**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington, D.C.  20549**

 

**FORM 10-Q**

 

**x****                             ****Quarterly Report Pursuant to Section 13 or 15(d) of theSecurities Exchange Act of 1934.**

**o****                                ****Transition Report Pursuant to Section 13 or 15(d) of theSecurities Exchange Act of 1934.**

 

**For Quarter Ended March 31, 2008**

**Commission File Number 1-3439**

 

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

(Exact name ofregistrant 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, ifchanged since last report)

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days.  Yes x  No o

 

Indicateby check mark whether the registrant is a large accelerated filer, an acceleratedfiler, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large acceleratedfiler,” “accelerated filer” and “smaller reporting company” in Rule 12b-2of the Exchange Act.

 

| Large  accelerated filer  o          |   | Accelerated  filer  o         |
|------------------------------------------------|--------|-----------------------------------------|
| Non-accelerated  filer  x            |   | Smaller  Reporting Company  o |
| (Do  not check if a smaller reporting company) |   |                                    |

 

Indicateby check mark if the registrant is a shell company (as defined in Rule 12b-2of the Act).Yes o  No x

 

APPLICABLEONLY TO CORPORATE ISSUERS:

 

Asof May 5, 2008, 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 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 1- FINANCIAL INFORMATION**

** **

**Item 1.    Financial Statements**

** **

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

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

**(Unaudited)**

 
| **Three Months Ended March 31, (In millions)** | ** ** | **2008**  | ** ** | **2007** | ** ** |
|------------------------------------------------------------------------------|------------|-----------|------------|----------|------------|
| Net sales                                                                    | ** ** | **$**     | **1,795**  |     | $          | 1,824 |   |
| Costs and expenses                                                           |       |      |       |     |       |
| Cost of goods  sold                                                          | ** ** | **1,583** |       | 1,610    |       |
| Selling and  administrative expenses                                         | ** ** | **191**   |       | 169      |       |
| Restructuring  expenses                                                      | ** ** | **4**     |       | 24       |       |
| Gain on disposal  of assets                                                  | ** ** | **(3**    | **)**      |     |       |
| Income from  operations                                                      | ** ** | **20**    | ** ** | 21       |       |
| Other income  (expense)                                                      |       |      | ** ** |     |       |
| Interest expense,  net                                                       | ** ** | **(63**   | **)**      | (74      | )          |
| Loss on early  extinguishment of debt                                        |       |      | ** ** | (23      | )          |
| Foreign currency  exchange gains (losses)                                    | ** ** | **15**    | ** ** | (5       | )          |
| Other, net                                                                   | ** ** | **(3**    | **)**      | (5       | )          |
| Loss before  income taxes                                                    | ** ** | **(31**   | **)**      | (86      | )          |
| Benefit from  income taxes                                                   | ** ** | **18**    | ** ** | 34       |       |
| Net loss                                                                     | ** ** | **$**     | **(13**    | **)**    | $          | (52 | ) |

 

See notes toconsolidated financial statements.

** **

**1**

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** **

**SMURFIT-STONECONTAINER ENTERPRISES, INC.**

**CONSOLIDATEDBALANCE SHEETS**

 
| ** **                                                                                                                   | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| **(In millions, except share data)**                                                                     | ** ** | **2008**           | ** ** | **2007**              | ** ** |
| ** **                                                                                                                   | ** ** | **(Unaudited)**    | ** ** | ** **            | ** ** |
| **Assets**                                                                                                                   |       |               |       |                  |       |
| Current assets                                                                                                               |       |               | ** ** |                  |       |
| Cash and cash  equivalents                                                                                                   | ** ** | **$**              | **10**     | ** **            | $          | 7 |   |
| Receivables,  less allowances of $7 in 2008 and 2007                                                                         | ** ** | **162**            | ** ** | 170                   |       |
| Retained  interest in receivables sold                                                                                       | ** ** | **259**            | ** ** | 249                   |       |
| Inventories,  including amounts valued under LIFO method   Work-in-process and finished goods                                |       | **157**            | ** ** | 145                   |       |
| Materials and  supplies                                                                                                      | ** ** | **419**            | ** ** | 395                   |       |
| ** **                                                                                                                   |       | **576**            | ** ** | 540                   |       |
| Prepaid expenses  and other current assets                                                                                   | ** ** | **46**             | ** ** | 36                    |       |
| Total current  assets                                                                                                        | ** ** | **1,053**          | ** ** | 1,002                 |       |
| Net property,  plant and equipment                                                                                           | ** ** | **3,459**          | ** ** | 3,454                 |       |
| Timberland, less  timber depletion                                                                                           | ** ** | **32**             | ** ** | 32                    |       |
| Goodwill                                                                                                                     | ** ** | **2,727**          | ** ** | 2,727                 |       |
| Other assets                                                                                                                 | ** ** | **158**            | ** ** | 172                   |       |
| ** **                                                                                                                   |       | **$**              | **7,429**  | ** **            | $          | 7,387 |   |
| **Liabilities  and Stockholder’s Equity**                                                                               |       |               | ** ** |                  |       |
|                                                                                                                         |       |               | ** ** |                  |       |
| Current  liabilities                                                                                                         |       |               | ** ** |                  |       |
| Current  maturities of long-term debt                                                                                        | ** ** | **$**              | **9**      | ** **            | $          | 11 |   |
| Accounts payable                                                                                                             | ** ** | **587**            | ** ** | 582                   |       |
| Accrued  compensation and payroll taxes                                                                                      | ** ** | **165**            | ** ** | 193                   |       |
| Interest payable                                                                                                             | ** ** | **61**             | ** ** | 66                    |       |
| Income taxes  payable                                                                                                        | ** ** | **35**             | ** ** | 10                    |       |
| Current deferred  income taxes                                                                                               | ** ** | **21**             | ** ** | 21                    |       |
| Other current  liabilities                                                                                                   | ** ** | **107**            | ** ** | 105                   |       |
| Total current  liabilities                                                                                                   | ** ** | **985**            | ** ** | 988                   |       |
| Long-term debt,  less current maturities                                                                                     | ** ** | **3,472**          | ** ** | 3,348                 |       |
| Other long-term  liabilities                                                                                                 | ** ** | **811**            | ** ** | 834                   |       |
| Deferred income  taxes                                                                                                       | ** ** | **454**            | ** ** | 505                   |       |
| Stockholder’s  equity                                                                                                   |       |               | ** ** |                  |       |
| Common stock,  par value $.01 per share; 1,000 shares authorized, 770 issued and outstanding  in 2008 and 2007, respectively |       |               | ** ** |                  |       |
| Additional  paid-in capital                                                                                                  | ** ** | **3,669**          | ** ** | 3,661                 |       |
| Retained  earnings (deficit)                                                                                                 | ** ** | **(1,711**         | **)**      | (1,696                | )          |
| Accumulated  other comprehensive income (loss)                                                                               | ** ** | **(251**           | **)**      | (253                  | )          |
| Total  stockholder’s equity                                                                                             | ** ** | **1,707**          | ** ** | 1,712                 |       |
| ** **                                                                                                                   |       | **$**              | **7,429**  | ** **            | $          | 7,387 |   |

 

See notes toconsolidated financial statements.

** **

**2**

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** **

**SMURFIT-STONECONTAINER ENTERPRISES, INC.**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(Unaudited)**

 
| **Three Months Ended March 31, (In millions)**                  | ** ** | **2008**   | ** ** | **2007**   | ** ** |
|-----------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|
| **Cash  flows from operating activities**                                                     |       |       |       |       |       |
| Net loss                                                                                      | ** ** | **$**      | **(13**    | **)**      | $          | (52 | ) |
| Adjustments to  reconcile net loss to net cash provided by (used for) operating activities    |       |       | ** ** |       |       |
| Loss on early  extinguishment of debt                                                         |       |       | ** ** | 23         |       |
| Depreciation,  depletion and amortization                                                     | ** ** | **87**     | ** ** | 88         |       |
| Amortization of  deferred debt issuance costs                                                 | ** ** | **2**      | ** ** | 2          |       |
| Deferred income  taxes                                                                        | ** ** | **(27**    | **)**      | (38        | )          |
| Pension and  postretirement benefits                                                          | ** ** | **(9**     | **)**      | (4         | )          |
| Gain on disposal  of assets                                                                   | ** ** | **(3**     | **)**      |       |       |
| Non-cash  restructuring expenses                                                              |       |       | ** ** | 12         |       |
| Non-cash stock  based compensation                                                            | ** ** | **5**      | ** ** | 6          |       |
| Non-cash foreign  currency exchange (gains) losses                                            | ** ** | **(15**    | **)**      | 5          |       |
| Change in  current assets and liabilities, net of effects from acquisitions and  dispositions |       |       | ** ** |       |       |
| Receivables and  retained interest in receivables sold                                        | ** ** | **(1**     | **)**      | (21        | )          |
| Inventories                                                                                   | ** ** | **(35**    | **)**      | (16        | )          |
| Prepaid expenses  and other current assets                                                    | ** ** | **(12**    | **)**      | 4          |       |
| Accounts payable  and accrued liabilities                                                     | ** ** | **(6**     | **)**      | 25         |       |
| Interest payable                                                                              | ** ** | **(5**     | **)**      | (16        | )          |
| Other, net                                                                                    | ** ** | **5**      | ** ** | 2          |       |
| Net cash  provided by (used for) operating activities                                         | ** ** | **(27**    | **)**      | 20         |       |
| **Cash  flows from investing activities**                                                     |       |       | ** ** |       |       |
| Expenditures for  property, plant and equipment                                               | ** ** | **(94**    | **)**      | (96        | )          |
| Proceeds from  property disposals                                                             | ** ** | **4**      | ** ** | 2          |       |
| Net cash used  for investing activities                                                       | ** ** | **(90**    | **)**      | (94        | )          |
| **Cash  flows from financing activities**                                                     |       |       | ** ** |       |       |
| Proceeds from  long-term debt                                                                 |       |       | ** ** | 675        |       |
| Net borrowings  (repayments) of long-term debt                                                | ** ** | **122**    | ** ** | (571       | )          |
| Debt repurchase  premiums                                                                     |       |       | ** ** | (19        | )          |
| Dividends paid                                                                                | ** ** | **(2**     | **)**      | (2         | )          |
| Deferred debt  issuance costs                                                                 |       |       | ** ** | (7         | )          |
| Net cash  provided by financing activities                                                    | ** ** | **120**    | ** ** | 76         |       |
|                                                                                          |       |       | ** ** |       |       |
| **Increase  in cash and cash equivalents**                                                    | ** ** | **3**      | ** ** | 2          |       |
| Cash and cash  equivalents                                                                    | ** ** | ** ** | ** ** |       |       |
| Beginning of  period                                                                          |       | **7**      | ** ** | 9          |       |
| End of period                                                                                 | ** ** | **$**      | **10**     | ** ** | $          | 11 |   |

 

See notes toconsolidated financial statements.

** **

**3**

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** **

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

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

(Tabular amounts in millions)

** **

**1.****              Significant Accounting Policies**

 

**Basisof Presentation:**  Theaccompanying consolidated financial statements and notes thereto of Smurfit-StoneContainer Enterprises, Inc. (“SSCE” or the “Company”) have been preparedin 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.  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, 2007 (“2007 10-K”) filed February 28,2008 with the Securities and Exchange Commission.

 

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

 

**RecentlyAdopted Accounting Standard:**   Effective January 1, 2008, theCompany adopted the provisions of Statement of Financial Accounting Standards (“SFAS”)No. 157, “Fair Value Measurements” (“SFAS No. 157”) for financialassets and liabilities.  SFAS No. 157defines fair value, establishes a framework for measuring fair value andexpands disclosures about fair value measurements (See Note 13).  SFAS No. 157 applies under otheraccounting pronouncements that require or permit fair value measurements and,accordingly, SFAS No. 157 does not require any new fair valuemeasurements.

 

**2.****              Reclassifications**

** **

Certain prior year amounts have beenreclassified to conform to the current year presentation.

 

**3.****             ****Calpine Corrugated LLC Transaction**

** **

In the first quarter of 2008, the Company recorded a charge of $22million to fully reserve all amounts due from Calpine Corrugated LLC (“CalpineCorrugated”).  Calpine Corrugated, anindependent corrugated container producer in Fresno, California for which theCompany is the primary containerboard supplier, has experienced start-up lossessince it began operations in 2006.

 

On April 17, 2008, the Company signed a letter of intent to take a90 percent ownership interest in Calpine Corrugated.  The transaction, which will be accounted foras a purchase business combination, is expected to close in the second quarterof 2008.  The acquisition of CalpineCorrugated’s operations will enable the Company to accelerate the optimizationof its Northern California packaging system and improve its position in theagricultural market segment.

 

In 2007, the Company recorded charges of $10 million to reserve foramounts due from Calpine Corrugated, of which $2 million was recorded in thefirst quarter.

 

4

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** **

**4.  Strategic Initiatives andRestructuring Activities**

 

During 2005, the Companyannounced a strategic initiative plan to improve performance and betterposition the Company for long-term growth. The plan focused on cost reduction, productivity initiatives andreinvestment in the Company’s operations.  The Company expects to achieve $525 million inannual savings by the end of 2008, compared to levels prior to the start of theplan.

 

In the first quarter of2008, in conjunction with the strategic initiative plan, the Company closed oneconverting facility and announced the closure of an additional converting facilityexpected to close in the second quarter of 2008.  As a result of the plant closure and other ongoingstrategic initiatives, the Company reduced its headcount by approximately 230 employees.  The Company recorded restructuring charges of$4 million, net of a gain of $2 million from the sale of a previously closedfacility.  Restructuring charges includenon-cash charges of $2 million related to the write-down of assets, primarilyproperty, plant and equipment, to estimated net realizable values and theacceleration of depreciation for equipment expected to be abandoned or takenout of service. The remaining charges of $4 million were primarily forseverance and benefits.  The net sales ofthe closed converting facilities in 2008 prior to closure and for the year endedDecember 31, 2007 were $14 million and $63 million, respectively.  The majority of these net sales are expectedto be transferred to other operating facilities.  Additional charges of up to $2 million willbe recorded in future periods for severance and benefits related to the closureof these converting facilities.

 

During the first quarter of 2007, the Company recorded restructuringcharges of $24 million related to the closure of three convertingfacilities and the announced closure of three additional converting facilities. Restructuring charges included non-cash chargesof $12 million related to the write-down of assets, primarily property,plant and equipment, to estimated net realizable value and the acceleration ofdepreciation for equipment expected to be abandoned or taken out of service.  The remaining charges were primarily forseverance and benefits.

 

At December 31,2007 the Company had $29 million of accrued exit liabilities related to therestructuring of operations.  During thefirst quarter of 2008, the Company incurred $5 million of cash disbursementsrelated to these exit liabilities.  Inaddition, for the three months ended March 31, 2008, the Company incurred$3 million of cash disbursements related to exit liabilities established during2008.

 

**5.  Accounts Receivable Securitization Programs**

 

At March 31,2008 and December 31, 2007, $693 million and $656 million, respectively,of receivables had been sold under two accounts receivable securitizationprograms, of which the Company retained a subordinated interest.  The off-balance sheet debt related to the twoaccounts receivable programs totaled $420 million and $422 million,respectively, as of those dates.

 

**6.  Guarantees and Commitments**

 

TheCompany has certain wood chip processing contracts extending from 2012 through2018 with minimum purchase commitments. As part of the agreements, the Company guarantees the third partycontractors’ debt outstanding and has a security interest in the chippingequipment.  At March 31, 2008, themaximum potential amount of future payments related to these guarantees wasapproximately $30 million and decreases ratably over the life of thecontracts.  In the event the guaranteeson these contracts were called, proceeds from the liquidation of the chippingequipment would be based on current market conditions and the Company may notrecover in full the guarantee payments made.

 

TheCompany has an agreement to guarantee a portion of Calpine Corrugated’s debtthrough January 2010.  At March 31,2008, the maximum potential amount of the future payments related to thisguarantee 

 

5

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was$12 million.  The Company has no recourseto the assets of Calpine Corrugated, other than that of a general unsecuredcreditor.  Upon the expected completionof the Calpine Corrugated transaction in the second quarter of 2008, theCompany expects to either fully guarantee or become a co-borrower on theoutstanding debt of Calpine Corrugated (See Note 3).

 

The Company iscontingently liable for $18 million under a one year letter of credit issued inApril 2007 to support borrowings of one of the Company’s non-consolidatedaffiliates.  In April 2008, theletter of credit was extended for an additional year.  The letter of credit is collateralized by apledge of affiliate stock owned by the other shareholder in the event theletter of credit is drawn upon and the other shareholder is unable to reimbursethe Company for their 50% share of the letter of credit obligation.

 

**7.  Long-Term Debt**

** **

In March 2007,the Company completed an offering of $675 million of 8.00% unsecured seniornotes due March 15, 2017.  TheCompany used the proceeds of this issuance to repay $546 million of the 9.75%unsecured senior notes due 2011, which were purchased in connection with a cashtender offer, pay related tender premiums and accrued interest of $19 millionand $8 million, respectively, and repay $95 million of the Company’s revolvingcredit facility.  In addition, theCompany used the proceeds to pay fees and expenses of $7 million related tothis transaction.  A loss on earlyextinguishment of debt of $23 million was recorded in the first quarter of2007, including $19 million for tender premiums and a $4 million write-off of unamortizeddeferred debt issuance costs.

** **

**8.  Employee Benefit Plans**

** **

The Company sponsorsnoncontributory defined benefit pension plans for its U.S. employees and alsosponsors noncontributory and contributory defined benefit pension plans for itsCanadian employees.  The Company’sdefined benefit pension plans cover substantially all hourly employees, as wellas salaried employees hired prior to January 1, 2006.  On August 31, 2007 the Company announcedthe freeze of its defined benefit pension plans for salaried employees,effective January 1, 2009.

 

The Company’spostretirement plans provide certain 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 ten years ofservice as of January 1, 2007.

 

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

 
| ** **                                    | ** ** | **Three months ended March 31,** | ** ** |
|-----------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                    | ** ** | **Defined   Benefit Plans**                | ** ** | **Postretirement   Plans** | ** ** |
| ** **                                    | ** ** | **2008**                                             | ** ** | **2007** | ** ** | **2008** | ** ** | **2007** | ** ** |
| Service cost                                  |       | $                                                    | 13         |   | $ | 14 |   | $ | 1 |   | $ | 1 |   |
| Interest cost                                 |       | 51                                                   |       | 49 |   | 3 |   | 3 |   |
| Expected return  on plan assets               |       | (63                                                  | )          | (58 | ) |   |   |   |   |
| Amortization of  prior service cost (benefit) |       | 1                                                    |       | 2 |   | (1 | ) | (1 | ) |
| Amortization of  net (gain) loss              |       | 10                                                   |       | 15 |   | (1 | ) | 1 |   |
| Settlements                                   |       |                                                 |       | 1 |   |   |   |   |   |
| Multi-employer  plans                         |       | 1                                                    |       | 1 |   |   |   |   |   |
| Net periodic  benefit cost                    |       | $                                                    | 13         |   | $ | 24 |   | $ | 2 |   | $ | 4 |   |

 

The Company’s 2008expected contributions to its qualified defined benefit plans and benefitpayments under its non-qualified defined benefit plans and postretirement plansare not expected to be materially different than the amounts disclosed in theCompany’s 2007 10-K.

 

The 2007 settlementcharges are related to closed facilities and are included as part ofrestructuring charges (See Note 4).

 

**9.  Derivative Instruments andHedging 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.  All cash flows associated with the Company’sderivative instruments are classified as operating activities in theconsolidated statements of cash flows.

** **

#### **Commodity DerivativeInstruments**

 

The Company uses derivative instruments, including fixed price swaps, tomanage fluctuations in cash flows resulting from commodity price risk in theprocurement of natural gas and other commodities.  The objective is to fix the price of aportion of the Company’s purchases of these commodities used in themanufacturing process.  The changes inthe market value of such derivative instruments have historically offset, andare expected to continue to offset, the changes in the price of the hedgeditem.  As of March 31, 2008, themaximum length of time over which the Company was hedging its exposure to thevariability in future cash flows associated with the commodities’ forecastedtransactions was nine months.

 

For the three months ended March 31, 2008 and 2007, the Companyreclassified a $1 million loss (net of tax) and a $5 million loss (net of tax),respectively, from other comprehensive income (loss) (“OCI”) to cost of goodssold when the hedged items were recognized. The fair value of these commodity derivative instruments at March 31,2008 was a $2 million asset, included in prepaid expenses and other currentassets.

 

For the three months ended March 31, 2008 and 2007, the Companyrecorded an immaterial amount and a $3 million gain (net of tax), respectively,in cost of goods sold related to the change in fair value of certain commodityderivative instruments not qualifying for hedge accounting.

 

7

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For the three months ended March 31, 2008 and 2007, the Companyrecorded an immaterial amount and a $4 million loss (net of tax), respectively,in cost of goods sold on settled commodity derivative instruments notqualifying for hedge accounting.

 

**Foreign Currency Derivative Instruments**

** **

The Company’s principal foreign exchange exposureis the Canadian dollar.  The Company usesforeign currency derivative instruments, including forward contracts andoptions, primarily to protect against Canadian currency exchange riskassociated with expected future cash flows. As of March 31, 2008, the maximum length of time over which theCompany was hedging its exposure to the variability in future cash flowsassociated with foreign currency was nine months.  For the three months ended March 31, 2008and 2007, the Company reclassified a $2 million gain (net of tax) and a $1 millionloss (net of tax), respectively, from OCI to cost of goods sold related to therecognition of the foreign currency derivative instruments.  The change in fair value of these derivativeinstruments is recorded in OCI until the underlying transaction is recorded.  The fair value of the Company’s foreigncurrency derivative instruments at March 31, 2008 was a $3 million asset, includedin prepaid expenses and other current assets.

** **

#### **Interest Rate SwapContracts**

 

TheCompany uses interest rate swap contracts to manage interest rate exposure on$300 million of the current Tranche B and Tranche C floating rate bank termdebt, effectively fixing the interest rate at 4.3%.  These contracts extend until 2011, consistentwith the maturity of the Company’s Tranche B and Tranche C term loans.  Changes in the fair value of the interestrate swap contracts are expected to be highly effective in offsetting thefluctuations in the floating interest rate and are recorded in OCI until theunderlying transaction is recorded.  Theaccounting for the cash flow impact of the swap contracts is recorded as anadjustment to interest expense each period. For the three months ended March 31, 2008 and 2007, the Companyreclassified an immaterial amount and a $1 million gain (net of tax),respectively, from OCI to interest expense when the hedged items were recognized.  The fair value of the Company’s interest rateswap contracts at March 31, 2008 was a $15 million liability included inother long-term liabilities.

 

**Deferred Hedge Gain (Loss)**

** **

Thecumulative deferred hedge loss in OCI on all derivative instruments was $7 million(net of tax) at March 31, 2008, including a $1 million gain (net of tax)on commodity derivative instruments, a $1 million gain (net of tax) on foreigncurrency derivative instruments and a $9 million loss (net of tax) on interestrate swap contracts.  The Company expectsto reclassify a $2 million gain (net of tax) into cost of goods sold within thenext 12 months, related to the commodity and foreign currency derivativeinstruments.

 

**10.  Income Taxes**

 

Thebenefit for income taxes for the first quarter of 2008 differed from the amountcomputed by applying the statutory U.S. federal income tax rate to loss beforeincome taxes due primarily to non-cash foreign currency exchange gains, stateincome taxes and the effect of other permanent differences.

 

Duringthe first quarter of 2008, $2 million of unrecognized tax benefits was recordedrelated to a tax position taken during the current year and for interest onunrecognized tax benefits previously recorded. In addition, a decrease of $4 million in unrecognized tax benefits wasrecorded due to foreign currency exchange gain on Canadian tax positions.

 

TheCanada Revenue Agency (“CRA”) is currently examining the Company’s income taxreturns for tax years 1999 through 2005. In connection with the examination of the Company’s 1999 and 2000Canadian income tax returns, the CRA is considering certain significantadjustments to taxable income related to the acquisition of a Canadiancompany.  This matter may be resolved atthe examination level or subsequently upon appeal within the next twelvemonths.  With respect to transfer pricesof inventory sold by the Company’s Canadian subsidiaries to its U.S.subsidiaries, the CRA has issued assessments of additional income taxes,interest and penalties, which the Company intends to appeal.  At March 31, 2008, the 

 

8

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Companyreclassified $23 million to current income taxes payable related to theseassessments.  While the final outcome ofthese matters, including an estimate of the range of the reasonably possiblechanges to unrecognized tax benefits, is not yet determinable, the Companybelieves that the examination or subsequent appeals will not have a materialadverse effect on its consolidated financial condition or results ofoperations.

 

**11.  Comprehensive Income (Loss)**

** **

Comprehensiveincome (loss) is as follows:

 
| ** **                                                             | ** ** | **Three months ended   March 31,** | ** ** |
|------------------------------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                                                             | ** ** | **2008**                                               | ** ** | **2007** | ** ** |
| Net loss                                                               |       | $                                                      | (13        | ) | $ | (52 | ) |
| Other  comprehensive income (loss), net of tax:                        |       |                                                   |       |   |   |
| Net changes in fair  value of hedging instruments                      |       | (3                                                     | )          | 3 |   |
| Net hedging  (gain) loss reclassified into earnings                    |       | (1                                                     | )          | 5 |   |
| Net deferred  employee benefit plan expense reclassified into earnings |       | 6                                                      |       | 10 |   |
| Comprehensive  loss                                                    |       | $                                                      | (11        | ) | $ | (34 | ) |

** **

**12.  Stock-Based Compensation**

** **

Certainofficers and key managers of the Company participate in various stock-basedcompensation plans sponsored by SSCC, which issues stock options and restrictedstock units (“RSUs”).  During the first quarterof 2008, the Company granted approximately 980,000 SSCC stock options with aweighted-average exercise price and grant date fair value of $8.94 and $3.00,respectively.  These options vest andbecome exercisable on the third anniversary of the award date.  Compensation expense is being recorded overthe three-year period on a straight-line basis.

 

TheCompany also issued approximately 335,000 non-vested SSCC RSUs to certainemployees and non-employee directors with a weighted-average grant date fairvalue of $8.95 per RSU.  To settle its2007 management incentive plan liability, the Company issued approximately 347,000vested SSCC RSUs, which had been accrued for in the prior year, andapproximately 69,000 related premium non-vested SSCC RSUs at a fair value of $9.14per RSU.  In accordance with the Company’sapplicable management incentive plan and long-term incentive plan, thenon-vested SSCC RSUs vest in three years.

** **

**13.  Fair Value Measurements**

** **

Certain financial assetsand liabilities are recorded at fair value on a recurring basis, including theCompany’s retained interest in receivables sold to the accounts receivableprograms (See Note 5), the Company’s residual interest in the Timber NoteHoldings (“TNH”) investment, and derivative assets and liabilities (See Note 9).

 

Fair value is defined asthe price that would be received to sell an asset or paid to transfer aliability in an orderly transaction between market participants at themeasurement date.  In determining fairvalue, the Company uses various valuation approaches, including market, incomeand/or cost approaches.  SFAS No. 157establishes a hierarchy for inputs used in measuring fair value that maximizesthe use of observable inputs and minimizes the use of unobservable inputs byrequiring that the most observable inputs be used when available.  Observable inputs are inputs that marketparticipants would use in pricing the asset or liability based on market dataobtained from sources independent of the Company.  Unobservable inputs are inputs that reflectthe Company’s assumptions about the assumptions market participants would usein pricing the asset or liability developed based on the best informationavailable in 

 

9

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the circumstances.  The hierarchy for inputs is broken down intothree levels based on their reliability as follows:

 

*Level 1*–Valuations based on quoted prices in active markets for identical assets orliabilities that the Company has the ability to access.  The Company has no assets or liabilitiesmeasured at fair value on a recurring basis utilizing Level 1 inputs.

 

*Level 2*– Valuations based on quoted prices in markets that are not active or for whichall significant inputs are observable, either directly or indirectly.  The Company’s assets and liabilitiesutilizing Level 2 inputs include derivative assets and liabilities, of whichthe fair values are estimated using model inputs specific to the derivativeincluding interest rate yield curves, commodity forward spread curves, andvolatility of the underlying commodities.

 

*Level 3*– Valuations based on inputs that are unobservable and significant to theoverall fair value measurement.  TheCompany’s assets and liabilities utilizing Level 3 inputs include the retainedinterest in receivables sold to the accounts receivable programs, of which thefair values are estimated using discounted residual cash flows, expected lossand dilution rates, and variable returns to investors, and the residualinterest in the TNH investment, of which the fair value is estimated usingdiscounted residual cash flows.

 

**Fair value on a recurring basis**

** **

Assets and liabilitiesmeasured at fair value on a recurring basis are categorized in the table belowbased upon the level of input to the valuations.

 
| ** **                             | ** ** | **March 31, 2008** | ** **   |
|----------------------------------------|------------|------------------------------|--------------|
| ** **                             | ** ** | **Level 1**             | ** **   | **Level 2** | ** ** | **Level 3** | ** ** | **Total** | ** ** |
| Retained  interest in receivables sold |       | $                            |    |   | $ |   |   | $ | 259 |   | $ | 259 |   |
| Residual  interest in TNH investment   |       |                         |         |   |   | 33 |   | 33 |   |
| Derivative  assets                     |       |                         |         | 5 |   |   |   | 5 |   |
| Derivative  liabilities                |       |                         |         | (15 | ) |   |   | (15 | ) |
|                                   |       | $                            |         |   | $ | (10 | ) | $ | 292 |   | $ | 282 |   |
|                                        |            |                              |              |  |  |  |  |  |  |  |  |  |  |  |

 

The following tablepresents the changes in Level 3 assets measured at fair value on a recurringbasis for the three months ended March 31, 2008:

 
| ** **                       | ** ** | **Retained   Interest in   Receivables   Sold** | ** ** | **Residual   Interest in   TNH   Investment** | ** ** | **Total** | ** ** |
|----------------------------------|------------|---------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|-----------|------------|
| Balance at  January 1, 2008 |       | $                                                                   | 249        |                                                              | $          | 44        |       | $ | 293 |   |
| Net payments and  sales          |       | 33                                                                  |       | (12                                                               | )          | 21        |       |
| Realized  gains/(losses)         |       | (23                                                                 | )          | 1                                                                 |       | (22       | )          |
| Balance at  March 31, 2008  |       | $                                                                   | 259        |                                                              | $          | 33        |       | $ | 292 |   |

 

Realizedgains (losses) associated with Level 3 financial instruments principally relateto the charge to reserve for the Calpine Corrugated receivables previously soldto the Company’s accounts receivable program, which is included in selling andadministrative expenses (See Note 3).

 

**14. Contingencies**

 

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 potentialenvironmental liability as a result of violations of permit terms and similarauthorizations that have 

 

10

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occurred from time totime at its facilities.  In addition, theCompany faces potential liability for response costs at various sites for whichit has received notice as being a potentially responsible party (“PRP”)concerning hazardous substance contamination. In estimating its reserves for environmental remediation and futurecosts at sites where it has been named as a PRP, the Company’s estimatedliability of $5 million reflects the Company’s expected share of costs afterconsideration for the relative percentage of waste deposited at each site, thenumber of other PRPs, the identity and financial condition of such parties andexperience regarding similar matters.  Asof March 31, 2008, the Company had approximately $16 million reserved forenvironmental liabilities included primarily in other long-term liabilities inthe consolidated balance sheet.  TheCompany believes the liability for these matters was adequately reserved at March 31,2008.

 

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 currentlydefending two putative class action cases filed in California state court onbehalf of current and former hourly employees at the Company’s Californiacorrugated container facilities.  Thesecases allege violations of the California on-duty meal break and rest periodstatutes and seek damages prescribed by such statutes.  In addition, the Company is a defendant in anumber of lawsuits and claims arising out of the conduct of its business.  During the first quarter of 2008, the Companyrecorded charges of $9 million related to litigation matters.  While the ultimate outcome of such suits orother proceedings against the Company cannot be predicted with certainty, themanagement 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.

 

11

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| **ITEM 2.** | ** ** | **MANAGEMENT’S DISCUSSION AND  ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS** |
|-------------|------------|-------------------------------------------------------------------------------------------------|

 

**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 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 toSmurfit-Stone Container Enterprises, Inc. or its management, are intendedto identify such forward-looking statements. These forward-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 uncertainties arediscussed in our 2007 Annual Report on Form 10-K (2007 Form 10-K).

 

Our actual results,performance or achievements could differ materially from those expressed in, orimplied by, these forward-looking statements. Accordingly, we can give no assurances that any of the eventsanticipated by the forward-looking statements will occur, or if any of them do,what impact they will have on our results of operations or financial condition. We expressly decline any obligation topublicly revise any forward-looking statements that have been made to reflectthe occurrence of events 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 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 March 31, 2008 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 business operations through us.  We operate as one segment, the Containerboard,Corrugated Containers and Reclamation segment.

 

**RECENTLY ADOPTED ACCOUNTINGSTANDARDS**

 

Effective January 1,2008, we adopted the provisions of Statement of Financial Accounting Standards(SFAS) No. 157, “Fair Value Measurements” (SFAS No. 157) forfinancial assets and liabilities.  SFAS No. 157defines fair value, establishes a framework for measuring fair value andexpands disclosures about fair value measurements.  SFAS No. 157 applies under otheraccounting pronouncements that require or permit fair value measurements and,accordingly, SFAS No. 157 does not require any new fair valuemeasurements.  For information concerningSFAS No. 157, see Note 13 of the Notes to Consolidated FinancialStatements.

 

# **RESULTS OF OPERATIONS**

 

**Non-GAAP Financial Measures**

 

In the accompanyinganalysis of financial information, we use the financial measure “adjusted netloss,”  which is derived from our consolidatedfinancial information but not presented in our financial statements prepared inaccordance with U.S. generally accepted accounting principles (GAAP). This measureis considered a “non-GAAP financial measure” under the U.S. Securities andExchange Commission (SEC) 

 

12

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rules.  Adjustednet loss is a non-GAAP financial measure that excludes from net loss theeffects of non-cash foreign currency exchange gains or losses, losses on earlyextinguishment of debt, restructuring charges, litigation charges and gains orlosses on sale of assets.  We believe thisnon-GAAP financial measure provides investors, potential investors, securityanalysts and others with useful information to evaluate the performance of ourbusiness because it excludes gains and losses and charges that managementbelieves are not indicative of the ongoing operating results of the business.  In addition, this measure may differfrom the adjusted net income (loss) calculations of other companies in ourindustry, limiting its usefulness as a comparative measure.  For such measure, we have provided thefollowing reconciliation to the most directly comparable GAAP financial measure.

 

**Reconciliation to GAAP FinancialMeasure**

 
| ** **                                                 | ** ** | **Three months ended  March 31,** | ** ** |
|------------------------------------------------------------|------------|--------------------------------------------------|------------|
| **(In millions)**                                     | ** ** | **2008**                                         | ** ** | **2007** | ** ** |
|                                                       |       |                                             |       |   |   |
| **Net  loss (GAAP)**                                       |       | $                                                | (13        | ) | $ | (52 | ) |
| Loss on early  extinguishment of debt, net of income taxes |       |                                             |       | 14 |   |
| Non-cash foreign  currency exchange (gains) losses         |       | (15                                              | )          | 5 |   |
| Gain on sale of  assets, net of income taxes               |       | (1                                               | )          |   |   |
| Restructuring  charges, net of income taxes                |       | 3                                                |       | 14 |   |
| Litigation  charges, net of income taxes                   |       | 5                                                |       |   |   |
| Adjusted net  loss                                         |       | $                                                | (21        | ) | $ | (19 | ) |

 

# **Overview**

 

We had a net loss of $13million for the first quarter of 2008 compared to a net loss of $52 million forthe first quarter of 2007.  The 2008results benefited from a non-cash foreign currency exchange gain of $15 millionand lower restructuring charges as compared to 2007.  Results in 2007 were negatively impacted by aloss on early extinguishment of debt, net of income tax, of $14 million.

 

We had an adjusted netloss of $21 million for the first quarter of 2008 compared to an adjusted netloss of $19 million for the first quarter of 2007.  Inthe first quarter of 2008, we benefited from higher average sellingprices for most of our products, benefits from our strategic initiatives andlower interest expense compared to last year. These items were offset by higherinput costs and a charge of $22 million to fully reserve all amounts due fromCalpine Corrugated LLC (Calpine Corrugated). For information concerning CalpineCorrugated, see Note 3 and Note 6 of the Notes to Consolidated FinancialStatements.

 

Despite a slower U.S.economy, we expect corrugated container shipments will improve slightly fromthe first quarter of 2008 due to seasonally stronger packaging demand.  We anticipate 20,000 tons of additionalmaintenance downtime in the second quarter which will impact mill productionvolume and increase maintenance expense. Given a continued weak U.S. dollar, containerboard exports should remainstrong.  As a result, we projectcontinued high mill operating rates and low containerboard inventory levels.  Timing factors, such as lower energy usage,will benefit the second quarter of 2008.  We expect continued inflationary costpressures, including higher energy, freight, fiber and chemical costs tocontinue through the remainder of 2008.

 

13

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# **Strategic Initiatives andRestructuring Activities**

 

We are in the third andfinal year of our three year transformation plan to achieve $525 million insavings and productivity improvements, net of transition costs, from ourstrategic initiatives, compared to levels prior to the start of our plan asadjusted for the impact of inflation.  Weexpect to achieve the $525 million in cumulative annual savings by the end of2008.

 

During the first quarterof 2008, in conjunction with our strategic initiative plan, we closed oneconverting facility and announced the closure of one additional convertingfacility, which is expected to close in the second quarter of 2008.  As a result of the plant closure and otherongoing strategic initiatives, we reduced our headcount by approximately 230employees.  The first quarterrestructuring charges of $4 million, which were net of a gain of $2 million fromthe sale of a previously closed facility, included non-cash charges of $2million related to the write-down of equipment and the acceleration ofdepreciation for equipment expected to be abandoned or taken out ofservice.  Other restructuring charges of$4 million were primarily for severance and benefits.  Additional charges of up to $2 million willbe recorded in future periods for severance and benefits related to the closureof these converting facilities.

 

**First Quarter 2008 Compared to FirstQuarter 2007**

 
| ** **                                                        | ** ** | **Three months ended March 31,** | ** ** |
|-------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                        | ** ** | **2008**                                             | ** ** | **2007** | ** ** |
| **(In millions)**                                            | ** ** | **Net   Sales**                                 | ** ** | **Profit/   (Loss)** | ** ** | **Net   Sales** | ** ** | **Profit/   (Loss)** | ** ** |
|                                                              |       |                                                 |       |   |   |   |   |   |   |
| Containerboard,  corrugated containers and reclamation operations |       | $                                                    | 1,795      |   | $ | 108 |   | $ | 1,824 |   | $ | 102 |   |
|                                                              |       |                                                 |       |   |   |   |   |   |   |
| Restructuring  charges                                            |       |                                                 |       | (4 | ) |   |   | (24 | ) |
| Gain on sale of  assets                                           |       |                                                 |       | 3 |   |   |   |   |   |
| Interest  expense, net                                            |       |                                                 |       | (63 | ) |   |   | (74 | ) |
| Loss on early  extinguishment of debt                             |       |                                                 |       |   |   |   |   | (23 | ) |
| Non-cash foreign  currency exchange gains (losses)                |       |                                                 |       | 15 |   |   |   | (5 | ) |
| Corporate  expenses and other (Note 1)                            |       |                                                 |       | (90 | ) |   |   | (62 | ) |
| Income (loss)  from continuing operations before income taxes     |       |                                                 |       | $ | (31 | ) |   |   | $ | (86 | ) |
|                                                                   |            |                                                      |            |  |  |  |  |  |  |  |  |  |  |

 

----

Note 1: Amounts includecorporate expenses and other expenses not allocated to operations, includingCalpine Corrugated charges and litigation charges.

 

Net sales decreased 1.6% inthe first quarter of 2008 compared to last year.  Net sales were negatively impacted by $138million in 2008 as a result of the sale of the Brewton, Alabama mill in September of2007 and a change in the mix resulting in more containerboard tons solddirectly to third parties due to lower corrugated container sales volume.  Net sales were favorably impacted by higheraverage selling prices ($109 million) for containerboard, corrugatedcontainers, market pulp and reclaimed fiber. Average domestic linerboard prices in the first quarter of 2008 decreasedby 0.5% compared to the fourth quarter of 2007, but were 7.5% higher comparedto the first quarter of 2007.  Ouraverage North American selling price for corrugated containers increased by 1.2%compared to the fourth quarter of 2007 and increased 4.7% compared to the firstquarter of 2007.  Third party shipmentsof containerboard increased 6.2% compared to the same period last year.  North American shipments of corrugatedcontainers on a total and per day basis were 7.4% and 5.9% lower, respectively,compared to last year due primarily to container plant closure efforts, actionsto improve margins by exiting unprofitable accounts and weaker marketconditions.  First quarter average salesprices for market pulp, SBS/SBL and kraft paper increased 

 

14

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15.1%, 0.2% and 5.7%,respectively, compared to the same period last year.  The average price for old corrugatedcontainers (OCC) increased approximately $20 per ton compared to last year.

 

Our containerboard millsoperated at 100.0% of capacity in the first quarter of 2008, whilecontainerboard production was 1.6% lower compared to last year due primarily tothe sale of the Brewton, Alabama mill and other mill closures.  Production of market pulp decreased 15.2% duein part to higher maintenance downtime in 2008 and kraft paper decreased 6.5%compared to last year.** **Production of SBS/SBL****decreased by****57.7% comparedto last year due primarily to the sale of the Brewton, Alabama mill.** **Total tons of fiberreclaimed and brokered was comparable to last year.

 

Cost of goods sold decreasedfrom $1,610 million in 2007 to $1,583 million in 2008 due primarily to areduction in our converting costs ($122 million) resulting from a sales mixchange from corrugated containers to containerboard and from the sale of theBrewton, Alabama mill. Cost of goods sold was negatively impacted by higher costsof reclaimed material ($41 million), energy ($20 million), freight ($18million), and other material ($8 million).  Cost of goods sold as a percent of net sales inthe first quarter of 2008 was 88.2%, comparable to last year.

 

Selling andadministrative expense in 2008 increased $22 million to 10.6% of net sales from9.3% in 2007 due primarily to the Calpine Corrugated charge and higher litigationcharges ($8 million).

 

Interest expense, net was$63 million in the first quarter of 2008. The $11 million decrease compared to the first quarter of 2007 was theresult of lower average borrowings ($5 million) and lower average interestrates ($6 million).  The lower averageborrowings were primarily due to debt reduction from the sale of the Brewton,Alabama mill.  Our overall averageeffective interest rate in the first quarter of 2008 was lower than 2007 by approximately0.89%.

 

In the first quarter of2007, we recorded a loss on early extinguishment of debt of $23 million including$19 million for tender premiums and $4 million for the non-cash write-off of deferreddebt issuance cost.

 

Other, net for the firstquarter of 2008 included non-cash foreign currency exchange gains of $15million compared to a loss of $5 million in 2007.

 

The benefit for income taxesfor the first quarter of 2008 differed from the amount computed by applying thestatutory U.S. federal income tax rate to loss before income taxes dueprimarily to non-cash foreign currency exchange gains, state income taxes and theeffect of other permanent differences.

 

#### **Statistical Data**

 
| ** **                                                                | ** ** | **Three months ended  March 31,** | ** ** |
|---------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| **(In thousands of tons, except as noted)** | ** ** | **2008**                                         | ** ** | **2007** | ** ** |
| Mill production                                                           |       |                                             |       |   |   |
| Containerboard  (1)                                                       |       | 1,784                                            |       | 1,813 |   |
| Kraft paper                                                               |       | 43                                               |       | 46 |   |
| Market pulp                                                               |       | 123                                              |       | 145 |   |
| SBS/SBL                                                                   |       | 33                                               |       | 78 |   |
| North American  corrugated containers sold (billion sq. ft.)              |       | 17.6                                             |       | 19.0 |   |
| Fiber reclaimed  and brokered                                             |       | 1,716                                            |       | 1,721 |   |

 

----

| (1) |   | For the three months  ended March 31, 2008 and 2007, our corrugated container plants consumed  1,171,000 tons and 1,264,000 tons of containerboard, respectively. |
|-----|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

15

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| **ITEM 3.** |   | **QUANTITATIVE AND QUALITATIVE  DISCLOSURES ABOUT MARKET RISK** |
|-------------|--------|-----------------------------------------------------------------|

 

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

 
| **ITEM 4.** |   | **CONTROLS AND PROCEDURES** |
|-------------|--------|-----------------------------|

 

**Evaluation of Disclosure Controlsand 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.

 

**Changes in 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.**  |   | **LEGAL PROCEEDINGS**                                                                                                                                                                                                                                                                                                                                                                                                                               |
|--------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|         |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|         |   | We are currently  defending two putative class action cases filed in California state court on  behalf of current and former hourly employees at our California corrugated  container facilities. These cases allege violations of the California on-duty  meal break and rest period statutes and seek damages prescribed by such  statutes. We believe that we have established reserves sufficient to account  for our liability in these cases. |
|         |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| **ITEM 1A.** |   | **RISK FACTORS**                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|         |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|         |   | There are no material  changes to the risk factors as disclosed in our 2007 Annual Report on  Form 10-K.                                                                                                                                                                                                                                                                                                                                       |
|         |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| **ITEM 2.**  |   | **UNREGISTERED SALES OF EQUITY  SECURITIES AND USE OF PROCEEDS**                                                                                                                                                                                                                                                                                                                                                                                    |
|         |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|         |   | Intentionally omitted  in accordance with General Instruction (H) of Form 10-Q.                                                                                                                                                                                                                                                                                                                                                           |
|         |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| **ITEM 3.**  |   | **DEFAULTS UPON SENIOR SECURITIES**                                                                                                                                                                                                                                                                                                                                                                                                                 |
|         |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|         |   | Intentionally omitted  in accordance with General Instruction (H) of Form 10-Q.                                                                                                                                                                                                                                                                                                                                                           |
|         |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| **ITEM 4.**  |   | **SUBMISSION OF MATTERS TO A VOTE  OF SECURITY HOLDERS**                                                                                                                                                                                                                                                                                                                                                                                            |
|         |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|         |   | Intentionally omitted  in accordance with General Instruction (H) of Form 10-Q.                                                                                                                                                                                                                                                                                                                                                           |

 

16

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| **ITEM 5.** |   | **OTHER INFORMATION** |
|-------------|--------|-----------------------|

 
|        |   | (a)                                                                                                                                                                                                       | None                                                                                                                                                                                                                                                                              |
|-------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|        |   |                                                                                                                                                                                                      |                                                                                                                                                                                                                                                                              |
|        |   | (b)                                                                                                                                                                                                       | There have been no  material changes to the procedures by which security holders may recommend  nominees to the Company’s Board of Directors implemented since the filing of  the Company’s Annual Report on Form 10-K for the year ended  December 31, 2007. |
|        |   |                                                                                                                                                                                                      |
| **ITEM 6.** |   | **EXHIBITS**                                                                                                                                                                                              |
| ** **  |   | ** **                                                                                                                                                                                                |
|        |   | The following exhibits  are included in this Form 10-Q:                                                                                                                                              |
|        |   |                                                                                                                                                                                                      |
| 31.1        |   | Certification pursuant  to Rules 13a–14(a) and 15d–14(a) 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(a) and 15d–14(a) 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.                                                                       |

 

17

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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: May 7, 2008 | /s/ Paul K. Kaufmann                            |
|------------------------|-------------------------------------------------|
|                   |       Paul K. Kaufmann |
|                   | Senior Vice President  and Corporate Controller |
|                   | (Principal Accounting  Officer)                 |

 

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