**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-Q**

 

**x****                             ****Quarterly Report Pursuant toSection 13 or 15(d) of the Securities Exchange Act of 1934.**

**o****                                ****Transition Report Pursuant toSection 13 or 15(d) of the Securities Exchange Act of 1934.**

** **

**ForQuarter Ended September 30, 2007**

**CommissionFile Number 1-3439**

 

**SMURFIT-STONECONTAINER 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’stelephone 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 bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days. Yes  xNo o

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer or a non-accelerated filer. See definition of “acceleratedfiler and large accelerated filer” in Rule 12(b) of the Exchange Act. (Checkone):

| Large  accelerated filer  o | Accelerated  filer  o | Non-accelerated  filer  x |
|---------------------------------------|---------------------------------|-------------------------------------|

 

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

 

APPLICABLE ONLY TOCORPORATE ISSUERS:

 

As of November 5, 2007,the registrant had outstanding 770 shares of common stock, $.01 par value pershare, all of which are owned by Smurfit-Stone Container Corporation.

 

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

 

 

----

 

**PART I - FINANCIAL INFORMATION**

 

**Item1.    Financial Statements**

 

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

**CONSOLIDATED STATEMENTS OF OPERATIONS**

**(Unaudited)**

 
| ** **                                                                                                                                               | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                                                                                                               | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| **(In millions)**                                                                                                                                   | ** ** | **2007**                         | ** ** | **2006**                        | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                                                                                                                               | ** ** | ** **                       | ** ** | **(Restated)**                  | ** ** | ** ** | ** ** | **(Restated)** | ** ** |
| Net sales                                                                                                                                                | ** ** | **$**                            | **1,885**  |                            | $          | 1,844 | ** ** | **$** | **5,579** |   | $ | 5,338 |   |
| Costs and expenses                                                                                                                                       |       |                             |       |                            |       |   |   |   |   |
| Cost of goods sold                                                                                                                                       | ** ** | **1,596**                        |       | 1,541                           | ** ** | **4,815** |   | 4,644 |   |
| Selling and administrative expenses                                                                                                                      | ** ** | **158**                          |       | 165                             | ** ** | **486** |   | 508 |   |
| Restructuring charges                                                                                                                                    | ** ** | **11**                           |       | 13                              | ** ** | **45** |   | 35 |   |
| (Gain) loss on disposal of assets                                                                                                                        | ** ** | **64**                           | ** ** | ** **                      |       | **64** |   | (24 | ) |
| Income from operations                                                                                                                                   | ** ** | **56**                           |       | 125                             | ** ** | **169** |   | 175 |   |
| Other income (expense)                                                                                                                                   |       |                             |       |                            |       |   |   |   |   |
| Interest expense, net                                                                                                                                    | ** ** | **(73**                          | **)**      | (78                             | )          | **(220** | **)** | (266 | ) |
| Loss on early extinguishment of debt                                                                                                                     | ** ** | **(1**                           | **)**      | ** **                      |       | **(29** | **)** | (28 | ) |
| Other, net                                                                                                                                               | ** ** | **(31**                          | **)**      | (3                              | )          | **(59** | **)** | (26 | ) |
| Income (loss) from continuing operations  before income taxes                                                                                            | ** ** | **(49**                          | **)**      | 44                              |       | **(139** | **)** | (145 | ) |
| (Provision for) benefit from income taxes                                                                                                                | ** ** | **(44**                          | **)**      | (18                             | )          | **(8** | **)** | 50 |   |
| Income (loss) from continuing operations                                                                                                                 | ** ** | **(93**                          | )          | 26                              | ** ** | **(147** | ) | (95 | ) |
| Discontinued operations                                                                                                                                  |       |                             |       |                            |       |   |   |   |   |
| Income from discontinued operations, net of  income tax provision of $9 for the nine months ended September 30, 2006                                     |       |                             |       |                            |       |   |   | 14 |   |
| Loss on sale of discontinued operations,  net of income tax benefit (provision) of $1 and ($174) for the three and nine  months ended September 30, 2006 |       |                             |       | (2                              | )          |   |   | (3 | ) |
| Net income (loss)                                                                                                                                        | ** ** | **$**                            | **(93**    | )                               | $          | 24 | ** ** | **$** | **(147** | ) | $ | (84 | ) |

 

See notes to consolidated financialstatements.

 

1

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**SMURFIT-STONECONTAINER ENTERPRISES, INC.**

**CONSOLIDATEDBALANCE SHEETS**

 
| ** **                                                                                                                          | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| **(In millions, except share data)**                                                                            | ** ** | **2007**               | ** ** | **2006**              | ** ** |
| ** **                                                                                                                          | ** ** | **(Unaudited)**        | ** ** | **(Restated)**        | ** ** |
| **Assets**                                                                                                                          |       |                   |       |                  |       |
| ** **                                                                                                                          |       |                   |       |                  |       |
| Current assets                                                                                                                      |       |                   |       |                  |       |
| Cash and cash equivalents                                                                                                           | ** ** | **$**                  | **11**     |                  | $          | 9 |   |
| Receivables, less allowances of $7 in 2007  and 2006                                                                                | ** ** | **192**                |       | 166                   |       |
| Retained interest in receivables sold                                                                                               | ** ** | **244**                |       | 179                   |       |
| Inventories, including amounts valued under  LIFO method                                                                            |       |                   |       |                  |       |
| Work-in-process and finished goods                                                                                                  | ** ** | **146**                |       | 155                   |       |
|  Materials and supplies                                                                                                        | ** ** | **384**                |       | 383                   |       |
| ** **                                                                                                                          |       | **530**                |       | 538                   |       |
| Prepaid expenses and other current assets                                                                                           | ** ** | **42**                 |       | 34                    |       |
| Total current assets                                                                                                                | ** ** | **1,019**              |       | 926                   |       |
| Net property, plant and equipment                                                                                                   | ** ** | **3,436**              |       | 3,731                 |       |
| Timberland, less timber depletion                                                                                                   | ** ** | **42**                 |       | 43                    |       |
| Goodwill                                                                                                                            | ** ** | **2,727**              |       | 2,873                 |       |
| Other assets                                                                                                                        | ** ** | **181**                |       | 203                   |       |
| ** **                                                                                                                          |       | **$**                  | **7,405**  |                  | $          | 7,776 |   |
| **Liabilities and Stockholder’s Equity**                                                                                       |       |                   |       |                  |       |
|                                                                                                                                |       |                   |       |                  |       |
| Current liabilities                                                                                                                 |       |                   |       |                  |       |
| Current maturities of long-term debt                                                                                                | ** ** | **$**                  | **12**     |                  | $          | 84 |   |
| Accounts payable                                                                                                                    | ** ** | **584**                |       | 542                   |       |
| Accrued compensation and payroll taxes                                                                                              | ** ** | **182**                |       | 211                   |       |
| Interest payable                                                                                                                    | ** ** | **60**                 |       | 79                    |       |
| Income taxes payable                                                                                                                | ** ** | **10**                 |       | 2                     |       |
| Current deferred income taxes                                                                                                       | ** ** | **2**                  |       | 2                     |       |
| Other current liabilities                                                                                                           | ** ** | **142**                |       | 145                   |       |
| Total current liabilities                                                                                                           | ** ** | **992**                |       | 1,065                 |       |
| Long-term debt, less current maturities                                                                                             | ** ** | **3,394**              |       | 3,550                 |       |
| Other long-term liabilities                                                                                                         | ** ** | **941**                |       | 1,010                 |       |
| Deferred income taxes                                                                                                               | ** ** | **470**                |       | 515                   |       |
| Stockholder’s equity                                                                                                           |       |                   |       |                  |       |
| Common stock, par value $.01 per share;  1,000 shares authorized, 770 shares issued and outstanding in 2007 and 2006,  respectively |       |                   |       |                  |       |
| Additional paid-in capital                                                                                                          | ** ** | **3,656**              |       | 3,635                 |       |
| Retained earnings (deficit)                                                                                                         | ** ** | **(1,738**             | **)**      | (1,587                | )          |
| Accumulated other comprehensive income  (loss)                                                                                      | ** ** | **(310**               | **)**      | (412                  | )          |
| Total stockholder’s equity                                                                                                     | ** ** | **1,608**              |       | 1,636                 |       |
| ** **                                                                                                                          |       | **$**                  | **7,405**  |                  | $          | 7,776 |   |

 

See notes to consolidated financial statements.

 

2

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

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Unaudited)**

 
| **Nine Months Ended September 30, (In millions)**                                                                     | ** ** | **2007**   | ** ** | **2006**       | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|----------------|------------|
| ** **                                                                                                                                          | ** ** | ** ** | ** ** | **(Restated)** | ** ** |
| **Cash flows from operating activities**                                                                                                            |       |       |       |           |       |
| Net loss                                                                                                                                            | ** ** | **$**      | **(147**   | **)**          | $          | (84 | ) |
| Adjustments to reconcile net loss to net  cash provided by operating activities                                                                     |       |       | ** ** |           |       |
| Gain on disposition of discontinued  operations                                                                                                     |       |       | ** ** | (171           | )          |
| Loss on early extinguishment of debt                                                                                                                | ** ** | **29**     | ** ** | 28             |       |
| Depreciation, depletion and amortization                                                                                                            | ** ** | **272**    | ** ** | 288            |       |
| Amortization of deferred debt issuance  costs                                                                                                       | ** ** | **6**      | ** ** | 7              |       |
| Deferred income taxes                                                                                                                               | ** ** | **(3**     | **)**      | 100            |       |
| Pension and postretirement benefits                                                                                                                 | ** ** | **(58**    | **)**      | (2             | )          |
| (Gain) loss on disposal of assets                                                                                                                   | ** ** | **64**     | ** ** | (24            | )          |
| Non-cash restructuring charges                                                                                                                      | ** ** | **8**      | ** ** | 16             |       |
| Non-cash stock-based compensation                                                                                                                   | ** ** | **16**     | ** ** | 18             |       |
| Non-cash foreign currency translation  losses                                                                                                       | ** ** | **47**     | ** ** | 12             |       |
| Change in current assets and liabilities, net  of effects from acquisitions and dispositions  Receivables and retained interest in receivables sold |       | **(83**    | **)**      |           |       |
| Inventories                                                                                                                                         | ** ** | **2**      | ** ** | 27             |       |
| Prepaid expenses and other current assets                                                                                                           | ** ** | **2**      | ** ** | 10             |       |
| Accounts payable and accrued liabilities                                                                                                            | ** ** | **(4**     | **)**      | (97            | )          |
| Interest payable                                                                                                                                    | ** ** | **(19**    | **)**      | (25            | )          |
| Other, net                                                                                                                                          | ** ** | **2**      | ** ** | 17             |       |
| Net cash provided by operating activities                                                                                                           | ** ** | **134**    | ** ** | 120            |       |
| **Cash flows from investing activities**                                                                                                            |       |       | ** ** |           |       |
| Expenditures for property, plant and  equipment                                                                                                     | ** ** | **(268**   | **)**      | (198           | )          |
| Proceeds from property disposals and sale  of businesses                                                                                            | ** ** | **399**    | ** ** | 956            |       |
| Net cash provided by investing activities                                                                                                           | ** ** | **131**    | ** ** | 758            |       |
| **Cash flows from financing activities**                                                                                                            |       |       | ** ** |           |       |
| Proceeds from long-term debt                                                                                                                        | ** ** | **675**    | ** ** |           |       |
| Net repayments of long-term debt                                                                                                                    | ** ** | **(904**   | **)**      | (848           | )          |
| Debt repurchase premiums                                                                                                                            | ** ** | **(23**    | **)**      | (24            | )          |
| Dividends paid                                                                                                                                      | ** ** | **(6**     | **)**      | (6             | )          |
| Capital contribution from SSCC                                                                                                                      | ** ** | **2**      | ** ** | 2              |       |
| Deferred debt issuance costs                                                                                                                        | ** ** | **(7**     | **)**      |           |       |
| Net cash used for financing activities                                                                                                              | ** ** | **(263**   | **)**      | (876           | )          |
| **Increase in cash and cash equivalents**                                                                                                           | ** ** | **2**      | ** ** | 2              |       |
| Cash and cash equivalents                                                                                                                           |       |       | ** ** |           |       |
| Beginning of period                                                                                                                                 | ** ** | **9**      | ** ** | 5              |       |
| End of period                                                                                                                                       | ** ** | **$**      | **11**     |           | $          | 7 |   |

 

See notes to consolidated financialstatements.

 

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 toForm 10-Q and reflect all adjustments which management believes necessary(which include only normal recurring accruals) to present fairly the Company’sfinancial position, results of operations and cash flows. These statements,however, do not include all information and footnotes necessary for a completepresentation of financial position, results of operations and cash flows inconformity with U.S. generally accepted accounting principles. Interim resultsmay not necessarily be indicative of results that may be expected for any otherinterim period or for the year as a whole. These financial statements should beread in conjunction with the audited consolidated financial statements andfootnotes included in the SSCE Annual Report on Form 10-K for the year endedDecember 31, 2006 (“2006 10-K”) filed February 28, 2007 with the Securities andExchange Commission (See Note 2).

 

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

 

**Recently Adopted Accounting Standard:** Effective January 1, 2007, the Company adoptedthe Financial Accounting Standards Board (“FASB”) Staff Position (“FSP”) No.AUG AIR-1, “Accounting for Planned Major Maintenance Activities.”  This FSP prohibits the use of theaccrue-in-advance method of accounting for planned major maintenance activitiesin annual and interim financial reporting periods. The FSP requiresretrospective application to all financial statements presented. The newstandard does not impact the Company’s annual 2006 financial statements;however the impact on the Company’s previously reported income (loss) from continuingoperations before income taxes for the three and nine months ended September30, 2006 was income of $10 million and $9 million, respectively, which isreflected in cost of goods sold. The impact on the Company’s net income (loss)for the three and nine months ended September 30, 2006 was income of $6 millionand $5 million, respectively.

 

Effective January 1,2007, the Company adopted the provisions of FASB Interpretation No. 48, “Accountingfor Uncertainty in Income Taxes” (“FIN No. 48”), an interpretation of Statementof Financial Accounting Standards (“SFAS”) No. 109, “Accounting for IncomeTaxes.”  FIN No. 48 creates a singlemodel to address accounting for uncertainty in tax positions and clarifies theaccounting for income taxes by prescribing a minimum recognition threshold atax position is required to meet before being recognized in the financialstatements. FIN No. 48 also provides guidance on derecognition, measurement,classification, interest and penalties, accounting in interim periods,disclosure and transition. Upon adoption, the Company reduced its existingreserves for uncertain tax positions by $2 million. This reduction was recordedas a cumulative effect adjustment to the retained deficit. As of January 1,2007, the Company had $134 million of unrecognized tax benefits, of which $38million was classified as a reduction to the amount of the Company’s netoperating loss carryforwards and $96 million was classified as a liability forunrecognized tax benefits and included in other long-term liabilities. Allunrecognized tax benefits, if recognized, would affect the Company’s effectivetax rate.

 

Upon adoption of FIN No.48, the Company elected to classify interest and penalties related tounrecognized tax benefits in the Company’s income tax provision, consistentwith the Company’s previous accounting policy. Unrecognized tax benefits of $14million for interest and penalties are included as a component of the $134million of unrecognized tax benefits noted above. The interest was computed onthe difference between the tax position recognized in accordance with FIN No.48 and the amount previously taken or expected to be taken in the Company’s taxreturns, adjusted to reflect the impact of net operating loss and other taxcarryforward items  (See Note 13).

 

4

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Effective April 1, 2006,the Company adopted Emerging Issues Task Force (“EITF”) Issue No. 04-13, “Accountingfor Purchases and Sales of Inventory With the Same Counterparty,” for newarrangements and modifications or renewals of existing arrangements. EITF No.04-13 requires certain inventory buy/sell transactions between counterpartieswithin the same line of business to be viewed as a single exchange transaction.EITF No. 04-13 required the Company to prospectively report, beginning in thesecond quarter of 2006, certain inventory buy/sell transactions of similarcontainerboard types on a net basis in the consolidated statements ofoperations. Had EITF No. 04-13 previously been in effect, net sales and cost ofgoods sold would have been reduced by $58 million for the nine months endedSeptember 30, 2006.

 

**2.****              Restatementof Prior Period Financial Statements**

 

During the second quarterof 2007, the Company determined that $28 million of net benefits from incometaxes previously recognized on non-cash foreign currency translation lossesfrom 2000 to 2006 should not have been recognized under SFAS No. 109, “Accountingfor Income Taxes.”  Because the Companyis indefinitely reinvested in the foreign operations, the losses should havebeen treated as permanent differences when determining taxable income forfinancial accounting purposes.

 

The Company performed anevaluation to determine if the errors resulting from recognizing the deferredtax impact of the non-cash foreign currency translation losses were material toany individual prior period, taking into account the requirements of SEC StaffAccounting Bulletin No. 108, “Consideringthe Effects of Prior Year Misstatements when Quantifying Misstatements inCurrent Year Financial Statements” (“SAB No.108”), which was adopted in2006. Based on this analysis, the Company concluded the errors were notmaterial to any individual period from 2000 to 2006 and, therefore, as providedfor by SAB No. 108, the correction of the error does not require previouslyfiled reports to be amended. The Company restated the 2006 financial statementsincluded in this filing. Financial statements for the years ended December 31,2005 and 2006 will be restated in the December 31, 2007 Annual Report on Form10-K.

 

The tables below presentthe effect of the financial statement adjustments related to the restatement ofthe Company’s previously reported financial statements for the fiscal yearsended December 31, 2006, 2005 and 2004, and for the three and nine monthperiods ended September 30, 2006. In addition, the 2004 consolidated balancesheet adjustment includes the cumulative effect of the income (loss)adjustments for the fiscal years ended December 31, 2003, 2002, 2001 and 2000of $(19) million, $(1) million, $3 million and $1 million, respectively.

 

5

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The effect of therestatement on the consolidated balance sheets as of December 31, 2006, 2005and 2004 is as follows:

 
| ** **                                       | ** ** | **As Reported** | ** ** | **Adjustments** | ** ** | **As Restated** | ** ** |
|--------------------------------------------------|------------|----------------------|------------|-----------------|------------|----------------------|------------|
| 2006                                             | ** ** | ** **           | ** ** | ** **      | ** ** | ** **           | ** ** |
| ** **                                       | ** ** | ** **           | ** ** | ** **      | ** ** | ** **           | ** ** |
| Total assets                                     |       | $                    | 7,776      |            | $          |                 | $          | 7,776 |   |
| Deferred income  taxes                           |       | 487                  |       | 28              |       | 515                  |       |
| Retained  earnings (deficit)                     |       | (1,559               | )          | (28             | )          | (1,587               | )          |
| Total  stockholder’s equity                 |       | 1,664                |       | (28             | )          | 1,636                |       |
| Total liabilities  and stockholder’s equity |       | 7,776                |       |            |       | 7,776                |       |
|                                             |       |                 |       |            |       |                 |       |
|                                             |       |                 |       |            |       |                 |       |
| 2005                                             |       |                 |       |            |       |                 |       |
| ** **                                       | ** ** | ** **           | ** ** | ** **      | ** ** | ** **           | ** ** |
| Total assets                                     |       | $                    | 9,114      |            | $          |                 | $          | 9,114 |   |
| Deferred income  taxes                           |       | 529                  |       | 28              |       | 557                  |       |
| Retained  earnings (deficit)                     |       | (1,492               | )          | (28             | )          | (1,520               | )          |
| Total  stockholder’s equity                 |       | 1,739                |       | (28             | )          | 1,711                |       |
| Total  liabilities and stockholder’s equity |       | 9,114                |       |            |       | 9,114                |       |
|                                             |       |                 |       |            |       |                 |       |
|                                             |       |                 |       |            |       |                 |       |
| 2004                                             |       |                 |       |            |       |                 |       |
|                                             |       |                 |       |            |       |                 |       |
| Total assets                                     |       | $                    | 9,583      |            | $          |                 | $          | 9,583 |   |
| Deferred income  taxes                           |       | 824                  |       | 25              |       | 849                  |       |
| Retained  earnings (deficit)                     |       | (1,157               | )          | (25             | )          | (1,182               | )          |
| Total  stockholder’s equity                 |       | 2,116                |       | (25             | )          | 2,091                |       |
| Total  liabilities and stockholder’s equity |       | 9,583                |       |            |       | 9,583                |       |

 

6

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The effect of therestatement on the 2006, 2005 and 2004 consolidated statements of operations isas follows:

 
| ** **                                           | ** ** | **As Reported** | ** ** | **Adjustments** | ** ** | **As Restated** | ** ** |
|------------------------------------------------------|------------|----------------------|------------|-----------------|------------|----------------------|------------|
| 2006                                                 | ** ** | ** **           | ** ** | ** **      | ** ** | ** **           | ** ** |
|                                                 |       |                 |       |            |       |                 |       |
| Loss from  continuing operations before income taxes |       | $                    | (110       | )               | $          |                 | $          | (110 | ) |
| Benefit from  income taxes                           |       | 40                   |       |            |       | 40                   |       |
| Loss from  continuing operations                     |       | (70                  | )          |            |       | (70                  | )          |
| Net loss                                             |       | (59                  | )          |            |       | (59                  | )          |
|                                                 |       |                 |       |            |       |                 |       |
| 2005                                                 |       |                 |       |            |       |                 |       |
|                                                 |       |                 |       |            |       |                 |       |
| Loss from  continuing operations before income taxes |       | $                    | (619       | )               | $          |                 | $          | (619 | ) |
| Benefit from  income taxes                           |       | 241                  |       | (3              | )          | 238                  |       |
| Loss from  continuing operations                     |       | (378                 | )          | (3              | )          | (381                 | )          |
| Net loss                                             |       | (327                 | )          | (3              | )          | (330                 | )          |
|                                                 |       |                 |       |            |       |                 |       |
| 2004                                                 |       |                 |       |            |       |                 |       |
| ** **                                           | ** ** | ** **           | ** ** | ** **      | ** ** | ** **           | ** ** |
| Loss from  continuing operations before income taxes |       | $                    | (126       | )               | $          |                 | $          | (126 | ) |
| Benefit from  income taxes                           |       | 73                   |       | (9              | )          | 64                   |       |
| Loss from  continuing operations                     |       | (53                  | )          | (9              | )          | (62                  | )          |
| Net income  (loss)                                   |       | 1                    |       | (9              | )          | (8                   | )          |

 

The effect of therestatement on the 2006, 2005 and 2004 consolidated statements of cash flows isas follows:

 
| ** **                                 | ** ** | **As Reported** | ** ** | **Adjustments** | ** ** | **As Restated** | ** ** |
|--------------------------------------------|------------|----------------------|------------|-----------------|------------|----------------------|------------|
| 2006                                       | ** ** | ** **           | ** ** | ** **      | ** ** | ** **           | ** ** |
|                                       |       |                 |       |            |       |                 |       |
| Net loss                                   |       | $                    | (59        | )               | $          |                 | $          | (59 | ) |
| Deferred income  taxes                     |       | 108                  |       |            |       | 108                  |       |
| Net cash  provided by operating activities |       | 265                  |       |            |       | 265                  |       |
|                                       |       |                 |       |            |       |                 |       |
|                                       |       |                 |       |            |       |                 |       |
| 2005                                       |       |                 |       |            |       |                 |       |
| ** **                                 | ** ** | ** **           | ** ** | ** **      | ** ** | ** **           | ** ** |
| Net loss                                   |       | $                    | (327       | )               | $          | (3                   | )          | $ | (330 | ) |
| Deferred income  taxes                     |       | (233                 | )          | 3               |       | (230                 | )          |
| Net cash  provided by operating activities |       | 221                  |       |            |       | 221                  |       |
|                                       |       |                 |       |            |       |                 |       |
|                                       |       |                 |       |            |       |                 |       |
| 2004                                       |       |                 |       |            |       |                 |       |
| ** **                                 | ** ** | ** **           | ** ** | ** **      | ** ** | ** **           | ** ** |
| Net income  (loss)                         |       | $                    | 1          |            | $          | (9                   | )          | $ | (8 | ) |
| Deferred income  taxes                     |       | (54                  | )          | 9               |       | (45                  | )          |
| Net cash  provided by operating activities |       | 265                  |       |            |       | 265                  |       |

 

7

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The effect of the restatementand the adoption of FSP No. AUG AIR-1 (See Note 1) on the consolidatedstatements of operations for the three and nine months ended September 30, 2006is as follows:

 
| ** **                                                    | ** ** | **As Reported** | ** ** | **Adjustments** | ** ** | **As Restated** | ** ** |
|---------------------------------------------------------------|------------|----------------------|------------|-----------------|------------|----------------------|------------|
| Three months  ended September 30, 2006                        |       |                 |       |            |       |                 |       |
| ** **                                                    | ** ** | ** **           | ** ** | ** **      | ** ** | ** **           | ** ** |
| Cost of goods  sold                                           |       | $                    | 1,551      |            | $          | (10                  | )          | $ | 1,541 |   |
| Income (loss)  from operations                                |       | 115                  |       | 10              |       | 125                  |       |
| Income (loss)  from continuing operations before income taxes |       | 34                   |       | 10              |       | 44                   |       |
| Benefit from  (provision for) income taxes                    |       | (14                  | )          | (4              | )          | (18                  | )          |
| Income (loss)  from continuing operations                     |       | 20                   |       | 6               |       | 26                   |       |
| Net income  (loss)                                            |       | 18                   |       | 6               |       | 24                   |       |
|                                                          |       |                 |       |            |       |                 |       |
|                                                          |       |                 |       |            |       |                 |       |
| Nine months  ended September 30, 2006                         |       |                 |       |            |       |                 |       |
| ** **                                                    | ** ** | ** **           | ** ** | ** **      | ** ** | ** **           | ** ** |
| Cost of goods  sold                                           |       | $                    | 4,653      |            | $          | (9                   | )          | $ | 4,644 |   |
| Income (loss)  from operations                                |       | 166                  |       | 9               |       | 175                  |       |
| Income (loss)  from continuing operations before income taxes |       | (154                 | )          | 9               |       | (145                 | )          |
| Benefit from  (provision for) income taxes                    |       | 59                   |       | (9              | )          | 50                   |       |
| Income (loss)  from continuing operations                     |       | (95                  | )          |            |       | (95                  | )          |
| Net income  (loss)                                            |       | (84                  | )          |            |       | (84                  | )          |

** **

The effect of therestatement on the consolidated statement of cash flows for the nine monthsended September 30, 2006, is as follows:

 
| ** **                                 | ** ** | **As Reported** | ** ** | **Adjustments** | ** ** | **As Restated** | ** ** |
|--------------------------------------------|------------|----------------------|------------|-----------------|------------|----------------------|------------|
| ** **                                 | ** ** | ** **           | ** ** | ** **      | ** ** | ** **           | ** ** |
| Net loss                                   |       | $                    | (84        | )               | $          |                 | $          | (84 | ) |
| Deferred income  taxes                     |       | 91                   |       | 9               |       | 100                  |       |
| Accounts payable  and accrued liabilities  |       | (88                  | )          | (9              | )          | (97                  | )          |
| Net cash  provided by operating activities |       | 120                  |       |            |       | 120                  |       |
|                                            |            |                      |            |                 |            |                      |            |  |  |

 

**3.****              Reclassifications**

 

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

 

**4.****              StrategicInitiatives and Restructuring Activities**

 

During 2005, the Companyannounced a strategic initiatives plan to improve performance and betterposition the Company for long-term growth. The plan focused on cost reductionand productivity initiatives, including reinvestment in the Company'soperations, from which the Company expects to achieve $525 million in annualsavings by the end of 2008.

 

During the third quarterof 2007, in conjunction with the strategic initiatives plan, the Companyannounced the closure of two converting facilities. As a result of other ongoingstrategic initiatives, the Company reduced its headcount by approximately 450employees, excluding the impact of the sale of the Brewton, Alabama mill (SeeNote 6). The third quarter restructuring charges of $11 million, which were netof a gain of $8 million on the sale of properties related to previously closedfacilities, included non-cash 

 

8

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charges of $12 millionrelated to the write-down of equipment and the acceleration of depreciation forequipment expected to be abandoned or taken out of service. Other restructuringcharges of $7 million were primarily for severance and benefits. Additionalcharges of up to $2 million will be recorded in future periods for severanceand benefits related to the closure of these converting facilities.

 

For the nine months endedSeptember 30, 2007, the Company has closed ten converting facilities and theCarthage, Indiana and Los Angeles, California medium mills and reduced itsheadcount by approximately 1,550 employees. The restructuring charges of $45million, which were net of a gain of $41 million on the sale of propertiesrelated to previously closed facilities, included non-cash charges of $49million. The non-cash charges related to the write-down of equipment and theacceleration of depreciation for equipment expected to be abandoned or takenout of service. Other restructuring charges of $37 million were primarily forseverance and benefits. The net sales of the closed converting facilities as ofSeptember 30, 2007 prior to closure and for the year ended December 31, 2006were $65 million and $192 million, respectively. The majority of these netsales are expected to be transferred to other operating facilities. The productionof the two medium mills, which had combined annual capacity of 200,000 tons,was partially offset by restarting the previously idled machine at theJacksonville, Florida mill with annual capacity to produce 170,000 tons ofmedium.

 

The Company recordedrestructuring charges of $13 million and $35 million for the three and ninemonths ended September 30, 2006, respectively, including non-cash charges of $6million and $16 million, respectively, related to the write-down of assets,primarily property, plant and equipment, to estimated net realizable valuerelated to the closure of converting facilities. The remaining charges wereprimarily for severance and benefits, including pension settlement costs of $4million and $6 million for the three and nine months ended September 30, 2006,respectively.

 

At December 31, 2006, theCompany had $47 million of accrued exit liabilities related to therestructuring of operations. For the three and nine months ended September 30,2007, the Company incurred $4 million and $25 million, respectively, of cashdisbursements related to these exit liabilities. In addition, for the three andnine months ended September 30, 2007, the Company incurred $6 million and $18million, respectively, of cash disbursements related to exit liabilitiesestablished during 2007.

 

**5.****              DiscontinuedOperations**

 

On June 30, 2006, theCompany completed the sale of substantially all of the assets of its ConsumerPackaging division for $1.04 billion. The Company recorded a pretax gain of$174 million, offset by a $175 million income tax provision, resulting in a netloss on sale of discontinued operations of $1 million in the second quarter of2006. The after-tax loss was the result of a provision for income taxes thatwas higher than the statutory income tax rate due to non-deductible goodwill of$273 million. The Company finalized post-closing adjustments in the thirdquarter of 2006, resulting in an additional pretax loss of $3 million, offsetby a $1 million income tax benefit.

 

The Consumer Packagingdivision was a reportable segment of the Company comprised of four coatedrecycled boxboard mills, 39 consumer packaging operations in the United States,including folding carton, multiwall and specialty bag, flexible packaging,label, contract packaging and lamination businesses and one consumer packagingplant in Brampton, Ontario. Net sales for these operations were $787 million throughthe date of sale on June 30, 2006. These facilities employed approximately6,600 hourly and salaried employees. The results of operations for the ConsumerPackaging segment have been reclassified as discontinued operations for thenine months ended September 30, 2006.

 

9

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**6.****              (Gain)Loss on Disposal of Assets**

 

On September 28, 2007,the Company completed the sale of its Brewton, Alabama, mill assets for $355million. The Company received cash proceeds of $338 million, which excluded $16million of accounts receivable previously sold to Stone Receivables Corporationunder the accounts receivable securitization program and was net of $1 millionof other closing adjustments. Current liabilities of $22 million were retainedand will be paid by the Company. The Brewton mill had annual productioncapacity of approximately 300,000 tons of white top linerboard and 190,000 tonsof solid bleached sulfate. The Company will continue to produce white toplinerboard at two of its mills. Substantially all of the proceeds from the salewere applied directly to debt reduction (See Note 10). The sale resulted in apretax loss of $65 million, which reflected the allocation of $146 million ofgoodwill (See Note 16). The Company recorded an after-tax loss of approximately$97 million related to the transaction, reflecting a provision for income taxesof $32 million, which is higher than the statutory income tax rate due to thenon-deductibility of goodwill.

 

The Company recorded again of $23 million in the first quarter of 2006 related to the divestiture ofits Port St. Joe, Florida joint venture interest and related real estate.

 

**7.****              Other,Net**

 

For the three and ninemonths ended September 30, 2007, the Company recorded non-cash foreign currencylosses of $22 million and $47 million, respectively, related to its operationsin Canada. For the three and nine months ended September 30, 2006, the Companyrecorded non-cash foreign currency losses of an insignificant amount and $12million, respectively, related to its operations in Canada.

 

During the second quarterof 2007, the Company recorded a $15 million gain on the sale of emissioncredits and water rights associated with the Los Angeles, California mill.

 

**8. Accounts ReceivableSecuritization Programs**

 

At September 30, 2007 andDecember 31, 2006, $697 million and $590 million, respectively, of receivableshad been sold under two accounts receivable securitization programs, of whichthe Company retained a subordinated interest. The off-balance sheet debt relatedto the two accounts receivable programs totaled $460 million and $448 million,respectively, as of those dates.

 

**9. Guarantees andCommitments**

 

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 September 30, 2007, the maximum potential amount offuture payments related to these guarantees was approximately $32 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.

 

In 2006, the Companyentered into an agreement to guarantee a portion of a third party’s debt indecreasing amounts through January 2010. The guarantee was entered into inconnection with the third party’s progress payment financing for the purchaseand installation of machinery and equipment for the conversion of corrugatedcontainerboard. The Company and the third party are parties to a supplyagreement through 2021, whereby the Company sells containerboard to the thirdparty, and a purchase agreement through 2014, whereby the third party sellscorrugated sheets to the Company. At September 

 

10

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30, 2007, the maximumpotential amount of the future payments related to this guarantee wasapproximately $12 million. The Company has no recourse to the assets of thethird party, other than that of a general unsecured creditor. The fair value ofthis guarantee at September 30, 2007 was an immaterial amount and is includedin other assets, with an offset in other long-term liabilities in theaccompanying consolidated balance sheets.

 

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. The letter of credit is collateralized by a pledge of affiliatestock owned by the other shareholder in the event the letter of credit is drawnupon and the other shareholder is unable to reimburse the Company for their 50%share of the letter of credit obligation.

 

**10. Long-Term Debt**

 

On March 26, 2007, theCompany completed an offering of $675 million of 8.00% unsecured senior notesdue March 15, 2017 (the “8.00% Senior Notes”). The Company used the proceeds ofthis issuance to repay $546 million of 9.75% Senior Notes due 2011 (the “9.75%Senior Notes”), which were purchased in connection with a cash tender offer,pay related tender premiums and accrued interest of $19 million and $8 million,respectively, and repay $95 million of the Company’s revolving credit facility.In addition, the Company used the proceeds to pay fees and expenses of $7million related to this transaction. A loss on early extinguishment of debt of$23 million was recorded in the first quarter of 2007, including $19 millionfor tender premiums and a $4 million write-off of unamortized deferred debtissuance costs.

 

On May 9, 2007, theCompany redeemed the remaining $102 million of the 9.75% Senior Notes at aredemption price of 103.25% plus accrued interest. Borrowings under the Company’srevolving credit facility were used to redeem the notes and pay related callpremiums and accrued interest. A loss on early extinguishment of debt of $5million was recorded in the second quarter of 2007, including $4 million fortender premiums and a $1 million write-off of unamortized deferred debtissuance costs.

 

The 8.00% Senior Notesare redeemable in whole or in part at the option of the Company beginning onMarch 15, 2012 at a price of 104.0% of the principal amount, plus accruedinterest. The redemption price will decline each year after 2012 and, beginningon March 15, 2015, will be 100% of the principal amount of the notes plusaccrued interest.

 

On September 28, 2007, theCompany completed the sale of its Brewton, Alabama mill (See Note 6) and usedthe net proceeds of $338 million to prepay $301 million of its Tranche B termloan and $21 million of its revolving credit facility. In addition, the Companypaid fees and expenses of $16 million related to the sale transaction. TheCompany recorded a loss on early extinguishment of debt of $1 million relatedto the write-off of unamortized deferred debt issuance costs.

 

For the nine months endedSeptember 30, 2007, the Company used $57 million of net proceeds received fromthe sale of properties related to previously closed facilities to prepay $30million of its Tranche C term loan, $9 million of its Tranche C-1 term loan andpay down $18 million of its revolving credit facility.

 

On March 30, 2007, theCompany used approximately $66 million in borrowings against its revolvingcredit facility, together with an escrow balance of $3 million, to prepay the$69 million outstanding aggregate principal balance of the Company’s 8.45%mortgage notes, which were payable on September 1, 2007.

 

In the second quarter of2006, the Company recorded a loss on early extinguishment of debt of $28million related to the repayment of borrowings with net proceeds from the saleof its Consumer Packaging division. The loss included $24 million for tenderpremiums and fees for the unsecured senior notes called and a $4 millionnon-cash write-off of related unamortized deferred debt issuance costs.

 

11

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**11. 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.

 

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.

 

On August 31, 2007, theCompany announced the freeze of its defined benefit pension plans for salariedemployees. Effective January 1, 2009, U.S. and Canadian salaried employees willno longer accrue additional years of service and U.S. salaried employees willno longer recognize future increases in compensation under the existing definedbenefit pension plans for benefit purposes. In accordance with SFAS No. 88, “EmployersAccounting for Settlements and Curtailments of Defined Benefit Pension Plansand for Termination Benefits,” the Company accounted for this freeze as a plancurtailment, remeasured its assets and obligation as of August 31, 2007 andrecognized a curtailment gain of approximately $3 million during the thirdquarter of 2007. Upon remeasurement, the Company reduced its benefit obligationin other long-term liabilities by $106 million, decreased accumulated othercomprehensive loss  by $64 million and increaseddeferred income tax liability by $42 million.

 

The components of netperiodic benefit costs for the defined benefit plans and the components of thepostretirement benefit costs, including the discontinued operations of the ConsumerPackaging division during 2006 (See Note 5), are as follows:

 
| ** **                                    | ** ** | **Three months ended September 30,** | ** ** | **Nine months ended September 30,** | ** ** |
|-----------------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                    | ** ** | **Defined Benefit  Plans**                          | ** ** | **Postretirement  Plans**                               | ** ** | **Defined Benefit  Plans** | ** ** | **Postretirement  Plans** | ** ** |
| ** **                                    | ** ** | **2007**                                                 | ** ** | **2006**                                                | ** ** | **2007** | ** ** | **2006** | ** ** | **2007** | ** ** | **2006** | ** ** | **2007** | ** ** | **2006** | ** ** |
| Service cost                                  |       | $                                                        | 14         |                                                    | $          | 15 |   | $ | 1 |   | $ | 1 |   | $ | 40 |   | $ | 54 |   | $ | 3 |   | $ | 4 |   |
| Interest cost                                 |       | 50                                                       |       | 50                                                      |       | 3 |   | 3 |   | 148 |   | 146 |   | 8 |   | 10 |   |
| Expected return  on plan assets               |       | (60                                                      | )          | (56                                                     | )          |   |   |   |   | (177 | ) | (167 | ) |   |   |   |   |
| Amortization of  prior service cost (benefit) |       | 2                                                        |       | 2                                                       |       | (1 | ) | (1 | ) | 6 |   | 7 |   | (2 | ) | (3 | ) |
| Amortization of  net (gain) loss              |       | 13                                                       |       | 14                                                      |       |   |   | 1 |   | 42 |   | 57 |   | (1 | ) | 3 |   |
| Curtailment loss  (gain)                      |       | (2                                                       | )          |                                                    |       | (2 | ) |   |   |   |   | 15 |   | (3 | ) | (5 | ) |
| Settlements                                   |       |                                                     |       | 4                                                       |       |   |   |   |   | 2 |   | 6 |   |   |   |   |   |
| Multi-employer  plans                         |       | 1                                                        |       | 2                                                       |       |   |   |   |   | 3 |   | 5 |   |   |   |   |   |
| Net periodic  benefit cost                    |       | $                                                        | 18         |                                                    | $          | 31 |   | $ | 1 |   | $ | 4 |   | $ | 64 |   | $ | 123 |   | $ | 5 |   | $ | 9 |   |

 

The Company’s 2007expected contributions to its qualified defined benefit plans and benefitpayments to its non-qualified defined benefit plans and postretirement plansare not expected to be materially different than the amounts disclosed atDecember 31, 2006.

 

The 2006 curtailment loss(gain) are related to the sale of the Consumer Packaging division and areincluded in the net loss on sale of discontinued operations (See Note 5).

 

The curtailment gain inthe third quarter of 2007 is primarily related to the salaried defined benefitplan freeze. For the nine months ended September 30, 2007, the curtailment gainis offset by charges related to closed facilities that are included as part ofrestructuring charges (See Note 4).

 

12

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The 2007 and 2006settlement charges are related to closed facilities and are included as part ofrestructuring charges (See Note 4).

 

**12. 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.

 

#### **Commodity DerivativeInstruments**

 

The Company usesderivative instruments, including fixed price swaps and options, to managefluctuations in cash flows resulting from commodity price risk in theprocurement of natural gas and other commodities, including fuel and heatingoil. The objective is to fix the price of a portion of the Company’s purchasesof these commodities used in the manufacturing process. The changes in themarket value of such derivative instruments have historically offset, and areexpected to continue to offset, the changes in the price of the hedged item. Asof September 30, 2007, the maximum length of time over which the Company washedging its exposure to the variability in future cash flows associated with thecommodities forecasted transactions was 15 months.

 

For the three and ninemonths ended September 30, 2007, the Company reclassified a $2 million loss(net of tax) and an $8 million loss (net of tax), respectively, from other comprehensiveincome (loss) (“OCI”) to cost of goods sold when the hedged items wererecognized. For the three and nine months ended September 30, 2006, the Companyreclassified a $2 million loss (net of tax) from OCI to cost of goods sold whenthe hedged items were recognized. The fair value of these commodity derivativeinstruments at September 30, 2007 was an $11 million liability, of which $10 millionwas included in other current liabilities, and $1 million was included in otherlong-term liabilities.

 

For the three and ninemonths ended September 30, 2007, the Company recorded a $1 million gain (net oftax) and a $4 million gain (net of tax), respectively, in cost of goods soldrelated to the change in fair value of certain commodity derivative instrumentsnot qualifying for hedge accounting. For the three and nine months ended September30, 2006, the Company recorded a $5 million loss (net of tax) and a $13 millionloss (net of tax), respectively, in cost of goods sold related to the change infair value of certain commodity derivative instruments not qualifying for hedgeaccounting.

 

For the three and ninemonths ended September 30, 2007, the Company recorded a $1 million loss (net oftax) and a $6 million loss (net of tax), respectively, in cost of goods sold onsettled commodity derivative instruments not qualifying for hedge accounting. Forthe three and nine months ended September 30, 2006, the Company recorded a $2million loss (net of tax) and a $4 million loss (net of tax), respectively, incost of goods sold on settled commodity derivative instruments not qualifyingfor hedge accounting.

 

#### **Foreign Currency DerivativeInstruments**

 

The Company’s principal foreign exchange exposure is the Canadiandollar. The Company uses foreign currency derivative instruments, including forwardcontracts and options, primarily to protect against Canadian currency exchangerisk associated with expected future cash flows. As of September 30, 2007, themaximum length of time over which the Company was hedging its exposure to thevariability in future cash flows associated with foreign currency was 15 months.For the three and nine months ended September 30, 2007, the Companyreclassified a $1 million gain (net of tax) and an immaterial amount,respectively, from OCI to cost of goods sold related to the recognition of theforeign currency derivative instruments. For the three and nine months ended September30, 2006, the Company reclassified a $1 million gain (net of tax) and a $3million gain (net of tax), respectively, from OCI to cost of goods sold relatedto the recognition of the foreign currency derivative instruments. The changein fair value of these derivative 

 

13

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instruments is recorded in OCI until the underlying transaction isrecorded. The fair value of the Company’s foreign currency derivativeinstruments at September 30, 2007 was an $11 million asset, of which $10million was included in prepaid expenses and other current assets, and $1million was included in other 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 nine months ended September 30,2007, the Company reclassified a $1 million gain (net of tax) and $2 million gain(net of tax), respectively, from OCI to interest expense when the hedged itemswere recognized. For the three and nine months ended September 30, 2006, theCompany reclassified a $1 million gain (net of tax) from OCI to interestexpense when the hedged items were recognized. The fair value of the Company’sinterest rate swap contracts at September 30, 2007 was a $5 million assetincluded in other assets.

 

**DeferredHedge Gain (Loss)**

 

The cumulative deferredhedge gain on all derivative instruments was $2 million (net of tax) at September30, 2007, including a $6 million loss (net of tax) on commodity derivativeinstruments, a $5 million gain (net of tax) on foreign currency derivativeinstruments and a $3 million gain (net of tax) on interest rate swap contracts.The Company expects to reclassify an immaterial amount into cost of goods soldwithin the next 12 months, related to the commodity and foreign currencyderivative instruments.

 

**13. IncomeTaxes**

 

During the three and ninemonths ended September 30, 2007, an additional $2 million and $5 million,respectively, of unrecognized tax benefits were recorded related to a taxposition taken during the current year and for interest on unrecognized taxbenefits previously recorded.

 

The sale of the Brewton,Alabama mill assets during the third quarter of 2007 generated a taxable gainfor U.S. income tax purposes that will be substantially offset by available netoperating loss (NOL) carryforwards (See Note 6).

 

During the nine monthsended September 30, 2007, the Company recorded a $5 million income tax benefitrelated to the resolution of a prior year tax matter.

 

The Canada Revenue Agency(“CRA”) is currently examining the tax years 1999 through 2005. In connectionwith the examination of the Company’s 1999 and 2000 Canadian income taxreturns, the CRA is considering certain significant adjustments to taxableincome related to the acquisition of a Canadian company and to transfer pricesof inventory sold by the Company’s Canadian subsidiaries to its U.S.subsidiaries. These matters may be resolved at the examination level orsubsequently upon appeal within the next twelve months. While the final outcomeof the examination or subsequent appeal, including an estimate of the range ofthe reasonably possible changes to unrecognized tax benefits, is not yetdeterminable, the Company believes that the examination will not have amaterial adverse effect on its consolidated financial condition or results of operations.

 

The Company has settledthe Internal Revenue Service examinations of tax years through 2003. However,the statute of limitations has not yet expired for the tax years 1999 through2003. There are currently no federal examinations in progress. In addition, theCompany files tax returns in numerous states. The states’ statutes oflimitations are generally open for the same years as the federal statute oflimitations.

 

14

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**14. Comprehensive Income (Loss)**

 

Comprehensive income (loss) is asfollows: 

 
| ** **                                                             | ** ** | **Three months ended  September 30,** | ** ** | **Nine months ended  September 30,** | ** ** |
|------------------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                             | ** ** | **2007**                                             | ** ** | **2006**                                            | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                                             | ** ** | ** **                                           | ** ** | **(Restated)**                                      | ** ** | ** ** | ** ** | **(Restated)** | ** ** |
| Net income  (loss)                                                     |       | $                                                    | (93        | )                                                   | $          | 24 |   | $ | (147 | ) | $ | (84 | ) |
| Other  comprehensive income (loss), net of tax:                        |       |                                                 |       |                                                |       |   |   |   |   |
| Net changes in  fair value of hedging instruments                      |       | (4                                                   | )          | (14                                                 | )          | 4 |   | (23 | ) |
| Net hedging loss  (gain) reclassified into earnings                    |       |                                                 |       |                                                |       | 6 |   | (2 | ) |
| Foreign currency  translation adjustment                               |       | 1                                                    |       |                                                |       | 1 |   | (1 | ) |
| Net deferred  employee benefit plan expense reclassified into earnings |       | 27                                                   |       |                                                |       | 27 |   |   |   |
| Net impact of  defined benefit plan remeasurement (See Note 11)        |       | 64                                                   |       |                                                |       | 64 |   |   |   |
| Comprehensive  income (loss)                                           |       | $                                                    | (5         | )                                                   | $          | 10 |   | $ | (45 | ) | $ | (110 | ) |

 

**15. 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 third quarter of 2007, the Company granted approximately 386,000SSCC stock options with a weighted-average exercise price and grant date fairvalue of $13.31 and $4.91, respectively. For the nine months ended September30, 2007, the Company granted approximately 1,209,000 SSCC stock options with aweighted-average exercise price and grant date fair value of $12.85 and $4.75,respectively. These options vest and become exercisable on the thirdanniversary of the award date. Compensation expense is being recorded over thethree-year period on a straight-line basis. For the nine months ended September30, 2007, the Company also granted 110,000 SSCC performance-based stock optionsto certain management level employees responsible for implementing thestrategic initiatives plan with a weighted-average exercise price and grantdate fair value of $11.70 and $3.99, respectively. Vesting of theperformance-based options is dependent upon the financial performance of theCompany and the attainment of the strategic initiatives savings through 2008. Compensationexpense is being recorded over the remaining strategic initiatives period basedon the achievement of the performance criteria.

 

During the thirdquarter of 2007, the Company also issued approximately 337,000 non-vested SSCC RSUsto certain employees and non-employee directors with a weighted-average grantdate fair value of $13.31 per RSU. For the nine months ended September 30,2007, the Company issued approximately 672,000 non-vested SSCC RSUs to certainemployees and non-employee directors with a weighted-average grant date fairvalue of $12.96 per RSU. In addition, the Company issued approximately 334,000vested SSCC RSUs and approximately 67,000 related premium non-vested SSCC RSUsat $10.83 per RSU to settle its 2006 management incentive plan liability, whichhad been accrued for in the prior year. The non-vested SSCC RSUs vest in threeyears, in accordance with the Company’s applicable management incentive planand long-term incentive plan.

 

15

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**16. Goodwill**

 

The following tablesummarizes the activity of goodwill for the nine months ended September 30,2007:

** **
| ** **                                                               | ** ** | **Total** | ** ** |
|--------------------------------------------------------------------------|------------|-----------|------------|
| Balance at  January 1, 2007                                              |       | $         | 2,873      |   |
| Goodwill  included in loss on sale of Brewton, Alabama mill (See Note 6) |       | (146      | )          |
| Balance at  September 30, 2007                                           |       | $         | 2,727      |   |

 

**17. BusinessSegment Information**

 

The Company’s Consumer Packaging segment, whichwas sold as of June 30, 2006 (See Note 5), has been classified as discontinuedoperations and is excluded from the segment results.

 

During the second quarterof 2007, the Company combined the Reclamation operations, previously considereda separate, non-reportable segment, into the Containerboard and CorrugatedContainers segment and therefore, now operates as one segment. The change toone segment was driven by changes to the Company’s management structure andfurther integration resulting from the strategic initiatives plan, includingthe sale of the Consumer Packaging division. The combined operating segmentincludes a system of mills and plants that produces a full line of containerboardthat is converted into corrugated containers and recycling operations thatprocure fiber resources for the Company’s paper mills as well as otherproducers. Corrugated containers are used to transport such diverse products ashome appliances, electric motors, small machinery, grocery products, produce,books, tobacco and furniture.

 

**18. 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 permit terms and similar authorizations that have occurred fromtime to time at its facilities. In addition, the Company faces potential liabilityfor response costs at various sites for which it has received notice as being apotentially responsible party (“PRP”) concerning hazardous substancecontamination. In estimating its reserves for environmental remediation andfuture costs 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. As of September 30, 2007, the Company hadapproximately $19 million reserved for environmental liabilities includedprimarily in other long-term liabilities in the consolidated balance sheet. TheCompany believes the liability for these matters was adequately reserved at September30, 2007.

 

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 adefendant in a number of lawsuits and claims arising out of the conduct of itsbusiness. While the ultimate outcome of such suits or other proceedings againstthe Company cannot be predicted with certainty, the management of the Companybelieves that the resolution of these matters will not have a material adverseeffect on its consolidated financial condition, results of operations or cashflows.

 

16

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**ITEM 2.****               MANAGEMENT’SDISCUSSION 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 ofSection 21E of the Securities Exchange Act of 1934, as amended. Although webelieve that, in making any such statements, our expectations are based onreasonable assumptions, any such statement may be influenced by factors thatcould cause actual outcomes and results to be materially different from thoseprojected. When used 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-lookingstatements. These forward-looking statements are subject to numerous risks anduncertainties. There are important factors that could cause actual results todiffer materially from those in forward-looking statements, certain of whichare beyond our control. These factors, risks and uncertainties are discussed inour 2006 Annual Report on Form 10-K (2006 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 noassurances that any of the events anticipated by the forward-looking statementswill occur, or if any of them do, what impact they will have on our results ofoperations 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 reduced disclosureformat permitted thereby. The omitted information is substantially similar tothe disclosures contained in Smurfit-Stone Container Corporation’s QuarterlyReport on Form    10-Q for the quarterended September 30, 2007 filed with the Securities and Exchange Commission onthe date hereof. In accordance with General Instruction (H) (2) (a), thediscussion of our results of operations below includes only a narrativeanalysis of the most recent fiscal year-to-date period presented and thecorresponding year-to-date period in the preceding fiscal year.

 

We are a wholly-owned subsidiary of Smurfit-Stone Container Corporation(Smurfit-Stone), a holding company with no business operations of its own. Smurfit-Stoneconducts its business operations through us.

 

Our Consumer Packagingsegment, which was sold as of June 30, 2006 (see Results of Operations, “DiscontinuedOperations”), is classified as discontinued operations and is excluded from thesegment results in 2006.

 

During the second quarterof 2007, the Company combined the Reclamation operations into theContainerboard and Corrugated Containers segment and therefore, now operates asone segment. The change to one segment was driven by changes to our managementstructure and further integration resulting from the strategic initiativesplan, including the sale of the Consumer Packaging division. The Reclamationsegment was previously a non-reportable segment. The 2006 financial informationhas been restated to conform to the current year presentation.

 

**RESTATEMENT OF PRIOR PERIODFINANCIAL STATEMENTS**

 

During the second quarterof 2007, we determined that $28 million of net benefits from income taxespreviously recognized on non-cash foreign currency translation losses from 2000to 2006 should not have been recognized under Statement of Financial AccountingStandards (SFAS) No. 109, “Accounting for Income Taxes.”  Because we are indefinitely reinvested in theforeign operations, the losses should have 

 

17

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been treated as permanentdifferences when determining taxable income for financial accounting purposes.

 

We performed anevaluation to determine if the errors resulting from recognizing the deferredtax impact of the non-cash foreign currency translation losses were material toany individual prior period, taking into account the requirements of Securitiesand Exchange Commission (SEC) Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatementswhen Quantifying Misstatements in Current Year Financial Statements”(SAB No.108), which was adopted in 2006. Based on this analysis, we concludedthe errors were not material to any individual period from 2000 to 2006 andtherefore, as provided by SAB No. 108, the correction of the error does notrequire previously filed reports to be amended. We have restated the 2006financial statements included in this filing. Financial statements for theyears ended December 31, 2005 and 2006 will be restated in our Annual Report onForm 10-K for the year ended December 31, 2007.

 

In Note 2 of the Notes toConsolidated Financial Statements, we have provided tables that show the impactof the financial statement adjustments related to the restatement of the Company’spreviously reported financial statements for the fiscal years ended December31, 2006, 2005 and 2004, and for the three and nine month periods ended September30, 2006.

 

**RECENTLY ADOPTED ACCOUNTINGSTANDARDS**

 

Effective January 1, 2007, we adopted theFinancial Accounting Standards Board (FASB) Staff Position (FSP) No. AUG AIR-1 “Accountingfor Planned Major Maintenance Activities.” This FSP prohibits the use of theaccrue-in-advance method of accounting for planned major maintenance activitiesin annual and interim financial reporting periods. The FSP requiresretrospective application to all financial statements presented. The newstandard does not impact our annual 2006 financial statements; however theimpact on our previously reported loss from continuing operations before incometaxes for the nine months ended September 30, 2006 was income of $9 million,which is reflected in cost of goods sold. The impact on our net loss for the ninemonths ended September 30, 2006 was income $5 million.

 

Effective January 1,2007, we adopted the provisions of FASB Interpretation No. 48, “Accounting forUncertainty in Income Taxes” (FIN No. 48), an interpretation of SFAS No. 109, “Accountingfor Income Taxes.”  FIN No. 48 creates asingle model to address accounting for uncertainty in tax positions andclarifies the accounting for income taxes by prescribing a minimum recognitionthreshold a tax position is required to meet before being recognized in thefinancial statements. FIN No. 48 also provides guidance on derecognition,measurement, classification, interest and penalties, accounting in interimperiods, disclosure and transition. Upon adoption, we reduced our existingreserves for uncertain tax positions by $2 million. This reduction was recordedas a cumulative effect adjustment to the retained deficit. As of January 1,2007, we had $134 million of unrecognized tax benefits, of which $38 millionwas classified as a reduction to the amount of our net operating losscarryforwards and $96 million was classified as a liability for unrecognizedtax benefits and included in other long-term liabilities. All unrecognized taxbenefits, if recognized, would affect our effective tax rate.

 

Upon adoption of FIN No.48, we elected to classify interest and penalties related to unrecognized taxbenefits in our income tax provision, consistent with our previous accountingpolicy. Unrecognized tax benefits of $14 million for interest and penalties areincluded as a component of the $134 million of unrecognized tax benefits noted above.The interest was computed on the difference between the tax position recognizedin accordance with FIN No. 48 and the amount previously taken or expected to betaken in our tax returns, adjusted to reflect the impact of net operating lossand other tax carryforward items  (SeeNote 13 of the Notes to the Consolidated Financial Statements).

 

Effective April 1, 2006,we adopted Emerging Issues Task Force (EITF) Issue No. 04-13, “Accounting forPurchases and Sales of Inventory With the Same Counterparty” (EITF No. 04-13),for new arrangements and modifications or renewals of existing arrangements. EITFNo. 04-13 requires certain inventory 

 

18

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buy/sell transactionsbetween counterparties within the same line of business to be viewed as asingle exchange transaction. EITF No. 04-13 required us to prospectivelyreport, beginning in the second quarter of 2006, certain inventory buy/selltransactions of similar containerboard types on a net basis in the consolidatedstatements of operations. Had EITF No. 04-13 been in effect, net sales and costof goods sold would have been reduced by $58 million for the nine months endedSeptember 30, 2006.

 

# **RESULTS OF OPERATIONS**

 

# **Overview**

 

For the nine months endedSeptember 30, 2007, we had a net loss of $147 million compared to a net loss of$84 million for 2006. The higher loss in the first nine months of 2007 comparedto the same period in 2006 was due primarily to the loss on the sale of theBrewton, Alabama mill and higher non-cash foreign currency translation losses. Inthe first nine months of 2007, the containerboard, corrugated containers andreclamation operating profit of $446 million was $79 million higher compared tothe same period last year due primarily to higher average selling prices formost of our products and benefits from our strategic initiatives. The 2007results were also favorably impacted by lower interest expense. Net salesincreased 4.5% in the first nine months of 2007 compared to the first nine monthsof 2006 due primarily to the higher average selling prices and highercontainerboard shipments.

 

While we expectsignificant price improvement in the fourth quarter of 2007, earnings willlikely decrease sequentially due to seasonal and timing factors. Results willbe impacted by significant additional mill maintenance downtime and associatedcosts, higher energy usage and wood fiber costs, and the impact from theBrewton mill sale. We expect profitability to improve during 2008 due to higherpricing and additional benefits from our ongoing strategic initiative efforts.

 

# **Strategic Initiatives andRestructuring Activities**

 

For 2007, we aretargeting $420 million in savings and productivity improvements, net oftransition costs, from our strategic initiatives, compared to levels prior tothe start of our plan as adjusted for the impact of inflation. During the ninemonths ended September 30, 2007, we realized estimated savings of $302 millionfrom these initiatives. The benefits were driven by headcount reductions,productivity improvements and the closures of four containerboard mills and 26converting facilities.

 

For the nine months endedSeptember 30, 2007, we closed ten converting facilities, announced the closureof two additional converting facilities, closed the Carthage, Indiana and LosAngeles, California medium mills and reduced our headcount by approximately1,550 employees. The restructuring charges of $45 million, which were net of again of $41 million on the sale of properties related to previously closedfacilities, included non-cash charges of $49 million. The non-cash chargesrelated to the write-down of equipment and the acceleration of depreciation forequipment expected to be abandoned or taken out of service. Other restructuringcharges of $37 million were primarily for severance and benefits. The net salesof the closed converting facilities as of September 30, 2007 prior to closureand for the year ended December 31, 2006, were $65 million and $192 million,respectively. The majority of these net sales are expected to be transferred toother operating facilities. The production of the two medium mills, which hadcombined annual capacity of 200,000 tons, was partially offset by restartingthe previously idled machine at the Jacksonville, Florida mill with annualcapacity to produce 170,000 tons of medium.

 

**Sale ofAssets**

 

On September 28, 2007 we completed thesale of the Brewton, Alabama, mill assets for $355 million. We received cashproceeds of $338 million, which excluded $16 million of accounts receivablepreviously sold to Stone Receivables Corporation under the accounts receivablesecuritization program and was net of $1 million of other closing adjustments. Currentliabilities of $22 million were retained and will be paid by us. The Brewtonmill has annual production capacity of approximately 300,000 tons of white toplinerboard and 190,000 tons of solid bleached sulfate (SBS). We continue toproduce white top linerboard at two of our mills. Substantially all of theproceeds were applied directly to debt reduction. 

 

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The sale resulted in a pre-tax loss of approximately $65 million, whichreflected the allocation of $146 million of goodwill to this operation. Werecorded an after-tax loss of approximately $97 million related to thetransaction, reflecting a provision for income taxes higher than the statutoryincome tax rate due to the non-deductibility of goodwill.

 

**Nine Months 2007 Compared to NineMonths 2006**

 
| ** **                                                                   | ** ** | **Nine months ended September 30,** | ** ** |
|------------------------------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                                   | ** ** | **2007**                                                | ** ** | **2006** | ** ** |
| **(In millions)**                                                       | ** ** | **Net  Sales**                                          | ** ** | **Profit/  (Loss)** | ** ** | **Net  Sales** | ** ** | **Profit/  (Loss)** | ** ** |
|                                                                         |       |                                                    |       |   |   |   |   |   |   |
| Containerboard,  corrugated containers and reclamation operations (Note 1,2) |       | $                                                       | 5,579      |   | $ | 446 |   | $ | 5,338 |   | $ | 367 |   |
|                                                                         |       |                                                    |       |   |   |   |   |   |   |
| Restructuring  charges                                                       |       |                                                    |       | (45 | ) |   |   | (35 | ) |
| Gain (loss) on  sale of assets                                               |       |                                                    |       | (64 | ) |   |   | 24 |   |
| Interest  expense, net                                                       |       |                                                    |       | (220 | ) |   |   | (266 | ) |
| Loss on early  extinguishment of debt                                        |       |                                                    |       | (29 | ) |   |   | (28 | ) |
| Non-cash foreign  currency translation losses                                |       |                                                    |       | (47 | ) |   |   | (12 | ) |
| Corporate expenses  and other (Note 1,3)                                     |       |                                                    |       | (180 | ) |   |   | (195 | ) |
| Loss from  continuing operations before income taxes                         |       |                                                    |       | $ | (139 | ) |   |   | $ | (145 | ) |
|                                                                              |            |                                                         |            |  |  |  |  |  |  |  |  |  |  |

 

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Note 1:  Effective January 1, 2007, working capitalinterest is no longer charged to operations. The financial information for the ninemonths ended September 30, 2006 has been restated to conform to the currentyear presentation.

 

Note 2:  Effective April 1, 2007, results for thereclamation operations have been combined with the Containerboard andCorrugated Containers segment. The financial information for the nine monthsended September 30, 2007 and 2006 has been restated to conform to the currentyear presentation.

 

Note 3:  Amounts include corporate expenses and otherexpenses not allocated to operations.

 

Net sales increased 4.5%in 2007 compared to last year due primarily to higher average selling prices($368 million) for containerboard, corrugated containers market pulp andreclaimed fiber. Net sales were unfavorably impacted by lower sales volume ($75million) primarily for corrugated containers and the impact of adopting EITFNo. 04-13 ($52 million), as described in “Recently Adopted AccountingStandards.”  Average domestic linerboardprices for the first nine months of 2007 were 4.3% higher compared to 2006. Ouraverage North American selling price for corrugated containers increased 3.5%compared to 2006. Third party shipments of containerboard increased 15.1%compared to the same period last year. Shipments of corrugated containers on atotal and per day basis were 6.4% and 6.9%, respectively, lower compared tolast year due primarily to container plant closure efforts, actions to improvemargins by exiting unprofitable accounts and weaker market conditions. Ouraverage sales prices for market pulp, solid bleached sulfate (SBS) and kraftpaper increased 14.6%, 3.3% and 6.6%, respectively, compared to last year. Theaverage price for OCC increased approximately $40 per ton compared to lastyear.

 

Our containerboard millsoperated at 99.0% of capacity in the first nine months of 2007 andcontainerboard production was 0.7% higher compared to last year. Production ofSBS increased by 2.6% compared to last year, while production of market pulpand kraft paper decreased 0.9% and 13.2**%,**respectively.Total tons of fiber reclaimed and brokered increased 3.0%.

 

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Cost of goods soldincreased from $4,644 million in 2006 to $4,815 million in 2007 due primarilyto higher costs of reclaimed material ($192 million), other materials ($29million), wood fiber ($17 million) and freight ($22 million). Cost of goodssold in 2007 was impacted by the adoption of EITF No. 04-13 ($52 million),lower sales volume ($65 million) and lower cost for energy ($32 million). Costof goods sold as a percent of net sales decreased from 87.0% in 2006 to 86.3%in 2007 due primarily to the impact of the higher average sales prices andadopting EITF No. 04-13.

 

Selling andadministrative expense decreased $22 million in 2007 compared to 2006 dueprimarily to lower employee benefits cost and savings achieved from ourstrategic initiatives plan. Selling and administrative expense as a percent ofnet sales decreased from 9.5% in 2006 to 8.7% in 2007 due primarily to thelower employee benefits costs and the higher average sales prices.

 

Interest expense, net was$220 million in 2007. The $46 million decrease compared to 2006 was the resultof lower average borrowings ($41 million), lower average interest rates ($4million) and higher interest income ($1 million). The lower average borrowingswere primarily due to the sale of the Consumer Packaging division and theresulting debt reduction. Our overall average effective interest rate for the ninemonths ended September 30, 2007 was lower than 2006 by approximately 0.14%.

 

For the nine months endedSeptember 30, 2007, we recorded a loss on early extinguishment of debt of $29million, including $23 million for tender premiums and a $6 million non-cashwrite-off of deferred debt issuance cost.

 

Other, net for 2007included non-cash foreign currency translation losses of $47 million comparedto losses of $12 million in 2006, and in 2007, a $15 million gain on sale ofemission credits and water rights associated with the Los Angeles, Californiamill.

 

The provision for incometaxes differed from the amount computed by applying the statutory U.S. federalincome tax rate to loss before income taxes due primarily to thenon-deductibility of goodwill on the sale of the Brewton, Alabama mill andnon-cash foreign currency translation losses, state income taxes and the effectof other permanent differences.

 

**Discontinued Operations**

 

On June 30, 2006, wecompleted the sale of substantially all of the assets of our Consumer Packagingdivision for $1.04 billion. For the nine months ended September 30, 2006, werecorded a pretax gain of $171 million, offset by a $174 million income taxprovision, resulting in a net loss on sale of discontinued operations of $3million. The after-tax loss was the result of a provision for income taxes thatwas higher than the statutory income tax rate due to non-deductible goodwill of$273 million.

 

The Consumer Packagingdivision was a reportable segment comprised of four coated recycled boxboardmills, 39 consumer packaging operations in the United States, including foldingcarton, multiwall and specialty bag, flexible packaging, label, contractpackaging and lamination businesses and one consumer packaging plant inBrampton, Ontario. Net sales for these operations were $787 million through thedate of the sale, June 30, 2006. These facilities employed approximately 6,600hourly and salaried employees.

 

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#### **Statistical Data**

 
| **(In thousands of tons, except as noted)** | ** ** | **Nine months ended  September 30,** | ** ** |
|---------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                | ** ** | **2007**                                            | ** ** | **2006** | ** ** |
| Mill production                                                           |       |                                                |       |   |   |
| Containerboard  (1)                                                       |       | 5,557                                               |       | 5,519 |   |
| Kraft paper                                                               |       | 132                                                 |       | 152 |   |
| Market pulp                                                               |       | 428                                                 |       | 432 |   |
| SBS                                                                       |       | 236                                                 |       | 230 |   |
| North American  corrugated containers sold (billion sq. ft.)              |       | 56.4                                                |       | 60.2 |   |
| Fiber reclaimed  and brokered                                             |       | 5,088                                               |       | 4,940 |   |

 

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(1)         Forthe nine months ended September 30, 2007 and 2006, our corrugated containerplants consumed 3,372,000 tons and 4,027,000 tons of containerboard,respectively.

 

**CRITICAL ACCOUNTING POLICIES ANDUSE OF ESTIMATES**

 

EffectiveJanuary 1, 2007, we adopted the provisions of FASB Interpretation No. 48, “Accountingfor Uncertainty in Income Taxes” (FIN No. 48), an interpretation of SFAS No.109, “Accounting for Income Taxes.” FIN No. 48 addresses the determination of how taxbenefits claimed or expected to be claimed on a tax return should be recordedin the financial statements. Under FIN No. 48, we must recognize the taxbenefit from an uncertain tax position only if it is more likely than not thatthe tax position will be sustained on examination by the taxing authorities,based on the technical merits of the position. The tax benefits recognized inthe financial statements from such a position are measured based on the largestbenefit that has a greater than fifty percent likelihood of being realized uponultimate resolution. Upon adoption, we reduced our existing reserves foruncertain tax positions by $2 million. This reduction was recorded as acumulative effect adjustment to the retained deficit. For additionalinformation regarding the adoption of FIN No. 48, see “Results of Operations - RecentlyAdopted Accounting Standards.”

 

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

 

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

 

**ITEM 4.**                         **CONTROLSAND 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 the end of theperiod covered by this report and concluded that, as of such date, ourdisclosure 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.

 

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**PART II -OTHER INFORMATION**

 
| **ITEM 1.**  | **LEGAL PROCEEDINGS**                                                                                                                                                                                                                                                                                     |
|--------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|         |                                                                                                                                                                                                                                                                                                      |
|         | None                                                                                                                                                                                                                                                                                                      |
|         |                                                                                                                                                                                                                                                                                                      |
| **ITEM 1A.** | **RISK FACTORS**                                                                                                                                                                                                                                                                                          |
|         |                                                                                                                                                                                                                                                                                                      |
|         | There are no material  changes to the risk factors as disclosed in our 2006 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.                                                                                                                                                                                                                     |
|         |                                                                                                                                                                                                                                                                                                      |
| **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 Quarterly  Report on Form 10-Q for the quarter ended June 30, 2007.            |
|         |                                                                                                                                                                                                                                                                                                      |
| **ITEM 6.**  | **EXHIBITS**                                                                                                                                                                                                                                                                                              |
|         |                                                                                                                                                                                                                                                                                                      |
|         | The following exhibits  are included in this Form 10-Q:                                                                                                                                                                                                                                                   |
|         |                                                                                                                                                                                                                                                                                                      |
| 10.1         | Asset Purchase  Agreement dated August 8, 2007, by and among Smurfit-Stone Container  Enterprises, Inc., Georgia-Pacific Brewton, LLC and Georgia-Pacific LLC  (incorporated by reference to Exhibit 2.1 to Smurfit-Stone Container  Corporation’s Current Report on Form 8-K dated August 8, 2007). |
|         |                                                                                                                                                                                                                                                                                                      |
| 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.                                                                                                                                                                                 |

 

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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:  November 7, 2007 |                                            | /s/ Paul K. Kaufmann |   |
|                              |                                            |      Paul  K. Kaufmann |   |
|                              | Senior Vice President  and Corporate Controller |
|                              | (Principal Accounting  Officer)                 |

 

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