**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.** |

 

**ForQuarter Ended June 30, 2008**

**CommissionFile 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 markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days. Yes  xNo  o

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company. See the definitions of “largeaccelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2of the Exchange Act.

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

 

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

 

APPLICABLE ONLY TOCORPORATE ISSUERS:

 

As of August 4, 2008,the registrant had outstanding 770 shares of common stock, $.01 par value pershare, all of which are owned by Smurfit-Stone Container Corporation.

 

**Theregistrant meets the conditions set forth in General Instruction (H) (1) (a) and(b) of Form 10-Q and is therefore filing this form with the reduceddisclosure format permitted thereby.**

 

 

 

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**PART 1 -FINANCIAL INFORMATION**

 

**Item 1.    FinancialStatements**

** **

**SMURFIT-STONECONTAINER ENTERPRISES, INC.**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

**(Unaudited)**

 
| ** **                                | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                | ** ** | **June 30,**      | ** ** | **June 30,**    | ** ** |
| **(In millions)**                         | ** ** | **2008**               | ** ** | **2007**             | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                      |       |                   |       |                 |       |   |   |   |   |
| Net sales                                 | ** ** | **$**                  | **1,835**  |                 | $          | 1,870 | ** ** | **$** | **3,630** |   | $ | 3,694 |   |
| Costs and  expenses                       |       |                   |       |                 |       |   |   |   |   |
| Cost of goods  sold                       | ** ** | **1,659**              |       | 1,609                | ** ** | **3,242** |   | 3,219 |   |
| Selling and  administrative expenses      | ** ** | **157**                |       | 164                  | ** ** | **348** |   | 333 |   |
| Restructuring  expenses                   | ** ** | **9**                  |       | 10                   | ** ** | **13** |   | 34 |   |
| Gain on disposal  of assets               | ** ** | **(1**                 | **)**      | ** **           | ** ** | **(4** | **)** | ** ** | ** ** |
| Income from  operations                   | ** ** | **11**                 |       | 87                   | ** ** | **31** |   | 108 |   |
| Other income  (expense)                   |       |                   |       |                 |       |   |   |   |   |
| Interest  expense, net                    | ** ** | **(61**                | **)**      | (73                  | )          | **(124** | **)** | (147 | ) |
| Loss on early  extinguishment of debt     |       |                   |       | (5                   | )          |   |   | (28 | ) |
| Foreign currency  exchange gains (losses) | ** ** | **(4**                 | **)**      | (20                  | )          | **11** |   | (25 | ) |
| Other, net                                | ** ** | **(3**                 | **)**      | 7                    | ** ** | **(6** | **)** | 2 |   |
| Loss before  income taxes                 | ** ** | **(57**                | **)**      | (4                   | )          | **(88** | **)** | (90 | ) |
| Benefit from  income taxes                | ** ** | **20**                 |       | 2                    | ** ** | **38** |   | 36 |   |
| Net loss                                  | ** ** | **$**                  | **(37**    | **)**                | $          | (2 | ) | **$** | **(50** | **)** | $ | (54 | ) |

 

See notes to consolidatedfinancial statements.

 

1

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

**CONSOLIDATED BALANCE SHEETS**

 
| ** **                                                                                                                   | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| **(In millions, except share data)**                                                                                         | ** ** | **2008**          | ** ** | **2007**              | ** ** |
| ** **                                                                                                                   |       | **(Unaudited)**   |       |                  |       |
| **Assets**                                                                                                                   |       |              |       |                  |       |
|                                                                                                                         |       |              |       |                  |       |
| Current assets                                                                                                               |       |              |       |                  |       |
| Cash and cash  equivalents                                                                                                   | ** ** | **$**             | **9**      |                  | $          | 7 |   |
| Receivables,  less allowances of $7 in 2008 and 2007                                                                         | ** ** | **184**           |       | 170                   |       |
| Retained  interest in receivables sold                                                                                       | ** ** | **288**           |       | 249                   |       |
| Inventories,  including amounts valued under LIFO method                                                                     |       |              |       |                  |       |
| Work-in-process  and finished goods                                                                                          | ** ** | **160**           |       | 145                   |       |
| Materials and  supplies                                                                                                      | ** ** | **405**           |       | 395                   |       |
|                                                                                                                         | ** ** | **565**           |       | 540                   |       |
| Prepaid expenses  and other current asset                                                                                    | ** ** | **50**            |       | 36                    |       |
| Total current  assets                                                                                                        | ** ** | **1,096**         |       | 1,002                 |       |
| Net property,  plant and equipment                                                                                           | ** ** | **3,481**         |       | 3,454                 |       |
| Timberland, less  timber depletion                                                                                           | ** ** | **32**            |       | 32                    |       |
| Goodwill                                                                                                                     | ** ** | **2,727**         |       | 2,727                 |       |
| Other assets                                                                                                                 | ** ** | **154**           |       | 172                   |       |
|                                                                                                                         | ** ** | **$**             | **7,490**  |                  | $          | 7,387 |   |
| **Liabilities  and Stockholder’s Equity**                                                                               | ** ** | ** **        | ** ** | ** **            | ** ** |
|                                                                                                                         |       |              |       |                  |       |
| Current  liabilities                                                                                                         |       |              |       |                  |       |
| Current  maturities of long-term debt                                                                                        | ** ** | **$**             | **11**     |                  | $          | 11 |   |
| Accounts payable                                                                                                             | ** ** | **615**           |       | 582                   |       |
| Accrued  compensation and payroll taxes                                                                                      | ** ** | **176**           |       | 193                   |       |
| Interest payable                                                                                                             | ** ** | **65**            |       | 66                    |       |
| Income taxes  payable                                                                                                        | ** ** | **14**            |       | 10                    |       |
| Current deferred  income taxes                                                                                               | ** ** | **21**            |       | 21                    |       |
| Other current  liabilities                                                                                                   | ** ** | **113**           |       | 105                   |       |
| Total current  liabilities                                                                                                   | ** ** | **1,015**         |       | 988                   |       |
| Long-term debt,  less current maturities                                                                                     | ** ** | **3,561**         |       | 3,348                 |       |
| Other long-term  liabilities                                                                                                 | ** ** | **789**           |       | 834                   |       |
| Deferred income  taxes                                                                                                       | ** ** | **436**           |       | 505                   |       |
| Stockholder’s  equity                                                                                                   |       |              |       |                  |       |
| Common stock,  par value $.01 per share; 1,000 shares authorized, 770 issued and outstanding  in 2008 and 2007, respectively |       |              |       |                  |       |
| Additional  paid-in capital                                                                                                  | ** ** | **3,673**         |       | 3,661                 |       |
| Retained  earnings (deficit)                                                                                                 | ** ** | **(1,750**        | **)**      | (1,696                | )          |
| Accumulated  other comprehensive income (loss)                                                                               | ** ** | **(234**          | **)**      | (253                  | )          |
| Total  stockholder’s equity                                                                                             | ** ** | **1,689**         |       | 1,712                 |       |
|                                                                                                                         | ** ** | **$**             | **7,490**  |                  | $          | 7,387 |   |

 

See notes to consolidatedfinancial statements.

 

2

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

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Unaudited)**

 
| **Six Months Ended June 30, (In millions)**                                              | ** ** | **2008**   | ** ** | **2007**   | ** ** |
|-----------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|
|                                                                                          |       |       |       |       |       |
| **Cash  flows from operating activities**                                                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net loss                                                                                      | ** ** | **$**      | **(50**    | **)**      | $          | (54 | ) |
| Adjustments to  reconcile net loss to net cash provided by (used for) operating activities    |       |       |       |       |       |
| Loss on early  extinguishment of debt                                                         |       |       |       | 28         |       |
| Depreciation,  depletion and amortization                                                     | ** ** | **175**    |       | 181        |       |
| Amortization of  deferred debt issuance costs                                                 | ** ** | **4**      |       | 4          |       |
| Deferred income  taxes                                                                        | ** ** | **(73**    | **)**      | (46        | )          |
| Pension and  postretirement benefits                                                          | ** ** | **(12**    | **)**      | (24        | )          |
| Gain on disposal  of assets                                                                   | ** ** | **(4**     | **)**      | ** ** | ** ** |
| Non-cash  restructuring expenses                                                              | ** ** | **2**      |       | 4          |       |
| Non-cash  stock-based compensation                                                            | ** ** | **9**      |       | 12         |       |
| Non-cash foreign  currency exchange (gains) losses                                            | ** ** | **(11**    | **)**      | 25         |       |
| Change in  current assets and liabilities, net of effects from acquisitions and  dispositions |       |       |       |       |       |
| Receivables and  retained interest in receivables sold                                        | ** ** | **(52**    | **)**      | (51        | )          |
| Inventories                                                                                   | ** ** | **(25**    | **)**      | (6         | )          |
| Prepaid expenses  and other current assets                                                    | ** ** | **(8**     | **)**      | 2          |       |
| Accounts payable  and accrued liabilities                                                     | ** ** | **36**     |       | 1          |       |
| Interest payable                                                                              |       |       |       | (12        | )          |
| Other, net                                                                                    | ** ** | **1**      |       | 7          |       |
| Net cash  provided by (used for) operating activities                                         | ** ** | **(8**     | **)**      | 71         |       |
| **Cash  flows from investing activities**                                                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Expenditures for  property, plant and equipment                                               | ** ** | **(207**   | **)**      | (171       | )          |
| Proceeds from  property disposals                                                             | ** ** | **8**      |       | 37         |       |
| Net cash used  for investing activities                                                       | ** ** | **(199**   | **)**      | (134       | )          |
| **Cash  flows from financing activities**                                                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Proceeds from  long-term debt                                                                 |       |       |       | 675        |       |
| Net borrowings  (repayments) of long-term debt                                                | ** ** | **213**    |       | (576       | )          |
| Debt repurchase  premiums                                                                     |       |       |       | (23        | )          |
| Dividends paid                                                                                | ** ** | **(4**     | **)**      | (4         | )          |
| Capital  contribution from SSCC                                                               |       |       |       | 1          |       |
| Deferred debt  issuance costs                                                                 |       |       |       | (7         | )          |
| Net cash provided  by financing activities                                                    | ** ** | **209**    |       | 66         |       |
| **Increase  in cash and cash equivalents**                                                    | ** ** | **2**      |       | 3          |       |
| Cash and cash  equivalents                                                                    |       |       |       |       |       |
| Beginning of  period                                                                          | ** ** | **7**      |       | 9          |       |
| End of period                                                                                 | ** ** | **$**      | **9**      |       | $          | 12 |   |

 

See notes to consolidatedfinancial statements.

 

3

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**SMURFIT-STONECONTAINER ENTERPRISES, INC.**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

(Tabular amounts in millions)

 

**1.****              SignificantAccounting Policies**

 

**Basis ofPresentation:**  The accompanying consolidated financialstatements and notes thereto of Smurfit-Stone Container Enterprises, Inc. (“SSCE”or the “Company”) have been prepared in accordance with the instructions to Form 10-Qand reflect all adjustments which management believes necessary (which includeonly normal recurring accruals) to present fairly the Company’s financialposition, results of operations and cash flows. These statements, however, donot include all information and footnotes necessary for a complete presentationof financial position, results of operations and cash flows in conformity withU.S. generally accepted accounting principles. Interim results may notnecessarily be indicative of results that may be expected for any other interimperiod or for 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 December 31,2007 (“2007 10-K”) filed February 28, 2008 with the Securities andExchange Commission.

 

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

 

**RecentlyAdopted Accounting Standard:**   EffectiveJanuary 1, 2008, the Company adopted the provisions of Statement ofFinancial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements”(“SFAS No. 157”) for financial assets 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. 157applies under other accounting pronouncements that require or permit fair valuemeasurements and, accordingly, SFAS No. 157 does not require any new fairvalue measurements.

 

**2.****              Reclassifications**

 

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

 

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

 

In the first quarter of2008, the Company recorded a charge of $22 million to fully reserve all amountsdue from Calpine Corrugated LLC (“Calpine Corrugated”). Calpine Corrugated, anindependent corrugated container producer in Fresno, California for which theCompany is the primary containerboard supplier, experienced start-up lossessince it began operations in 2006.

 

On July 29, 2008,the Company completed its previously announced acquisition of a 90 percentownership interest in Calpine Corrugated. In conjunction with the acquisition,the Company guaranteed approximately $45 million of Calpine Corrugated’s thirdparty outstanding debt. There was no cash consideration paid. The transactionwill be accounted for as a purchase business combination and results ofoperations of Calpine Corrugated will be included in the consolidatedstatements of operations beginning July 29, 2008. The preliminary purchaseprice allocation is expected to result in approximately $55 million of assetsand liabilities, including approximately $45 million of debt. No goodwill isexpected to be recorded for the transaction. The acquisition of CalpineCorrugated’s operations enables the Company to accelerate the optimization ofits Northern California packaging system and improve its position in theagricultural market segment.

 

4

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In 2007, the Companyrecorded charges of $10 million to reserve for amounts due from CalpineCorrugated, of which $3 million and $5 million, respectively, were recorded inthe three and six months ended June 30, 2007.

 

**4.****              StrategicInitiatives and Restructuring 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 and reinvestment in the Company’s operations. TheCompany expects to achieve $525 million in annual savings by the end of 2008,compared to levels prior to the start of the plan.

 

During the second quarterof 2008, in conjunction with the strategic initiative plan, the Companyannounced it would cease operations of its containerboard machine at theSnowflake, Arizona mill in the fourth quarter of 2008. In addition, the Companyannounced the closure of two converting facilities expected to close in the fourthquarter of 2008. As a result of other ongoing strategic initiatives, theCompany reduced its headcount by approximately 150 employees. The Company recordedrestructuring charges of $9 million, including non-cash charges of $2 millionrelated to the acceleration of depreciation for equipment expected to beabandoned or taken out of service. The remaining charges of $7 million were primarilyfor severance and benefits.

 

For the six months ended June 30,2008, the Company closed one converting facility, announced the closure ofthree additional converting facilities and announced it would cease operationsof its containerboard machine at the Snowflake, Arizona mill. As a result ofthese closures and other ongoing strategic initiatives, the Company reduced itsheadcount by approximately 380 employees. The Company recorded restructuringcharges of $13 million, net of a gain of $2 million from the sale of apreviously closed facility. Restructuring charges included non-cash charges of$4 million related to the acceleration of depreciation for equipment expectedto be abandoned or taken out of service. The remaining charges of $11 millionwere primarily for severance and benefits. The net sales of the announced and closedconverting facilities as of June 30, 2008 prior to closure and for theyear ended December 31, 2007 were $68 million and $154 million,respectively. The majority of these net sales are expected to be transferred toother operating facilities. The Snowflake, Arizona containerboard machine hasthe capacity to produce 135,000 tons of medium annually.  The customers will be supplied by theCompany’s other mills. Additional charges of up to $3 million are expected tobe recorded in future periods for severance and benefits related to the closureof these facilities.

 

The Company recordedrestructuring charges of $10 million and $34 million for the three and sixmonths ended June 30, 2007, respectively, which were net of a gain of $33million in the second quarter of 2007 on the sale of properties related topreviously closed facilities. Restructuring charges included non-cash chargesof $25 million and $37 million for the three and six months ended June 30,2007, respectively, 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. Theremaining charges were primarily for severance and benefits.

 

At December 31, 2007the Company had $29 million of accrued exit liabilities related to therestructuring of operations. For the three and six months ended June 30,2008, the Company incurred $1 million and $6 million, respectively, of cashdisbursements related to these exit liabilities. In addition, for the three andsix months ended June 30, 2008, the Company incurred $4 million and $7million, respectively, of cash disbursements related to exit liabilitiesestablished during 2008.

 

5

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**5.****              AccountsReceivable Securitization Programs**

 

At June 30, 2008 andDecember 31, 2007, $681 million and $656 million, respectively, ofreceivables had been sold under two accounts receivable securitizationprograms, of which the Company retained a subordinated interest. Theoff-balance sheet debt related to the two accounts receivable programs totaled$393 million and $422 million, respectively, as of those dates.

 

**6.****              Guaranteesand Commitments**

 

The Company has certainwood chip processing contracts extending from 2012 through 2018 with minimumpurchase commitments. As part of the agreements, the Company guarantees thethird party contractors’ debt outstanding and has a security interest in thechipping equipment. At June 30, 2008, the maximum potential amount offuture payments related to these guarantees was approximately $29 million anddecreases ratably over the life of the contracts. 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.

 

The Company had anagreement to guarantee a portion of Calpine Corrugated’s debt through January 2010.At June 30, 2008, the maximum potential amount of the future paymentsrelated to this guarantee was $12 million. Upon the completion of the Calpine Corrugatedtransaction on July 29, 2008, the Company became the full guarantor of 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, the letter of credit was extended for anadditional year. The letter of credit is collateralized by a pledge ofaffiliate stock owned by the other shareholder in the event the letter ofcredit is drawn upon and the other shareholder is unable to reimburse theCompany for their 50% share of the letter of credit obligation.

 

**7.****              Long-TermDebt**

 

In March 2007, theCompany completed an offering of $675 million of 8.00% unsecured senior notesdue March 15, 2017. The Company used the proceeds of this issuance torepay $546 million of the 9.75% unsecured senior notes due 2011, which werepurchased in connection with a cash tender offer, pay related tender premiumsand accrued interest of $19 million and $8 million, respectively, and repay $95million of the Company’s revolving credit facility. In addition, the Companyused the proceeds to pay fees and expenses of $7 million related to thistransaction. A loss on early extinguishment of debt of $23 million was recordedin the first quarter of 2007, including $19 million for tender premiums and a$4 million write-off of unamortized deferred debt issuance costs.

 

In May 2007, theCompany redeemed the remaining $102 million of the 9.75% Senior Notes utilizingborrowings under the Company’s revolving credit facility to redeem the notesand pay related call premiums and accrued interest. A loss on earlyextinguishment of debt of $5 million was recorded in the second quarter of2007, including $4 million for tender premiums and a $1 million write-off ofunamortized deferred debt issuance costs.

 

6

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**8.****              EmployeeBenefit 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’s defined benefit pension plans coversubstantially all hourly employees, as well as salaried employees hired priorto January 1, 2006. In August 2007, the Company announced the freezeof 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.

 

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

 
| ** **                                    | ** ** | **Three months ended June 30,** | ** ** | **Six months ended June 30,** | ** ** |
|-----------------------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| ** **                                    | ** ** | **Defined  Benefit Plans**           | ** ** | **Postretirement   Plans**         | ** ** | **Defined Benefit  Plans** | ** ** | **Postretirement  Plans** | ** ** |
| ** **                                    | ** ** | **2008**                             | ** ** | **2007**                           | ** ** | **2008** | ** ** | **2007** | ** ** | **2008** | ** ** | **2007** | ** ** | **2008** | ** ** | **2007** | ** ** |
| Service cost                                  |       | $                                    | 10         |                               | $          | 12 |   | $ | 1 |   | $ | 1 |   | $ | 23 |   | $ | 26 |   | $ | 2 |   | $ | 2 |   |
| Interest cost                                 |       | 51                                   |       | 49                                 |       | 2 |   | 2 |   | 102 |   | 98 |   | 5 |   | 5 |   |
| Expected return  on plan assets               |       | (61                                  | )          | (59                                | )          |   |   |   |   | (124 | ) | (117 | ) |   |   |   |   |
| Amortization of  prior service cost (benefit) |       | 1                                    |       | 2                                  |       | (1 | ) |   |   | 2 |   | 4 |   | (2 | ) | (1 | ) |
| Amortization of  net (gain) loss              |       | 11                                   |       | 14                                 |       |   |   | (2 | ) | 21 |   | 29 |   | (1 | ) | (1 | ) |
| Curtailment  (gain) loss                      |       |                                 |       | 2                                  |       |   |   | (1 | ) |   |   | 2 |   |   |   | (1 | ) |
| Settlements                                   |       |                                 |       | 1                                  |       |   |   |   |   |   |   | 2 |   |   |   |   |   |
| Multi-employer  plans                         |       | 1                                    |       | 1                                  |       |   |   |   |   | 2 |   | 2 |   |   |   |   |   |
| Net periodic  benefit cost                    |       | $                                    | 13         |                               | $          | 22 |   | $ | 2 |   | $ |   | $ | 26 |   | $ | 46 |   | $ | 4 |   | $ | 4 |   |
|                                               |            |                                      |            |                                    |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The 2007 curtailment(gain) loss and the 2007 settlement charges are related to closed facilitiesand are included as part of restructuring charges (See Note 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.

 

**9.****              DerivativeInstruments 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.All cash flows associated with the Company’s derivative instruments areclassified as operating activities in the consolidated statements of cashflows.

 

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#### **Commodity DerivativeInstruments**

#### ** **

The Company usesderivative instruments, including fixed price swaps, to manage fluctuations incash flows resulting from commodity price risk in the procurement of naturalgas and other commodities. The objective is to fix the price of a portion ofthe Company’s purchases of these commodities used in the manufacturing process.The changes in the market value of such derivative instruments havehistorically offset, and are expected to continue to offset, the changes in theprice of the hedged item. As of June 30, 2008, the maximum length of timeover which the Company was hedging its exposure to the variability in futurecash flows associated with the commodities’ forecasted transactions was 18 months.

 

For the three and six monthsended June 30, 2008, the Company reclassified an immaterial amount and a $1million loss (net of tax), respectively, from other comprehensive income (loss)(“OCI”) to cost of goods sold when the hedged items were recognized. For thethree and six months ended June 30, 2007, the Company reclassified a $1million loss (net of tax) and a $6 million loss (net of tax), respectively,from OCI to cost of goods sold when the hedged items were recognized. The fairvalue of these commodity derivative instruments at June 30, 2008 was a $10million asset, included in prepaid expenses and other current assets.

 

For the three and six monthsended June 30, 2008, the Company recorded a $1 million gain (net of tax)in cost of goods sold related to the change in fair value of certain commodityderivative instruments not qualifying for hedge accounting. For the three andsix months ended June 30, 2007, the Company recorded an immaterial amountand a $3 million gain (net of tax), respectively, in cost of goods sold relatedto the change in fair value of certain commodity derivative instruments notqualifying for hedge accounting.

 

For the three and sixmonths ended June 30, 2008, the Company recorded an immaterial amount incost of goods sold on settled commodity derivative instruments not qualifyingfor hedge accounting. For the three and six months ended June 30, 2007,the Company recorded a $1 million loss (net of tax) and a $5 million loss (netof tax), respectively, in cost of goods sold on settled commodity derivativeinstruments not qualifying for hedge accounting.

 

#### **Foreign Currency DerivativeInstruments**

#### ** **

The Company’s principal foreign exchange exposure is the Canadiandollar. The Company uses foreign currency derivative instruments, includingforward contracts and options, primarily to protect against Canadian currencyexchange risk associated with expected future cash flows. As of June 30,2008, the maximum length of time over which the Company was hedging itsexposure to the variability in future cash flows associated with foreigncurrency was ten months. For the three and six months ended June 30, 2008,the Company reclassified a $1 million gain (net of tax) and a $3 million gain (netof tax), respectively, from OCI to cost of goods sold related to therecognition of the foreign currency derivative instruments. For the three andsix months ended June 30, 2007, the Company reclassified an immaterialamount and a $1 million loss (net of tax), respectively, from OCI to cost ofgoods sold related to the recognition of the foreign currency derivativeinstruments. The change in fair value of these derivative instruments isrecorded in OCI until the underlying transaction is recorded. The fair value ofthe Company’s foreign currency derivative instruments at June 30, 2008 wasa $2 million asset, included in prepaid expenses and other current assets.

** **

#### **Interest Rate Swap Contracts**

#### ** **

The Company uses interestrate swap contracts to manage interest rate exposure on $300 million of thecurrent Tranche B and Tranche C floating rate bank term debt, effectivelyfixing the interest rate at 4.3%. These contracts extend until 2011, consistentwith the maturity of the Company’s Tranche B and Tranche C term loans. Changesin the fair value of the interest rate swap contracts are expected to be highlyeffective in offsetting the fluctuations in the floating interest rate and arerecorded in OCI until the underlying transaction is recorded. The accountingfor the cash flow impact of the swap contracts is recorded as an adjustment tointerest expense each period. For the three and six months ended June 30,2008, the Company reclassified an immaterial amount from OCI to interestexpense when the hedged items were recognized. For the three and six monthsended June 30, 2007, the Company reclassified an immaterial amount and a$1 million gain (net of tax), respectively, from OCI to interest expense whenthe hedged items

 

8

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were recognized. The fairvalue of the Company’s interest rate swap contracts at June 30, 2008 was a$4 million liability included in other long-term liabilities.

 

**DeferredHedge Gain (Loss)**

 

The cumulative deferredhedge gain in OCI on all derivative instruments was $3 million (net of tax) at June 30,2008, including a $5 million gain (net of tax) on commodity derivative instruments,an immaterial amount on foreign currency derivative instruments and a $2 millionloss (net of tax) on interest rate swap contracts. The Company expects toreclassify a $6 million gain (net of tax) into cost of goods sold within thenext 12 months, related to the commodity and foreign currency derivativeinstruments.

 

**10.  IncomeTaxes**

 

The benefit for income taxesfor the three and six months ended June 30, 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 (losses),state income taxes, lower effective tax rates in certain foreign jurisdictionsand the effect of other permanent differences. Due to fluctuations inpretax income, lower effective tax rates in certain foreign jurisdictions andthe effect of permanent differences, the expected income tax benefit for theyear ending December 31, 2008 is calculated on a discrete quarterly basiswhich more accurately reflects income tax benefit as it is realized.

 

During the three and sixmonths ended June 30, 2008, an additional $3 million and $5 million,respectively, of unrecognized tax benefits were recorded related to taxpositions taken during the current year and for interest on unrecognized taxbenefits previously recorded. In addition, during the three and six monthsended June 30, 2008, unrecognized tax benefits were increased by $1million and decreased by $3 million, respectively, due to fluctuations in the foreigncurrency exchange rate on Canadian tax positions.

 

The Canada Revenue Agency(“CRA”) is currently examining the Company’s income tax returns for tax years1999 through 2005. In connection with the examination of the Company’s 1999 and2000 Canadian income tax returns, the CRA is considering certain significantadjustments to taxable income related to the acquisition of a Canadian company.This matter may be resolved at the examination level or subsequently uponappeal within the next twelve months. With respect to transfer prices ofinventory sold by the Company’s Canadian subsidiaries to its U.S. subsidiaries,the CRA has issued assessments of additional income taxes, interest andpenalties. The Company has appealed the assessments. During the second quarterof 2008, the Company made payments of $23 million to the CRA and expects tomake a $4 million payment in the second half of 2008 related to theassessments. As a result of these payments, future interest charges will bereduced. While the final outcome of these matters, including an estimate of therange of the reasonably possible changes to unrecognized tax benefits, is notyet determinable, the Company believes that the examination or subsequentappeals will not have a material adverse effect on its consolidated financialcondition or results of operations.

 

9

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**11.****       ComprehensiveIncome (Loss)**

 

Comprehensive income (loss) is asfollows:

 
| ** **                                                             | ** ** | **Three months ended  June 30,** | ** ** | **Six months ended  June 30,** | ** ** |
|------------------------------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                                                             | ** ** | **2008**                              | ** ** | **2007**                            | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                                                   |       |                                  |       |                                |       |   |   |   |   |
| Net loss                                                               |       | $                                     | (37        | )                                   | $          | (2 | ) | $ | (50 | ) | $ | (54 | ) |
| Other  comprehensive income (loss), net of tax:                        |       |                                  |       |                                |       |   |   |   |   |
| Net changes in  fair value of hedging instruments                      |       | 11                                    |       | 5                                   |       | 8 |   | 8 |   |
| Net hedging  (gain) loss reclassified into earnings                    |       | (1                                    | )          | 1                                   |       | (2 | ) | 6 |   |
| Net deferred  employee benefit plan expense reclassified into earnings |       | 6                                     |       | 9                                   |       | 12 |   | 19 |   |
| Foreign currency  translation adjustment                               |       | 1                                     |       |                                |       | 1 |   |   |   |
| Comprehensive  income (loss)                                           |       | $                                     | (20        | )                                   | $          | 13 |   | $ | (31 | ) | $ | (21 | ) |

 

**12.****       Stock-BasedCompensation**

 

Certain officers andkey managers of the Company participate in various stock-based compensationplans sponsored by SSCC, which issues stock options and restricted stock units(“RSUs”). During the second quarter of 2008, the Company granted approximately 62,000SSCC stock options with a weighted-average exercise price and grant date fairvalue of $7.23 and $2.46, respectively. For the six months ended June 30,2008, the Company granted 1,042,000 SSCC stock options with a weighted-averageexercise price and grant date fair value of $8.84 and $2.97, respectively. Theseoptions vest and become exercisable on the third anniversary of the award date.Compensation expense is being recorded over the three-year period on astraight-line basis.

 

During the secondquarter of 2008, the Company issued approximately 129,000 non-vested SSCC RSUsto certain employees and non-employee directors with a weighted-average grantdate fair value of $6.03 per RSU. For the six months ended June 30, 2008,the Company granted 464,000 non-vested SSCC RSUs with a weighted-average grantdate fair value of $8.13 per RSU. In addition, to settle its 2007 managementincentive plan liability, the Company issued approximately 347,000 vested SSCC RSUs,which had been accrued for in the prior year, and approximately 69,000 relatedpremium non-vested SSCC RSUs at a fair value of $9.14 per RSU. In accordancewith the Company’s applicable management incentive plan and long-term incentiveplan, the non-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 fair value, the Company uses various valuationapproaches, including market, income and/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. Observableinputs are inputs that market participants would use in pricing the asset orliability based on market data obtained from sources independent of the Company.Unobservable inputs are inputs that reflect the Company’s assumptions about theassumptions market

 

10

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participants would use inpricing the asset or liability developed based on the best informationavailable in 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 noassets or liabilities measured at fair value on a recurring basis utilizingLevel 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. TheCompany has no assets or liabilities measured at fair value on a recurringbasis utilizing Level 2 inputs.

 

*Level 3*– Valuations based on inputs that are unobservable and significant to theoverall fair value measurement. The Company’s assets and liabilities utilizingLevel 3 inputs include the retained interest in receivables sold to theaccounts receivable programs, the residual interest in the TNH investment andderivative assets and liabilities. The fair values of the retained interest inreceivables sold are estimated using discounted residual cash flows, expectedloss and dilution rates, and variable returns to investors. The fair value ofthe residual interest in the TNH investment is estimated using discounted residualcash flows. The fair values of the derivative assets and liabilities areestimated using model inputs specific to the derivative, including interestrate yield curves, commodity forward spread curves and volatility of theunderlying commodities.

 

**Fairvalue 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.

 
| ** **                             | ** ** | **June 30, 2008** | ** ** |
|----------------------------------------|------------|------------------------|------------|
| ** **                             | ** ** | **Level 1**            | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Total** | ** ** |
| Retained  interest in receivables sold |       | $                      |       | $ |   | $ | 288 |   | $ | 288 |   |
| Residual interest in  TNH investment   |       |                   |       |   |   | 33 |   | 33 |   |
| Derivative  instruments                |       |                   |       |   |   | 8 |   | 8 |   |
|                                   |       | $                      |       | $ |   | $ | 329 |   | $ | 329 |   |

 

The following tablepresents the changes in Level 3 assets (liabilities) measured at fair value ona recurring basis for the three and six months ended June 30, 2008:

 
| ** **                              | ** ** | **Retained  Interest in  Receivables  Sold** | ** ** | **Residual  Interest in  TNH  Investment** | ** ** | **Derivative  Instruments** | ** ** | **Total** | ** ** |
|-----------------------------------------|------------|----------------------------------------------|------------|--------------------------------------------|------------|-----------------------------|------------|-----------|------------|
| Balance at  January 1, 2008        |       | $                                            | 249        |                                       | $          | 44                          |       | $         | (3         | ) | $ | 290 |   |
| Net payments,  sales and settlements    |       | 33                                           |       | (12                                        | )          | (1                          | )          | 20        |       |
| Realized and  unrealized gains/(losses) |       | (23                                          | )          | 1                                          |       | (6                          | )          | (28       | )          |
| Balance at  March 31, 2008         |       | 259                                          |       | 33                                         |       | (10                         | )          | 282       |       |
| Net payments,  sales and settlements    |       | 34                                           |       |                                       |       | (1                          | )          | 33        |       |
| Realized and  unrealized gains/(losses) |       | (5                                           | )          |                                       |       | 19                          |       | 14        |       |
| Balance at  June 30, 2008          |       | $                                            | 288        |                                       | $          | 33                          |       | $         | 8          |   | $ | 329 |   |

 

Realized gains(losses) associated with the retained interest in receivables sold principallyrelate to the first quarter of 2008 charge to reserve for the CalpineCorrugated receivables previously sold to the Company’s accounts receivableprogram, which is included in selling and administrative expenses (See Note 3).Unrealized gains (losses) associated with derivative instruments represents thechange in fair value included in other comprehensive income for derivativeinstruments qualifying for hedge accounting and cost

 

11

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of goods sold forderivative instruments not qualifying for hedge accounting (See Note 9).

 

**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 potential environmental liability as a result ofviolations of these environmental requirements, environmental permit terms andsimilar authorizations that have occurred from time to time at its facilities.In addition, the Company faces potential liability for remediation at certainowned and formerly owned facilities, as well as response costs at various sitesfor which it has received notice as being a potentially responsible party(“PRP”) concerning hazardous substance contamination. In estimating itsreserves for environmental remediation and future costs at sites where it hasbeen named as a PRP, the Company’s estimated liability of $5 million reflectsthe Company’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 June 30, 2008, the Company had approximately $16million 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 June 30, 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. These cases allege violations of theCalifornia on-duty meal break and rest period statutes and seek damagesprescribed 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 Company recorded charges of $9 millionrelated 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.

 

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

 

**FORWARD-LOOKINGSTATEMENTS**

 

Some information includedin this report may contain forward-looking statements within the meaning of Section 21Eof the Securities Exchange Act of 1934, as amended. Although we believe that,in making any 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 2007 Annual Report on Form 10-K(2007 Form 10-K).

 

Ouractual results, performance or achievements could differ materially from thoseexpressed in, or implied by, these forward-looking statements. Accordingly, wecan give no assurances that any of the events anticipated by theforward-looking statements will occur, or if any of them do, what impact theywill have on our results of operations or financial condition. We expresslydecline any obligation to publicly revise any forward-looking statements thathave been made to reflect the 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. The omitted information is substantiallysimilar to the disclosures contained in Smurfit-Stone Container Corporation’sQuarterly Report on Form 10-Q for the quarter ended June 30, 2008filed 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-ownedsubsidiary of Smurfit-Stone Container Corporation (Smurfit-Stone), a holdingcompany with no business operations of its own. Smurfit-Stone conducts itsbusiness operations through us. We operate as one segment, the Containerboard,Corrugated Containers and Reclamation segment.

 

**RECENTLYADOPTED ACCOUNTING STANDARDS**

 

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. 157 defines fair value,establishes a framework for measuring fair value and expands disclosures aboutfair value measurements. SFAS No. 157 applies under other accountingpronouncements that require or permit fair value measurements and, accordingly,SFAS No. 157 does not require any new fair value measurements. Forinformation concerning SFAS No. 157, see Note 13 of the Notes toConsolidated Financial Statements.

 

# **RESULTS OF OPERATIONS**

#  

**Non-GAAPFinancial Measure**

 

In the accompanyinganalysis of financial information, we use the financial measure “adjusted netloss,” which is derived from our consolidated financial information but is notpresented in our financial statements prepared in accordance with U.S.generally accepted accounting principles (GAAP). This measure isconsidered a “non-GAAP financial measure” under the U.S. Securities andExchange 

 

13

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Commission (SEC) rules. Adjusted net loss is a non-GAAP financialmeasure that excludes from net loss the effects of non-cash foreign currencyexchange gains or losses, losses on early extinguishment of debt, restructuringcharges, litigation charges, gains or losses on sale of assets and resolutionof certain tax matters. We believe this non-GAAP financial measure providesinvestors, potential investors, security analysts and others with usefulinformation to evaluate the performance of our business because it excludes gainsand losses and charges that management believes are not indicative of theongoing operating results of the business. In addition, this measure maydiffer from the adjusted net income (loss) calculations of other companies inour industry, limiting its usefulness as a comparative measure. For suchmeasure, we have provided the following reconciliation to the most directly comparableGAAP financial measure.

 

**Reconciliationto GAAP Financial Measure**

 
| ** **                                                 | ** ** | **Six months ended   June 30,** | ** ** |
|------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| **(In millions)**                                     | ** ** | **2008**                                            | ** ** | **2007** | ** ** |
|                                                       |       |                                                |       |   |   |
| **Net  loss (GAAP)**                                       |       | $                                                   | (50        | ) | $ | (54 | ) |
| Loss on early  extinguishment of debt, net of income taxes |       |                                                |       | 17 |   |
| Non-cash foreign  currency exchange (gains) losses         |       | (11                                                 | )          | 25 |   |
| Gain on sale of  assets, net of income taxes               |       | (1                                                  | )          |   |   |
| Restructuring  charges, net of income taxes                |       | 8                                                   |       | 15 |   |
| Litigation  charges, net of income taxes                   |       | 5                                                   |       |   |   |
| Resolution of a  prior year income tax matter              |       |                                                |       | (4 | ) |
| Adjusted net  loss                                         |       | $                                                   | (49        | ) | $ | (1 | ) |

#  

# **Overview**

#  

For the six months ended June 30,2008, we had an adjusted net loss of $49 million compared to an adjusted netloss available to common stockholders of $1 million for the first half of 2007.The results for the first half of 2008were negatively impacted by higher costs for energy, fiber, freight andchemicals and a charge of $22 million to fully reserve all amounts duefrom Calpine Corrugated LLC (Calpine Corrugated). In 2007, we recorded chargesof $10 million to reserve for amounts due from Calpine Corrugated, of which $5million was recorded in the six months ended June 30, 2007. Forinformation concerning Calpine Corrugated, see Note 3 and Note 6 of the Notesto Consolidated Financial Statements. Theseitems were partially offset by higher average selling prices for most ofour products, benefits from our strategic initiatives and lower interestexpense compared to the same period last year.

 

We expect earnings toimprove in the third quarter of 2008 as a result of higher average sellingprices and increased mill production, despite additional cost inflation. In July 2008,we began implementing a $55 per ton containerboard price increase and acorresponding corrugated container price increase. We expect our average sellingprices will improve as we substantially realize the current price increases in thefourth quarter. Mill production is expected to improve in the third quarter of2008 due to one additional production day and 24,000 tons less mill maintenancedowntime. 

 

# **Strategic Initiatives andRestructuring Activities**

#  

We are in the final yearof our three year transformation plan to achieve $525 million in savings andproductivity improvements, net of transition costs, from our strategicinitiatives, compared to levels prior to 

 

14

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the start of our plan asadjusted for the impact of inflation. We expect to achieve the $525 million in cumulativeannual savings by the end of 2008.

 

For the six months ended June 30,2008, we closed one converting facility, announced the closure of threeadditional converting facilities and announced that we would cease operationsof our containerboard machine at the Snowflake, Arizona mill in the fourthquarter of 2008. As a result of these closures and other ongoing strategicinitiatives, we reduced our headcount by approximately 380 employees. We recordedrestructuring charges of $13 million, net of a gain of $2 million from the saleof a previously closed facility. Restructuring charges included non-cashcharges of $4 million related to the acceleration of depreciation for equipmentexpected to be abandoned or taken out of service. The remaining charges of $11million were primarily for severance and benefits. The net sales of theannounced and closed converting facilities as of June 30, 2008 prior toclosure and for the year ended December 31, 2007 were $68 million and $154million, respectively. The majority of these net sales are expected to betransferred to other operating facilities. The Snowflake, Arizonacontainerboard machine has the capacity to produce 135,000 tons of mediumannually. The customers will be supplied by our other mills. Additional chargesof up to $3 million are expected to be recorded in future periods for severanceand benefits related to the closure of these facilities.

 

**SixMonths 2008 Compared to Six Months 2007**

** **
| ** **                                                        | ** ** | **Six months ended June 30,** | ** ** |
|-------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                        | ** ** | **2008**                                          | ** ** | **2007** | ** ** |
| **(In millions)**                                            | ** ** | **Net  Sales**                                    | ** ** | **Profit/   (Loss)** | ** ** | **Net  Sales** | ** ** | **Profit/   (Loss)** | ** ** |
|                                                              |       |                                              |       |   |   |   |   |   |   |
| Containerboard,  corrugated containers and reclamation operations |       | $                                                 | 3,630      |   | $ | 182 |   | $ | 3,694 |   | $ | 264 |   |
|                                                              |       |                                              |       |   |   |   |   |   |   |
| Restructuring charges                                             |       |                                              |       | (13 | ) |   |   | (34 | ) |
| Gain on sale of  assets                                           |       |                                              |       | 4 |   |   |   |   |   |
| Interest  expense, net                                            |       |                                              |       | (124 | ) |   |   | (147 | ) |
| Loss on early  extinguishment of debt                             |       |                                              |       |   |   |   |   | (28 | ) |
| Non-cash foreign  currency translation gains (losses)             |       |                                              |       | 11 |   |   |   | (25 | ) |
| Corporate  expenses and other (Note 1)                            |       |                                              |       | (148 | ) |   |   | (120 | ) |
| Loss before  income taxes                                         |       |                                              |       | $ | (88 | ) |   |   | $ | (90 | ) |
|                                                                   |            |                                                   |            |  |  |  |  |  |  |  |  |  |  |

 

Net sales decreased 1.7%in 2008 compared to last year. Net sales were negatively impacted by $261million 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 primarilyas a result of plant closures. Net sales were favorably impacted by higheraverage selling prices ($197 million) for containerboard, corrugatedcontainers, market pulp and reclaimed fiber. Average domestic linerboard pricesfor the first half of 2008 were 6.8% higher compared to 2007. Our average NorthAmerican selling price for corrugated containers increased by 4.1% compared to2007. Our average sales prices for market pulp, SBS/SBL and kraft paperincreased 13.3%, 2.0% and 5.3%, respectively, compared to the same period lastyear. The average price for old corrugated containers (OCC) increasedapproximately $15 per ton compared to last year. Third party shipments ofcontainerboard increased 3.4% compared to the same period last year. NorthAmerican shipments of corrugated containers on both a total and a per day basiswere 5.7% lower compared to last year due primarily to container plantclosures, actions to improve margins by exiting unprofitable accounts andweaker market conditions.

 

Our containerboard millsoperated at 99.5% of capacity in the first half of 2008, while containerboardproduction was 3.1% lower compared to last year due primarily to the sale ofthe Brewton, Alabama mill and other mill closures. Production of market pulpand kraft paper decreased 7.2% and 6.5%, 

 

15

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respectively, compared tolast year. Production of SBS/SBL****decreased by****61.3% compared to last year due primarily to the sale ofthe Brewton, Alabama mill. Total tons of fiber reclaimed and brokered wascomparable to last year.

 

Cost of goods sold as apercent of net sales in the first half of 2008 was 89.3%, compared to 87.1%last year. Cost of goods sold increased from $3,219 million in 2007 to $3,242million in 2008 due primarily to higher costs of reclaimed material ($62million), energy ($52 million), freight ($39 million), wood fiber ($20 million),chemicals ($17 million) and maintenance ($8 million). Cost of goods sold wasimpacted by a reduction in costs ($227 million) due primarily to the sale ofthe Brewton, Alabama mill and the sales mix change as discussed above.

 

Selling andadministrative expense in 2008 increased $15 million to 9.6% of net sales from 9.0%in 2007 due primarily to higher charges for Calpine Corrugated ($17 million)and litigation ($8 million).

 

Interest expense, net was$124 million in 2008. The $23 million decrease compared to 2007 was the resultof lower average borrowings ($9 million) and lower average interest rates ($14million). The lower average borrowings were primarily due to debt reductionfrom the sale of the Brewton, Alabama mill. Our overall average effectiveinterest rate in the first half of 2008 was lower than 2007 by 0.93%.

 

In the first half of2007, we recorded a loss on early extinguishment of debt of $28 millionincluding $23 million for tender premiums and $5 million for the non-cashwrite-off of deferred debt issuance cost.

 

Other, net for the firsthalf of 2008 included non-cash foreign currency exchange gains of $11 millioncompared to losses of $25 million for the same period in 2007.

 

Thebenefit for income taxes for the six months ended June 30, 2008 differedfrom the amount computed by applying the statutory U.S. federal income tax rateto loss before income taxes due primarily to non-cash foreign currency exchangegains (losses), state income taxes, lower effective tax rates in certainforeign jurisdictions and the effect of other permanent differences. Dueto fluctuations in pretax income, lower effective tax rates in certain foreignjurisdictions and the effect of permanent differences, the expected income taxbenefit for the year ending December 31, 2008 is calculated on a discretequarterly basis, which more accurately reflects income tax benefit as it isrealized.

 

#### **Statistical Data**

 
| ** **                                                                | ** ** | **Six months ended   June 30,** | ** ** |
|---------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| **(In thousands of tons, except as noted)** | ** ** | **2008**                                            | ** ** | **2007** | ** ** |
| Mill production                                                           |       |                                                |       |   |   |
| Containerboard  (1)                                                       |       | 3,551                                               |       | 3,664 |   |
| Kraft paper                                                               |       | 87                                                  |       | 93 |   |
| Market pulp                                                               |       | 259                                                 |       | 279 |   |
| SBS/SBL                                                                   |       | 62                                                  |       | 160 |   |
| North American  corrugated containers sold (billion sq. ft.)              |       | 35.7                                                |       | 37.9 |   |
| Fiber reclaimed  and brokered                                             |       | 3,393                                               |       | 3,400 |   |

#### ** **

----

(1) For the six months ended June 30, 2008and 2007, our corrugated container plants consumed 2,362,000 tons and 2,511,000tons of containerboard, respectively.

 

16

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**ITEM 3.**        **QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

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

 

**ITEM 4.****        CONTROLS AND PROCEDURES**

 

**Evaluationof Disclosure Controls and Procedures**

 

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

 

**Changesin Internal Control**

 

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

 

**PART II - OTHER INFORMATION**

 

**ITEM 1.****        LEGAL PROCEEDINGS**

 

None.

 

**ITEM 1A.****     RISK FACTORS**

 

Thereare no material changes to the risk factors as disclosed in our 2007 AnnualReport on Form 10-K.

 

**ITEM 2.****        UNREGISTERED SALES OFEQUITY SECURITIES AND USE OF PROCEEDS**

 

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

 

**ITEM 3.****        DEFAULTS UPON SENIORSECURITIES**

 

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

 

**ITEM 4.****        SUBMISSION OF MATTERSTO A VOTE OF SECURITY HOLDERS**

 

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

 

**ITEM 5.****        OTHER INFORMATION**

 

(a)   None.

 

(b)   Therehave been no material changes to the procedures by which security holders mayrecommend nominees to the Company’s Board of Directors implemented since thefiling of the Company’s Quarterly Report on Form 10-Q for the quarterended March 31, 2008.

 

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

 

Thefollowing exhibits are included in this Form 10-Q:

 

10.1                 FirstAmendment of Employment Agreement of Steven J. Klinger, effective as of April 23,2008, between Smurfit-Stone Container Corporation and Steven J. Klinger (incorporatedby reference to Exhibit 10.1 to Smurfit-Stone’s Quarterly Report on Form 10-Qfor the quarter ended June 30, 2008 (File No. 0-23876)).

 

10.2                 Amendedand Restated Guaranty dated as of July 28, 2008, made by Smurfit-StoneContainer Enterprises, Inc. (SSCE), as Guarantor, in favor of The CITGroup/Equipment Financing, Inc., as the Initial Lender and asAdministrative Agent for the benefit of the other lenders, as defined therein(incorporated by reference to Exhibit 10.2 to SSCC’s Quarterly Report on Form 10-Qfor the quarter ended June 30, 2008 (File No. 0-23876)).

 

10.3                 ContinuingGuaranty dated as of July 28, 2008, made by and between SSCE, asGuarantor, and Union Bank of California, N.A. (incorporated by reference to Exhibit 10.3to SSCC’s Quarterly Report on Form 10-Q for the quarter ended June 30,2008 (File No. 0-23876)).

 

31.1                 Certificationpursuant to Rules 13a–14(a) and 15d–14(a) under the Securities ExchangeAct of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Actof 2002.

 

31.2                 Certificationpursuant to Rules 13a–14(a) and 15d–14(a) under the Securities ExchangeAct of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Actof 2002.

 

32.1                 Certificationpursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906of the Sarbanes-Oxley Act of 2002.

 

32.2                 Certificationpursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906of the Sarbanes-Oxley Act of 2002.

 

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Signature

 

Pursuant to the requirementsof the Securities Exchange Act of 1934, the Registrant has duly caused thisreport to be signed on its behalf by the undersigned thereunto duly authorized.

 

 
|   | SMURFIT-STONE  CONTAINER ENTERPRISES, INC. |
|--------|--------------------------------------------|
|   | (Registrant)                               |

 

 
| Date:    August 6, 2008 | /s/ Paul K.  Kaufmann                           |
|----------------------------------------|-------------------------------------------------|
|                                   | Paul K. Kaufmann                                |
|                                   | Senior Vice  President and Corporate Controller |
|                                   | (Principal  Accounting Officer)                 |

 

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