets and liabilities, net of effects from acquisitions and  dispositions | ** ** | ** ** |       |     |       |
| Receivables and  retained interest in receivables sold                                        | ** ** | **(39**    | **)**      | (24      | )          |
| Inventories                                                                                   | ** ** | **8**      |       | (11      | )          |
| Prepaid expenses  and other current assets                                                    | ** ** | **(3**     | **)**      | (1       | )          |
| Accounts payable  and accrued liabilities                                                     | ** ** | **(71**    | **)**      | (70      | )          |
| Interest payable                                                                              | ** ** | **(18**    | **)**      | (15      | )          |
| Other, net                                                                                    | ** ** | **10**     |       | (4       | )          |
| Net cash used for  operating activities                                                       | ** ** | **(119**   | **)**      | (70      | )          |
| **Cash flows from investing  activities**                                                     | ** ** | ** ** |       |     |       |
| Expenditures for  property, plant and equipment                                               | ** ** | **(56**    | **)**      | (66      | )          |
| Proceeds from  property disposals                                                             | ** ** | **28**     |       | 5        |       |
| Net cash used  for investing activities                                                       | ** ** | **(28**    | **)**      | (61      | )          |
| **Cash flows from financing  activities**                                                     | ** ** | ** ** |       |     |       |
| Net borrowings  of long-term debt                                                             | ** ** | **147**    |       | 133      |       |
| Dividends paid                                                                                | ** ** | **(2**     | **)**      | (2       | )          |
| Capital  contribution from SSCC                                                               | ** ** | **1**      |       | 1        |       |
| Deferred debt  issuance costs                                                                 |       |       |       | (2       | )          |
| Net cash  provided by financing activities                                                    | ** ** | **146**    |       | 130      |       |
| **Decrease in cash and cash equivalents**                                                     | ** ** | **(1**     | **)**      | (1       | )          |
| Cash and cash  equivalents                                                                    | ** ** | ** ** |       |     |       |
| Beginning of  period                                                                          | ** ** | **5**      |       | 6        |       |
| End of period                                                                                 | ** ** | **$**      | **4**      |     | $          | 5 |   |

See notes to consolidatedfinancial statements.

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**SMURFIT-STONECONTAINER ENTERPRISES, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**(Tabularamounts in millions)

 

**1. SignificantAccounting Policies**

Theaccompanying consolidated financial statements and notes thereto ofSmurfit-Stone Container Enterprises, Inc. (“SSCE” or the “Company”) have beenprepared in accordance with the instructions to Form 10-Q and reflect alladjustments which management believes necessary (which include only normalrecurring accruals) to present fairly the Company’s financial position, resultsof operations and cash flows. These statements, however, do not include allinformation and footnotes necessary for a complete presentation of financialposition, results of operations and cash flows in conformity with U.S.generally accepted accounting principles. Interim results may not necessarilybe indicative of results that may be expected for any other interim period orfor the year as a whole. These financial statements should be read inconjunction with the audited consolidated financial statements and footnotesincluded in the SSCE Annual Report on Form 10-K for the year ended December31, 2005 (“2005 10-K”) filed March 6, 2006 with the Securities and ExchangeCommission.

SSCE is a wholly-owned subsidiary of Smurfit-StoneContainer Corporation (“SSCC”). SSCE has domestic and international operations.

**2. Reclassifications**

Certain prior yearamounts have been reclassified to conform to the current year presentation.

**3. Strategic Initiatives and Restructuring Activities**

During the fourth quarterof 2005, the Company announced a strategic reassessment plan to improveperformance and better position itself for long-term growth. The new strategyfocuses on (i) cost reduction initiatives from which the Company expects toachieve $600 million in annual savings by the end of 2008, (ii) revenue growthinitiatives from which the Company expects to generate $650 million inincremental annual revenue by the end of 2008 and (iii) organizational changesto enable the cost reduction and revenue growth initiatives. The Companyrealized savings of approximately $35 million from its strategic initiatives inthe first quarter of 2006 compared to cost levels prior to the commencement ofthe initiatives.

In connection with thisplan, the Company recorded restructuring charges of $9 million, includingnon-cash charges of $5 million related to the write-down of assets, primarilyproperty, plant and equipment, to estimated net realizable value, during thefirst quarter of 2006. The Company announced the closure of three convertingfacilities, which resulted in approximately 210 employees being terminated. Thenet sales and operating losses of these facilities for the year ended December 31,2005 were $40 million and $5 million, respectively. The remaining charges wereprimarily for severance and benefits. Additional charges of up to $7 millionwill be recorded in future periods for severance and benefits related to theclosure of the three converting facilities and for pension settlement costs.

The Company recorded restructuring charges of $1 million for the threemonths ended March 31, 2005, including severance and benefits for terminatedemployees at a converting facility, the closure of which was announced in thefourth quarter of 2004.

At December 31,2005, the Company had $55 million of accrued exit liabilities related to therestructuring of operations. During the first quarter of 2006, the Companyincurred $12 million of cash disbursements 

4

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related to theseexit liabilities. In addition, for the three months ended March 31, 2006, theCompany incurred $3 million of cash disbursements related to exit liabilitiesestablished during 2006.

**4. Stock-Based Compensation**

Certain officers and key managers of the Companyparticipate in various stock-based compensation plans sponsored by SSCC, whichissues stock options and restricted stock units.  In December 2004, the Financial AccountingStandards Board issued Statement of Financial Accounting Standards (“SFAS”) No.123(R), “Shared-Based Payment,” effective January 1, 2006, which is a revisionof SFAS No. 123, “Accounting for Stock-Based Compensation.”  SFAS No. 123(R) requires all share-basedpayments to employees, including grants of employee stock options, to berecognized in the financial statements based on their fair values.  The Company adopted SFAS No. 123(R) onJanuary 1, 2006, under the modified prospective method, in which therequirements of SFAS No. 123(R) must be applied to new awards and to previouslygranted awards that are not fully vested on the effective date, but does notrequire a restatement of previous years’ financial statements.  Upon adoption, the Company implemented alattice option pricing model to estimate the value of stock options grantedafter January 1, 2006.  

The lattice option pricing model considers a range ofassumptions related to volatility, risk-free interest rate and historicalemployee behavior.  Expected volatilitywas based on historical and current implied volatilities from traded options onSSCC’s common stock.  The risk-free interestrate was based on U.S. Treasury security yields at the time of grant.  The dividend yield on SSCC’s common stock isassumed to be zero since SSCC has not paid dividends and has no current plansto do so in the future.  The expectedlife was determined from the lattice option pricing model.  The lattice option pricing model incorporatedexercise and post-vesting forfeiture assumptions based on analysis ofhistorical data.  The following tableprovides the assumptions used in determining the fair value of the stock-basedawards granted during the three months ended March 31, 2006.
| ** **                       | ** ** | **Three months ended  March 31, 2006** | ** ** |
|----------------------------------|------------|------------------------------------------------------------|------------|
| Weighted-average  dividend yield |       | 0.00%                                                      |       |
| Weighted-average  volatility     |       |     41%                                     |       |
| Risk-free  interest rate         |       |  4.65%                                                |       |
| Weighted-average  expected life  |       |    5                                             |       |

 

The impact of adopting SFAS No. 123(R) for the threemonths ended March 31, 2006 was a $1 million increase in selling andadministrative expenses due to recognizing expense on non-vested, outstandingshares issued prior to the adoption of SFAS No. 123 on January 1, 2003.  At March 31, 2006, the total compensationcost related to non-vested awards not yet recognized was approximately $50million to be recognized through March 31, 2009, with a weighted-averageexpense period of approximately 2.2 years. 

During the first quarter of 2006, the Company grantedperformance-based stock options, in which vesting is dependent upon theprofitability performance of the Company and the attainment of the strategicinitiative savings from 2006 to 2008. These performance-based stock options expire no later than seven yearsfrom the date of grant.  Compensationexpense is recorded over the three year performance period based on theachievement of the performance criteria.

Prior to the adoption of SFAS No. 123(R), the Companyaccounted for stock-based compensation under SFAS No. 123.  The Company selected the prospectivetransition method as allowed in SFAS No. 148, “Accounting for Stock-BasedCompensation-Transition and Disclosure,” which requires expensing optionsprospectively, beginning in the year of adoption, and utilized theBlack-Scholes formula to estimate the value of stock options granted toemployees.  The assumptions used in theBlack-Scholes formula are described in the 2005 10-K.  Because the prospective transition method wasused and awards vest over three to eight years, the expense for the threemonths ended March 31, 2005 is less than what would have been recognized if thefair value-based method had been applied to all awards since the originaleffective date of SFAS No. 123.  Thefollowing table illustrates the effect on net loss if the fair value basedmethod had been applied to all outstanding and unvested awards for the periodended March 31, 2005.
| ** **                                                                                                                                    | ** ** | **Three months ended** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                                                                                    | ** ** | **March 31, 2005**     | ** ** |
| Net loss, as  reported                                                                                                                        |       | $                      | (16        | ) |
| Add: Stock-based  employee compensation expense included in reported net loss, net of related  tax effects                                    |       | 2                      |       |
| Deduct: Total  stock-based employee compensation expense determined under fair value-based  method for all awards, net of related tax effects |       | (3                     | )          |
| Pro forma net  loss                                                                                                                           |       | $                      | (17        | ) |

 

**5. Gain on Sale of Assets**

TheCompany recorded a gain of $23 million in the first quarter of 2006 related tothe divestiture of its Port St. Joe, Florida joint venture interest and relatedreal estate.

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**6. Other, Net**

Forthe three months ended March 31, 2006 and 2005, the Company recorded non-cashforeign currency gains of $2 million and losses of $1 million, respectively,related to its operations in Canada.

**7. Accounts Receivable SecuritizationPrograms**

At March 31, 2006 and December 31, 2005, $613 million and$592 million, respectively, of receivables had been sold under two accountsreceivable securitization programs, of which the Company retained asubordinated interest. The off-balance sheet Stone Receivables Corporation debtand funding received from the Canadian accounts receivable program totaled $487million and $472 million, respectively, as of those dates.

**8. Guarantees**

The Company has certain wood chip processingcontracts extending from 2012 through 2018 with minimum purchase commitments. Aspart of the agreements, the Company guarantees the third party contractors’debt outstanding and has a security interest in the chipping equipment. At March31, 2006, the maximum potential amount of future payments related to theseguarantees was approximately $36 million and decreases ratably over the life ofthe contracts. In the event the guarantees on these contracts were called,proceeds from the liquidation of the chipping equipment would be based oncurrent market conditions and the Company may not recover in full the guaranteepayments made.

**9. Employee Benefit Plans**

TheCompany sponsors noncontributory defined benefit pension plans coveringsubstantially all U.S. employees. The Company also sponsors noncontributory andcontributory defined benefit pension plans for its Canadian operations.

TheCompany’s postretirement plans provide health care and life insurance benefitsfor all retired salaried and certain retired hourly employees, and for salariedand certain hourly employees who have reached the age of 60 with 10 years ofservice as of January 1, 2007.

Thecomponents of net periodic benefit costs for the defined benefit plans and thecomponents of the postretirement benefit costs are as follows:
| ** **                                    | ** ** | **Three months ended March 31,** | ** ** |
|-----------------------------------------------|------------|----------------------------------|------------|
| ** **                                    | ** ** | **Defined**                      | ** ** | **Postretirement** | ** ** |
| ** **                                    | ** ** | **Benefit Plans**                | ** ** | **Plans** | ** ** |
| ** **                                    | ** ** | **2006**                         | ** ** | **2005** | ** ** | **2006** | ** ** | **2005** | ** ** |
| Service cost                                  |       | $                                | 20         |   | $ | 20 |   | $ | 1 |   | $ | 2 |   |
| Interest cost                                 |       | 48                               |       | 48 |   | 4 |   | 4 |   |
| Expected return  on plan assets               |       | (55                              | )          | (51 | ) |   |   |   |   |
| Amortization of  prior service cost (benefit) |       | 2                                |       | 2 |   | (1 | ) | (1 | ) |
| Amortization of  net loss                     |       | 21                               |       | 16 |   | 1 |   | 1 |   |
| Settlements                                   |       | 2                                |       |   |   |   |   |   |   |
| Multi-employer  plans                         |       | 2                                |       | 2 |   |   |   |   |   |
| Net periodic benefit  cost                    |       | $                                | 40         |   | $ | 37 |   | $ | 5 |   | $ | 6 |   |

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TheCompany’s 2006 expected contributions to its qualified defined benefit plansand benefit payments to its non-qualified defined benefit plans andpostretirement plans are not expected to be materially different from theamounts disclosed at December 31, 2005.

**10. Derivative Instruments and Hedging Activities**

TheCompany’s derivative instruments used for its hedging activities are designedas 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 variable rate debt.

#### **Commodity DerivativeInstruments**

The Company uses derivative instruments, including fixed price swaps andoptions, to manage fluctuations in cash flows resulting from commodity pricerisk in the procurement of natural gas. The objective is to fix the price of aportion of the Company’s purchases of natural gas used in the manufacturingprocess. 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 March 31, 2006, themaximum length of time over which the Company was hedging its exposure to thevariability in future cash flows associated with natural gas forecastedtransactions was 33 months. For the three months ended March 31, 2006 and 2005,the Company reclassified a $1 million gain (net of tax) and a $1 million loss(net of tax), respectively, from other comprehensive income (“OCI”) to cost ofgoods sold when the hedged items were recognized. The fair value of thesecommodity derivative instruments at March 31, 2006 was a $9 million asset, ofwhich $5 million was included in prepaid expenses and other current assets and$4 million was included in other assets.

For the three months ended March 31, 2006 and 2005, the Company recordeda $5 million loss (net of tax) and a $6 million gain (net of tax),respectively, in cost of goods sold related to the change in fair value ofcertain commodity derivative instruments not qualifying for hedge accounting.

For the three months ended March 31, 2006 and 2005, the Company recordeda $1 million loss (net of tax) for both periods in cost of goods sold onsettled commodity derivative instruments related to commodity derivativeinstruments not qualifying for hedge accounting.

#### **ForeignCurrency Derivative Instruments**

The Company’s principal foreign exchange exposure is the Canadian dollar.The Company uses foreign currency derivative instruments, including forwardcontracts and options, primarily to protect against Canadian currency exchangerisk associated with expected future cash flows. As of March 31, 2006, themaximum length of time over which the Company was hedging its exposure to thevariability in future cash flows associated with foreign currency was 16 months.For the three months ended March 31, 2006 and 2005, the Company reclassified a$1 million gain (net of tax) and a $2 million gain (net of tax), respectively,from OCI to cost of goods sold related to the recognition of the foreigncurrency derivative instruments. The change in fair value of these derivativeinstruments is recorded in OCI until the underlying transaction is recorded. Thefair value of the Company’s foreign currency derivative instruments at March 31,2006 was a $5 million asset, included in prepaid expenses and other currentassets.

For the three months ended March 31, 2006 and 2005, the Company recordedan immaterial amount and a $1 million loss (net of tax), respectively, in costof goods sold related to the change in fair value of certain foreign currencyderivative instruments not qualifying for hedge accounting.

For the three months ended March 31, 2006 and 2005, the Company recordedan immaterial amount and a $1 million gain (net of tax), respectively, in costof goods sold on settled foreign currency derivative instruments not qualifyingfor hedge accounting.

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#### **Interest Rate SwapContracts**

The Company uses interest rateswap contracts to manage interest rate exposure on $300 million of the currentTranche B and Tranche C floating rate bank term debt, effectively fixing theinterest rate at 4.3%. These contracts extend until 2011, consistent with thematurity of the Company’s Tranche B and Tranche C term loans. Changes in thefair 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 accountingfor the cash flow impact of the swap contracts is recorded as an adjustment tointerest expense each period. For the three months ended March 31, 2006 and2005, the Company reclassified an immaterial amount and a $1 million loss (netof tax), respectively, from OCI to interest expense when the hedged items wererecognized. The fair value of the Company’s interest rate swap contracts at March31, 2006 was a $14 million asset included in other assets.

The cumulative deferred hedgegain on all derivative instruments was $11 million (net of tax) at March 31,2006, including a $2 million gain (net of tax) on commodity derivativeinstruments, a $1 million gain (net of tax) on foreign currency derivativeinstruments and an $8 million gain (net of tax) on interest rate swap contracts.The Company expects to reclassify a $1 million loss (net of tax) into cost ofgoods sold within the next 12 months, related to the commodity and foreigncurrency derivative instruments.

**11. Comprehensive Income (Loss)**

Comprehensiveincome (loss) is as follows:
| ** **                                       | ** ** | **Three months ended** | ** ** |
|--------------------------------------------------|------------|------------------------|------------|
| ** **                                       | ** ** | **March 31,**          | ** ** |
| ** **                                       | ** ** | **2006**               | ** ** | **2005** | ** ** |
| Net loss                                         |       | $                      | (61        | ) | $ | (16 | ) |
| Other  comprehensive income (loss), net of tax:  |       |                   |       |   |   |
| Net changes in fair value of hedging instruments |       | (9                     | )          | 12 |   |
| Net hedging gain reclassified into earnings      |       | (2                     | )          |   |   |
| Foreign currency translation adjustment          |       | (1                     | )          | 1 |   |
| Comprehensive income  (loss)                     |       | $                      | (73        | ) | $ | (3 | ) |

 

**12. Business Segment Information**

The Company has two reportable segments:  (1) Containerboard and Corrugated Containersand (2) Consumer Packaging. The Containerboard and Corrugated Containerssegment is highly integrated. It includes a system of mills and plants thatproduces a full line of containerboard that is converted into corrugatedcontainers. It also provides single source full merchandising solutions toretailers and consumer packaging companies. Corrugated containers are used totransport such diverse products as home appliances, electric motors, smallmachinery, grocery products, produce, books, tobacco and furniture. TheConsumer Packaging segment is also highly integrated. It includes a system ofmills and plants that produces a broad range of coated recycled boxboard thatis converted into folding cartons. In addition, the Consumer Packagingsegment converts kraft and specialty paper into multiwall bags, consumer bagsand intermediate bulk containers. The bags and intermediate containers aredesigned to ship and protect a wide range of industrial and consumer productsincluding fertilizers, chemicals, concrete and pet and food products. Folding cartons are used primarily to protect andmarket products such as food, fast food, detergents, paper products, beverages,health and beauty aids and other consumer products, while providing point ofpurchase advertising. Flexible packaging, paper and metalized paper labels andheat transfer labels are used in a wide range of consumer applications.

The Company evaluates performance and allocates resourcesbased on profit or loss from operations before income taxes, interest expenseand other non-operating gains and losses. The accounting policies of thereportable segments are the same as those described in the summary ofsignificant accounting 

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policies in the 2005 10-K. Intersegment sales andtransfers are recorded at market prices.

The Company’s reportable segments are strategic businessunits that offer different products. The reportable segments are each managedseparately because they manufacture distinct products. Other includes corporaterelated items and a non-reportable segment, Reclamation. The prior year segmentinformation has been restated to conform to the 2005 10-K presentation. Corporaterelated items include expenses not allocated to reportable segments, includingcorporate expenses, restructuring charges, unrealized gains or losses onderivative instruments not qualifying for hedge accounting, non-cash foreigncurrency gains or losses and interest expense.

The Company is currently evaluating strategic options forits Consumer Packaging segment, including the possible sale of some or all ofthese businesses from which the proceeds would be used to reduce debt. As of March31, 2006, the Company did not meet the criteria to account for the ConsumerPackaging segment as assets held for sale, in accordance with SFAS No. 144, “Accountingfor the Impairment or Disposal of Long-Lived Assets.”  Accordingly, the operations of the ConsumerPackaging segment are included in continuing operations in the consolidatedstatements of operations and as a reportable segment.

A summary by business segment follows:
| ** **                       | ** ** | **Container-**  | ** ** | ** **    | ** ** | ** ** | ** ** | ** ** | ** ** |
|----------------------------------|------------|-----------------|------------|---------------|------------|------------|------------|------------|------------|
| ** **                       | ** ** | **board &** | ** ** | ** **    | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                       | ** ** | **Corrugated**  | ** ** | **Consumer**  | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                       | ** ** | **Containers**  | ** ** | **Packaging** | ** ** | **Other**  | ** ** | **Total**  | ** ** |
| Three months  ended March 31,    |       |            |       |          |       |       |       |       |       |
| 2006                             |       |            |       |          |       |       |       |       |       |
| Revenues from external customers |       | $               | 1,626      |          | $          | 416        |       | $          | 83         |   | $ | 2,125 |   |
| Intersegment revenues            |       | 35              |       |          |       | 58         |       | 93         |       |
| Segment profit (loss)            |       | 9               |       | 16            |       | (123       | )          | (98        | )          |
|                             |       |            |       |          |       |       |       |       |       |
| 2005                             |       |            |       |          |       |       |       |       |       |
| Revenues from external customers |       | $               | 1,589      |          | $          | 404        |       | $          | 100        |   | $ | 2,093 |   |
| Intersegment revenues            |       | 37              |       |          |       | 72         |       | 109        |       |
| Segment profit  (loss)           |       | 66              |       | 15            |       | (109       | )          | (28        | )          |

 

**13. Contingencies**

In 2003, the Company settled theantitrust class action cases pending against the Company, which were based onallegations of a conspiracy among linerboard manufacturers from 1993 to 1995,and made aggregate settlement payments of $92.5 million, one-half of which waspaid in December 2003 and the remainder of which was paid in January 2005. TheCompany, along with other large linerboard manufacturers, was named a defendantin several lawsuits brought on behalf of numerous companies that opted out ofthese class actions to seek their own recovery, all but one of which wereconsolidated for pretrial proceedings in the United States District Court forthe Eastern District of Pennsylvania, and one of which was remanded to KansasDistrict Court (the “Direct Action Cases”). In 2005, the Company settled amajority of the Direct Action Cases. The remaining Direct Action Cases weresettled in the first quarter of 2006. In connection with these settlements, theCompany made aggregate payments of $60 million, including $14 million in 2005,$36 million in the first quarter of 2006 and $10 million in April 2006. TheCompany accounted for these settlements by applying existing reserves andrecording additional charges in the fourth quarter of 2005.

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 environmental liability as a result ofviolations of permit terms and similar authorizations that have 

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occurred from time totime at its facilities. In addition, the Company faces potential liability forresponse costs at various sites for which it has received notice as being apotentially responsible party (“PRP”) concerning hazardous substancecontamination. In estimating its reserves for environmental remediation andfuture costs, the Company’s estimated liability of $4 million reflects theCompany’s expected share of costs after consideration for the relativepercentage of waste deposited at each site, the number of other PRPs, theidentity and financial condition of such parties and experience regardingsimilar matters. As of March 31, 2006, the Company had approximately $26million reserved for environmental liabilities included primarily in otherlong-term liabilities in the consolidated balance sheet. The Company believesthe liability for these matters was adequately reserved at March 31, 2006.

If all or most of theother PRPs are unable to satisfy their portion of the clean-up costs at one ormore of the significant sites in which the Company is involved or the Company’sexpected share increases, the resulting liability could have a material adverseeffect on the Company’s consolidated financial condition or results ofoperations.

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 ofsuch suits or other proceedings against the Company cannot be predicted withcertainty, the management of the Company believes that the resolution of thesematters will not have a material adverse effect on its consolidated financialcondition or results of operations.

**14. NewAccounting Pronouncements**

In September 2005, theEmerging Issues Task Force reached a consensus on Issue No. 04-13, “Accountingfor Purchases and Sales of Inventory With the Same Counterparty,” (“EITF 04-13”)effective for the Company April 1, 2006, for new arrangements and modificationsor renewals of existing arrangements. EITF 04-13 requires certain inventoryexchange transactions between counterparties within the same line of businessto be viewed as a single exchange transaction. The Company is currentlyevaluating the impact of EITF 04-13.

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**ITEM 2.        MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OFOPERATIONS**

**FORWARD-LOOKING STATEMENTS**

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 such statements, our expectations are based on reasonableassumptions, any such statement may be influenced by factors that could causeactual outcomes and results to be materially different from those projected. Whenused in this document, the words “anticipates,” “believes,” “expects,” “intends”and similar expressions as they relate to Smurfit-Stone Container Enterprises, Inc.or its management, are intended to identify such forward-looking statements. Theseforward-looking statements are subject to numerous risks and uncertainties. Thereare important factors that could cause actual results to differ materially fromthose in forward-looking statements, certain of which are beyond our control. Thesefactors, risks and uncertainties are discussed in our 2005 Annual Report on Form 10-K(2005 Form 10-K).

Our actual results, performance or achievements coulddiffer materially from those expressed in, or implied by, these forward-lookingstatements. Accordingly, we can give no assurances that any of the eventsanticipated by the forward-looking statements will transpire or occur, or ifany of them do so, what impact they will have on our results of operations orfinancial condition. We expressly decline any obligation to publicly revise anyforward-looking statements that have been made to reflect the occurrence ofevents after the date hereof.

# **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 thereduced disclosure format permitted thereby. The omitted information issubstantially similar to the disclosures contained in Smurfit-Stone ContainerCorporation’s Quarterly Report on Form 10-Q for the quarter ended March 31,2006 filed with the Securities and Exchange Commission 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-owned subsidiary of Smurfit-StoneContainer Corporation (Smurfit-Stone), a holding company with no businessoperations of its own. Smurfit-Stone conducts its business operations throughus. We are the surviving company resulting from the merger (the Merger) ofSmurfit-Stone’s primary operating subsidiaries on November 1, 2004. JSCE, Inc. merged with and into JeffersonSmurfit Corporation (U.S.) (JSC(U.S.)), with JSC(U.S.) as the survivingcompany, and then JSC(U.S.) merged with and into us, with us as the survivingentity. The Merger was effected principally to consolidate debt financingactivities of Smurfit-Stone and its subsidiaries. We were simultaneouslyrenamed 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 ofthe Merger, our financial statements for all periods presented have beenrestated to include the combined results of us and JSC(U.S.). The Merger didnot impact the operating activities of the merged companies, which continue todo business as Smurfit-Stone.

# **RESULTS OF OPERATIONS**

# **StrategicInitiatives**

Duringthe fourth quarter of 2005, we announced a strategic reassessment plan toimprove performance and better position us for long-term growth. Our newstrategy focuses on (i) cost reduction initiatives from which we expect toachieve $600 million in annual savings by the end of 2008, (ii) revenuegrowth

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initiativesfrom which we expect to generate $650 million in incremental annual revenue bythe end of 2008 and (iii) organizational changes to enable the costreduction and revenue growth initiatives. As part of the overall initiatives,we are currently evaluating strategic options for our Consumer Packagingsegment.

For 2006, we aretargeting $280 million of costs savings from our strategic initiatives and $100million of above market revenue growth. In the first quarter of 2006, werealized savings of approximately $35 million from our strategic initiatives. Sincewe announced our strategic reassessment plan, we have realized cumulativesavings of approximately $80 million. The cumulative savings include areduction of fixed costs primarily related to the closures of twocontainerboard mills in August 2005, other workforce reductions in theContainerboard and Corrugated Containers segment and a one-time curtailmentgain related to the elimination of postretirement health care and lifeinsurance benefits for certain employees. To date, we have closed twocontainerboard mills, shut down or announced the closures of six convertingfacilities and removed two additional corrugators. As a result of theseactions, we have reduced our headcount by more than 2,200 since June 30,2005, including 700 during the first quarter of 2006. For the first quarter of2006, our revenue growth has kept pace with the overall market.

# **Overview**

Wehad a net loss of $61 million for the first quarter of 2006. Net salesincreased 1.5% compared to the first quarter of 2005 due primarily to increasedsales volume for corrugated containers and containerboard. Compared to thefirst quarter of 2005, our net loss increased due primarily to lower averagesales prices, higher restructuring charges and higher costs for energy andfreight.

Weexpect our results from operations to improve in the second quarter of 2006 asa result of higher sales prices for containerboard and corrugated containers,lower energy and employee benefit costs and the continued benefit from ourstrategic initiatives. Prices for our corrugated container products shouldcontinue to trend higher in the second half of 2006.

**First Quarter 2006 Comparedto First Quarter 2005**
| ** **                                                              | ** ** | **Three months ended March 31,** | ** ** |
|-------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                              | ** ** | **2006**                                             | ** ** | **2005** | ** ** |
| ** **(In millions)                                            | ** ** | **Net  Sales**                                       | ** ** | **Profit/  (Loss)** | ** ** | **Net  Sales** | ** ** | **Profit/  (Loss)** | ** ** |
|                                                                    |       |                                                 |       |   |   |   |   |   |   |
| Containerboard  and corrugated containers                               |       | $                                                    | 1,626      |   | $ | 9 |   | $ | 1,589 |   | $ | 66 |   |
| Consumer  packaging                                                     |       | 416                                                  |       | 16 |   | 404 |   | 15 |   |
| Other operations                                                        |       | 83                                                   |       | 4 |   | 100 |   | 6 |   |
| Total segment operations                                                |       | $                                                    | 2,125      |   | 29 |   | $ | 2,093 |   | 87 |   |
|                                                                    |       |                                                 |       |   |   |   |   |   |   |
| Restructuring  charges                                                  |       |                                                 |       | (9 | ) |   |   | (1 | ) |
| Gain on sale of  assets                                                 |       |                                                 |       | 23 |   |   |   |   |   |
| Interest  expense, net                                                  |       |                                                 |       | (92 | ) |   |   | (86 | ) |
| Non-cash foreign  currency gains (losses)                               |       |                                                 |       | 2 |   |   |   | (1 | ) |
| Mark-to-market  unrealized gains (losses) on derivative instruments (1) |       |                                                 |       | (9 | ) |   |   | 8 |   |
| Corporate  expenses and other (2)                                       |       |                                                 |       | (42 | ) |   |   | (35 | ) |
| Loss before  income taxes                                               |       |                                                 |       | $ | (98 | ) |   |   | $ | (28 | ) |

 

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(1)          Amounts includemark-to-market unrealized gains or losses on natural gas commodity and foreigncurrency derivative instruments not qualifying for hedge accounting.

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

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The increase in net sales was due primarily to theimprovement in sales volume for the Containerboard and Corrugated Containerssegment. The change in net sales for each of our segments is summarized in thechart below:
| **(In millions)**       | ** ** | **Container-  board &  Corrugated  Containers** | ** ** | **Consumer  Packaging** | ** ** | **Other  Operations** | ** ** | **Total** | ** ** |
|------------------------------|------------|----------------------------------------------------------|------------|-------------------------|------------|-----------------------|------------|-----------|------------|
|                         |       |                                                     |       |                    |       |                  |       |      |       |
| Sales price and  product mix |       | $                                                        | (21        | )                       | $          | 4                     |       | $         | (18        | ) | $ | (35 | ) |
| Sales volume                 |       | 58                                                       |       | 8                       |       | 1                     |       | 67        |       |
| Total                        |       | $                                                        | 37         |                    | $          | 12                    |       | $         | (17        | ) | $ | 32 |   |

 

Cost of goods sold increased from $1,835 million in2005 to $1,936 million in 2006 due primarily to the higher sales volume ($59million) and higher costs for energy ($39 million), wood fiber ($6 million),freight ($16 million) and chemicals ($7 million). Cost of goods sold wasfavorably impacted by lower cost for reclaimed material ($34 million). Cost ofgoods sold as a percent of net sales increased from 87.7% in 2005 to 91.1% in2006 due primarily to the higher costs.

Selling and administrative expense increased $10million compared to last year due primarily to higher stock-based compensationexpense ($3 million), including $1 million due to the impact of adoptingStatement of Financial Accounting Standards No. 123(R), “Share-BasedPayment,” on January 1, 2006, and costs related to the implementation ofthe strategic initiatives ($3 million). For information concerning stock-basedcompensation, see Note 4 of the Notes to Consolidated Financial Statements. Sellingand administrative expense as a percent of net sales increased from 9.4% in2005 to 9.7% in 2006.

In connection with ourstrategic initiatives, we recorded restructuring charges of $9 million,including non-cash charges of $5 million related to the write-down of assets,primarily property, plant and equipment, to estimated net realizable value,during the first quarter of 2006. We announced the closure of three convertingfacilities, which resulted in approximately 210 employees being terminated. Theremaining charges were primarily for severance and benefits. Additional chargesof up to $7 million will be recorded in future periods for severance andbenefits related to the closure of three converting facilities and for pensionsettlement costs.

Werecorded a gain of $23 million in the first quarter of 2006 related to thedivestiture of our Port St. Joe, Florida joint venture interest and relatedreal estate.

Interestexpense was $92 million in 2006. The $6 million increase over 2005 was theresult of higher interest rates ($5 million) and increased borrowings ($1million). Our overall average effective interest rate in 2006 was higher than2005 by approximately 0.40%.

Other,net for 2006 included non-cash foreign currency gains of $2 million compared tolosses of $1 million in 2005.

Benefit from income taxes differed from the amountcomputed by applying the statutory U.S. federal income tax rate to loss beforeincome taxes due primarily to state income taxes and the effect of otherpermanent differences.

**Containerboard andCorrugated Containers Segment**

Netsales increased 2.3% in 2006 compared to last year primarily as a result ofhigher sales volume for corrugated containers and containerboard. Shipments ofcorrugated containers increased 2.6% and containerboard shipments to thirdparties increased 12.4% compared to the same period last year. Average domesticlinerboard prices in the first quarter of 2006 were 10.1% higher than thefourth quarter of 2005, but decreased 0.5% compared to the first quarter of2005. Our average North American selling price for corrugated containers was3.6% higher compared to the fourth quarter of 2005, but decreased 

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2.5%compared to the first quarter of 2005. First quarter average sales prices formarket pulp and solid bleached sulfate (SBS) increased approximately 1.4% and2.8%, respectively, compared to the same period last year. The average salesprice for kraft paper declined 3.1% compared to the same period last year.

Ourcontainerboard mills operated at 96.6% of capacity in the first quarter of 2006and production increased 1.1% compared to last year. Production of market pulp,SBS and kraft paper increased by 2.8%, 10.8% and 3.8%, respectively, comparedto last year.

Profits decreased by $57 million compared to last yeardue primarily to the lower average sales prices and higher costs of energy ($17million), freight ($15 million), chemicals ($6 million) and wood fiber ($6million). Profits were favorably impacted by the higher sales volume and lowercosts for reclaimed fiber ($12 million).

**Consumer Packaging Segment**

Netsales increased 3.0% in 2006 primarily due to higher sales volume for foldingcartons and coated recycled boxboard. Folding carton shipments increased 3.2%and shipments of coated recycled boxboard to third parties increased 10.0%compared to last year. Multiwall bag shipments were comparable to last year,while flexible packaging shipments increased 3.9%. Average sales prices forcoated recycled boxboard and flexible packaging increased 2.8% and 11.6%,respectively. Average sales prices for folding cartons were comparable to lastyear, while average sales prices for multiwall bags were lower by 1.1%. Thecoated recycled boxboard mills operated at 98.6% of capacity in 2006 ascompared to 98.3% of capacity in 2005.

Profitsincreased by $1 million compared to last year primarily as a result of the highersales volume and lower cost for reclaimed fiber ($2 million) which werepartially offset by higher costs for energy ($4 million), freight ($1 million)and chemicals ($1 million).

**Other Operations**

Netsales decreased 17.0% due primarily to lower average sales prices for reclaimedfiber. The average price for old corrugated containers decreased byapproximately $25 per ton compared to last year. Total tons of fiber reclaimedand brokered increased by 1.8% as a result of higher internal consumption, whichwas partially offset by lower external sales volume. Profits in 2006 decreased$2 million compared to last year due primarily to the lower average sellingprices and the loss of a profitable customer account.

#### **Statistical Data**

#### (In thousands of tons, except as noted)

| ** **                                                       | ** ** | **Three months ended  March 31,** | ** ** |
|------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                       | ** ** | **2006**                                         | ** ** | **2005** | ** ** |
| Mill production                                                  |       |                                             |       |   |   |
| Containerboard (1)                                               |       | 1,771                                            |       | 1,751 |   |
| Kraft paper                                                      |       | 54                                               |       | 52 |   |
| Market pulp                                                      |       | 145                                              |       | 141 |   |
| SBS                                                              |       | 72                                               |       | 65 |   |
| Coated recycled boxboard                                         |       | 137                                              |       | 138 |   |
| North American  corrugated containers sold (billion sq. ft.) (2) |       | 20.0                                             |       | 19.5 |   |
| Folding cartons  sold                                            |       | 128                                              |       | 124 |   |
| Multiwall bags  sold (million bags)                              |       | 269                                              |       | 270 |   |
| Fiber reclaimed and  brokered                                    |       | 1,666                                            |       | 1,636 |   |

 

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(1)          For the three monthsended March 31, 2006 and 2005, our corrugated container plants consumed1,355,000 tons and 1,326,000 tons of containerboard, respectively.

(2)          Excludes intercompanyshipments. Includes our proportionate share of affiliates reported on an equityownership basis.

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**NEW ACCOUNTING PRONOUNCEMENTS**

In September 2005, theEmerging Issues Task Force reached a consensus on Issue No. 04-13, “Accountingfor Purchases and Sales of Inventory With the Same Counterparty,” (EITF 04-13)effective for us April 1, 2006, for new arrangements and modifications orrenewals of existing arrangements. EITF 04-13 requires certain inventoryexchange transactions between counterparties within the same line of businessto be viewed as a single exchange transaction. We are currently evaluating theimpact of EITF 04-13.

**ITEM 3.**          **QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK**

Intentionally omitted in accordance with GeneralInstruction (H) of Form 10-Q.

**ITEM 4.          CONTROLSAND PROCEDURES**

**Evaluation of Disclosure Controls and Procedures**

Ourmanagement, with the participation of our principal executive officer and ourprincipal financial officer, evaluated the effectiveness of our disclosurecontrols and procedures (as defined in Exchange Act Rules 13a-15(e) and15d-15(e)) as of the end of the period covered by this report and haveconcluded that, as of such date, our disclosure controls and procedures wereadequate and effective.

**Changesin Internal Control**

Therehave not been any changes in our internal control over financial reportingduring the most recent quarter that have materially affected, or are reasonablylikely to materially affect, our internal control over financial reporting.

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**PART II—OTHER INFORMATION**

**ITEM 1.          LEGAL PROCEEDINGS**

In 2003, we settled the antitrust class action casespending against Smurfit-Stone, which were based on allegations of a conspiracyamong linerboard manufacturers from 1993 to 1995, and made aggregate settlementpayments of $92.5 million, one-half of which was paid in December 2003 and theremainder of which was paid in January 2005. We, along with other largelinerboard manufacturers, were named a defendant in several lawsuits brought onbehalf of numerous****companies thatopted out of these class actions to seek their own recovery, all but one****of which were consolidated for pretrialproceedings in the United States District Court for the Eastern District ofPennsylvania, and one of which was remanded to Kansas District Court (theDirect Action Cases). In 2005, we settled a majority of the Direct Action Cases.The remaining Direct Action Cases were settled in the first quarter of 2006. Inconnection with these settlements, we made aggregate payments of $60 million,including $14 million in 2005, $36 million in the first quarter of 2006 and $10million in April 2006. We accounted for these settlements by applying existingreserves and recording additional charges in the fourth quarter of 2005.

**ITEM 1A.       RISK FACTORS**

There are no material changes tothe risk factors as disclosed in our 2005 Annual Report on Form 10-K.

**ITEM 2.          UNREGISTERED SALES OF EQUITYSECURITIES AND USE OF PROCEEDS**

Intentionally omitted in accordance with GeneralInstruction (H) of Form 10-Q.

**ITEM 3.          DEFAULTS UPON SENIOR SECURITIES**

Intentionally omitted in accordance with General Instruction (H) of Form10-Q.

**ITEM 4.          SUBMISSION OF MATTERS TO A VOTE OFSECURITY HOLDERS**

Intentionally omitted inaccordance with General Instruction (H) of Form 10-Q.

**ITEM 5.          OTHER INFORMATION**

None

**ITEM 6.          EXHIBITS**

Thefollowing exhibits are included in this Form 10-Q:

31.1                                                   Certification Pursuant to Rules 13a-14 and15d-14 under the Securities Exchange Act of 1934, as Adopted Pursuant to Section302 of the Sarbanes-Oxley Act of 2002.

31.2                                                   Certification Pursuant to Rules 13a-14 and15d-14 under the Securities Exchange Act of 1934, as Adopted Pursuant to Section302 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

Pursuantto the requirements of the Securities Exchange Act of 1934, the Registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.
|                   | SMURFIT-STONE  CONTAINER ENTERPRISES, INC.      |
|-------------------|-------------------------------------------------|
|              | (Registrant)                                    |
|              |                                            |
| Date: May 5, 2006 | /s/ Paul K.  Kaufmann                           |
|              | Paul K. Kaufmann                                |
|              | Senior Vice  President and Corporate Controller |
|              | (Principal  Accounting Officer)                 |

 

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