# **Securities and Exchange Commission**

## **Washington, D.C. 20549**

## ** **

### **Form 10-K**

### ** **

| **ý**                                                                                                                                                                                                                | **Annual Report Pursuant to  Section 13 or 15(d) of the Securities Exchange Act of 1934**     |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                      |                                                                                          |   |
| **For the fiscal year ended December 31, 2005**                                                                                                                                                                           |
|                                                                                                                                                                                                                      |                                                                                          |   |
| **or**                                                                                                                                                                                                                    |
|                                                                                                                                                                                                                      |                                                                                          |   |
| **o**                                                                                                                                                                                                                     | **Transition Report Pursuant to Section 13 or  15(d) of the Securities Exchange Act of 1934** |
|                                                                                                                                                                                                                      |                                                                                          |   |
| **For the transition period from                to               ** |
|                                                                                                                                                                                                                      |
| **Commission file number 0-23876**                                                                                                                                                                                        |

 

#### **Smurfit-Stone Container Corporation**

(Exact name of registrant as specified in itscharter)

 

| **Delaware**                                           | ** ** | **43-1531401**                       |
|--------------------------------------------------------|------------|--------------------------------------|
| (State of incorporation or organization)               |       | (I.R.S. Employer Identification No.) |
|                                                   |       |                                 |
| **150  North Michigan Avenue**                         | ** ** | ** **                           |
| **Chicago, Illinois**                                  | ** ** | **60601**                            |
| (Address of principal executive offices)               |       | (Zip code)                           |
|                                                   |       |                                 |
| **Registrant’s  Telephone Number:**(312) 346-6600 |

## ** **

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###### **Securitiesregistered pursuant to Section 12(b) of the Act:         **None

###### ** **

Securities registered pursuant to Section 12(g) of the Act:

 

Title of Class

Common Stock, $0.01 par value

7% Series A Cumulative ExchangeableRedeemable Convertible Preferred Stock, $.01 par value

 

Indicate by check mark if the registrant is a well-known seasonedissuer, as defined in Rule 405 of the Securities Act. Yes  ý   No  o

 

Indicate by check mark if the registrant is not required to filereports pursuant to Section 13 or Section 15(d) of the Act.

Yes  o    No  ý

 

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

 

Indicateby check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to the bestof the registrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or any amendment tothis Form 10-K.           ý

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer or a non-accelerated filer (as defined in Rule 12b-2 of theExchange Act).

 

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

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Act).   Yes  o    No  ý

 

Theaggregate market value of the voting stock held by non-affiliates of theregistrant as of the last business day of the registrant’s most recentlycompleted second fiscal quarter was approximately $2.6 billion, based on theclosing sales price of $10.17 per share of such stock on The Nasdaq NationalMarket on June 30, 2005.

 

The number of shares outstanding of the registrant’s common stock as ofFebruary 28, 2006: 254,043,143

** **

**DOCUMENTS INCORPORATED BY REFERENCE:**

 

| ** **                                                                                | ** ** | **Part of Form 10-K Into Which** |
|-------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------|
| **Document**                                                                              | ** ** | **Document Is Incorporated**                    |
| Sections of the Registrant’s Proxy Statement to be filed on or before  April 4, 2006 |       |                                                      |
| for the Annual Meeting of Stockholders to be held on May 10, 2006.                        |       | Part III                                                  |
|                                                                                      |       |                                                      |

 

 

 

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SMURFIT-STONE CONTAINER CORPORATION

ANNUAL REPORT ON FORM 10-K

December 31, 2005

 

TABLE OF CONTENTS

 
| **PART I**   | ** **                                                                                                         | ** ** |
|--------------|--------------------------------------------------------------------------------------------------------------------|------------|
| Item 1.      | Business                                                                                                           |       |
| Item 1A.     | Risk  Factors                                                                                                      |       |
| Item 1B.     | Unresolved Staff Comments                                                                                          |       |
| Item 2.      | Properties                                                                                                         |       |
| Item 3.      | Legal  Proceedings                                                                                                 |       |
| Item 4.      | Submission of Matters to a Vote of Security Holders                                                                |       |
|         |                                                                                                               |       |
| **PART II**  |                                                                                                               |       |
| Item 5.      | Market for Registrant’s Common Equity, Related Stockholder Matters  and Issuer Purchases of Equity Securities |       |
| Item 6.      | Selected Financial Data                                                                                            |       |
| Item 7.      | Management’s Discussion and Analysis of Financial Condition and  Results of Operations                        |       |
| Item 7A.     | Quantitative and Qualitative Disclosures  About Market Risk                                                        |       |
| Item 8.      | Financial Statements and Supplementary Data                                                                        |       |
| Item 9.      | Changes  in and Disagreements With Accountants on Accounting and Financial Disclosure                              |       |
| Item 9A.     | Controls and Procedures                                                                                            |       |
| Item 9B.     | Other Information                                                                                                  |       |
|         |                                                                                                               |       |
| **PART III** |                                                                                                               |       |
| Item 10.     | Directors and Executive Officers of the  Registrant                                                                |       |
| Item 11.     | Executive Compensation                                                                                             |       |
| Item 12.     | Security Ownership of Certain Beneficial  Owners and Management and Related                                        |       |
|         | Stockholder Matters                                                                                                |       |
| Item 13.     | Certain Relationships and Related  Transactions                                                                    |       |
| Item 14.     | Principal Accounting Fees and Services                                                                             |       |
|         |                                                                                                               |       |
| **PART IV**  |                                                                                                               |       |
| Item 15.     | Exhibits and Financial Statement Schedules                                                                         |       |
|         |                                                                                                               |       |
| Signatures   |                                                                                                               |

 

###### **FORWARD-LOOKING STATEMENTS**

Exceptfor the historical information contained in this Annual Report on Form 10-K,certain matters discussed herein, including (without limitation) under Part I,Item 1, “Business - Environmental Compliance,” under Part I, Item 3, “LegalProceedings” and under Part II, Item 7, “Management’s Discussion and Analysisof Financial Condition and Results of Operations,” contain forward-lookingstatements within the meaning of Section 21E of the Securities Exchange Act of1934, as amended. Although we believe that, in making any such statements, ourexpectations are based on reasonable assumptions, any such statements may beinfluenced by factors that could cause actual outcomes and results to bematerially different from those projected. When used in this document, thewords “anticipates,” “believes,” “expects,” “intends” and similar expressionsas they relate to Smurfit-Stone Container Corporation or its management areintended to identify such forward-looking statements. These forward-lookingstatements are subject to numerous risks and uncertainties. There are importantfactors that could cause actual results to differ materially from those inforward-looking statements, certain of which are beyond our control. Thesefactors, risks and uncertainties are discussed in Part 1, Item 1A, “RiskFactors.”

 

Ouractual results, performance or achievement could differ materially from thoseexpressed in, or implied by, these forward-looking statements. Accordingly, wecan give no assurances that any of the events anticipated by theforward-looking statements will transpire or occur or, if any of them do so,what impact they will have on our results of operations or financial condition.We expressly decline any obligation to publicly revise any forward-lookingstatements that have been made to reflect the occurrence of events after thedate hereof.

 

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** **

**PART I**

 

**ITEM 1.  BUSINESS**

 

Unless the context otherwise requires, “we,” “us,” “our,” “Company” or“Smurfit-Stone” refers to the business of Smurfit-Stone Container Corporationand its subsidiaries.

 

**GENERAL**

 

Smurfit-Stone Container Corporation, incorporated in Delaware in 1989,is the industry’s leading integrated manufacturer of paperboard and paper-basedpackaging in North America, including containerboard, corrugated containers,multiwall bags and coated recycled boxboard, and is one of the world’s largestpaper recyclers. In addition, we are a leading producer of solid bleachedsulfate (SBS) and folding cartons. We have a complete line of graphicscapabilities for packaging. For the year ended December 31, 2005, our net saleswere $8,396 million and net loss available to common stockholders was $339million. For financial information relating to the geographic areas in which weoperate, see the information set forth in Note 25 of the Notes to ConsolidatedFinancial Statements.

 

Smurfit-Stone is a holding company with no business operations of itsown. Smurfit-Stone conducts its business operations through its wholly-ownedsubsidiary Smurfit-Stone Container Enterprises, Inc. (SSCE), a Delawarecorporation. SSCE is the surviving company resulting from the merger (theMerger) of our primary operating subsidiaries on November 1, 2004. JSCE, Inc.merged with and into Jefferson Smurfit Corporation (U.S.) (JSC(U.S.)), withJSC(U.S.) as the surviving company, and then JSC(U.S.) merged with and intoStone Container Corporation, with Stone Container as the surviving company. StoneContainer was simultaneously renamed Smurfit-Stone Container Enterprises, Inc. TheMerger was effected principally to consolidate our debt financing activities. StoneContainer and JSC(U.S.) were wholly-owned subsidiaries of Smurfit-Stone and,therefore, the Merger does not impact the Smurfit-Stone consolidated financialstatements. The Merger did not impact the operating activities of the merged companies,which continue to do business as Smurfit-Stone.

 

**FINANCIAL INFORMATION CONCERNING INDUSTRY SEGMENTS**

 

We have two reportable segments: (1) Containerboard and CorrugatedContainers and (2) Consumer Packaging. For financial information relating to oursegments for the last three fiscal years, including our net sales to externalcustomers by country of origin and total assets, see the information set forthin Note 25 of the Notes to Consolidated Financial Statements.

 

We are currently evaluating strategic options for our ConsumerPackaging segment, including the possible sale of some or all of thesebusinesses. As of December 31, 2005, we did not meet the criteria to accountfor the Consumer Packaging segment as assets held for sale, in accordance with Statementof Financial Accounting Standards (SFAS) No. 144, “Accounting for theImpairment or Disposal of Long-Lived Assets.” Accordingly, the operations of the Consumer Packaging segment areincluded in continuing operations in the consolidated statements of operationsand as a reportable segment.

 

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###### **PRODUCTS**

###### ** **

###### **CONTAINERBOARD AND CORRUGATED CONTAINERS SEGMENT**

###### ** **

The Containerboard and Corrugated Containers segment includes 19 papermills (16 located in the United States and three in Canada), 148 containerplants (125 located in the United States, 18 in Canada, four in Mexico and onein Puerto Rico) and one wood products plant located in the United States. Inaddition, we have an equity ownership in five corrugated container plants inAsia (four in China and one in Thailand), as well as two sheet plants and alithographic printing plant in China. Also, we own approximately one millionacres of timberland in Canada and operate wood harvesting facilities in Canada andthe United States. The primary products of our Containerboard and CorrugatedContainers segment include:

 

•                  corrugatedcontainers;

•                  containerboard;

•                  kraft paper;

•                  SBS; and

•                  market pulp.

 

We produce a full range of high quality corrugated containers designedto protect, ship, store and display products made to our customers’merchandising and distribution specifications. Corrugated containers are soldto a broad range of manufacturers of consumer goods. Corrugated containers areused to ship such diverse products as home appliances, electric motors, smallmachinery, grocery products, produce, computers, books, furniture and manyother products. We provide customers withinnovative packaging solutions to advertise and sell their products. Inaddition, we manufacture and sell a variety of retail ready, point of purchasedisplays and a full line of specialty products, including pizza boxes,corrugated clamshells for the food industry, Cordeck® recyclable pallets andcustom die-cut boxes to display packaged merchandise on the sales floor. Ourcontainer plants serve local customers and large national accounts. Net salesof corrugated containers for 2005, 2004 and 2003 represented 55% of theCompany’s total net sales for each period.

 

In 2004, Innovation to Implementation (i2iSM)was formed as a single-source integrator and provider of merchandisingsolutions to retailers and consumer packaging companies. i2iSM wasreported as a non-reportable segment in 2004. During the fourth quarter of2005, these operations were moved into the Containerboard and CorrugatedContainers segment and the 2004 segment information was restated. i2iSMcombines the creativity of our packaging solution centers, the capabilities ofour packaging facilities and externally sourced products and services todeliver merchandise solutions, including strategic brand development andcreative design, to customers. The products and services provided by i2iSMinclude branding, marketing, design photography, artwork production, pre-press,sourcing, fulfillment and inventory management. The operations of i2iSMinclude three packaging design centers in North America and one in Asia.

 

Our containerboard mills produce a full line of containerboard, whichis used primarily in the production of corrugated packaging. We produced3,581,000 tons of unbleached kraft linerboard, 971,000 tons of white toplinerboard and 2,663,000 tons of medium in 2005. Our containerboard mills andcorrugated container operations are highly integrated, with the majority of ourcontainerboard used internally by our corrugated container operations. In 2005,our corrugated container plants consumed 5,451,000 tons of containerboard. Netsales of containerboard to third parties for 2005, 2004 and 2003 represented16%, 15% and 15%, respectively, of the Company’s total net sales.

 

Our paper mills also produce SBS, kraft paper, market pulp and otherspecialty products. We specialize in high-quality grades of SBS, which aredesigned to meet the demanding print requirements of folding carton and cardedpackaging customers in the food, pharmaceutical, cosmetics and other nichemarkets. A portion of our SBS is consumed internally by our folding cartonplants. Kraft paper is used in numerous products, including consumer andindustrial bags, grocery and shopping bags, counter rolls, handle stock andrefuse bags. A significant portion of our kraft paper is consumed by ourconsumer packaging operations. In addition, we produce bleached northern andsouthern hardwood pulp and bleached

 

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southern softwood pulp, which is sold to manufacturers of paperproducts, including photographic and other specialty papers, as well as theprinting and writing sectors.

 

Production for our paper mills and sales volume for our corrugatedcontainer facilities for the last three years were:

 
| ** **                                               | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|----------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Tons produced (in thousands)                             |       |     |       |     |       |     |       |
| Containerboard                                           |       | 7,215    |       | 7,438    |       | 7,185    |       |
| Kraft paper                                              |       | 204      |       | 259      |       | 293      |       |
| SBS                                                      |       | 283      |       | 276      |       | 290      |       |
| Market pulp                                              |       | 563      |       | 549      |       | 497      |       |
| Corrugated containers sold (in billion sq.  ft.) (1) (2) |       | 80.8     |       | 81.6     |       | 79.7     |       |

 

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(1)          Includes 100% of Smurfit-MBI, a Canadiancorrugated container producer, after March 31, 2003, the date we acquired theremaining 50% not previously owned.

(2)          Excludes intercompany shipments. Includes ourproportionate share of affiliates reported on an equity ownership basis.

 

###### **CONSUMER PACKAGING SEGMENT**

###### ** **

The Consumer Packaging segment includes four paper mills, 17 foldingcarton plants, 11 bag packaging plants and 14 other converting plants. OurConsumer Packaging operations are primarily located in the United States. Theprimary products of our Consumer Packaging segment include:

 

•                  folding cartons;

•                  coated recycledboxboard;

•                  multiwall andconsumer bags;

•                  flexiblepackaging;

•                  laminatedproducts; and

•                  paper, foil andheat transfer labels.

 

Folding cartons are used primarily to protect customers’ products,while providing point of purchase advertising. We produce a full range ofcarton styles, appropriate for nearly all carton end uses. The folding cartonplants offer extensive converting capabilities, including sheet and weblithographic, rotogravure and flexographic printing and laminating. Inaddition, we provide LithofluteTM packaging for a number of applications. Thefolding carton plants also provide a full line of structural and graphic designservices tailored to specific technical requirements, as well as photographyfor packaging, sales promotion concepts and point of purchase displays. Convertingcapabilities include gluing, tray forming, windowing, waxing and laminating,plus other specialties. Our customer base is made up primarily of producers ofpackaged foods, beverages, fast food, detergents, paper, pharmaceuticals andcosmetics. Our customers range from local accounts to large national accounts.

 

Our coated recycled boxboard mills produce a broad range of recycledgrades, including clay-coated newsback, kraftback and whiteback, as well aswaxable and laminated grades. Our coated boxboard mills and folding cartonoperations are highly integrated, with the majority of our coated boxboard usedinternally by our folding carton operations. In 2005, our folding carton plantsconsumed 369,000 tons of recycled boxboard.

 

Multiwall bags are designed to safely and effectively ship a wide rangeof industrial and commercial products, including fertilizers, chemicals,pharmaceuticals, building products, concrete, food, feed, seed and salt. Bagscan be customized with easy-open features, handles and resealable closures,with a variety of liners, coatings and other treatments. We have developed andpatented many innovative styles, including Cap-Sac®, PeelPak®, Soni-Loc®,Peel-N-PourTM, SquareStackTM and SquareSakTM. We also manufacture small consumerbags for food and other products sold at retail outlets, including pet food andlitter, cookies, flour, baking mixes and microwave popcorn. In 2005, our bagoperations consumed approximately 128,000 tons of kraft paper.

 

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Production for our coated recycled boxboard mills and sales volume forthe folding carton and multiwall bag facilities for the last three years were:

 
| ** **                            | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|---------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Tons (in thousands)                   |       |     |       |     |       |     |       |
| Coated recycled boxboard produced     |       | 556      |       | 560      |       | 577      |       |
| Folding cartons sold                  |       | 523      |       | 517      |       | 514      |       |
| Multiwall bags sold (in million bags) |       | 1,112    |       | 1,157    |       | 1,156    |       |

 

Our flexible packaging operations manufacture a complete line of plainand printed polyethylene bags, sheeting and tubing in a variety of colors withcustom treatments for specific applications. We specialize in packaginghard-to-hold products, condiments for fast food, pharmaceutical and health caretechnologies, flexographic film printing and servicing multi-design andmulti-structural accounts.

 

We also produce printed paper, foil and DI-NA-CAL® heat transferlabels, which are used in a wide range of industrial and consumer productapplications. DI-NA-CAL® is a proprietary labeling system that applieshigh-speed heat transfer labels to plastic containers. We also producespecialized laminations of film, foil and paper.

 

**NON-REPORTABLE SEGMENT**

 

**Reclamation**

Our reclamation operations procure fiber resources for our paper millsas well as other producers. We operate 23 reclamation facilities in the UnitedStates that collect, sort, grade and bale recovered paper. We also collectaluminum and plastics for resale to manufacturers of these products. Inaddition, we operate a nationwide brokerage system whereby we purchase andresell recovered paper to our recycled paper mills and other producers on aregional and national contract basis. Our waste reduction services extractadditional recyclables from the waste stream by partnering with customers toreduce their waste expenses and increase efficiencies. Brokerage contractsprovide bulk purchasing, often resulting in lower prices and cleaner recoveredpaper. Many of our reclamation facilities are located close to our recycledpaper mills, ensuring availability of supply with minimal shipping costs. Totaltons of fiber reclaimed and brokered for 2005, 2004 and 2003 were 6,501,000,6,542,000 and 6,549,000, respectively. In 2005, our paper mills consumed2,988,000 tons of the fiber reclaimed and brokered by our reclamationoperations, representing an integration level of approximately 46%.

 

**RAWMATERIALS**

 

Woodfiber and reclaimed fiber are the principal raw materials used in themanufacture of our paper products. We satisfy the majority of our need for woodfiber through purchases on the open market or under supply agreements. Wesatisfy essentially all of our need for reclaimed fiber through our reclamationfacilities and nationwide brokerage system.

 

**MARKETINGAND DISTRIBUTION**

 

Our marketing strategy is to sell a broadrange of paper-based packaging products to manufacturers of industrial andconsumer products. We seek to meet the quality and service needs of thecustomers of our converting plants at the most efficient cost, while balancingthose needs against the demands of our open market paperboard customers. Ourconverting plants focus on supplying both specialized packaging with high valuegraphics that enhance a product’s market appeal and high-volume commodityproducts.

 

We serve a broad customer base for each of our segments. As a result,we serve thousands of accounts from our plants. We sell packaging and otherproducts directly to end users and converters, as well as through resellers. Ourpackaging businesses have historically operated in a decentralized environment,largely fielding their own operating and sales teams and carving out marketterritories. To respond to challenging market opportunities, we reorganized ourfolding carton sales organization several years ago to centralize the salesresponsibilities for those converting plants. Late in 2005, we began a similarprocess to centralize the corrugated container sales organization. Thisreorganization will allow us to

 

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better focus on revenue growth and assign the right resources to thebest opportunities. Marketing ofcontainerboard and pulp to third parties is centralized in our board salesgroup, which sells approximately 2.7 million tons of pulp and paperboardannually.

 

Our business is not dependent upon a singlecustomer or upon a small number of major customers. We do not believe the lossof any one customer would have a material adverse effect on our business.

 

**COMPETITION**

 

Themarkets in which we sell our principal products are highly competitive andcomprised of many participants. Although no single company is dominant, we doface significant competitors in each of our businesses. Our competitors includelarge vertically integrated companies as well as numerous smaller companies. Theindustries in which we compete have historically been sensitive to pricefluctuations brought about by shifts in industry capacity and other cyclicalindustry conditions. While we compete primarily on the basis of price in manyof our product lines, other competitive factors include design, quality andservice, with varying emphasis depending on product line.

 

**BACKLOG**

 

Demandfor our major product lines is relatively constant throughout the year andseasonal fluctuations in marketing, production, shipments and inventories arenot significant. Backlogs are not a significant factor in the industry. We donot have a significant backlog of orders as most orders are placed for deliverywithin 30 days.

 

**RESEARCHAND NEW PRODUCT DEVELOPMENT**

 

Themajority of our research and development activities are performed at ourfacilities located in Carol Stream and Westmont, Illinois. We use advancedtechnology to assist all levels of the manufacturing and sales processes, fromraw material supply through finished packaging performance. Research programshave provided improvements in coatings and barriers, stiffeners, inks andprinting. Our technical staff conducts basic, applied and diagnostic research,develops processes and products and provides a wide range of other technicalservices. We spent approximately $10 million in 2005 on research and newproduct development activities. Comparable amounts were spent in 2004 and 2003.

 

Weactively pursue applications for patents on new inventions and designs andattempt to protect our patents against infringement. Nevertheless, we believeour success and growth are more dependent on the quality of our products andour relationships with customers than on the extent of our patent protection. Wehold or are licensed to use certain patents, licenses, trademarks and tradenames on products, but do not consider the successful continuation of anymaterial aspect of our business to be dependent upon such intellectualproperty.

 

**EMPLOYEES**

 

Wehad approximately 33,500 employees at December 31, 2005, of which approximately28,200 were employees of U.S. operations. Approximately 17,300 (61%) of ourU.S. employees are represented by collective bargaining units. The expirationdates of union contracts for our major paper mill facilities are as follows:

 

•                  Hodge,Louisiana - June 2006

•                  Jacksonville,Florida -  August 2006

•                  Missoula,Montana -  June 2007

•                  Hopewell,Virginia - July 2007

•                  Brewton, Alabama-  October 2007

•                  Panama City,Florida - March 2008

•                  FernandinaBeach, Florida - June 2008

•                  West Point,Virginia - September 2008

•                  Florence, SouthCarolina - August 2009

•                  La Tuque,Quebec, Canada - August 2009

 

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Webelieve our employee relations are generally good. There were no work stoppagesduring 2005, although our Los Angeles, California medium mill has beenoperating under an expired collective bargaining agreement, coveringapproximately 80 employees, since June 2005, and negotiations to reach a newagreement have been unsuccessful. The Los Angeles mill has a capacity toproduce 145,000 tons annually. While the terms of our collective bargainingagreements may vary, we believe the material terms of the agreements arecustomary for the industry, the type of facility, the classification of theemployees and the geographic location covered thereby.

 

**ENVIRONMENTALCOMPLIANCE**

 

Ouroperations are subject to extensive environmental regulation by federal, stateand local authorities. In the past, we have made significant capitalexpenditures to comply with water, air, solid and hazardous waste and otherenvironmental laws and regulations. We expect to make significant expendituresin the future for environmental compliance. Because various environmentalstandards are subject to change, it is difficult to predict with certainty theamount of capital expenditures that will ultimately be required to comply withfuture standards.

 

In 1998, the United States Environmental Protection Agency (EPA) issuedits comprehensive rule governing air emissions (Maximum Achievable ControlTechnology (MACT)) and water discharges (Effluent Limitation Guidelines) forthe pulp, paper and paperboard industry, known as the “Cluster Rule.”  All mills that are subject to Phase I of MACTI, MACT II and the Effluent Limitation Guidelines of the Cluster Rule havecompleted capital projects to ensure compliance.

 

Phase II of MACT I of the Cluster Rule will require the implementationof systems to collect high volume, low concentration gases at various mills andhas a compliance date of April 16, 2006, although certain of our mills havebeen granted one year extensions to April 16, 2007. Based on currentlyavailable information, we estimate that the aggregate compliance cost of PhaseII of MACT I will be approximately $80 million. We have spent approximately $42million through 2005 and we anticipate spending approximately $33 million in2006 and $5 million in 2007 for projects related to Phase II of MACT I, whichwill substantially complete all of the projects to bring us into compliancewith Phase II of MACT I.

 

In recent years, the EPA has undertaken significant air qualityinitiatives associated with nitrogen oxide emissions, regional haze andnational ambient air quality standards. Several of our mills are located instates affected by these EPA initiatives. The EPA has also promulgated a BoilerMACT regulation that will limit particulate emissions from industrial boilers. Severalof our mills will be subject to the Boiler MACT regulation and will be requiredto install new pollution control equipment in order to meet the 2007 compliancedeadline. Based on currently available information, we estimate that theaggregate compliance cost for Boiler MACT will be approximately $100 million. Wehave spent approximately $19 million through 2005 and expect to spendapproximately $43 million in 2006 and $38 million in 2007 on projects to bringus into compliance with the Boiler MACT.

 

Inaddition to Cluster Rule and Boiler MACT compliance, we anticipate additionalcapital expenditures related to environmental compliance. Excluding thespending on Cluster Rule and Boiler MACT projects described above, for the pastthree years we have spent an average of approximately $14 million annually oncapital expenditures for environmental purposes. Since our principalcompetitors are subject to comparable environmental standards, including theCluster Rule and Boiler MACT, it is our opinion, based on current information,that compliance with environmental standards should not adversely affect our competitiveposition or operating results. However, we could incur significant expendituresdue to changes in law or the discovery of new information, which could have amaterial adverse effect on our operating results. See Part 1, Item 3, “LegalProceedings, Environmental Matters.”

 

**AVAILABLEINFORMATION**

 

Wemake available free of charge our annual report on Form 10-K, quarterly reportson Form 10-Q, current reports on Form 8-K and amendments to those reports filedor furnished as required by Section 13(a) or 15(d) of the Securities ExchangeAct of 1934, as amended (the Exchange Act), through our Internet Website(www.smurfit-stone.com) as soon as reasonably practicable after weelectronically file such material with, or furnish it to, the Securities andExchange Commission (SEC). You may access these SEC filings via the hyperlinkthat we provide on our Website to a third-party SEC filings Website.

 

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**ITEM 1A.  RISK FACTORS**

 

Weare subject to certain risks and events that, if one or more of them occur,could adversely affect our business, our financial condition and results ofoperations and the trading price of our common stock. You should consider thefollowing risk factors, in addition to the other information presented in thisreport, as well as the other reports and registration statements we file fromtime to time with the SEC, in evaluating us, our business and an investment inour securities. The risks below are not the only ones we face. Additional risksnot currently known to us or that we currently deem immaterial also may impairour business.

 

**We have a highly leveraged capitalstructure.**

 

Oursubstantial leverage could have significant consequences for us, including thefollowing:

 

•                        we may berequired to seek additional sources of capital, including additional borrowingsunder our existing credit facilities, other private or public debt or equityfinancings to service or refinance our indebtedness, which borrowings may notbe available on favorable terms, particularly in the event that our creditratings are downgraded by rating agencies;

•                        asubstantial portion of our cash flow from operations will be needed to meet thepayment of principal and interest on our indebtedness and other obligations andwill not be available for our working capital, capital expenditures and othergeneral corporate purposes; and

•                        our levelof debt makes us more vulnerable to economic downturns and reduces ouroperational and business flexibility in responding to changing business andeconomic conditions and opportunities.

 

Inaddition, weare more highly leveraged than some of our competitors, which may placeus at a competitive disadvantage.

 

**The terms of our debt may severelylimit our ability to plan for or respond to changes in our business.**

 

Ourability to incur additional debt, and in certain cases refinance outstandingdebt, is significantly limited or restricted under the agreements relating toour and our subsidiaries’ existing debt. Our senior secured credit facilitiesand the indentures governing our outstanding senior notes restrict our abilityto take specific actions, even if such actions may be in our best interest. Theserestrictions limit our ability to:

 

•              incur liens or make negativepledges on our assets;

•              merge, consolidate or sell ourassets;

•              issue additional debt;

•              pay dividends or repurchase orredeem capital stock and prepay other debt;

•              make investments and acquisitions;

•              enter into certain transactionswith stockholders and affiliates;

•              make capital expenditures;

•              materially change our business;

•              amend our debt and other materialagreements;

•              issue and sell capital stock;

•              make investments in unrestrictedsubsidiaries; or

•              prepay specified indebtedness.

 

Oursenior secured credit facility requires us to maintain specified financialratios. Our failure to comply with these covenants could result in an event ofdefault that, if not cured or waived, could result in our being required torepay these borrowings before their due date. If we were unable to make thisrepayment or otherwise refinance these borrowings, our lenders could forecloseon our assets. If we were unable to refinance these borrowings on favorableterms, our costs of borrowing could increase significantly.

 

Oursenior debt bears interest at fixed and floating rates. Our floating interestrates currently are not capped. If interest rates rise, our senior debtinterest payments also will increase. Although we may enter into agreements tohedge our interest rate risk, these agreements may be inadequate to protect usfully against our interest rate risk.

 

8

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**Our industry is cyclical andhighly competitive****.**

 

Ouroperating results reflect the industry’s general cyclical pattern. The majorityof our products can be subject to extreme price competition. Some segments ofour industry have production overcapacity, which may require us to takedowntime periodically to reduce inventory levels during periods of weak demand.In addition, the industry is capital intensive, which leads to high fixed costsand has historically resulted in continued production as long as prices aresufficient to cover marginal costs. These conditions have contributed tosubstantial price competition and volatility in the industry. Decreases inprices for our products, coupled with our highly leveraged financial position,may adversely impact our ability to respond to competition and to other marketconditions or to otherwise take advantage of business opportunities.

 

Thepaperboard and packaging products industries are highly competitive and areparticularly sensitive to price fluctuations as well as other factors includinginnovation, design, quality and service, with varying emphasis on these factorsdepending on the product line. To the extent that one or more of ourcompetitors become more successful with respect to any key competitive factor,our ability to attract and retain customers could be materially adverselyaffected. Many of our competitors are less leveraged and have financial andother resources greater than ours and are able to better withstand the adversenature of the business cycle. If our facilities are not as cost efficient asthose of our competitors, we may need to temporarily or permanently close suchfacilities and suffer a consequent reduction in our revenues.

 

**Our pension plans are underfunded and will requireadditional cash contributions.**

 

Wehave made substantial contributions to our pension plans in the past threeyears and expect to continue to make substantial contributions in the comingyears in order to ensure that our funding levels remain adequate in light ofprojected liabilities. These contributions reduce the amount of cash availablefor us to repay indebtedness or make capital investments. The United StatesCongress is considering several legislative alternatives that could require usto continue to make substantial contributions to the pension plans until theplans are fully funded, which would further limit our financial flexibility.

 

**Price fluctuations in energy costs and rawmaterials could adversely affect our manufacturing costs.**

 

Thecost of producing our products is highly sensitive to the price of energy. Energyprices, in particular oil and natural gas, have experienced significantvolatility in recent years, with a corresponding effect on our production costs.Energy prices may continue to fluctuate and may rise to higher levels in futureyears. This could adversely affect our production costs and results ofoperations. Although we may enter into agreements to hedge our energy costs,these agreements may be inadequate to protect us fully against the volatilityof energy costs. To the extent we have un-hedged positions or our hedgingprocedures do not work as planned, fluctuating energy costs could reduce ouroperating profit.

 

Woodfiber and reclaimed fiber, the principal raw materials used in the manufactureof our paper products, are purchased in highly competitive, price-sensitivemarkets, which have historically exhibited price and demand cyclicality. Adverseweather, conservation regulations and the shutdown of a number of sawmills havecaused, and will likely continue to cause, a decrease in the supply of woodfiber and higher wood fiber costs in some of the regions in which we procurewood fiber. Fluctuations in supply and demand for reclaimed fiber haveoccasionally caused tight supplies of reclaimed fiber. At such times, we mayexperience an increase in the cost of fiber or may temporarily have difficultyobtaining adequate supplies of fiber.

 

9

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**Factors beyond our control****could hinder our ability toservice our debt and meet our operating requirements.**

 

Ourability to meet our obligations and to comply with the financial covenantscontained in our debt instruments will largely depend on our future performance.Our performance will be subject to financial, business and other factorsaffecting us. Many of these factors will be beyond our control, such as:

 

•              the state of the economy;

•              the financial markets;

•              demand for, and selling prices of,our products;

•              performance of our majorcustomers;

•              costs of raw materials and energy;

•              hurricanes and other majorweather-related disruptions; and

•              legislation and other factorsrelating to the paperboard and packaging products industries generally or tospecific                competitors.

 

Ifoperating cash flows or net proceeds from borrowings and any divestitures andamounts from other financing sources do not provide us with sufficientliquidity to meet our operating and debt service requirements, we will berequired to pursue other alternatives to repay debt and improve liquidity. Suchalternatives may include:

 

•              sales of assets;

•              cost reductions;

•              deferral of certain discretionarycapital expenditures and benefit payments; and

•              seeking amendments or waivers toour debt instruments.

 

Suchmeasures may not be successfully completed or may not generate the liquidityrequired by us to operate our business and service our obligations. If we arenot able to generate sufficient cash flow or otherwise obtain funds necessaryto make required debt payments or fail to comply with our debt covenants, wewould be in default under the terms of our various debt instruments. This wouldpermit our debt holders to accelerate the maturity of such debt and would causedefaults under our other debt.

 

**We may be unable torealize the expected cost savings and revenue growth from our strategicinitiative plan.**

 

Ourability to generate sufficient cash flows to meet our operating and debtservice requirements depends in part on our ability to execute certainstrategic initiatives, which are intended to result in revenue growth and alower cost structure through increased efficiency in our manufacturingprocesses. Although we have implemented several restructuring initiatives inthe past, there are inherent risks related to these programs, including theclosure of manufacturing facilities, disruption of business operations,inability to meet customer demand, higher costs than anticipated, environmentalissues associated with the closed facilities and a failure to complete theseinitiatives in the time frames contemplated. The cost savings may be offset bycosts incurred in restructuring our operations, as well as by increases inother expenses unrelated to the restructuring. We cannot provide assurance thatthe restructuring activities willachieve the full expected benefits of the cost savings or revenue enhancementswithin the expected time frame.

 

**We are subject to environmentalregulations and liabilities that could weaken our operating results.**

 

Federal,state, provincial, foreign and local environmental requirements, particularlythose relating to air and water quality, are a significant factor in ourbusiness. The EPA has finalized significant portions of its comprehensive rulegoverning air emissions (Maximum Achievable Control Technology (MACT)) andwater discharges (Effluent Limitation Guidelines) for the pulp, paper andpaperboard industry, known as the “Cluster Rule,” which has required, and willcontinue to require, significant capital expenditures. The EPA has alsopromulgated a Boiler MACT regulation that will limit particulate emissions fromindustrial boilers. Several of our mills will be subject to the Boiler MACTregulation and will be required to install new pollution control equipment inorder to meet the 2007 compliance deadline. In the past we have had, and in thefuture may face, environmental liability for the costs of remediating soil orgroundwater that is or was contaminated by us or a third party at various siteswhich are now or were previously owned or operated by us. We are also engagedin legal proceedings with federal and state authorities concerning

 

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allegedviolations of various discharge and emission standards. These proceedings mayresult in the imposition of fines or penalties as well as mandated remediationprograms that may require substantial, and potentially unplanned, capitalexpenditures. There also may be similar liability at third party disposal siteswith respect to which either we have received, or in the future may receive,notice that we may be a potentially responsible party (PRP) and which are thesubject of cleanup activity under the Comprehensive Environmental Response,Compensation and Liability Act of 1980 (CERCLA), analogous state laws and otherlaws concerning hazardous substance contamination.

 

**Foreign currency risks andexchange rate fluctuations could hinder the results of our Canadian operations.**

 

Ourassets and liabilities outside the United States are primarily located inCanada. Our principal foreign exchange exposure is the Canadian dollar. Thefunctional currency for our Canadian operations is the U.S. dollar. To theextent we have un-hedged positions or our hedging procedures do not work asplanned, fluctuating currencies could reduce our sales and net income. Ourfinancial performance is directly affected by exchange rates because:

 

•                              certainof our products are manufactured in Canada, but sold in U.S. dollars; and

•                              themonetary assets and liabilities of our Canadian operations are translated intoU.S. dollars for financial reporting purposes.

 

**ITEM 1B.  UNRESOLVED STAFFCOMMENTS**

 

None

 

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**ITEM 2.  PROPERTIES**

 

Themanufacturing facilities of our consolidated subsidiaries are located in NorthAmerica. We believe that our facilities are adequately insured, properlymaintained and equipped with machinery suitable for our use. We continue tostudy the economics of modernization or adopting other alternatives for highercost facilities. See Part II, Item 7, “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations, Strategic Initiatives.”  Our manufacturing facilities as of December31, 2005 are summarized below:

 
| ** **                                         | ** ** | **Number of Facilities** | ** ** | **State** | ** ** |
|----------------------------------------------------|------------|------------------------------------|------------|-----------|------------|
| ** **                                         | ** ** | **Total**                          | ** ** | **Owned** | ** ** | **Leased** | ** ** | **Locations(a)** | ** ** |
| **United States**                                  |       |                               |       |      |       |   |   |   |   |
| Containerboard and Corrugated Containers  Segment: |       |                               |       |      |       |   |   |   |   |
| Paper mills                                        |       | 16                                 |       | 16        |       |   |   | 12 |   |
| Corrugated container plants                        |       | 125                                |       | 84        |       | 41 |   | 32 |   |
| Wood products plant                                |       | 1                                  |       | 1         |       |   |   | 1 |   |
| Consumer Packaging Segment:                        |       |                               |       |      |       |   |   |   |   |
| Coated recycled boxboard mills                     |       | 4                                  |       | 4         |       |   |   | 4 |   |
| Consumer packaging plants                          |       | 40                                 |       | 24        |       | 16 |   | 18 |   |
| Non-Reportable Segment:                            |       |                               |       |      |       |   |   |   |   |
| Reclamation plants                                 |       | 23                                 |       | 16        |       | 7 |   | 14 |   |
| Subtotal                                           |       | 209                                |       | 145       |       | 64 |   | 39 |   |
|                                               |       |                               |       |      |       |   |   |   |   |
| **Canada and Other North America**                 |       |                               |       |      |       |   |   |   |   |
| Containerboard and Corrugated Containers  Segment: |       |                               |       |      |       |   |   |   |   |
| Paper mills                                        |       | 3                                  |       | 3         |       |   |   | N/A |   |
| Corrugated container plants                        |       | 23                                 |       | 19        |       | 4 |   | N/A |   |
| Consumer Packaging Segment:                        |       |                               |       |      |       |   |   |   |   |
| Consumer packaging plants                          |       | 2                                  |       | 2         |       |   |   | N/A |   |
| Subtotal                                           |       | 28                                 |       | 24        |       | 4 |   |   |   |
|                                               |       |                               |       |      |       |   |   |   |   |
| Total                                              |       | 237                                |       | 169       |       | 68 |   | N/A |   |

 

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(a)Reflects the number of states in which we have at least one manufacturingfacility.

 

Ourpaper mills represent approximately 72% of our investment in property, plantand equipment. In addition to manufacturing facilities, we own approximatelyone million acres of timberland in Canada and operate wood harvestingfacilities in Canada and the United States. The approximate annual tons ofproductive capacity of our paper mills at December 31, 2005, were:

 
| ** **               | ** ** | **Annual Capacity** | ** ** |
|--------------------------|------------|--------------------------|------------|
| ** **               | ** ** | **(in thousands)**  | ** ** |
| **United States**        |       |                     |       |
| Containerboard           |       | 6,896                    |       |
| Kraft paper              |       | 214                      |       |
| SBS                      |       | 187                      |       |
| Coated recycled boxboard |       | 561                      |       |
| Market pulp              |       | 311                      |       |
| Subtotal                 |       | 8,169                    |       |
| **Canada**               |       |                     |       |
| Containerboard           |       | 496                      |       |
| SBS                      |       | 111                      |       |
| Market pulp              |       | 245                      |       |
| Subtotal                 |       | 852                      |       |
| Total                    |       | 9,021                    |       |

 

###### **Substantiallyall of our North American operating facilities have been pledged as collateralunder our various credit agreements. See Part II, Item 7, “Management’sDiscussion and Analysis of Financial**

 

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Condition and Results ofOperations, Liquidity and Capital Resources - Net Cash Provided By (Used For)Financing Activities.”

 

###### **ITEM3.  LEGAL PROCEEDINGS**

 

**LITIGATION**

 

In 2003, we settled the antitrust class action cases pending againstSmurfit-Stone, which were based on allegations of a conspiracy among linerboardmanufacturers from 1993 to 1995, and made aggregate settlement payments of$92.5 million, one-half of which was paid in December 2003 and the remainder ofwhich was paid in January 2005. Smurfit-Stone, along with other largelinerboard manufacturers, was named a defendant in several lawsuits brought onbehalf of numerous****companies thatopted out of these class actions to seek their own recovery, all but one****of which were consolidated for pretrial proceedings in theUnited States District Court for the Eastern District of Pennsylvania, and oneof which was remanded to Kansas District Court (the Direct Action Cases). Duringthe nine month period ended September 30, 2005, we settled certain of theDirect Action Cases and made aggregate payments of approximately $14 million. Asa result of renewed discussions with counsel representing a majority of theremaining plaintiffs, in December 2005, we settled a majority of the remainingDirect Action Cases, making aggregate payments of $33 million in January 2006. Alsoin January 2006, we settled two additional Direct Action Cases and paidapproximately $3 million, and in March 2006, we settled the final two DirectAction Cases, and will make a payment of approximately $10 million in April2006, which will finalize the resolution of all of the Direct Action Cases. Weaccounted for these settlements by applying existing reserves and recordingadditional charges of $36 million in the fourth quarter of 2005.

 

We are a defendant in a numberof lawsuits and claims arising out of the conduct of our business, includingthose related to environmental matters. While the ultimate results of suchsuits or other proceedings against us cannot be predicted with certainty, webelieve the resolution of these matters will not have a material adverse effecton our consolidated financial condition or results of operations.

 

**ENVIRONMENTAL MATTERS**

 

Federal, state and local environmental requirements are a significantfactor in our business. We employ processes in the manufacture of pulp,paperboard and other products which result in various discharges, emissions andwastes. These processes are subject to numerous federal, state and localenvironmental laws and regulations, including reporting and disclosureobligations. We operate and expect to continue to operate under permits andsimilar authorizations from various governmental authorities that regulate suchdischarges, emissions and wastes.

 

In May 2003, we received a Violation Notice from the IllinoisEnvironmental Protection Agency (IEPA) alleging that our flexible packagingfacility in Schaumburg, Illinois violated various provisions of the IllinoisEnvironmental Protection Act and various conditions of the applicable Clean AirAct permit issued to the facility. In June 2003, we received a Notice of Violation(NOV) and Finding of Violation (FOV) from the EPA containing similarallegations. The allegations primarily relate to the alleged failure of twoafterburner systems designed to capture and reduce certain emissions fromprinting presses below required levels and the potential impact of such failureon past and future regulatory standards, permitting requirements, emissioncredit requirements, recordkeeping and reporting. After making certain repairsto the two old systems, we subsequently replaced these systems with a singleregenerative thermal oxidizer to eliminate future failures and ensure long-termcompliance. We responded to the IEPA Violation Notice and the EPA NOV and FOVand are attempting to reach an acceptable resolution with IEPA and EPA. Basedon discussions to date with the two agencies, we believe the costs to resolvethis matter will not be material and will not exceed established reserves.

 

In April 2005, EPA issued an NOV and an FOV that alleged that weviolated the Prevention of Significant Deterioration regulations and New SourcePerformance Standards of the Clean Air Act in connection with the replacementof burners in a boiler at our medium mill in Ontonagon, Michigan in 1995. Specifically,

 

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the EPA has alleged that the burner replacement project resulted in anincrease of the coal burning capacity of the boiler that in turn led toincreased emissions of nitrogen oxides and sulfur dioxide. We believe that theburner replacement project was routine maintenance and did not increase thecoal burning capacity of the boiler, and that differences in emissions resultedfrom permissible switching of fuels from natural gas to coal. We have met withthe EPA to discuss this matter, and have advised the EPA that we disagree withthe allegations and intend to contest the NOV and FOV. Based on the informationdeveloped to date and discussion with the EPA, we believe the costs to resolvethis matter will not be material and will not exceed established reserves.

 

We also face potential liability as a result of releases, or threatenedreleases, of hazardous substances into the environment from various sites ownedand operated by third parties at which Company-generated wastes have allegedlybeen deposited. Generators of hazardous substances sent to off-site disposallocations at which environmental problems exist, as well as the owners of thosesites and certain other classes of persons (PRPs) are, in most instances,subject to joint and several liability for response costs for the investigationand remediation of such sites under CERCLA and analogous state laws, regardlessof fault or the lawfulness of the original disposal. We have received noticethat we are or may be a PRP at a number of federal and/or state sites whereresponse action may be required and as a result may have joint and severalliability for cleanup costs at such sites. However, liability for CERCLA sitesis typically shared with other PRPs and costs are commonly allocated accordingto relative amounts of waste deposited. In estimating our reserves forenvironmental remediation and future costs, our estimated liability of $3million reflects our expected share of costs after consideration for therelative percentage of waste deposited at each site, the number of other PRPs,the identity and financial condition of such parties and experience regardingsimilar matters. In addition to participating in the remediation of sites ownedby third parties, we have entered into consent orders for the investigationand/or remediation of certain of our owned properties.

 

Based on current information, we believe the probable costs of thepotential environmental enforcement matter discussed above, response costsunder CERCLA and similar state laws, and the remediation of owned property willnot have a material adverse effect on our financial condition or results ofoperations. As of December 31, 2005, we had approximately $29 million reservedfor environmental liabilities. We believe our liability for these matters wasadequately reserved at December 31, 2005.

 

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

###### ** **

No matters were submitted to a vote of security holders, through thesolicitation of proxies or otherwise, during the fourth quarter ended December31, 2005.

 

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## **PART II**

## ** **

## **ITEM 5.**         MARKET FORREGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OFEQUITY SECURITIES

## ** **

**MARKETINFORMATION**

 

AtDecember 31, 2005, approximately 58,000 stockholders, including stockholders ofrecord, beneficial owners and employee participants in our voluntary savingsplans, held our common stock. Our common stock trades on The Nasdaq NationalMarket under the symbol “SSCC.”  The highand low sales prices of our common stock in 2005 and 2004 were:

 
| ** **     | ** ** | **2005** | ** ** | **2004** | ** ** |
|----------------|------------|----------|------------|----------|------------|
| ** **     | ** ** | **High** | ** ** | **Low**  | ** ** | **High** | ** ** | **Low** | ** ** |
| First Quarter  |       | $        | 18.85      |     | $          | 14.92 |   | $ | 19.14 |   | $ | 16.00 |   |
| Second Quarter |       | $        | 15.76      |     | $          | 10.11 |   | $ | 20.10 |   | $ | 15.95 |   |
| Third Quarter  |       | $        | 13.12      |     | $          | 9.87 |   | $ | 19.95 |   | $ | 16.59 |   |
| Fourth Quarter |       | $        | 14.18      |     | $          | 9.06 |   | $ | 19.87 |   | $ | 16.78 |   |

 

**DIVIDENDSON COMMON STOCK**

 

Wehave not paid cash dividends on our common stock and do not intend to paydividends in the foreseeable future. Our ability to pay dividends in the futureis restricted by certain provisions contained in various agreements andindentures relating to SSCE’s outstanding indebtedness. See Item 7,“Management’s Discussion and Analysis of Financial Condition and Results ofOperations, Liquidity and Capital Resources - Net Cash Provided By (Used For)Financing Activities.”

 

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**ITEM 6. SELECTED FINANCIAL DATA**

(In millions, except per share and statistical data)

 
| ** **                                                                                         | ** ** | **2005** | ** ** | **2004** | ** ** | **2003(a)(b)** | ** ** | **2002(c)** | ** ** | **2001** | ** ** |
|----------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------------|------------|-------------|------------|----------|------------|
| **Summary of Operations**                                                                          |       |     |       |     |       |           |       |        |       |     |       |
| Net sales                                                                                          |       | $        | 8,396      |     | $          | 8,291          |       | $           | 7,722      |     | $          | 7,483 |   | $ | 7,691 |   |
| Income (loss) from operations (d)(e)                                                               |       | (167     | )          | 263      |       | 47             |       | 462         |       | 583      |       |
| Income (loss) from continuing operations  before cumulative effect of accounting change            |       | (327     | )          | (46      | )          | (198           | )          | 59          |       | 53       |       |
| Discontinued operations, net of income tax  provision (f)                                          |       |     |       |     |       | 6              |       | 6           |       | 24       |       |
| Net income (loss) available to common  stockholders                                                |       | (339     | )          | (57      | )          | (208           | )          | 54          |       | 66       |       |
|                                                                                               |       |     |       |     |       |           |       |        |       |     |       |
| Basic earnings per share of common stock                                                           |       |     |       |     |       |           |       |        |       |     |       |
| Income (loss) from continuing operations  before cumulative effect of accounting change            |       | (1.33    | )          | (.23     | )          | (.85           | )          | .20         |       | .17      |       |
| Net income (loss) available to common  stockholders                                                |       | (1.33    | )          | (.23     | )          | (.85           | )          | .22         |       | .27      |       |
| Weighted average shares outstanding                                                                |       | 255      |       | 253      |       | 246            |       | 244         |       | 244      |       |
|                                                                                               |       |     |       |     |       |           |       |        |       |     |       |
| Diluted earnings per share of common stock                                                         |       |     |       |     |       |           |       |        |       |     |       |
| Income (loss) from continuing operations  before cumulative effect of accounting change            |       | (1.33    | )          | (.23     | )          | (.85           | )          | .20         |       | .17      |       |
| Net income (loss) available to common  stockholders                                                |       | (1.33    | )          | (.23     | )          | (.85           | )          | .22         |       | .27      |       |
| Weighted average shares outstanding                                                                |       | 255      |       | 253      |       | 246            |       | 246         |       | 245      |       |
|                                                                                               |       |     |       |     |       |           |       |        |       |     |       |
| **Other Financial Data**                                                                           |       |     |       |     |       |           |       |        |       |     |       |
| Net income (loss) available to common  stockholders, adjusted to exclude goodwill amortization (g) |       | $        | (339       | )        | $          | (57            | )          | $           | (208       | )        | $          | 54 |   | $ | 157 |   |
| Net cash provided by operating activities                                                          |       | 221      |       | 273      |       | 162            |       | 503         |       | 597      |       |
| Net cash provided by (used for) investing  activities                                              |       | (277     | )          | (200     | )          | 15             |       | (462        | )          | (197     | )          |
| Net cash provided by (used for) financing  activities                                              |       | 55       |       | (79      | )          | (171           | )          | (53         | )          | (420     | )          |
| Depreciation, depletion and amortization  (g)                                                      |       | 408      |       | 416      |       | 415            |       | 401         |       | 478      |       |
| Capital investments and acquisitions                                                               |       | 285      |       | 232      |       | 238            |       | 570         |       | 232      |       |
| Working capital, net                                                                               |       | (4       | )          | 148      |       | 136            |       | 590         |       | 465      |       |
| Net property, plant, equipment and  timberland                                                     |       | 4,289    |       | 4,682    |       | 4,974          |       | 5,182       |       | 5,166    |       |
| Total assets                                                                                       |       | 9,114    |       | 9,583    |       | 9,956          |       | 10,805      |       | 10,652   |       |
| Long-term debt (h)                                                                                 |       | 4,571    |       | 4,498    |       | 4,807          |       | 4,990       |       | 4,943    |       |
| Redeemable preferred stock                                                                         |       | 89       |       | 85       |       | 82             |       | 79          |       | 76       |       |
| Stockholders’ equity                                                                          |       | 1,882    |       | 2,259    |       | 2,270          |       | 2,320       |       | 2,485    |       |
|                                                                                               |       |     |       |     |       |           |       |        |       |     |       |
| **Statistical Data (tons in thousands)**                                                           |       |     |       |     |       |           |       |        |       |     |       |
| Containerboard production (tons) (i)                                                               |       | 7,215    |       | 7,438    |       | 7,185          |       | 6,860       |       | 6,640    |       |
| Kraft paper production (tons)                                                                      |       | 204      |       | 259      |       | 293            |       | 283         |       | 287      |       |
| Market pulp production (tons)                                                                      |       | 563      |       | 549      |       | 497            |       | 567         |       | 545      |       |
| Solid bleached sulfate production (tons)                                                           |       | 283      |       | 276      |       | 290            |       | 296         |       | 306      |       |
| Coated boxboard production (tons) (i)                                                              |       | 556      |       | 560      |       | 577            |       | 582         |       | 569      |       |
| Corrugated containers sold (billion sq.  ft.) (i) (j)                                              |       | 80.8     |       | 81.6     |       | 79.7           |       | 76.9        |       | 75.7     |       |
| Folding cartons sold (tons)                                                                        |       | 523      |       | 517      |       | 514            |       | 504         |       | 523      |       |
| Multiwall bags sold (million bags)                                                                 |       | 1,112    |       | 1,157    |       | 1,156          |       | 1,162       |       | 1,108    |       |
| Fiber reclaimed and brokered (tons)                                                                |       | 6,501    |       | 6,542    |       | 6,549          |       | 6,582       |       | 6,714    |       |
| Number of employees                                                                                |       | 33,500   |       | 35,300   |       | 36,700         |       | 38,600      |       | 38,500   |       |

 

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**Notes to Selected Financial Data**

 

(a)          Results for2003 include the acquisition of Smurfit-MBI after March 31, 2003, the date ofthe acquisition.

(b)         We recordeda $5 million charge, net of income tax, or $.02 per diluted share, in 2003 forthe cumulative effect of an accounting change in accordance with SFAS No. 143,“Accounting for Asset Retirement Obligations.”

(c)          Results for2002 include the acquisition of the Stevenson, Alabama containerboard mill andthe related corrugated container assets after September 30, 2002, the date ofthe acquisition.

(d)         In 2004,income from operations included an asset impairment charge of $73 millionattributable to the write-down of non-core pulp mill fixed assets.

(e)          In 2005, 2004, 2003, 2002 and 2001, we recorded restructuring charges of$321 million, $16 million, $115 million, $24 million and $10 million,respectively.

(f)            Includesincome from discontinued operations (net of income taxes) and gain or loss ondisposition of discontinued operations (net of income taxes).

(g)         EffectiveJanuary 1, 2002, we adopted SFAS No. 142, “Goodwill and Other IntangibleAssets.” SFAS No. 142 requires that goodwill no longer be amortized, butinstead be tested for impairment at least annually. Depreciation, depletion andamortization includes goodwill amortization of $91 million in 2001.

(h)         In 2005, 2004, 2003, 2002 and 2001, long-term debt includes obligationsunder capital leases of $12 million, $13 million, $12 million, $16 million and$22 million, respectively.

(i)             Excludesdiscontinued operations.

(j)             Excludes intercompany shipments.

 

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** **

**ITEM 7.****        ****MANAGEMENT’S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION****AND RESULTS OF OPERATIONS**

 

**OVERVIEW**

 

Smurfit-Stone Container Corporation is an integrated manufacturer ofpaperboard and paper-based packaging. Our major products are containerboard,corrugated containers, multiwall bags, SBS, market pulp, recycled fiber, coatedrecycled boxboard and folding cartons. We operate in two reportable industrysegments. Approximately 76% of our 2005 net sales were generated by theContainerboard and Corrugated Containers segment and 20% were generated by theConsumer Packaging segment. Our mill operations supply paper to our corrugatedcontainer, folding carton and multiwall bag converting operations. The productsof our converting operations, as well as the mill and reclamation tonnage inexcess of what is consumed internally, are the main products sold to thirdparties. Our operating facilities and customers are located primarily in theUnited States and Canada.

 

Market conditions and demand for our products are subject to cyclicalchanges in the economy and changes in industry capacity, both of which cansignificantly impact selling prices and our profitability. In recent years, thecontinued loss of domestic manufacturing to offshore competition and thechanging retail environment in the U.S. have also played a key role. Theinfluence of superstores and discount retailing giants, as well as the impactsfrom online shopping, has resulted in a shifting of demand to packaging whichis more condensed, lighter weight and less expensive. These factors havegreatly influenced the corrugated industry.

 

Throughout much of 2005, industry shipments of corrugated containerswere below the comparable 2004 level. In August 2005, demand began to improveand industry shipments of corrugated containers ended the year 0.2% higher thanthe 2004 level. Our shipments of corrugated containers decreased 0.7% comparedto 2004 due to weak demand in the first half of the year and the impact ofplant closures. For 2005, we recorded a net loss of $327 million due principallyto lower demand, higher costs for energy, freight and wood fiber and higherrestructuring charges.

 

Because of our disappointing operating results and the current markettrends, we initiated a strategic reassessment plan during 2005. The elements ofthat plan, discussed more fully below, include initiatives for cost reductionand revenue growth and organizational changes to allow for the achievement ofthe initiatives. In addition, we are currently evaluating strategic options forour Consumer Packaging segment, including the possible sale of some or all ofthese businesses.

 

Aswe enter 2006, our business fundamentals are improving due to stronger demand,lower inventory levels and encouraging price trends for most of our products. Weanticipate a healthy U.S. economy will drive continued growth in packagingdemand. While challenged by higher costs, growth in volume and pricingimprovement should lead to an improvement in our operating results in 2006. EffectiveFebruary 1, 2006, we began implementing a $40 per ton price increase forcontainerboard with corresponding increases for corrugated containers.

 

**STRATEGIC INITIATIVES**

 

During 2005, we announced a strategic reassessment plan to improveperformance and better position us for long-term growth. Our new strategyfocuses on i) cost reduction initiatives from which we expect to achieve $600million in annual savings by the end of 2008, ii) revenue growth initiatives togenerate $650 million in incremental annual revenue by the end of 2008 and iii)organizational changes to enable the cost reduction and revenue growthinitiatives. As part of the overall initiatives, we are currently evaluatingstrategic options for our Consumer Packaging segment. Proceeds from the sale ofsome or all of these businesses would be used to reduce debt.

 

**Cost Reduction Initiatives**

In order to achieve our cost reduction initiatives, we expect to closeup to 20 percent of our corrugated container facilities by the end of 2008. Someplant closures will enable us to transfer production volume to our otherplants, thereby lowering costs through higher equipment utilization. Otherplant closures will be part of our scaling plan in larger markets, whichinvolves investment in new high speed corrugators

 

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and finishing equipment. Production volume in these larger markets willthen be scheduled at the lowest cost facilities. We expect to achieveadditional cost reductions through i) mill consolidation, ii) productivityimprovements at the mills, the remaining container plants and the consumerpackaging plants, iii) standardization of containerboard trim sizes and gradesproduced, iv) transportation and procurement savings and v) reductions inselling and administrative expenses.

 

**Revenue Growth Initiatives**

To achieve our revenue growth initiatives, we plan to focus on marketsegments with above average growth, in particular those where customers requirevalue-added products, services and creative merchandising solutions. We plan toexpand the marketing of innovative products for segments where we already havea leading share. We will also partner with developers and manufacturers ofinnovative packaging to serve growing niches, such as environmentally sensitivepackaging. We will direct our expertise in high value graphics and point ofpurchase appeal to expand our participation in packaging for private labelmanufacturers. In addition, we will serve as the customers’ agent in developingbranding and related services for retailers who are expanding their own privatelabel products. To expand this agency capability, we will continue to grow ourrelationships with strategic partners in brand management as well asmanufacturing partners overseas. As a further driver of revenue growth, ourlower cost converting profile will enable us to compete for new business wherethe customer has minimal need for high-end packaging.

 

**Organizational Changes**

To enable the cost reductions and the revenue growth initiatives, ourorganizational structure was changed. A chief operating officer was appointedto lead all of the operations. The corrugated container division wasreorganized to operate on an enterprise-wide basis rather than as individualfacilities functioning autonomously. Manufacturing and sales responsibilitiesfor that division were then centralized and separated along functional lines toallow us to better focus on lower manufacturing costs and revenue growth. Also,an initiatives management office, reporting to the chief executive officer, wasformed to manage and measure the progress of the strategic initiatives.

 

To implement these initiatives, we expect to incur capital expendituresof up to $400 million from 2006 through the end of 2008, which will be inaddition to our baseline annual capital spending of approximately $275 millionper year. We expect to incur approximately $90 million of the incrementalcapital expenditures in 2006, with the remainder to be spent in 2007 and 2008. Thecapital expenditures will be funded by anticipated improvements in ouroperating cash flows and with borrowings under our revolving credit facility.

 

In 2005, as the first step in this cost reduction process and in orderto better align our production capacity with market conditions and demand, wepermanently closed the New Richmond, Quebec linerboard mill, the Bathurst, NewBrunswick medium mill and the previously idled No. 2 paper machine at theFernandina Beach, Florida linerboard mill. Our containerboard manufacturingcapacity was reduced by 700,000 tons, or 8.5%, as a result of these closures. Inaddition, we also closed two converting facilities, exited our investment inthe Las Vegas, Nevada converting facility and agreed to the closure of theGroveton, New Hampshire medium mill, in which we own a minority interest. Werecorded restructuring charges of $321 million, including non-cash charges of$263 million related to the write-down of assets, primarily property, plant andequipment, to estimated net realizable values, and $4 million related to apension curtailment charge for terminated employees. The remaining charges wereprimarily for severance, benefits, lease commitments and post-closureenvironmental costs. These shutdowns resulted in approximately 780 employeesbeing terminated. During the next three years, we expect to record additionalrestructuring charges of approximately $200 million, including non-cash chargesof approximately $100 million, related to the expected closures of certaincorrugated container facilities in connection with the implementation of thesestrategic initiatives.

 

Duringthe second half of 2005, we realized savings of approximately $45 million fromour strategic initiatives. The savings included a reduction of fixed costsprimarily related to the closures of the two containerboard mills, other workforcereductions in the Containerboard and Corrugated Container segment and aone-time curtailment gain related to the elimination of postretirement healthcare and life insurance benefits for certain employees.

 

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**RESULTS OF OPERATIONS**

###### ** **

| ** **                                                                                      | ** ** | **2005**       | ** ** | **2004**            | ** ** | **2003**       | ** ** |
|-------------------------------------------------------------------------------------------------|------------|----------------|------------|---------------------|------------|----------------|------------|
| **Segment Data  (In millions)**                                                       | ** ** | **Net  Sales** | ** ** | **Profit/  (Loss)** | ** ** | **Net  Sales** | ** ** | **Profit/  (Loss)** | ** ** | **Net  Sales** | ** ** | **Profit/  (Loss)** | ** ** |
| Containerboard and corrugated containers                                                        |       | $              | 6,359      |                | $          | 183            |       | $ | 6,247 |   | $ | 314 |   | $ | 5,759 |   | $ | 246 |   |
| Consumer packaging                                                                              |       | 1,663          |       | 83                  |       | 1,656          |       | 81 |   | 1,656 |   | 82 |   |
| Other operations                                                                                |       | 374            |       | 19                  |       | 388            |       | 28 |   | 307 |   | 22 |   |
| Total segment operations                                                                        |       | $              | 8,396      |                | 285        |           | $          | 8,291 |   | 423 |   | $ | 7,722 |   | 350 |   |
|                                                                                            |       |           |       |                |       |           |       |   |   |   |   |   |   |
| Restructuring charges                                                                           |       |           |       | (321                | )          |           |       | (16 | ) |   |   | (115 | ) |
| Asset impairment charge                                                                         |       |           |       |                |       |           |       | (73 | ) |   |   |   |   |
| Gain (loss) on sale of assets                                                                   |       |           |       | (1                  | )          |           |       | 7 |   |   |   | (5 | ) |
| Interest expense, net                                                                           |       |           |       | (346                | )          |           |       | (343 | ) |   |   | (341 | ) |
| Loss on early extinguishment of debt                                                            |       |           |       |                |       |           |       | (11 | ) |   |   | (3 | ) |
| Litigation charges and settlements, net                                                         |       |           |       | (36                 | )          |           |       | (3 | ) |   |   | (110 | ) |
| Corporate expenses and other (1)                                                                |       |           |       | (115                | )          |           |       | (93 | ) |   |   | (114 | ) |
| Loss from continuing operations before  income taxes and cumulative effect of accounting change |       |           |       | $                   | (534       | )              |       |   | $ | (109 | ) |   |   | $ | (338 | ) |

 

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(1) Corporate expenses and other includecorporate expenses, corporate charges to segments for working capital interestand other expenses not allocated to segments.

 

**2005 COMPARED TO 2004**

 

The increase in our loss from continuing operations before income taxesand cumulative effect of accounting change was due primarily to higherrestructuring charges, lower segment profits and higher litigation charges andsettlements, net. Segment profits were negatively impacted by higher costs ofwood fiber, freight, energy and chemicals and lower containerboard sales andproduction volumes. Segment profits were favorably impacted by higher averagesale prices for most of our products.

 

Net sales of $8,396 million in 2005 increased 1.3% over 2004 dueprimarily to improvements in pricing for the Containerboard and CorrugatedContainers segment. Average sales prices for most of our products in ourConsumer Packaging segment also improved. The change in net sales for each ofour segments is summarized in the chart below:

 
| **(In millions)**      | ** ** | **Container-  board &  CorrugatedContainers** | ** ** | **ConsumerPackaging** | ** ** | **OtherOperations** | ** ** | **Total** | ** ** |
|-----------------------------|------------|--------------------------------------------------------|------------|-----------------------|------------|---------------------|------------|-----------|------------|
|                        |       |                                                   |       |                  |       |                |       |      |       |
| Sales price and product mix |       | $                                                      | 169        |                  | $          | 39                  |       | $         | (20        | ) | $ | 188 |   |
| Sales volume                |       | (57                                                    | )          | (32                   | )          | 6                   |       | (83       | )          |
| Total                       |       | $                                                      | 112        |                  | $          | 7                   |       | $         | (14        | ) | $ | 105 |   |

###### ** **

###### **Costof goods sold increased from $7,176 million in 2004 to $7,434 million in 2005due primarily to higher costs, including energy ($82 million), wood fiber ($38million), freight ($60 million) and chemicals ($32 million). Cost of goods soldas a percent of net sales increased from 86.6% in 2004 to 88.5% in 2005 dueprimarily to the higher costs.**

###### ** **

Selling and administrative expenses increased from $770 million in 2004to $807 million in 2005 due to the increase in litigation and settlementcharges, net. See Part I, Item 3, “Legal Proceedings.” Selling andadministrative expenses as a percent of net sales increased from 9.3% in 2004to 9.6% in 2005.

 

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Interest expense, net was $346 million in 2005, an increase of $3million compared to 2004. The increase was due to higher average interest rates($19 million), which were partially offset by lower average borrowings ($16million). Our overall average effective interest rate in 2005 was higher than2004 by approximately .45%.

 

Other, net for 2005 included non-cash foreign exchange losses of $9million compared to losses of $22 million in 2004. See Item 7A, “Quantitativeand Qualitative Disclosures About Market Risk, Foreign Currency Risk.”

 

Benefit from income taxes in 2005 differed from the amount computed byapplying the statutory U.S. federal income tax rate to loss from continuingoperations before income taxes and cumulative effect of accounting change dueprimarily to a $44 million benefit related to the resolution of certain prioryear tax matters, a provision of $34 million related to the repatriation offoreign earnings, state income taxes, foreign income taxes and the effects ofother permanent differences. For information concerning income taxes, see Note13 of the Notes to Consolidated Financial Statements.

 

**Containerboard and Corrugated Containers Segment**

Net sales increased 1.8% in 2005 compared to 2004 primarily as a resultof higher average sales prices. For the year ended December 31, 2005, averageNorth American corrugated container prices increased 2.2% and average domesticlinerboard prices were higher by 4.1% compared to 2004. Average sales pricesfor market pulp, SBS and kraft paper increased 6.6%, 3.3% and 6.1%,respectively, compared to the same period last year. Shipments of corrugatedcontainers in 2005 were lower by 0.7% compared to last year due to weak demandin the first half of 2005 and the impact of plant closures and third partycontainerboard shipments decreased by 10.0% compared to the same period lastyear.

 

Containerboard production decreased 3.0% compared to 2004. Ourcontainerboard mills operated at an average rate of 92.6% of capacity in 2005compared to 93.9% in 2004. Production of market pulp increased 2.6% andproduction of SBS increased 2.5%. Production of kraft paper declined 21.2% dueprimarily to the shift of production from kraft paper to containerboard on oneof our paper machines.

 

Profits decreased $131 million due primarily to higher costs and lowercontainerboard sales volume. Profits were unfavorably impacted by our lowercontainerboard mill production, the lower sales volume and higher costs ofenergy ($70 million), wood fiber ($38 million), freight ($60 million) andchemicals ($30 million). Profits were favorably impacted by the higher averagesales prices.

 

**Consumer Packaging Segment**

Net sales in 2005 were comparable to 2004. Net sales were favorablyimpacted by higher sales volume for folding cartons and higher sales prices forfolding cartons, coated recycled boxboard and multiwall bags, which improved by3.3%, 8.0% and 1.2%, respectively. Sales volume for folding cartons increased1.2% despite the closure of a converting facility, while sales volume formultiwall bags decreased 3.9% due in part to the closure of a convertingfacility. Third party shipments of coated recycled boxboard were 0.4% higherand laminated product shipments declined due primarily to the sale of a plant. Netsales were unfavorably impacted by the sale of our distribution rights for ourflexible intermediate bulk container business in the third quarter of 2004 andthe plant closures. Flexible packaging shipments increased 6.8%. The coatedrecycled boxboard mills operated at near 100% capacity in 2005, comparable to2004.

 

Profits for 2005 were $2 million higher than last year due primarily tothe higher average sales price and lower cost for reclaimed fiber ($4 million).The improvements in profit were partially offset by the lower sales volume formultiwall bags and higher costs for energy ($9 million), kraft paper ($5million) and employee benefits ($7 million).

 

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#### **Other Operations**

#### Net sales decreased 3.6% in 2005 compared to2004 due primarily to lower sales prices for reclaimed fiber. The average priceof old corrugated containers (OCC) decreased by approximately $5 per toncompared to 2004. Total tons of fiber reclaimed and brokered in 2005 werecomparable to last year. Higher external sales volume was offset by lowerinternal consumption due primarily to the containerboard mill closures. Profitsin 2005 decreased $9 million compared to last year due primarily to the loweraverage sales prices and the loss of a profitable customer account.

####  

**2004 COMPARED TO 2003**

 

The improvement in our loss from continuing operations before incometaxes and cumulative effect of accounting change was due primarily to highersegment profits and lower restructuring and litigation charges and settlements,net. An asset impairment charge recorded in the fourth quarter of 2004partially offset these improvements. Total segment operating profit increaseddue primarily to higher sales prices and sales volumes for containerboard andcorrugated containers, higher mill operating rates and the impacts of costsaving initiatives implemented beginning in the fourth quarter of 2003. Segmentprofits were negatively impacted by higher costs of fiber, employee benefitsand freight.

 

Net sales of $8,291 million in 2004 increased 7.4% due primarily tohigher average sales prices and higher sales volume. Net sales include thesales of Smurfit-MBI, a Canadian corrugated producer, after March 31, 2003, thedate we acquired the remaining 50% not previously owned (the Smurfit-MBIAcquisition). The change in net sales for each of our segments is summarized inthe chart below:

 
| **(In millions)**      | ** ** | **Container-  board &  CorrugatedContainers** | ** ** | **ConsumerPackaging** | ** ** | **OtherOperations** | ** ** | **Total** | ** ** |
|-----------------------------|------------|--------------------------------------------------------|------------|-----------------------|------------|---------------------|------------|-----------|------------|
|                        |       |                                                   |       |                  |       |                |       |      |       |
| Sales price and product mix |       | $                                                      | 186        |                  | $          | —              |       | $         | 75         |   | $ | 261 |   |
| Sales volume                |       | 183                                                    |       | —                |       | 6                   |       | 189       |       |
| Smurfit-MBI Acquisition     |       | 119                                                    |       | —                |       | —              |       | 119       |       |
| Total                       |       | $                                                      | 488        |                  | $          | —              |       | $         | 81         |   | $ | 569 |   |

###### ** **

###### **Costof goods sold increased from $6,673 million in 2003 to $7,176 million in 2004due to the Smurfit-MBI Acquisition ($111 million), higher product shipments($164 million) and higher costs, including reclaimed fiber ($120 million), woodfiber ($21 million) and employee benefits. Cost of goods sold as a percent ofnet sales was comparable to 2003.**

###### ** **

Selling and administrative expenses decreased $112 million compared tolast year. The expense in 2003 included litigation charges and settlements, netof $110 million. Selling and administrative expenses as a percent of net salesdecreased from 11.4% in 2003 to 9.3% in 2004.

 

As part of our continued overall strategy to rationalize operations andcut costs in response to market conditions, we closed ten converting facilitiesand sold our Indonesian operations in 2004. We recorded restructuring chargesof $16 million, net of a $5 million gain from the sale of three shutdownfacilities. The assets of the 2004 shutdown operations were adjusted to theestimated net realizable value, resulting in a $7 million non-cash write-down. Theremaining charges are primarily severance and benefits resulting from thetermination of approximately 1,000 employees.

 

The 2004 restructuring activities were a continuation of ourrestructuring strategy announced in the fourth quarter of 2003 to rationalizeoperations and cut costs in response to expected future market conditions. Wehave achieved the planned reduction of 1,400 positions in our workforce and,for the year ended December 31, 2004, have realized approximately $159 millionin savings from the workforce reductions, reduced fixed costs and processimprovements.

 

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We recorded an asset impairment charge of $73 million in the fourthquarter of 2004 related to the write-down of non-core pulp mill property, plantand equipment included in our Containerboard and Corrugated Containers segment.

 

Interest expense, net was $343 million in 2004, an increase of $2million compared to 2003. The increase was due to higher average interest rates($3 million), which were partially offset by lower average borrowings ($1million). Our overall average effective interest rate in 2004 was higher than2003 by approximately .10%.

 

Other, net for 2004 included non-cash foreign exchange losses of $22million compared to losses of $50 million in 2003. See Item 7A, “Quantitativeand Qualitative Disclosures About Market Risk, Foreign Currency Risk.”

 

Benefit from income taxes in 2004 differed from the amount computed byapplying the statutory U.S. federal income tax rate to loss from continuingoperations before income taxes and cumulative effect of accounting change dueprimarily to a $10 million benefit related to the resolution of certain prioryear tax matters, state income taxes and the effects of other permanentdifferences. For information concerning income taxes, see Note 13 of the Notesto Consolidated Financial Statements.

 

**Containerboard and Corrugated Containers Segment**

Net sales increased 8.5% in 2004 compared to 2003. The increaseresulted primarily from higher corrugated container shipments, due in part tothe Smurfit-MBI Acquisition, higher containerboard shipments and higher salesprices. Corrugated container prices, which declined steadily in 2003 and thefirst part of 2004, have increased since their low point in April 2004. For theyear ended December 31, 2004, average North American corrugated containerprices have increased 1.8% and average domestic linerboard prices were higherby approximately 6.3% compared to 2003. Market pulp prices were approximately3.2% higher than 2003. Shipments of corrugated containers on a per day basisincreased 1.8% compared to 2003. The increase in corrugated container shipmentswas negatively impacted by the shutdown of nine converting facilities during2004.

 

Containerboard production increased 3.5% compared to 2003. Ourcontainerboard mills operated at an average rate of 93.8% of capacity in 2004compared to 88.7% in 2003. Production of market pulp increased 10.5%, whileproduction of SBS decreased by 4.8%. Production of kraft paper declined 11.6%due primarily to the shifting of production to containerboard on one of ourpaper machines, which is capable of producing both products.

 

Profits increased $68 million due primarily to higher average salesprices, improvements in our mill operating rates and cost savings initiatives($137 million) we have implemented since the fourth quarter of 2003, includingreductions in our workforce and productivity improvements. Profits wereunfavorably impacted by the higher costs of wood ($21 million), reclaimed fiber($36 million), freight and employee benefits.

 

**Consumer Packaging Segment**

Net sales were comparable to 2003. Flexible packaging shipments werehigher compared to 2003, while folding carton and multiwall bag shipments wereflat. The coated recycled boxboard mills operated at near 100% capacity in 2004compared to 94.9% in 2003, but production was lower by 2.9% due to the permanentclosure of a paper machine in the fourth quarter of 2003. Shipments oflaminated products declined primarily as a result of the sale of a plant. Averagesales prices for folding cartons were flat, while multiwall bag sales priceswere higher by 0.8%. Sales prices of coated recycled boxboard were higher by2.3%.

 

Profits decreased $1 million due primarily to an increase in reclaimedfiber cost ($8 million) and a $2 million loss related to a fire at our SaltLake City, Utah bag facility. Cost saving initiatives ($21 million) implementedsince the fourth quarter of 2003, including reductions in our workforce andproductivity improvements, partially offset the higher costs.

 

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**Other Operations**

#### Net sales increased 26.4% due primarily tohigher sales prices for reclamation products in 2004. The average price of OCCwas higher by approximately $20 per ton. Total tons of fiber reclaimed andbrokered were comparable to last year. Higher external sales of reclaimed fiberwere offset by lower internal consumption as a result of the shutdown of threeof our paper machines in the fourth quarter of 2003.

####  

**LIQUIDITY AND CAPITAL RESOURCES**

 

The following table presents a summary of our cash flows for the yearsended December 31:

 
| **(In millions)**                  | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|-----------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Net cash provided by (used for):        |       |     |       |     |       |     |       |
| Operating activities                    |       | $        | 221        |     | $          | 273      |       | $ | 162 |   |
| Investing activities                    |       | (277     | )          | (200     | )          | 15       |       |
| Financing activities                    |       | 55       |       | (79      | )          | (171     | )          |
| Effect of exchange rate changes on cash |       |     |       |     |       | (2       | )          |
| Net increase (decrease) in cash         |       | $        | (1         | )        | $          | (6       | )          | $ | 4 |   |

 

**Net Cash Provided By Operating Activities**

Net cash provided by operating activities for the year ended December31, 2005 decreased $52 million, or 19.0%, compared to 2004 due to lower segmentprofits. Working capital decreased by $123 million in 2005. The lower level ofworking capital in 2005 was primarily due to lower inventory levels, anincrease to accounts payable and a decrease in accounts receivable. Contributionsto our pension plans were $174 million in 2005 compared to $177 million in 2004and $171 million in 2003.

 

**Net Cash Provided By (Used For) Investing Activities**

Net cash used for investing activities was $277 million for the yearended December 31, 2005. Expenditures for property, plant and equipment in 2005were $276 million, including $61 million for environmental projects and $215million for upgrades, modernization and expansion.

 

**Net Cash Provided By (Used For) Financing Activities**

Net cash provided by financing activities for the year ended December31, 2005 of $55 million included net debt proceeds of $69 million, which wereused to fund operating and investing activities, deferred debt issuance cost of$7 million and to pay preferred dividends of $8 million.

 

We as guarantor, and SSCE and its subsidiary, Smurfit-Stone ContainerCanada Inc. (SSC Canada), as borrowers, entered into a new credit agreement(the Credit Agreement) on November 1, 2004. The Credit Agreement, whichrefinanced and replaced our former credit agreements in their entirety,provided for (i) a revolving credit facility of $600 million to SSCE, of which$98 million was borrowed as of December 31, 2005 and (ii) a revolving creditfacility of $200 million to SSCE and SSC Canada, of which $147 million was borrowedas of December 31, 2005. The revolving credit facilities include sub-limits forthe issuance of letters of credit and swingline loans. Each of these revolvingcredit facilities matures on November 1, 2009. The Credit Agreement alsoprovided for a Tranche B term loan to SSCE in the aggregate principal amount of$975 million and a Tranche C term loan to SSC Canada in the aggregate principalamount of $300 million. The credit facilities bear interest at rates selectedat the option of SSCE, equal to LIBOR plus 2.50% or alternate base rate (ABR)plus 1.50%, in the case of the revolving credit facilities and LIBOR plus 2.25%or ABR plus 1.25%, in the case of the term loan facilities. We pay a 0.5%commitment fee on the unused portions of our revolving credit facilities. Theterm loans are payable in quarterly installments beginning on April 1, 2005 andending on November 1, 2011. In addition, the Credit Agreement provides for adeposit funded letter of credit facility to us, related to our variable rate industrialrevenue bonds, for approximately $122 million that matures on November 1, 2010.

 

The obligations of SSCE under the Credit Agreement are unconditionallyguaranteed by us and the material U.S. subsidiaries of SSCE. The obligations ofSSC Canada under the Credit Agreement are

 

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unconditionally guaranteed by us, SSCE, the material U.S. subsidiariesof SSCE and the material Canadian subsidiaries of SSC Canada. The obligationsof SSCE under the Credit Agreement are secured by a security interest insubstantially all of our assets and properties, and those of SSCE and thematerial U.S. subsidiaries of SSCE, by a pledge of all of the capital stock ofSSCE and the material U.S. subsidiaries of SSCE and by a pledge of 65% of thecapital stock of SSC Canada that is directly owned by SSCE. The securityinterests securing SSCE’s obligation under the Credit Agreement exclude cash,cash equivalents, certain trade receivables, three paper mills and the land andbuildings of certain corrugated container facilities. The obligations of SSCCanada under the Credit Agreement are secured by a security interest insubstantially all of the assets and properties of SSC Canada and the materialCanadian subsidiaries of SSC Canada, by a pledge of all of the capital stock ofthe material Canadian subsidiaries of SSC Canada and by the same U.S. assets,properties and capital stock that secure SSCE’s obligations under the CreditAgreement. The security interests securing SSC Canada’s obligation under theCredit Agreement exclude three mills and property related thereto and certainother real property located in New Brunswick and Quebec.

 

The Credit Agreement contains various covenants and restrictionsincluding (i) limitations on dividends, redemptions and repurchases of capitalstock, (ii) limitations on the incurrence of indebtedness, liens, leases andsale-leaseback transactions, (iii) limitations on capital expenditures and (iv)maintenance of certain financial covenants. The Credit Agreement also requiresprepayments if we have excess cash flows, as defined, or receive proceeds fromcertain asset sales, insurance or incurrence of certain indebtedness. Ourfailure to comply with these covenants could result in an event of default that,if not cured or waived, could result in us being required to repay theseborrowings before their due date. If we were unable to make this repayment orotherwise refinance these borrowings, our lenders could foreclose on our assets.If we were unable to refinance these borrowings on favorable terms, our costsof borrowing could increase significantly. As of December 31, 2005, subject tothe above limitations, we have unused borrowing capacity under SSCE’s revolvingcredit facilities of $439 million, after giving consideration to outstandingletters of credit.

 

InOctober 2005, we and our lending group entered into an amendment to the CreditAgreement to ease one of the financial covenant requirements. The othermaterial terms of the Credit Agreement, including interest rate, security andfinal maturity, remained the same as under the original Credit Agreement. Subsequentto obtaining this amendment, we determined that we were in compliance with allof the original financial covenants contained in the Credit Agreement atSeptember 30, 2005. We paid fees and other expenses of $1 million related tothis transaction.

 

In December 2005, we and our lenders entered into an agreement andamendment (Incremental Term Loan Assumption Agreement and Amendment No. 2) tothe Credit Agreement to (i) further ease certain financial covenantrequirements as of December 31, 2005 and for future periods through September30, 2007, (ii) increase interest rates for the credit facilities by 0.25% and(iii) provide for a new term loan. Under the Incremental Term Loan AssumptionAgreement and Amendment No. 2, we have the option to borrow at a rate equal toLIBOR plus 2.25% or ABR plus 1.25% for the term loan facilities and LIBOR plus2.50% or ABR plus 1.50% for the revolving credit facilities (the ApplicableRate). The Applicable Rate will increase by 0.25% if at any time our seniorsecured indebtedness is rated lower than BB- by Standard & Poor’s andBa3 by Moody’s Investors Service. The Applicable Rate with respect to revolvingcredit facilities will decrease by 0.25% if, at any time, the Company’sConsolidated Senior Secured Leverage Ratio is less than 3.0 to 1.0. Theamendment also provides for a prepayment premium equal to 1.0% of the amount ofany prepayment of a term loan, deposit funded loan or deposit as a result of arepricing transaction if the prepayment is made prior to the first anniversaryof the amendment effective date. The other material terms of the CreditAgreement, including security and final maturity, remained the same as underthe original Credit Agreement. The Incremental Term Loan Assumption Agreementand Amendment No. 2 also provided for a new SSC Canada Incremental Term Loan(Tranche C-1) in the aggregate principal amount of $90 million. The term loanis payable in quarterly installments beginning January 2, 2006 and matures onNovember 1, 2011. We used the proceeds of the Tranche C-1 to repay $90 millionof Tranche B term loan. We paid fees and other expenses of $4 million relatedto this transaction.

 

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At December 31, 2005, we were in compliance with the revised financialcovenants required by the Credit Agreement. We expect to remain in compliancewith the financial covenants during 2006 by achieving our 2006 financial plan,which includes realizing higher sales prices on containerboard and corrugatedcontainers and successfully implementing certain revenue growth and costreduction initiatives resulting from the strategic reassessment plan. Inaddition, we are currently evaluating strategic options for our ConsumerPackaging segment, including the possible sale of some or all of thesebusinesses from which the proceeds would be used to reduce debt. If we are notsuccessful in achieving the 2006 financial plan, we could also pursue otheralternatives to repay debt and improve liquidity. These alternatives, asdiscussed in Part I, Item 1A, “Risk Factors,” include deferral of certaincapital expenditures and discretionary benefit payments, reduction of costs andsale of assets. If we are not successful in achieving the 2006 financial plan,as well as the aforementioned alternatives, we may not be in compliance withthe revised financial covenants and would seek an amendment to the CreditAgreement. Although we believe that we could obtain such an amendment, failureto obtain an amendment would result in a default under the Credit Agreement,which could result in a material adverse impact on our financial condition.

 

**FUTURE CASH FLOWS**

 

**Contractual Obligations and Commitments**

At December 31, 2005, our contractual obligations and commitments wereas follows:

 
| ** **                                    | ** ** | ** ** | ** ** | **Amounts Payable During** | ** ** |
|-----------------------------------------------|------------|------------|------------|--------------------------------------|------------|
| **(In millions)**                        | ** ** | **Total**  | ** ** | **2006**                             | ** ** | **2007-08** | ** ** | **2009-10** | ** ** | **2011 &  Beyond** | ** ** |
|                                          |       |       |       |                                 |       |   |   |   |   |   |   |
| Long-term debt, including capital leases  (1) |       | $          | 4,571      |                                 | $          | 35 |   | $ | 406 |   | $ | 399 |   | $ | 3,731 |   |
| Operating leases                              |       | 433        |       | 108                                  |       | 141 |   | 84 |   | 100 |   |
| Purchase obligations (2)                      |       | 956        |       | 278                                  |       | 312 |   | 149 |   | 217 |   |
| Commitments for capital expenditures (3)      |       | 255        |       | 207                                  |       | 48 |   | 0 |   | 0 |   |
| Other long-term liabilities (4)               |       | 1,012      |       | 173                                  |       | 152 |   | 234 |   | 473 |   |
| Total contractual obligations                 |       | $          | 7,227      |                                 | $          | 801 |   | $ | 1,059 |   | $ | 866 |   | $ | 4,521 |   |

 

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(1)          Projected contractual interest payments areexcluded. Based on interest rates in effect and long-term debt balancesoutstanding as of December 31, 2005, hypothetical projected contractualinterest payments would be approximately $360 million in 2006 and for eachfuture year. For the purpose of this disclosure, our variable and fixed ratelong-term debt would be replaced at maturity with similar long-term debt. Thisdisclosure does not attempt to predict future cash flows or changes in interestrates. See Item 7A, “Quantitative and Qualitative Disclosures About MarketRisk, Interest Rate Risk.”

(2)          Amounts shown consist primarily of nationalsupply contracts to purchase containerboard, wood, reclaimed fiber, natural gasand other energy resources for which value is received. We do not aggregateopen purchase orders executed in the normal course of business by each of ouroperating locations and such purchase orders are therefore excluded from thetable.

(3)          Amounts shown are estimates of futurespending on capital projects which were committed to prior to December 31,2005, but were not completed by December 31, 2005. We expect capitalexpenditures for 2006 to be approximately $365 million.

(4)          Amounts shown consist primarily of minimumpension contribution obligations, severance costs and other rationalizationexpenditures, settlement of pending litigation and environmental liabilitieswhich have been recorded in our December 31, 2005 balance sheet. The table doesnot include our deferred income tax liability and accruals for self-insuredlosses because it is not certain when these liabilities will become due. Wecontributed $174 million to our pension plans and $19 million to otherpostretirement plans in 2005 and expect to contribute approximately $160million and $18 million, respectively, to such plans in 2006. Futurecontributions to our pension and other postretirement plans will be dependentupon pending legislation, future changes in discount rates and the earningsperformance of our plan assets.

 

We expect further improvement in our cash flow from operations in 2006,provided we are able to achieve our 2006 financial plan. Scheduled debtpayments, including capital lease payments, for 2006 and 2007

 

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are $35 million and $89 million, respectively. We expect that our cashflow from operations and our unused borrowing capacity under SSCE’s revolvingcredit facilities, in combination, will be sufficient for the next severalyears to meet our obligations and commitments, including debt service, pensionfunding, settlement of pending litigation, costs related to the strategicrepositioning plan, preferred stock dividends, expenditures related toenvironmental compliance and other capital expenditures.

 

**Contingent Obligations**

We issue standby letters of credit primarily for performance bonds andfor self-insurance. Letters of credit are issued under SSCE’s revolving creditfacilities, generally have a one-year maturity and are renewed annually. As ofDecember 31, 2005, SSCE had $116 million of letters of credit outstanding.

 

We have certain woodchip processing contracts, which provide forguarantees of third party contractors’ debt outstanding, with a securityinterest in the chipping equipment. Guarantee payments would be triggered inthe event of a loan default by any of the contractors. The maximum potentialamount of future payments related to all of such arrangements as of December31, 2005 was $36 million. Cash proceeds received from liquidation of thechipping equipment would be based on market conditions at the time of sale, andwe may not recover in full the guarantee payments made.

 

**Pension Obligations**

As of December 31, 2005, our pension benefitobligations exceeded the fair value of pension plan assets by $891 million, upfrom $870 million at the end of 2004. In 2005, we recorded an increase to theminimum pension liability of $125 million and a decrease to other comprehensiveincome of $81 million, net of tax of $44 million.

 

#### **Exit Liabilities**

We recorded restructuring charges of $321 million in 2005, including$58 million for exit liabilities, which were principally for severance andbenefit cost and facility closure cost. In 2005, we incurred cash expendituresof $18 million for these exit liabilities.

 

We had $33 million of exit liabilities as of December 31, 2004, relatedto the restructuring of our operations. During 2005, we incurred cashexpenditures of $10 million for these exit liabilities and reducedenvironmental exit liabilities by $4 million. The exit liabilities remaining asof December 31, 2005, including the 2005 restructuring activities, totaled $55million. Future cash outlays, principally for severance and benefits cost andlong-term lease commitments and facility closure cost, are expected to be $34million in 2006, $7 million in 2007 and $14 million thereafter. We intend tocontinue funding exit liabilities through operations as originally planned.

 

**Environmental Matters**

As discussed in Item 1, “Business, Environmental Compliance,” based oncurrently available information, we estimate that the aggregate compliance costof Phase II of MACT I will be approximately $80 million. We spent $42 millionthrough December 31, 2005 and will spend approximately $33 million in 2006 and$5 million in 2007 for projects related to Phase II of MACT I. Based oncurrently available information, we estimate that the aggregate compliance costfor Boiler MACT will be approximately $100 million. We spent $19 millionthrough December 31, 2005 and will spend approximately $43 million in 2006 and$38 million in 2007 for projects related to Boiler MACT. In addition to ClusterRule and Boiler MACT compliance, we anticipate additional capital expendituresrelated to environmental compliance. Excluding the spending on the Cluster Ruleand Boiler MACT projects, we have spent an average of approximately $14 millionin each of the last three years on capital expenditures for environmentalpurposes. We anticipate that environmental capital expenditures, exclusive ofthe Cluster Rule and Boiler MACT projects, will be approximately $5 million in2006.

 

#### **OFF-BALANCE SHEET ARRANGEMENTS**

####  

At December 31, 2005, we had three off-balance sheet financingarrangements.

 

SSCE has a $475 million accounts receivable securitization programwhereby it sells, without recourse, on an ongoing basis, certain of itsaccounts receivable to Stone Receivables Corporation (SRC). SRC is awholly-owned non-consolidated subsidiary of SSCE and a qualifiedspecial-purpose entity under the

 

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provisions of SFAS No. 140, “Accounting for Transfers and Servicing ofFinancial Assets and Extinguishments of Liabilities.” Accordingly, accountsreceivable sold to SRC for which we do not retain an interest are not includedin our consolidated balance sheets. SRC transfers the receivables to anon-consolidated subsidiary, a limited liability company, which has issuednotes to third-party investors. At December 31, 2005, $521 million of accountsreceivable had been sold under the program, of which $118 million was retainedby SSCE as a subordinated interest and recorded in retained interest inreceivables sold in the accompanying consolidated balance sheet. The investorsand the limited liability company have no recourse to SSCE for failure ofdebtors to pay when due.

 

SSCE, through Smurfit-MBI, has an accounts receivable securitizationprogram whereby it sells, without recourse, on an ongoing basis, certain of itsCanadian accounts receivable to a trust in which SSCE holds a variableinterest, but is not the primary beneficiary. Accordingly, under FinancialAccounting Standards Board (FASB) Interpretation No. 46, “Consolidation ofVariable Interest Entities,” accounts receivable sold to the trust, for whichSSCE is not the primary beneficiary, are not included in the accompanyingconsolidated balance sheet. At December 31, 2005, $71 million of accountsreceivable had been sold under the program, of which $21 million was retainedby SSCE as a subordinated interest and recorded in retained interest inreceivables sold in the accompanying consolidated balance sheet. The investorsand the securitization trust have no recourse to SSCE for failure of debtors topay when due.

 

We sold 980,000 acres of owned and leased timberland in October 1999. Thefinal purchase price, after adjustments, was $710 million. We received $225million in cash and $485 million in the form of installment notes, which maturefrom December 31, 2007 to December 31, 2014. Under our program to monetize theinstallment notes receivable, the notes were sold, without recourse, to TimberNote Holdings LLC (TNH), a qualified special purpose entity under theprovisions of SFAS No. 140, for $430 million in cash proceeds and a residualinterest in the notes. The residual interest included in other assets in theaccompanying consolidated balance sheet was $46 million at December 31, 2005. TNHand its creditors have no recourse to us in the event of a default on theinstallment notes.

 

###### **EFFECTS OF INFLATION**

###### ** **

Increases in costs for energy, fiber, freight, chemicals and employeebenefits have had an adverse impact on our operating results during the pastthree years. Energy, fiber and freight cost increases are strongly influencedby supply and demand factors such as from hurricanes or other natural disastersin certain regions of the United States, and when supplies become tight, wehave experienced increases in the cost of these items. We continue to seek waysto mitigate the impact of such cost increases and, to the extent permitted bycompetition, pass the increased cost on to customers by increasing sales pricesover time.

 

We use the last-in, first-out method of accounting for approximately54% of our inventories. Under this method, the cost of goods sold reported inthe financial statements approximates current cost and thus provides a closermatching of revenue and expenses in periods of increasing costs.

 

Replacement of assets acquired in prior years will be at higher costs,but this will take place over many years. New assets will result in higherdepreciation charges; but, in many cases, due to technological improvements,there may be operating cost savings as well.

 

###### **CRITICAL ACCOUNTING POLICIES AND USE OFESTIMATES**

###### ** **

Our consolidated financial statements have been prepared in accordancewith U.S. generally accepted accounting principles (GAAP). The preparation offinancial statements in accordance with U.S. GAAP requires our management tomake estimates and assumptions that affect the amounts reported in theconsolidated financial statements and accompanying notes. Our estimates andassumptions are based on historical experiences and changes in the businessenvironment. However, actual results may differ from these estimates. Criticalaccounting policies and estimates are defined as those that are both mostimportant to the portrayal of our financial condition and results and requiremanagement’s most subjective judgments. Our most critical accounting policiesand use of estimates are described below.

 

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# **Long-Lived Assets Including Goodwill**

We conductimpairment reviews of long-lived assets including goodwill in accordance withSFAS No. 144 and SFAS No 142. Such reviews require us to make estimates offuture cash flows and fair values. Our cash flow projections includesignificant assumptions about economic conditions, demand and pricing for ourproducts and cost as well as, for 2005, estimates of the achievement of thestrategic initiatives as described in Item 7, “Management’s Discussion andAnalysis of Financial Condition and Results of Operations, StrategicInitiatives.” Our estimates of fair value are determined using a variety ofvaluation techniques, including pricing of recent industry acquisitions. Whilesignificant judgment is required, we believe that our estimates of future cashflows and fair value are reasonable. However, should our assumptions change infuture years, our fair value models could result in lower fair values forlong-lived assets and goodwill, which could materially affect the value ofproperty, plant and equipment and goodwill and results of operations.

 

## **Restructurings and IdlePaper Machines**

In the thirdquarter of 2005, we permanently closed production capacity at three NorthAmerican containerboard mills. We permanently closed the No. 2 paper machine atFernandina Beach, Florida linerboard mill, which had been idled since April2001, and the New Richmond, Quebec linerboard mill and Bathurst, New Brunswickmedium mill. As a result of these closures, our containerboard capacity wasreduced by 700,000 tons, or 8.5%.

 

We have temporarily shut down one of our paper machines inJacksonville, Florida. Our decision to shut down this machine was based uponanticipated supply and demand factors, its locations and operating cost. TheJacksonville machine, which was idled in the fourth quarter of 2003, has theannual capacity to produce 174,000 tons of medium. No decision has been made topermanently shut down this machine, as it may be restarted, subject to futuredemand and industry conditions. As of December 31, 2005, the Jacksonvillepaper machine had a net book value of approximately $19 million. Foraccounting purposes, this machine is classified as held and used and continuesto be depreciated.

 

In recent years, we have closed a number of operating facilities andexited non-core businesses. Identifying and calculating the cost to exit thesebusinesses requires certain assumptions to be made, the most significant ofwhich are anticipated future liabilities, including leases and othercontractual obligations, and the net realizable value of assets held for sale. Webelieve our estimates are reasonable, considering our knowledge of the paperindustry, previous experience in exiting activities and valuations receivedfrom independent third parties in the calculation of such estimates. Althoughour estimates have been reasonably accurate in the past, significant judgmentis required, and these estimates and assumptions may change as additionalinformation becomes available and facts or circumstances change.

 

## **Allowance for DoubtfulAccounts**

Weevaluate the collectibility of accounts receivable on a case-by-case basis andmake adjustments to the bad debt reserve for expected losses. We also estimatereserves for bad debts based on historical experience and past due status ofthe accounts. We perform credit evaluations and adjust credit limits based uponeach customer’s payment history and credit worthiness. While credit losses havehistorically been within our expectations and the provisions established,actual bad debt write-offs may differ from our estimates, resulting in higheror lower charges in the future for our allowance for doubtful accounts.

 

## **Pension**

The determination of pension obligations and expense is dependent uponour selection of certain assumptions, the most significant of which are theexpected long-term rate of return on plan assets and the discount rates appliedto plan liabilities. Consulting actuaries assist us in determining theseassumptions, which are described in Note 14 of the Notes to ConsolidatedFinancial Statements. In 2005, we adjusted the expected long-term rate ofreturn on our foreign plan assets to 7.75%, down from 8.0%, which increasedretirement plan expense approximately $2 million in 2005. Effective for 2006,the expected long-term rate of return was reduced from 9.00% on U.S. planassets and 7.75% on foreign plan assets in 2005 to 8.75% and 7.50%,respectively. The discount rates used to determine the benefit obligations forthe U.S. and foreign retirement plans at December 31, 2005 were 5.61% and5.00%, respectively. The assumed rate for the long-term return on plan assetswas determined based upon

 

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target asset allocations and expected long-term rates of return byasset class. Our assumed discount rate was developed using a portfolio of Moody’sAa-rated fixed income securities that approximate the duration of our pensionliabilities. A decrease in the assumed rate of return of 0.25% would increasepension expense by approximately $6 million. A decrease in the discount rate of0.25% would increase our pension expense by approximately $9 million and ourpension obligations by approximately $105 million.

 

## **Income Taxes**

Deferred tax assets and liabilities reflect our assessment of futuretaxes to be paid in the jurisdictions in which we operate. These assessmentsinvolve temporary differences resulting from differing treatment of items fortax and accounting purposes, as well as estimates of our current tax exposures.Based on our evaluation of our tax positions, we believe we were adequatelyreserved for these matters at December 31, 2005.

 

At December 31, 2005, we had deferred tax assets related to netoperating loss, alternative minimum tax and other tax credit carryforwards inthe amount of $925 million. A valuation allowance of $208 million has beenestablished for a portion of these deferred tax assets based on projectedfuture taxable income, the expected timing of deferred tax liability reversalsand the expiration dates of these carryforwards. See Note 13 of the Notes toConsolidated Financial Statements. We expect our deferred tax assets, net ofthe valuation allowance, will be fully realized through the reversal of nettaxable temporary differences at December 31, 2005, in combination withexpected improvement in our operating results. Substantially all of ourvaluation allowance was recorded in connection with the 1998 merger with StoneContainer and a reduction in the valuation allowance would result principallyin a corresponding reduction to goodwill. Should additional valuationallowances be necessary because of changes in economic circumstances, thoseallowances would be established through a charge to income tax expense.

 

In October 2004, the American Jobs Creation Act (the AJCA) was signedinto law. The AJCA includes a temporary incentive for U.S. multinationals torepatriate foreign earnings by providing an elective 85% dividends receiveddeduction for certain cash dividends from controlled foreign corporations. Underthis law, in December 2005, we repatriated dividends of $483 million fromearnings of foreign subsidiaries previously considered indefinitely reinvested.The income tax expense associated with the repatriation was $34 million. Excludingthe repatriation discussed above, through December 31, 2005, no provision hasbeen made for income taxes on the remaining undistributed earnings of ourforeign subsidiaries, as we intend to indefinitely reinvest such earnings inour foreign subsidiaries.

 

We frequently face challenges from domestic and foreign tax authoritiesregarding the amount of taxes due. These challenges include questions regardingthe timing and amount of income and deductions and the allocation of incomeamong various tax jurisdictions. We have settled the Internal Revenue Service’sexamination of the years 2002 and 2003, resulting in no additional tax paymentor refund. Due principally to this settlement, we recorded a tax benefit of $44million in the fourth quarter of 2005. The Canadian Revenue Agency is currentlyexamining the years 1999 through 2002 of the Company’s Canadian subsidiaries. Tothe extent we prevail in matters for which accruals have been established orare required to pay amounts in excess of our reserves, our effective tax ratein a given financial statement period may be materially impacted. While theultimate results cannot be predicted with certainty, we believe that theexaminations will not have a material adverse effect on our consolidatedfinancial condition or results of operations.

 

## **Legal and EnvironmentalContingencies**

Accruals for legal and environmental matters are recorded when it isprobable that a liability has been incurred and the amount of loss can bereasonably estimated. Such liabilities are developed based on currentlyavailable information and require judgments as to probable outcomes. Assumptionsare based on historical experience and recommendations of legal counsel. Environmentalestimates include assumptions and judgments about particular sites, remediationalternatives and environmental regulations. We believe our accruals areadequate. However, due to uncertainties associated with these assumptions andjudgments, as well as potential changes to governmental regulations andenvironmental technologies, actual costs could differ materially from theestimated amounts.

 

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### **Self-Insurance**

We self-insure a majority of our workers’ compensation and generalliability costs subject to specific retention levels for certain policies andcoverage. Losses above these retention levels are transferred to insurancecompanies. In addition, we self-insure the majority of our group health carecosts. All of the health care, workers’ compensation and general liabilityclaims are handled by third-party administrators. Consulting actuaries andadministrators assist us in determining our liability for self-insured claims. Lossesare accrued based upon the aggregate self-insured claims determined by thethird-party administrators, actuarial assumptions and our historical experience.While we believe that our assumptions are appropriate, significant differencesin our actual experience or significant changes in our assumptions maymaterially affect our workers’ compensation, general liability and group healthcare costs.

 

**PROSPECTIVE ACCOUNTING STANDARDS**

 

In November 2004, the FASB issued SFAS No. 151, “Inventory Costs,”effective January 1, 2006. SFAS No. 151 requires abnormal amounts of idlefacility expense, freight, handling costs and wasted materials to be recognizedas current period charges. In addition, SFAS No. 151 requires allocation offixed production overheads to the costs of conversion be based on the normalcapacity of the production facilities. The impact of this standard is notexpected to be material.

 

In September 2005, the Emerging Issues Task Force (EITF) reached aconsensus on Issue No. 04-13, “Accounting for Purchases and Sales of Inventorywith the Same Counterparty” (EITF 04-13) effective April 1, 2006 for newarrangements and modifications or renewals of existing arrangements. EITF 04-13requires certain inventory exchange transactions between counterparties withinthe same line of business to be viewed as a single exchange transaction. We arecurrently evaluating the impact of EITF 04-13.

 

**ITEM 7A.  QUANTITATIVE ANDQUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

###### **Weare exposed to various market risks, including commodity price risk, foreigncurrency risk and interest rate risk. To manage the volatility related to theserisks, we enter into various derivative contracts. The majority of thesecontracts are settled in cash. However, such settlements have not had asignificant effect on our liquidity in the past, nor are they expected to besignificant in the future. We do not use derivatives for speculative or tradingpurposes.**

###### ** **

**Commodity Price Risk**

We use financial derivative instruments, including fixed price swapsand options, to manage fluctuations in cash flows resulting from commodityprice risk in the procurement of natural gas. Our objective is to fix the priceof a portion of the purchases of natural gas used in the manufacturing process.The changes in the market value of such derivative instruments havehistorically been, and are expected to continue to be, highly effective atoffsetting changes in price of the hedged item. As of December 31, 2005, themaximum length of time over which we are hedging our exposure to thevariability in future cash flows associated with natural gas forecastedtransactions is two years. As of December 31, 2005, we had monthly derivativeinstruments to hedge approximately 65% of our expected natural gas requirementsin 2006. Excluding the impact of derivative instruments, the potential changein our expected 2006 and 2005 natural gas cost, based upon our expected annualusage and unit cost, resulting from a hypothetical 10% adverse price change,would be approximately $23 million and $14 million, respectively. The changesin energy cost discussed in Item 7, “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations” include the impact of thenatural gas derivative instruments. See Note 9 of the Notes to ConsolidatedFinancial Statements.

 

**Foreign Currency Risk**

Our principal foreign exchange exposure is the Canadian dollar. Assetsand liabilities outside the United States are primarily located in Canada. Thefunctional currency for our Canadian operations is the U.S.

 

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dollar. Our investments in foreign subsidiaries with a functionalcurrency other than the U.S. dollar are not hedged.

 

We use financial derivative instruments, including forward contractsand options, primarily to protect against Canadian currency exchange riskassociated with expected future cash flows. These instruments typically havematurities of twelve months or less. As of December 31, 2005, we had monthlyCanadian dollar forward purchase contracts to hedge 75% of our requirementsthrough March 2006, substantially all of our Canadian dollar requirements forApril 2006 to June 2006 and approximately 40% of our Canadian dollarrequirements for the remainder of 2006.

 

Weperformed a sensitivity analysis as of December 31, 2005 and 2004 that measuresthe change in the book value of our netmonetary Canadian liability****arisingfrom a hypothetical 10% adverse movement in the exchange rate of the Canadiandollar relative to the U.S. dollar with all other variables held constant. Thepotential change in fair value resulting from a hypothetical 10% adverse changein the Canadian dollar exchange rate at December 31, 2005 and 2004, would be$32 million and $33 million, respectively. Fluctuations in Canadian dollarmonetary assets and liabilities result in gains or losses, which are creditedor charged to income.

 

In2005, 2004 and 2003, the average exchange rates for the Canadian dollarstrengthened against the U.S. dollar by 6.9%, 7.1% and 10.8%, respectively.

 

**Interest Rate Risk**

Ourearnings and cash flow are significantly affected by the amount of interest onour indebtedness. Our financing arrangements include both fixed and variablerate debt in which changes in interest rates will impact the fixed and variablerate debt differently. A change in the interest rate of fixed rate debt willimpact the fair value of the debt, whereas a change in the interest rate on thevariable rate debt will impact interest expense and cash flows. Our objectiveis to mitigate interest rate volatility and reduce or cap interest expensewithin acceptable levels of market risk. We periodically enter into interestrate swaps, caps or options to hedge interest rate exposure and manage risk withinCompany policy. Any derivative would be specific to the debt instrument,contract or transaction, which would determine the specifics of the hedge.

 

In 2004, we entered into interest rate swap contracts effectivelyfixing the interest rate at 4.3% for $300 million of the Tranche B and TrancheC variable rate term loans. Changes in the fair value of the interest rate swapcontracts are expected to be highly effective in offsetting the fluctuations inthe variable interest rate, and are recorded in other comprehensive incomeuntil the underlying transaction is recorded. The accounting for the cash flowimpact of the swap contracts is recorded as an adjustment to interest expenseeach period. The fair value of our interest rate swap contracts at December 31,2005 was an $11 million asset, of which $3 million was included in prepaidexpenses and other other current assets and $8 million was included in otherassets. These contracts extend until 2011, consistent with the maturity on ourTranche B and Tranche C term loans.

 

In the second quarter of 2005, we entered into forward startinginterest rate swaps of $225 million at a fixed rate of 4.75%, based on anexpected debt refinancing to occur in 2006. At December 31, 2005, we determinedthat the expected debt refinancing was no longer probable of occurring. As aresult, these forward starting interest rate swaps were marked-to-marketthrough income resulting in a $2 million gain (net of tax) recorded as anadjustment to interest expense.

 

Weperformed a sensitivity analysis as of December 31, 2005 and 2004 that measuresthe change in interest expense on our variable rate debt arising from ahypothetical 100 basis point adverse movement in interest rates. Based on ouroutstanding variable rate debt as of December 31, 2005 and 2004, a hypothetical100 basis point adverse change in interest rates would increase interestexpense by approximately $13 million and $12 million, respectively.

 

Thetable below presents principal amounts by year of anticipated maturity for ourdebt obligations and related average interest rates based on the weightedaverage interest rates at the end of the period. Variable interest ratesdisclosed do not attempt to project future interest rates and do not reflectthe

 

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impactof our interest rate swap contracts. This information should be read inconjunction with Note 8 of the Notes to Consolidated Financial Statements.

 

###### **Short and Long-Term Debt**

 

Outstanding as of December 31, 2005

 
| **(U.S.$, in millions)**                                   | ** ** | **2006** | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **There-  after** | ** ** | **Total** | ** ** | **Fair  Value** | ** ** |
|----------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|-------------------|------------|-----------|------------|-----------------|------------|
| Bank term loans and revolver 6.9% average  interest rate (variable)  |       | $        | 13         |     | $          | 13       |       | $        | 13         |     | $          | 258               |       | $         | 13         |            | $          | 1,201 |   | $ | 1,511 |   | $ | 1,519 |   |
| U.S. senior notes 8.7% average interest rate  (fixed)                |       |     |       |     |       | 300      |       |     |       |     |       | 2,350             |       | 2,650     |       | 2,556           |       |
| U.S. industrial revenue bonds 6.5% average  interest rate (fixed)    |       | 11       |       | 3        |       | 1        |       | 4        |       | 1        |       | 178               |       | 198       |       | 198             |       |
| U.S. industrial revenue bonds 6.3% average  interest rate (variable) |       |     |       |     |       |     |       |     |       | 120      |       |              |       | 120       |       | 120             |       |
| Other U.S.                                                           |       | 11       |       | 73       |       | 3        |       | 2        |       | 1        |       | 2                 |       | 92        |       | 92              |       |
| Total debt                                                           |       | $        | 35         |     | $          | 89       |       | $        | 317        |     | $          | 264               |       | $         | 135        |            | $          | 3,731 |   | $ | 4,571 |   | $ | 4,485 |   |

** **

**ITEM 8.  FINANCIAL STATEMENTSAND SUPPLEMENTARY DATA**

 
| Index to Financial Statements:                                                      |   |
|-------------------------------------------------------------------------------------|--------|
|                                                                                |   |
| Management’s Report on Internal Control  Over Financial Reporting              |   |
| Reports of Independent Registered Public  Accounting Firm                           |   |
| Consolidated Balance Sheets - December 31, 2005 and 2004                            |   |
| For the years ended December 31, 2005, 2004  and 2003:                              |   |
| Consolidated Statements of Operations                                               |   |
| Consolidated Statements of Stockholders’ Equity                                |   |
| Consolidated Statements of Cash Flows                                               |   |
| Notes to Consolidated Financial Statements                                          |   |
|                                                                                |   |
| The following consolidated financial  statement schedule is included in Item 15(a): |   |
|                                                                                |   |
| II: Valuation and Qualifying Accounts and  Reserves                                 |   |

 

Allother schedules specified under Regulation S-X have been omitted because theyare not applicable, because they are not required or because the informationrequired is included in the financial statements or notes thereto.

 

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**Management’sReport on Internal Control Over Financial Reporting**

 

Ourmanagement is responsible for establishing and maintaining adequate internalcontrol over financial reporting for Smurfit-Stone Container Corporation, assuch term is defined in Rule 13a-15(f) under the Exchange Act. As required byRule 13a-15(c) under the Exchange Act, we carried out an evaluation, with theparticipation of our principal executive officer and principal financialofficer, of the effectiveness of our internal control over financial reportingas of the end of the latest fiscal year. The framework on which such evaluationwas based is contained in the report entitled “Internal Control - Integrated Framework”**issued by the Committee of Sponsoring Organizationsof the Treadway Commission. This evaluation included review of thedocumentation of controls, evaluation of the design effectiveness of controls,testing of the operating effectiveness of controls and a conclusion on thisevaluation. Although there are inherent limitations in the effectiveness of anysystem of internal control over financial reporting, based on our evaluation,we have concluded that our internal control over financial reporting waseffective as of December 31, 2005.

 

Ernst & Young LLP, our independent registered public accounting firm,has issued an attestation report on management’s assessment of internal controlover financial reporting for Smurfit-Stone Container Corporation as of December31, 2005, which is included herein.

 
| /s/ Patrick J. Moore                              |   |
|---------------------------------------------------|--------|
| Patrick J. Moore                                  |
| Chairman, President and Chief Executive Officer   |
| (Principal Executive Officer)                     |
|                                              |
| /s/ Charles A. Hinrichs                      |   |
| Charles A. Hinrichs                               |
| Senior Vice President and Chief Financial Officer |
| (Principal Financial Officer)                     |
|                                              |
| /s/ Paul K. Kaufmann                         |   |
| Paul K. Kaufmann                                  |
| Senior Vice President and Corporate Controller    |
| (Principal Accounting Officer)                    |

 

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REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

Board of Directors

Smurfit-Stone Container Corporation

 

We have audited management’s assessment, included in the accompanyingManagement’s Report on Internal Control over Financial Reporting, thatSmurfit-Stone Container Corporation maintained effective internal control overfinancial reporting as of December 31, 2005, based on criteria established inInternal Control—Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission (the COSO criteria). Smurfit-StoneContainer Corporation’s management is responsible for maintaining effectiveinternal control over financial reporting and for its assessment of theeffectiveness of internal control over financial reporting. Our responsibilityis to express an opinion on management’s assessment and an opinion on theeffectiveness of the Company’s internal control over financial reporting basedon our audit.

 

We conducted our audit in accordance with the standards of the PublicCompany Accounting Oversight Board (United States). Those standards requirethat we plan and perform the audit to obtain reasonable assurance about whethereffective internal control over financial reporting was maintained in allmaterial respects. Our audit included obtaining an understanding of internalcontrol over financial reporting, evaluating management’s assessment, testingand evaluating the design and operating effectiveness of internal control, andperforming such other procedures as we considered necessary in thecircumstances. We believe that our audit provides a reasonable basis for ouropinion.

 

A company’s internal control over financial reporting is a processdesigned to provide reasonable assurance regarding the reliability of financialreporting and the preparation of financial statements for external purposes inaccordance with generally accepted accounting principles. A company’s internalcontrol over financial reporting includes those policies and procedures that(1) pertain to the maintenance of records that, in reasonable detail,accurately and fairly reflect the transactions and dispositions of the assetsof the company; (2) provide reasonable assurance that transactions are recordedas necessary to permit preparation of financial statements in accordance withgenerally accepted accounting principles and that receipts and expenditures ofthe company are being made only in accordance with authorizations of managementand directors of the company; and (3) provide reasonable assurance regardingprevention or timely detection of unauthorized acquisition, use or dispositionof the company’s assets that could have a material effect on the financialstatements.

 

Because of its inherent limitations, internal control over financialreporting may not prevent or detect misstatements. Also, projections of anyevaluation of effectiveness to future periods are subject to the risk thatcontrols may become inadequate because of changes in conditions or that thedegree of compliance with the policies or procedures may deteriorate.

 

In our opinion, management’s assessment that Smurfit-Stone ContainerCorporation maintained effective internal control over financial reporting asof December 31, 2005, is fairly stated, in all material respects, based on theCOSO criteria. Also, in our opinion, Smurfit-Stone Container Corporationmaintained, in all material respects, effective internal control over financialreporting as of December 31, 2005, based on the COSO criteria.

 

We also have audited, in accordance with the standards of the PublicCompany Accounting Oversight Board (United States), the consolidated balancesheets as of December 31, 2005 and 2004, and the related consolidatedstatements of operations, stockholders’ equity and cash flows for each of thethree years in the period ended December 31, 2005, of Smurfit-Stone ContainerCorporation, and our report dated March 1, 2006, expressed an unqualifiedopinion thereon.

 
|   | /s/ Ernst  & Young LLP |   |
|--------|----------------------------|--------|
|   | Ernst & Young LLP      |

 

St. Louis, Missouri

March 1, 2006

 

35

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

Board of Directors

Smurfit-Stone Container Corporation

 

We have audited the accompanying consolidated balance sheets ofSmurfit-Stone Container Corporation as of December 31, 2005 and 2004, and therelated consolidated statements of operations, stockholders’ equity and cashflows for each of the three years in the period ended December 31, 2005. Ouraudits also included the financial statement schedule listed in the Index atItem 15(a). These financial statements and schedule are the responsibility ofthe Company’s management. Our responsibility is to express an opinion on thesefinancial statements and schedule based on our audits.

 

We conducted our audits in accordance with the standards of the PublicCompany Accounting Oversight Board (United States). Those standards requirethat we plan and perform the audit to obtain reasonable assurance about whetherthe financial statements are free of material misstatement. An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements. An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well asevaluating the overall financial statement presentation. We believe that ouraudits provide a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above presentfairly, in all material respects, the consolidated financial position ofSmurfit-Stone Container Corporation at December 31, 2005 and 2004, and theconsolidated results of its operations and its cash flows for each of the threeyears in the period ended December 31, 2005, in conformity with U.S. generallyaccepted accounting principles. Also, in our opinion, the related financialstatement schedule, when considered in relation to the basic financial statementstaken as a whole, presents fairly, in all material respects, the informationset forth therein.

 

As discussed in Note 1 to the financial statements, in 2003 the Companychanged its method of accounting for asset retirement obligations.

 

We also have audited, in accordance with the standards of the PublicCompany Accounting Oversight Board (United States), the effectiveness ofSmurfit-Stone Container Corporation’s internal control over financial reportingas of December 31, 2005, based on the criteria established in Internal Control– Integrated Framework issued by the Committee of Sponsoring Organizations ofthe Treadway Commission and our report dated March 1, 2006, expressed anunqualified opinion thereon.

 
|   | /s/ Ernst  & Young LLP |   |
|--------|----------------------------|--------|
|   | Ernst & Young LLP      |

 

St. Louis, Missouri

March 1, 2006

 

36

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**SMURFIT-STONE CONTAINER CORPORATION**

**CONSOLIDATED BALANCE SHEETS**

 
| **December 31, (In millions, except share data)**                                                                            | ** ** | **2005**   | ** ** | **2004** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|----------|------------|
| **Assets**                                                                                                                                                 |       |       |       |     |       |
|                                                                                                                                                       |       |       |       |     |       |
| Current assets                                                                                                                                             |       |       |       |     |       |
| Cash and cash equivalents                                                                                                                                  |       | **$**      | **5**      |     | $          | 6 |   |
| Receivables, less allowances of $10 in 2005  and $12 in 2004                                                                                               |       | **224**    |       | 254      |       |
| Retained interest in receivables sold                                                                                                                      |       | **139**    |       | 158      |       |
| Inventories                                                                                                                                                |       |       |       |     |       |
| Work-in-process and finished goods                                                                                                                         |       | **234**    |       | 265      |       |
| Materials and supplies                                                                                                                                     |       | **500**    |       | 521      |       |
| ** **                                                                                                                                                 |       | **734**    |       | 786      |       |
| Prepaid expenses and other current assets                                                                                                                  |       | **82**     |       | 60       |       |
| Total current assets                                                                                                                                       |       | **1,184**  |       | 1,264    |       |
| Net property, plant and equipment                                                                                                                          |       | **4,245**  |       | 4,638    |       |
| Timberland, less timber depletion                                                                                                                          |       | **44**     |       | 44       |       |
| Goodwill                                                                                                                                                   |       | **3,309**  |       | 3,301    |       |
| Other assets                                                                                                                                               |       | **332**    |       | 336      |       |
| ** **                                                                                                                                                 |       | **$**      | **9,114**  |     | $          | 9,583 |   |
| **Liabilities and Stockholders’ Equity**                                                                                                              |       |       |       |     |       |
|                                                                                                                                                       |       |       |       |     |       |
| Current liabilities                                                                                                                                        |       |       |       |     |       |
| Current maturities of long-term debt                                                                                                                       |       | **$**      | **35**     |     | $          | 19 |   |
| Accounts payable                                                                                                                                           |       | **654**    |       | 604      |       |
| Accrued compensation and payroll taxes                                                                                                                     |       | **186**    |       | 191      |       |
| Interest payable                                                                                                                                           |       | **97**     |       | 95       |       |
| Income taxes payable                                                                                                                                       | ** ** | **17**     |       |     |       |
| Current deferred taxes                                                                                                                                     | ** ** | **15**     |       |     |       |
| Other current liabilities                                                                                                                                  |       | **184**    |       | 207      |       |
| Total current liabilities                                                                                                                                  |       | **1,188**  |       | 1,116    |       |
| Long-term debt, less current maturities                                                                                                                    |       | **4,536**  |       | 4,479    |       |
| Other long-term liabilities                                                                                                                                |       | **1,123**  |       | 1,048    |       |
| Deferred income taxes                                                                                                                                      |       | **385**    |       | 681      |       |
| Stockholders’ equity                                                                                                                                  |       |       |       |     |       |
| Preferred stock, aggregate liquidation  preference of $116; 25,000,000 shares authorized; 4,599,300 issued and  outstanding                                |       | **89**     |       | 85       |       |
| Common stock, par value $.01 per share;  400,000,000 shares authorized, 254,652,321 and 254,238,645 issued and outstanding  in 2005 and 2004, respectively | ** ** | **3**      |       | 3        |       |
| Additional paid-in capital                                                                                                                                 |       | **4,020**  |       | 3,999    |       |
| Unamortized restricted stock                                                                                                                               | ** ** | **(11**    | **)**      | (7       | )          |
| Retained earnings (deficit)                                                                                                                                |       | **(1,846** | **)**      | (1,507   | )          |
| Accumulated other comprehensive income  (loss)                                                                                                             |       | **(373**   | **)**      | (314     | )          |
| Total stockholders’ equity                                                                                                                            |       | **1,882**  | ** ** | 2,259    |       |
| ** **                                                                                                                                                 |       | **$**      | **9,114**  |     | $          | 9,583 |   |

 

See notes to consolidated financialstatements.

 

37

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**SMURFIT-STONE CONTAINER CORPORATION**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

 
| **Year Ended December 31, (In millions, except per share data)** | ** ** | **2005**   | ** ** | **2004**   | ** ** | **2003**   | ** ** |
|---------------------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| Net sales                                                                                                     | ** ** | **$**      | **8,396**  | ** ** | $          | 8,291      |       | $ | 7,722 |   |
| Costs and  expenses                                                                                           |       |       | ** ** |       |       |       |       |
| Cost of goods sold                                                                                            | ** ** | **7,434**  | ** ** | 7,176      |       | 6,673      |       |
| Selling and administrative expenses                                                                           | ** ** | **807**    | ** ** | 770        |       | 882        |       |
| Restructuring charges                                                                                         | ** ** | **321**    | ** ** | 16         |       | 115        |       |
| Asset impairment charge                                                                                       |       |       | ** ** | 73         |       |       |       |
| Loss (gain) on sale of assets                                                                                 | ** ** | **1**      | ** ** | (7         | )          | 5          |       |
| Income (loss) from continuing operations                                                                      | ** ** | **(167**   | **)**      | 263        |       | 47         |       |
| Other income  (expense)                                                                                       |       |       | ** ** |       |       |       |       |
| Interest expense, net                                                                                         | ** ** | **(346**   | **)**      | (343       | )          | (341       | )          |
| Loss from early extinguishment of debt                                                                        |       |       | ** ** | (11        | )          | (3         | )          |
| Other, net                                                                                                    | ** ** | **(21**    | **)**      | (18        | )          | (41        | )          |
| Loss from continuing operations before  income taxes and cumulative effect of accounting change               | ** ** | **(534**   | **)**      | (109       | )          | (338       | )          |
| Benefit from  income taxes                                                                                    | ** ** | **207**    | ** ** | 63         |       | 140        |       |
| Loss from continuing operations before  cumulative effect of accounting change                                |       | **(327**   | **)**      | (46        | )          | (198       | )          |
| Discontinued  operations                                                                                      |       |       | ** ** |       |       |       |       |
| Income from discontinued operations, net of  income tax provision of $4                                       |       |       | ** ** |       |       | 6          |       |
| Loss before cumulative effect of accounting  change                                                           | ** ** | **(327**   | **)**      | (46        | )          | (192       | )          |
| Cumulative  effect of accounting change                                                                       |       |       | ** ** |       |       |       |       |
| Asset retirement obligations, net of income  tax benefit of $3                                                |       |       | ** ** |       |       | (5         | )          |
| Net loss                                                                                                      |       | **(327**   | **)**      | (46        | )          | (197       | )          |
| Preferred  stock dividends and accretion                                                                      |       | **(12**    | **)**      | (11        | )          | (11        | )          |
| Net loss available to common stockholders                                                                     |       | **$**      | **(339**   | **)**      | $          | (57        | )          | $ | (208) |   |
|                                                                                                          |       |       | ** ** |       |       |       |       |
| **Basic  and diluted earnings per common share**                                                              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Loss from continuing operations before  cumulative effect of accounting change                                | ** ** | **$**      | **(1.33**  | **)**      | $          | (.23       | )          | $ | (.85 | ) |
| Discontinued operations                                                                                       |       |       | ** ** |       |       | .02        |       |
| Cumulative effect of accounting change                                                                        |       |       | ** ** |       |       | (.02       | )          |
| Net loss available to common stockholders                                                                     | ** ** | **$**      | **(1.33**  | **)**      | $          | (.23       | )          | $ | (.85 | ) |
| Weighted  average shares outstanding                                                                          | ** ** | **255**    | ** ** | 253        |       | 246        |       |

 

See notes to consolidated financialstatements.

 

38

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**SMURFIT-STONECONTAINER CORPORATION**

**CONSOLIDATED STATEMENTS OF STOCKHOLDERS’EQUITY**

 
| **(In  millions, except share data)**                                   | ** ** | **Common Stock**      | ** **             | **Preferred Stock** | ** ** | **Additional  Paid-In  Capital** | ** **    | **Unamortized  Restricted  Stock** | ** ** | **Retained  Earnings  (Deficit)** | ** ** | **Accumulated  Other  Comprehensive  Income (Loss)** | ** ** | **Total**  | ** ** |
|-------------------------------------------------------------------------|------------|-----------------------|------------------------|---------------------|------------|----------------------------------|---------------|------------------------------------|------------|-----------------------------------|------------|------------------------------------------------------|------------|------------|------------|
| **Number  of  Shares**                                                  | ** ** | **Par  Value,  $.01** | **Number  of  Shares** | ** **          | **Amount** |
|                                                                    |       |                  |                   |                |       |                             |          |                               |       |                              |       |                                                 |       |       |       |   |   |   |   |
| **Balance at January 1, 2003**                                          |       | 244,578,449           |                   | $                   | 2          |                             | 4,599,300     |                               | $          | 79                                |       | $                                                    | 3,845      |       | $          | (1 | ) | $ | (1,242 | ) | $ | (363 | ) | $ | 2,320 |   |
| Comprehensive income (loss)                                             |       |                  |                   |                |       |                             |          |                               |       |                              |       |                                                 |       |       |       |   |   |   |   |
| Net loss                                                                |       |                  |                   |                |       |                             |          |                               |       |                              |       |                                                 |       | (197       | )          |   |   | (197 | ) |
| Other  comprehensive income (loss)                                      |       |                  |                   |                |       |                             |          |                               |       |                              |       |                                                 |       |       |       |   |   |   |   |
| Deferred hedge  gain, net of tax of $0                                  |       |                  |                   |                |       |                             |          |                               |       |                              |       |                                                 |       |       |       | 1 |   | 1 |   |
| Foreign currency  translation adjustment, net of tax expense of $13     |       |                  |                   |                |       |                             |          |                               |       |                              |       |                                                 |       |       |       | 23 |   | 23 |   |
| Minimum pension  liability adjustment, net of tax expense of $32        |       |                  |                   |                |       |                             |          |                               |       |                              |       |                                                 |       |       |       | 50 |   | 50 |   |
| Comprehensive  income (loss)                                            |       |                  |                   |                |       |                             |          |                               |       |                              |       |                                                 |       |       |       |   |   | (123 | ) |
| Issuance of  common stock under stock option and restricted stock plans |       | 5,969,263             |                   | 1                   |       |                             |          |                               |       | 81                                |       | (1                                                   | )          |       |       |   |   | 81 |   |
| Preferred stock dividends and accretion                                 |       |                  |                   |                |       |                             |          | 3                                  |       |                              |       |                                                 |       | (11        | )          |   |   | (8 | ) |
| **Balance at December 31, 2003**                                        |       | 250,547,712           |                   | 3                   |       | 4,599,300                        |          | 82                                 |       | 3,926                             |       | (2                                                   | )          | (1,450     | )          | (289 | ) | 2,270 |   |
| Comprehensive income (loss)                                             |       |                  |                   |                |       |                             |          |                               |       |                              |       |                                                 |       |       |       |   |   |   |   |
| Net loss                                                                |       |                  |                   |                |       |                             |          |                               |       |                              |       |                                                 |       | (46        | )          |   |   | (46 | ) |
| Other  comprehensive income (loss)                                      |       |                  |                   |                |       |                             |          |                               |       |                              |       |                                                 |       |       |       |   |   |   |   |
| Deferred hedge  loss, net of tax benefit of $4                          |       |                  |                   |                |       |                             |          |                               |       |                              |       |                                                 |       |       |       | (7 | ) | (7 | ) |
| Foreign currency  translation adjustment, net of tax benefit of $2      |       |                  |                   |                |       |                             |          |                               |       |                              |       |                                                 |       |       |       | (4 | ) | (4 | ) |
| Minimum pension  liability adjustment, net of tax benefit of $7         |       |                  |                   |                |       |                             |          |                               |       |                              |       |                                                 |       |       |       | (14 | ) | (14 | ) |
| Comprehensive  income (loss)                                            |       |                  |                   |                |       |                             |          |                               |       |                              |       |                                                 |       |       |       |   |   | (71 | ) |
| Issuance of  common stock under stock option and restricted stock plans |       | 3,690,933             |                   |                |       |                             |          |                               |       | 73                                |       | (7                                                   | )          |       |       |   |   | 66 |   |
| Amortization of restricted stock                                        |       |                  |                   |                |       |                             |          |                               |       |                              |       | 2                                                    |       |       |       |   |   | 2 |   |
| Preferred stock dividends and accretion                                 |       |                  |                   |                |       |                             |          | 3                                  |       |                              |       |                                                 |       | (11        | )          |   |   | (8 | ) |
| **Balance at December 31, 2004**                                        |       | 254,238,645           |                   | 3                   |       | 4,599,300                        |          | 85                                 |       | 3,999                             |       | (7                                                   | )          | (1,507     | )          | (314 | ) | 2,259 |   |
| Comprehensive income (loss)                                             |       |                  |                   |                |       |                             |          |                               |       |                              |       |                                                 |       |       |       |   |   |   |   |
| Net loss                                                                | ** ** | ** **            | ** **             | ** **          |       |                             |          |                               |       |                              |       |                                                 |       | **(327**   | **)**      |   |   | **(327** | **)** |
| Other  comprehensive income (loss)                                      |       |                  |                   |                |       |                             |          |                               |       |                              |       |                                                 |       |       |       |   |   |   | ** ** |
| Deferred hedge  gain, net of tax expense of $18                         | ** ** | ** **            | ** **             | ** **          |       |                             |          |                               |       |                              |       |                                                 |       |       |       | **29** | ** ** | **29** | ** ** |
| Foreign currency  translation adjustment, net of tax benefit of $4      | ** ** | ** **            | ** **             | ** **          |       |                             |          |                               |       |                              |       |                                                 |       |       |       | **(7** | **)** | **(7** | **)** |
| Minimum pension  liability adjustment, net of tax benefit of $44        | ** ** | ** **            | ** **             | ** **          |       |                             |          |                               |       |                              |       |                                                 |       |       |       | **(81** | **)** | **(81** | **)** |
| Comprehensive  income (loss)                                            | ** ** | ** **            |                   |                |       |                             |          |                               |       |                              |       |                                                 |       |       |       | ** ** |   | **(386** | **)** |
| Issuance of  common stock under stock option and restricted stock plans | ** ** | **413,676**           | ** **             | ** **          | ** ** | ** **                       | ** **    | ** **                         |       | **21**                            | ** ** | **(9**                                               | **)**      | ** ** |       |   |   | **12** | ** ** |
| Amortization of restricted stock                                        | ** ** | ** **            | ** **             | ** **          |       |                             |          |                               |       |                              |       | **5**                                                |       |       |       |   |   | **5** | ** ** |
| Preferred stock dividends and accretion                                 | ** ** | ** **            | ** **             | ** **          | ** ** | ** **                       |          | **4**                              | ** ** | ** **                        | ** ** | ** **                                           |       | **(12**    | **)**      | ** ** |   | **(8** | **)** |
| **Balance at December 31, 2005**                                        | ** ** | **254,652,321**       | ** **             | **$**               | **3**      | ** **                       | **4,599,300** | ** **                         | **$**      | **89**                            | ** ** | **$**                                                | **4,020**  | ** ** | **$**      | **(11** | **)** | **$** | **(1,846** | **)** | **$** | **(373** | **)** | **$** | **1,882** | ** ** |

 

See notes to consolidated financialstatements.

 

39

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**SMURFIT-STONE CONTAINER CORPORATION**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

 
| **Year Ended December 31, (In millions)**                           | ** ** | **2005** | ** ** | **2004**   | ** ** | **2003** | ** ** |
|----------------------------------------------------------------------------------------------|------------|----------|------------|------------|------------|----------|------------|
| **Cash flows from operating activities**                                                     |       |     |       |       |       |     |       |
| Net loss                                                                                     |       | **$**    | **(327**   | **)**      | $          | (46      | )          | $ | (197 | ) |
| Adjustments to reconcile net loss to net  cash provided by operating activities              |       |     | ** ** |       |       |     |       |
| Loss from early extinguishment of debt                                                       |       |     | ** ** | 11         |       | 3        |       |
| Cumulative effect of accounting change for  asset retirement obligations                     |       |     | ** ** |       |       | 8        |       |
| Depreciation, depletion and amortization                                                     |       | **408**  | ** ** | 416        |       | 415      |       |
| Amortization of deferred debt issuance  costs                                                |       | **9**    | ** ** | 11         |       | 10       |       |
| Deferred income taxes                                                                        |       | **(233** | **)**      | (80        | )          | (203     | )          |
| Non-cash impairment and restructuring  charges                                               | ** ** | **267**  | ** ** | 80         |       | 85       |       |
| Pension and postretirement benefits                                                          |       | **(44**  | **)**      | (48        | )          | (62      | )          |
| Non-cash foreign currency losses                                                             |       | **9**    | ** ** | 22         |       | 50       |       |
| Change in current assets and liabilities, net  of effects from acquisitions and dispositions |       |     | ** ** |       |       |     |       |
| Receivables                                                                                  |       | **48**   | ** ** | (99        | )          | 82       |       |
| Inventories                                                                                  |       | **39**   | ** ** | (50        | )          | 31       |       |
| Prepaid expenses and other current assets                                                    |       | **5**    | ** ** | (18        | )          | 1        |       |
| Accounts payable and accrued liabilities                                                     |       | **28**   | ** ** | 64         |       | (69      | )          |
| Interest payable                                                                             |       | **3**    | ** ** | (4         | )          | (2       | )          |
| Income tax benefit on exercise of employee  stock options                                    |       |     | ** ** | 8          | ** ** | 7        |       |
| Other, net                                                                                   |       | **9**    | ** ** | 6          |       | 3        |       |
| Net cash provided by operating activities                                                    |       | **221**  | ** ** | 273        |       | 162      |       |
| **Cash flows from investing activities**                                                     |       |     | ** ** |       |       |     |       |
| Expenditures for property, plant and  equipment                                              |       | **(276** | **)**      | (219       | )          | (212     | )          |
| Proceeds from property and timberland  disposals and sale of businesses                      | ** ** | **8**    | ** ** | 32         |       | 253      |       |
| Payments on acquisitions, net of cash  received                                              | ** ** | **(9**   | **)**      | (13        | )          | (26      | )          |
| Net cash provided by (used for) investing  activities                                        |       | **(277** | **)**      | (200       | )          | 15       |       |
| **Cash flows from financing activities**                                                     |       |     | ** ** |       |       |     |       |
| Proceeds from long-term debt                                                                 |       | **162**  | ** ** | 1,480      |       | 300      |       |
| Net repayments of debt                                                                       |       | **(93**  | **)**      | (1,615     | )          | (502     | )          |
| Net repayments under accounts receivable  securitization programs                            |       |     |       | (177       | )          | (10      | )          |
| Net proceeds from sale of receivables                                                        |       |     | ** ** | 203        |       |     |       |
| Preferred dividends paid                                                                     | ** ** | **(8**   | **)**      | (8         | )          | (8       | )          |
| Proceeds from exercise of stock options                                                      | ** ** | **1**    | ** ** | 54         |       | 57       |       |
| Deferred debt issuance costs                                                                 |       | **(7**   | **)**      | (16        | )          | (8       | )          |
| Net cash provided by (used for) financing  activities                                        |       | **55**   | ** ** | (79        | )          | (171     | )          |
|                                                                                         |       |     | ** ** |       |       |     |       |
| Effect of exchange rate changes on cash                                                      |       |     | ** ** |       |       | (2       | )          |
| **Increase (decrease) in cash and cash  equivalents**** **                              |       | **(1**   | **)**      | (6         | )          | 4        |       |
| Cash and cash equivalents                                                                    |       |     | ** ** |       |       |     |       |
| Beginning of year                                                                            |       | **6**    | ** ** | 12         |       | 8        |       |
| End of year                                                                                  |       | **$**    | **5**      | ** ** | $          | 6        |       | $ | 12 |   |

 

See notes to consolidated financialstatements.

 

40

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**SMURFIT-STONE CONTAINERCORPORATION**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

(Tabular amounts in millions, except sharedata)

 

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

 

**Basis of Presentation:**  Smurfit-Stone ContainerCorporation (“SSCC” or the “Company”) is a holding company that owns 100% ofthe equity interest in Smurfit-Stone Container Enterprises, Inc. (“SSCE”).The Company has no operations other than its investment in SSCE.

 

Priorto November 1, 2004, SSCC owned 100% of the equity interest in JSCE, Inc.(“JSCE”) and Stone Container Corporation (“Stone”). JSCE owned 100% of theequity interest in Jefferson Smurfit Corporation (U.S.) (“JSC(U.S.)”) and wasthe guarantor of the senior unsecured indebtedness of JSC(U.S.). JSCE had nooperations other than its investment in JSC(U.S.). On November 1, 2004,JSCE merged with and into JSC(U.S.), with JSC(U.S.) as the surviving company,and then JSC(U.S.) merged with and into Stone, with Stone as the survivingcompany (the “Merger”), principally to consolidate debt financing activities ofthe Company and its subsidiaries. Stone was simultaneously renamed SSCE. Stoneand JSC(U.S.) were wholly-owned subsidiaries of SSCC and, therefore, the Mergerdoes not impact SSCC’s consolidated financial statements. The Merger did notimpact the operating activities of the merged companies which continue to dobusiness as SSCC.

 

**Nature of Operations:**  The Company’s major operationsare containerboard and corrugated containers, consumer packaging and reclamation.The Company’s paperboard mills procure virgin and reclaimed fiber and producepaperboard for conversion into corrugated containers, folding cartons and bagsat Company-owned facilities and third-party converting operations. The Companyalso provides single source full service merchandising solutions to retailersand consumer packaging companies. Paper product customers represent a diverserange of industries including paperboard packaging and a broad range ofmanufacturers of consumer goods. Recycling operations collect or brokerwastepaper for sale to Company-owned and third-party paper mills. Customers andoperations are located principally in North America.

 

**Principles of Consolidation:**  The consolidated financialstatements include the accounts of the Company and majority-owned andcontrolled subsidiaries. Investments in non-majority owned affiliates areaccounted for using the equity method. Significant intercompany accounts andtransactions are eliminated in consolidation.

 

**Cash and Cash Equivalents:**  The Company considers allhighly liquid investments with an original maturity of three months or less tobe cash equivalents.

 

**Revenue Recognition:**  The Company recognizes revenueat the time persuasive evidence of an agreement exists, price is fixed anddeterminable, title passes to external customers and collectibility isreasonably assured. Shipping and handling costs are included in cost of goodssold.

 

**Receivables, Less Allowances:**  Credit is extended to customersbased on an evaluation of their financial condition. The Company evaluates thecollectibility of accounts receivable on a case-by-case basis and makesadjustments to the bad debt reserve for expected losses, considering suchthings as ability to pay, bankruptcy, credit ratings and payment history. TheCompany also estimates reserves for bad debts based on historical experienceand past due status of the accounts.

 

**Inventories:**  Inventories are valued at the lower of costor market under the last-in, first-out (“LIFO”) method, except for $337 millionin 2005 and $351 million in 2004, which are valued at the lower of average costor market. First-in, first-out (“FIFO”) costs (which approximate replacementcosts) exceed the LIFO value by $123 million and $94 million at December 31,2005 and 2004, respectively.

 

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**Net Property, Plant and Equipment:** Property, plant and equipment are carried at cost. The costs ofadditions, improvements and major replacements are capitalized, whilemaintenance and repairs are charged to expense as incurred. Provisions fordepreciation and amortization are made using straight-line rates over theestimated useful lives of the related assets and the shorter of useful lives orterms of the applicable leases for leasehold improvements. Papermill machineshave been assigned a useful life of 18 to 23 years, while major convertingequipment and folding carton presses have been assigned useful lives rangingfrom 12 to 20 years (See Note 6).

 

**Timberland, Less Timber Depletion:** Timberland is stated at cost less accumulated cost of timber harvested. Theportion of the costs of timberland attributed to standing timber is chargedagainst income as timber is cut, at rates determined annually, based on therelationship of unamortized timber costs to the estimated volume of recoverabletimber. The costs of seedlings and reforestation of timberland are capitalized.

 

**Goodwill and Other Intangible Assets:**  Goodwilland other intangible assets with indefinite lives are no longer amortized, butinstead are reviewed annually or more frequently, if impairment indicatorsarise. For purposes of measuring goodwill impairment, the Company’s reportingunits are its business segments. Other intangible assets represent the fairvalue of identifiable intangible assets acquired in purchase businesscombinations. Other intangible assets are amortized over their expected usefullife, unless the assets are deemed to have an indefinite life. Other intangibleassets are included in other assets in the Company’s consolidated balance sheets(See Note 20).

 

**Deferred Debt Issuance Costs and Losses From Extinguishment of Debt:** Deferred debt issuance costs included in other assets are amortized overthe terms of the respective debt obligations using the interest method. TheCompany records losses due to early extinguishment of debt as a component ofincome (loss) from continuing operations.

 

**Long-Lived Assets:**  Long-lived assets held and usedby the Company are reviewed for impairment when events or changes incircumstances indicate that their carrying amount may not be recoverable. Circumstanceswhich could trigger a review include, but are not limited to:  significant decreases in the market price ofthe asset; significant adverse changes in the business climate or legalfactors; accumulation of costs significantly in excess of the amount originallyexpected for the acquisition or construction of the asset; current period cashflow or operating losses combined with a history of losses or a forecast ofcontinuing losses associated with the use of the asset; and current expectationthat the asset will more likely than not be sold or disposed of significantlybefore the end of its estimated useful life.

 

Recoverabilityis assessed based on the carrying amount of the asset compared to the sum ofthe undiscounted cash flows expected to result from the use and the eventualdisposal of the asset, as well as specific appraisal in certain instances. Animpairment loss is recognized when the carrying amount is not recoverable andexceeds fair value (See Note 5).

 

Acomponent of the Company is classified as a discontinued operation if theoperations and cash flows of the component will be (or have been) eliminatedfrom the ongoing operations of the Company.

 

**Income Taxes:**  The Company accounts for income taxes inaccordance with the liability method of accounting for income taxes. Under theliability method, deferred assets and liabilities are recognized based uponanticipated future tax consequences attributable to differences betweenfinancial statement carrying amounts of assets and liabilities and theirrespective tax bases (See Note 13).

 

**Foreign Currency Translation:**  The functional currency for Canadianoperations is the U.S. dollar. Fluctuations in Canadian dollar monetary assetsand liabilities result in gains or losses which are credited or charged toincome. Foreign currency transactional gains or losses are also credited orcharged to income.

 

42

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TheCompany’s remaining foreign operations’ functional currency is the applicablelocal currency. Assets and liabilities for these foreign operations aretranslated at the exchange rate in effect at the balance sheet date, and incomeand expenses are translated at average exchange rates prevailing during theyear. Translation gains or losses are included within stockholders’ equity as part ofaccumulated other comprehensive income (loss) (“OCI”) (See Note 18).

 

**Derivatives and Hedging Activities:**  TheCompany recognizes all derivatives on the balance sheet at fair value. Derivativesnot qualifying for hedge accounting are adjusted to fair value through income. Derivativesqualifying for hedge accounting are recognized in OCI until the hedged item isrecognized in earnings. Hedges related to anticipated transactions aredesignated and documented at hedge inception as cash flow hedges and evaluatedfor hedge effectiveness quarterly (See Note 9).

 

**Transfers of Financial Assets:**  Certain financial assets are transferredto qualifying special-purpose entities and variable interest entities where theCompany is not the primary beneficiary. The assets and liabilities of suchentities are not reflected in the consolidated financial statements of theCompany. Gains or losses on sale of financial assets depend in part on theprevious carrying amount of the financial assets involved in the transfer,allocated between the assets sold and the retained interests based on theirrelative fair value at the date of transfer. Quoted market prices are notavailable for retained interests, so the Company estimates fair value based onthe present value of expected cash flows estimated by using management’s bestestimates of key assumptions (See Note 7).

 

**Stock-Based Compensation:**  At December 31, 2005, theCompany has stock-based employee compensation plans, including stock optionsand restricted stock units (“RSUs”) (See Note 16).

 

Stock Options:  In the second quarter of 2003, the Companyadopted the fair value recognition provisions of Statement of FinancialAccounting Standards (“SFAS”) No. 123, “Accounting for Stock-BasedCompensation,” effective as of January 1, 2003. The Company selected theprospective transition method as allowed in SFAS No. 148, “Accounting forStock-Based Compensation-Transition and Disclosure,” which requires expensingoptions prospectively, beginning in the year of adoption. Because theprospective method was used and awards vest over three to eight years, the 2003,2004 and 2005 expense is less than what would have been recognized if the fairvalue based method had been applied to all awards since the original effectivedate of SFAS No. 123.

 

Thefollowing table illustrates the effect on net loss and earnings per share ifthe fair value based method had been applied to all outstanding and unvestedawards in each period.

 
| ** **                                                                                                                                    | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Net loss available to common stockholders,  as reported                                                                                       | ** ** | **$**    | **(339**   | **)**    | $          | (57      | )          | $ | (208 | ) |
| Add:  Stock-based employee compensation expense included in reported net loss, net  of related tax effects                                    | ** ** | **7**    | ** ** | 6        |       | 2        |       |
| Deduct:  Total stock-based employee compensation expense determined under fair value  based method for all awards, net of related tax effects | ** ** | **(12**  | **)**      | (15      | )          | (13      | )          |
|                                                                                                                                          |       |     | ** ** |     |       |     |       |
| Pro forma net loss available to common  stockholders                                                                                          | ** ** | **$**    | **(344**   | **)**    | $          | (66      | )          | $ | (219 | ) |
|                                                                                                                                          |       |     | ** ** |     |       |     |       |
| Earnings per share:                                                                                                                           |       |     | ** ** |     |       |     |       |
| Basic and  diluted – as reported                                                                                                         | ** ** | **$**    | **(1.33**  | **)**    | $          | (.23     | )          | $ | (.85 | ) |
| Basic and  diluted – pro forma                                                                                                           | ** ** | **$**    | **(1.35**  | **)**    | $          | (.26     | )          | $ | (.89 | ) |

 

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RSUs:  Amounts earned under the Company’s annualmanagement incentive plan, which are deferred and paid in the form ofRSUs, immediately vest and are expensed by the Company in the year earned. RSUsrelated to the Company matching program and non-vested RSUs are expensed overthe vesting period. When non-vested RSUs are issued, unamortized restrictedstock compensation is recorded as a reduction of stockholders’ equity.

 

SFAS No. 123(R), “Share-Based Payment”:  In December 2004,the FASB issued SFAS No. 123(R), effective January 1, 2006, which isa revision of SFAS No. 123. SFAS No. 123(R) requires all share-basedpayments to employees, including grants of employee stock options, to berecognized in the financial statements based on their fair values. Currently,the Company uses the Black-Scholes formula to estimate the value of stockoptions granted to employees and may continue to use this acceptableoption valuation model in 2006.

 

On January 1, 2006, theCompany adopted SFAS No. 123(R) under the modified prospective method inwhich the requirements of SFAS No. 123(R) must be applied to new awardsand to previously granted awards that are not fully vested on the effectivedate, but does not restate previous years’ financial statements. Since theCompany adopted SFAS No. 123 using the prospective transition method(which applied only to awards granted, modified or settled beginning January 1,2003), compensation cost for some previously granted awards that were not expensedunder SFAS No. 123 will be recognized under SFAS No. 123(R). However,had the Company adopted SFAS No. 123(R) in prior periods, the impact ofthat standard using the Black-Scholes formula, would have approximated theimpact of SFAS No. 123 as described in the disclosure of pro forma netloss and earnings per share disclosed under the “Stock Options” section ofthis note.

 

Stock options and RSUsissued under the Company’s long-term incentive plans through December 31,2005 allowed for immediate vesting and exercisability in the event ofretirement. The Company has recognized compensation expense over the explicitservice period (up to the date of actual retirement) using a straight-linemethod and will continue this method for awards granted prior to the adoptionof SFAS No. 123(R).

 

For stock options and RSUs grantedsubsequent to the adoption of SFAS No. 123(R) on January 1, 2006, thecompensation expense for employees that become eligible to retire must berecognized over the period from date of grant through the date that theemployee first becomes eligible to retire and is no longer required to provideservice to earn the award. The following table illustrates the effect onpro-forma net loss available to common stockholders and earnings per share ifthe retiree-eligible compensation costs acceleration requirements had beenapplied to all outstanding and unvested awards in each period:

 
| ** **                                                                                                                     | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Pro forma  net loss available to common stockholders                                                                           | ** ** | **$**    | **(344**   | **)**    | $          | (66      | )          | $ | (219 | ) |
|                                                                                                                           |       |     | ** ** |     |       |     |       |
| Adjustment  due to acceleration of retiree-eligible compensation costs, net of tax                                             | ** ** | **2**    | ** ** | 5        |       | 1        |       |
|                                                                                                                           |       |     | ** ** |     |       |     |       |
| Pro forma  net loss available to common stockholders after adjustment for acceleration  of retiree-eligible compensation costs | ** ** | **$**    | **(342**   | **)**    | $          | (61      | )          | $ | (218 | ) |
|                                                                                                                           |       |     | ** ** |     |       |     |       |
| Earnings per  share:                                                                                                           |       |     | ** ** |     |       |     |       |
| Basic and  diluted – pro forma                                                                                            | ** ** | **$**    | **(1.35**  | **)**    | $          | (.26     | )          | $ | (.89 | ) |
| Basic and  diluted – pro forma after adjustment for acceleration of retiree-eligible  compensation costs                  | ** ** | **$**    | **(1.34**  | **)**    | $          | (.24     | )          | $ | (.88 | ) |

 

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SFASNo. 123(R) also requires the benefits of tax deductions in excess ofrecognized compensation cost to be reported as a financing cash flow, ratherthan as an operating cash flow as required under current literature. Thisrequirement will reduce net operating cash flows and increase net financingcash flows in periods after adoption. While the Company cannot estimate whatthose amounts will be in the future (because they depend on, among otherthings, when employees exercise stock options), the amounts of operating cashflows recognized in prior periods for such excess tax deductions were zero, $8million and $7 million in 2005, 2004 and 2003, respectively.

 

**Environmental Matters:**  The Company expensesenvironmental expenditures related to existing conditions resulting from pastor current operations from which no current or future benefit is discernible. Expendituresthat extend the life of the related property or mitigate or prevent futureenvironmental contamination are capitalized. The Company records a liability atthe time when it is probable and can be reasonably estimated. Such liabilitiesare not discounted or reduced for potential recoveries from insurance carriers.

 

**Asset Retirement Obligations:**  Effective January 1, 2003,the Company adopted SFAS No. 143, “Accounting for Asset RetirementObligations.”  SFAS No. 143establishes accounting standards for the recognition and measurement of anasset retirement obligation and its associated asset retirement cost. It alsoprovides accounting guidance for legal obligations associated with theretirement of tangible long-lived assets. The Company’s asset retirementobligations relate primarily to environmental requirements upon closure of anoperating facility. Certain of the Company’s facilities have indeterminatelives because they are expected to remain in operation for the foreseeablefuture. Consequently, the asset retirement obligations related to thesefacilities cannot be reasonably estimated and therefore, no obligation has beenrecognized (See Note 12).

 

**Restructuring:**  Costs associated with exit or disposalactivities are generally recognized when they are incurred rather than at thedate of a commitment to an exit or disposal plan (See Note 2).

 

**Guarantees:**  Effective January 1, 2003, the Companyadopted Financial Accounting Standards Board (“FASB”) Interpretation No. 45,“Guarantor’s Accounting and Disclosure Requirements for Guarantees, IncludingIndirect Guarantees of Indebtedness of Others,” which clarifies and expands onexisting disclosure requirements for guarantees and requires the Company torecognize a liability for the fair value of its obligations under thatguarantee. The initial measurement and recognition provisions are prospectivefor guarantees issued after December 31, 2002. Disclosure requirements areeffective for all guarantees (See Note 11).

 

**Use of Estimates:**  The preparation of financialstatements in conformity with U.S. generally accepted accounting principlesrequires management to make estimates and assumptions that affect the reportedamounts of assets and liabilities and disclosure of contingent assets andliabilities at the date of the financial statements and the reported amounts ofrevenues and expenses during the reporting period. Actual results could differfrom those estimates.

 

**Reclassifications:**  Certain reclassifications ofprior year presentations have been made to conform to the 2005 presentation.

 

**Prospective Accounting Pronouncements: **In November 2004,the FASB issued SFAS No. 151, “Inventory Costs,” effective January 1,2006. SFAS No. 151 requires abnormal amounts of idle facility expense,freight, handling costs and wasted materials to be recognized as current periodcharges. In addition, SFAS No. 151 requires allocation of fixed productionoverheads to the costs of conversion be based on the normal capacity of the productionfacilities. The impact of this standard is not expected to be material.

 

InSeptember 2005, the Emerging Issues Task Force (“EITF”) reached aconsensus on Issue No. 04-13, “Accounting for Purchases and Sales ofInventory With the Same Counterparty,” (“EITF 04-13”) effective April 1,2006, for new arrangements and modifications or renewals of existingarrangements. EITF 04-13 requires certain inventory exchange transactionsbetween counterparties within the same line of business

 

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tobe viewed as a single exchange transaction. The Company is currently evaluatingthe impact of EITF 04-13.

 

**2.****             ****Strategic Initiatives and RestructuringActivities**

 

**Overview**

 

For2005, the Company recorded a net loss of $327 million due principally to lowerdemand for its containerboard products, higher costs for energy, freight andwood fiber, and restructuring costs. Because of the weak operating results andthe current market trends, the Company initiated a strategic reassessmentduring 2005. The resulting plan, including initiatives for cost reduction andrevenue growth, as well as strategic options being evaluated for the ConsumerPackaging segment are discussed below.

 

Asa result of the losses in 2005, the Company and its lender group amended theCredit Agreement during 2005 to ease certain financial covenant requirements asof September 30, 2005, and for the periods ended December 31, 2005through September 30, 2007. The Credit Agreement and amendments are morefully described in Note 8.

 

AtDecember 31, 2005, the Company was in compliance with the revisedfinancial covenants required by the Credit Agreement. The Company expects toremain in compliance with the financial covenants during 2006 by achieving its2006 financial plan, which includes realizing higher sales prices oncontainerboard and corrugated containers and successfully implementing certain revenuegrowth and cost reduction initiatives resulting from the strategic reassessmentplan. In addition, the Company is currently evaluating strategic options forits Consumer Packaging segment, including the possible sale of some or all ofthese businesses from which the proceeds would be used to reduce debt. If theCompany is not successful in achieving the 2006 financial plan, the Company couldpursue other alternatives to repay debt and improve liquidity including thedeferral of certain capital expenditures and discretionary benefit payments,reduction of costs and sale of assets. If the Company is not successful inachieving the 2006 financial plan, as well as the aforementioned alternatives,it may not be in compliance with the revised financial covenants and wouldseek an amendment to the Credit Agreement. Although the Company believes thatit could obtain such an amendment, failure to obtain an amendment would resultin a default under the Credit Agreement, which could result in a materialadverse impact on the Company’s financial condition.

 

**Strategic Initiatives and Restructuring Activities**

 

During2005, the Company announced a strategic repositioning plan to improveperformance and better position itself for long-term growth. The new strategyfocuses on i) cost reduction initiatives from which the Company expects toachieve $600 million in annual savings by the end of 2008, ii) revenue growthinitiatives to generate $650 million in incremental annual revenue by the endof 2008 and iii) organizational changes to enable the cost reduction andrevenue growth initiatives.

 

Toimplement these initiatives, the Company expects to incur capital expendituresof approximately $400 million from 2006 through the end of 2008, which will bein addition to its baseline annual capital spending of approximately $275million per year. The Company expects to incur approximately $90 million of theincremental capital expenditures in 2006 with the remainder to be spent in 2007and 2008. The capital expenditures will be funded by anticipated improvementsin the Company’s operating results and borrowings under the Company’s revolvingcredit facility.

 

In2005, as the first step in this cost reduction process and in order to betteralign production capacity with market conditions and demand, the Companypermanently closed the New Richmond, Quebec linerboard mill, the Bathurst, NewBrunswick medium mill and the previously idled No. 2 paper machine at theFernandina Beach, Florida linerboard mill. The Company’s containerboardmanufacturing capacity was reduced by 700,000 tons, or 8.5% as a result ofthese closures. In addition, the Company also closed two converting facilities,exited its investment in the Las Vegas, Nevada converting facility, and agreedto the closure of the Groveton, New Hampshire medium mill, in which the Companyowns a minority interest.

 

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TheCompany recorded restructuring charges of $321 million, including non-cashcharges of $263 million related to the write down of assets, primarily property,plant and equipment, to estimated net realizable values and $4 million relatedto a pension curtailment charge for terminated employees. The remaining chargeswere primarily for severance, benefits, lease commitments and post-closureenvironmental costs. These shutdowns resulted in approximately 780 employeesbeing terminated. During the next three years, to implement other planinitiatives, the Company expects to record additional restructuring charges ofapproximately $200 million, including non-cash charges of approximately $100million, related to the expected future closure of certain corrugated containerfacilities.

 

Thenet sales and operating losses of the two shutdown converting operations in2005 prior to closure were $24 million and $5 million, respectively. The netsales and operating losses of these facilities in 2004 were $28 million and $3million, respectively. The net sales and operating losses of these facilitiesin 2003 were $29 million and $3 million, respectively.

 

During2004, the Company closed ten converting facilities and exited its Indonesianoperations, resulting in restructuring charges of $16 million, net of a $5million gain from sales of three shutdown facilities. The fixed assets of theshutdown operations were adjusted to the estimated net realizable value,resulting in a $7 million non-cash write-down. The remaining charges wereprimarily severance and benefits resulting from approximately 1,000 employeesbeing terminated. The net sales and operating losses of these shutdownoperations in 2004 prior to closure were $99 million and $15 million, respectively.The net sales and operating losses of these facilities for the year ended December 31,2003 were $213 million and $11 million, respectively.

 

During2003, the Company recorded restructuring charges of $115 million. The assets ofthe shutdown operations were adjusted to the estimated net realizable value,resulting in an $85 million non-cash charge primarily related to the write-downof fixed assets at the Thunder Bay, Ontario and Philadelphia, Pennsylvaniamills. The shutdowns resulted in approximately 1,000 employees being terminated.The net sales and operating losses of these shutdown operations in 2003 priorto closure were $78 million and $10 million, respectively.

 

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Thefollowing is a summary of the restructuring liabilities recorded as part ofthe rationalization of the Company’s mill and converting operations, includingthe termination of employees and liabilities for lease commitments at theclosed facilities.

 
| ** **                        | ** ** | **Write-down of  Property,  Equipment and  Investments to  Fair Value** | ** ** | **Severance  and  Benefits** | ** ** | **Lease  Commitments** | ** ** | **Facility  Closure  Costs** | ** ** | **Other**  | ** ** | **Total**  | ** ** |
|-----------------------------------|------------|---------------------------------------------------------------------------------------------|------------|------------------------------|------------|------------------------|------------|------------------------------|------------|------------|------------|------------|------------|
| Balance at January 1, 2003   |       | $                                                                                           |       |                         | $          |                   |       | $                            | 14         |       | $          | 10         |       | $ |   |   | $ | 24 |   |
|                              |       |                                                                                        |       |                         |       |                   |       |                         |       |       |       |       |       |
| Charge                            |       | 85                                                                                          |       | 23                           |       | 1                      |       | 6                            |       |       |       | 115        |       |
| Payments                          |       |                                                                                        |       | (6                           | )          | (3                     | )          | (1                           | )          |       |       | (10        | )          |
| Non-cash  reduction               |       | (85                                                                                         | )          |                         |       |                   |       |                         |       |       |       | (85        | )          |
| Balance at December 31, 2003 |       |                                                                                        |       | 17                           |       | 12                     |       | 15                           |       |       |       | 44         |       |
|                              |       |                                                                                        |       |                         |       |                   |       |                         |       |       |       |       |       |
| Charge                            |       | 7                                                                                           |       | 11                           |       | 1                      |       | 2                            |       | (5         | )          | 16         |       |
| Payments                          |       |                                                                                        |       | (23                          | )          | (2                     | )          | (5                           | )          |       |       | (30        | )          |
| Non-cash  reduction               |       | (7                                                                                          | )          |                         |       |                   |       |                         |       |       |       | (7         | )          |
| Sale of  assets                   |       |                                                                                        |       |                         |       |                   |       |                         |       | 5          |       | 5          |       |
| Balance at December 31, 2004 |       |                                                                                        |       | 5                            |       | 11                     |       | 12                           |       |       |       | 28         |       |
|                              |       |                                                                                        |       |                         |       |                   |       |                         |       |       |       |       |       |
| Charge                            | ** ** | **263**                                                                                     | ** ** | **35**                       | ** ** | **7**                  | ** ** | **16**                       | ** ** | ** ** | ** ** | **321**    | ** ** |
| Payments                          | ** ** | ** **                                                                                  | ** ** | **(21**                      | **)**      | **(3**                 | **)**      | **(3**                       | **)**      | ** ** | ** ** | **(27**    | **)**      |
| Non-cash  reduction               | ** ** | **(263**                                                                                    | **)**      | **(4**                       | **)**      | ** **             | ** ** | **(4**                       | **)**      | ** ** | ** ** | **(271**   | **)**      |
| Balance at December 31, 2005 | ** ** | **$**                                                                                       | ** ** | **$**                        | **15**     | ** **             | **$**      | **15**                       | ** ** | **$**      | **21**     | ** ** | **$**      | ** ** | **$** | **51** | ** ** |
|                                   |            |                                                                                             |            |                              |            |                        |            |                              |            |            |            |            |            |  |  |  |  |  |  |

 

The$4 million reduction to facility closure costs in 2005 is due primarily to thereduction of the environmental exit liabilities associated with acontainerboard mill.

 

**Cash Requirements**

Futurecash outlays under the restructuring of operations are anticipated to be $33million in 2006, $6 million in 2007, $5 million in 2008 and $7 millionthereafter.

 

**3.****             ****Discontinued Operations andExchange Transaction**

 

InDecember 2002, the Company reached agreements with an affiliate ofJefferson Smurfit Group (“JS Group”), formerly SSCC’s largest stockholder, toexchange, in two separate transactions, its European packaging operations forJS Group’s 50% ownership in Smurfit-MBI, a Canadian packaging business, and apayment from JS Group of approximately $189 million. On March 31, 2003,the Company completed these exchange transactions, resulting in no additionaladjustments to the Company’s results of operations. Net sales for the Europeanoperations were $192 million for the three months ended March 31, 2003. Theresults of operations from the European operations have been reclassified asdiscontinued operations for 2003.

 

Previously,the Company owned 50% of Smurfit-MBI and, as a result of the completedtransactions, now owns 100% of Smurfit-MBI. At the time of the acquisition, Smurfit-MBIoperated 16 converting facilities in Canada and employed approximately 2,500hourly and salaried employees. The results of operations have been included inthe consolidated statements of operations after March 31, 2003.

 

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**4.****             ****Acquisitions and Mergers**

 

**Equity Affiliates**

During2005, the Company invested in four separate joint ventures for a total of $9million. The largest is an investment of $7 million in a producer of corrugatedsheets and packaging products located in China.

 

**Innovative Packaging**

InDecember 2004, the Company acquired 15% of Innovative Packaging Corp. (“IPC”),a corrugated container facility in Milwaukee, Wisconsin, for $13 million. Previously,the Company owned 85% of IPC and, as a result of the acquisition, now owns 100%.The cost to acquire the remaining 15% of IPC eliminated the Company’s minorityinterest liability of $1 million with the remaining balance of $12 million preliminarilyallocated to intangible assets. In 2005, the Company completed its allocationof the purchase price resulting in the reclassification of $8 million fromintangible assets to goodwill. The $8 million of goodwill is reflected in theContainerboard and Corrugated Containers segment.

 

**Arko**

OnMay 31, 2003, the Company acquired the operations of Arko Paper ProductsCo., Inc. (“Arko”), a folding carton producer, for $30 million. Theresults of operations have been included in the consolidated statements ofoperations after May 31, 2003. The purchase price allocation, completedduring the fourth quarter of 2003, resulted in goodwill of $12 million andintangible assets of $3 million, which have been allocated to the ConsumerPackaging segment.

 

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Thefollowing table is a summary of the remaining exit liabilities recorded as part ofacquisition and merger transactions completed in prior years.

 
| ** **                        | ** ** | **Severance** | ** ** | **Lease  Commitments** | ** ** | **Other  Commitments** | ** ** | **Facility  Closure  Costs** | ** ** | **Total**  | ** ** |
|-----------------------------------|------------|---------------|------------|------------------------|------------|------------------------|------------|------------------------------|------------|------------|------------|
| Balance at January 1, 2003   |       | $             | 5          |                   | $          | 12                     |       | $                            | 10         |       | $          | 1 |   | $ | 28 |   |
|                              |       |          |       |                   |       |                   |       |                         |       |       |       |
| Payments                          |       | (5            | )          | (1                     | )          |                   |       |                         |       | (6         | )          |
| Adjustments                       |       |          |       | (7                     | )          | (8                     | )          |                         |       | (15        | )          |
| Balance at December 31, 2003 |       |          |       | 4                      |       | 2                      |       | 1                            |       | 7          |       |
|                              |       |          |       |                   |       |                   |       |                         |       |       |       |
| Payments                          |       |          |       | (1                     | )          |                   |       | (1                           | )          | (2         | )          |
| Balance at December 31, 2004 |       |          |       | 3                      |       | 2                      |       |                         |       | 5          |       |
|                              |       |          |       |                   |       |                   |       |                         |       |       |       |
| Payments                          | ** ** | ** **    | ** ** | **(1**                 | **)**      | ** **             | ** ** | ** **                   | ** ** | **(1**     | **)**      |
| Balance at December 31, 2005 | ** ** | **$**         | ** ** | ** **             | **$**      | **2**                  | ** ** | **$**                        | **2**      | ** ** | **$**      | ** ** | ** ** | **$** | **4** | ** ** |

 

The$7 million reduction to lease commitments in 2003 is due primarily to therenegotiation of a lease contract. The $8 million reduction to othercommitments in 2003 is due primarily to the reduction of the environmental exitliabilities associated with a containerboard mill.

 

**Cash Requirements**

Futurecash outlays under the exit liabilities are anticipated to be $1 million in 2006,$1 million in 2007, $1 million in 2008 and $1 million thereafter.

 

**5.****             ****Asset Impairment Charge**

 

TheCompany recorded an asset impairment charge of $73 million in 2004 related tothe write-down of non-core pulp mill property, plant and equipment. The Companyperformed the impairment review as a result of significant operating and cashflow losses in 2004, combined with a history of losses due to a prolongedeconomic downturn affecting the pulp mill. The Company evaluated therecoverability of its long-lived assets and recorded the impairment charge basedon the amounts by which the carrying value of the assets exceeded their fairvalue. Fair value of the assets was determined based on discounted cash flowanalysis of the pulp mill’s projected operating results. No goodwill had beenassigned to the pulp mill, which is included in the Containerboard andCorrugated Containers segment.

 

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**6.****             ****Net Property, Plant and Equipment**

 

Netproperty, plant and equipment at December 31 consist of:

 
| ** **                           | ** ** | **2005**   | ** ** | **2004**   | ** ** |
|--------------------------------------|------------|------------|------------|------------|------------|
| Land and land improvements           | ** ** | **$**      | **185**    | ** ** | $          | 185 |   |
| Buildings and leasehold improvements | ** ** | **681**    | ** ** | 702        |       |
| Machinery, fixtures and equipment    | ** ** | **6,080**  | ** ** | 6,191      |       |
| Construction in progress             | ** ** | **169**    | ** ** | 126        |       |
| ** **                           |       | **7,115**  | ** ** | 7,204      |       |
| Less accumulated depreciation        | ** ** | **(2,870** | **)**      | (2,566     | )          |
| Net  property, plant and equipment   | ** ** | **$**      | **4,245**  | ** ** | $          | 4,638 |   |

 

Depreciationexpense was $404 million, $413 million and $406 million for 2005, 2004 and 2003,respectively, excluding depreciation expense related to discontinued operationsof $7 million in 2003. Property, plant and equipment include capitalized leasesof $31 million and $28 million and related accumulated amortization of $21million and $17 million at December 31, 2005 and 2004, respectively.

 

**7.****             ****Transfers of Financial Assets**

 

**Receivables Securitization Program**

 

InNovember 2004, in connection with the Merger, the Company replaced its former$265 million off-balance sheet accounts receivable securitization program with anew $475 million accounts receivable securitization program whereby the Companysells, without recourse, on an ongoing basis, certain of its accountsreceivable to Stone Receivables Corporation (“SRC”), a wholly-ownednon-consolidated subsidiary of the Company.

 

SRCtransfers the receivables to a non-consolidated subsidiary, a limited liabilitycompany which has issued notes to third-party investors. The Company hasretained servicing responsibilities and a subordinated interest in the limitedliability company. The Company receives annual servicing fees of 1% of theunpaid balance of the receivables and rights to future cash flows arising afterthe investors in the securitization limited liability company have received thereturn for which they have contracted.

 

SRC,whose legal structure and purpose have remained unchanged subsequent to theMerger, is a qualified special–purpose entity under the provisions of SFAS No. 140,“Accounting for Transfers and Servicing of Financial Assets and Extinguishmentsof Liabilities.”  Accordingly, accountsreceivable sold to SRC, for which the Company does not retain an interest, arenot included in the Company’s consolidated balance sheets.

 

AtDecember 31, 2005 and 2004, $521 million and $557 million, respectively,of accounts receivable had been sold to SRC, of which $118 million and $140 million,respectively, were retained by the Company as a subordinated interest. TheCompany’s retained interest is carried at fair value and is included in retainedinterest in receivables sold in the accompanying consolidated balance sheets. TheCompany recognized a loss on sales of receivables to SRC of $20 million and $6 millionin 2005 and 2004, respectively, which is included in other, net in theconsolidated statements of operations.

 

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Keyeconomic assumptions used in measuring the retained interest are as follows:

 
| ** **                        | ** ** | **Year Ended  December 31,  2005** | ** ** | **December 31,  2005** | ** ** | **Year Ended  December 31,  2004** | ** ** | **December 31,  2004** | ** ** |
|-----------------------------------|------------|----------------------------------------------|------------|-----------------------------|------------|----------------------------------------------|------------|-----------------------------|------------|
| Residual cash flows discounted at | ** ** | **8.00**                                     | **%**      | **8.00**                    | **%**      | 8.00                                         | %          | 8.00                        | %          |
| Expected loss and dilution rate   | ** ** | **1.96-3.35**                                | **%**      | **2.54**                    | **%**      | 2.45-4.39                                    | %          | 2.45                        | %          |
| Variable return to investors      | ** ** | **LIBOR  plus 23 to  135 basis points**      | ** ** | **4.77**                    | **%**      | LIBOR plus  23 to  135 basis points          |       | 2.78                        | %          |

 

AtDecember 31, 2005, the sensitivity of the current fair value of residualcash flows to immediate 10% and 20% adverse changes in the expected loss anddilution rate was $1 million and $3 million, respectively. The effects of thesensitivity analysis on the residual cash flow discount rate and the variablereturn to investors were insignificant.

 

Thetable below summarizes certain cash flows received from SRC:

 
| ** **                                      | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------------------------------------|------------|----------|------------|----------|------------|
| Cash proceeds from sales of receivables         | ** ** | **$**    | **5,903**  |     | $          | 3,059 |   |
| Servicing fees received                         | ** ** | **6**    |       | 3        |       |
| Other cash flows received on retained  interest | ** ** | **85**   |       | 31       |       |
|                                                 |            |          |            |          |            |  |  |

 

**MBI Securitization Program**

OnMarch 30, 2004, the Company, through Smurfit-MBI, entered into a $70million Canadian (approximately $60 million U.S. as of December 31, 2005) accountsreceivable securitization program whereby the Company sells, without recourse,on an ongoing basis, certain of its Canadian accounts receivable to a trust inwhich the Company holds a variable interest, but is not the primary beneficiary.Accordingly, under FASB Interpretation No. 46, “Consolidation of VariableInterest Entities,” accounts receivable sold to the trust, for which theCompany is not the primary beneficiary, are not included in the accompanyingconsolidated balance sheets. The Company has retained servicing responsibilitiesand a subordinated interest in future cash flows from the receivables. TheCompany receives rights to future cash flows arising after the investors in thesecuritization trust have received the return for which they have contracted.

 

Theamount available to the Company under the receivables program fluctuates basedon the amount of eligible receivables available and by the performance of thereceivables portfolio. The Company’s residual interest in the securitizationprogram is recorded at fair value and is based upon the total outstandingreceivables sold, adjusted for dilution and loss reserves of approximately 4.0%and 4.75%, at December 31, 2005 and 2004, respectively, less the amountfunded to the Company.

 

AtDecember 31, 2005 and 2004, $71 million and $67 million, respectively, ofaccounts receivable had been sold under the program, of which $21 million and $18million, respectively, were retained by the Company as a subordinated interest.The amount funded to the Company at December 31, 2005 and 2004, was $47 millionand $46 million, respectively. The Company’s retained interest is included in retainedinterest in receivables sold in the accompanying consolidated balance sheets. TheCompany recognized a loss on sales of receivables to the trust of $1 millionand $2 million in 2005 and 2004, respectively, which is included in other, netin the consolidated statements of operations.

 

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**Timberland Sale and Note Monetization**

TheCompany sold approximately 980,000 acres of owned and leased timberland inFlorida, Georgia and Alabama in October 1999. The final purchase price,after adjustments, was $710 million. The Company received $225 million in cash,with the balance of $485 million in the form of installment notes.

 

TheCompany entered into a program to monetize the installment notes receivable. Thenotes were sold without recourse to Timber Note Holdings LLC, a qualifiedspecial-purpose entity under the provisions of SFAS No. 140, for $430 millioncash proceeds and a residual interest in the notes. The transaction wasaccounted for as a sale under SFAS No. 140. The cash proceeds from thesale and monetization transactions were used to prepay borrowings under the Company’sCredit Agreement. The residual interest was $46 million and $45 million at December 31,2005 and 2004, respectively, and is included in other assets in theaccompanying consolidated balance sheets. The key economic assumption used inmeasuring the residual interest at the date of monetization was the rate atwhich the residual cash flows were discounted (9%). At December 31, 2005,the sensitivity on the current fair value of the residual cash flows toimmediate 10% and 20% adverse changes in the assumed rate at which the residualcash flows were discounted (9%) was $2 million and $3 million, respectively.

 

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**8.****             ****Long-Term Debt**

 

Long-termdebt as of December 31 is as follows:

 
| ** **                                                                                                                                                | ** ** | **2005**  | ** ** | **2004** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------|------------|----------|------------|
| **Bank  Credit Facilities**                                                                                                                               |       |      |       |     |       |
| Tranche B  Term Loan (6.7% weighted average variable rate), due in various installments  through November 1, 2011                                    | ** ** | **$**     | **878**    |     | $          | 975 |   |
| Tranche C  Term Loan (6.7% weighted average variable rate), due in various installments  through November 1, 2011                                    | ** ** | **298**   |       | 300      |       |
| Tranche C-1  Term Loan (6.6% weighted average variable rate), due in various installments  through November 1, 2011                                  | ** ** | **90**    |       |     |       |
| SSCE  revolving credit facility (7.7% weighted average variable rate), due November 1,  2009                                                         | ** ** | **98**    |       | 144      |       |
| SSC Canada  revolving credit facility (7.8% weighted average variable rate), due November 1,  2009                                                   | ** ** | **147**   |       |     |       |
| ** **                                                                                                                                                |       | **1,511** |       | 1,419    |       |
| **Senior  Notes**                                                                                                                                         |       |      |       |     |       |
| 8.45%  mortgage notes, payable in monthly installments through August 1, 2007  and $69 on September 1, 2007                                     | ** ** | **72**    |       | 74       |       |
| 9.25%  unsecured senior notes, due February 1, 2008                                                                                                  | ** ** | **300**   |       | 300      |       |
| 9.75%  unsecured senior notes, due February 1, 2011                                                                                                  | ** ** | **750**   |       | 750      |       |
| 8.375%  unsecured senior notes, due July 1, 2012                                                                                                     | ** ** | **400**   |       | 400      |       |
| 8.25%  unsecured senior notes, due October 1, 2012                                                                                                   | ** ** | **700**   |       | 700      |       |
| 7.50%  unsecured senior notes, due June 1, 2013                                                                                                      | ** ** | **300**   |       | 300      |       |
| 7.375%  unsecured senior notes, due July 15, 2014                                                                                                    | ** ** | **200**   |       | 200      |       |
| ** **                                                                                                                                                |       | **2,722** |       | 2,724    |       |
|                                                                                                                                                      |       |      |       |     |       |
| **Other  Debt**                                                                                                                                           |       |      |       |     |       |
| Fixed rate  utility systems and pollution control revenue bonds (fixed rates ranging from  5.1% to 8.1%), payable in varying annual payments through 2027 | ** ** | **193**   |       | 207      |       |
| Variable  rate industrial revenue bonds (6.3% weighted average variable rate), payable  in varying annual payments through 2035                           | ** ** | **120**   |       | 120      |       |
| Other  (including obligations under capitalized leases of $12 and $13)                                                                                    | ** ** | **25**    |       | 28       |       |
| ** **                                                                                                                                                |       | **338**   |       | 355      |       |
| Total debt                                                                                                                                                | ** ** | **4,571** |       | 4,498    |       |
| Less current  maturities                                                                                                                                  | ** ** | **(35**   | **)**      | (19      | )          |
| **Total  long-term debt**                                                                                                                                 | ** ** | **$**     | **4,536**  |     | $          | 4,479 |   |

 

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Theamounts of total debt outstanding at December 31, 2005 maturing during thenext five years are as follows:

 
| 2006       |   | $     | 35     |   |
|------------|--------|-------|--------|--------|
| 2007       |   | 89    |   |
| 2008       |   | 317   |   |
| 2009       |   | 264   |   |
| 2010       |   | 135   |   |
| Thereafter |   | 3,731 |   |

 

**Bank Credit Facilities**

Inconnection with the Merger, the Company, as guarantor, and SSCE and itssubsidiary, Smurfit-Stone Container Canada Inc. (“SSC Canada”), as borrowers,entered into a new credit agreement (the “Credit Agreement”) on November 1,2004. The Credit Agreement, which refinanced and replaced SSCC’s former creditagreements in their entirety, provided for (i) a revolving credit facilityof $600 million to SSCE, of which $98 million was borrowed as of December 31,2005 and (ii) a revolving credit facility of $200 million to SSCE and SSCCanada, of which $147 million was borrowed as of December 31, 2005. The revolvingcredit facilities include sub-limits for the issuance of letters of credit andswingline loans. The Company pays a 0.5% commitment fee on the unused portionsof its revolving credit facilities. At December 31, 2005, the unusedportion of these facilities, after giving consideration to outstanding lettersof credit, was $439 million subject to limitations in the Credit Agreementdescribed below. Each of these revolving credit facilities mature on November 1,2009. The Credit Agreement also provided for a Tranche B term loan to SSCE inthe aggregate principal amount of $975 million and a Tranche C term loan to SSCCanada in the aggregate principal amount of $300 million, with outstandingbalances of $878 million and $298 million, respectively, at December 31,2005. The term loans are payable in quarterly installments beginning April 1,2005 and mature on November 1, 2011. In addition, the Credit Agreementprovides for a deposit funded letter of credit facility, related to thevariable rate industrial revenue bonds, for approximately $122 million thatmatures on November 1, 2010.

 

SSCEused the proceeds of the Credit Agreement, including $179 million under itsrevolving credit facility, along with $19 million available cash to repay alloutstanding obligations under the former credit facilities and to pay fees andother expenses of approximately $11 million related to this transaction. A lossof $12 million was recorded in 2004 due to the early extinguishment of debt.

 

Theobligations of SSCE under the Credit Agreement are unconditionally guaranteedby the Company and the material U.S. subsidiaries of SSCE. The obligations ofSSC Canada under the Credit Agreement are unconditionally guaranteed by theCompany, SSCE, the material U.S. subsidiaries of SSCE and the material Canadiansubsidiaries of SSC Canada. The obligations of SSCE under the Credit Agreementare secured by a security interest in substantially all of the assets andproperties of the Company, SSCE (except for three paper mills) and the materialU.S. subsidiaries of SSCE, by a pledge of all of the capital stock of SSCE andthe material U.S. subsidiaries of SSCE and by a pledge of 65% of the capitalstock of SSC Canada that is directly owned by SSCE. The security interestssecuring SSCE’s obligation under the Credit Agreement exclude cash, cashequivalents, certain trade receivables, three paper mills and the land andbuildings of certain corrugated container facilities. The obligations of SSCCanada under the Credit Agreement are secured by a security interest insubstantially all of the assets and properties of SSC Canada (except threepaper mills) and the material Canadian subsidiaries of SSC Canada, by a pledgeof all of the capital stock of the material Canadian subsidiaries of SSC Canadaand by the same U.S. assets, properties and capital stock that secure SSCE’sobligations under the Credit Agreement. The security interests securing SSCCanada’s obligation under the Credit Agreement exclude three mills and propertyrelated thereto and certain other real property located in New Brunswick andQuebec.

 

TheCredit Agreement contains various covenants and restrictions including (i) limitationson dividends, redemptions and repurchases of capital stock, (ii) limitationson the incurrence of indebtedness, liens, leases and sale-leasebacktransactions, (iii) limitations on capital expenditures and (iv) maintenanceof certain financial covenants. The Credit Agreement also requires prepaymentsif the Company has

 

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excesscash flows, as defined, or receives proceeds from certain asset sales,insurance or incurrence of certain indebtedness.

 

InOctober 2005, the Company and its lender group entered into an amendmentto the Credit Agreement to ease one of the financial covenant requirements forthe period ended September 30, 2005. Subsequent to obtaining thisamendment, the Company determined it was in compliance with all of the originalfinancial covenants contained in the Credit Agreement at September 30, 2005.The Company paid fees and other expenses of $1 million related to thistransaction.

 

InDecember 2005, the Company and its lenders entered into an agreement andamendment (“Incremental Term Loan Assumption Agreement and Amendment No. 2”)to the Credit Agreement to i) further ease certain financial covenantrequirements as of December 31, 2005 and for future periods through September 30,2007, ii) increase interest rates for the credit facilities by 0.25% and iii)provide for a new term loan. Under the Incremental Term Loan AssumptionAgreement and Amendment No. 2, the Company has the option to borrow at arate equal to LIBOR plus 2.25% or alternate base rate (“ABR”) plus 1.25% forthe term loan facilities and LIBOR plus 2.50% or ABR plus 1.50% for the revolvingcredit facilities (the “Applicable Rate”). The Applicable Rate will increase by0.25% if at any time the Company’s senior secured indebtedness is rated lowerthan BB- by Standard & Poor’s and Ba3 by Moody’s Investors Service. TheApplicable Rate with respect to revolving credit facilities will decrease by0.25% if, at any time, the Company’s Consolidated Senior Secured Leverage Ratiois less than 3.0 to 1.0. The amendment also provides for a prepayment premiumequal to 1.0% of the amount of any prepayment of a term loan, deposit fundedloan or deposit as a result of a repricing transaction if the prepayment ismade prior to the first anniversary of the amendment effective date. The othermaterial terms of the Credit Agreement, including security and final maturity,remained the same as under the original Credit Agreement. The Incremental TermLoan Assumption Agreement and Amendment No. 2 also provided for a new SSCCanada Incremental Term Loan (“Tranche C-1”) in the aggregate principal amountof $90 million. The term loan is payable in quarterly installments beginning January 2,2006 and matures on November 1, 2011. The Company used the proceeds of theTranche C-1 to repay $90 million of Tranche B term loan. The Company paid feesand other expenses of $4 million related to this transaction.

 

AtDecember 31, 2005, the Company was in compliance with the revisedfinancial covenants required by the Credit Agreement. As discussed in Note 2,the Company expects to remain in compliance with the financial covenants during2006 by achieving its 2006 financial plan or pursuing other alternatives torepay debt and improve liquidity. In the event the Company does not remain incompliance with the revised financial covenants, it would seek an amendment tothe Credit Agreement to revise certain of the financial covenants. Although theCompany believes that it could obtain such an amendment, failure to obtain anamendment would result in a default under the Credit Agreement, which could resultin a material adverse impact on the Company’s financial condition.

 

TheCompany has entered into interest rate swap contracts effectively fixing theinterest rate at 4.3% for $300 million of the Tranche B and Tranche C variablerate term loans (See Note 9).

 

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**Senior Notes**

The9.75% unsecured senior notes of $750 million are redeemable in whole or in part atthe option of SSCE beginning on February 1, 2006 at a price of 104.875%plus accrued interest. The redemption price will decline each year after 2006and beginning on February 1, 2009 will be 100% of the principal amount,plus accrued interest.

 

The8.375% unsecured senior notes of $400 million are redeemable in whole or in part atthe option of SSCE beginning on July 1, 2007 at a price of 104.188% plusaccrued interest. The redemption price will decline each year after 2007 andbeginning on July 1, 2010 will be 100% of the principal amount, plusaccrued interest.

 

The8.25% unsecured senior notes of $700 million are redeemable in whole or in part atthe option of SSCE beginning on October 1, 2007 at a price of 104.125%plus accrued interest. The redemption price will decline each year after 2007and beginning on October 1, 2010 will be 100% of the principal amount,plus accrued interest.

 

The7.50% unsecured senior notes of $300 million are redeemable in whole or in part atthe option of SSCE beginning on June 1, 2008 at a price of 103.75% plusaccrued interest. The redemption price will decline each year after 2008 andbeginning on June 1, 2011 will be 100% of the principal amount, plusaccrued interest.

 

The7.375% unsecured senior notes of $200 million are redeemable in whole or in part atthe option of SSCE beginning on July 15, 2009 at a price of 103.688% plusaccrued interest. The redemption price will decline each year after 2009 andbeginning on July 15, 2012 will be 100% of the principal amount, plusaccrued interest.

 

The9.25% unsecured senior notes aggregating $300 million are not redeemable priorto maturity.

 

Thesenior notes contain business and financial covenants which are lessrestrictive than those contained in the Credit Agreement.

 

The8.45% mortgage notes are secured by the assets of 37 corrugated containerplants.

 

**Other**

InMay 2005, the Company issued environmental improvement revenue refundingbonds in the amount of $72 million. New bonds in the principal amount of $30million were issued at an interest rate of 5.125% and are due in 2013. Newbonds in the principal amount of $42 million were issued at an interest rate of5.25% and are due in 2015. The proceeds of these bonds were used to repay $72 millionof revenue refunding bonds at interest rates of 7.875% and 8.25%, respectively.

 

Interestcosts capitalized on construction projects in 2005, 2004 and 2003 totaled $8million, $5 million and $6 million, respectively. Interest payments on all debtinstruments for 2005, 2004 and 2003 were $344 million, $340 million and $341million, respectively.

 

**9.****             ****Derivative Instruments andHedging Activities**

 

TheCompany’s derivative instruments and hedging activities are designated as cashflow hedges and relate to minimizing exposures to fluctuations in the price ofcommodities used in its operations, the movement in foreign currency exchangerates and the fluctuations in the interest rate on variable rate debt.

 

**Commodity Derivative Instruments**

TheCompany uses derivative instruments, including fixed price swaps and options, tomanage fluctuations in cash flows resulting from commodity price risk in theprocurement of natural gas. The

 

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objectiveis to fix the price of a portion of the Company’s purchases of natural gas usedin the manufacturing process. The changes in the market value of such derivativeinstruments have historically been, and are expected to continue to be, highlyeffective at offsetting changes in price of the hedged item. As of December 31,2005, the maximum length of time over which the Company is hedging its exposureto the variability in future cash flows associated with natural gas forecastedtransactions is two years. For the years ended December 31, 2005 and 2004,the Company reclassified a $7 million gain (net of tax) and a $1 million gain (netof tax), respectively, from OCI to cost of goods sold when the hedged itemswere recognized.

 

Thefair value of the Company’s commodity derivative instruments at December 31,2005 was a $40 million asset, of which $31 million was included in prepaidexpenses and other current assets and $9 million was included in other assets. Thefair value of the Company’s commodity derivative instruments at December 31,2004 was a net $2 million asset, of which $6 million was included in prepaidexpenses and other current assets and $4 million was included in other currentliabilities.

 

Forthe years ended December 31, 2005 and 2004, the Company recorded a $2 milliongain (net of tax) and a $4 million gain (net of tax), respectively, in cost ofgoods sold related to the change in fair value of certain commodity derivativeinstruments not qualifying for hedge accounting.

 

Forthe years ended December 31, 2005 and 2004, the Company recorded an $8million gain (net of tax) and a $1 million gain (net of tax), respectively, incost of goods sold on settled commodity derivative instruments not qualifying forhedge accounting.

 

**Foreign Currency Derivative Instruments**

TheCompany’s principal foreign exchange exposure is the Canadian dollar. TheCompany uses foreign currency derivative instruments, including forwardcontracts and options, primarily to protect against Canadian currency exchangerisk associated with expected future cash flows. As of December 31, 2005,the maximum length of time over which the Company is hedging its exposure tothe variability in future cash flows associated with foreign currency exchangerisk is one year. For the years ended December 31, 2005 and 2004, theCompany reclassified a $1 million gain (net of tax) and a $2 million gain (netof tax), respectively, from OCI to cost of goods sold related to the recognitionof the foreign currency derivative instruments. The change in fair value ofthese derivative instruments is recorded in OCI until the underlyingtransaction is recorded. The fair value of the Company’s foreign currency derivativeinstruments at December 31, 2005 and 2004 was a $6 million asset and an $11million asset, respectively, included in prepaid expenses and other current assets.

 

Forthe years ended December 31, 2005 and 2004, the Company recorded a $2million loss (net of tax) and a $2 million gain (net of tax), respectively, incost of goods sold related to the change in fair value of certain foreigncurrency derivative instruments not qualifying for hedge accounting.

 

Forthe years ended December 31, 2005 and 2004, the Company recorded a $2 milliongain (net of tax) and zero, respectively, in cost of goods sold on settledforeign currency derivative instruments not qualifying for hedge accounting.

 

**Interest Rate Swap Contracts**

TheCompany uses interest rate swap contracts to manage interest rate exposure on$300 million of the current Tranche B and Tranche C floating rate bank termdebt, effectively fixing the interest rate at 4.3%. These contracts extenduntil 2011, consistent with the maturity of the Company’s Tranche B and TrancheC term loans. Changes in the fair value of the interest rate swap contracts areexpected to be highly effective in offsetting the fluctuations in the floating interestrate and are recorded in OCI until the underlying transaction is recorded. Theaccounting for the cash flow impact of the swap contracts is recorded as anadjustment to interest expense each period. For the years ended December 31,2005 and 2004, the Company reclassified a $2 million loss (net of tax) and animmaterial amount, respectively, from OCI to interest expense when the hedgeditems were recognized.

 

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Inthe second quarter of 2005, the Company entered into forward starting interestrate swaps of $225 million at a fixed rate of 4.75%, based on an expected debtrefinancing to occur in 2006. At December 31, 2005, the Company determinedthat the expected debt refinancing was no longer probable of occurring. As aresult, these forward starting interest rate swaps were marked-to-marketthrough income resulting in a $2 million gain (net of tax) recorded as anadjustment to interest expense.

 

Thefair value of the Company’s interest rate swap contracts at December 31, 2005was an $11 million asset, of which $3 million was included in prepaid expensesand other current assets and $8 million was included in other assets. The fairvalue of the Company’s interest rate swap contracts at December 31, 2004was a $2 million liability included in other current liabilities.

 

Thecumulative deferred hedge gain on all derivative instruments was $23 million(net of tax) at December 31, 2005, including a $16 million gain (net oftax) on commodity derivative instruments, a $2 million gain (net of tax) onforeign currency derivative instruments and a $5 million gain (net of tax) oninterest rate swap contracts. The net cumulative deferred hedge loss onderivative instruments was $6 million (net of tax) at December 31, 2004, includinga $7 million loss (net of tax) on commodity instruments, a $2 million gain (netof tax) on foreign currency derivative instruments and a $1 million loss (netof tax) on interest rate swap contracts. The Company expects to reclassify a $12million gain (net of tax) into cost of goods sold during 2006 related to thecommodity and foreign currency derivative instruments.

 

**10.****      ****Leases**

 

TheCompany leases certain facilities and equipment for production, selling andadministrative purposes under operating leases. Certain leases contain renewaloptions for varying periods, and others include options to purchase the leasedproperty during or at the end of the lease term. Future minimum rentalcommitments (exclusive of real estate taxes and other expenses) under operatingleases having initial or remaining noncancelable terms in excess of one year,excluding lease commitments on closed facilities, are reflected below:

 
| 2006                          |   | $   | 108    |   |
|-------------------------------|--------|-----|--------|--------|
| 2007                          |   | 83  |   |
| 2008                          |   | 58  |   |
| 2009                          |   | 46  |   |
| 2010                          |   | 38  |   |
| Thereafter                    |   | 100 |   |
| Total  minimum lease payments |   | $   | 433    |   |

 

Netrental expense for operating leases, including leases having a duration of lessthan one year, was approximately $167 million, $168 million and $188 millionfor 2005, 2004 and 2003, respectively.

 

**11.****      ****Guarantees**

 

TheCompany has certain wood chip processing contracts extending from 2012 through2018 with minimum purchase commitments. As part of the agreements, theCompany guarantees the third party contractor’s debt outstanding and has asecurity interest in the chipping equipment. At December 31, 2005 and 2004,the maximum potential amount of future payments related to these guarantees wasapproximately $36 million and $43 million, respectively, and decreases ratablyover the life of the contracts. In the event the guarantees on these contractswere called, proceeds from the liquidation of the chipping equipment would be basedon current market conditions and the Company may not recover in full theguarantee payments made.

 

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**12.****      ****Asset Retirement Obligations**

 

Uponadoption of SFAS No. 143 in 2003, the Company recorded an increase in netproperty, plant and equipment of $2 million, an asset retirement obligationliability of $10 million and a charge for the cumulative effect of anaccounting change of $5 million, net of income taxes of $3 million. The netcumulative effect charge reflected the offset of a $5 million accrual recordedunder the Company’s previous accounting for landfills.

 

Thefollowing provides a reconciliation of the asset retirement obligations:

 
| Balance at January 1,  2003  |       | $      | 15         |       |
|-----------------------------------|------------|--------|------------|------------|
| Accretion  expense                |       |   |       |
| Adjustments                       |       | (2     | )          |
| Balance at December 31, 2003 |       | 13     |       |
| Accretion  expense                |       | 1      |       |
| Balance at December 31, 2004 |       | 14     |       |
| Accretion  expense                | ** ** | **1**  | ** ** |
| Adjustments                       | ** ** | **(1** | **)**      |
| Balance at December 31, 2005 | ** ** | **$**  | **14**     | ** ** |

 

The2005 and 2003 adjustments relate to the closures of containerboard mill facilitiesand the reclassification of these liabilities to a restructuring accrual.

 

**13.****      ****Income Taxes**

 

Significantcomponents of the Company’s deferred tax assets and liabilities at December 31are as follows:

 
| ** **                                                                | ** ** | **2005**   | ** ** | **2004** | ** ** |
|---------------------------------------------------------------------------|------------|------------|------------|----------|------------|
| Deferred tax liabilities                                                  |       |       | ** ** |     |       |
| Property,  plant and equipment and timberland                             | ** ** | **$**      | **(1,320** | **)**    | $          | (1,441 | ) |
| Inventory                                                                 | ** ** | **(61**    | **)**      | (51      | )          |
| Timber  installment sale                                                  | ** ** | **(134**   | **)**      | (134     | )          |
| Other                                                                     | ** ** | **(29**    | **)**      | (26      | )          |
| Total  deferred tax liabilities                                           | ** ** | **(1,544** | **)**      | (1,652   | )          |
|                                                                      |       |       | ** ** |     |       |
| Deferred tax assets                                                       |       |       | ** ** |     |       |
| Employee  benefit plans                                                   | ** ** | **310**    | ** ** | 298      |       |
| Net  operating loss, alternative minimum tax and tax credit carryforwards | ** ** | **925**    | ** ** | 776      |       |
| Deferred  gain                                                            |       |       | ** ** | 4        |       |
| Purchase  accounting liabilities                                          | ** ** | **6**      | ** ** | 5        |       |
| Restructuring                                                             | ** ** | **17**     | ** ** | 11       |       |
| Other                                                                     | ** ** | **94**     | ** ** | 85       |       |
| Total  deferred tax assets                                                | ** ** | **1,352**  | ** ** | 1,179    |       |
| Valuation  allowance for deferred tax assets                              | ** ** | **(208**   | **)**      | (208     | )          |
|                                                                      |       |       | ** ** |     |       |
| Net deferred  tax assets                                                  | ** ** | **1,144**  | ** ** | 971      |       |
|                                                                      |       |       | ** ** |     |       |
| Net deferred  tax liabilities                                             | ** ** | **$**      | **(400**   | **)**    | $          | (681 | ) |

 

AtDecember 31, 2005, the Company had $1,877 million of net operating losscarryforwards for U.S. federal income tax purposes that expire from 2012through 2025, with a tax value of $657 million. A valuation allowance of $152 millionhas been established for a portion of these deferred tax assets based

 

60

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onprojected future taxable income, the expected timing of deferred tax liabilityreversals and the expiration dates of these carryforwards. The Company had netoperating loss carryforwards for state purposes with a tax value of $131 million,which expire from 2006 to 2025. Substantially all of the Company’s valuationallowance was recorded in connection with the 1998 merger with Stone Containerand a reduction in the valuation allowance would result principally in a correspondingreduction to goodwill. A valuation allowance of $56 million has beenestablished for a portion of these deferred tax assets. Further, the Companyhad $129 million of net operating loss carryforwards for Canadian tax purposesthat expire from 2007 to 2012, with a tax value of $42 million, and Canadianinvestment tax credits that expire from 2012 to 2015, with a tax value of $4 million.The Company had $74 million of alternative minimum tax credit carryforwards forU.S. federal income tax purposes, which are available indefinitely. Inaddition, the Company had other tax carryforwards of $17 million at December 31,2005, which can be carried forward indefinitely. Deferred income taxes relatedto net operating loss carryforwards have been classified as noncurrent toreflect the expected utilization of the carryforwards.

 

InOctober 2004, the American Jobs Creation Act (the “AJCA”) was signed intolaw. The AJCA includes a temporary incentive for U.S. multinationals torepatriate foreign earnings by providing an elective 85% dividends receiveddeduction for certain cash dividends from controlled foreign corporations. Underthis law, in December 2005, the Company repatriated dividends of $483million from earnings of foreign subsidiaries previously consideredindefinitely reinvested. The income tax expense associated with therepatriation was $34 million. Excluding the repatriation discussed above,through December 31, 2005, no provision has been made for income taxes onthe remaining undistributed earnings of the Company’s foreign subsidiaries, asthe Company intends to indefinitely reinvest such earnings in its foreignsubsidiaries.

 

61

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Benefitfrom income taxes on loss from continuing operations before income taxes and cumulativeeffect of accounting change is as follows:

 
| ** **                       | ** ** | **2005** | ** ** | **2004**   | ** ** | **2003** | ** ** |
|----------------------------------|------------|----------|------------|------------|------------|----------|------------|
| Current                          |       |     | ** ** |       |       |     |       |
| Federal                          | ** ** | **$**    | **(10**    | **)**      | $          |     | $          |   |
| State and  local                 | ** ** | **(5**   | **)**      | (1         | )          | (1       | )          |
| Foreign                          | ** ** | **(21**  | **)**      | (16        | )          | (8       | )          |
| Total  current expense           | ** ** | **(36**  | **)**      | (17        | )          | (9       | )          |
|                             |       |     | ** ** |       |       |     |       |
| Deferred                         |       |     | ** ** |       |       |     |       |
| Federal                          | ** ** | **148**  | ** ** | 65         |       | 113      |       |
| State and  local                 | ** ** | **28**   | ** ** | 10         |       | 22       |       |
| Foreign                          | ** ** | **67**   | ** ** | 5          |       | 14       |       |
| Total  deferred benefit          | ** ** | **243**  | ** ** | 80         |       | 149      |       |
| Total  benefit from income taxes | ** ** | **$**    | **207**    | ** ** | $          | 63       |       | $ | 140 |   |
|                                  |            |          |            |            |            |          |            |  |  |  |

 

TheCompany’s benefit from income taxes differed from the amount computed byapplying the statutory U.S. federal income tax rate to loss from continuingoperations before income taxes and cumulative effect of accounting change asfollows:

 
| ** **                                                 | ** ** | **2005** | ** ** | **2004**   | ** ** | **2003** | ** ** |
|------------------------------------------------------------|------------|----------|------------|------------|------------|----------|------------|
| U.S. federal income tax benefit at federal  statutory rate | ** ** | **$**    | **187**    |       | $          | 38       |       | $ | 118 |   |
| Permanent differences and other items                      | ** ** | **53**   |       | 15         |       | 5        |       |
| State income taxes, net of federal income  tax effect      | ** ** | **15**   |       | 6          |       | 15       |       |
| Foreign taxes                                              | ** ** | **(14**  | **)**      | 4          |       | 2        |       |
| Repatriation of foreign earnings                           | ** ** | **(34**  | **)**      |       |       |     |       |
| Total benefit from income taxes                            | ** ** | **$**    | **207**    | ** ** | $          | 63       |       | $ | 140 |   |

 

TheCompany has settled the Internal Revenue Service examination of the years 2002and 2003, resulting in no additional tax payment or refund. Permanentdifferences in the preceding table include benefits of $44 million, $10 millionand $12 million in 2005, 2004 and 2003, respectively, related to the resolutionof tax matters in these years.

 

Thecomponents of the loss from continuing operations before income taxes andcumulative effect of accounting change are as follows:

 
| ** **                                                                                       | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|--------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| United  States                                                                                   | ** ** | **$**    | **(358**   | **)**    | $          | (151     | )          | $ | (325 | ) |
| Foreign                                                                                          | ** ** | **(176** | **)**      | 42       |       | (13      | )          |
| Loss from  continuing operations before income taxes and cumulative effect of accounting  change | ** ** | **$**    | **(534**   | **)**    | $          | (109     | )          | $ | (338 | ) |

 

62

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TheCanadian Revenue Agency is currently examining the years 1999 through 2002 ofthe Company’s Canadian subsidiaries. While the ultimate results cannot bepredicted with certainty, the Company’s management believes that theexamination will not have a material adverse effect on its consolidatedfinancial condition or results of operations, and that the accrued taxliabilities are adequate for all years.

 

TheCompany made income tax payments of $36 million, $18 million and $70 million in2005, 2004 and 2003, respectively.

 

**14.**** ****Employee Benefit Plans**

 

**Defined Benefit Plans**

TheCompany sponsors noncontributory defined benefit pension plans coveringsubstantially all U.S. employees. The Company also sponsors noncontributory andcontributory defined benefit pension plans for its Canadian operations. TheCompany’s pension plans’ weighted-average asset allocations at December 31,by asset category are as follows:

 
| ** **        | ** ** | **U.S. Plans** | ** ** | **Canadian Plans** | ** ** |
|-------------------|------------|---------------------|------------|-------------------------|------------|
| ** **        | ** ** | **2005**            | ** ** | **2004**                | ** ** | **2005** | ** ** | **2004** | ** ** |
|              |       |                |       |                    |       |   |   |   |   |
| Cash equivalents  | ** ** | **3**               | **%**      | 5                       | %          | **1** | **%** | 2 | % |
| Debt securities   | ** ** | **35**              | **%**      | 33                      | %          | **43** | **%** | 44 | % |
| Equity securities | ** ** | **61**              | **%**      | 61                      | %          | **53** | **%** | 51 | % |
| Real estate       | ** ** | ** **          | ** ** |                    |       | **3** | **%** | 3 | % |
| Other             | ** ** | **1**               | **%**      | 1                       | %          |   | ** ** |   |   |
| Total             | ** ** | **100**             | **%**      | 100                     | %          | **100** | **%** | 100 | % |

 

Equitysecurities for the U.S. plans at December 31, 2005 and 2004 include 2.7million shares of SSCC common stock with a market value of approximately $38 millionand $50 million respectively, (2% and 3%, respectively, of total U.S. planassets).

 

Theprimary objective of the Company’s investment policy is to provide eligibleemployees with scheduled pension benefits. The basic strategy of thisinvestment policy is to earn the highest risk adjusted rate of return on assetsconsistent with prudent investor standards identified in the EmployeeRetirement Income Security Act of 1974 for the U.S. plans and the Quebec SupplementalPension Plans Act and other applicable legislation in Canada for the Canadianplans. In identifying the target asset allocation that would best meet theabove policy, consideration is given to a number of factors including thevarious pension plans’ demographic characteristics, the long-term nature of theliabilities, the sensitivity of the liabilities to interest rates andinflation, the long-term return expectations and risks associated with keyasset classes as well as their return correlation with each other,diversification among asset classes and other practical considerations forinvesting in certain asset classes. The target asset allocation for the pensionplans during a complete market cycle is as follows:

 
| ** **                | ** ** | **U.S. Plans** | ** ** | **Canadian Plans** | ** ** |
|---------------------------|------------|---------------------|------------|-------------------------|------------|
| Equity securities         |       | 58                  | %          | 52                      | %          |
| Debt securities           |       | 35                  | %          | 45                      | %          |
| Alternative asset classes |       | 7                   | %          | 3                       | %          |

 

63

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**Postretirement Health Care and Life Insurance Benefits**

TheCompany provides certain health care and life insurance benefits for allsalaried as well as certain hourly employees. The assumed health care costtrend rates used in measuring the accumulated postretirement benefit obligation(“APBO”) at December 31 are as follows:

 
| ** **                                                                         | ** ** | **2005**      | ** ** | **2004**   | ** ** |
|------------------------------------------------------------------------------------|------------|---------------|------------|------------|------------|
| **U.S. Plans**                                                                     | ** ** | ** **    | ** ** | ** ** | ** ** |
| Health care cost trend  rate assumed for next year                                 | ** ** | **10.00**     | **%**      | 11.00      | %          |
| Rate to which the cost  trend rate is assumed to decline (the ultimate trend rate) |       | **5.00**      | **%**      | 5.00       | %          |
| Year the rate reaches the  ultimate trend rate                                     | ** ** | **2011**      |       | 2011       |       |
| **Foreign Plans**                                                                  | ** ** | ** **    | ** ** | ** ** | ** ** |
| Health care cost trend  rate assumed for next year                                 | ** ** | **8.30-9.20** | **%**      | 8.30-9.20  | %          |
| Rate to which the cost  trend rate is assumed to decline (the ultimate trend rate) |       | **4.80-4.90** | **%**      | 4.80-4.90  | %          |
| Year the rate reaches the  ultimate trend rate                                     | ** ** | **2011**      |       | 2010       |       |

 

Theeffect of a 1% change in the assumed health care cost trend rate wouldincrease/(decrease) the APBO as of December 31, 2005 by $21 million and $17million, respectively, and would increase/(decrease) the annual net periodicpostretirement benefit cost by $2 million for 2005.

 

InDecember 2003, the Medicare Prescription Drug, Improvement andModernization Act of 2003 (the “Act”) was enacted. The Act introduced aprescription drug benefit under Medicare Part D as well as a federalsubsidy to sponsors of retiree health care benefit plans that provide a benefitthat is at least actuarially equivalent to Medicare Part D. In May 2004,FASB Staff Position (“FSP”) 106-2 was issued and provides guidance on theaccounting for the effects of the Act and also requires employers to providecertain disclosures provided by the Act. The Company determined that certain ofits plans are actuarially equivalent to Medicare Part D and the impact ofthe Act was to reduce its APBO as of December 31, 2003 by approximately$13 million. In accordance with FSP 106-2, the Company reduced postretirementbenefit costs by $2 million in 2004. The Company did not elect the federalsubsidy provisions of the Act; rather the Company coordinated benefits withavailable Medicare coverage as the primary payor.

 

InDecember 2005, the Company announced the elimination of postretirementhealth care and life insurance benefits for all salaried and certain hourlyemployees who have not reached the age of 60 with 10 years of service as of January 1,2007. As a result of the plan changes, the Company recorded an $8 millioncurtailment gain in 2005.

 

64

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Thefollowing provides a reconciliation of benefit obligations, plan assets andfunded status of the plans:

 
| ** **                                     | ** ** | **Defined Benefit** | ** ** | **Postretirement** | ** ** |
|------------------------------------------------|------------|--------------------------|------------|--------------------|------------|
| ** **                                     | ** ** | **Plans**                | ** ** | **Plans**          | ** ** |
| ** **                                     | ** ** | **2005**                 | ** ** | **2004**           | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Change in benefit obligation:**              |       |                     |       |               |       |   |   |   |   |
| Benefit obligation at January 1           | ** ** | **$**                    | **3,336**  | ** **         | $          | 3,029 |   | **$** | **283** | ** ** | $ | 296 |   |
| Service cost                                   | ** ** | **79**                   | ** ** | 72                 |       | **7** | ** ** | 7 |   |
| Interest cost                                  | ** ** | **189**                  | ** ** | 183                |       | **16** | ** ** | 16 |   |
| Amendments                                     | ** ** | **8**                    | ** ** | 9                  |       | **(21** | **)** |   |   |
| Settlements                                    |       |                     | ** ** | (1                 | )          |   | ** ** |   |   |
| Curtailments                                   | ** ** | **(11**                  | **)**      | (3                 | )          | **(1** | **)** | (1 | ) |
| Actuarial loss (gain)                          | ** ** | **123**                  | ** ** | 141                |       | **(7** | **)** | (19 | ) |
| Plan participants’ contributions          | ** ** | **6**                    | ** ** | 6                  |       | **16** | ** ** | 15 |   |
| Benefits paid and expected expenses            | ** ** | **(171**                 | **)**      | (157               | )          | **(35** | **)** | (35 | ) |
| Foreign currency rate changes                  | ** ** | **32**                   | ** ** | 57                 |       | **2** | ** ** | 4 |   |
| Benefit obligation at December 31         | ** ** | **$**                    | **3,591**  | ** **         | $          | 3,336 |   | **$** | **260** | ** ** | $ | 283 |   |
| ** **                                     |       |                     | ** ** | ** **         |       |   | ** ** |   |   |
| **Change in plan assets:**                     | ** ** | ** **               | ** ** |               |       | ** ** | ** ** |   |   |
| Fair value of plan assets at January 1    | ** ** | **$**                    | **2,466**  | ** **         | $          | 2,149 |   | **$** | ** ** | **$** | ** ** |
| Actual return on plan assets                   | ** ** | **200**                  | ** ** | 246                |       | ** ** | ** ** |   |   |
| Settlements                                    |       |                     | ** ** | (1                 | )          |   | ** ** |   |   |
| Employer contributions                         | ** ** | **174**                  | ** ** | 177                |       | **19** | ** ** | 20 |   |
| Plan participants’ contributions          | ** ** | **6**                    | ** ** | 6                  |       | **16** | ** ** | 15 |   |
| Benefits paid                                  | ** ** | **(169**                 | **)**      | (153               | )          | **(35** | **)** | (35 | ) |
| Foreign currency rate changes                  | ** ** | **23**                   | ** ** | 42                 |       | ** ** | ** ** |   |   |
| Fair value of plan assets at December 31  | ** ** | **$**                    | **2,700**  | ** **         | $          | 2,466 |   | **$** | ** ** | **$** | ** ** |
| ** **                                     |       |                     | ** ** | ** **         |       |   | ** ** |   |   |
| **Over (under) funded status:**                | ** ** | **$**                    | **(891**   | **)**              | $          | (870 | ) | **$** | **(260** | **)** | $ | (283 | ) |
| Unrecognized actuarial loss                    | ** ** | **823**                  | ** ** | 762                |       | **61** | ** ** | 74 |   |
| Unrecognized prior service cost (benefit)      | ** ** | **74**                   | ** ** | 79                 |       | **(30** | **)** | (19 | ) |
| Net amount recognized                          | ** ** | **$**                    | **6**      | ** **         | $          | (29 | ) | **$** | **(229** | **)** | $ | (228 | ) |
| ** **                                     |       |                     | ** ** | ** **         |       |   | ** ** |   |   |
| **Amounts recognized in the balance sheets:**  | ** ** | ** **               | ** ** |               |       | ** ** | ** ** |   |   |
| Accrued benefit liability                      | ** ** | **$**                    | **(710**   | **)**              | $          | (622 | ) | **$** | **(229** | **)** | $ | (228 | ) |
| Intangible asset                               | ** ** | **77**                   | ** ** | 79                 |       | ** ** | ** ** |   |   |
| Accumulated other comprehensive (income)  loss | ** ** | **639**                  | ** ** | 514                |       | ** ** | ** ** |   |   |
| Net amount recognized                          | ** ** | **$**                    | **6**      | ** **         | $          | (29 | ) | **$** | **(229** | **)** | $ | (228 | ) |

 

Theincrease in the minimum pension liability, included in other comprehensive(income) loss, was $125 million and $21 million for the years ended December 31,2005 and 2004, respectively.

 

Theaccumulated benefit obligation for all defined benefit pension plans was $3,411million and $3,088 million at December 31, 2005 and 2004, respectively.

 

Theprojected benefit obligation, accumulated benefit obligation and fair value ofplan assets for the pension plans with accumulated benefit obligations inexcess of plan assets were $3,578 million, $3,400 million, and $2,688 million,respectively, as of December 31, 2005 and $3,324 million, $3,079 millionand $2,456 million, respectively, as of December 31, 2004.

 

65

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Thecomponents of net pension expense for the defined benefit plans and thecomponents of the postretirement benefit costs are as follows:

 
| ** **                                    | ** ** | **Defined Benefit Plans** | ** ** | **Postretirement Plans** | ** ** |
|-----------------------------------------------|------------|-------------------------------------|------------|-------------------------------|------------|
| ** **                                    | ** ** | **2005**                            | ** ** | **2004**                      | ** ** | **2003** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| Service cost                                  | ** ** | **$**                               | **81**     | ** **                    | $          | 72 |   | $ | 61 | ** ** | **$** | **7** | ** ** | $ | 7 |   | $ | 6 |   |
| Interest  cost                                | ** ** | **189**                             | ** ** | 183                           |       | 176 | ** ** | **15** | ** ** | 16 |   | 17 |   |
| Expected  return on plan assets               | ** ** | **(210**                            | **)**      | (194                          | )          | (174 | ) |   | ** ** |   |   |   |   |
| Amortization  of prior service cost (benefit) | ** ** | **10**                              | ** ** | 10                            |       | 10 | ** ** | **(2** | **)** | (2 | ) | (3 | ) |
| Amortization  of net loss                     | ** ** | **62**                              | ** ** | 49                            |       | 37 | ** ** | **5** | ** ** | 5 |   | 5 |   |
| Curtailment  loss (gain)                      | ** ** | **4**                               | ** ** | 3                             |       | 4 | ** ** | **(8** | **)** |   |   |   |   |
| Multi-employer  plans                         | ** ** | **6**                               | ** ** | 6                             |       | 9 |   |   | ** ** |   |   |   |   |
| Net periodic  benefit cost                    | ** ** | **$**                               | **142**    | ** **                    | $          | 129 |   | $ | 123 | ** ** | **$** | **17** | ** ** | $ | 26 |   | $ | 25 |   |

 

Theweighted average assumptions used to determine the benefit obligations at December 31are as follows:

 
| ** **                     | ** ** | **Defined Benefit Plans** | ** ** | **Postretirement Plans** | ** ** |
|--------------------------------|------------|-------------------------------------|------------|-------------------------------|------------|
| ** **                     | ** ** | **2005**                            | ** ** | **2004**                      | ** ** | **2005** | ** ** | **2004** | ** ** |
| **U.S. Plans**                 |       |                                |       |                          |       |   |   |   |   |
| Discount  rate                 | ** ** | **5.61**                            | **%**      | 5.84                          | %          | **5.61** | **%** | 5.84 | % |
| Rate of  compensation increase | ** ** | **3.11**                            | **%**      | 4.00                          | %          | **N/A** | ** ** | N/A |   |
| **Foreign Plans**              |       |                                | ** ** |                          |       |   | ** ** |   |   |
| Discount  rate                 | ** ** | **5.00**                            | **%**      | 5.75                          | %          | **5.00** | **%** | 5.75 | % |
| Rate of  compensation increase | ** ** | **3.60**                            | **%**      | 3.95                          | %          | **N/A** | ** ** | N/A |   |

 

Theweighted average assumptions used to determine net periodic benefit cost forthe years ended December 31 are as follows:

 
| ** **                                | ** ** | **Defined Benefit Plans** | ** ** | **Postretirement Plans** | ** ** |
|-------------------------------------------|------------|-------------------------------------|------------|-------------------------------|------------|
| ** **                                | ** ** | **2005**                            | ** ** | **2004**                      | ** ** | **2005** | ** ** | **2004** | ** ** |
| **U.S. Plans**                            |       |                                |       |                          |       |   |   |   |   |
| Discount  rate                            | ** ** | **5.84**                            | **%**      | 6.25                          | %          | **5.84** | **%** | 6.25 | % |
| Expected  long-term return on plan assets | ** ** | **9.00**                            | **%**      | 9.00                          | %          | **N/A** | ** ** | N/A |   |
| Rate of  compensation increase            | ** ** | **4.00**                            | **%**      | 4.00                          | %          | **N/A** | ** ** | N/A |   |
| **Foreign Plans**                         |       |                                | ** ** |                          |       |   | ** ** |   |   |
| Discount  rate                            | ** ** | **5.75**                            | **%**      | 6.00                          | %          | **5.75** | **%** | 6.00 | % |
| Expected  long-term return on plan assets | ** ** | **7.75-8.00**                       | **%**      | 8.00                          | %          | **N/A** | ** ** | N/A |   |
| Rate of  compensation increase            | ** ** | **3.95**                            | **%**      | 3.65                          | %          | **N/A** | ** ** | N/A |   |

 

EffectiveJanuary 1, 2006, the expected long-term rate of return using the currenttarget asset allocation for U.S. and foreign pension plans was reduced to 8.75%and 7.50%, respectively. The fundamental assumptions behind the expected rateof return are the cumulative effect of several estimates, including theanticipated yield on high quality debt securities, the equity risk premiumearned by investing in equity securities over a long-term time horizon andactive investment management.

 

TheCompany expects to contribute $160 million to its defined benefit plans and $18million to its postretirement plans in 2006.

 

66

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**Expected Future Benefit Plan Payments**

Expectedfuture benefit plan payments to participants, which reflect expected futureservice, are as follows:

 
| ** ** | ** ** | **Defined Benefit Plans** | ** ** | **Postretirement Plans** | ** ** |
|------------|------------|-------------------------------------|------------|-------------------------------|------------|
| 2006       |       | $                                   | 209        |                          | $          | 18 |   |
| 2007       |       | 192                                 |       | 19                            |       |
| 2008       |       | 198                                 |       | 19                            |       |
| 2009       |       | 207                                 |       | 19                            |       |
| 2010       |       | 215                                 |       | 20                            |       |
| 2011-2015  |       | 1,198                               |       | 96                            |       |
|            |            |                                     |            |                               |            |  |  |

 

Thedefined benefit plan payments in 2006 include lump sum settlement payments toNew Richmond, Quebec and Bathurst, New Brunswick mill employees terminatedduring 2005 (See Note 2).

 

**Savings Plans**

TheCompany sponsors voluntary savings plans covering substantially all salariedand certain hourly employees. The Company match was paid in SSCC common stockthrough 2005, up to an annual maximum. Beginning in 2006, the Company matchwill be paid according to the employees’ selected investment allocation. The Company’sexpense for the savings plans totaled $23 million in each of 2005, 2004 and 2003.

 

**15.****      ****Preferred Stock**

 

Theholders of the Company’s preferred stock are entitled to cumulative dividendsof $0.4375 per quarter, payable in cash except in certain circumstances. SSCC hadapproximately 4.6 million shares of preferred stock issued and outstanding asof December 31, 2005 and 2004. Preferred stock dividends of $8 millionwere paid during 2005, 2004 and 2003. Preferred stock accretion of $4 millionin 2005 and $3 million in 2004 and 2003 was charged to retained earnings(deficit). The holders of preferred stock are not entitled to voting rights onmatters submitted to the Company’s stockholders. The preferred stock isconvertible, at the option of the holder, into shares of SSCC common stock at aconversion price of $34.28 (equivalent to a conversion rate of 0.729 shares ofSSCC common stock for each share of preferred stock), subject to adjustmentbased on certain events. The preferred stock may alternatively beexchanged, at the option of the Company, for new 7% Convertible SubordinatedExchange Debentures due February 15, 2012. The preferred stock isredeemable at the Company’s option until February 15, 2012, at which timethe preferred stock must be redeemed. The preferred stock may be redeemed,at the Company’s option, with cash or SSCC common stock with an equivalent fairvalue. The redemption price is 100% of the liquidation preference. It is theCompany’s intention to redeem the preferred stock with SSCC common stock. Theliquidation preference is $25 per share plus dividends accrued and unpaid.

 

**16.****      ****Stock-Based Compensation**

 

TheCompany has stock options and RSUs outstanding under several long-termincentive plans. The stock options granted under plans prior to the 1998Long-Term Incentive Plan (the “1998 Plan”) are fully vested and exercisable.

 

The1998 Plan and the 2004 Long-Term Incentive Plan (the “2004 Plan”) have reserved16.5 million and 12.5 million shares, respectively, of Company common stock fornon-qualified stock options, RSUs and performance awards to officers, keyemployees and non-employee directors of the Company. The stock options areexercisable at a price equal to fair market value of the Company’s stock ondate of grant. The vesting schedule and other terms and conditions ofoptions granted under each plan are established separately for each grant. Theseoptions expire no later than ten years from the date of grant.

 

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Thestock options granted prior to April 2001 vest and become exercisableeight years after the date of grant subject to acceleration based upon theattainment of pre-established stock price targets. For grants between April 2001and June 2004, the stock options vest and become exercisable at the rateof 25% each year for four years. All grants issued subsequent to June 2004vest and become exercisable on the third anniversary of the award date. Awardswith pro rata vesting are expensed on a straight-line basis.

 

Certaingrants under the 2004 Plan and the 1998 Plan contain change in controlprovisions which provide for immediate vesting and exercisability in the eventthat specific ownership conditions are met. These grants also allow forimmediate vesting and exercisability in the event of retirement. These optionsremain exercisable until the earlier of five years from retirement or ten yearsfrom the initial grant date.

 

Theperformance awards permit the holder to receive amounts, denominated in sharesof Company common stock, based on the Company’s performance during the periodbetween the date of grant and a pre-established future date. Performancecriteria, the length of the performance period and the form and time ofpayment of the award are established separately for each grant. There were noperformance awards outstanding under the 2004 Plan or 1998 Plan at December 31,2005 and 2004.

 

TheCompany issues RSUs to pay a portion of employee bonuses under its annualmanagement incentive plan. These RSUs vest immediately, but the restrictions donot lapse until the third anniversary of the award date. The Company pays apremium on the employee bonuses in the form of RSUs (“Premium RSUs”) tocertain employees. Premium RSUs vest at the earlier of a change in control,death, disability or three years after the award date. Non-employee directorsare annually awarded non-vested RSUs as part of their directorcompensation. In 2005 and 2004, the Company granted non-vested RSUs under the2004 Plan to certain employees. These non-employee directors and employeesnon-vested RSUs vest at the earlier of a change in control, death, disabilityor three years after the award date. The RSUs are non-transferable and do nothave voting rights.

 

Proforma information regarding net income and earnings per share is required bySFAS No. 123 and has been determined as if the Company had accounted forits employee stock options issued subsequent to December 31, 1994 underthe fair value method (See Note 1). The fair value of options included in the proforma information for 2005, 2004 and 2003 and options included in the 2005, 2004and 2003 consolidated statements of operations was estimated at the date ofgrant using a Black-Scholes option pricing model with the followingassumptions:

 
| ** **                               | ** ** | **2005**  | ** ** | **2004** | ** ** | **2003** | ** ** |
|------------------------------------------|------------|-----------|------------|----------|------------|----------|------------|
| Expected option life (years)             | ** ** | **6**     | ** ** | 6        |       | 6        |       |
| Risk-free weighted average interest rate | ** ** | **4.10**  | **%**      | 4.08     | %          | 3.16     | %          |
| Stock price volatility                   | ** ** | **41.00** | **%**      | 31.00    | %          | 41.00    | %          |
| Dividend yield                           | ** ** | **0.0**   | **%**      | 0.0      | %          | 0.0      | %          |

 

Theweighted average fair values of options granted during 2005, 2004 and 2003 were$6.29, $7.17 and $6.23 per share, respectively.

 

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Additionalinformation relating to the stock options is as follows:

 
| ** **                            | ** ** | **Shares Under  Option** | ** ** | **Option  Price Range** | ** **         | **Weighted  Average  Exercise  Price** | ** ** |
|---------------------------------------|------------|-------------------------------|------------|------------------------------|--------------------|----------------------------------------|------------|
| Outstanding at January 1, 2003   |       | 20,050,091                    |       | $                            | 10.00 – 23.38 |                                   | $          | 13.52 |   |
| Granted                               |       | 3,083,945                     |       | 13.53 – 14.44           |               | 14.09                                  |       |
| Exercised                             |       | (5,601,332                    | )          | 10.00 – 17.03           |               | 11.65                                  |       |
| Cancelled                             |       | (207,801                      | )          | 10.00 – 22.35           |               | 16.16                                  |       |
| Outstanding at December 31, 2003 |       | 17,324,903                    |       | 10.00 – 23.38           |               | 14.20                                  |       |
|                                  |       |                          |       |                         |               |                                   |       |
| Granted                               |       | 992,144                       |       | 18.78                        |               | 18.78                                  |       |
| Exercised                             |       | (3,546,349                    | )          | 10.00 – 18.18           |               | 13.17                                  |       |
| Cancelled                             |       | (497,459                      | )          | 10.00 – 22.35           |               | 14.54                                  |       |
| Outstanding at December 31, 2004 |       | 14,273,239                    |       | 10.56 – 23.38           |               | 14.76                                  |       |
|                                  |       |                          |       |                         |               |                                   |       |
| Granted                               | ** ** | **1,054,508**                 | ** ** | **10.56 – 16.37**       | ** **         | **13.78**                              | ** ** |
| Exercised                             | ** ** | **(100,044**                  | **)**      | **10.56 – 17.03**       | ** **         | **13.40**                              | ** ** |
| Cancelled                             | ** ** | **(770,577**                  | **)**      | **11.13 – 22.35**       | ** **         | **17.41**                              | ** ** |
| Outstanding at December 31, 2005 | ** ** | **14,457,126**                | ** ** | **10.56 – 23.38**       | ** **         | **14.55**                              | ** ** |
|                                       |            |                               |            |                              |                    |                                        |            |  |  |

 

Thefollowing table summarizes information about stock options outstanding at December 31,2005:

 
| **Range of  Exercise  Prices** | ** **          | **Options  Outstanding** | ** ** | **Weighted  Average  Exercise Price** | ** ** | **Average  Remaining  Contractual  Life (Years)** | ** ** | **Options  Exercisable** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
|-------------------------------------|---------------------|--------------------------|------------|--------------------------------------------|------------|--------------------------------------------------------|------------|--------------------------|------------|----------------------------------------|------------|
| $                                   | 10.56 –  12.81 |                     |       | 3,723,477                                  |       | $                                                      | 12.33      |                     | 3.91       |                                   | 2,430,080  |   | $ | 12.38 |   |
|   13.00 – 14.44           |                |                     | 6,538,938  |                                       | 14.07      |                                                   | 5.28       |                     | 5,146,625  |                                   | 14.03      |   |
|   14.81 – 17.03           |                |                     | 2,785,434  |                                       | 16.53      |                                                   | 6.58       |                     | 1,791,929  |                                   | 16.58      |   |
|   17.19 – 23.38           |                |                     | 1,409,277  |                                       | 18.76      |                                                   | 6.82       |                     | 421,880    |                                   | 18.39      |   |
|                                |                |                     | 14,457,126 |                                       |       |                                                   |       |                     | 9,790,514  |                                   |       |   |
|                                     |                     |                          |            |                                            |            |                                                        |            |                          |            |                                        |            |  |  |  |  |

 

Thenumber of options exercisable at December 31, 2004 and 2003 was 8,917,003and 9,679,096, respectively. Available shares under the 1998 Plan are nowavailable for issuance under the 2004 Plan. As of December 31, 2005, 10,861,598shares are available for grant under the 2004 Plan.

 

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Additionalinformation relating to RSUs is as follows:

 
| ** **                            | ** ** | ** **    | ** ** | **Weighted Average** | ** ** |
|---------------------------------------|------------|---------------|------------|---------------------------|------------|
| ** **                            | ** ** | ** **    | ** ** | **Grant Date**       | ** ** |
| ** **                            | ** ** | **RSUs**      | ** ** | **Fair Value**       | ** ** |
| Outstanding at January 1, 2003   |       | 448,916       |       |                      |       |
| Granted                               |       | 443,914       |       | $                         | 14.08      |   |
| Converted to  SSCC common stock       |       | (19,262       | )          |                      |       |
| Forfeited                             |       | (3,952        | )          |                      |       |
| Outstanding at December 31, 2003 |       | 869,616       |       |                      |       |
|                                  |       |          |       |                      |       |
| Granted                               |       | 594,301       |       | 18.16                     |       |
| Converted to  SSCC common stock       |       | (32,918       | )          |                      |       |
| Forfeited                             |       | (13,659       | )          |                      |       |
| Outstanding at December 31, 2004 |       | 1,417,340     |       |                      |       |
| ** **                            | ** ** | ** **    | ** ** | ** **                | ** ** |
| Granted                               | ** ** | **972,464**   | ** ** | **13.27**                 | ** ** |
| Converted to  SSCC common stock       | ** ** | **(345,352**  | **)**      | ** **                | ** ** |
| Forfeited                             | ** ** | **(43,748**   | **)**      | ** **                | ** ** |
| Outstanding at December 31, 2005 | ** ** | **2,000,704** | ** ** | ** **                | ** ** |
|                                       |            |               |            |                           |            |  |

 

Thenumber of RSUs vested at December 31, 2005, 2004 and 2003 was 732,838;766,965 and 639,793, respectively.

 

**17.****      ****Stockholder Rights Plan**

 

InSeptember 2002, the Company adopted a stockholder rights plan under whichthe Board of Directors declared a dividend of one preferred stock purchaseright (“Right”) for each outstanding share of the Company’s common stock heldof record as of the close of business on September 17, 2002. Each Rightentitles the holder to purchase one one-thousandth of a share of Series BJunior Participating Preferred Stock (“Preferred Stock”). The Rights becomeexercisable following a public announcement that an acquiring person (“AcquiringPerson”), as determined by the Board of Directors, has obtained beneficialownership of 15% or more of the outstanding shares of the Company’s commonstock or commenced a tender or exchange offer that would result in suchownership threshold being attained. Each Right, if and when it becomesexercisable, will entitle holders of the Rights (other than an AcquiringPerson), upon payment of the exercise price, to the number of shares ofPreferred Stock having a fair value equal to approximately two times theexercise price. In addition, if after a person or group becomes an AcquiringPerson and the Company was acquired in a merger or other business combination,each holder of Rights (other than an Acquiring Person) will have the right toacquire, upon payment of the exercise price, that number of shares of commonstock of the acquiring company having a fair value equal to approximately twotimes the exercise price. The Rights expire on September 9, 2012 unlessearlier redeemed or exchanged by the Company.

 

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**18.****      ****Accumulated Other Comprehensive Income (Loss)**

 

Accumulatedother comprehensive income (loss), net of tax is as follows:

 
| ** **                                         | ** ** | **Foreign  Currency  Translation  Adjustment** | ** ** | **Minimum  Pension  Liability** | ** ** | **Deferred  Hedge  Gain  (Loss)** | ** ** | **Accumulated  Other  Comprehensive  Income (Loss)** | ** ** |
|----------------------------------------------------|------------|------------------------------------------------|------------|---------------------------------|------------|-----------------------------------|------------|-----------------------------------------------------------|------------|
| Balance at January 1, 2003                    |       | $                                              | (12        | )                               | $          | (351                              | )          | $                                                         |       | $ | (363 | ) |
| Net changes  in fair value of hedging transactions |       |                                           |       |                            |       | 3                                 |       | 3                                                         |       |
| Net gain  reclassified into earnings               |       |                                           |       |                            |       | (2                                | )          | (2                                                        | )          |
| Exchange  transaction (See Note 3)                 |       | 20                                             |       |                            |       |                              |       | 20                                                        |       |
| Current  period change                             |       | 3                                              |       | 50                              |       |                              |       | 53                                                        |       |
| Balance at December 31, 2003                  |       | 11                                             |       | (301                            | )          | 1                                 |       | (289                                                      | )          |
| Net changes  in fair value of hedging transactions |       |                                           |       |                            |       | (4                                | )          | (4                                                        | )          |
| Net gain  reclassified into earnings               |       |                                           |       |                            |       | (3                                | )          | (3                                                        | )          |
| Current  period change                             |       | (4                                             | )          | (14                             | )          |                              |       | (18                                                       | )          |
| Balance at December 31, 2004                  |       | 7                                              |       | (315                            | )          | (6                                | )          | (314                                                      | )          |
| Net changes  in fair value of hedging transactions | ** ** | ** **                                     | ** ** | ** **                      | ** ** | **35**                            | ** ** | **35**                                                    | ** ** |
| Net gain  reclassified into earnings               | ** ** | ** **                                     | ** ** | ** **                      | ** ** | **(6**                            | **)**      | **(6**                                                    | **)**      |
| Current  period change                             | ** ** | **(7**                                         | **)**      | **(81**                         | **)**      | ** **                        | ** ** | **(88**                                                   | **)**      |
| Balance at December 31, 2005                  | ** ** | **$**                                          | ** ** | ** **                      | **$**      | **(396**                          | **)**      | **$**                                                     | **23**     | ** ** | **$** | **(373** | **)** |
|                                                    |            |                                                |            |                                 |            |                                   |            |                                                           |            |  |  |  |  |

 

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**19.****      ****Earnings Per Share**

 

Thefollowing table sets forth the computation of basic and diluted earnings pershare:

 
| ** **                                                                                                      | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|-----------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Numerator:                                                                                                      |       |     |       |     |       |     |       |
| Loss from  continuing operations before cumulative effect of accounting change                                  | ** ** | **$**    | **(327**   | **)**    | $          | (46      | )          | $ | (198 | ) |
| Preferred  stock dividends and accretion                                                                        | ** ** | **(12**  | **)**      | (11      | )          | (11      | )          |
| Net loss  available to common stockholders                                                                      | ** ** | **$**    | **(339**   | **)**    | $          | (57      | )          | $ | (209 | ) |
|                                                                                                            |       |     | ** ** |     |       |     |       |
| Denominator:                                                                                                    |       |     | ** ** |     |       |     |       |
| Denominator  for basic and diluted earnings per share – weighted average shares and  assumed conversions   | ** ** | **255**  | ** ** | 253      |       | 246      |       |
|                                                                                                            |       |     | ** ** |     |       |     |       |
| Basic and  diluted earnings per share from continuing operations before cumulative  effect of accounting change | ** ** | **$**    | **(1.33**  | **)**    | $          | (.23     | )          | $ | (.85 | ) |

 

Convertiblepreferred stock to acquire three million shares of common stock with an effectof $12 million, $11 million and $11 million on net loss available to commonstockholders for 2005, 2004 and 2003, respectively, is excluded from thediluted earnings per share computation because they are antidilutive for allyears presented. Employee stock options and non-vested RSUs are excluded fromthe diluted earnings per share calculation for 2005, 2004 and 2003 because theyare antidilutive.

 

**20.****      ****Goodwill and Other Intangible Assets**

 

TheCompany has completed the required annual impairment tests and determined thereto be no impairment.

 

During 2004, theCompany preliminarily allocated $12 million to intangible assets related to theacquisition of the remaining 15% of IPC, a corrugated container facility inMilwaukee, Wisconsin. In 2005, the Company completed its allocation of thepurchase price related to IPC, resulting in the reclassification of $8 millionfrom intangible assets to goodwill (See Note 4).

 

**Goodwill**

Thefollowing table summarizes the activity of goodwill by segment:

 
| ** **                        | ** ** | **Containerboard  & Corrugated  Containers** | ** **      | **Consumer  Packaging** | ** ** | **Total**     | ** ** |
|-----------------------------------|------------|-------------------------------------------------------|-----------------|-------------------------|------------|---------------|------------|
| Balance at January 1, 2004   |       | $                                                     | 3,022           |                    | $          | 279           |       | $ | 3,301 |   |
| Goodwill  acquired                |       |                                                  |            |                    |       |          |       |
| Balance at December 31, 2004 |       | 3,022                                                 |            | 279                     |       | 3,301         |       |
| Adjustment                        | ** ** | **8**                                                 | ** **      | ** **              | ** ** | **8**         | ** ** |
| Balance at December 31, 2005 | ** ** | **$**                                                 | ** 3,030** | ** **              | **$**      | ** 279** | ** ** | **$** | ** 3,309** | ** ** |

 

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**Other Intangible Assets**

Intangibleasset activity is as follows:

 
| ** **                        | ** ** | **Definite Life** | ** **   | **Indefinite Life** | ** ** | **Total**    | ** ** |
|-----------------------------------|------------|------------------------|--------------|--------------------------|------------|--------------|------------|
| Balance at January 1, 2004   |       | $                      | 34           |                     | $          | 12           |       | $ | 46 |   |
| Intangible assets acquired        |       | 12                     |         |                     |       | 12           |       |
| Amortization                      |       | (3                     | )            |                     |       | (3           | )          |
| Balance at December 31, 2004 |       | 43                     |         | 12                       |       | 55           |       |
| Adjustment                        | ** ** | **(8**                 | **)**        | ** **               | ** ** | **(8**       | **)**      |
| Amortization                      | ** ** | **(4**                 | **)**        | ** **               | ** ** | **(4**       | **)**      |
| Balance at December 31, 2005 | ** ** | **$**                  | ** 31** | ** **               | **$**      | ** 12** | ** ** | **$** | ** 43** | ** ** |

 

Thegross carrying value of the definite life intangible assets, primarily customerrelationships, is $40 million and $48 million and related accumulatedamortization of $9 million and $5 million at December 31, 2005 and 2004,respectively. The weighted-average amortization period of the definite lifeintangible assets is 13 years.

 

**21.**** ****Related Party Transactions**

 

**Transactions with Non-consolidated Affiliates**

TheCompany sold paperboard, market pulp and fiber to and purchased containerboardand kraft paper from various non-consolidated affiliates on terms generallysimilar to those prevailing with unrelated parties. The following tablesummarizes the Company’s related party transactions with its non-consolidatedaffiliates for each year presented:

 
| ** **                            | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|---------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Product sales                         | ** ** | **$**    | **67**     |     | $          | 77       |       | $ | 114 |   |
| Product and raw material purchases    | ** ** | **36**   |       | 32       |       | 26       |       |
| Trade receivables at December 31 | ** ** | **7**    |       | 8        |       | 15       |       |
| Notes receivable at December 31  | ** ** | **2**    |       |     |       |     |       |
| Trade payables at December 31    | ** ** | **5**    |       | 3        |       | 3        |       |
|                                       |            |          |            |          |            |          |            |  |  |  |

 

**Transactions with JS Group**

JSGroup, formerly SSCC’s largest stockholder, was a related party of the Companyuntil May 8, 2003 when Michael W. J. Smurfit, Anthony P. J. Smurfit,Dermot F. Smurfit and Howard E. Kilroy, each of whom were current or former directorsor executive officers of JS Group, retired from SSCC’s Board of Directors.

 

OnMarch 31, 2003, the Company exchanged its European packaging operationsfor JS Group’s 50% ownership in Smurfit-MBI and a payment from JS Group of $189million (See Note 3).

 

**Other Transactions**

LeighJ. Abramson, a member of the Company’s Board of Directors until hisresignation, effective May 8, 2003, was a Managing Director of MorganStanley & Co. Incorporated, which has provided, and continues toprovide, various financial services to the Company, including investmentbanking, investment management, financial advisory and commodity hedging. Paymentsmade to Morgan Stanley & Co. Incorporated, representing commissionsearned, were immaterial in 2003 through May 8, 2003.

 

ThomasA. Reynolds, III, a member of the Company’s Board of Directors, is amember of the Executive Committee of the law firm of Winston & StrawnLLP, which has provided, and continues to provide, legal services to theCompany and its subsidiaries.

 

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WilliamD. Smithburg, a member of the Company’s Board of Directors since May 2003,is a member of the Board of Directors of Barry-Wehmiller Companies, Inc.,which sold the Company equipment for $9 million, $9 million and $6 million during2005, 2004 and the period May 2003 through December 2003,respectively. All such sales were made on an arm’s-length basis.

 

PatrickJ. Moore, Chairman, President and Chief Executive Officer and a member of theCompany’s Board of Directors, is a member of the Board of Directors of ArcherDaniels Midland Company (“ADM”) since November 2003. ADM sold the Company $9million and $8 million of supplies used in mill operations in 2005 and 2004,respectively. The Company sold products to ADM of $21 million, $15 million and$3 million in 2005, 2004 and the period November 2003 through December 2003,respectively. All such sales were made on an arm’s-length basis.

 

**22.****      ****Fair Value of Financial Instruments**

 

Thecarrying amounts and fair values of the Company’s financial instruments as of December 31are as follows:

 
| ** **                                  | ** ** | **2005**             | ** ** | **2004**        | ** ** |
|---------------------------------------------|------------|----------------------|------------|-----------------|------------|
| ** **                                  | ** ** | **Carrying  Amount** | ** ** | **Fair  Value** | ** ** | **Carrying  Amount** | ** ** | **Fair  Value** | ** ** |
| Cash and cash equivalents                   | ** ** | **$**                | **5**      | ** **      | **$**      | **5** |   | $ | 6 |   | $ | 6 |   |
| Cost method investments                     | ** ** | **2**                | ** ** | **2**           |       |   |   |   |   |
| Notes receivable                            | ** ** | **8**                | ** ** | **8**           |       | 7 |   | 7 |   |
| Residual interest in timber notes           | ** ** | **46**               | ** ** | **46**          |       | 45 |   | 45 |   |
| Net derivative assets                       | ** ** | **57**               | ** ** | **57**          |       | 11 |   | 11 |   |
| Long-term debt including current maturities | ** ** | **4,571**            | ** ** | **4,485**       |       | 4,498 |   | 4,746 |   |
|                                             |            |                      |            |                 |            |  |  |  |  |  |  |  |  |

 

Thecarrying amount of cash equivalents approximates fair value because of theshort maturity of those instruments. The carrying amount of cost methodinvestments approximates fair value. The fair values of notes receivable arebased on discounted future cash flows or the applicable quoted market price. Thefair value of the residual interest in timber notes is based on discountedfuture cash flows. The fair values of the Company’s derivatives are based onprevailing market rates. The fair value of the Company’s debt is estimatedbased on the quoted market prices for the same or similar issues or on thecurrent rates offered to the Company for debt of the same remaining maturities.

 

**23.****      ****Other, Net**

 

Thesignificant components of other, net in the Company’s consolidated statementsof operations are as follows:

 
| ** **                              | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|-----------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Foreign currency exchange losses        | ** ** | **$**    | **(9**     | **)**    | $          | (20      | )          | $ | (47 | ) |
| Loss on sales of receivables            | ** ** | **(21**  | **)**      | (8       | )          | (4       | )          |
| Income from non-consolidated affiliates |       |     | ** ** | 3        | ** ** | 5        |       |
| Other                                   | ** ** | **9**    | ** ** | 7        |       | 5        |       |
| Total other, net                        | ** ** | **$**    | **(21**    | **)**    | $          | (18      | )          | $ | (41 | ) |

 

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**24.****      ****Contingencies**

 

In 2003, the Company settledthe antitrust class action cases pending against the Company, which werebased on allegations of a conspiracy among linerboard manufacturers from 1993to 1995 and made aggregate settlement payments of $92.5 million, one-half ofwhich was paid in December 2003 and the remainder of which was paid in January 2005.The Company, along with other large linerboard manufacturers, was named adefendant in several lawsuits brought on behalf of numerous companies thatopted out of these class actions to seek their own recovery, all but oneof which were consolidated for pretrial proceedings in the United StatesDistrict Court for the Eastern District of Pennsylvania, and one of which hasbeen remanded to Kansas District Court (the “Direct Action Cases”). During thenine month period ended September 30, 2005, the Company settled certain ofthe Direct Action Cases and made aggregate payments of approximately $14million. As a result of renewed discussions with counsel representing amajority of the remaining plaintiffs, in December 2005, the Companysettled a majority of the remaining Direct Action Cases, making aggregatepayments of $33 million in January 2006. Also in January 2006, theCompany settled two additional Direct Action Cases and paid approximately $3million, and in March 2006, the Company settled the final two DirectAction Cases, and will make a payment of approximately $10 million in April2006, which will finalize the resolution of all of the Direct Action Cases. The Company accounted for these settlementsby applying existing reserves and recording additional charges of $36 millionin the fourth quarter of 2005. The Company recorded charges of $3 million and$121 million in 2004 and 2003, respectively, related to the antitrust class actioncases and the Direct Action Cases.

 

TheCompany’s past and present operations include activities which are subject tofederal, state and local environmental requirements, particularly relating toair and water quality. The Company faces potential environmental liability as aresult of violations of permit terms and similar authorizations that haveoccurred from time to time at its facilities. In addition, the Company facespotential liability for response costs at various sites for which it hasreceived notice as being a potentially responsible party (“PRP”) concerninghazardous substance contamination. In estimating its reserves for environmentalremediation and future costs, the Company’s estimated liability of $3 million reflectsthe Company’s expected share of costs after consideration for the relativepercentage of waste deposited at each site, the number of other PRPs, theidentity and financial condition of such parties and experience regardingsimilar matters. As of December 31, 2005, the Company had approximately $29million reserved for environmental liabilities included primarily in otherlong-term liabilities in the consolidated balance sheet. The Company believesthe liability for these matters was adequately reserved at December 31, 2005.

 

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

 

TheCompany is a defendant in a number of lawsuits and claims arising out of theconduct of its business, including those related to environmental matters. Whilethe ultimate results of such suits or other proceedings against the Companycannot be predicted with certainty, the management of the Company believes thatthe resolution of these matters will not have a material adverse effect on itsconsolidated financial condition or results of operations.

 

**25.****      ****Business Segment Information**

 

TheCompany has two reportable segments:  (1) Containerboardand Corrugated Containers and (2) Consumer Packaging. The Containerboardand Corrugated Containers segment is highly integrated. It includes a system ofmills and plants that produces a full line of containerboard that is convertedinto corrugated containers. It also provides single source full merchandisingsolutions to retailers and

 

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consumerpackaging companies through its Innovation to Implementation (“i2i SM”)operations. Corrugated containers are used to transport such diverse productsas home appliances, electric motors, small machinery, grocery products,produce, books, tobacco and furniture. The Consumer Packaging segment is alsohighly integrated. It includes a system of mills and plants that produce a broadrange of coated recycled boxboard that is converted into folding cartons andpackaging labels. In addition, the Consumer Packaging segment converts kraftand specialty paper into multiwall bags, consumer bags and intermediate bulkcontainers. Folding cartons are used primarily to protect products, such asfood, fast food, detergents, paper products, beverages, health and beauty aidsand other consumer products, while providing point of purchase advertising. Flexiblepackaging, paper and metalized paper labels and heat transfer labels are usedin a wide range of consumer applications. The bags and intermediate containersare designed to ship and protect a wide range of industrial and consumerproducts including fertilizers, chemicals, concrete and pet and food products.

 

TheCompany evaluates performance and allocates resources based on profit or loss fromoperations before income taxes, interest expense and other non-operating gainsand losses. The accounting policies of the reportable segments are the same asthose described in the summary of significant accounting policies. Intersegmentsales and transfers are recorded at market prices.

 

TheCompany’s reportable segments are strategic business units that offer differentproducts. The reportable segments are each managed separately because theymanufacture distinct products. Other includes corporate related items and two non-reportablesegments, including Reclamation and International, which has been eliminated asof the end of 2004. The i2i SM operations, formed in 2004, werereported as a non-reportable segment and included as part of other in 2004.During the fourth quarter of 2005, these operations were moved into theContainerboard and Corrugated Containers segment and the 2004 segmentinformation was restated. Corporate related items include expenses notallocated to reportable segments including corporate expenses, asset impairmentcharges, restructuring charges, non-cash foreign currency gains or losses andinterest expense.

 

TheCompany is currently evaluating strategic options for its Consumer Packagingsegment, including the possible sale of some or all of these businesses (SeeNote 2). As of December 31, 2005, the Company did not meet the criteria toaccount for the Consumer Packaging segment as assets held for sale, inaccordance with SFAS No. 144, “Accounting for the Impairment or Disposalof Long-Lived Assets.”  Accordingly, theoperations of the Consumer Packaging segment are included in continuingoperations in the consolidated statements of operations and as a reportablesegment.

 

76

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| ** **                               | ** ** | **Container-  board &  Corrugated  Containers** | ** ** | **Consumer  Packaging** | ** ** | **Other** | ** ** | **Total** | ** ** |
|------------------------------------------|------------|----------------------------------------------------------|------------|-------------------------|------------|-----------|------------|-----------|------------|
| **Year ended December 31, 2005**    |       |                                                     |       |                    |       |      |       |      |       |
| Revenues from external customers         | ** ** | **$**                                                    | **6,359**  | ** **              | **$**      | **1,663** | ** ** | **$**     | **374**    | ** ** | **$** | **8,396** | ** ** |
| Intersegment revenues                    | ** ** | **151**                                                  | ** ** | ** **              | ** ** | **284**   | ** ** | **435**   | ** ** |
| Depreciation, depletion and amortization | ** ** | **332**                                                  | ** ** | **42**                  | ** ** | **34**    | ** ** | **408**   | ** ** |
| Segment profit (loss)                    | ** ** | **183**                                                  | ** ** | **83**                  | ** ** | **(800**  | **)**      | **(534**  | **)**      |
| Total assets                             | ** ** | **4,584**                                                | ** ** | **616**                 | ** ** | **3,914** | ** ** | **9,114** | ** ** |
| Expenditures for long-lived assets       | ** ** | **214**                                                  | ** ** | **38**                  | ** ** | **24**    | ** ** | **276**   | ** ** |
|                                     |       |                                                     |       |                    |       |      |       |      |       |
| **Year ended December 31, 2004**    |       |                                                     |       |                    |       |      |       |      |       |
| Revenues from external customers         |       | $                                                        | 6,247      |                    | $          | 1,656     |       | $         | 388        |   | $ | 8,291 |   |
| Intersegment revenues                    |       | 144                                                      |       |                    |       | 303       |       | 447       |       |
| Depreciation, depletion and amortization |       | 340                                                      |       | 40                      |       | 36        |       | 416       |       |
| Segment profit (loss)                    |       | 314                                                      |       | 81                      |       | (504      | )          | (109      | )          |
| Total assets                             |       | 5,097                                                    |       | 605                     |       | 3,881     |       | 9,583     |       |
| Expenditures for long-lived assets       |       | 163                                                      |       | 27                      |       | 29        |       | 219       |       |
|                                     |       |                                                     |       |                    |       |      |       |      |       |
| **Year ended December 31, 2003**    |       |                                                     |       |                    |       |      |       |      |       |
| Revenues from external customers         |       | $                                                        | 5,759      |                    | $          | 1,656     |       | $         | 307        |   | $ | 7,722 |   |
| Intersegment revenues                    |       | 142                                                      |       |                    |       | 260       |       | 402       |       |
| Depreciation, depletion and amortization |       | 333                                                      |       | 39                      |       | 36        |       | 408       |       |
| Segment profit (loss)                    |       | 246                                                      |       | 82                      |       | (666      | )          | (338      | )          |
| Total assets                             |       | 5,410                                                    |       | 690                     |       | 3,856     |       | 9,956     |       |
| Expenditures for long-lived assets       |       | 129                                                      |       | 41                      |       | 42        |       | 212       |       |

 

Thefollowing table presents net sales to external customers by country of origin:

 
| ** **       | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|------------------|------------|----------|------------|----------|------------|----------|------------|
| United States    | ** ** | **$**    | **7,513**  |     | $          | 7,434    |       | $ | 7,033 |   |
| Foreign          | ** ** | **883**  |       | 857      |       | 689      |       |
| Total net  sales | ** ** | **$**    | **8,396**  |     | $          | 8,291    |       | $ | 7,722 |   |

 

Thefollowing table presents long-lived assets by country:

 
| ** **               | ** ** | **2005**  | ** ** | **2004** | ** ** | **2003** | ** ** |
|--------------------------|------------|-----------|------------|----------|------------|----------|------------|
| United States            | ** ** | **$**     | **3,647**  |     | $          | 3,894    |       | $ | 4,060 |   |
| Canada                   | ** ** | **623**   |       | 768      |       | 890      |       |
| Other                    | ** ** | **19**    |       | 20       |       | 24       |       |
| ** **               |       | **4,289** |       | 4,682    |       | 4,974    |       |
| Goodwill                 | ** ** | **3,309** |       | 3,301    |       | 3,301    |       |
| Total  long-lived assets | ** ** | **$**     | **7,598**  |     | $          | 7,983    |       | $ | 8,275 |   |

 

TheCompany’s export sales from the United States were approximately $530 millionfor 2005, $482 million for 2004 and $461 million for 2003.

 

77

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**26.****      ****Quarterly Results (Unaudited)**

 

Thefollowing is a summary of the unaudited quarterly results of operations:

 
| ** **                                          | ** ** | **First  Quarter** | ** ** | **Second  Quarter** | ** ** | **Third  Quarter** | ** ** | **Fourth  Quarter** | ** ** |
|-----------------------------------------------------|------------|--------------------|------------|---------------------|------------|--------------------|------------|---------------------|------------|
| **2005**                                            |       |               |       |                |       |               |       |                |       |
| Net sales                                           | ** ** | **$**              | **2,093**  | ** **          | **$**      | **2,153**          | ** ** | **$**               | **2,103**  | ** ** | **$** | **2,047** | ** ** |
| Gross profit                                        | ** ** | **258**            | ** ** | **289**             | ** ** | **237**            | ** ** | **178**             | ** ** |
| Income  (loss) from continuing operations (a)       | ** ** | **(16**            | **)**      | **4**               | ** ** | **(226**           | **)**      | **(89**             | **)**      |
| Net income  (loss)                                  | ** ** | **(16**            | **)**      | **4**               | ** ** | **(226**           | **)**      | **(89**             | **)**      |
| Preferred  stock dividends and accretion            | ** ** | **(3**             | **)**      | **(3**              | **)**      | **(3**             | **)**      | **(3**              | **)**      |
| Net income  (loss) available to common stockholders | ** ** | **(19**            | **)**      | **1**               | ** ** | **(229**           | **)**      | **(92**             | **)**      |
| ** **                                          | ** ** | ** **         | ** ** | ** **          | ** ** | ** **         | ** ** | ** **          | ** ** |
| **Basic  and diluted earnings per share:**          | ** ** | ** **         | ** ** | ** **          | ** ** | ** **         | ** ** | ** **          | ** ** |
| Income  (loss) from continuing operations           | ** ** | **(.07**           | **)**      | **.00**             | ** ** | **(.90**           | **)**      | **(.36**            | **)**      |
| Net income  (loss)                                  | ** ** | **(.07**           | **)**      | **.00**             | ** ** | **(.90**           | **)**      | **(.36**            | **)**      |
|                                                |       |               |       |                |       |               |       |                |       |
| **2004**                                            |       |               |       |                |       |               |       |                |       |
| Net sales                                           |       | $                  | 1,942      |                | $          | 2,038              |       | $                   | 2,165      |   | $ | 2,146 |   |
| Gross profit                                        |       | 192                |       | 256                 |       | 336                |       | 331                 |       |
| Income  (loss) from continuing operations (b)       |       | (63                | )          | (7                  | )          | 31                 |       | (7                  | )          |
| Net income  (loss)                                  |       | (63                | )          | (7                  | )          | 31                 |       | (7                  | )          |
| Preferred  stock dividends and accretion            |       | (3                 | )          | (3                  | )          | (3                 | )          | (2                  | )          |
| Net income  (loss) available to common stockholders |       | (66                | )          | (10                 | )          | 28                 |       | (9                  | )          |
| ** **                                          | ** ** | ** **         | ** ** | ** **          | ** ** | ** **         | ** ** | ** **          | ** ** |
| **Basic  and diluted earnings per share:**          | ** ** | ** **         | ** ** | ** **          | ** ** | ** **         | ** ** | ** **          | ** ** |
| Income  (loss) from continuing operations           |       | (.26               | )          | (.04                | )          | .11                |       | (.04                | )          |
| Net income  (loss)                                  |       | (.26               | )          | (.04                | )          | .11                |       | (.04                | )          |

 

----

(a)          Income (loss) from continuing operations includes litigation settlementpretax charges of $36 million and restructuring pretax charges of $24 millionin the fourth quarter of 2005.

 

(b)         Income (loss) from continuing operations includes an asset impairment pretaxcharge of $73 million in the fourth quarter of 2004.

 

78

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**SMURFIT-STONE CONTAINERCORPORATION**

**SCHEDULE II—VALUATION ANDQUALIFYING ACCOUNTS AND RESERVES**

(In millions)

 
| **Column A**                                                      | ** ** | **Column B**                              | ** ** | **Column C**                                        | ** ** | **Column D**   | ** ** | **Column E**        | ** ** | **Column F**                        | ** **  |
|------------------------------------------------------------------------|------------|------------------------------------------------|------------|----------------------------------------------------------|------------|---------------------|------------|--------------------------|------------|------------------------------------------|-------------|
| **Description**                                                        | ** ** | **Balance at  Beginning of  Period** | ** ** | **Additions  Charged to  Costs and  Expenses** | ** ** | **Other  Describe** | ** ** | **Deductions  Describe** | ** ** | **Balance at  End of  Period** | ** **  |
| **Allowance  for doubtful accounts and sales returns and allowances:** |       |                                           |       |                                                     |       |                |       |                     |       |                                     |        |
|                                                                   |       |                                           |       |                                                     |       |                |       |                     |       |                                     |        |
| Year ended December 31,  2005                                     | ** ** | **$**                                          | **12**     | ** **                                               | **$**      | **3**               | ** ** | **$**                    | **(1**     | **)(a)**                                 | **$**       | **4** | **(b)** | **$** | **10** | ** ** |
|                                                                   |       |                                           |       |                                                     |       |                |       |                     |       |                                     |        |
| Year ended December 31,  2004                                     |       | $                                              | 38         |                                                     | $          | 8                   |       | $                        | (24        | )(a)                                     | $           | 10 | (b) | $ | 12 |   |
|                                                                   |       |                                           |       |                                                     |       |                |       |                     |       |                                     |        |
| Year ended December 31,  2003                                     |       | $                                              | 38         |                                                     | $          | 11                  |       | $                        | (3         | )(a)(c)                                  | $           | 8 | (b) | $ | 38 |   |
|                                                                   |       |                                           |       |                                                     |       |                |       |                     |       |                                     |        |
| **Acquisitions  and mergers exit liabilities:**                        |       |                                           |       |                                                     |       |                |       |                     |       |                                     |        |
|                                                                   |       |                                           |       |                                                     |       |                |       |                     |       |                                     |        |
| Year ended December 31,  2005                                     | ** ** | **$**                                          | **5**      | ** **                                               | **$**      | ** **          | **$**      | ** **               | ** ** | **$**                                    | ** 1** | **(d)** | **$** | ** 4** | ** ** |
|                                                                   |       |                                           |       |                                                     |       |                |       |                     |       |                                     |        |
| Year ended December 31,  2004                                     |       | $                                              | 7          |                                                     | $          |                | $          |                     |       | $                                        |  2     | (d) | $ |  5 |   |
|                                                                   |       |                                           |       |                                                     |       |                |       |                     |       |                                     |        |
| Year ended December 31,  2003                                     |       | $                                              | 28         |                                                     | $          |                | $          | (15                      | )(e)       | $                                        | 6           | (d) | $ | 7 |   |
|                                                                   |       |                                           |       |                                                     |       |                |       |                     |       |                                     |        |
| **Restructuring:**                                                     |       |                                           |       |                                                     |       |                |       |                     |       |                                     |        |
|                                                                   |       |                                           |       |                                                     |       |                |       |                     |       |                                     |        |
| Year ended December 31,  2005                                     | ** ** | **$**                                          | **28**     | ** **                                               | **$**      | **321**             | ** ** | **$**                    | ** ** | **$**                                    | **298**     | **(d)** | **$** | **51** | ** ** |
|                                                                   |       |                                           |       |                                                     |       |                |       |                     |       |                                     |        |
| Year ended December 31,  2004                                     |       | $                                              | 44         |                                                     | $          | 16                  | (f)        | $                        | 5          | (f)                                      | $           | 37 | (d) | $ | 28 |   |
|                                                                   |       |                                           |       |                                                     |       |                |       |                     |       |                                     |        |
| Year ended December 31,  2003                                     |       | $                                              | 24         |                                                     | $          | 115                 |       | $                        |       | $                                        | 95          | (d) | $ | 44 |   |
|                                                                        |            |                                                |            |                                                          |            |                     |            |                          |            |                                          |             |  |  |  |  |  |  |  |

 

----

(a)          Includes the effect of the accounts receivable securitizationapplication.

(b)         Uncollectible amounts written off, net of recoveries.

(c)          Includes $1 million in connection with the Smurfit-MBI exchange transaction.

(d)         Charges against the reserves.

(e)          Charges and adjustments associated with the exit activities related to acquisitionand merger transactions completed in prior years.

(f)            Gain on sale of closed properties reduces thecharge by $5 million and is added back to other, since there is no impact onexit liabilities.

 

79

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| **ITEM 9.** | ** ** | **CHANGES  IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE** |
|-------------|------------|-------------------------------------------------------------------------------------------|

 

None.

 

**ITEM 9A.****  CONTROLSAND PROCEDURES**

 

**Evaluationof Disclosure Controls and Procedures**

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

 

**Changesin Internal Control**

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

 

The Sarbanes-Oxley Act of 2002 (the Act) imposedmany requirements regarding corporate governance and financial reporting. Onerequirement under Section 404 of the Act, beginning with our 2004 Annual Report,was for management to report on the Company’s internal control over financialreporting and for our independent registered public accountants to attest tothis report. Management’s Report on Internal Control over Financial Reportingand our independent registered public accounting firm’s report with respect to management’sassessment of the effectiveness of internal control over financial reporting areincluded in Item 8, “Financial Statements and Supplementary Data.”

 

**ITEM 9B.****  OTHERINFORMATION**

 

None.

 

## **PART III**

## ** **

**ITEM 10.****  DIRECTORSAND EXECUTIVE OFFICERS OF THE REGISTRANT**

 

Additionalinformation regarding Smurfit-Stone’s directors and executive officers, andcalled for by this Item 10, is set forth in the Proxy Statement for the annualmeeting to be held May 10, 2006 (the Proxy Statement) and is incorporatedherein by reference.

 

# **Directors**

Set forth below is certaininformation concerning Smurfit-Stone’s directors.

 

**James R.Boris,**born****October 25,1944,****is the retired Chairman and ChiefExecutive Officer of EVEREN Securities, Inc. (formerly Kemper Securities, Inc.).Mr. Boris is a director of Peoples Energy Corporation, Loyola UniversityHealth Systems, Inc. and the Chicago Board Options Exchange.

 

**Connie K.Duckworth**, born November 3, 1954, has been President andChairman of Arzu, Inc. since August 2003 and partner of 8WingsEnterprises, LLC since July 2001. She was a partner of Circle FinancialGroup, LLC from January 2003 to December 2004. Ms. Duckworthretired from Goldman Sachs & Co. as Advisory Director in 2001.Ms. Duckworth is a director of Northwestern Mutual, DNP Select Income Fundand Nuveen Investments, Inc.

 

80

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**Alan E.Goldberg**, born September 1, 1954, has been a Co-ManagingPartner of Lindsay Goldberg & Bessemer GP LLC and its relatedinvestment manager, Goldberg Lindsay & Co. LLC, since March 2001.He served as Chairman and Chief Executive Officer of Morgan Stanley Dean WitterPrivate Equity from February 1998 through January 2001. He served asManaging Director of Morgan Stanley & Co. Incorporated from January 1988through January 2001.

 

**WilliamT. Lynch, Jr.,**born December 3, 1942, has beenPresident and Chief Executive Officer of Liam Holdings, LLC since April 1997.Mr. Lynch is a director of Krispy Kreme Doughnuts, Inc., PellaCorporation and Ygomi LLC.

 

**PatrickJ. Moore**, born September 7, 1954, was appointedPresident and Chief Executive Officer of Smurfit-Stone in January 2002 andbecame Chairman of the Board in May 2003. He was Vice President and ChiefFinancial Officer of Smurfit-Stone from November 1998 to January 2002.Mr. Moore is a director of Archer Daniels Midland Company.

 

**James J.O’Connor**, born March 15, 1937, is the former Chairmanand Chief Executive Officer of Unicom Corporation and its subsidiary,Commonwealth Edison Company. Mr. O’Connor is a director of CorningIncorporated, Trizec Properties, Inc. and UAL Corporation.

 

**Jerry K.Pearlman**, born March 27, 1939, is the retired Chairmanof the Board and Chief Executive Officer of Zenith Electronics Corporation.Mr. Pearlman is a director of Ryerson-Tull Inc. and Nanophase TechnologiesCorporation and served as director of Stone Container from 1984 to 1998.

 

**Thomas A.Reynolds, III**, born May 12, 1952, has been apartner of Winston & Strawn LLP since 1984, a law firm that regularlyrepresents Smurfit-Stone on numerous matters. Mr. Reynolds is a member ofWinston & Strawn LLP’s executive committee.

 

**Eugene C.Sit**, born August 8, 1938, has been Chairman, ChiefExecutive Officer and Chief Investment Officer of Sit Investment Associates formore than five years. Mr. Sit is a director of Corning Incorporated.

 

**WilliamD. Smithburg,**born July 9, 1938, is the retiredChairman, President and Chief Executive Officer of The Quaker Oats Company. Heis a director of Abbott Laboratories, Northern Trust Corporation and CorningIncorporated.

 

**ExecutiveOfficers**

Set forth below is certaininformation concerning the executive officers of Smurfit-Stone.

 

**Jeffrey S.Beyersdorfer,**born November 21, 1961, was appointed VicePresident and Treasurer in June 2002. Prior to joining Smurfit-Stone, Mr. Beyersdorferserved as Vice President of Finance and Treasurer of Premcor Inc. from April 1997to June 2002.

 

**MathewBlanchard,**born September 9, 1959, was appointed VicePresident and General Manager - Board Sales Division in July 2000.

 

**James E. Burdiss,**born May 15, 1951, was appointed Senior Vice President and ChiefInformation Officer on February 23, 2005, and prior to that had been VicePresident and Chief Information Officer since January 2002. He was SeniorDirector of Smurfit-Stone’s Enterprise Transformation Project from January 2001to January 2002.

 

**James D.Duncan**, born June 12, 1941, was appointed Senior Vice President – Corporate Sales and Marketing on February 23,2005, and prior to that had been Vice President - Corporate Sales andMarketing since October 2000.

 

81

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**Daniel J.Garand**, born December 12, 1950, was appointed Senior Vice President – Supply Chain Management on February 23,2005, and prior to that had been Vice President – Supply ChainManagement since April 2004. He was Vice President of Supply ChainOperations from October 1999 to April 2004.

 

**Ronald D.Hackney,**born November 9, 1946, was appointed Senior Vice President – Human Resources on February 23,2005, and prior to that had been Vice President - Human Resources since July 2003.He was Division Human Resource Manager for the Containerboard Mill and ForestResources Division from April 1995 to July 2003.

 

**CharlesA. Hinrichs**, born December 3, 1953, was appointed Senior Vice President and ChiefFinancial Officer on February 23, 2005, and prior to that had beenVice President and Chief Financial Officer since January 2002. He was VicePresident and Treasurer from November 1998 to January 2002.

 

**Craig A.Hunt**, born May 31, 1961, was appointed Senior Vice President, Secretary and General Counsel on February 23,2005, and prior to that had been Vice President, Secretary and GeneralCounsel since November 1998.

 

**Mack C.Jackson**, born May 18, 1955, was appointed Senior Vice President and General Manager – ContainerboardMill and Forest Resources Division on February 23, 2005, and prior to thathad been Vice President and General Manager – Containerboard Mill andForest Resources Division since January 2005. He was Vice President ofMill Operations from August 2002 to January 2005. Prior to that, hewas General Manager of one of our containerboard mills since 1994.

 

**Paul K.Kaufmann**, born May 11, 1954, was appointed Senior Vice President and Corporate Controller on February 23,2005, and prior to that had been Vice President and Corporate Controllersince November 1998.

 

**John L.Knudsen**, born August 29, 1957, was appointed Senior VicePresident of Manufacturing for the Container Division in October 2005. Hewas Vice President of Strategic Planning for the Container Division from April 2005to October 2005. Prior to that, he was Vice President and Regional Managerfor the Container Division from August 2000 to April 2005.

 

**TimothyJ.P. McKenna**, born March 25, 1948, was appointed Senior Vice President – InvestorRelations and Communications on February 23, 2005, and prior to that had beenVice President – Investor Relations and Communications since November 1998.

 

**PatrickJ. Moore** – See Directors.

 

**Mark R. O’Bryan**,born January 15, 1963, was appointed Senior Vice President – StrategicInitiatives in July 2005. He was Vice President - Operational Improvementfor the Consumer Packaging Division from April 2004 to July 2005. Priorto that, he was Vice President – Procurement from October 1999 to April 2004.

 

**MichaelR. Oswald**, born October 29, 1956, was appointed Senior VicePresident and General Manager of the Reclamation Division in August 2005. Priorto that, he was Vice President of Operations for the Reclamation Division from January 1997to August 2005.

 

**Thomas A.Pagano**, born January 21, 1947, was appointed Senior Vice President – Corporate Development on February 23,2005, and prior to that had been Vice President – Corporate Developmentsince April 2004. Prior to that, he was Vice President - Planning from November 1998to April 2004.

 

**John M. Riconosciuto**, born September 4,1952, was appointed Chief Operating Officer on October 26, 2005, and priorto that had been Senior Vice President and General Manager - Consumer Packaging

 

82

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Division since February 2005. He was VicePresident and General Manager - Consumer Packaging Division from January 2004to February 2005, Vice President of Operations for the Consumer PackagingDivision from January 2002 to January 2004 and Vice President andGeneral Manager – Specialty Packaging Division from October 2000 to January 2002.

 

**AuditCommittee**

We have a separately designatedstanding Audit Committee established in accordance with Section 3(a)(58)(A) ofthe Exchange Act. The members of the Audit Committee are Mr. Pearlman(Chairman), Mr. Boris, Mr. O’Connor and Mr. Sit.

 

**Audit CommitteeFinancial Expert**

Our Board of Directorshas determined that Mr. Pearlman is an audit committee expert as definedby Item 401(h) of Regulation S-K of the Exchange Act and is independentwithin the meaning of Item 7(d)(3)(iv) of Schedule 14A of the ExchangeAct.

 

**Code ofEthics**

We have adopted a Code ofEthics for Senior Financial Officers (including our Principal Executive Officer,Principal Financial Officer and Principal Accounting Officer). The Code of Ethicsis available on our Internet Website (www.smurfit-stone.com).

 

**Section 16(a) BeneficialOwnership Reporting Compliance**

Information regarding Section 16(a) BeneficialOwnership Reporting Compliance is set forth under the caption “SecurityOwnership of Certain Beneficial Owners and Management-Section 16(a) BeneficialOwnership Reporting Compliance” in the Proxy Statement and is incorporated hereinby reference.

 

**Recommendationof Director Nominees by Stockholders**

There have been nomaterial changes to the procedures by which stockholders may recommenddirector nominees to our Board of Directors since the filing of our proxystatement in 2005.

 

**ITEM 11.****  EXECUTIVECOMPENSATION**

 

Information required in response to thisitem is set forth under the captions “Executive Compensation,” “Report of theCompensation Committee on Executive Compensation” and “Compensation CommitteeInterlocks and Insider Participation” in our Proxy Statement and isincorporated herein by reference.

 

**ITEM 12.****  SECURITYOWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERMATTERS**

 

Information required in response to thisitem is set forth under the captions “Principal Stockholders” and “ExecutiveCompensation, Existing Equity Compensation Plan Information” in the ProxyStatement and is incorporated herein by reference.

 

**ITEM 13.  CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS**

 

Information required in response to thisitem is set forth under the caption “Certain Relationships and Related Transactions”in the Proxy Statement and is incorporated herein by reference.

 

83

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**ITEM 14.****       PRINCIPALACCOUNTING FEES AND SERVICES**

 

Information required inresponse to this item is set forth under the proposal “Ratification ofAppointment of Independent Registered Public Accounting Firm” in our ProxyStatement and is incorporated herein by reference.

 

**PART IV**

 

**ITEM 15.****       EXHIBITSAND FINANCIAL STATEMENT SCHEDULES**

 
| (a)    |   | (1) and  (2) The list of Financial Statements and Financial Statement Schedules  required by this item is included in Item 8.                                                                                                                                                                                                                                                                          |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                             |
|   |   | (3) Exhibits.                                                                                                                                                                                                                                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                             |
| 3.1    |   | Restated  Certificate of Incorporation of Smurfit-Stone Container Corporation (“SSCC”)  (incorporated by reference to Exhibit 3(a) to SSCC’s Registration  Statement on Form S-4 (File No. 333-65431)).                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                             |
| 3.2    |   | Second Amended  and Restated Bylaws of Smurfit-Stone Container Corporation (incorporated by  reference to Exhibit 3.2 to SSCC’s Annual Report on Form 10-K for  the fiscal year ended December 31, 2002).                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                             |
| 4.1    |   | Certificate for  Smurfit-Stone Container Corporation’s Common Stock (incorporated by reference  to Exhibit 4.3 to SSCC’s Registration Statement on Form S-8 (File  No. 33-57085)).                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                             |
| 4.2    |   | Form of  Certificate of Designation establishing the terms of Smurfit-Stone Container  Corporation’s Series A Preferred Stock (incorporated by reference to  Exhibit 4.2 to SSCC’s Registration Statement on Form S-4 (File  No. 333-43656)).                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                             |
| 4.3    |   | Certificate for  Smurfit-Stone Container Corporation’s Series A Preferred Stock  (incorporated by reference to Exhibit 4.4 to SSCC’s Registration  Statement on Form S-4 (File No. 333-43656)).                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                             |
| 4.4    |   | Certificate of  Designation of Series B Junior Participating Preferred Stock  (incorporated by reference to Exhibit 4.1 to SSCC’s Quarterly Report on  Form 10-Q for the quarter ended September 30, 2002).                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                             |
| 4.5    |   | Rights Agreement  dated as of September 9, 2002 by and between SSCC and Mellon Investor  Services, as Rights Agent. The Rights Agreement includes as Exhibit B  the form of Rights Certificate and as Exhibit C the form of  Certificate of Designations (incorporated by reference to Exhibit 4.1 to  SSCC’s Current Report on Form 8-K dated September 10, 2002). |

 

Indentures and other debt instrumentswith respect to long-term debt that do not exceed 10% of the total assets ofSSCC and its subsidiaries on a consolidated basis are not filed herewith. TheRegistrant agrees to furnish a copy of such documents to the Commission uponrequest.

 
| 4.6(a) |   | Master Indenture  dated as of November 23, 2004 between SSCE Funding, LLC, as Issuer, and  Deutsche Bank Trust Company Americas, as Indenture Trustee (incorporated by  reference to Exhibit 4.1 to Smurfit-Stone Container  Enterprises, Inc.’s (“SSCE”) Current Report on Form 8-K dated  November 24, 2004). |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

84

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| 4.6(b)  |   | Series 2004-1  Indenture Supplement to Master Indenture dated as of November 23, 2004  between SSCE Funding, LLC, as Issuer, and Deutsche Bank Trust Company  Americas, as Indenture Trustee (incorporated by reference to Exhibit 4.2  to SSCE’s Current Report on Form 8-K dated November 24, 2004).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|---------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 4.6(c)  |   | Series 2004-2  Indenture Supplement to Master Indenture dated as of November 23, 2004  between SSCE Funding, LLC, as Issuer, and Deutsche Bank Trust Company  Americas, as Indenture Trustee (incorporated by reference to Exhibit 4.3  to SSCE’s Current Report on Form 8-K dated November 24, 2004).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.1(a) |   | Credit  Agreement, dated November 1, 2004, by and among SSCC, as guarantor, SSCE  and Smurfit-Stone Container Canada Inc., as borrowers, JPMorgan Chase Bank,  N.A., as Senior Agent, Deposit Account Agent and Deposit Funded Facility  Facing Agent, Deutsche Bank and Trust Company Americas, as Senior Agent,  Administrative Agent, Collateral Agent, Swingline Lender and Revolving  Facility Facing Agent, Deutsche Bank AG, as Canadian Administrative Agent and  Revolving (Canadian) Facility Facing Agent, and the other financial  institutions party thereto, as lenders (incorporated by reference to  Exhibit 10.1 to SSCC’s Current Report on Form 8-K dated  November 1, 2004 (File No. 0-23876)).                                                                                                                           |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.1(b) |   | Amendment  No. 1, dated as of September 30, 2005, to the Credit Agreement,  dated as of November 1, 2004, among SSCC, as Guarantor, SSCE and  Smurfit-Stone Container Canada Inc., as Borrowers, the Lenders party thereto,  Deutsche Bank Trust Company Americas, as Senior Agent, Administrative Agent,  Collateral Agent, Swingline Lender and Revolving Facility Facing Agent,  Deutsche Bank AG, as Canadian Administrative Agent and Revolving (Canadian)  Facility Facing Agent, and JPMorgan Chase Bank, N.A., as Senior Agent,  Deposit Account Agent and Deposit Funded Facility Facing Agent (incorporated  by reference to Exhibit 10.1 to SSCC’s Current Report on Form 8-K  dated October 5, 2005).                                                                                                                        |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.1(c) |   | Incremental Term  Loan Assumption and Amendment No. 2, dated as of December 20, 2005,  related to the Credit Agreement, dated as of November 1, 2004, as  amended by Amendment No. 1 dated as of September 30, 2005, among  SSCC, as Guarantor, SSCE and Smurfit-Stone Container Canada Inc., as Borrowers,  the Lenders party thereto, Deutsche Bank Trust Company Americas, as Senior  Agent, Administrative Agent, Collateral Agent, Swingline Lender and Revolving  Facility Facing Agent, Deutsche Bank AG, as Canadian Administrative Agent and  Revolving (Canadian) Facility Facing Agent, and JPMorgan Chase Bank, N.A., as  Senior Agent, Deposit Account Agent and Deposit Funded Facility Facing Agent  (incorporated by reference to Exhibit 10.1 to SSCC’s Current Report on  Form 8-K dated December 20, 2005). |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.2    |   | Sale Agreement  dated as of November 23, 2004 by and between SSCE, as Seller, and Stone  Receivables Corporation (“SRC”) (incorporated by reference to  Exhibit 10.1 to SSCE’s Current Report on Form 8-K dated  November 24, 2004).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.3    |   | Transfer and  Servicing Agreement dated as of November 23, 2004 by and among SRC, SSCE  Funding, LLC and SSCE, as Servicer (incorporated by reference to  Exhibit 10.2 to SSCE’s Current Report on Form 8-K dated  November 24, 2004).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.4    |   | Variable Funding  Note Purchase Agreement dated as of November 23, 2004 by and among SSCE  Funding, LLC, as issuer, Barton Capital LLC, as conduit purchaser, certain  financial institutions, as committed purchasers, and Societe Generale, as  agent for the purchasers (incorporated by reference to Exhibit 10.3 to  SSCE’s Current Report on Form 8-K dated November 24, 2004).                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.5(a) |   | Receivables  Purchase Agreement, dated March 30, 2004, among MBI Limited/Limitee, in  its capacity as General Partner of Smurfit-MBI, an Ontario Limited  Partnership and                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |

 

85

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|      |   | Computershare  Trust Company of Canada, in its capacity as Trustee of King Street Funding  Trust and Scotia Capital Inc. (incorporated by reference to  Exhibit 10.2(a) to Stone Container’s Quarterly Report on  Form 10-Q for the quarter ended March 31, 2004).                                                                                                                                          |
|-----------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|      |   |                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.5(b)   |   | Support  Agreement, dated March 30, 2004, between Stone Container Corporation  (“Stone Container”) and Computershare Trust Company of Canada, in its  capacity as Trustee of King Street Funding Trust, by its Administrator,  Scotia Capital Inc. (incorporated by reference to  Exhibit 10.2(b) to Stone Container’s Quarterly Report on  Form 10-Q for the quarter ended March 31, 2004). |
|      |   |                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.6(a)*  |   | Jefferson  Smurfit Corporation Amended and Restated 1992 Stock Option Plan, dated as of  May 1, 1997 (incorporated by reference to Exhibit 10.10 to SSCC’s  Annual Report on Form 10-K for the fiscal year ended December 31,  1997).                                                                                                                                                                       |
|      |   |                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.6(b)*  |   | Amendment of the  Jefferson Smurfit Corporation Amended and Restated 1992 Stock Option Plan  (incorporated by reference to Exhibit 10.3 to SSCC’s Quarterly Report on  Form 10-Q for the quarter ended September 30, 1999).                                                                                                                                                                                      |
|      |   |                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.7(a)*  |   | Stone Container  Corporation 1993 Stock Option Plan (incorporated by reference to Appendix A  to Stone Container’s Proxy Statement dated as of April 10, 1992).                                                                                                                                                                                                                                                            |
|      |   |                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.7(b)*  |   | Amendment of the  Stone Container Corporation 1993 Stock Option Plan (incorporated by reference  to Exhibit 10.3 to Stone Container’s Quarterly Report on Form 10-Q  for the quarter ended September 30, 1999).                                                                                                                                                                                                  |
|      |   |                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.8*     |   | Jefferson  Smurfit Corporation Deferred Compensation Plan as amended (incorporated by  reference to Exhibit 10.7 to SSCC’s Annual Report on Form 10-K for  the fiscal year ended December 31, 1996).                                                                                                                                                                                                             |
|      |   |                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.9*     |   | Jefferson  Smurfit Corporation Management Incentive Plan (incorporated by reference to  Exhibit 10.10 to SSCC’s Annual Report on Form 10-K for the fiscal  year ended December 31, 1995).                                                                                                                                                                                                                        |
|      |   |                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.10(a)* |   | Stone Container  Corporation 1995 Long-Term Incentive Plan (incorporated by reference to  Exhibit A to Stone Container’s Proxy Statement dated as of April 7,  1995).                                                                                                                                                                                                                                                 |
|      |   |                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.10(b)* |   | Amendment of the  1995 Long-Term Incentive Plan of Stone Container Corporation (incorporated by  reference to Exhibit 10.2 to Stone Container’s Quarterly Report on Form 10-Q  for the quarter ended September 30, 1999).                                                                                                                                                                                        |
|      |   |                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.11(a)* |   | Smurfit-Stone  Container Corporation 1998 Long-Term Incentive Plan (incorporated by  reference to Exhibit 10.14 to SSCC’s Annual Report on Form 10-K for  the fiscal year ended December 31, 1998).                                                                                                                                                                                                              |
|      |   |                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.11(b)* |   | First Amendment  of the Smurfit-Stone Container Corporation 1998 Long-Term Incentive Plan  (incorporated by reference to Exhibit 10.2 to SSCC’s Quarterly Report on  Form 10-Q for the quarter ended September 30, 1999).                                                                                                                                                                                        |
|      |   |                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.11(c)* |   | Second Amendment  of the Smurfit-Stone Container Corporation 1998 Long-Term Incentive Plan  (incorporated by reference to Exhibit 10.1 to SSCC’s Quarterly Report on  Form 10-Q for the quarter ended June 30, 2001).                                                                                                                                                                                            |

 

86

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| 10.11(d)* |   | Third Amendment  of the Smurfit-Stone Container Corporation 1998 Long-Term Incentive Plan  (incorporated by reference to Exhibit 10.1 to SSCC’s Quarterly Report on  Form 10-Q for the quarter ended September 30, 2001).                                                                                   |
|-----------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|      |   |                                                                                                                                                                                                                                                                                                                            |
| 10.12(a)* |   | Smurfit-Stone  Container Corporation 2004 Long-Term Incentive Plan (incorporated by  reference to Appendix I to SSCC’s Proxy Statement dated April 5, 2004).                                                                                                                                                          |
|      |   |                                                                                                                                                                                                                                                                                                                            |
| 10.12(b)* |   | First Amendment  of the Smurfit-Stone Container Corporation 2004 Long-Term Incentive Plan  (incorporated by reference to Exhibit 10.1 to SSCC’s Quarterly Report on  Form 10-Q for the quarter ended June 30, 2004).                                                                                        |
|      |   |                                                                                                                                                                                                                                                                                                                            |
| 10.13*    |   | Form of  Employment Security Agreements (incorporated by reference to  Exhibit 10(h) to SSCC’s Registration Statement on Form S-4 (File  No. 333-65431)).                                                                                                                                         |
|      |   |                                                                                                                                                                                                                                                                                                                            |
| 10.14*    |   | Consulting  Agreement, dated as of October 24, 1996, by and between James E. Terrill  and Jefferson Smurfit Corporation (U.S.) (incorporated by reference to  Exhibit 10.15 to SSCC’s Annual Report on Form 10-K for the fiscal  year ended December 31, 1996).                                        |
|      |   |                                                                                                                                                                                                                                                                                                                            |
| 10.15(a)* |   | Employment  Agreement for Patrick J. Moore (incorporated by reference to  Exhibit 10.28 to SSCC’s Annual Report on Form 10-K for the fiscal  year ended December 31, 1999).                                                                                                                                 |
|      |   |                                                                                                                                                                                                                                                                                                                            |
| 10.15(b)* |   | First Amendment  of Employment Agreement of Patrick J. Moore (incorporated by reference to  Exhibit 10.2 to SSCC’s Quarterly Report on Form 10-Q for the  quarter ended September 30, 2002).                                                                                                                |
|      |   |                                                                                                                                                                                                                                                                                                                            |
| 10.16(a)* |   | Restricted Stock  Unit Agreement dated as of January 4, 2002 by and between SSCC and  Patrick J. Moore (incorporated by reference to Exhibit 10.3 to SSCC’s  Quarterly Report on Form 10-Q for the quarter ended September 30,  2002).                                                                 |
|      |   |                                                                                                                                                                                                                                                                                                                            |
| 10.16(b)* |   | Amendment, dated  June 1, 2004, of Restricted Stock Unit Agreement dated as of  January 4, 2002 by and between SSCC and Patrick J. Moore (incorporated  by reference to Exhibit 10.2 to SSCC’s Quarterly Report on  Form 10-Q for the quarter ended June 30, 2004).                               |
|      |   |                                                                                                                                                                                                                                                                                                                            |
| 10.16(c)* |   | Amendment  No. 2, dated December 31, 2004, of Restricted Stock Unit Agreement  dated as of January 4, 2002 by and between SSCC and Patrick J. Moore  (incorporated by reference to Exhibit 10.20(c) to SSCC’s Annual  Report on Form 10-K for the fiscal year ended December 31, 2004). |
|      |   |                                                                                                                                                                                                                                                                                                                            |
| 10.17*    |   | Employment  Agreement of John M. Riconosciuto (incorporated by reference to  Exhibit 10.23 to SSCC’s Annual Report on Form 10-K for the fiscal  year ended December 31, 2004).                                                                                                                              |
|      |   |                                                                                                                                                                                                                                                                                                                            |
| 10.18*    |   | Employment  Agreement of Charles A. Hinrichs (incorporated by reference to  Exhibit 10.22 to SSCC’s Annual Report on Form 10-K for the fiscal  year ended December 31, 2003).                                                                                                                               |
|      |   |                                                                                                                                                                                                                                                                                                                            |
| 10.19*    |   | Consulting  Agreement of William N. Wandmacher (incorporated by reference to  Exhibit 10.21(b) to SSCC’s Annual Report on Form 10-K for the  fiscal year ended December 31, 2004).                                                                                                                     |
|      |   |                                                                                                                                                                                                                                                                                                                            |
| 10.20*    |   | Smurfit-Stone  Container Corporation Executive Deferred Compensation Plan (incorporated by  reference to Exhibit 10.25 to SSCC’s Annual Report on Form 10-K for  the fiscal year ended December 31, 2004).                                                                                                  |
|      |   |                                                                                                                                                                                                                                                                                                                            |
| 21.1      |   | Subsidiaries of  Smurfit-Stone Container Corporation.                                                                                                                                                                                                                                                                           |

 

87

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| 23.1   |   | Consent of  Independent Registered Public Accounting Firm.                                                                                                                      |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                            |
| 24.1   |   | Powers of  Attorney.                                                                                                                                                            |
|   |   |                                                                                                                                                                            |
| 31.1   |   | Certification  Pursuant to Rules 13a-14 and 15d-14 under the Securities Exchange Act of  1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of  2002. |
|   |   |                                                                                                                                                                            |
| 31.2   |   | Certification  Pursuant to Rules 13a-14 and 15d-14 under the Securities Exchange Act of  1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of  2002. |
|   |   |                                                                                                                                                                            |
| 32.1   |   | Certification  Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002.                                             |
|   |   |                                                                                                                                                                            |
| 32.2   |   | Certification  Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002.                                             |
|   |   |                                                                                                                                                                            |
| (b)    |   | Exhibits filed  with this annual report are included under Item (a) (3).                                                                                                   |
|   |   |                                                                                                                                                                            |
| (c)    |   | None.                                                                                                                                                                           |

 

----

*Indicates a management contract or compensation plan or arrangement.

 

88

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SIGNATURES

 

Pursuant to the requirements of Section 13or 15(d) of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned, thereuntoduly authorized.

 
| DATE   | March 6,  2006 |                                               | SMURFIT-STONE  CONTAINER CORPORATION |   |
|--------|---------------------|----------------------------------------------------|--------------------------------------|--------|
|   |                |                                               | (Registrant)                         |
|   |                |                                               |                                 |
|   |                | BY                                                 | /s/ Charles A. Hinrichs              |   |
|   |                |                                               | Charles A. Hinrichs                  |   |
|   |                | Senior Vice  President and Chief Financial Officer |
|        |                     |                                                    |                                      |        |  |  |  |

 

Pursuant to the requirements of theSecurities Exchange Act of 1934, this report has been signed below by thefollowing persons on behalf of the registrant in the capacities and on the dateindicated.

 
| **SIGNATURE**                 |   |   | **TITLE**                                  |   | **DATE**            |
|-------------------------------|--------|--------|--------------------------------------------|--------|---------------------|
|                          |   |   |                                       |   |
| /s/ Patrick J.  Moore         |   |   | Chairman,  President and Chief Executive   |   | March 6,  2006 |
| Patrick J. Moore              |   |   | Officer and  Director                      |   |                |
|                          |   |   | (Principal  Executive Officer)             |   |                |
|                          |   |   |                                       |   |                |
| /s/ Charles A.  Hinrichs      |   |   | Senior Vice  President and Chief Financial |   | March 6,  2006 |
| Charles A.  Hinrichs          |   |   | Officer                                    |   |                |
|                          |   |   | (Principal  Financial Officer)             |   |                |
|                          |   |   |                                       |   |                |
| /s/ Paul K.  Kaufmann         |   |   | Senior Vice  President and Corporate       |   | March 6,  2006 |
| Paul K. Kaufmann              |   |   | Controller                                 |   |                |
|                          |   |   | (Principal  Accounting Officer)            |   |                |
|                          |   |   |                                       |   |                |
| *                             |   |   | Director                                   |   |                |
| James R. Boris                |   |   |                                       |   |                |
| *                             |   |   | Director                                   |   |                |
| Connie K.  Duckworth          |   |   |                                       |   |                |
| *                             |   |   | Director                                   |   |                |
| Alan E. Goldberg              |   |   |                                       |   |                |
| *                             |   |   | Director                                   |   |                |
| William T. Lynch, Jr.    |   |   |                                       |   |                |
| *                             |   |   | Director                                   |   |                |
| James J. O’Connor        |   |   |                                       |   |                |
| *                             |   |   | Director                                   |   |                |
| Jerry K.  Pearlman            |   |   |                                       |   |                |
| *                             |   |   | Director                                   |   |                |
| Thomas A.  Reynolds, III |   |   |                                       |   |                |
| *                             |   |   | Director                                   |   |                |
| Eugene C. Sit                 |   |   |                                       |   |                |
| *                             |   |   | Director                                   |   |                |
| William D.  Smithburg         |   |   |                                       |   |                |
|                               |        |        |                                            |        |                     |  |

 
| *By /s/ Charles  A. Hinrichs |   |   | pursuant to  Powers of Attorney filed  |   |          |
|------------------------------|--------|--------|----------------------------------------|--------|---------------|
| Charles A.  Hinrichs         |   |   | as a part of  the Form 10-K. |   | March 6, 2006 |

 

89

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